[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Is `Washington Consensus` still working?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 26 Sep, 2011[/B]

WITH the world teetering on the edge of possibly another economic downturn, following on the one that deeply affected, both developed and developing countries, policymakers have begun to reflect on the pros and cons of globalisation.

Three years ago before the global economy went into a deep recession, what came to be called `globalisation` was all the rage. The term stood for open economies which allowed relatively free flow of trade, capital and information.

A new economic philosophy was structured around this concept.

Called the `Washington Consensus`since its advocates worked in such Washington-based institutions as the World Bank, the IMF and Inter-American Development Bank it laid a detailed prescription for developing economies. Developing countries that approached the Washingtonbased institutions for assistance were persuaded to adopt the approach. Most countries in Latin America and East Asia obliged and initially benefited.

But then came the Asian Financial Crisis of the late 1990s when several countries in the region discovered that the foreign capital that flowed in could also move out and do so quickly.

Recognising the downside to the process of globalisation, some of the East Asian nations became more cautious about economicopenness particularly in terms of capital flows. While placing some judicious controls on capital flows, these nations kept their economies open to trade.

If there were some who doubted the wisdom of totally open economies, they were mostly in the developing world. They believed that most of the benefits of openness accrues to rich countries who, taking advantage of the lowering or totally removing the barriers to trade, harmed the nascent industries in the emerging world.

But experience with open economies brought considerable benefits to the well-managed emerging economies. Since international trade increased much more rapidly than the growth in global product, open economies in Asia benefitted enormously. In a well-known report, the World Bank called them the `miracle economies` as some of them saw rates of growth that were a multiple of those ever recorded in history.

While East Asia was a ready convert to the idea of `globalisation` the South Asians moved much more slowly. The subcontinent had adopted what economists called the `import substitution` approach to development. They were keen on developing domestic enterprises by restricting foreign competition. However, developing industrial and commercial capacities behind high walls of protection meant a great deal of inefficiency. It was only in the early 1990s when the Indians, faced with a serious balance of payments crisis, opened their economy, not so much to outside competition as todomestic enterprise.

The elaborate system of controls that had come to be called the `license raj` was replaced with almost unconstrained role by the private sector. The economy took off.

About the same time, Pakistan also began the process of reducingthe control of the government over industry, commerce and finance.

However, in Pakistan`s case political uncertainty stood in the way of the response of the private sector.

Consequently the economy did not match the Indian experience.

Given this history, can it be saidthat globalisation has brought benefits to the developing world? The economic downturn of 2008-09 exposed the more open economies of East Asia and Latin America to the associated decline in international trade and credit squeeze that were some of its direct consequences.

South Asia in particular India suffered less. Pakistan was also hurt a bit but overall the Great Recession of 2008-09 did not prove to be a major setback for South Asia.

The tepid recovery of the last two years has restored some of the lost activity in the global market place. For instance, world trade in 2011 has recovered to the levels of the pre-crisis boom. At the same time investment flows from rich countries to emerging markets are back to above $1,000 billion. This is still short of the record set in 2007 when as much as $1.2 trillion was provided to the developing world.

While some of the processes associated with globalisation are being restored some serious questions are being raised in the developed world about its consequences. There are debates in both, America and Europe about the impact of globalisation, particularly the way the poorer segments of the society have been affected. Many western analysts believe that the structural change brought about by globalisation is one reason why the recovery in Europe and America has been so slow, that there is a real chance of their economies going back into recession.

Writing in the Financial Times last month, Jeffrey Sachs a highly respected American economistsaid: `Globalisation has raised very serious adjustment challenges for the high-income world, and most high-income countries, notably the US, have failed to meet these challenges.` His reference, of course, was to the fact that the little economic recovery that has taken place since the Great Recession was declared to be officially over more than two years ago, in the first quarter of calendar 2009, has had practically no impact on the job market.

The rate of employment in the United States having dipped for a few months to below nine per cent is up again. There is political clamor for action and some of what is being demanded will hurt the developing world. It will also retard the process of globalisation.

Some of the left-leaning economists are suggesting that the massive restructuring of the global production process that accompanied globalisation has resulted in massive job losses in the West.

According to this line of thinking, manufacturing activities as a result of globalization were relocated from Europe and America to many parts of the developing world. As western entrepreneurs discovered the cost advantages of doing business in the emerging world, they moved not only manufacturing but also a number of other activities to some emerging economies. This is when globalisation began to help South Asia but mostly India.

A number of large American and European corporations, impressed with the quality of the work force available in that country formed formal alliances withthe Indian companies operating in the sectors of information, communication, entertainment, health services and pharmaceuticals.

These are precisely the sectors of the global economy which are likely to grow at a rate considerably higher than the overall increase in world output.

It appears that the opportunities created by globalisation for the emerging world may begin to be constrained as the political pressure increases in the United States in particular but in other developed countries as well to focus on keeping jobs at home. Two days before the start of the annual meetings of the World Bank and the IMF in Washington, the Fund released a report cutting its forecast for global growth. The rate of increase in the aggregate GDP of developed countries is likely to be only 2.2 per cent in 2011 while that of the emerging world will be three times as much, 6.6 per cent.

This sharp difference between the prospects of the two groups of countries is being seen in many political quarters as emerging countries benefitting from the troubles of the developed world. The meaning of this for a country such as Pakistan is clear. It has stayed on the margins of the global economy for several years as most of East Asia and some parts of South Asia India in particular benefitted from globalisation.

The future for it most probably lies in working with other parts of the developing world. Not only will the West have less to offer. It will also be less hospitable for the developing world.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=26_09_2011_606_004]Is `Washington Consensus` still working? | ePaper | DAWN.COM[/url]

[B][U][CENTER][SIZE="5"]Breakdown of the “Grand Bargain” — I[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: October 3, 2011[/B]

More often than not, change that makes history happens slowly, mostly unnoticed. Why it occurs is left to the historians to explain and argue about. Sometimes revolutions bring about change as happened in 18th century America and France and 20th century Russia and China. What we are witnessing now in the Arab world is a revolution. In the series of articles I begin today, and will continue to contribute to this space for weeks to come, I will explore the relevance of what is happening in the Arab world, not only for the countries that are its part, it will profoundly affect the rest of the world as well. And its impact on Pakistan will be significant. Well understood by the policymaking elite, the revolution on the Arab street could change Pakistan’s situation for the better.

The Arab Spring is a movement that has brought the citizenry of the several countries affected by this unfolding drama to the centre stage of politics. If all goes well, those in power will no longer be able to ignore the wishes and aspirations of the people. People will have influence on the making of economic and social policy and policies affecting relations with the outside world. It will not be possible for the leadership in these countries to disregard what the ‘street’ thinks and believes in. Over time ‘the street’ will be replaced by the representatives of the people who will be able to hold the executive branch of the government responsible for the actions it takes. What keeps western leaders awake at night is the fear that they will have to make more than a phone call to persuade the various heads of state to walk their way.

They should also lose some sleep over the fact that by slipping over into the neighbouring regions, the peoples’ movement may further erode the global presence of the West. The Arab Spring will affect not only the entire Middle East and most non-Arab Muslim countries in the area. It is also likely to profoundly impact South Asia. That is likely to happen not only because a third of the South Asian population — half-a-billion out of the total of 1.5 billion people — are Muslims. There will be consequences for different countries in the region for different reasons. The peoples’ revolution would have come to Pakistan if the country had not opted in early 2008 for democratic governance. But it will still come through a different route, one which will take it out of the American orbit in which the country moved for more than half a century into one that has at its center some of the regional powers — Turkey, Egypt, perhaps also Pakistan itself.

The Anna Hazare movement in India has already exposed the shortcomings in the traditional democratic structure in which the elected parliament does not always seem to represent what the electorate really wants. That is why a large number of people, mostly from the expanding middle class, felt that their economic gains in recent years were not matched by any kind of political profit. Troubled by the fact that while their economic advance was the product of hard work and risk-taking enterprise, large fortunes had been made and were being made by misusing the power of the government. In Hazare they found a ‘saint-politician’ they were happy to support. The Indian system may also need some change as it is not working for the people of the less well performing regions of the vast country –they constitute the majority of the Indian population. The income and performance gaps between the states on the west coast compared to those in the country’s east are increasing. Millions of people in the poorer states feel and resent that the tide of ‘rising India’ is passing them by.

Bangladesh, the third largest country in the South Asian mainland, is also struggling to find its political feet. Like other South Asian countries, it has also not been able to institutionalise the process of political transition. Political power if not usurped by military leaders as was in its case and was also the case of Pakistan, tends to flow through dynastic channels. In Pakistan three major political parties are controlled by families. Pakistan Peoples Party is engaged in the process of preparing the third generation after Zulfikar Ali Bhutto to take over its leadership. If the current plans succeed, India’s Congress Party will be handing over the reins of management to the fourth generation. In Bangladesh the two mainstream parties are led by the leaders who owe their positions to the members of their families who were once the country’s presidents. The current prime minister has removed one provision in the constitution through an amendment that had previously ensured some order in the transfer of power. The country’s president will no longer be able to let a caretaker administration take the responsibility for holding elections at the appointed time and in way that ensured political fairness.

One of the main lessons of the Arab Spring seems to have been lost on the leadership groups in South Asia, in particular on the families that have governed for so long and without being seriously challenged by political processes. One reason why so many people came out on the streets or assembled in public squares in so many different countries was the frustration with the fact that no political means were available for bringing about regime change. It is no coincidence that the three regimes that fell in less than one year had been in place for decades. The presidents of Tunisia, Egypt and Libya had governed for a total of 120 years. Populations frustrated with their performance and seeing no improvements in their own situation chose to rebel rather than continuing to remain passive and tolerant. There were many reasons why the street and the public square succeeded. One of the more important ones was that the established order did not have the support of the world outside the borders of the countries where people desired change. The “grand bargain” between the political elite and the West that had scaffolded the rule by the former finally broke down.

[B]Source: [URL="http://tribune.com.pk/story/265280/breakdown-of-the-grand-bargain--i/"]Breakdown of the Grand Bargain[/URL][/B]

[B][U][CENTER][COLOR="DarkOliveGreen"][SIZE="5"][FONT="Georgia"]Creating order out of chaos[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 03 Oct, 2011 [/B]

THE last time the global community attempted to create a new economic order out of total and utter chaos was in 1944 when the likely victors of the Second World War assembled at a resort, Bretton Woods, in New Hampshire in northeast of the United States.

The countries invited to attend the meeting were `likely winners` since the war in East Asia was still not over. Japan surrendered several months later. The Bretton Woods meeting was held largely at the urging of John Maynard Keynes, the British economist, who had studied the economic aftermath of the First World War. He had concluded that the seeds for the Second World War were sown when the victors of the conflict chose to punish and humiliate those who had lost and laid down their arms.

Keynes wrote about the treatment meted out to the vanquished arguing that real peace would only return if the European countries could rebuild their economies and provide hope to all the people in the continent no matter whether they were the winners or the losers.

His advice was not taken and the result, as he had predicted, was another European upheaval. Germany took to the battlefield again in order to avenge the humiliation at Versailles.

The task before the conferees was easy at Bretton Woods. While several countries had helped with the war effort,there was only one clear winner, the United States. And there was also one clear thinker. John Keynes provided the intellectual underpinning of the system of global economic and financial management that was to emerge from these deliberations.

The countries attending the meeting decided to adopt a system of two-tier exchange rate with all currencies linked to the American dollar at a fixed rate and the dollar itself pegged at the rate of $38 per ounce of gold. If countries got into external financial crisis they would be provided funds by the International Monetary Fund, a new institution set up for this purpose.The Fund`s resources would come from the quotas paid to it by the member countries with the United States paying the most. These payments would be used by the Fund to create its own currency, the Special Drawing Rights (SDR).

As the name suggests these constituted the `rights` the member nations could exercise in proportion to the contributions they had made to the Fund`s capital. But the withdrawal will not be automatic. It could be made by the country in distress after it had satisfied the authorities in the Fund that they were making policy adjustments to prevent the recurrence of the crisis.

But the Fund`s mandate was to dealwith emergencies. War-torn Europe needed to be rebuilt as well. For this purpose the Bretton Woods conferees created another institution and called it the International Bank for Reconstruction and Development, the IBRD. The bank was promised a lot of capital but only a part of it was `paid-in`. It could use the rest of the promised money as collateral to raise funds in the capital markets by selling bonds. Later, when a number of former European colonies became independent countries, the IBRD expanded its mandate and changed its name to the World Bank.

What this brief history of the past experience of creating order out of chaos tells us is that it is possible to restructure the global system if there are people who have the intelligence and the foresight to think deep into the future. There are not many at this time who could fit that description. In 2008 when Barack Obama won the election to the US presidency there was an impression that a man of vision had arrived on the scene. His slogan `yes, we can` not only excited the electorate in the United States but reverberated across the globe. Unfortunately, he has fallen short of what was expected of him.

The global economy is now faced with three different sets of crises that need to be dealt with simultaneously since they impact on one another. The first of these, of course, is the crisis in Europe where a bunch of countries on the continent`s periphery have gotten into a cycle which may end in at least one of them most likely Greece defaulting on its foreign obligations.The situation in these countries has earned them their own unflattering acronym the PIIGS for Portugal, Italy, Ireland, Greece and Spain. If a default does occur several large European banks that hold large amounts of PIIGS debt will face possible bankruptcy. This will set up a chain reaction reminiscent of the bankruptcy of Lehman Brothers in the United States that froze for a while all institutional credit. The solution to the European crisis is to create an institutional mechanism that will allow the countries under stress to borrow from an entity backed by the powerful states in the Union. This means institutional support by Germany and to a lesser extent France. Neither especially Germany is prepared to go that route. German Chancellor Angela Merkel is too afraid of the political right in her country to take on extra burden to save the Eurozone from collapsing.

The second crisis is in the United States where a new political movement the Tea Party Movement has created an environment in which policymakers are too scared to tread. The tepid economic recovery in the country that has kept the rate of unemployment very high and for a very long time must not be allowed to persist. It does not call for cutting down government spending as the Tea Partiers want and are likely to get unless someone in the political system is prepared to provide real leadership. What is needed is a significant increase in government expenditure over the short term for as long as economic recovery remains sluggish and the rate of unemployment is unacceptably high. The only person whocould do that is President Obama but he will have to first shed his diffidence and distaste for strong action.

The third problem not quite a crisis at this time but could become one if attention is not given to it is the consequence of the accumulated reserves in the emerging world that are mostly invested in the United States and to a lesser extent in Europe and Japan. These reserves are the result of the East Asians selling more in the global market place than they have been buying for themselves and the oil-exporting countries able to charge a high price for their abundant resource.

About two thirds of the total global savings of some $10 trillion are with these countries. If for whatever reason, confidence in one of the large economic entities in the world the United States and the European Union were to suddenly disappear there will a run on the liquidation of these reserves. This will be the equivalent of the dreaded run on the banks.

What the global economy needs at this time is a mechanism that addresses these problems and finds a comprehensive solution. This is what was done in 1944 by the victors of the Second World War. If there was an expectation that something like Bretton Woods II would come out from the recently concluded annual meetings of the World Bank and the International Monetary Fund that did not happen. The leaders of global finance have gone home after giving long speeches on the threat their respective countries and the world collectively face without promising action.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=03_10_2011_605_004]Creating order out of chaos | ePaper | DAWN.COM[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Breakdown of the grand bargain — II[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Published: October 10, 2011[/B]

The Arab Spring has resulted in breaking down what might be called the ‘grand bargain’ between the West and the autocratic governments that had long dominated the Arab and Muslim worlds. This bargain filled in the vacuum created first by the collapse of the Ottoman Empire in the early parts of the 20th century, followed by the end of colonialism a few decades later in the same century. But the Arab world was too important a geographic space to be left to the own devices of the countries that were created, most of them artificially, by the departing colonial powers. What was put in place was an informal arrangement that might be called the ‘grand bargain’.

It had four components. Three of these were promises of good behaviour in terms of the strategic interests of the West on the part of the ruling establishment. The fourth was the implicit — on some occasions explicit — promise by America and Europe to protect the establishment from its own people.

The West wanted the Arab leaders to ensure its access to the vast energy resources of the region. Its dependence on oil from the Middle East increased in the 1990s as the rates of economic growth in almost all countries in this part of the world reached levels without precedence in their recent economic histories. None of the western capitals wished to live through once again the uncertainty and economic upheaval caused by the oil embargo imposed by the Arab oil producers to punish the United States for its unqualified support of Israel. That was the first and only time the Arab governments took collective action to protest what they considered to be the wrong done to the Palestinians by the West, in particular by the United States.

The West also wanted unhindered access to the economically and strategically important sea lanes that pass through the waters controlled by the countries in the area. The memory of the 1956 nationalisation of the Suez Canal by Gemal Abdul Nasser, the nationalist leader of Egypt, while dimmed by time, was still a part of the strategic thinking in the West. The nationalisation was the only time that a deep fissure developed among the western countries in the post-World War era. Britain and France attempted to annul Nasser’s act by sending in their militaries while the United States was troubled by the moves of the two major European powers. The Israelis also moved their troops and flotilla and another war in the Middle East seemed imminent. However, Washington stepped in to prevent any such flare-up. President Dwight Eisenhower ordered London and Paris to pull back their assault troops, the only time the United States took an action that was not totally in favour of the Jewish state.

The third element in the grand bargain was the Arab acceptance of the creation of Israel and the recognition of the Jewish state. A significant step in that direction was taken by Egypt when its president on March 26, 1979 signed the peace agreement with Menachem Begin, the prime minister of Israel. The move was not welcomed for some time by the rest of the Arab world. A few months after the signing of the agreement in America, the Arab League expelled Egypt from its membership and moved its headquarter from Cairo and Tunis. While the boundaries of Israel were not defined in this agreement or the one signed subsequently with Jordan by Israel, the Israelis kept changing the ‘facts on the ground’ by expanding their settlements deep into the West Bank. They have continued to implement this strategy.

In return for these three parts of the grand bargain, the West implicitly pledged not only to tolerate the Arab regimes but provide them with military support when their existence was threatened by some internal forces. They also allowed the members of the establishment to store their looted riches in the West — in the form of large bank accounts and large real estate holdings. This is one reason why George HW Bush, then the American president, went to war in 1991 to expel Saddam Hussein from Kuwait after the latter had invaded the country in his immediate neighbourhood. Allowing Saddam to stay in Kuwait would have been against the grand bargain. He had to be expelled.

It didn’t matter that the regimes the West supported were often brutal towards their people and plundered the enormous wealth of the countries over which they presided. It should have been seen by the parties involved in the grand bargain that it would not produce a stable economic and political order. Several policy analysts had warned as long ago as the 1960s when their works were published in the United States that political institutions must be allowed to develop to accommodate economic change. One of them was Samuel P Huntington, a Harvard political scientist who was later to win fame by predicting what he called a clash between two civilizations, the West and Islam. In an earlier work he argued that economic progress produces societal tensions. He suggested, in a book titled Political Order in Changing Societies, that those who feel “relatively deprived” will agitate, if not altogether rebel, against the state. The same conclusion was reached by the economist Albert O Hirschman, also of Harvard University, who discussed the three choices that are available and could be exercised by the deprived – exit, voice or royalty. The Arab street chose voice over the two other options.

With the Arab Spring having disposed of three long-enduring regimes — in Tunisia, Egypt, and Libya, in that order — and may succeed in bringing down at least three more — Bahrain, Syria and Yemen, difficult to say in which order — the will of the people can no longer be ignored. Factoring in what the people want in policymaking has already resulted in the collapse of the ‘grand bargain”. A new order has already begun to take shape and will affect the relations of the countries in the region with the West, in particular with the United States.

[B][I]Published in The Express Tribune, October 10th, 2011.[/I][/B]
[url=http://tribune.com.pk/story/270292/breakdown-of-the-grand-bargain--ii/]Breakdown of the grand bargain[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Likely cuts in US aid[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Monday, 10 Oct, 2011[/B]

AS the political system in the United States grapples with the popular demand to cut government expenditure and reduce the burden of debt the country carries, one outcome is clear.

America will be less generous towards its foreign friends. What kind of impact this will have on Pakistan? Pakistan, by some counts, is now the second largest recipient of aid from Washington. Israel is the largest beneficiary. Before the government of President Hosni Mobarrak was overthrown, Egypt was in the second place. Israel receives $3 billion a year from Washington.

Under the Kerry-Lugar Bill signed into law by President Barack Obama in 2009, Pakistan was supposed to get $1.5 billion a year as economic assistance. Additional amounts are to be provided to the military for assistance it provides the US for the American operations in Afghanistan. The military is also to get help to improve its capacity to fight terrorism.

Before discussing the impact on Pakistan, I will briefly discuss America`s aid politics .Democrats and Republicans don`t agree on most things but there is agreement between them on reducing the amount of money the US spends on foreign aid. For the fiscal year that started on October 1, the Obama administration proposed spending of $59 billion on international affairs, $6 billion more than spent in the earlier year.

In financial year 2010, the first year of the Obama administration, expenditure for this item had increased to $55 billion.

Most of this was spent by the State Department which, through the Agency for International Development (AID), provides economic assistance to the countries Washington wishes to help.

In the US political system, on matters of government spending, the executive branch proposes while the legislature disposes. At this time both parts of the US Congress, the House and the Senate, are inclined to be far less generous in providing foreign assistance than the amount asked for by the Obama administration.

The House appropriations subcommittee which is now controlled by the Republicans has cut $12 billion from the administration`s request. Its proposed amount of $47 billion has $39 billion for State Department`s operations and aid and $7.6 billion for what is described asthe `contingency account for Iraq, Afghanistan and Pakistan.` Even the Senate version of the budget seeks a cut of $6 billion in the Obama proposal. This part of Congress is still in the hands of Democrats, President Obama`s political party.

The proposed declines in spending on foreign operations will bring it down to 0.95 per cent of the federal budget. In 1985, the share of foreign operations had reached two per cent fueled, in part, by the first war in Afghanistan when the United States was closely aligned with Pakistan and Saudi Arabia to expel the Soviet Union from Afghanistan. The proportion declined to about 0.9 per cent in the 1990s after the collapse of the Soviet Union.

There was another spike after 9/11 when the United States embarked on an effort to `win the hearts and minds` of the people in the Muslim world. There was a belief that one way to stop the attraction of the country`s youth for extremist groups in the Muslim world was to quicken the pace of economic development in the countries in the area. Pakistan was to be a major beneficiary of this effort.

It would be fair to conclude that the United States` foreign aid is motivated by the country`s strategic interests rather than by the desire to help the less developed parts of the world. Strategic consideration motivates in particular the Republicans, the party that is now at the forefront of the move to reduce government expenditure.

According to one assessment, `the Republicans attach conditions on aid to Pakistan, Egypt and the Palestinians, suspending the latter entirely if the Palestinians succeed in winning recognition of statehood at the UN. However, one of the largest portions of foreign aid -more than $3 billion for Israel-is left untouched in both the House and Senate versions, showing that even in times of austerity, some spending is inviolable.

The presence of a strong domestic lobby for Israel in the United States helps a great deal in securing assistance from the country. This is what Israel is able to do and what the Indians have begun to do. All one needs to do to understand how weak is Pakistan`s situation in the US is to pick up any mainstream newspaper any day and read the coverage on Pakistan.

While the clear intention behind the Kerry-Lugar legislations was not to link the flow of economic assistance on conditions that would not reflect the US`s strategic interests, there is now considerable pressure on the Obama administration to reverse course.To take one example of thispressure: In a recent article in The Washington Post, the authors John Podesta and Caroline Wadhams suggest that aid should be used to get Pakistan into line with American interests. `If Pakistan cannot bring insurgent elements to the negotiating table, and present a plan for a political settlement or a desired outcome, the United States should begin by labelling the Haqqani network a terror group. Other options include cutting all military assistance to Pakistan, and coordinating among international and regional allies to more sharply contain and isolate Pakistan.

The article is important since Podesta, one of its authors, is an important figure in Obama`s political party. He was the head of the transition team appointed by Barack Obama after the winning the elections in 2008.

Washington has as yet to do the arithmetic to understand how much leverage it carries in terms of the economic and military assistance it provides Pakistan.

Cutting military aid would do much more damage than reducing economic aid. The first two years of the five-year period covered by Kerry-Lugar should have produced $3 billion worth of capital flows to Pakistan. That hasn`t happened. The total amount of help Pakistan has received is a fraction of that amount.

Even if the entire $1.5bn a year were to be disbursed in net terms excluding the amounts spent on administering aid and also the large amounts charged by the US consultants who work on the various projects Washington is supporting the amount is more like a billion dollars a year.

Since those who have studied the US aid effort in Pakistan have concluded that it is poorly managed, the impact on growth is perhaps no more that 0.14 per cent of GDP. If Pakistan were to lose the entire pledged aid, its impact on growth will be very small.

The other way of looking at the impact of aid is to calculate the contribution it makes to meeting the financial gap the country has because of the difference between the value of imports and exports the `trade gap`and the amount needed to service outstanding foreign debt. This gap is of the order of $15 billion a year. If the full amount of American aid were to be disbursed, it would amount to only six to seven per cent of the total financial gap.

The conclusion from this brief analysis is that aid flows don`t provide the kind of leverage the United States thinks it has on Pakistan to do what is in Washington`s interests. What Islamabad should be keeping in view is its own strategic interests.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=10_10_2011_605_002]Likely cuts in US aid | ePaper | DAWN.COM[/url]

[B][U][CENTER][SIZE="5"]Breakdown of the grand bargain — III[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: October 17, 2011[/B]

For some reasons that will be identified and discussed by historians for decades to come, several countries in the Muslim world began to see a change in the structure of their politics more or less at the same time. Perhaps the rise of al Qaeda and the terrorist attacks of September 11, 2001 on the United States and the American response made the populations in dozens of Muslim countries to question the systems of governance they had lived under and tolerated for many decades. The Americans began to describe 9/11 as an event that changed the world. That change not only affected them but seems to have contributed to bringing change in the Muslim world as well. What is generally referred to as the ‘Arab Spring’ is the result of the reaction to what had happened in and around the Muslim world.

In some countries such as Indonesia and Pakistan, democratic systems that had appeared off and on began to be consolidated. This went further in Indonesia than in Pakistan. The Indonesians have held two open and fair elections since the fall of Suharto and the country is now governed by an elected president and parliament that operates within an accepted democratic framework. The system now works to manage transition from one set of rulers to another. This is ultimately the test of a working democratic system. As discussed in an earlier article, even in an established democratic system such as the one India has operated with some success for several decades, the issue of transition remains unsettled. At least in the largest political organisation, the Congress Party, leadership has been passing from one generation to another.

This brings me to raise a couple of interesting questions the answers to which, in the absence of research —which will no doubt be carried out at some stage — can only be in the nature of speculation. Why has the Muslim world led the movement to make established political order responsive to the wishes and aspirations of the citizenry? Why have the people living in democratic systems come out on the streets and started to demand change? There cannot be any doubt that the ‘Arab street’ has inspired movements in India, Israel, Spain, Greece, Britain, even in New York’s Wall Street. As Nichloas Kulish of the The New York Times put it in a thoughtful article, the “consensus that had emerged after the 1991 collapse of the Soviet Union that liberal economics combined with democratic institutions represented the only path forward…has been shaken and broken by a seemingly endless crises.” That consensus was the main theme of Francis Fukuyama’s widely read book, The End of History and the Last Man. Disillusionment with western liberal democracy and capitalism is widespread not only in the developing world, but also in the parts of the world where these philosophies were developed and put into practice. Policy makers all over the world have been found wanting. They have been unable to cushion their people from the shocks the economic systems have delivered over the last several years. The real issue in India and in some of the other old democracies is the loss of confidence on the part of the electorate in the political system.

There are perhaps two reasons why the citizens of the Muslim world have led the way in demanding change. First, the autocratic systems in most countries in this part of the world kept their citizens at a distance much greater than was the case in established and democratic systems. The political orders in these nations were inherently unstable. They had to give way once the people found a way of getting organised and coming out in numbers that overwhelmed the security systems. Second, the first reaction to the ‘grand bargain’ that gave the West’s cover to the autocratic regimes took the form of religious upheaval. The rise of the al Qaeda and other like-minded groups may have drawn some recruits from the disgruntled but the vast number of the indignados — as the outraged and the disappointed are called in Spanish — could not possibly find much comfort in this form of Islamic revival. Solutions for them have to be found in the political and economic order that cannot be hijacked by the elite — even if the elite owe their economic and political positions to elections held within democratic frameworks. Given the turmoil and uncertainty, even within the established political and economic systems, the question arises as to what kind of models the Muslim world should follow as it seeks to bring about change?

There is a continuum among Muslim nations that has Turkey and Saudi Arabia occupying the two extremes. There are changes taking place even in these two countries that are poles apart. In late September King Abdullah promised to open up the political system a little when by 2015 women would be allowed to vote in municipal elections and also have the right to be appointed to the Advisory Council. However, even as this announcement was receiving some attention and restrained applause, a Saudi woman was sentenced to receive ten lashes. Her offense: she was driving her car. She was later pardoned by the King. Turkey, on other hand, was moving in the other direction. It had decided to dilute some of the westernisation and little bit of the secularism that had become the defining features of the system bequeathed by Kamal Ataturk. But it has preserved the secular basis of the Turkish state. In between these two extremes are dozens of countries that are attempting to find their political feet. Some of them such as Tunisia and Egypt, are working to develop new structures from scratch; some like Bangladesh, Indonesia and Pakistan are struggling to make their systems more egalitarian and representative; some such as Syria and Yemen are still engaged in using the security apparatus to keep the old order in place. In this kind of fluid situation, what would be the role of Islam in the political structures that have begun to evolve in the liberated parts of the Arab world? I will turn to this question in the article in this space next week.

[B]Source: [URL="http://tribune.com.pk/story/275280/breakdown-of-the-grand-bargain--iii/"]Breakdown of the Grand Bargain III[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Can China fill the need gap?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 17 Oct, 2011[/B]


SINCE Pakistan gained independence 64 years ago, it has needed foreign funds to augment its poor domestic savings. That was generally true of all the countries that emerged from under colonial rule in the 1940s and 1950s and became independent.

This was also the time when improvements in public health added significantly to life expectancy in what came to be called, the developing world. Low savings meant low rates of investment which in turn meant low rates of GDP growth. Low GDP growth would translate into higher incidence of poverty for the rapidly increasing populations in the developing world.

The only way to break into this vicious cycle was to have government-to-government aid flow into the developing world.

Most developed countries came up with aid programmes while the World Bank and its sister regional banks were equipped to finance development in poor nations.

Pakistan`s leaders thought that they could use the strategic location of their country as an added reason why the West in particular the United States would come to its assistance. In the 1960s, the 1980s and the early 2000s, it received large amounts of aid from Washington.

Some $20 billion flowed into the country in the ten year period since the 9/11 terrorist attack on the US. Then president Pervez Musharraf responded positively to Washington`s call for help and the country was compensated by the Americans. The US launched attacks on Afghanistan on October 7, 2001 using Pakistan`s airspace.

These three periods of extensive American help produced one positive and one negative impact. The positive impact was that in each of these three periods the growth rate of Pakistan`s national product increased by 50 per cent, more than its structural rate of increase.

Without external help, Pakistan cannot have managed a GDP growth rate of more than 4-4.5 per cent a year. In the aid-abundant periods, the GDP increased by an average of 6.5 per cent a year. The negative consequence of foreigner assistance was that practically no effort was made to raise resources for de-velopment from within the economy.

Economists and financial people call this mode of behaviour `moral hazard`. If there are friends prepared to support, you turn to them during periods of crisis rather than make own sacrifices to avoid repeating the situation. For many reasons, that option may no longer be available to Pakistan at this time. The United States has gone negative on Pakistan. Its senior leaders continue to hold it responsible for the difficulties Washington is running into as it begins to pull out of Afghanistan.

Having softened somewhat the public statements issued by Admiral Mike Mullen who has recently retired as the chairman of Joint Chiefs of Staff in the US, the administration went back to beating on Pakistan.

On October 6, President Obama in a press conference called to address America`s economic difficulties was asked about Pakistan. His long answer was not encouraging for Pakistan. `I think that they have hedged their bets in terms of what Afghanistan would look like,` he told the press.

`And part of hedging their bets is having interactions with some of the unsavory characters who they think might end up regaining power in Afghanistan after coalition forces have left. The United States will constantly evaluate Pakistan`s cooperation. But there is no doubt, you know, we`re not going to feel comfortable with a long-term strategic relationship with Pakistan if we don`t think that they are not mindful of our interests as well`.

The American president left no doubt in the minds of his listeners at the press conference where his country was headed in terms of its relations with Pakistan. One newspaper analyst drew the right conclusions. `Mr Obama`s remarks seemed to call into question whether the United States could continue supplying Pakistan with billions of dollars in military and economic aid, as it has done since the September 11 attacks, if its intelligence service could not be persuaded to drop its support for militant groups long used as proxies against India and Afghanistan, wrote Rick Gladstone of The New York Times.

This is a demand Pakistan is unlikely to meet given the sentiment that exists in the country about the United States.

A recent Pew Center survey reports that only 12 per cent of the Pakistani population has a favourable view ofthe United States.

As suggested in an earlier article in this space withdrawal of economic aid by the United States will not be disastrous for the Pakistani economy. But military aid has been significant and since money is fungible its decline will put pressure on the country`s already precarious resource situation.

It is the hope of the Pakistani policymakers and its citizens that China will step into the gap, increasing its already significant involvement with Pakistan.

But there are serious doubts in some policy circles whether Beijing would be prepared to commit itself to Pakistan`s development as much as the Pakistanis would like.

According to one analysis, `a rising China with global ambitions is unlikely to supplant the United States in Pakistan.

And while Pakistan`s latest flirtations with Beijing have been received cordially, Pakistani officials have walked away from their junkets with far less that they might have hoped.

Nonetheless, the two countries do share a strategic interest in limiting India`s rising influence in the area. Beijing in particular would not want a very close relationship to develop between Washington and New Delhi. All the talk about, `all-weather friendship` between the two countrieshas yet to be translated into close economic links.

For instance trade between China and Pakistan remains less than significant. It has grown to $9 billion with Pakistan`s exports only a billion dollars. China`s trade with India, on the other hand, exploded from $2.9 billion in 2000 to $61 billion in 2010. This was a twenty-fold increase in a decade.

At some stage China would like to develop a naval presence in the Arabian Sea and also gain access for its western provinces to the sea. This would mean upgrading the port at Gwadar on the Balochistan coast and the Karakoram Highway.

According to the analyst quoted above, China`s `core interests lie somewhere else -in its competition with the United States and in East Asia. It has shown little interest in propping up the troubled Pakistan economy, consistently passing up opportunities to do so.` The implication of the American displeasure with Pakistan and not enough interest on the part of the Chinese is that Pakistan will have to rely on its own resources to finance the working of the government, pay for defence and invest in development. No country has ever succeeded in moving towards sustainable development without investing its own resources.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=17_10_2011_604_001]Can China fill the need gap? | ePaper | DAWN.COM[/url]

Breakdown of the grand bargain IV
 

[B][U][CENTER][SIZE="5"]Breakdown of the grand bargain IV[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: October 24, 2011[/B]

The breakdown of the grand bargain between the West and the Middle East means that the countries that have managed to get rid of the old and established order are beginning with a clean slate. In designing new political structures and putting into place new economic models, they will have to define their approach towards a number of elements that were once part of the grand bargain. The first is the nature of the political system and that includes the role of Islam in politics. The second is the role of the state, which means the relationship between those who govern and over whom they govern.

In the old and now discarded system, Islam was kept out of politics. The West, which was the other party in the grand design, was not comfortable with the influence Islam could exercise on politics. For instance, France encouraged the Algerian establishment not to give up power to an Islamic party that had clearly won in the elections to the national legislature. Similarly, the United States and most of its European allies have refused to accept the political legitimacy of Hamas in Palestine in spite of that party’s overwhelming triumph in electoral politics. That won’t be possible in the new order that is now emerging in the countries that have freed themselves of authoritarian rule and will increasingly detach themselves from the West.

But bringing Islam into politics does not mean making a political system Islamic. As Humeira Iqtidar, a Pakistani scholar who teaches in London, points out in her new book, the differences between what can be called Islamists, Islamic revivalists, and Islamic fundamentalists should be understood in order to fully comprehend what is happening in most of the Islamic world. For her, Islamist movements are concerned with introducing broad Islamic principles and values into the working of the state by using democratic processes. That has happened in Turkey and will probably happen in many other parts of the Muslim world. Reformist Islam, as the term suggests, means interpreting the religion so that it does not come into serious conflict with modern ways. Those who can be called Islamic fundamentalists are people who belong to, provide support to and sympathise with movements such as al Qaeda. They interpret the religion in its most fundamentalist sense. But as Raza Aslan, the American-Iranian scholar of Islam, points out in his book Cosmic Wars, fundamentalism is not unique to Islam. Similar movements have captured political space in Christian and Jewish societies. The rampage in Oslo by Andres Behring Breivik, the Norwegian religious activist, is an example of a fundamentalist action in a non-Muslim society.

The post-grand bargain societies in the Middle East are now deeply engaged in this debate as they begin the task of providing them with new political structures.

This debate has been picked up by Islamic activists in Egypt, another country engaged in a similar exercise. Abdel Moneim Abou el-Fotouh, a former Muslim brotherhood leader who is a candidate for the country’s presidency, has joined several breakaway political parties in suggesting that “the state should avoid interpreting Islam or enforcing Islamic law, regulating religious texts or barring a person from running for president based on gender or religion”. The debate in the post-Arab Spring world, therefore, is not about how much influence Islam should have on statecraft. The issue is whether those who are devout can be accommodated within policymaking circles.

Even though it is still too early to predict what will be the political order that will take shape in the countries that were directly affected by the Arab Spring, one thing is clear. Islam in politics will no longer be a taboo subject. It will be accommodated in some form other in the political lives of these nations.

What kind of state will emerge once the Arab world, unsettled by recent events, finds its political feet? There are no working models in the Arab world. The only one the emerging leadership can look to is Turkey which, in many remarkable ways, has been able to combine Islam with modernity.

[B]Source: [URL="http://tribune.com.pk/story/280243/breakdown-of-the-grand-bargain-iv/"]Breakdown of Grand Bargain IV[/URL][/B]

Dawn
 

[B]By Shahid Javed Burki
Monday, 24 Oct, 2011[/B]

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[B][U][CENTER][SIZE="5"]Pakistan and America: A roller-coaster relationship[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: October 31, 2011[/B]

By one count, this is the third time in about 50 years that Pakistan’s relations with the United States are moving through a rough patch. In a series of several articles, one today and more to follow in the weeks to come, I will provide a brief history of Pakistan’s relations with the United States and then go on to examine where the two countries may be heading in the next several years.

Field Marshal Ayub Khan, Pakistan’s first military president, was the architect of a close relationship with the United States. America then was one of the two superpowers. By concluding two defence agreements with Washington, he distanced his country from the Soviet Union, the other superpower. This was a different line from the one pursued by most other developing nations. India, under Jawaharlal Nehru, had joined other large developing countries to follow what came to be called the ‘non-aligned movement’, or NAM. The NAM countries kept themselves at an equal distance from the two superpowers. Pakistan, along with some nations in the Middle East and Southeast Asia, cast its lot with the United States.

When Zulfikar Ali Bhutto, once Ayub Khan’s foreign minister, questioned this approach, the military leader countered by titling his political autobiography, Friends not Masters. Bhutto had suggested that Pakistan had acquired a ‘master’ by entering into several defence relationships with the United States. The former foreign minister responded by writing his own book under the title of Myth of Independence. The two books appeared after the United States had already walked out of Pakistan. This happened when Islamabad went to war with India in September 1965. Washington responded by cutting military and economic aid to Pakistan. The close relationship engineered by Ayub Khan thus lasted for just over a decade.

The second close alliance between Pakistan and America was also under a military president, this time under General Ziaul Haq. There was clearer quid pro quo this time around. Pakistan agreed to help the United States throw out the Soviet Union from Afghanistan. Moscow had sent its troops into Afghanistan in 1979 when a series of changes in Kabul seemed to threaten its hold over that country. Occupation of Afghanistan by the rival superpower was not acceptable to the United States. Pakistan was a partner in the proxy war fought by Washington that ultimately expelled the Soviet Union from Afghanistan a decade after its troops had entered the country. America lost interest in Pakistan and the region in which it is located once Moscow pulled out its troops.

Deciding that Pakistan was no longer strategically important for the United States, President George HW Bush invoked the Pressler Amendment, which required that Washington would not provide economic or military assistance to a country that was thought to be developing a nuclear arsenal. However, it took almost a decade for relations between Pakistan and the United States to completely rupture. This happened in 1998 when Pakistan exploded a series of nuclear devices in the hills of Balochistan. Pakistan’s explosions followed those by India. Washington was now under President Bill Clinton who, following the nuclear tests, froze all contacts between the two countries. A year later, the American president reacted very negatively to the coup that brought the military back to power in Islamabad. He snubbed Pakistan after a very successful visit to India. He visited Islamabad briefly but refused to shake hands with General Pervez Musharraf, the new military head of the Pakistani state.

America’s stance towards Pakistan changed dramatically after the country was attacked by a group of Islamic extremists on September 11, 2001. George W Bush, the new American president, gave Pakistan a clear warning. Islamabad was told that “either you are with us or you are against us” in the fight against international terrorism. To the surprise of the American administration, Pakistan quickly agreed to the terms laid out by Washington. Later, after leaving office, President Musharraf revealed that Richard Armitage, the then American deputy secretary of state, told the Pakistanis that if they did not cooperate with the United States as the latter set into motion the plans to attack Afghanistan, their country would be bombed back into the Stone Age. This was essentially the reason why Musharraf agreed to work with the United States, offering Pakistan’s air space for American bombers to reach Afghanistan and the use of the country’s road system to supply US and Nato forces operating there. In return, Pakistan’s relationship with the United States was raised to the level only a notch below what Washington had with Nato countries.

Following 9/11, Musharraf, earlier snubbed by the Clinton administration, became a welcome visitor to Washington. He was offered the real privilege to visit the presidential retreat at Camp David in the mountains of Maryland. Pakistan also received generous amounts of military and economic assistance. The amount provided in the 10-year period since September 11, 2011 is estimated at more than $20 billion. Pakistan thus became the second largest recipient of American aid after Israel. However, this amount, on a yearly basis and in real terms, was not more than that given during the period of Ayub Khan. But there was a difference. Washington indicated that this time around it will follow a different approach. Unlike previous associations, when Washington pulled out of Pakistan and the region whenever its strategic interests for involvement were not paramount, it pledged to place the new relationship on firmer ground. This was to be done by embedding assistance to Pakistan in a bill approved by Congress for a period that would last for at least five years. That way the discretion of the executive branch in dealing with Pakistan would become less subject to the whims of those who occupied the White House. A bill was passed and was signed into law in the summer of 2009 by Barack Obama, the newly elected president. However, as I will discuss later, even this time around the relationship did not get out of the roller coaster it had ridden for over half a century.

[B]Source: [URL="http://tribune.com.pk/story/285122/pakistan-and-america-a-roller-coaster-relationship/"]Pakistan and America Relationships[/URL][/B]

[B]By Shahid Javed Burki
Monday, 31 Oct, 2011[/B]

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[url=http://epaper.dawn.com/Advt.php?StoryImage=31_10_2011_606_003]| ePaper | DAWN.COM[/url]

[B][U][CENTER][SIZE="5"]A new paradigm[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: November 7, 2011[/B]

The decision on November 2 by the Pakistani cabinet to grant the ‘Most Favoured Nation’ (MFN) status to India in matters pertaining to trade is a tectonic shift in the country’s relations with its large neighbour. India awarded the MFN status to Pakistan in 1996 soon after joining the World Trade Organisation. Pakistan was also obliged to give to all members of WTO — and that included India — the same status. But Islamabad refused to act, in the mistaken belief that it could use it as a lever to get concessions from New Delhi on Kashmir. As most economists have argued, improving trade and economic relations with India would bring greater benefits to Pakistan, the smaller of the two economies, than to India. If trade were to be used as a lever, India has greater power than its neighbour, Pakistan.

The Pakistani decision concerning the grant of MFN status was received with enthusiasm by the Indian leadership. Anand Sharma, India’s commerce minister, hailed it as part of a “paradigm shift” and said that New Delhi “deeply appreciated” the move. It will be beneficial for both countries, he said. Pakistan’s initiative had the support of its powerful military which had continued to look at India with suspicion. The Pakistani military’s approval was implied by Firdous Ashiq Awan, Pakistan’s information minister in announcing the cabinet’s decision. “This was decision was taken in the national interest and all stakeholders, including our defence institutions were on board” she told the press.

The business community on both sides of the border applauded the move. Many believed that there will be almost immediate benefits in terms of reducing the transaction costs of doing business between the two countries. The Federation of Indian Export Organisations estimated that trade between the two nations could double from current levels of about $2.7 billion a year simply by the rerouting of goods currently sent via Dubai and through some other channels. But according to one newspaper report, “the Confederation of Indian Industry cautioned that road blocks such as stringent visa rules, non-tariff barriers and communication problems still need to be dismantled and more trade routes opened up” for full benefits to be realised.

But the real significance in this breakthrough will go much beyond increasing India-Pakistan trade. It will provide foreign policymaking in Pakistan with a new base, moving the country away from total preoccupation with the United States. At this time, relations with America have become highly strained. Improving relations with India will certainly help to place the dealings with Washington in a new context. Although the ground on which Pakistan has sought to structure its relations with the United States over the past six decades has continuously moved, it always included concerns about India.

Pakistan got close to America as a part of its effort to build its defences to protect itself from the threat it then perceived was posed by India. That was essentially the reason why Ayub Khan, first as defence minister and later as the country’s president, negotiated a series of defence agreements with the US. Pakistan bound itself in arrangements that covered a wide geographic front, stretching from the Mediterranean to the Pacific. Good relations with Washington also brought economic help to the country at the time Pakistan was attempting to speed up the rate of economic growth. That was a by-product, not the real motivation behind the effort to get close to Washington.

Later, during the presidency of General Ziaul Haq, while economic assistance from the US became the main motive for association with Washington, concern with India remained at the back of the policymakers’ mind. Both economic considerations and the need to strengthen its defences against India were the reason why Zia famously turned down the offer of help by President Jimmy Carter in return for Islamabad’s assistance to throw the Soviet Union out of Afghanistan. He famously called the American offer “peanuts”. Islamabad wanted more from the US than Carter’s America was prepared to give. Carter’s defeat in the elections of 1979 brought Ronald Reagan to power in Washington. The new head of the American state was prepared to do much more than his predecessor to destroy what he called the “evil empire”, the Soviet Union. Pakistan’s willingness to align itself with America to achieve this objective was welcome news in Washington. In return for Islamabad’s support to expel the Soviet Union from Afghanistan, America was prepared to provide copious amount of military and economic help.

By becoming a member of the American alliances in the 1950s and the 1960s, Pakistan was making a hypothetical commitment. It would support the US in any activity directed to stop the advance of communism in Asia and the Middle East. However, in the 1980s, association with the US meant providing active support in a military campaign — the one fought by the US in Afghanistan with the help of a number of proxies. This change produced a new dynamics in Pakistan’s situation. It shifted focus to Afghanistan in the making of policy and, at the same time, the country had to contend with many unanticipated consequences, being an active player in a battlefield close at hand. Among the latter were the rise of Islamic extremism in the country, weaponisation of Pakistani society and culture and ethnic conflict between some of the communities in the country. The large-scale migration of Afghans to Pakistan was to increase the Pashtun population in Karachi. The consequence of this particular development is still being felt in Pakistan’s largest city.

While the persisting concern with India was at the base of Pakistan’s Afghan policy, the entry of Afghanistan as a variable in the making of policy was to acquire increasing significance after the terrorist attacks on the US. Under General Pervez Musharraf and, after his departure, under the successor civilian government, curbing the rise of Islamic extremism and international terrorism associated with it became the basis of relations with the US.

However, with the easing of tensions with India, relations with the larger neighbour will become less of a factor in the crafting of foreign policy. A different kind of relationship with India would introduce a new variable in the way Pakistan looks at the world outside its borders. This will affect the country’s relations with the US as well.

[B]Source: [URL="http://tribune.com.pk/story/288495/a-new-paradigm/"]A New Paradigm[/URL][/B]

[B][U][CENTER][SIZE="5"]Accommodating a rising Asia[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: November 14, 2011[/B]

There is a reason why it has been so difficult for the West and Japan to find a solution to their growing problems. This was not the case after the Second World War when the victors assembled in a small resort in the United States to craft a new world economic order, which came to be called the Bretton Woods system. Politics then was on the side of economics. It was not hard to argue and hence convince the voters that it would not pay to punish those who were defeated in the conflict. That was done after the First World War and the result was another global conflagration.

The first order of business at Bretton Woods was to rebuild Europe and since the United States was the only country with the resources to do that, it took the lead. John Maynard Keynes provided the intellectual underpinning of the ‘big idea’ developed at Bretton Woods. It was not hard for him to persuade those attending the conference that the disaster left by the about-to-be concluded war could only be dealt with by the states working together. That work had to be done in the fields of finance and development, and that would need new institutions. These were founded and became the International Monetary Fund and the World Bank.

The current crises in the global economy are different. They are the consequence of large changes in the make-up of the societies of the richer parts of the world. These changes have crept up slowly but coming together have produced a situation that can be resolved only by the articulation of a new ‘big idea’. This idea has to deal simultaneously with four developments: aging of the populations in Japan and the West, growing income inequalities in these countries that cannot be sustained in democratic societies, expectations that the state will provide security to those not in the work force and loss of confidence in the working of the state. That there are contradictions in some of these expectations can only be brought home to the voting population by leaders who are prepared to lead. Those don’t seem to be around at this time.

It may be a bit of a stretch to suggest that the future of the global economy could be driven by Asia. The continent may have some of the largest economies in the world but in terms of per capita income its citizens are about one-tenth as rich as the West and Japan. But the Asian continent is on the right side of the development equation. It has young populations, relatively strong states, large foreign exchange reserves and strong economic links with the world’s older economies. The last of these three is what gives Asia the leverage to author the big idea. It has become clear that no single country can provide the resources needed by Europe to save some of its parts from bankruptcy. Asia has the financial wherewithal to fund the facility the Europeans have put in place to aid the countries experiencing stress. The Cannes summit failed to provide the European Financial Stability Facility the financial resources it needed. Appeals were made to the BRIC leaders attending the summit to use their large surpluses to help EFSF but they demurred. It was right for them to show reluctance. They were being asked to either fund the EFSF directly or by expanding the resource base of the IMF. Doing the former would have made some economic sense since the returns on these resources would be much higher than those available from other relatively safe investments such as US treasury bonds. The latter would have made some political sense since the BRICs, in return for help, could have asked for a larger role in the running of the IMF. But that would have been incremental change.

The United States’ leadership has noted the rapid change in the structure of the global economy brought about by Asia’s rise. In an article titled “America’s Pacific Century” published in the November issue of Foreign Policy, the US secretary of state provided reasons why harnessing Asia’s growth and dynamism should be central to American economic strategic interests and a key priority for President Barack Obama. The article appeared on the eve of the American president’s third visit to Asia since coming into office. This visit took him to attend and the East Asia Summit in Bali, Indonesia as well as to the Asia Pacific Economic Cooperation summit in Hawaii.

The United States is working on bringing about an incremental change in the institutional structure of the global economy in order to accommodate rising Asia. What is needed, however, is a new institution in which the emerging world has a large voice, much more than seems possible in the Bretton Woods institutions. The older economies are reluctant to yield power to the emerging states. This was amply demonstrated when, following the resignation of Dominique Strauss Kahn, a French politician, the international community went looking for a new head of the IMF. It chose another French citizen, this time a woman who had served as finance minister in the government headed by President Nicolas Sarkozy, to replace Strauss Kahn even though there was expression of interest in the job by the citizens of some of the large emerging markets. The established order was not ready to pass on the baton.

Several emerging markets, in particular those in Asia, now have the financial clout to play a more meaningful and assertive role in the arena of international economics. They can also persuade the West to adopt some of the policies that would ease its economic difficulties. This is precisely what the West did when some of the important emerging economies were affected first by the Latin American debt crisis and later by the financial crisis in emerging Asia. In retrospect, it was a mistake to impose on these countries the role of the state which did more damage than good not only in the emerging world but later in rich countries as well. The shoe now is on the other foot.

[B]Source: [URL="http://tribune.com.pk/story/291254/accommodating-a-rising-asia/"]Accomodating a Rising Asia[/URL][/B]

[B][U][CENTER][SIZE="5"]Reasonable politics, bad economics[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: November 21, 2011[/B]

Pakistan once again stands at a crossroads as it struggles to strengthen the participatory system of democracy it reinstated in early 2008. It is also attempting to straighten the economy and ensure that it does not collapse altogether with its various pieces falling into a deep abyss. There is serious social discontent, particularly in the country’s urban areas — and within the urban areas, in the large cities —that could explode into street violence of the type seen in the Arab world over the last one year. Pakistan has lost nearly all respect among the members of the international community. That community itself is in a state of stress and is looking hard to find a way out. Pakistan, although now the world’s sixth largest country in terms of the size of its population, has not been invited to participate in the deliberations taking place to fashion a new global economic and political order. The country is isolated as never before in its more than six decades of history.

Which of the several roads should or could or would Pakistan take out of the crossroads? There has been much written recently on the country in foreign journals, magazines and newspapers to answer this question. Most of the writings suggest, either explicitly or implicitly, that the country is faced with a serious existential threat. A few serious books have also appeared that come to different conclusions about the country’s future. For instance, Anatol Lieven in his book, Pakistan: A Hard Country, decides that there are certain things about Pakistan’s society that would make it possible for it to survive even though the times are difficult. It is a hard country to understand but also a hard country to collapse and fall apart. Bruce O Riedel, once a close adviser of President Barack Obama and his administration on Pakistan and Afghan affairs, reaches the opposite conclusion in his book, Deadly Embrace: Pakistan, America and the Future of Global Jihad. Pakistan, he believes, wrongly I think, will not be able to carry the weight it currently bears and simply collapse from fatigue and lack of endurance. By collapse he means the destruction of the liberal political and economic order that will not be able to withstand the force of radical and extremist Islam. While Lieven who knows Pakistan well, having written on the country for many years for the Financial Times, and understands well the internal political and economic dynamics, Riedel’s knowledge of the country is considerably more superficial. As the title of his book suggests, his focus is on Pakistan’s stance towards what was once called America’s “war on terror”.

It would be right to round of this discussion with some of the recent writings on Pakistan by reference to Maleeha Lodhi’s compilation of the writings of a number of serious Pakistani scholars. The book with an important contribution by the editor, appeared under the title of Pakistan: “Beyond the Crisis”. As the title suggests, the county is in a state of crisis — a serious one as analysed by the various contributors to the volume — but the ‘beyond’ is more hopeful than indicated by Riedel and several other pessimists. The country will pull through by the adoption of intelligent policies by a wise leadership working within a participatory system of governance. The three key phrases in this formulation are the ‘system of governance’, ‘wise leadership’, and ‘intelligent policies’. These will be the three constructs on which I will base my analyses. Let me begin with the system of governance.

After more than six decades of experimentation, Pakistan seems to be settling down in politics. The earlier attraction for strongman rule is no longer there. There is now a consensus that competitive politics is the way to go. This means winning people’s support by exciting their interest in what elected politicians can do for them once they attain office. If there is a perception that those who have been voted into power are failing to deliver what they were expected to provide, they can be replaced when the time comes to go back to the polls. In between elections, a free media and free civil society can be expected to keep some check on the working of the political system. This is the way democracy is supposed to work and has begun to work in Pakistan.

But there is more to democracy than periodic elections and the watchful eye of the media and civil society. This was underscored by Fareed Zakaria some years ago in a powerful book about the needs of a true liberal democracy. It needs more than periodic free and fair elections. It requires rule of law, which ensures accountability on the part of those who occupy public positions. This can only be provided by a legal system that has a judiciary that can dispense justice without fear or favour. This condition is not fully met in Pakistan in spite of the hard-won independence by the upper echelons of the judicial system. The part of the legal system that comes into contact with the ordinary citizen is still not delivering justice in Pakistan. The citizenry is not being well served by the lower levels of the legal system.

There is also much talk of corruption and lack of accountability at all levels of government. Imran Khan, in his well-attended public meeting in Lahore, had a great deal to say about corruption, knowing full well that that is what people wanted to hear. But how to translate the desire for clean governance into some kind of policy and institutional framework? India, across the border, is also struggling with these questions although its governance structure is more developed than that of Pakistan’s. In other words, while the system of governance in Pakistan now has the trappings of a dramatic structure, it is still underdeveloped. Much more needs to be done. Will the political leadership have the wisdom to move forward in the right direction? Take the right road out of the crossroads?

[B]Source: [URL="http://tribune.com.pk/story/294821/reasonable-politics-bad-economics/"]Reasonable Politics, Bad Economics[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Policy stance in a changing world[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B]By Shahid Javed Burki
Monday, 07 Nov, 2011[/B]

THE European crisis was only partly and temporarily addressed on October 26 when the continent`s leaders agreed to raise additional resources to build a firewall around the economies that were heading towards financial collapse.

The markets around the globe reacted to the agreement with enthusiasm. In the United States, Dow Jones Industrials rose by 340 points, a 2.9 per cent increase, taking the index to beyond 12,000. There was a similar reaction by the markets in Europe.

But this initial enthusiasm quickly dissipated as the markets and analysts began to see that the agreement did not have enough substance in it. It was built on a series of promises that were not likely to be realised in the way the continent was politically structured. Greece seemed to be walking away from the agreement.

The agreement had neatly dealt with the issue of Greece`s sovereign debt. It was recognised that no amount of belt tightening will enable the country to meet its obligations. The banks holding Greece`s debt were persuaded to accept a `haircut` of 50 per cent, terms which are usually available to bondholders following default.

In other words, Greece was allowed to effectively default with-out calling it that. The second part of the agreement sought to recapitalise the banks, increasing the ratio of capital to assets. This will have implications for the banking industry since it will result in reducing its profit and raising interest rates.

There was understandable concern that the emergency fund, the European Financial Stability Facility, had used mirror and images in order to provide comfort to the market. An amount of $1.4 trillion was mentioned as the size of the resources the EFSF will be able to use to stop crises in individual countries from becoming systemic.

Because of German insistence, the facility`s initial size was capped at $600 billion of which a bit more than $250 billion was tied up in loans to troubled countries.

This left about $350 billion for future operations. However, by indicating that the EFSF will guaranteeupto20percentofthe bonds floated by members, the available amount was to be leveraged at a ratio of one to five.

There was a hope that some of the countries that had large foreign currency reserves will be prepared to invest in the facility.

Right after the agreement was signed, Klaus Regling, head of EFSF, went to Beijing to get China to make a significant contribution to his facility. An amount of $100 billion was talked about.

It was indicated that if capitalsurplus countries such as China, Brazil, India, Russia, South Korea and Singapore were to make significant contributions to bolster the resources of EFSF, it could spin off a subsidiary to be managed by the IME If this happens these emerging markets will havefinally found a role for themselves in international economic affairs.

It is suggestive that the same issue of the Financial Times (November 1) carried two stories, one about Pakistan`s troubled economic situation and the otherabout India`s increasing economic influence in the global market place.

In an interview with the newspaper, Hafeez Sheikh, Pakistan`s finance minister, announced the decision by his government to forfeit the remaining part of the$11.3 billion loan the country had negotiated in late 2008. An amount of $3.7 billion remained undisbursed from the negotiated amount.

The minister acknowledged that disagreements with the Fundover fiscal management led to the programme`s suspension at the end of 2010. He said the country walked away from the Fund since the Washington-based financial institutions `demands had become too tough and the government would instead press aheadwith a homegrown fiscal programme`.

Pakistan appeared to have settled for a much more modest economic goal. The minister argued that a resilient Pakistani economy growing at about 3.5 per cent thisyear did not need the IMF lending and that government had resources of its own to take care of its obligations. These include payments to the IMF that would begin in early 2012 with a transfer of $1.2 billion to the institution to service the amount it has already received.

The minister confirmed that his government was approaching China for economic assistance.

Although not mentioned by Mr Sheikh, it is known that Pakistan is about to sign a $4.5 billion swap agreement with Beijing that will run for three years and make it possible for the country to service its large trade imbalance with its large neighbour without paying out in dollars.

While Pakistan was settling for a rate of growth less than one-half that of neighbouring India`s, New Delhi was increasing its economic clout in international economic affairs. It has already given large grants and credits to Afghanistan and Bangladesh, was planning to provide assistance to some of the resource-rich countries of Africa, and had established its own aidgiving agency. It was now seriously considering providing capital to augment the resources needed by Europe to address the continent`s mounting economic problems.

In an interview with the Financial Times, Monetk Ahluwalia, deputy chairman of India`s Planning Commission, laid out the conditions for Indian sup-port. He said that India along with other BRICS countries in return for helping Europe will demand a larger voice in international economic affairs, in partieular in determining how the IMF operates.

`The principal agency that is responsible for bringing about international stability is the IMF, he said. `We would certainly support the IMF in providing resource support to Europe. It seems to me that the IMF should be strengthened but be evenhanded.` The Fund, he said, should apply the same rules to both rich and poor countries. In a way the Indian official was making the same point made by the Pakistani minister. But there was a difference. The Pakistani was speaking as a supplicant; the Indian as a potential global economic master.

The divergent paths on which India and Pakistan are proceeding means that Islamabad has no problem in being sidelined in international economic affairs while India continues to carve out a prominent role for itself.

Accepting that India is now in a different economic league compared to Pakistan should not be a problem but this recognition should come with a change in policy stance. Among the changes needed is the willingness to trade more with India and also to accept investment by that country in particular its private sector in the Pakistani economy.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=07_11_2011_606_004]Policy stance in a changing world | ePaper | DAWN.COM[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]G20`s failure at Cannes[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 14 Nov, 2011[/B]

THE world now stands at a crossroads. The future looks grim. It is also in search of leadership and a new economic theory. In 2012, the American economy is set to grow at only 1.8 per cent while the Eurozone made up of 17 countries that have a common currency will see its economy increase by 0.3 per cent.

The problems the global economy faces are clear: slow pace of recovery, high rates of unemployment in most large industrial countries, large trade imbalances that have created equally large savings imbalances, and inflationary pressures in several large emerging economies. Some of these problems are linked; a problem in one part of the world contributes to the creation of a different problem in another.

There is also the need to develop a new theory of economic management during periods of stress. Such a theory was authored by the British economist John Maynard Keynes to guide the governments during the period of the Great Depression. His thinking helped to develop the Bretton Woods system of global economic management. It also assigned a major role to the state, particularly during periods of economic stress.

The modern world has no Keynes at this time with an authoritative voice. There is also a growing concern that the era of multilateralism inaugurated by the founding of the Bretton Woods system in 1944 is giving way to a new wave of nationalism.

According to one interpretation, `Thomas Hobbes is now prevailing over Immanuel Kant in the reordering of the global system`. But there is a paradox in this move. `Governments have cededpower to mobile financial capital, to cross border supply chains, and to rapid shifts in comparative advantage.

Control of information now belongs to 24-hour satellite television, and the cacophony that is the web.

The consequence is the crisis of politics. Citizens expect national politicians to protect them against the insecurities economic, social and physical that come with global integration. Yet governments have lost much of the capacity to meet the demand.` Of particular concern for the management of the world economy is the role that should be assigned to the state in various partsof the world, in particular in the West.

There cannot be sustained globalisation without truly multilateral institutions to guide it. But this is proving hard to do.

There was a brief period of hope that the various `Gs` the G7 group of rich nations; the G8 that added Russia to the G7 group of the world`s largest economies; the G20 group of the world`s largest economies, including several from the emerging parts of the world could be trusted to guide the governments around the globe to walk in step. In April 2009, the G20, meeting in London, was able to craft a response to pull out the global economy from the deepdownturn from which it was suffering because of the working of the financial sector.

The group then agreed on a massive government spending plan that briefly had China, Europe, the United States and others pulling in the same direction. In the words of Barack Obama, `because of the coordinated action the G20 took then, the global economy began to grow again. Emerging economies rebounded. In the United States, we`ve had 19 straight months of private sector job growth and added more than 2.5 million private sector jobs`. But he emphasised that much remained to bedone and that needed international cooperation.

`The G20 nations must deepen cooperation on the range of global challenges that affect our shared prosperity...When we met in London two years ago, we knew that putting the global economy on the path to recovery would be neither easy nor quick. But together, we forged a response that pulled the global economy back from the brink of catastrophe. That`s the leadership we`ve demonstrated before. That`s the leadership we need now to sustain economic recovery and put people back to work, in our own countries and around the world.` But that leadership was missing at Cannes, France where the G20 leaders met once again for their semi-annual summit.

According to Moises Naim of the Carnegie Endowment for International Peace, a Washington think-tank, the stimulus agreement reached in London `provided the very strong sense that indeed it was the committee that ran the world.

After that every single meeting has been less impactful than the prior one.` Some governments decided not to wait for collective action to materialise. The Swiss, for instance, decided to place a limit beyond which their highly sought after currency would not be allowed to go. On the eve of the G20 meeting in Cannes, the Japanese intervened massively to keep in check the persistent rise in the value of their currency. With these unilateral actions in place it became difficult to put pressure on China to let its currency rise in value and thus help address the problem of global imbalances.

According to one analyst, `as they arrived in Cannes, the leaders of the countries representing 8s per cent of global output found the agenda dominated by political turmoil in Greece and a Euro-zone crisis too hot for the G20 to handle. It produced an action plan for growth and jobs that committed countries to almost nothing they were not al-ready pursuing; and left the international monetary system almost unchanged` They had little success in making progress on their medium-term goals` The Cannes G20 summit ended on October 28 after issuing a communiqué that had more negatives than positives about the role the group was willing to play in addressing the problems faced by the global economy. The document recognised that the Doha round of trade negotiations was not likely to succeed in meeting its development objectives.

There was no agreement on funding the European Financial Stability Facility either directly or through the IMF The conferees did what is normally done when a consensus cannot be reached. They postponed action to a later date to the meeting of the finance ministers scheduled for February 2012.

According to one newspaper account, `putting a brave face on the lack of agreement, a grim-faced Nicholas Sarkozy, French president, said the communiqué mentioned increased funds for the IMF`s special drawing rights. The latter, Mr Sarkozy added, was likely to be the option adopted in February probably.

While all the G20 agreed that `exchange rate regimes that are currently relatively inflexible will be made more flexible, more swiftly, including China` Beijing did not commit itself to any fundamental change. The Chinese, instead, repeated their demand for better management of fiscal affairs by the economically more advanced countries in America and Europe.

Some nations with sound public finances Australia, Brazil, Canada, China, Germany, Indonesia, and South Korea committed to `additional measures to support demand if the economic situation worsens`. This was tepid response to a difficult situation that called for resolute actions.

There were many promises at Cannes but meagre results.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=14_11_2011_606_004]G20`s failure at Cannes | ePaper | DAWN.COM[/url]

[B][U][CENTER][SIZE="5"]In a state of flux[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: November 28, 2011[/B]

It would not be an exaggeration to say that Pakistan’s political situation is in a state of flux. There is low viscosity fluidity. The tide that is building up can go in many different directions. While natural tides are not subject to human control, the political one that is gaining strength in Pakistan can be managed by political forces. As politicians and the groups they lead get ready to bring about change, they are working to raise passions among the populace by using populist slogans. They have understood that phrases such as persistent poverty and corrosive corruption have emotive values. They use them to excite the masses they hope to lead. However, they have said little as to how they will address these problems once the masses have placed them in power.

There are precedents in Pakistan’s turbulent political history of the use of populism as an easy way to power. It was done by Sheikh Mujibur Rahman in the late 1960s by using the ‘six point programme’ to gain autonomy for East Pakistan. The momentum he built-up led to a brutal civil war and the eventual break-up of Pakistan. It was used by Zulfikar Ali Bhutto to build popular support for him and his new political grouping, the Pakistan People’s Party. Bhutto’s ‘roti, kapra, makan’ was a powerful slogan that mobilised the masses and brought him to power in what was left of Pakistan after the emergence of East Pakistan as the independent state of Bangladesh.

The important lesson to be learnt from these two incidents of the use of populism to gain power is that the results can be destructive unless the slogans used are accompanied by solid programmes. Both Mujibur Rahman and Bhutto came to power without understanding how they would deliver what they had promised. Both created chaos; political in the case of Rahman, economic in the case of Bhutto. Both paid with their lives for the mistakes they made.

There are some important differences between the Rahman-Bhutto eras and the one politicians face today. Thanks to the extraordinary increase in the flow of information and the availability of means to access it, people are much better informed about their relative situations than they were four decades ago. As political scientists such as Samuel Huntington and political-economists such as Albert Hirschman wrote in the late 1960s, perception of relative deprivation is a powerful political motivator. It can lead to extreme political instability, sometimes even to revolution, if institutional means for dealing with it are not found by those who are in positions of power.

The other important difference is that the various means of social-networking can be used and, have been used by those who feel deprived, to get organised to challenge the established order. This was done not only by those who brought the Arab Spring and with it regime change in several countries in the Middle East but it also helped organise the upheaval in London this summer against the policies of the ruling Conservative Party. It is also what has made the on-going Occupy Wall Street movement in the United States a powerful expression of discontent. Technology, therefore, has increased the attention span of the citizenry but reduced their tolerance. If they perceive that their situation with respect to the others is not to their satisfaction, they will react, sometimes even with violence.

Relative deprivation can be with respect to the other, more fortunate people in the same society. It can also be with respect to people in other parts of the world. Pakistan’s politicians have to grasp the important fact that the citizenry is not only deeply concerned about the growing inequality in their own country, as well as but also the ground their country is losing to other nations around the globe.

Perception about deprivation has several other dimensions. It is not only income and wealth inequalities that become the subject of great concern with people. Inequalities in opportunity also become the source of unhappiness. Readily available information tells people of the kinds of opportunities that are available to the more privileged ones who inhabit the same geographic space.

In recent days and weeks, we have been treated to reams of newspaper articles about how important it is for politicians to come up with ideas, preferably embedded in party manifestos, on how they will cure the society and the economy of the many ills from which they suffer. But the advice has not been taken. In the two well-attended meetings held by political parties currently in opposition to the Islamabad coalition, the leaders stuck to generalities. No indication was provided as to what precisely will be done when they attain power. To help them along, it may be useful to list some of the problems the country faces at this time. Let me list half a dozen of these, each needing a well-thought-out approach.

It is possible to identify a number of glaring failures of public policy over the last two to three years, especially since democracy returned to the country. Among them, the following six are particularly important. At the urging of the International Monetary Fund there was excessive concentration on attaining fiscal stability even at the expense of sacrificing growth. There was focus on personal rather than social gains. There was indifference towards defining long-term strategic priorities, which meant concentration on short-term problem-solving. There was almost total disregard of increases in personal and regional income inequalities. No attention was given to building institutions that are regarded as critical for obtaining sustainable economic and social development. And, there was no attention paid to the ground Pakistan was losing in terms of positioning itself in the rapidly changing global economic and political order.

If this is a reasonably accurate list of what ails the Pakistani economy at this critical time in the country’s history, then this is what politicians seeking power should be focusing on. A well-informed electorate will reward those who look at issues such as these in appealing for support. It is in the context of this kind of list of past failures that their performance will be judged, were they to attain power.

[B]Source: [URL="http://tribune.com.pk/story/298465/in-a-state-of-flux/"]In a State of Flux[/URL][/B]

[B][U][CENTER][SIZE="5"]Narratives for the next elections[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: December 5, 2011[/B]

Several new development narratives should emerge as the date for the next general elections draws near. One would hope that out of these different lines of thinking at least two distinct programmes programs — perhaps even more — will surface for addressing current economic woes. These would offer distinct choices to the people as they go to the polls. People should know not just who they will be voting for but also what they will be voting for.

I happen to believe that the nature of politics is changing in Pakistan. In a recent book, Anatol Lieven described Pakistan as a hard country – hard to understand, but also hard to put down as a failure. He argues that while the Pakistani state is weak and is becoming weaker by the day, its society is strong. What lends strength to the society is people’s allegiance to small groups and communities. That makes it possible for the society to work; the leaders of these groups work with another. They thus produce a pyramidal structure that has a great deal of strength. This is what is meant by baradari politics. But that is set to change. Change will come as people gather more information about what is happening around them and what they are losing by having a weak state.

In the forthcoming elections, a larger proportion of people are likely to depart from caste and baradari interests and vote on the basis of what they consider to be good for the larger society. By weakening the politics of baradari, they may be able to strengthen the Pakistani state. This will mean a major change in the structure of politics that has endured for centuries. But for this change to proceed, the people must have confidence that as the larger state displaces the smaller communities and baradris, their own interests will be well served. For that to happen they must know what is being promised by the politicians who are seeking power.

However, a good part of the rhetoric emanating for politicians is focused on foreign relations, in particular relations with the United States. While this is an important matter and will have consequences for the country’s future, the discourse of economics is where attention needs to be given. To help the development of this discourse, it would be useful to pose some questions to those politicians who are trying to gain the attention of the country’s citizens, by appealing to them on the basis of issues rather than on cementing community and baradari ties.

Scanning what the politicians are saying these days about economics, it is surprising that the question of reviving growth in Pakistan’s faltering economy has not yet entered public discourse. Those who are currently active on the political stage should know that the most serious problem the country’s economy faces today, is that it continues to move forward at a tepid base. For the three-year-period between 2008 and 2011, the rate of GDP growth is likely to average only three per cent a year. With the population still growing at an explosive rate of two per cent per annum, income per head of the population is increasing by a paltry one per cent. With this low rate of economic expansion we can expect that a number of difficult economic, social and political problems will surface.

Those working hard to take away political power from those who currently wield it should be focusing their attention on the question of growth. They need to ask a number of questions. Why growth remains poor, why the economy’s slow expansion is mostly the consequence of public policy, and why the problem of sluggish growth, will create even more problems in the future? Having raised these issues they should then clearly indicate what they will do to revive growth.

Those who are in power now and have been responsible for making public economic policy will have a lot of explaining to do. Why is it that Pakistan today is South Asia’s sick man, growing at a rate less than half of that of Bangladesh and a quarter of that of India. They will undoubtedly attempt to place a great deal of blame on the poor security situation in the country and argue that the uncertainty that is created affects both domestic and foreign investment. They will also put emphasis on the destruction caused by recurrent natural disasters — two devastating floods in two successive years that have taken a heavy toll on the economy, in particular on the sector of agriculture. They will also blame the uncertainty created by the continuing turmoil in the global economy and its adverse impact on the domestic economy.

In other words, the focus of the people in power will be on the factors over which they had little control, while those on the other side of the political divide will blame the policymakers in place today for much that has gone wrong. In this ongoing debate, the truth lies nearer the position taken by those who blame policy for the disaster in economics. The external environment and natural disasters played a role but nowhere as much as was done by poor governance.

With the focus shifting to economics, the first issue that has to be taken in hand is that of the revival of growth. Here it should be emphasised that the traditional model that focuses on capital accumulation with most of the needed capital coming from abroad, will not work. The model Pakistan needs to adopt must include a number of other things — development of new institutions and strengthening of those that continue to function. Whichever leader, supported by whichever group, takes command, will have to take many decisions to orient the economy in a different direction. The leader will have to decide which economic classes should be placed in the lead of which sectors of the economy, in which sectors of the economy should the state work with the private sector and how much emphasis should be given to the development of some of the newer sectors. These are important questions; I will touch upon them in this space in the next few weeks.

[B]Source: [URL="http://tribune.com.pk/story/302111/narratives-for-the-next-elections/"]Narratives for the Next Elections[/URL][/B]

[B][U][CENTER][SIZE="5"]Putting growth on top of the agenda[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: December 12, 2011[/B]

A developing country without robust economic growth cannot know social peace and political tranquillity. This is especially so, if the country also has a high rate of population increase. This is certainly the case with Pakistan. Currently, the rate of GDP increase is stuck in the three to 3.5 per cent range, while the country’s population is still increasing at a rate of close to two per cent a year. This means that the income per head of the population is growing at a rate of no more than 1.5 per cent per annum. The rate of increase could be as low as one per cent a year. Since the distribution of income is becoming increasingly unequal, much of the growth in national income is being captured by the rich and the very rich. The poor and the not-so-poor are left with very little. There cannot be any doubt that the number of people living in absolute poverty is increasing at a rate higher than the rate of increase in population. Therefore the proportion of the poor in the population is increasing — perhaps increasing very rapidly. Pakistan is creating conditions that could produce political and social upheaval in the not-too -distant future.

The only way to address this problem is to move the economy forward at a rate much higher than the one at the present. This could be done but, it will need serious reflection on the part of policymakers and hard work by people in power. It would not be too ambitious to aim at a rate of growth twice the present rate — to set the goal at 6.5 to 7 per cent a year. This leads me to ask two obvious questions. Is such acceleration possible? If it is possible, how soon can this target be reached? I will take up the second question first.

My own six-year experience with Latin America at the World Bank, from late 1993 to late 1999, left me with some understanding about how fast economies that had faltered can recover. This can happen once policies are set right and once the right kind of people begin to walk the corridors of power. I saw the economies of Argentina, Brazil and Mexico recover rapidly when the policymakers began to pursue the right set of objectives with the right sets of policies. In all three cases, the command of the economy was taken over by new groups who could quickly reorient their economies. In other words, sluggish economies can bounce back reasonably quickly.

There is another example close to home of a sluggish economic bounce back. Beginning in 1991, India completely altered the model of economic management. It gave up the ‘license raj’ that had put the state on the commanding heights of the economy. Instead, the private sector was allowed almost all the room it needed to take hold of the economy. The result was electric. Within a few years, the rate of increase in India’s GDP almost tripled. This rate of increase had begun to be called the Hindu rate of growth. Pakistan, too, can achieve the same kind of bounce-back over the same kind of period — three to five years. What are the policies that need to be put in place to get Pakistan’s economy to pick up speed? The list is a long one and cannot be covered in one newspaper article. I will take up just one issue today: rampant corruption.

To begin with, Islamabad needs to provide good governance and encourage the provinces to do the same. The government has failed, or is failing in almost all the areas that should be its responsibility. Much of the talk about governance is cantered on corruption. Eradication of this social and economic disease has begun to appear prominently in the agenda of at least one political party — Pakistan Tehreek-e-Insaf — and promises are being made by its leader that, if he and his associates gain power, they will go after corruption and those who have indulged in it with vengeance. Imran Khan, the party’s founder and its inspiration, has set the stage by declaring the value and location of his assets. He has claimed that he can account for all that he has spent on creating his asset base and unlike some other leaders, he does not hold assets outside the country. This is a good beginning. It places the responsibility squarely and fairly on the shoulders of those who aspire to lead the country.

But corruption is a complex phenomenon. It cannot be totally eradicated. It exits even in developed and rich societies — the societies that have highly developed institutions of governance. What needs to be addressed are those aspects of it that hinder economic growth and development and place a great deal of burden on the poor.

Corruption is present in all societies, old and new, developed and developing. It is present, for instance, in the United States. A few days ago, Rod Blagojevich, the ousted governor of Illinois, was sentenced to 14 years in prison. Among his 18 convictions is the charge that he tried to leverage his power to appoint someone to Barack Obama’s vacated Senate seat in exchange for campaign cash or a high paying job. India, next door, is politically more developed than Pakistan. It, too, is tackling the problem of rampant corruption that has involved people serving in the lowest rung of the administrative structure to those who occupy high positions. Some of the amounts involved in corrupt practices in India are staggering. In one deal pertaining to the award of licenses for cellular telephones, a minister cost the country some $40 billion of lost revenue. The minister has landed in jail.

These two examples — one from a developed and the other from an emerging economy — show that an important part of dealing with corruption is to create institutions of accountability. Pakistan has tried to do that but with little success. Some of the institutions created in the past themselves became arenas of corruption and political exploitation. People in high places have been charged but have escaped punishment. How should the institutions which need to be set up for ensuring accountability themselves become accountable?

[B]Source: [URL="http://tribune.com.pk/story/305111/putting-growth-on-top-of-the-agenda/"]Putting Growth on Top of the Agenda[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Black swans` in an interconnected world[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 12 Dec, 2011[/B]

IN a global economy, effects of crisis in one part of the globe get quickly transmitted to the other parts. The world is now interconnected in ways never seen before.

Some of it happens because of the development of modern communication technologies.

News travels fast; those with access to mobile phones and tablets remain connected with other parts of the world.This is why the youth most likely to use these technologies and the instruments based on them have become so restless.

This was seen in the rapid spread of what came to be called the Arab Spring that has already resulted in the demise of several long-enduring regimes while threatening many more.

This, however, is not the only reason for the interconnectedness of the global society and economy. Over the last couple of decades the system of industrial production has been profoundly altered.

Most finished products meant for both domestic and international markets are now made from dozens, if not hundreds, of components made in many other parts of the world.

Apple`s iconic I Pad is one example ofa product that is made this way. It was designed by Apple in the United States but is made in one of the world`s largest factories in south of China. That factory brings in parts from several countries most of which are in East Asia. Cars and computers are also manufactured in this way. Boeings newest plane the Dreamliner or 787 is assembled in the United States but from the parts made in Europe, Japan, and China.

The development of this production system has created long supply chains that can be disrupted by unforeseen developments in some part of the world.

This happened when an earthquake produced a tsunami in Japan and caused major problems in the United States.

These problems slowed down the rate of economic growth in the US.

Major floods in Thailand this summer caused a significant fall in the production of lap tops and desk computers in many production centres all around the world. The Thai floods even affected Pakistan. One of Pakistan`s largest IT firms, the Lahore-based Netsol, has a large centre located in Bangkok that caters to the demands of a number of customers in East Asia. Disruptions caused by the floods resulted in a decline in Netsol`s operations.

These connections in the industrial production system mean that interna-tional trade has to be free of obstacles that countries used to erect to protect their domestic manufactures. Over the last several decades, the flow of international trade has become relatively free.

Countries around the globe have brought down significantly tariffs on imported goods. They have also dismantled other barriers to trade such as quotas on imports and providing large subsidies to domestic manufacturers. That notwithstanding, the sector of agriculture in most rich countries continues to enjoy some protection from imports from developing countries. The removal of this favoured treatment was one of the objectives of the now-stalled Doha round of trade negotiations.

That said changes in public policies around the globe and development of many global institutions have meant easier flow of trade among the nations around the globe. Trade now flows substantially unhindered among nations, as required by WTO.

Trade is not the only defining part of the process of globalisation that has gathered pace in the last couple of decades. Capital now flows almost freely among different economies, developed and emerging. Billions of dollars move across national frontiers at the flick of a computer`s switch.

Opportunities for making large profitsarise and are made use of by operators around the globe. With the development of new financial centres around the globe, the world of finance never sleeps.

It is open 24-hours a day, seven days a week, 12-months a year.A slight change in the environment even in countries that are less well connected with the global system can result in the flow in and flow out of large sums of money. For instance, the news that President Asif Ali Zardari had possibly suffered a heart attack and was flown out of Islamabad to Dubai caused capital to flow out the Karachi stock market.There is now even freer movement of people across national boundaries than was the case some decades ago. Even the anti-immigration sentiment in Europe and the United States has not kept out those who are determined to enter rich countries in search of better economic opportunities.

No amounts of barriers to the movement of people have kept people out. Go to any frequented tourist stop along the Mediterranean in Europe, and you will come across people from such populous Asian countries as Pakistan and Bangladesh selling umbrellas and trinkets in make-shift stalls that can be quickly removed when law enforcement officials arrive. Most of these peddlers have entered illegally.

There are therefore opportunities and risks for emerging markets in this growing interconnectedness. As already indicated shocks can get quickly transmitted and have to be absorbed by the countries that have only weak institutions to deal with them. Capital can move in and out, production systems can be disrupted, terms of trade can change quickly, various types of regulatory systems can affect the flow of trade. In the past Pakistan has had to deal with all such vicissitudes.

Violence in Karachi and security problems have discouraged foreign investorsand caused them to pull out millions of dollars from the Karachi stock market.

A sharp increase in the prices of agricultural commodities and oil in 2007-08 drained billions of dollars from Pakistan`s foreign exchange reserves.

Suspicions about the quality of shrimps exported from Karachi, led to a sharp decline in their export to Western Europe.

Concerns about the use of child labour in the shops manufacturing sports goods resulted in a serious loss of markets for this important item of export.

These are some of the problems created for vulnerable countries such as Pakistan. They are in addition to those brought by such natural disasters as floods and earthquakes. Planners and economic policymakers in Pakistan, however, have given little attention to protecting the country from these unforeseen shocks.

As Nasim Taleb puts it in his bestselling book, the appearance of `black swans` in human history have resulted in greater change than by those events whose occurrence could be predicted with some certainty. Black swan moments can cause havoc or produce opportunities. While their occurrence can be foretold which is why they are `black swans` any sensible economic management must factor them into its calculations.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=12_12_2011_605_004]`Black swans` in an interconnected world | ePaper | DAWN.COM[/url]

[B][U][CENTER][SIZE="5"]The uncertainity that exists[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: December 19, 2011[/B]

With the amount of uncertainty that currently exists, Pakistan’s economic future is hard to predict. The economy could go in one of two ways. It could enter a period of even deeper crisis, especially when the country is faced with a serious balance of payments situation exacerbated by Islamabad’s decision to terminate the programme negotiated with the IMF in late 2008. Or it could recover and begin to climb on to a trajectory similar to the one India — and to a lesser extent Bangladesh — is already on at this time. The path Pakistan will take depends on what policies are put in place by the people who gain power following the next general elections that must be held sometime in the next 15 months. But why wait until then? Why shouldn’t those in power now adopt the needed growth-promoting policies?

The country will probably have to wait for the elections to clarify who will yield power in Islamabad and the provinces following the polls. It is passing through a very difficult period — the kind of period that in the past brought the military to power. There now appears to be consensus in the country that repeated interventions by the people in uniform is not the way to move forward and that the solutions to the many problems Pakistan now faces must be found within a broadly representative democratic framework. It is worth the wait for such a system to grow roots. That developing a democratic culture would take time was to be expected, since real democracies take effort and patience before they take root. Even if the wait means a loss of five to 10 percentage points of growth over a few years, this foregone increase in income is worth the price to pay. This is the lesson that we learn by looking at the history of political development around the world.

One of these lessons is that policy reforms in democratic systems don’t move in a straight line. All reforms mean that there will be some losers but many gainers. If the losers have a great amount of political clout, they will manage to block the needed change. It is only when the potential gainers have learnt to mobilise and put pressure on policymakers that the needed reforms can go forward. It is now well recognised that politics and economics react in many different ways. Some of these are obvious; some of them more subtle. But one thing is clear. In democratic societies, change does not come easily. That notwithstanding, it is better to have change within a democratic framework than in those where the decision-making power is in the hands of a few people. There are interesting examples of this non-linear aspect to the process of economic reforms from both India and Pakistan. Beginning first with the Indian case.

In an interview given on December 14, Manmohan Singh, the Indian prime minister, said that his nation’s economy will return to a long-term growth rate of nine per cent a year, as inflation slows and the government extends a record of market-opening policies. For the moment, interrupted reforms have stalled the rate of growth. But growth is not the only setback to the Indian economy. Inflation has increased significantly, in part because of the fall in the value of the Indian rupee. India’s currency has tumbled 17 per cent this year, the worst performance among 10 major Asian currencies. The prime minister promised to get India back on the high growth track.

“We will stay the course. We will make India an eminently bankable and creditworthy economy”, he told the press. However, gross domestic product will increase to 7.5 per cent in the financial year ending March 31, 2012. This is two-and-a half percentage points lower than what India has been aiming at for the last several years.

High on the Indian agenda is the reform of retail trade, which is an important part of the Indian service sector but one that has been marred by extremely low productivity. One way of improving that is to permit large retail groups from the West to set-up shop in India. But the entry of companies such as United States’ Wal-Mart, Britain’s Tesco and France’s Carrefour was blocked by the small operators in the country. There are millions of small shops in India that intermediate between the small producers and small consumers. Shop owners have numbers and political power on their side. They were able to successfully work against the latest move by the government to allow these companies to set-up their businesses in India. To Prime Minister Singh’s great embarrassment, the government fearing a political backlash had to take back its decision. In the interview quoted above, the prime minister said that he expects to succeed in his push to open India’s retail market to foreign companies after regional elections conclude by the end of March 2012. The most important of these will be in the state of Uttar Pradesh that has a population of 200 million and where Rahul Gandhi, the heir to the Nehru-Gandhi dynasty, is attempting to establish his credentials for becoming the country’s new leader.

It is interesting that Pakistan was able to open its retail sector to foreign competition a couple of years ago. Three large western companies have come to the country. These include France’s Carrefour, the Netherland’s Metro and Germany’s Macro. Their entry has already had a profound impact on the productivity of the retail sector. However, Pakistan has done less well in the area of domestic resource mobilisation. Here, politics have intervened negatively. Pakistan had to walk out of the IMF programme, since in the judgment of the policymakers it was not feasible to introduce tax reforms desired by it. Politicians in power seem to have concluded that the cost of undertaking these reforms outweighs the benefits.

This leads to an obvious conclusion. Rather than changing the political system as Pakistan did so many times in its difficult history, people active in the political field must educate their constituents: to get them to see that those who fear that they will lose in the short-term, need not lose over the long-run. Immediate loss may be much smaller than long-term gains.

[B]Source: [URL="http://tribune.com.pk/story/308426/the-uncertainity-that-exists/"]The Uncertainty that Exists[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Rescuing US assistance programme[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 26 Dec, 2011[/B]

WILL Pakistan be able to go alone if it was shunned by the United States? What will be the cost to America of a breakdown in relations with Pakistan? These questions were asked by a report issued recently by Woodrow Wilson Centre, a Washington-based think-tank. Titled Aiding Without Abetting: Making US Civilian Assistance to Pakistan Work for Both Sides.

The report was the work of a group of 17 development experts, some of them of Pakistani origin. As the title suggests the report looked at the impact on both Pakistan and the United States if the Kerry-LugarBerman (KLB) act signed into law by President Barack Obama in October 2009 did not deliver on its promise. The KLB was developed to satisfy Pakistan`s quest for a relationship with the United States that was not subject to Washington`s political whims.

In the work done by me for the report I estimated that the impact of a total shutdown of American economic assistance to Pakistan will be minimal. It will push down the rate of growth by no more than 0.14 per cent a year. However, a breakdown of relations will have consequences for other financial flows to the country.

America`s net aid flows may not amount to a great deal but its influence on other sources of finance could be significant.

Pakistan`s decision to walk out of the IMF programme will put a serious squeeze on the government`s financial situation. Large repayments to the Fund will begin in early 2012. Unless the country taps other sources, these payments will very quickly deplete the foreign exchange reserves. It is in this environment that American aid to Pakistan should be viewed. This wasthe context in which Woodrow Wilson group wrote its report.

The report`s 28 recommendations could be divided into four parts. The first deals with the fragility of the situation in Pakistan. The report underscored the point that while Pakistan could fail as a state, it was too large a country and too strategically placed to be allowed to fall apart.

In this context the report looked carefully at the country`s current circumstances. `Pakistan already a fragile state, faces a tidal wave of internal stresses that could belie the myth that the country always muddles though. This looming `tsunami` is centred in `settled` or `main` Pakistan where most Pakistanis live, and not in the tribal belt bordering Afghanistan,` wrote the report`s authors.

The crisis the country was facing was fueled by a number of circumstances. These included economic, political, and social divisions that have been complicated by Islamization.

There are socioeconomic pressures building from below after decades of dominance and neglect by a narrow elite in the military and civilian establishments that retains a monopoly over the best education, agricultural land, urban real estate, and jobs and access to scarce capital. A legacy of 20 years of zigzagging policies that have left the country politically and economically underdeveloped and un-reformed, The current situation is precarious.

Added to this is a youth wave that is about to engulf the urban areas.

Half of Pakistan`s 180 million people are 21 years old or younger. Rural inmigrants were piling into slums that often lack access to clean water, basic health care and reasonably well paying jobs.

Given a very poor domestic resource situation, Pakistan for the timebeing has to rely on external assistance that would be sustained over a period of time and would eventually allow the country to stand on its own feet. That was what the KLB was meant to achieve.

The KLB act was divided into two parts or `titles`. The first title spelt out the democratic, economic and development assistance, the second dealt with security assistance. There were no programme specific conditions attached to the flow of assistance under the first title but the resources under the second title came with a number of conditions related to Pakistan`s participation in the struggle against Islamic extremism.

The worsening of relations between the two countries seems to have persuaded a significant number of American legislators to ask the executive branch of the government to attach stringent conditions to the aid that was promised to the country $ 7.5 billion over a five year period. In other words, there is an effort in Congress to attach to economic aid the same kind of conditions that were used for security assistance.

The report argued against such an approach. The Wilson group recommended that the United States `should continue to implement KLB without adding securityor econom ic-related-reformconditions but advocate reforms. [It should press] Pakistan to return to an arrangement with the International Monetary Fund`.

The Woodrow Wilson Center group also recognised that the Americans were poorly managing their aid programme in Pakistan. Its report had a series of recommendations on improving both the design of the programme as well as its execution. It suggested that Washington should `continue budgetary support for theBenazir Income Support Programme` but do so only `if it is tightened to exclude political manipulation and move beneficiaries toward eventual independence.

An effort should be made to `partner with local civil society organizations to improve input from aid beneficiaries, local citizen watchdog groups, and impacted populations throughout the life of a programme.

Recognising that the current programme was being run by people who stayed in Pakistan for short periods on account of security concerns, did not always of good knowledge of development issues and looked constantly back at Washington for guidance, the Wilson Center recommended that there should also be an effort by the American officials managing the aid programme to `recruit more seasoned technical experts, extend Pakistan tours, and devolve authority and accountability.

The Wilson group`s final set of recommendations concerned the building of capacity to handle the making of public policy as well as implementing aided programmes. It suggested that one of the objectives followed should be to `make vocational training the main US contribution to education in Pakistan.` It also recommended the aid programme should `help fill Pakistan`s government`s most critical expertise at the federal and provincial levels but with `payback` conditions for beneficiaries.

The Wilson Centre, in other words, argued for a serious mid-course correction for the KLB programme. The failure of KLB will have consequences for Pakistan`s relations with other countries in the West. Public opinion in many countries that Pakistan once counted as its friends was rapidly souring. Without support from the public, policymakers in countries such as Britain, Canada, France and Germany will not be able to provide significant amounts of assistance to Pakistan.

One example of the growing impatience with Pakistan in a country other than the United States is indicated by an editorial in National Post, a conservative Canadian newspaper, that called the authorities in Ottawa to stop aiding Pakistan.

`Every dollar that we spend on civil projects in Pakistan is another dollar that the country`s security establishment has available to it for providing material support to the Taliban and the Haqqani network in the Afghanistan-Pakistan borderlands.

In replacing Pakistan on its country-of-focus list [the Canadian International Development Agency] can pick from plenty of other countries that are not supporting the terrorists who are planting the roadside bombs that kill our troops,` wrote the newspaper. The collapse of the KerryLugar-Berman effort therefore would have serious consequences for Pakistan. It would spread discomfort about Pakistan beyond the United States.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=26_12_2011_606_001]Rescuing US assistance programme | ePaper | DAWN.COM[/url]

[B][U][CENTER][SIZE="5"]Achieving a critical mass[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: December 31, 2011[/B]

Social scientists have begun to note that in the first decade of the 21st century, globalisation and a revolution in information technology have achieved a critical mass. According to one analyst, “this has resulted in the democratisation — all at once — of so many things that neither weak states nor weak companies can stand up against popular expression”. We have seen the democratisation of information, of war fighting, of innovation and of expectations. The last is particularly important for reshaping political institutions. The year 2011 started with tens of thousands of Arab youth demanding an end to authoritarian rule. It is ending with the young in Russia asking for the same. As Aleksei Navalny, an imprisoned blogger in Russia, wrote recently: “We are not cattle or slaves. We have voices and votes and the power to uphold them.”

The street first rose in the Arab world but its rise gave encouragement to the forces of dissent in such different cultures as in Britain, France, Spain, Russia and the United States. A clear lesson has to be learnt by political systems in the making, such as the one in Pakistan. The lesson is that the people’s voice must be factored in both the design and working of political systems and their capacity to deliver results for the masses.

Given that, is it too optimistic to hope, as I did in last week’s article, that the next elections may serve to cleanse the political system in Pakistan? On the other hand, is Pakistan’s political system utterly and comprehensively broken? Or is the country simply dealing with the birth pangs of a new system that has been through a long and painful period of delivery over which the military presided off and on for many decades? Can a political system in such a perilous state manage an economy that is in tatters, fixing it in a way to ensure a high rate of GDP growth sustainable over time?

These are hard questions to answer. Neither economic theory nor political science is of much help. That said, it would be hard to argue that the progress the country has made in moving towards a system in which the people have some voice should be interrupted and replaced once again with strongman rule. Governments under strong leaders have done well in East Asia and China. Similar arrangements in Pakistan did not produce the same kind of results. The failure of strongmen in Pakistan was because they had short-term and narrow interests. With the possible exception of General Ayub Khan, none of the other military leaders came with visions to set the economy right in a way that benefits flowed to a majority of the population.

Some could argue that the economy is too sick to be left to the care of political doctors who have displayed little talent in handling it. To be tempted to move in that direction would be to repeat the so many mistakes of history. As I suggested last week, it is worth paying the economic price to develop a system of governance that would last for good and which would provide for all citizens in an equitable and caring way.

Today’s system is far from doing that and what is being promised by those present on the political stage at this moment does not get us there. According to the American political scientist and Senior Fellow at the Center on Democracy, Development and the Rule of Law at Stanford University, Francis Fukuyama, “the passion of protesters and democracy advocates around the world, from South Africa to Romania to Ukraine, might be sufficient to bring about ‘regime change’ from authoritarian to democratic government, but the latter might not succeed without a long, costly, laborious, difficult process of institution building”. This was written before the Arab Spring added more examples to those the author had used for how the pressure of the street could start the process of political change. But, continues Fukuyama: “Human institutions are subject to deliberate design and choice, unlike genes, they are transmitted across time culturally rather than genetically; and they are invested with intrinsic value through a variety of psychological and social mechanisms, which makes them hard to change. The inherent conservatism of human institutions then explains why political development is frequently reversed by political decay, since there is often a substantial lag between changes in the external environment that should trigger institutional change, and the actual willingness of the societies to make those changes.”

On their way to political development, history tells us that societies have followed cycles of development and decay. Those who seek to guard against decay must ensure that political systems have several institutional layers which would protect against slippages occurring. If this reading of the process of political development is correct, there is real danger of political decay in Pakistan. Descent into it should be prevented and this will require hard work and understanding. Pakistan will have to have patience before a set of institutions will get settled and will begin to work together and reinforce one another to provide for the common good.

Looking back at the political mess Pakistan finds itself in today, one cannot but wonder about what the country’s leaders were thinking when they embarked on a series of outdated approaches. The approaches they tried might have worked — in Pakistan’s case they did succeed to some degree — but they had no chance of lasting success being perpetuated way into the future. Among the more serious mistakes were those that invested more confidence in the style of political management that put premium on leading from the top. In addition there was confidence that America could protect the leadership groups while they attempted to manipulate the populace from great heights. That way of political management could not have worked and is not working. A profound change is needed in which we manage political development in the country.

[B]Source: [URL="http://tribune.com.pk/story/314220/achieving-a-critical-mass/"]Achieving a Critical Mass[/URL][/B]

[B][U][CENTER][SIZE="5"]Pluck the low hanging fruit[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: January 9, 2012[/B]

There is not much hope that the people who currently hold the reins of power in Islamabad have the political will or the competence to arrest the current economic decline. It appears that the citizenry will have to wait for a regime change before serious action gets to be taken. It is important that this change comes through democratic means. Any other way would seriously set the country back. When the change does come, what should the people in power to do to revive the economy and set it on the trajectory of sustainable growth at a reasonably high level?

There are many lessons policymakers can learn from the experiences in other parts of the world. When I looked after Latin America and the Caribbean region for the World Bank, I saw many economies pick themselves up from almost free fall, steady their situation and then begin to grow and improve the well-being of the citizenry. Both, Argentina and Brazil were able to accomplish that feat. One thing that impressed me about the Latin American economies in extreme distress was that once the right set of policies were adopted, the bounce-back in the rate of economic expansion happened quickly. The recovery was fairly sharp and enduring. This is what is meant by plucking the low hanging fruit.

What are the few things that need to be done immediately — say in the first one hundred days — after the change in regime occurs? I would suggest four areas of economic reform. One consequence these suggested policies will have is to increase investor confidence in the future of the economy. That alone will bring new investments into the economy by the private sector.

The first is to indicate that there will be no tolerance for corruption in high places. Corruption takes many forms and affects people differently. It will take a while and serious institutional innovation to bring it under control at the lower-level. Significant amount of corruption is built into the administrative systems. The British designed the systems of land records and maintenance of law and order at the local (thana) level so that the people paid for the services of the patwari and the thanedar rather than have the state assume the entire budgetary burden of adequately paying these functionaries. Dealing with corruption at these levels will take time. There will need to be major systemic changes before this can be brought under control. But higher level misdemeanour can be dealt with through the setting of good examples by the policymakers who occupy senior levels and by putting in place a system of accountability that is independent of executive control. The previous attempts in Pakistan to create such a system became the victims of political exploitation. Once the signal goes out that there will be no tolerance for bad behaviour, it will have a salutary effect on the way policymakers will deal with the people.

The second area for attention by the new regime should be the improvement in the investment climate for the private sector. As economists have known for a long time, confidence in the future is an extremely important determinant of private investment and, hence, of economic growth. The private sector will also be encouraged if the regulatory system is overhauled. The new government would do well to review all the regulations in place and streamline them with a view to ridding the system of those that serve no economic or social purpose. They have remained in place since they provide handsome rents to those responsible for implementing them. Some of the laws on the books have long served their purpose but have been retained since some vested interests have turned their provisions into rent seeking activities.

The third area that should receive the attention of the new set of policymakers is the size and funding of the public sector development programme. The Planning Commission has carried out a thorough review of the programme as it stands today and found that there are thousands of projects on its books with trillions of rupees of throw-forward. This is the amount that was allocated but not actually provided and, therefore, remains undisbursed. Several projects are under implementation, providing funds for their managers, staffs, residences and offices. Cleaning up this programme will not only save the government considerable amount of resources, it will also help to rationalise public sector spending.

The fourth area requiring immediate attention is the energy sector. Pakistan’s energy problem now encompasses both electricity and natural gas. It is badly hurting the people and the people have begun to react. There was recently tire-burning on the Islamabad Highway as people expressed their anger at the shortage of gas in their cooking stoves. Gas and electricity shortages are also hurting the economy.

Solving the energy crisis will take time and also require a great deal of investment. The state does not have the resources to meet the growing needs. The private sector has to be brought in. One approach would be to allow the provinces to invite the private sector to invest in hydro power. If anecdotal evidence is any guide, various provinces in the country have hundreds of sites on canals, streams and rivers that can be tapped to produce electricity.

Licenses to invest should be given not on the basis of the price the state is prepared to pay for buying the power produced. This was done when the first wave of IPP (independent power producers) invested in developing the energy sector. Instead, licenses should be handed out on the basis of auctions, with those indicating the lowest price they want for the power they produce, getting the go-ahead. This should be the limit of the state’s involvement.

With these policies and initiatives in place, the Pakistani economy could bounce back from its current slump. They will also set the stage for undertaking deeper structural reforms without which the country cannot climb on a high growth trajectory. The four reform areas discussed above could add as much as a percentage and a half points to the rate of growth every year. This means that by the calendar year 2015, two years after a set of new rulers takes office, Pakistan’s growth rate could double, increasing from three to six per cent a year.

[B]Source: [URL="http://tribune.com.pk/story/318463/pluck-the-low-hanging-fruit/"]Pluck the Low Hanging Fruit[/URL][/B]

[B][U][CENTER][SIZE="5"]Pakistan and the new Great Game[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: January 17, 2012[/B]

The latest American defence strategy revealed by President Barack Obama, on January 5, could result in the South Asian subcontinent becoming the stage on which the large powers will play the new Great Game. India and Pakistan are likely to find themselves on the opposite side of the new great power divide. It would not be healthy for South Asia if the United States growing concern about China’s increasing influence results in promoting rivalry between China and India. A healthy competition between the two Asian giants will serve the two well. What would not help is Washington’s use of India to balance China’s rise and thus have New Delhi serve its strategic interests.

The deteriorating relations between the US and Pakistan, as result of a series of events in 2011, have presented the policymakers in Washington with a choice. They can work to resolve the differences and remain engaged with the country that remains critical to its long-term — not just short-term — strategic interests or, they can simply walk out of the country as was done in 1989 when Pakistan’s usefulness to the US was diminished after the Soviet Union was pushed out of Afghanistan. There is considerable temptation to adopt the latter approach. That is certainly the case in the US Congress, which has already declared its intention to reduce the amount of military assistance and economic aid promised to Pakistan.

The new US defence strategy, by focusing so much attention on China, is bound to further complicate the situation and add another element in the American-Pakistani equation. With heavy dependence on external flows to retain some dynamism in the economy and with the Americans threatening to reduce their assistance, Islamabad has already reacted by attempting to draw even closer to Beijing. This effort was only partially successful; Beijing, with its eye on Washington, was not inclined to walk into Pakistan to fully compensate for the threatened American withdrawal. But Beijing may rethink its cautious approach. If the defence strategy sends the message to Beijing that China-containment had become the main interest for the US in world affairs, the Chinese may seek to list Islamabad as its partner to counter the American moves. And if the US responds by getting even closer to India what will result is a four-power ‘Great Game’ with America and India seeking to contain China and China and Pakistan working together to limit Washington’s influence in their geographic space. This will be an unhappy development for South Asia.

What is needed instead is a deep American involvement in helping Pakistan to develop its political system and its economy to guide the ongoing revolution in the Middle East and several other Muslim countries into the right channels. Drawing a connection between the Arab Spring and Pakistan’s development as a way of helping the West’s strategic interests may, at first sight, seem a bit of a stretch. But such a link becomes apparent when the dynamic unleashed by the events in the Middle East is put in a historical perspective.

What is at issue now is the direction the Arab Spring is likely to take. The first series of elections in the Arab world — in Morocco, Tunisia and Egypt — following the street-inspired revolutions have brought parties with strong Islamic roots into prominence. In Egypt, it is already clear that the party affiliated with the Muslim Brotherhood will have the largest presence in the newly elected assembly. It has won close to one-half of the seats, while another quarter has gone to the Salafists. The revolution was brought about by disaffected youth but its consequences will not bring them into political power. “So why are so many Arabs voting for parties that seem regressive to Westerners?” asks John M Owen, a professor of politics at the University of Virginia and the author of an important book on the clash of ideas and politics. His answer: “Liberalism in the 19-century Europe and Islamism in the Arab world today, are like channels dug by one generation of activists and kept open, sometimes quietly, by future ones. When the storms of revolution arrive, whether in Europe or in the Middle East, the waters will find those channels. Islamism is winning out because it is the deepest and widest channel into which today’s Arab discontent can flow”.

But today’s revolutions are different from those that came earlier; they are taking place in full global view where those participating in them are in constant communication with those watching them. It is unlikely that the liberal forces that relieved the countries of absolutist leadership will easily give way to the dominance of political forces that may take the affected countries towards another form of control. This happened in Iran in the late 1970s. To ensure that Islamists, even if they win elections, will not dispense with liberal democratic forms, the liberal forces are looking for models in which religious parties are embedded within democratic systems.

Pakistan could become such a model if its fledgling democratic system succeeds. Pakistan, at this time, is deeply involved in containing the rise of Islamic extremism. One way to deal with it is to combine the use of force with accommodation. Those not prepared to work within the established legal framework must be dealt with firmly while those inclined to use the norms of democracy to advance their agendas must be given accommodation. Pakistan’s difficult political evolution is being watched by many in the Middle East. If it succeeds, it will be seen as an example to be replicated. However, the United States by withdrawing its support at such a critical time and forcing the new Great Game on South Asia, will unleash another dynamic that could seriously set back the Pakistani experiment. A strong anti-American sentiment would undoubtedly help the Islamic groups and inhibit the more liberal forces. In other words, Washington must look at Pakistan through the lens of the Arab Spring rather than as a player on the other side of the game to contain China.

[B]Source: [URL="http://tribune.com.pk/story/322350/pakistan-and-the-new-great-game/"]Pakistan and New Great Game[/URL][/B]

[B][U][CENTER][SIZE="5"]Poor governance and citizen’s discomfort[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: January 23, 2012[/B]

When ‘governance’ entered the language of economics, it was a camouflage term used by the World Bank. The latter substituted it for the term ‘corruption’. By bringing in the term governance in its discourse, the Bank wished to impress the countries it was working with that corruption was taking a heavy toll on their economies, in particular on the poorer segments of the population. But at that time, corruption was too impolite a word to use in a dialogue with the countries who borrowed from the Bank. Once serious analytical work got to be done by the Washington-based institution, it was realised that the word governance went much beyond corruption. It also implied, the distance between the government and the people it was meant to serve. It included the responsibility for providing public services to the citizenry and their quality. It included holding public servants accountable for their work. Responsibility, deliverability and accountability, therefore, are three important attributes of good governance.

Since poor governance has a negative impact on economic performance, this is one reason why the rate of economic growth has stalled in Pakistan. It has contributed to Pakistan not achieving the rates of GDP growth attained by other large South Asian economies. In addition to poor governance, a number of structural problems prevented the country from reaching its potential. These included a high rate of population growth; low rates of domestic savings and consequently, inadequate investment, not only in human capital but also in infrastructure, industry and agriculture; weak industrial and export structures, dominated by products based on cotton; an ambivalent attitude towards the private sector and the absence of liberal economic framework until the early 1990s; high levels of defence spending; poor resource mobilisation by the government; underdeveloped institutions of governance; and highly centralised decision-making. Among these contributors to economic growth, poor governance is one of the more important ones.

Since 2008, the country has been limping through a period of political transition. The rule by the army, that had by then governed for 33 years out of the 61 years of independence, gave way to that by the elected representatives of the people. There was excitement in the air; there was expectation that through their representatives, the country’s citizens will sit at the table where important public policy decisions were being taken. There was optimism that the pace, at which political transition then underway, would proceed smoothly and would usher in a government that would be more responsive to the needs of the citizenry. However, within a couple of months of its induction into office, the coalition government that had assumed office in Islamabad collapsed and the country entered a period of political uncertainty that has lasted to this date. Political uncertainty contributes to economic stress; people willing to invest in the economy are unlikely to invest their capital when risks are high. Political turmoil and poor governance were to take a heavy economic toll.

Pakistan has given scant attention to the need to provide good governance not only in recent times but throughout its history. However, the country has reached the point where the issue of governance can no longer be ignored by the ruling establishment. The need for good governance acquired special significance as the streets in Middle East exploded and brought about regime change in four countries that had been governed for decades by the same heads of state and relying on the support of the same sets of people. A number of other countries in the region have also come under pressure. The street and the public square in the Middle East have sent out two clear messages to those who govern. First: the people subjected to decades of rule in which they had no role to play and in which their welfare was simply ignored have arrived at the limits of their patience. The other message was that in the modern means of communication, the citizenry have found the tools to get organised, agitate and put pressure on the ruling establishment to mend its ways. These two messages have relevance for Pakistan as well.

The quality of governance in Pakistan is as poor as that in the Middle Eastern countries, contributing to a major economic downturn. Poor economic performance, however, has not prevented the well-to-do from becoming rich, leaving the rest of the citizenry way behind. Political scientists from the days of Samuel P. Huntington have been emphasising that relative deprivation — their term — can be a powerful sentiment for forcing political change. It has been deployed in Pakistan’s torrid history for bringing about regime change. The governments headed by President Ayub Khan and Prime Minister Zulfikar Ali Bhutto fell largely because the people were unhappy with what they had received from the ruling establishment.

When the youth get agitated of what lies in their future, they are likely to raise their voice and if the voice was is heard, they are likely to take to the streets and assemble in public squares. This is precisely what happened in Tunisia and Egypt. These countries were not spared the pressure of the street even though their economies were growing at a brisk pace. In fact, as Political scientist, Samuel Huntington wrote a number of years ago, the feeling of relative deprivation becomes acute when the economy is growing rapidly but most of the incremental income is captured by narrow economic and political elites. Absence of good governance, therefore, could — and often does — result in political instability. An open political system and vibrant media serve as safety valves but when the pressure being built up cannot be released, there can be trouble for the establishment. It would appear that the movement launched by Imran Khan and his Tehreek-e-Insaf has got traction because of the growing discontent among the citizenry, in particular among the country’s youth. It is worth noting that corruption and its eradication were the main themes in the speeches given by Khan at the largely attended rallies in Lahore and Karachi.
[B]
Source: [URL="http://tribune.com.pk/story/325573/poor-governance-and-citizens-discomfort/"]Poor Governance and Citizen's Discomfort[/URL][/B]

[B][U][CENTER][SIZE="5"]Governance and citizen’s discomfort[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: January 29, 2012[/B]

Political uncertainty need not have produced poor governance. In Pakistan, however, the two came together. Poor governance has many meanings. It means the indifference of those in power towards delivering the services people need; to ensure security for the lives and properties of the citizenry; to respect the rights of all minorities, ethnic as well as religious; to hold themselves accountable for their actions; to provide stability and continuity of policies; and to create an environment which leads people to develop confidence in their future. Those who have governed Pakistan since 2008 have failed on most — if not all — of these counts. There are many indicators of the decline in the quality of governance. To take one, corruption: according to the 2011 report issued by the Berlin-based Transparency International, Pakistan ranks poorly on that score. It is close to the bottom in the organisation’s ranking of countries around the globe.

There are several measures a well-intentioned government could have adopted to improve the quality of governance. Of these, four are of particular importance: to establish a system of accountability for all public officials in which the citizenry has confidence, to strengthen the legal and judicial systems, to give autonomy to the judiciary and to bring the government closer to the people. There was some movement on two of these four. One of these — autonomy of the judiciary — was forced upon the political system by the civil society. The second — grant of greater authority to the governments at the subnational levels is still work in progress.

Some attempts were made to set up institutions of accountability, most recently, by the administration headed by ex-president Pervez Musharraf. He reorganised the apparatus inherited from the democratic governments that ruled in the 1990s and appointed a highly respected army general — Lieutenant General Muhammad Amjad, in whom he saw all the needed qualities — as its head. The National Accountability Bureau (NAB) was meant to “put the fear of God into the rich and powerful who had been looting the state”, Musharraf wrote later in his autobiography. “A special NAB ordinance was issued to give power and full autonomy to the organisation”, he continued. The NAB worked diligently and hard at the beginning of the Musharraf era. But as had happened so many times before it, too, became politicised.

In an attempt to stay in power, while realising that he could not stop the country from moving towards democracy, president Musharraf struck a deal with Benazir Bhutto and her party, the PPP. As a part of the deal, he issued the National Reconciliation Ordinance (NRO) on October 5, 2007. According to Transparency International “in many ways, this was a set-back for anti-corruption moves in Pakistan, as all proceedings under investigation or pending in any court that had been initiated, or involved the National Accountability Bureau NAB prior to October 12, 1999 were withdrawn and terminated with immediate effect. NRO also granted further protection to parliamentarians as no sitting member of the parliament or provincial assembly can could be arrested without taking into consideration the recommendations of the of the Special Parliamentary Committee on Ethics or the Special Committee of the Provincial Assembly on Ethics.” The NRO became an issue of contention between an assertive judiciary and the PPP-led government. The issue remains unresolved.

Pakistan — in particular its policymakers — have not fully grasped the importance of a well-functioning legal system for providing good governance. No significant attempts have been made since the founding of the country to reform the legal system so that it adequately addresses the varied needs of the citizenry. Dispute settlement and holding accountable those who break the law are two of the more important attributes of a good legal structure. Both attributes not only help the poorer segments of the society. Failure of one or of both hurt the political system and it obstructs the smooth economic development. The legal system’s inability to deliver timely justice is one reason why an increasing number of people in Pakistan are being attracted towards the Islamic way of providing justice.

The problems with the existing system have been investigated a number of times, most recently by the Asian Development Bank (ADB). The well-funded ADB project to reform the legal system did not go very far in addressing the problems that have rendered it dysfunctional. Its failure to fully achieve the stated objectives was the poor by-in by the various governments at the federal as well as the provincial levels. In spite of the pressure exerted by the Bank, there was little establishment interest in making the legal system responsive to the needs of the common man.

A legal system is as effective as the judiciary that administers it. Largely, because of the support by the citizenry through the various civil society organisations, Pakistan’s judiciary at the senior levels has begun to provide comfort to the people. The heavy involvement of the legal community — the ‘black coats’ movement — during the waning days of the Musharraf regime has increased people’s confidence in the Supreme Court and the provincial high courts. The courts operating at these levels have begun to take a deep and increasing interest in the political and bureaucratic systems accountability. The current conflict between the Supreme Court and the PPP-led government in Islamabad is likely to be resolved in favour of the judiciary, notwithstanding, the resolution passed by the National Assembly on January 16, expressing confidence in democracy. An efficient and effective judicial system is an important part of the democratic structure, not separate from it.

There is hope that the reshaping of the structure of government following the passage of the Eighteenth Amendment to the constitution will improve the quality of governance by bringing the state closer to the people. But there is also anxiety that the devolution of so much authority to the provinces could cause disruption in a number of areas. There is a particular concern that unless the process of devolution is managed carefully, it could result in the deterioration of public services to the poorer segments of the population. It is now recognised that bringing the government closer to the people is essential for improving the quality of services provided by the public sector. This objective can be achieved if the process of devolution underway, factors in the lessons that history and experiences have to teach.

[B]Source: [URL="http://tribune.com.pk/story/328908/governance-and-citizens-discomfort/"]Governance and Citizens' discomfort[/URL][/B]

dawn 30/01/2012
 

[CENTER][IMG]http://i295.photobucket.com/albums/mm136/adeesaha/30_01_2012_605_003.jpg[/IMG][/CENTER]

[url=http://epaper.dawn.com/Advt.php?StoryImage=30_01_2012_605_003]| ePaper | DAWN.COM[/url]

[U][CENTER][SIZE="5"][B]Political parties and economic policymaking[/B][/SIZE][/CENTER][/U]

[B]By Shahid Javed Burki
Published: February 13, 2012[/B]

At this stage in our political development it is useful to provide a brief overview of the structure of politics and identify a number of divergent interests that are embedded in today’s political system. They will have to be reconciled in order to formulate a coherent set of policies aimed at finding appropriate solutions to the many economic problems the country currently faces. At play are half a dozen political interests each of which is represented either by political parties or by people’s movements. I will begin with the political parties and the ideologies they represent.

The two major political parties — the Pakistan People’s Party (PPP) and the Pakistan Muslim League (N) (PML-N) are committed to a significant presence of private enterprise in managing the economy. For the PPP, this is a major departure from the days of its founding. In the ‘foundation documents’ issued in 1967 and 1968 when the party was developing its approach to economic management, it adopted an economic ideology described as ‘Islamic socialism’. The Islamic part of the slogan was mostly for optical purposes; it had little relevance for policymaking once the party gained power. But the party was serious about socialism. Once in power, the party went ahead and expropriated a significant part of the privately owned economic assets.

The PML-N on the other hand inherited the private sector orientation of the original party. Under Muhammad Ali Jinnah, the long-serving president of the party and the founding father of the state of Pakistan, there was a strong preference for encouraging private entrepreneurship. Being a member of the trading community, private enterprise and private initiative were in Jinnah’s DNA. In fact, once the British had agreed to create Pakistan, Jinnah encouraged some of the well-established business houses to move from India to Pakistan. Among them was the Habib family. Under Nawaz Sharif the party has simply reverted to its original preferences.

While it is helpful that the two mainstream political parties are no longer far apart in their economic preferences, there is major difference in the way they look at governance. That said, I would argue that the PPP has been less concerned than PML-N about the appropriateness of using government finance for personal use or for the benefit of the constituencies that support it. The League’s traditions go back to the days of Jinnah and Liaquat Ali Khan. The former was a rich man before he assumed the reins of power in Muslim politics. He did not add to his wealth when he became Pakistan’s chief executive and gave much of it away when he died. Liaquat Ali Khan, who stepped in his shoes, is said to have died a near-pauper. Several other leaders of early Pakistan, Iskander Mirza and General Yahya Khan among them did not have large assets on which they could live after they left office.

Moving down from the national to the subnational parties, the economic interests of the MQM, and ANP, are focused on bettering the economic interests of the communities they represent. The former has been more diligent in pursuing the economic interests of its constituents. The latter, while representing the Pashtun communities of the province of Khyber-Pakhtunkhwa (K-P), has been less active. Given their support base, both parties are in favour of putting more power in the hands of the provinces. The MQM would like to go a step further since its political and economic interests are not entirely served by devolving power to the provinces. It would like to see authority devolve to local government institutions since its power base is concentrated in Sindh provinces large cities of the province of Sindh. While the MQM has been more successful in working for the welfare of its constituencies, the ANP’s record is much less attractive in this context.

There are also several regional parties operating in Balochistan. Most of these are convinced that the federal government has not acted to promote the development of this large and resource-rich province. Dominated by tribal leaders, the sociocultural attributes of this province are different from those of K-P, the other small province in the Pakistani federation. Even when an attempt was made to provide financial compensation to the province for the exploitation of its ample mineral wealth for national use, much of this amount was expropriated by the powerful tribal maaliks and very little trickled down to the very poor. Even when the distribution of income is deteriorating in the country as a whole, it is getting even worse in this province. Given Balochistan’s geopolitical position, with long borders with Afghanistan and Iran, and with Pakistan’s longest coast line, it is not surprising that there is growing foreign interest in the area. Some of the smaller political parties operating in the province are reported to be receiving foreign funding.

For a country in which Islam, in particular its extremist version, has become such a visible and often destructive force, parties functioning in the domain of religion have had little political consequence. Islamic groups in the country can be divided into two categories. There are those like the Jamaat-e-Islami and Jamiatul-Islam that have always functioned in the formal political space, accepting the norms of political behaviour. It was only when they coalesced and came under one banner as they did when they created a coalition called the Muttahida Majlis-e-Amal that they became influential in the policymaking arena. More often than not, they operated from the margins of the political space. However, political organisations such as the Lashkar-e-Taiba have a very different political agenda — a radical make-up of the Pakistani society and its political and economic aspects. They are willing to resort to the use of violence rather than operate within the political system.

Reflecting all these divergent political interests in shaping a common approach to formulating economic policy will require clever and dedicated leadership. This is not present on the scene at this stage. The next set of elections may bring a new group of people into the political space and put them in policymaking positions to rescue the country out of its difficult economic situation. Until then, Pakistan will have to muddle along, costing a great deal in terms of lost growth and increased levels of poverty.

[B]Source: [URL="http://tribune.com.pk/story/335419/political-parties-and-economic-policymaking/"]Political parties and Economic Policy Making[/URL][/B]

[B][U][CENTER][SIZE="5"]Pakistan’s most difficult test[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: February 21, 2012[/B]

Understanding the history of crises in Pakistan can contribute to a better appreciation of the way the Pakistani economy has evolved since the country’s birth in 1947. History also helps to define the space in which those making public policy must operate. Some economists call it path dependence. In technical terms, ‘path dependence’ is something economists have begun to believe is an important determinant of the present. This refers to the notion that ‘often if something that seems normal or inevitable today, began with a choice that made sense at a particular time in the past, but survived despite the eclipse of the justification for that choice’.

The current structure of the Pakistani economy was shaped to a considerable extent by the past. So were its relations with many countries in the region. It helps to understand how that happened in order to deal with the problems to which the past may have contributed. One possible solution to the many problems Pakistan faces today is to improve the country’s relations with India, the sister state to the south. Why focus on relations with India is a question that needs a detailed answer.

Pakistan, a crisis prone country, is now faced with its most difficult test. The government that holds the reins of power in Islamabad is preparing to complete its first term in office. Will that happen and will the PPP-led coalition in Islamabad call for another set of elections sometime before the end of Spring of 2013? If the country passes that critical mark on the way to its further political evolution, it would have possibly set itself on a course it has been seeking to travel on ever since it gained independence nearly 65 years ago. There are many hurdles over which it must jump before the country reaches that point. If it does, would that mean the end of the period of crises that began the moment the military passed the baton to an elected set of people’s representatives?

The period since March 2008 — when the current prime minister from the PPP took office — has seen many crises not just in politics but in a number of other areas as well. Nothing has remained unaffected — not economics, not the society at large, not relations with the world beyond the borders. Pakistan’s torrid history is speckled with crises. They arrived at regular intervals to claim the attention of the people in power. This preoccupation with finding solutions to crises deflected a series of policymakers from evolving a long-term vision for developing the economy and shaping the political system.

Crises began the day the British decided to transfer power not to one, but to two successor states. One state — India — was created on the basis of an idea that the state structure could be erected that would serve all people, all the time. That idea has mostly worked. But the ‘idea of Pakistan’ did not work. Pakistan was given statehood in the belief that the Muslims of British India could not live in a political system and in an economy dominated by people from other faiths. They had to have a country of their own which they could mould according to their sets of beliefs. These were different from those on which India would build its own state structure.

Less than a quarter century after gaining independence, Muslim Pakistan broke into two parts. The one in the east used ethnicity to create the state of Bangladesh. As the name of the new country implies, it was to be a country for ethnic Bengalis. The other part in the west, then called West Pakistan, retained the name of Pakistan. The new Pakistan was multi-ethnic, spoke several languages but did not know what should be the basis of nationhood.

Is it necessary for Pakistan to define the meaning of nationhood? After all, hundreds of new states have been created since the founding of Pakistan and only a handful of those are based on an ‘idea’. However, Pakistan having been established on the basis of a distinct idea, believes that it must have a reason for its existence as a separate state. For more than half a century, it used India as the basis of nationhood. Perceived Indian threat was used for decades by various groups of Pakistani leaders to create a sense of statehood among a very diverse citizenry. To some extent, the impression that India was set to undo Pakistan was justified by a series of actions taken by the first Indian administration under prime minister Jawaharlal Nehru. It seemed determined to cripple Pakistan before it could develop its own economic legs on which it could stand. This India centric approach may have made sense in the first decade or so after independence since, a number of crises were created by the hostility of the administration headed by Nehru. But it has now lost its relevance.

The drama of crises in Pakistan divides into three acts. The first, as already suggested, figured India. New Delhi took a number of actions — some real, others more feared than real — that made the leaders of Pakistan extremely nervous about the intentions of India towards their country. The second figured leaders in Pakistan with strong ideological preferences. General Ayub Khan, the first military president, favoured the private sector to take the lead in developing the economy. Zulfikar Ali Bhutto was disposed towards a socialist approach, choosing to expand the role of the state in economic management. General Ziaul Haq was inclined to ‘Islamise’ the economy without fully appreciating what that implied.

The third act in the drama is the one that is playing out at this time. Most of the crises the country currently faces are the product of poor governance. In this context, the term ‘poor governance’ needs to be defined in broad terms. It means more than corruption, of which there is a great deal in the country. It also means neglecting the creation of institutions without which no economy can develop. One thing is clear about this on-going, three-act drama. It is only by building the capacity to deal with crises that their recurrence can be prevented.

[B]Source: [URL="http://tribune.com.pk/story/339176/pakistans-most-difficult-test/"]Pakistan's most difficult test[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Asia-centric approach to development[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 27 Feb, 2012[/B]

PAKISTAN`s policymakers, preoccupied as they have been with handling repeated economic crises, haven`t spent much time on thinking strategically about their country`s future.

When they do get around to doing that, it would be appropriate to look at Pakistan`s future in terms of the country being a part of `rising Asia.`That is important not only for Pakistan but other Asian countries as well.

However, even for those countries that think long and China is certainly one of them strategic considerations still focus on old ties. That is a mistake.

If the two recent visits by Xi Jinming, China`s president-to-be, can be seen as guide to rising Asia`s aspirations, it can be summed up as follows: to stay connected with the old world. The United States, visited by Xi in mid-March remains not only the world`s largest economy, it is also its most innovative.

Ireland, the tiny country in Europe`s northeast, offers an opportunity to enter the continent. Xi visited it after his tour of America.

He brought along 150 Chinese businessmen with him and invited Enda Kenny, the country`s prime minister, to Beijing. It appears that the fast rising and changing China wants to leave one thing unchanged: its connection with America and Europe.

This makes little sense if Asia`s prospects are viewed from a different perspective. Some Japanese economists some time ago came up with the notion that the flying geese offer a good way to describe how the prevailing order among nations changes with time. The pattern flying gees follow is known to all those who watch the sky as birds fly from one distant place to another. The bird in the lead can stay in place the lead for only a short time.

When it is in that position, it faces the most air pressure, in a way protecting those that are behind.

After a while, when it is overcome by fatigue, it just slips back, taking the last position while the bird right behind it goes in the lead. This was evolution`s way of teaching the flying birds how to cope with long-distance travel and air pressure.

This behaviour is only a slight fit for what happens to world economies. We have known for many decades that the country or countries in the lead eventually lose their position to those that are right behind. This happened to Britain after it had taken a big lead following the Industrial Revolution.

France caught up with it. Later Germany did the catching up with both Britain and France. Later still, the United States not only caught up with Western Europe but overtook it. Europe did not retreat to the back row but stayed right behind. There was much learning done in the catching up process.

Now the catching is being done by Asia, in particular the eastern part of the continent. But this latest episode of `catching up` has been messier than those that came before it and is likely to profoundly affect the working of the global economy.

The previous catch up periods were the result of technological advances. This is what happened to Britain because of the Industrial Revolution or to the United States because of the introduction of standardisation and mass production, first introduced by the automobile industry. Constant innovation became the main reason for the continuous dynamism of the American economy. Or the catching up happened because of the government of the day decided to play an aggressive role in reshaping the economy.

In France as well Germany, public policies helped domestic industries to move ahead and catch upwith those in the leading economies. The catching up, in other words, was the consequence of what happened to the economies in the second row. This time around, however, it is the first row economies that have begun to stumble. This is certainly the case in Europe and may also happen in the United States.

For most of Europe rapid decline is the consequence of important structural changes, not all of which have been fully understood by the continent`s policymakers. The most significant of these relates to the demographic structures of most European societies. They are experiencing rapid fertility declines that are tuning the population pyramids in these countries upside down.The proportion of old people has increased at the expense of those who are very young. This has several consequences. Two of these are particularly important.

With the share of the young in the population declining, it becomes increasingly difficult to run educational and entrepreneurial systems that retain the cutting edge. And the social system constructed over the last several decades that pay very well to the retirees cannot be sustained with fewer people in the working age and therefore fewer people paying taxes. The only long-term solution to the European problem is for the continent to admit more migrants and this is proving to be difficult because of the strong biases against cultural dilution.

But the Europeans have opted for what the economist Paul Krugman describes as `pain without gain` approach to address their crisis. Some European nations are suffering Great Depressionlevel pain: Greece and Ireland have had double-digit declines in output, Spain has 23 per cent unemployment, Britain`s slump has now gone on longer than its slump in the 1930s. `Worse yet, European leaders and quite a few influential players in America are still wedded to the economic disaster responsible for this disaster...Specifically, in the early 2010 austerity economics insistence that governments that should slash spending even in the face of unemployment became all the rage in European capital,` wrote Krugman recently in his New York Times column.

It appears, therefore, that there will not be an orderly rearrangement of the flying geese; that the European stepping back from the front line of the global economic structure is likely to be more painful and chaotic than need be the case. All the previous periods of catch up occurred when the world was not as well connected as is now the case. Any major adjustment and any major structural change reverberates around the globe. Pain in Europe is being felt in other parts of the world.

This is particularly the case in Asia and in Asia more in the continent`s eastern part than in other parts that has built up industrial structures based on the markets in the world`s more developed parts.

West`s economic decline is coming at a rate more rapid than was envisaged even by those who saw the 21st as Asia`s century. Asia should figure not only on the travel itineraries of aspiring Asian leaders but in the economic plans and thinking of all policymakers.

Asian countries should adopt Asia-centric approach to economic growth and development.

For Pakistan, placing Asia in the centre of strategic thinking means forging investment and trade links with the countries in the neighbourhood.

Once that is done, Pakistan will have to reorient its economic and industrial policies so that it takes advantage of the fast-paced changes in many parts of Asia, in particular the eastern part of the continent. Also, in developing future ties with Europe and America attention should be given to developing the industries that have growing demand in these older economies.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=27_02_2012_605_001]Asia-centric approach to development | ePaper | DAWN.COM[/url]

[B][U][CENTER][SIZE="5"]Making the system inclusive[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: March 12, 2012[/B]

Pakistan’s political evolution towards a sustainable democratic system has been slow but reasonably steady. Since democracy returned in 2008, two sets of Senate elections have been held. The second one resulted in shifting the control of the upper house to the coalition that currently governs at the center. This transfer of power occurred normally without causing a political earthquake. Unless something that is entirely unexpected happens in the next few months, the next general election will be held before the end of this year or early next year. With those elections an elected administration would have completed its full term in office. This would a milestone in the country’s political development — the first time in 65 years that an elected government was allowed to complete its tenure. This would be a giant step towards the realisation of a goal that seemed out of reach for several generations that have come and gone since Pakistan became an independent state. These developments lead to an important question: If Pakistan does settle down politically what would be the impact on the development of the economy?

An important recent book by James Robinson and Daron Acemoglu, two economists from Harvard University and the Massachusetts Institute of Technology respectively, suggests a close link between political and economic development. To argue that politics is an important determinant of economic change is relatively rare for economists. That is not so for political scientists who have been postulating such a link for decades. Samuel P. Huntington of the ‘clash of civilizations’ fame, pointed out in a work published more than 40 years ago that the association between political and economic change runs in both directions. His important finding based on a number of case studies that included Pakistan, was that rapid economic growth can be politically destabilising in the absence of institutions that can absorb the shocks and tensions that inevitably follow.

Viewing change from the perspective of economics, Robinson and Acemoglu reach a number of important conclusions. Two of these are important for understanding what is happening in Pakistan at this critical juncture in its history. Political progress is not inevitable, they maintain. The outcome is “never certain and even if in hindsight we see many historical events as inevitable, the path of history is contingent”. The same point is made by Francis Fukuyama in his recent book on the origins of political order. According to him history is littered with examples of political development being followed by political decay.

The lesson for Pakistan is obvious: people as well as institutions interested in seeing the political system evolve in the right direction need to remain vigilant lest slippage occurs. This has happened many times in Pakistan’s torrid political history. Four times the military’s intervention was accepted by the people — sometimes with considerable enthusiasm — since there were no viable alternatives available to address the problems the country faced at that time. Also, the military did not face any challenge to its move into the political arena. This is no longer the case. Now the citizens are confident that the country can be better managed by their representatives. If the representatives disappoint they can be removed through the electoral process. The citizens have also learnt to have their voices heard. This happened during the ‘black coats’ movements that helped to restore to their positions the judges fired by President Pervez Musharraf, an autocrat. Now, with the powerful precedence of the Arab Spring, the citizens feel even more equipped to raise their voices and be heard.

The second conclusion is even more powerful from Pakistan’s perspective. Robinson and Acemoglu argue that “countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people”. In that context the book differentiates between two different types of political institutions, each producing its own economic dynamics. There are ‘extractive political institutions’, which serve the interests of the few at the expense of the many. This is where most of Pakistan’s political parties are today. They cater to the interests of the few at the expense of the masses. This is the reason why the country is following economic policies that provide rich rewards to narrow interests — the political elite. One sign of healthy political development will be to have these extractive institutions become ‘inclusive’.

The defining characteristics of inclusive institutions in both the economic and political fields are the combination of centralisation, the rule of law, and pluralism. Power resting with a strong political entity at the center of the system would ensure that private interests can be checked. At the same time, the power of the central authority must be constrained by law and by instruments that ensure accountability.

These two types of institutional structures influence one another. Extractive political institutions produce extractive economic institutions. The influence can move in the other direction as well. The same holds for inclusive institutions. Inclusive institutions in politics will create inclusive economic institutions. It is right to suggest that at this point in time, Pakistan’s political and economic development is stuck at the extractive stage. One way of moving from the extractive to the inclusive stage is to dispense with the control of families over political parties. Dynastic politics provides party governance at the national as well as the regional levels. Democracy must be practiced not only for providing good governance, it must also be adopted by the parties that dominate the political landscape.

[B]Source: [URL="http://tribune.com.pk/story/348582/making-the-system-inclusive/"]Making the System Inclusive[/URL][/B]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Self-perpetuating, extractive system[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 12 March, 2012[/B]

THERE is now a nearconsensus among the economists who work in the area of development that political and economic progress interact with one another.

There cannot be movement in one without there being movement in the other. The most recent entry in this type of analysis is a book by two American economists, James Robinson and Daron Acemoglu.

Their book, `Why Nations Fail: The Origins of Power, Prosperity and Poverty` asks the following important question: Why are some societies democratic, prosperous and stable while others are autocratic, poor and unstable? They have a simple answer. Those that have been left behind usually have performed poorly in making political progress.

How should this finding be applied to the case of Pakistan? It is the case that Pakistan of recent years has moved in one right and one wrong direction. It has made some progress towards creating representative form of governance but has failed in moving forward its economy. Not only is the economy stagnating with the country growing at a rate one-half that of Bangladesh and one-third that of India. It has also seen a palpable increase in the incidence of poverty and as sharp deterioration inTHERE is now a nearconsensus among the economists who work in the area of development that political and economic progress interact with one another.

There cannot be movement in one without there being movement in the other. The most recent entry in this type of analysis is a book by two American economists, James Robinson and Daron Acemoglu.

Their book, `Why Nations Fail: The Origins of Power, Prosperity and Poverty` asks the following important question: Why are some societies democratic, prosperous and stable while others are autocratic, poor and unstable? They have a simple answer. Those that have been left behind usually have performed poorly in making political progress.

How should this finding be applied to the case of Pakistan? It is the case that Pakistan of recent years has moved in one right and one wrong direction. It has made some progress towards creating representative form of governance but has failed in moving forward its economy. Not only is the economy stagnating with the country growing at a rate one-half that of Bangladesh and one-third that of India. It has also seen a palpable increase in the incidence of poverty and as sharp deterioration inthe distribution of income and assets. In that context the country is moving against the trend in other developing nations. A report recently published by the World Bank reaches the surprising conclusion `that for the first time the proportion of people living in extreme poverty on less than $1.25 a day fell in every developing region from 2005 to 2008. And the biggest recession since the Great Depression seems not to have thrown that trend off course, preliminary data from 2010 indicate.

The progress is so drastic that the world has met the United Nation`s Millennium Development Goals to cut poverty in half five years before the 2015 deadline.` The world therefore has much to celebrate but Pakistan cannot join the celebration. It has bucked the trend.

Why? The answer comes from the Robinson-Acemoglu book.

They argue that only those political systems work to produce growth with poverty alleviation and improvement in the distribution of income that are `inclusive`.

Pakistan has developed what they describe as extractive systems.

They provide for the few not for the many.

In what way would an inclusive system work for Pakistani economy? It should aim to achieve at least the following three policy changes. Not only should there be a significant change in the government`s economic priorities,. some of the content of the policies need to be adopted should also change.

More imagination and politicalthe distribution of income and assets. In that context the country is moving against the trend in other developing nations. A report recently published by the World Bank reaches the surprising conclusion `that for the first time the proportion of people living in extreme poverty on less than $1.25 a day fell in every developing region from 2005 to 2008. And the biggest recession since the Great Depression seems not to have thrown that trend off course, preliminary data from 2010 indicate.

The progress is so drastic that the world has met the United Nation`s Millennium Development Goals to cut poverty in half five years before the 2015 deadline.` The world therefore has much to celebrate but Pakistan cannot join the celebration. It has bucked the trend.

Why? The answer comes from the Robinson-Acemoglu book.

They argue that only those political systems work to produce growth with poverty alleviation and improvement in the distribution of income that are `inclusive`.

Pakistan has developed what they describe as extractive systems.

They provide for the few not for the many.

In what way would an inclusive system work for Pakistani economy? It should aim to achieve at least the following three policy changes. Not only should there be a significant change in the government`s economic priorities,. some of the content of the policies need to be adopted should also change.

More imagination and politicalwill are needed than have been on display in recent years.

The first priority should be to improve the quality of governance by creating a system of accountability. A number of attempts have been made by several administrations in the past but did not serve the objective of holding elected officials and bureaucrats accountable to the citizenry. In fact, most of those attempts resulted in politicising the accountability structure.

In recent years the governments headed by Prime Ministers Nawaz Sharif and Benazir Bhutto and President Pervez Musharraf used the accountability apparatus that had been set up to settle political scores or to achieve political goals.

A new effort is needed. This should ensure full autonomy to an accountability system and thus prevent interference by the executive branch of the government.

One way of achieving this objective would be to appoint, say, a five-member accountability board (AB) to oversee the working of all branches of government-the executive, the legislature and the judiciary. AB should be appointed by the national legislature on the recommendations made by the executive branch. The chairman of the board as well as its members should serve terms longer than that of the legislature, perhaps eight years. Two members should be appointed every two years. The board should oversee the working of the investigative agency and the AB courts. It should prepare and present to the national assemblywill are needed than have been on display in recent years.

The first priority should be to improve the quality of governance by creating a system of accountability. A number of attempts have been made by several administrations in the past but did not serve the objective of holding elected officials and bureaucrats accountable to the citizenry. In fact, most of those attempts resulted in politicising the accountability structure.

In recent years the governments headed by Prime Ministers Nawaz Sharif and Benazir Bhutto and President Pervez Musharraf used the accountability apparatus that had been set up to settle political scores or to achieve political goals.

A new effort is needed. This should ensure full autonomy to an accountability system and thus prevent interference by the executive branch of the government.

One way of achieving this objective would be to appoint, say, a five-member accountability board (AB) to oversee the working of all branches of government-the executive, the legislature and the judiciary. AB should be appointed by the national legislature on the recommendations made by the executive branch. The chairman of the board as well as its members should serve terms longer than that of the legislature, perhaps eight years. Two members should be appointed every two years. The board should oversee the working of the investigative agency and the AB courts. It should prepare and present to the national assemblyevery year a report on the state of governance in the country.

The second area needing attention is the mobilisation of domestic resources for running the affairs of the government and for making public sector investments.

Without adequate public revenues, high rates of economic growth will not be possible.

Resource constraint is not a n new problem. It is also the one that various governments at various times in the country`s history have worked upon but without much success. The tax-to-GDP ratio has now declined to 8.5 per cent, the lowest of any large developing country economy.

A number of previous reform efforts were made with the help of outside development and finance institutions particularly the World Bank and the IME. The former advised the governments in office to develop and modernise the tax collection system including the working of the tax collection agency now called the Federal Board of Revenue. The latter made increasing the collection of government revenues as one of the conditions for providing much needed assistance.

The last IMF effort was made in 2008-11 but was abandoned after Islamabad indicated to the agency that the reforms it was pushing were politically not feasible. In fact, it was the absence of political will that resulted in the collapse of the Fund programme. However, it remains critical to improve the government resource situation.every year a report on the state of governance in the country.

The second area needing attention is the mobilisation of domestic resources for running the affairs of the government and for making public sector investments.

Without adequate public revenues, high rates of economic growth will not be possible.

Resource constraint is not a n new problem. It is also the one that various governments at various times in the country`s history have worked upon but without much success. The tax-to-GDP ratio has now declined to 8.5 per cent, the lowest of any large developing country economy.

A number of previous reform efforts were made with the help of outside development and finance institutions particularly the World Bank and the IME. The former advised the governments in office to develop and modernise the tax collection system including the working of the tax collection agency now called the Federal Board of Revenue. The latter made increasing the collection of government revenues as one of the conditions for providing much needed assistance.

The last IMF effort was made in 2008-11 but was abandoned after Islamabad indicated to the agency that the reforms it was pushing were politically not feasible. In fact, it was the absence of political will that resulted in the collapse of the Fund programme. However, it remains critical to improve the government resource situation.A programme aimed at this objective could have the following four elements: (a) reforming the tax collection system, possibly by contracting it out to a consortium of private management firms based on carefully worked out targets following a time-line; (b) expanding the tax base by bringing in the excluded sectors into the tax net, (c) eliminating exemptions, (d) prescribing targets for provincial tax mobilisation.

Possible targets could be increasing the ratio by 1.5 percentage points a year at the federal levelA programme aimed at this objective could have the following four elements: (a) reforming the tax collection system, possibly by contracting it out to a consortium of private management firms based on carefully worked out targets following a time-line; (b) expanding the tax base by bringing in the excluded sectors into the tax net, (c) eliminating exemptions, (d) prescribing targets for provincial tax mobilisation.

Possible targets could be increasing the ratio by 1.5 percentage points a year at the federal leveland 0.5 percentage points for the provinces.

It has not been recognised by policymakers that by not raising enough resources for the proper functioning of the government, the country loses the space within which it can operate without foreign interference. Continuing reliance on foreign flows results in some loss of sovereignty. That this would inevitably be the result is now fully apparent as Pakistan relations with the United States continue to deteriorate. Washington is now Pakistan`s largest donor andand 0.5 percentage points for the provinces.

It has not been recognised by policymakers that by not raising enough resources for the proper functioning of the government, the country loses the space within which it can operate without foreign interference. Continuing reliance on foreign flows results in some loss of sovereignty. That this would inevitably be the result is now fully apparent as Pakistan relations with the United States continue to deteriorate. Washington is now Pakistan`s largest donor andit wants in return what the country cannot politically deliver.

These US demands could have been met when the administration was in the hands of the military. A government that draws its power from the people is naturally constrained by their wishes.

The third area needing attention is that of the development of the country`s abundant human resource. This has been neglected in the past and continues to be given low priority by a socially exclusive political system. Pakistan`s educational and health systems now have the involvement of considerable private initiative. Privately owned and managed schools, colleges, universities, clinics and hospitals serve the well-to-do well.

The rest of the population is left to the poorly performing public sector institutions. Pakistan has one of the youngest populations in the world. The median age is only 21 years which means that some 90 million people are less than that age. If the country trains and educates them, enormous economic and social benefits could flow. If not, the youth will become a burden hard to carry.

For moving the country towards inclusive social systems rather than continue to function as extractive economic and political systems, the citizens must put pressure on those who govern to adopt the types of policies described above. Extractive systems become self-perpetuating. Only the people can move them in the right direction.it wants in return what the country cannot politically deliver.

These US demands could have been met when the administration was in the hands of the military. A government that draws its power from the people is naturally constrained by their wishes.

The third area needing attention is that of the development of the country`s abundant human resource. This has been neglected in the past and continues to be given low priority by a socially exclusive political system. Pakistan`s educational and health systems now have the involvement of considerable private initiative. Privately owned and managed schools, colleges, universities, clinics and hospitals serve the well-to-do well.

The rest of the population is left to the poorly performing public sector institutions. Pakistan has one of the youngest populations in the world. The median age is only 21 years which means that some 90 million people are less than that age. If the country trains and educates them, enormous economic and social benefits could flow. If not, the youth will become a burden hard to carry.

For moving the country towards inclusive social systems rather than continue to function as extractive economic and political systems, the citizens must put pressure on those who govern to adopt the types of policies described above. Extractive systems become self-perpetuating. Only the people can move them in the right direction.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=12_03_2012_605_004]Self-perpetuating, extractive system | ePaper | DAWN.COM[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Making decentralisation work[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 19 March, 2012[/B]

HOW does Pakistan`s evolving federal system compare with those that have been around for a long time? While the system is in transition, will it deliver what the citizens want: good governance and economic growth that spread benefits broadly? These are important questions and some answers can be provided by looking at the experiences of other federal systems around the globe. The answers I will provide will not be comforting.

Compared to other federalist structures, four differences stand out. Pakistan is attempting to quickly achieve what took considerable period of time to develop in more successful systems.

The aim of developing federal systems is to bring government closer to the people. In Pakistan the process appears to have stopped at the provincial level.

Decentralisation has not reached the local level where it is needed the most.

It has not provided the fiscal space to the subnational governments so that they can raise their own resources and be responsible to the citizens as to how they are used. And, not much attention was given to creating a fully representative system for watching over how decentralisation proceeds.

The most important difference between the evolving federal structure in Pakistan and those inHOW does Pakistan`s evolving federal system compare with those that have been around for a long time? While the system is in transition, will it deliver what the citizens want: good governance and economic growth that spread benefits broadly? These are important questions and some answers can be provided by looking at the experiences of other federal systems around the globe. The answers I will provide will not be comforting.

Compared to other federalist structures, four differences stand out. Pakistan is attempting to quickly achieve what took considerable period of time to develop in more successful systems.

The aim of developing federal systems is to bring government closer to the people. In Pakistan the process appears to have stopped at the provincial level.

Decentralisation has not reached the local level where it is needed the most.

It has not provided the fiscal space to the subnational governments so that they can raise their own resources and be responsible to the citizens as to how they are used. And, not much attention was given to creating a fully representative system for watching over how decentralisation proceeds.

The most important difference between the evolving federal structure in Pakistan and those ina number of other democracies is that in the case of the former it was done quickly and by way of a change in the basic law of the land.

Most of the successful federal structures evolved gradually from the basic law or the constitution adopted by the federating system. Once the constitution was in place it guided the process of governance and the evolution of the federal system. And that was not done with the involvement of the local communities. This is certainly the case with the large federal systems spread around the globe.

This is not happening in Pakistan.

Take the American and Indian systems as two examples. In the case of the United States, there was a deep and involved debate among the founding fathers on the virtues of a federal system and the rights of the federating units within the system. The founding fathers, while keen to create a viable central authority, were equally anxious to protect the rights of the states they represented. A compromise was reached which allowed the states considerable autonomy while entrusting the federal authority a number of essential and vital functions.

The Indian system was born with a strong centre. In fact, the central government was called the union government rather than the federal government. The two systems evolved in very different directions. In the American system, largely because of the role played by the Supreme Court, the federal government acquired more power than was originally envisaged. Thea number of other democracies is that in the case of the former it was done quickly and by way of a change in the basic law of the land.

Most of the successful federal structures evolved gradually from the basic law or the constitution adopted by the federating system. Once the constitution was in place it guided the process of governance and the evolution of the federal system. And that was not done with the involvement of the local communities. This is certainly the case with the large federal systems spread around the globe.

This is not happening in Pakistan.

Take the American and Indian systems as two examples. In the case of the United States, there was a deep and involved debate among the founding fathers on the virtues of a federal system and the rights of the federating units within the system. The founding fathers, while keen to create a viable central authority, were equally anxious to protect the rights of the states they represented. A compromise was reached which allowed the states considerable autonomy while entrusting the federal authority a number of essential and vital functions.

The Indian system was born with a strong centre. In fact, the central government was called the union government rather than the federal government. The two systems evolved in very different directions. In the American system, largely because of the role played by the Supreme Court, the federal government acquired more power than was originally envisaged. Thecourt used the `commerce clause` in the constitution that called for free flow of goods and people across state boundaries and interpreted it broadly to increase the powers of the central authority.

In India, the states grew stronger at the expense of the union.

This happened because of the rise in power of the regional political parties. The regional parties are now politically more powerful than the two national organisations. That is still not the case in Pakistan.

The Constitution of 1973 in Pakistan was designed to create a federal system with the provinces allowed to exercise authority in a number of areas. This was considered to be a necessary condition for preserving what was left of Pakistan after the country`s eastern wing broke away and became the independent state of Bangladesh. However, the full extent of autonomy was not granted immediately. The process was to be completed following the development of competence and capacity in the federating units. That, of course, did not happen.

In other words, the Pakistani system did not evolve from practice; it was the outcome of a major change in the basic law the eighteenth amendment to the constitution. The pace adopted to bring about a major structural change was the result of the mistrust that existed between those who wield power in Islamabad and those who govern in the provinces.

Since the system did not evolve, it does not balance thecourt used the `commerce clause` in the constitution that called for free flow of goods and people across state boundaries and interpreted it broadly to increase the powers of the central authority.

In India, the states grew stronger at the expense of the union.

This happened because of the rise in power of the regional political parties. The regional parties are now politically more powerful than the two national organisations. That is still not the case in Pakistan.

The Constitution of 1973 in Pakistan was designed to create a federal system with the provinces allowed to exercise authority in a number of areas. This was considered to be a necessary condition for preserving what was left of Pakistan after the country`s eastern wing broke away and became the independent state of Bangladesh. However, the full extent of autonomy was not granted immediately. The process was to be completed following the development of competence and capacity in the federating units. That, of course, did not happen.

In other words, the Pakistani system did not evolve from practice; it was the outcome of a major change in the basic law the eighteenth amendment to the constitution. The pace adopted to bring about a major structural change was the result of the mistrust that existed between those who wield power in Islamabad and those who govern in the provinces.

Since the system did not evolve, it does not balance therights granted to the federating provinces and their capacity to handle new authority. This mismatch is posing a number of serious problems. There is the problem associated with the availability of finance to pay for new functions. It has been estimated that it will cost the provinces at least Rs200 crores to adequately carry out the new responsibilities assigned under the 18th Amendment. The additional resources that have been maderights granted to the federating provinces and their capacity to handle new authority. This mismatch is posing a number of serious problems. There is the problem associated with the availability of finance to pay for new functions. It has been estimated that it will cost the provinces at least Rs200 crores to adequately carry out the new responsibilities assigned under the 18th Amendment. The additional resources that have been madeavailable by the formula adopted by the Seventh National Finance Commission Award amount to only Rs35 crores, or about a sixth of the needed amount.

This gap should be met by the provinces raising their own resources. They will need both authority and competence to achieve this objective. At about 0.5 per cent of GDP, provincial own resource is very low. There are several reasons for this and they need to be addressed by creating appropriate in-centives for the local authorities.

At this time, provincial taxing capacity is low; provinces have a limited administrative capacity to manage their finances; the tax base has been reduced as a result of several exemptions and preferential treatment; and political considerations prevent pressure on property owners and other potential taxpayers to pay their dues to the government.

Decentralisation needs to go beyond the provincial level. Take the American system as an example. It comprises some 90,000 governments or 1,800 governments per state. The government, in other words, reaches down to the people.

And, with emphasis on electing rather than appointing officials responsible for providing services to the people, they are also accountable to them. Americans choose more than half a million elected officials and in many places they also get to vote directly on legislation through initiatives and referenda. This structure provides unparalleled openings for citizenship participation.

Another important problem with the way the process of decentralisation is being carried out in Pakistan is to give to the executive branch the responsibility for resolving disputes between the governments at different levels and for guiding further evolution of the system. In moving forward there has to be much greater involvement of local communities and that can only happen if they are able to have their voice heard.

As one commentator, writing onthe American experience, puts it, `creating constitutional rights without foundation frays the community fabric and, with it, the very notion that the majority can enact into law some expression of shared values that make ours a society whose whole is better than the sum of its parts. In pushing a constitutional vision of location in larger social settings, liberals risk weakening the communal values and institutions that best afford our most disadvantaged the chance of good life`.

There are two main conclusions to be drawn from this discussion.

Since the new federal structure was adopted in great hurry, there are a number of problems with its design.

Some of these will create enormous financial problems and constrain the ability of the central authority to manage the economy.

The other problem with the entire process of devolution is its topdown approach. Local communities were left out while the new system was being designed.

There was the assumption that since the designing was being done by the people`s elected representatives, the people`s rights will be protected and their aspirations fully realised. But in exercising authority policymakers are influenced by where they sit and not always by whom they represent.

Devolution was a centrally managed exercise and which means that local interests were not fully reflected. It is important to correct the course on which we are proceeding.the American experience, puts it, `creating constitutional rights without foundation frays the community fabric and, with it, the very notion that the majority can enact into law some expression of shared values that make ours a society whose whole is better than the sum of its parts. In pushing a constitutional vision of location in larger social settings, liberals risk weakening the communal values and institutions that best afford our most disadvantaged the chance of good life`.

There are two main conclusions to be drawn from this discussion.

Since the new federal structure was adopted in great hurry, there are a number of problems with its design.

Some of these will create enormous financial problems and constrain the ability of the central authority to manage the economy.

The other problem with the entire process of devolution is its topdown approach. Local communities were left out while the new system was being designed.

There was the assumption that since the designing was being done by the people`s elected representatives, the people`s rights will be protected and their aspirations fully realised. But in exercising authority policymakers are influenced by where they sit and not always by whom they represent.

Devolution was a centrally managed exercise and which means that local interests were not fully reflected. It is important to correct the course on which we are proceeding.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=19_03_2012_605_004]Making decentralisation work | ePaper | DAWN.COM[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Experimenting with growth models[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 26 March, 2012[/B]

PAKISTAN`S poorly performing economy calls for a well thought out growth strategy. The Planning Commission has drafted one but it is unlikely that it will get to be implemented.

It calls for a major change in the way the economy needs to be managed and developed. Its aim is to realise a reasonably high and sustainable rate of growth by concentrating not on investment but on increasing the efficiency of the economy.

The proposedstrategyneeds the full backing of the political establishment which will be difficult to secure as the governing political coalition gets ready for the next general election. What a quick reading of history tells us is that Pakistan has been subjected to so many policy changes in the past that those who would have liked to invest in the economy are holding back.

Investors don`t appreciate uncertainty. From the perspective of economic management, Pakistan`s history divides fairly neatly into several periods. The first began almost 65 years ago when the country gained independence and lasted for a dozen years. Those who governed in the period from 1947 to 1958 were preoccupied with two problems.

The first was the way the Indian administration under the leadership of Jawaharlal Nehru looked at Pakistan as the latter triedstand on its own economic legs.

It appeared to those responsible for managing the Pakistani economy that India was determined to cripple it, perhaps in the hope that Muhammad Ali Jinnah, Pakistan`s founding father, would apply for readmission into the Indian union.

The second problem the first Pakistani administration needed to deal with was the settlement of eight million refugees who arrived from India. Thus preoccupied, the new administration had no time to deal with the question of economic growth. That was left to be dealt with at a later date.

Serious economic planning began under General Ayub Khan, the first military president. He placed the Planning Commission in his own office and appointed himself as the chairman. Saeed Hasan, a senior civil servant, was appointed the Commission`s deputy chairman.

The president also asked the United States for technical assistance for preparing the Second Five Year Plan. This came in the form of nearly a dozen economists from Harvard University who were deployed as advisors in the Planning Commission and in the then two provincial planning and development departments.

A plan was produced in 1960 to cover the 1960-65 five year period.

It had three important features: emphasis on growth, reliance on the private sector with only light guidance provided by the government, and significant augmentation of domestic savings by official development assistance (ODA).

The United States and theInternational Development Associations (IDA), a new affiliate of the World Bank, were the main sources of ODA.

The second plan was remarkably successful in accelerating the pace of economic growth. It more than doubled the increase in per capita income which reached an unprecedented level of three per cent a year. The third plan (196570) followed the same model and would have produced the same result had it not been interrupted by two developments. The first was the 17 days war with India in September 1965 just as the third plan period was beginning.

The second was Ayub Khan`s illness which weakened him physically and affected his resolve to bring about the country`s rapid development. He was forced out office in 1969 by General Yahya Khan, the commander-in-chief of the armed forces. The new president was himself thrown out of office after he had caused East Pakistan to separate and become the independent state of Bangladesh.

This change of administration happened in a coup in December 1971 staged by a group of young military officers. They brought Zulfikar Ali Bhutto, a civilian, to govern first as president and chief martial law administrator and later as prime minister.

Bhutto had a deep interest in economic matters but his approach was quite the opposite to the one that had produced the 1960s miracle. His model of economic management and change also had three elements: a majorrole for the state, state-led industrialisation, and tapping the rapidly increasing wealth of the Middle East for external finance. He achieved the first objective by nationalising the privately owned large industries, banks and insurance companies.

To achieve the second, he established a number of state-owned corporations. For the third he encouraged the migration of millions of construction workers to help the oil-rich countries build infrastructure. These policies jolted the economy from which it took a long time to recover. It was surprising that Bhutto an avowed socialist did not have any place in his scheme of governance for disciplined planning. The public sector projects implemented during the period were not subjected to the kind of analysis used during the period of Ayub Khan. Many reflected the whims and interests of the ruler and the ruling establishment.

The next economic period began in 1977 when Bhutto was removed from office and lasted for 11 years until the death of General Ziaul Haq, the country`s third military ruler. The new administration attempted to put the economy back on the track on which it was moving before the Bhutto interregnum. Powerful bureaucrats and a clutch of economists were back in power. Mahbubul Haq, the principal author of the Second and Third Plans, was brought back from the World Bank and placed in change first of the Planning Commission and then of the ministry of finance.

Growth returned to the econo-my but not because a well thought out strategy was put in place. It was largely the consequences of the large flow of external assistance provided by the United States in return for the effort Islamabad made to expel the armed forces of the Soviet Union from neighbouring Afghanistan.

Most of the structural changes made during the Bhutto period remained. Pakistan had to wait for the death of President Zia before the private sector once again be-gan to play the leading role in managing the economy.

Yet another distinct period in the country`s economic history saw the reversal of some of Bhutto`s policies. The financial sector was placed in private hands and `Washington Consensus` set of policles were adopted. These included the opening of the economy to the world outside. However, this fundamental change in the approach did not bring growth back to the economy.By that time a number of fault lines had opened up under the economic structure for the country and these were not removed since no administration stayed long enough to affect change. The country was politically unsettled. Seven administrations four elected and three appointed as caretakers governed during the eleven year period between Zia`s death and the fourth military intervention in October 1999.

Under President Pervez Musharraf the tried and tested model of economic management was put in place again. The three features of the Musharraf`s model were the provision of space in which the private sector could operate without much constrain by the state, centralisation of economic policy making with little provincial autonomy, and dependence on external finance to augment paltry domestic savings. As was to be expected, the economy rebounded largely because of the activation of the capacity that had been created during the earlier periods.

With the return of democracy in 2008, nine years after Musharraf`s rule, the political establishment was too preoccupied with managing the transition to civilian rule to pay much attention to economic management. This is where the situation stands today while the economy continues to slip without much guidance provided by the policymakers. Will the administration that takes office following the next general elections adopt a viable growth strategy? Only time will tell.

[url=http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=26_03_2012_605_004]Experimenting with growth models | ePaper | DAWN.COM[/url]

The middle class debate
 

[B][U][CENTER][SIZE="5"]The middle class debate[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: April 2, 2012[/B]

There is a debate both inside and outside Pakistan about the size of the middle class in the country. I had suggested in an article written some time ago for Dawn that the size of the middle class was about 40 million. At that time the country’s population was about 170 million. If my estimate was correct, the Pakistani middle class accounted for a bit less than 24 per cent of the population. This did not seem to be an unreasonable estimate for a country at Pakistan’s stage of development. I had used a simple back-of-the-envelope type of calculation to reach my estimate, which used the World Bank’s income distribution numbers for Pakistan that provided the shares of income for the upper and lower deciles of population and for the quintiles in between.

Based on considerably more robust pieces of analyses carried out by several Indian scholars, it was determined that the Indian middle class accounted for some 40 per cent of that country’s population. This meant that some 500 million people in India could be said to belong to this economic and social class. While the Indian estimate generated considerable excitement among western businesses, my estimate for Pakistan provoked some controversy. At a conference held in Belagio, Italy, some participants from the US doubted my numbers, suggesting that it was a very high estimate. Why this questioning when a much larger one for India was readily accepted?

The answer is simple. There is a group of scholars in the US who believe that the endgame has been reached for Pakistan as we (and they) know the country today. They believe that Pakistan is now ripe for takeover by Islamic radicals. Once they have succeeded in overthrowing the current political and social order, they will go on to establish a regime not too different from the one that has been governing for the last several decades. Such a regime, like the one in Tehran, will be hostile towards the West, in particular towards the US. It will also be much more dangerous being in possession of a large nuclear arsenal — now believed to be the fourth largest in the world — a radical Islamic Pakistan would pose a serious threat to the US, and by implication, to the state of Israel. The West should, therefore, be prepared to take action to prevent such an unpleasant outcome. It was, however, not specified exactly what action should be taken.

The middle class estimate, such as the one I had offered, countered this line of thinking. It was recognised that the middle classes normally are more inclined towards modernity than other classes. In this context it is worth quoting from Francis Fukuyama’s recent article in Foreign Affairs. He writes: “It is most broadly accepted in countries that have reached a level of material prosperity sufficient to allow a majority of their citizens to think of themselves as middle-class, which is why there tends to be a correlation between high levels of development and stable democracy”. He accepts the fact that there can be deviations from this path, as has been the case in Iran and Saudi Arabia, but that is explained by their enormous oil wealth which they can use to obtain the loyalty of the middle class. The Arab Spring has shown — he maintains — that the middle class can be mobilised against any kind of dictatorship including the theocratic ones to which the followers of radical Islam aspire. What stands in the way of the nightmare seen in Pakistan by some American scholars is the middle class. If it is large enough, their fear is unfounded and no action is needed. The academics advocating that the West should be prepared, don’t like this conclusion to be reached since it is likely to breed complacency amongst policymakers.

More serious work has been done on the size of the middle class in Pakistan since I wrote my article. In a recent contribution by the economist Sakib Sherani to Dawn titled “Consumption conundrum” (March 23), he presents a much higher estimate than I had provided, both in terms of the size of the middle class in Pakistan and its proportion in the total population. “I updated the figure arrived at earlier, making one crucial adjustment: for the estimated size of Pakistan’s undocumented (or ‘black’ economy). The adjusted figure for the middle class is a staggering 70 million people, or 40 per cent of the population”, he writes. This brings the Pakistani situation closer to the one that is generally accepted for India.

A large Pakistani middle class will keep Pakistan moving on a relatively liberal path in terms of its economic and political development. This class is also influenced by the members of the large Pakistani and Muslim diasporas, particularly in the US. The Pakistani middle class is well-represented in the various diasporas dispersed across the globe. Notwithstanding the European and American fears about the penetration of radical Islam into these communities, large segments of these populations have picked up the liberal economic, political and social values of their host populations. This makes the diasporas more modern and secular than the native populations from which they are drawn. With the development of communication technologies in recent years, the Muslim communities in the West are not only in touch with their homelands, they are also influencing the populations from which they come from.

We know from the several case studies that have been carried out to understand the dynamics of the Arab Spring, that the diasporas had a deep influence on the events leading up to the uprisings in the streets and the public squares. Prominent members of the diasporas are now prominently engaged in the political restructuring of countries such as Egypt, Libya, and Tunisia. In Pakistan, Imran Khan’s rise has the support and financial backing of the Pakistani diasporas in Britain, the Middle East and North America. I think it is safe to assume that Pakistan’s development will be deeply influenced by its middle class, which is not likely to adopt the radicalism on offer by various groups such as al Qaeda and the Taliban.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Non-traditional trade opportunities in India[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 02 April, 2012[/B]

ALTHOUGH the pace has been slow, Pakistan and India are making progress in moving towards normal trade relations.

This was recognised by the comments made by Dr Manmohan Singh, the Indian prime minister, after his meeting in Seoul, Korea with his Pakistani counterpart.

He was appreciative of the fact that Pakistan had moved from using a positive list to regulate trade with its neighbour to a negative list. As trade economists have long argued, positive lists are more restrictive compared to the negative ones. They also create rent-seeking opportunities for the officials who manage trade.

However, given the huge burden of history the two countries carry, it will take both time and effort before trade relations become close to normal, and goods, commodities, services and people begin to flow relatively freely across the border. In this context, it would be useful to indicate some of the opportunities that exist on both sides of the border for the gains that could be made by producers, traders and consumers.

Private industrial and commercial groups in both countries are preparing for more open trade.

One example of the way industry and trade will be affected comesfrom some industrial groups in India. It was reported in both the Indian and Pakistani press that Indian oil companies including the Hindustan Petroleum Corporation (HPCL), the Indian Oil Corporation (IOCL) and GAIL India are preparing to supply petroleum products and liquefied natural gas to Pakistan. There are enormous opportunities in Pakistan for products such as these produced in India.

Pakistan`s refining capacity meets only half of its total domestic requirement while India now exports almost one-fourth of the 185 million tons it refines. A Mumbaibased oil analyst was quoted as follows by the Times of India: `Pakistan`s move to ease trade with India could translate into a big opportunity for HPCL as it will be best positioned to use its Bhatinda refinery as a critical gateway.` This will require the building of a 50 km pipeline connecting the refinery being erected in the Indian Punjab with Lahore in Pakistan.

`We plan to tap capital markets as soon as our Bhatinda refinery nears completion to lay the pipeline` said a member of the HPCL board. Also, India`s largest oil refiner, the Indian Oil Corporation, is examining the possibility of connecting its Panipat and Mutthura facilities with the contemplated Bhatinda-Lahore pipeline.

Liquefied natural gas is another product of interest for the Indianindustry since Pakistan does not have domestic capacity for producing LNG. The Indians estimate that by 2016 Pakistan could experience shortfalls of three billion cubic feet per day. A Pakistan delegation led by petroleum and natural resources secretary visited New Delhi in late March to hold discussion for facilitating trade in petroleum products and petrochemicals between the two nations.

It is worth noting that entrepreneurs in India are looking at the possibility offered by the Pakistani market by not confining their attention to products. There is also talk of exporting services to Pakistan. During the Musharraf period there was a visit from senior Tata officials who wanted to create a presence for their IT wing in Pakistan.

Tata is India`s largest information technology and consulting company. It has expanded rapidly along with several other firms based in India. They have now begun to experience worker shortages in some skills that Pakistan has developed but are not fully employed in its own IT industry.

The Indians were hoping to set up shop in Pakistan. After showing some interest in the Tata initiative, the Musharraf administration backed away, fearing political backlash in the country.

But smaller companies that would not have a large footprint that would invite political noticehave ventured into Pakistan. I know of an Indian-owned company based in Singapore that has Pakistani programmers working in two offices, one in Lahore and the other in Islamabad. The company`sCEO told me that the entire programming work for his enterprise is done in the Pakistani offices since he is able to find the skills he needs at a much lower price than he would pay in his native India.Film industry is another area where the entrepreneurs in the two countries could work together.

A Pakistani newspaper recently reported on a visit to Lahore by Mahesh Bhatt, an Indian film mak-er. He was part of an 11 member delegation from India that came to Lahore to celebrate Bhagat Singh`s death anniversary.

`In 2003, I received a lot of flak in India for saying that the centreof music in the sub-continent was Karachi. Even today that statement rings true,` he told an audience at the Punjabi Complex in Gaddafi Stadium.

`Although Pakistan is going through a dark period, it can still take South Asian culture forward.

He also revealed that he was working on a project with the late Salmaan Taseer for the joint production of a film. The project is on hold following Taseer`s death but Bhatt is confident that he will be able to move forward. `I want to create a film in which 70 per cent of the technical team is from Pakistan, only then the film will be profitable for the Pakistani film industry,` he told his audience.

While India is industrially more developed and its manufactured products will have more prospects in the Pakistani markets, Pakistan should be able to do well in agriculture, agricultural processing, various industrial supply chains, and in some services. There is nothing wrong or belittling about using Pakistan`s potentially rich agriculture sector as leading the way to India. After all, Denmark and the Netherland, two of the richest countries in Europe, are large exporters of agricultural products to other states in the continent. To take one example: Cultivation and marketing of flowers in the areas around Lahore are now big businesses. These could be developed further once the large and rapidlygrowing Indian markets open up for Pakistan. When I was working for the World Bank on Latin America I saw countries such as Colombia and Ecuador reap rich rewards by exporting flowers to the United States. These two countries are not close to America as Lahore is to such large centers of consumption as Delhi in India.

Pakistan`s well developed and rapidly developing fashion industry is another non-traditional area of opportunity for the country.

There are several aspects of this industry that are attractive. It uses locally produced cotton cloth as the main input. It provides employment to a growing number of women. It is managed mostly by women entrepreneurs. It is promoting the development of expertise in some of the educational institutions in the country.

Periodically women from this industry go overseas to sell their produce to the expatriate community in Britain and the United States. For them India offers an even better and larger market.

The important point about the opportunities that will open up as a result of the easing of trade restrictions in the sub-continent is that all of them cannot be anticipated at this point. An alert entrepreneurial class will be able to develop new ideas about products and services as trade begins to flow in an unrestricted way between Pakistan and India.

[url]http://epaper.dawn.com/~epaper/DetailImage.php?StoryImage=02_04_2012_605_004[/url]

[B][U][CENTER][SIZE="5"]Islamabad’s Indifference Towards Global Issues[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: April 9, 2012[/B]

It should be a matter of great concern in Pakistan that the country’s leadership remains totally oblivious to the fact that the global economic and political order is being slowly reshaped. Islamabad is too concerned with the domestic economic and political situation to have the time, or the inclination, to raise its sights beyond its borders. If that sight is raised, one would see the rapidly deteriorating situation in Afghanistan and how the US is viewing Islamabad. It is possibly because the policymakers in the Pakistani capital are so preoccupied with these kinds of concerns that they have ignored the developments that will affect the country in the not-too-distant future.

Pakistan’s policymakers should be concerned that their country has been totally excluded from the deliberations that are currently going on to construct a new — or to reshape the old — global and economic and political order. I find it quite extraordinary, and somewhat disturbing, that the Pakistani media, both the print and electronic versions, gave so little attention to the New Delhi summit of the BRICS (Brazil, Russia, India, China, South Africa) nations. The meeting was held in New Delhi on March 29 when Prime Minister Yousaf Raza Gilani was meeting with important political leaders, heads of the armed forces, and the chief of the main intelligence agency to fashion a new relationship with the US. That meeting appropriately received full media coverage. But the media did not seem too interested in the summit of the five heads of states of the BRICS nations next door in New Delhi.

Hosted by the Indian Prime Minister Dr Manmohan Singh, the BRICS summit discussed a number of issues that should also be of immediate concern for Islamabad and Pakistan’s informed citizenry. That apparently is not the case. One reason why Pakistan is treated with such little respect is that it has made very little effort to get involved in global economic and political matters. There is a lesson to be learned from the way Turkey has positioned itself on the global stage. It was not a very long time ago that Ankara was totally ignored by the international community. Now it is represented effectively in a number of different forums.

The New Delhi meeting was the fourth time that the BRICS leaders have met. The first meeting was held in Russia in 2009. This time around they took up a number of matters on which they believe a collective decision would have a greater impact than acting alone. One of the issues taken up, on which no definitive stance was adopted, was about the restructuring of the institutional structure that supports the old global economic order. They want their countries to have a greater say in the way these institutions are managed and make their policies. Both the IMF and the World Bank are important for Pakistan. The country leans on the former during difficult times. It relies on the latter all the time for development assistance. Not only has Islamabad not taken much interest in the way these institutions are likely to evolve to maintain their relevance in a rapidly changing global economy, the country also has extremely weak official representation in these two institutions.

The BRICS nations have expressed some interest in creating a development bank of their own. If established, this new financial institution will draw its capital from the developing world. All the BRICS nations have large external account balances. China now holds the world’s largest foreign exchange reserves. If it decides to create a World Bank type-of-institution, it will have no problem finding capital for it. The institution might not be able to rival the World Bank in terms of access to resources but it could certainly acquire the significance that the Asian Development Bank enjoys. It should be of interest to Pakistan to keep a watch over the working of the process that might eventually lead to the establishment of a BRICS bank. How will such an institution be managed; who will have access to its resources and how will that access be determined; what will be its lending policies; how will it deal with other development institutions? These are some of the questions that will be raised and when the answers are found, they would serve the interests of the founding members and other developing nations. Is there some ministry or government institution in Pakistan that is concerned with such issues? The answer is, probably not.

Do we, in Pakistan, know that James O’Neill, the author of the BRICS idea has now come up with another suggestion? He believes that the world would do well to watch the progress being made by another group of countries he calls the “new eleven”. This group includes Pakistan along with more dynamic, emerging economies such as Argentina, Indonesia, Mexico, South Korea, and Turkey. These countries have either the demographic size (for instance Indonesia, Mexico and Turkey) or high rates of economic growth (for instance South Korea and Turkey) that will have considerable influence on the working of the global economy. If that idea is picked up, would it also lead to the development of an institutional device or a forum where these countries can actively pursue their interests?

The main conclusion I want to draw from this discussion is that Pakistan’s policymakers are so absorbed in dealing with a rapidly deteriorating domestic situation, that they have not turned their attention towards the way the global system is being reshaped. Islamabad may assign a low priority to what is happening to the economic world some distance away from its borders. This will prove to be costly neglect. We must operate in a system in which we have a voice and a role in developing it. This is not the case at this time. Unless we change our priorities we will be functioning in an environment that will remain hostile towards us, and in which our position will be increasingly uncomfortable.

[B]Source: [URL="http://tribune.com.pk/story/361613/islamabads-indifference-towards-global-issues/"]Islamabad's Indifference Towards Global Issues[/URL][/B]

[B][U][CENTER][SIZE="5"]How nations fail?[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: April 16, 2012[/B]

One answer to the question ‘how and why nations fail?’ comes from the authors of a powerful new book Why nations fail, that has become the talk of the development community. In it the authors — James Robinson, a political scientist teaching at Harvard University and Daron Acemoglu, an economist teaching at MIT — suggest that for a number of poor and struggling countries, the future looks grim. In most developing societies what they call “extractive institutions” dominate the landscape and prevent the emergence of “inclusive institutions” without which development cannot and will not occur. Should we apply this idea to today’s Pakistan?

Pakistan has been shaped by ideas. Some of these were developed by those within the society. Some were borrowed from abroad. The two-nation theory evolved from the thinking of Muhammad Iqbal and Muhammad Ali Jinnah. The idea behind it was simple but powerful. These two leaders of the Muslims in British India were convinced that their community will not get a fair deal from a political system that was dominated by the Hindus. They argued for the creation of a separate homeland for the Muslims in which they will they will be able to lead their lives according to their beliefs.

In the area of economics in which Pakistan had initially few thinkers of its own, there was a great deal of borrowing of ideas from the world outside. In the 1950s and the 1960s, economists believed that countries remained poor because they lacked capital. The solution was to augment their meager domestic savings by providing them cheap money. This led to the adoption of plans by the world’s rich nations to transfer 0.7 per cent of their total incomes to poor countries as aid every year. The rich also set up institutions such as the International Development Association, IDA, as an affiliate of the World Bank to provide concessional assistance to poor countries that lacked creditworthiness to tap the financial markets. This approach to development resulted in creating dependence of the poor on the rich.

Pakistan’s geography made it possible for those who dominated politics to trade it off with foreign flows of capital. In taking that route they made the country a slave of those who had the money to give. There were growth spurts in the 1960s under General Ayub Khan, in the 1980s under General Ziaul Haq and in the early 2000s under General Pervez Musharraf. The high rates of growth became possible since easy money became available from the United States in return for supporting the latter’s strategic interests in the area in which Pakistan occupied an important place. The fact that this always happened under military rule is easy to explain. Army rulers could turn Pakistan around without worrying about peoples’ reaction.

This dependence on cheap foreign capital for promoting development did not always work and inevitably resulted in academics asking an important question: Does aid matter? The answer was that most of the time aid-induced development benefitted the rich and the “extractive institutions” rather than the poor. This was certainly the case in Pakistan. In the 1980s and the 1990s, a consensus developed that countries remained poor because of poor economic policies. This emphasis on policies led to the development of a framework that came to be called the ‘Washington Consensus’. It encouraged the developing world to pull the state back from managing the economy and to open domestic markets to both domestic and foreign players. Once, again Pakistan was at the forefront of allowing this idea to shape thinking on development. It was the Musharraf government under the influence of a banker who had worked in a foreign institution all his life that jumped on the ‘Consensus’ bandwagon with predictable results — a high rate of economic growth, increase in income inequality, domination of a few over the institutions of governance.

The situation did not change with the change of regime when the military was replaced by an elected civilian administration. Under the watch of the people’s elected representatives the economy slumped, the incidence of poverty increased, consumption by the rich grew but that by the poor declined, foreign aid declined and pressure on foreign reserves increased. There were negative developments on the political and social fronts as well. Karachi exploded with ethnic violence, the incidence of urban crime increased, while the quality of governance deteriorated. The country appears to be heading for a disaster. With these developments, Pakistan is sometimes called the world’s most dangerous place; sometimes a fragile state; and sometimes it is seen as a failing state. Why did this happen as the country was moving towards the establishment of a democratic system of governance? There was the belief that a democratic system was better at inclusive economic development by which economists mean the pattern of economic growth that provides for the poor and the disadvantaged. Why was that not happening in Pakistan?

Enter Messrs Robinson and Acemoglu to provide an explanation that is relevant not only for Pakistan but for dozens of similarly placed countries. They argue that there is a strong correlation between politics and economics. Causality can run in both directions. In open and democratic systems most changes occur following elections but elections don’t necessarily produce the institutions that provide for inclusive economic development. In the cultures dominated by narrow elites elections strengthen their position. The result is that instead of producing “inclusive” institutions, they develop “extractive” institutions. The latter type of institutions extract from the economy as well as society, for the benefit of the elites. The poor and the less privileged are left out in the cold. This is precisely what has happened in Pakistan in recent years. The making of policy is dominated by those who are committed to serving their own interests, not caring for the society at large. Such an institutional structure can be self-perpetuating and will ultimately lead to social, political and economic chaos. This is how nations fail. We seem to be moving towards that situation.

[B]Source: [URL="http://tribune.com.pk/story/365133/how-nations-fail/"]How Nations Fail?[/URL][/B]

Reclaiming lost ground
 

[B][U][CENTER][SIZE="5"]Reclaiming lost ground[/SIZE][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Published: April 24, 2012[/B]

It is fair to suggest that ever since Pakistan began life as an independent state, it has never developed a sound growth strategy to deliver a high rate of GDP increase that would be sustainable. It followed the simple production function approach put forward be the early thinkers in the field of development economics. According to it, all that was needed for economic growth was to combine capital with labour. Have enough of both and the result would be a respectable increase in national income. Pakistan had plenty of labour but not enough capital. For the latter, it cultivated friends abroad that were prepared to give it the needed funds as long as their interests in the area around Pakistan were kept in mind. First the US, then China, and still later, Saudi Arabia provided the required finance. Consequently, the economy did well when large doses of external finance were available. It performed poorly when the friends tuned away, not happy with what Islamabad was prepared to do in return for the favours it received. The economy has hit a rough patch at this time, partly because foreign friends are not satisfied with what they are receiving in return.

There is, of course, a different approach to development: to mobilise domestic resources for needed investment. But this will need a sense of confidence on the part of those who have the capital to invest in the economy. Economists have long recognised that confidence is by far the most important determinant of economic performance. Those who developed the old growth model had factored it out of their equation. They did not recognise that even if capital and labour are present in abundance, they will only begin to work together if the owners of capital had the confidence that there will be good results produced from their effort. This confidence is absent at this difficult moment in Pakistan’s history. Could this be restored and could the lost ground be reclaimed. The answer is yes, but that would need the adoption of public policies which would provide confidence to the people that those in positions of power will be acting for the larger good of the citizenry, not just for their narrow interests.

The right time to revive confidence will be when a new administration takes office following the next general elections to be held, presumably, sometime early next year. At that time, whoever becomes the prime minister should announce a set of policies aimed at confidence-building. Those who are reflecting on this matter probably have their own lists; my list has two important items.

The first, of course, is improving the quality of governance. Only when that happens that people with capital will begin to invest in the economy rather than sending capital abroad as seems to be happening now. The well-to-do are acquiring foreign assets even when the return from them is much lower than would be the case if domestic corruption had not increased their transaction costs. If it takes a significant proportion of the capital being committed to a particular enterprise just to get the government’s support, there will be a lowering of the rate of return. There are several ways of reducing corruption. One of these is a system of accountability that is effective and efficient and also one in which people have a high level of confidence. Pakistan has tried several systems over the last half-century. They did not work for the simple reason that they were not allowed to be autonomous. They were controlled by the executive branch, the very branch that was to be the subject of accountability. A government that is serious about making elected and public officials accountable must create a system that is beyond the reach of the people and the institutions that are being looked at. This should not be an impossible objective to achieve. The country is working with different approaches to make appointment to offices and functions such as the Chief Election Commission and senior judiciary as free of influence as possible. The same should be possible for those who manage the accountability process.

The regulatory system is another source of corruption and another area that reduces the confidence of the potential entrepreneurs that their investments will provide the needed returns. The current system of regulation was built over time; some of it dates back to the time of the British. The entire structure needs to be carefully reviewed and the provisions that do not serve the citizens’ interest should be removed. One good example is the infamous SRO issued by those who manage external trade to provide relief to a particular industry or enterprise. Giving so much power to one particular part of the bureaucracy almost always invites rent-seeking behaviour.

The new prime minister by announcing just these two measures — an accountability system that is free of influence and the review of the regulatory system with the intention of reforming it — will help to restore the confidence of the currently disheartened likely investors and get them to participate in making the economy work again. Just the fact that the government has an interest in turning the economy around would bring back hope to the community of potential investors.

[B]Source: [URL="http://tribune.com.pk/story/368772/reclaiming-lost-ground/"]Reclaiming Lost Ground[/URL][/B]