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  #61  
Old Monday, October 05, 2009
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No consensus on ending global imbalances


By Shahid Javed Burki
Monday, Oct 05, 2009


THE choice of Pittsburgh by the administration of President Barack Obama for the meeting of G20 seemed strange in the light of the city’s reputation as the capital of the “rust belt” – once the industrial heartland of America dominated by steel mills and other capital intensive industries. Those factories were long gone; only American Steel remained.
But slowly and helped by a unique working relationship among the members of big business, academia and the health industry, Pittsburgh rediscovered itself. It was this resurrected city that the American president wished to showcase not only to the world but also to the citizens of his own country.

Pittsburgh had shown how a city that was once so dependent on the industries in which America was no longer competitive could provide large-scale employment to the displaced workers in new sectors of the economy. According to The Economist, “today, its main industries, health care and education are thriving.

Pittsburgh’s heath services business has almost tripled in size since 1979 creating more than 100,000 jobs. More than 70,000 work in research and development in the metro area’s 35 universities (Jonas Salk produced the polio vaccine at the University of Pittsburgh in 1955) and 100 corporate research centres, such as that of Bayer US, a pharmaceutical company…Pittsburgh’s unemployment rate, at 7.8 in July, was lower than the national rate of 9.4 per cent.” And, the city was also a good example of how the new “green technologies” could be put to the use of a large city. “The building hosting the G20 is the world’s first and largest LEED certified (meaning green) convention centre and sits on the city’s former red-light district.” The Pittsburgh meeting will go down in history not so much for the decisions taken to improve the functioning of the global financial system. These will have a lasting effect on the way the world manages its financial institutions. The meeting’s historical significance lies in the fact that it has become the primary forum for discussing global economic issues.

President Obama proposed that G20 should replace G8 as the primary policymaking body for international economic affairs. “Dramatic changes in the world economy have not always been reflected in the global architecture,” said the White House on the eve of the meeting. “This all started to change today with the historic agreement to put the G20 at the centre of efforts to work together to build a durable recovery.” Britain’s Gordon Brown went even further describing G20 as offering “more chance of delivering results than anything since the Second World War”. The move highlighted the growing importance of Asia and parts of Latin America in the global economy.

The United States and many European countries were now aware of the fact that the global economy was emerging from the “Great Recession” because of the aggressive measures adopted by some of the large Asian economies, in particular China.

The G20 consisting of 19 countries, including the seven developed nations that made up the G7 (Canada, France, Germany, Italy, Japan, UK, USA), plus the European Union, was created at a G7 meeting of finance ministers to help the global community deal with the aftermath of the Asian financial crisis of 1996-97. The dozen countries that were added to G7 included Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey.

Pakistan was one of the largest developing countries to be left out of the group. The first meeting of the group was held in September 1999. The idea was to devise ways for not having such a crisis repeat itself. From that point on the finance minister met annually. At the November 2007 meeting in Cape Town, there was agreement that central banks should pump liquidity into markets in response to the start of the global financial crisis.

In November 2008, the lame-duck President George W. Bush called the first G20 summit of heads of state in Washington to coordinate the global response to the crisis. By that time it had been recognised that China would have to play a critical role in preventing the global economy from spinning out of control and going into a depression.

The second summit was held in London in April 2009. It was the first large heads of state meeting held after Barack Obama was sworn in as the US president. Among the deci sions taken at London was the agreement to provide the IMF with $500 billion additional resources. Pakistan is one of the beneficiaries of that move.

The G20 heads of state met for the third time in Pittsburgh since the beginning of what economists have begun to call the “Great Recession”. This time President Barack Obama was in the chair. Though differences persisted among the participants, a broad consensus was reached in the discussions on the measures to be adopted in order to put the global financial system on the right track The firmest area of agreement was for higher capital reserve requirements at banks and other financial institutions. This would mean that the institutions will have less latitude to leverage their investments with large amounts of borrowed money. Agreement was also reached on the more contentious issue of regulating compensation for the executives working in financial institutions.The French, always critical of the Anglo-Saxon approach to the management of the financial sector, had argued for specific caps on bonuses but did not pursue the matter at Pittsburgh.

The most difficult area of discussion involved the issue of global imbalances that were central to the bubble and burst cycles of last several years.The biggest of these was between the trade deficits of the United States and the surpluses of China. The group did not reach any consensus on how to reduce these imbalances but there was agreement to monitor each other through a “peer review process” managed by the International Monetary Fund. Some of the more difficult areas were left out of the communiqué issued after the Pittsburg meeting. These included climate change.

Would the G20 evolve into a more effective forum for global decisions? While some of the large G7 countries are optimistic, some of the smaller ones such as Canada have indicated that they will continue to focus on the G8. The Canadians have decided to invite the G20 finance ministers when they host the next G8 meeting. Some experts believe that it would have been better to reconstitute the G8 by replacing, for instance, Canada and Italy by China and India. But inter-governmental cooperation always adds; it never subtracts. It appears to me that while G2 – the United States and China – will emerge the focus of global economic cooperation, G8 and G20 will at best play supporting roles.
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  #62  
Old Tuesday, October 06, 2009
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Pakistan and US aid


By Shahid Javed Burki
Tuesday, 06 Oct, 2009


DIRECTLY or indirectly the United States has been involved in helping Pakistan develop its economy. It is good to acquaint ourselves with the history of this involvement in order to prepare for what is likely to come.

The strategy of growth adopted by Pakistan in the early days of independence was a reaction to some of the measures adopted by India in dealing with its new neighbour. One element of this strategy was that it forced the country to industrialise quickly by seeking to become self-sufficient in the production of basic manufactured goods.

But the strategy needed finance of which Pakistan had very little. It turned to America for help, first indirectly and then much more directly. A deep relationship of mutual dependence was to develop between the two countries. This relationship was underlined by four wars — the Korean War, the Cold War, the war against the Soviet occupation of Afghanistan and the war against terrorism. Pakistan played a role in each one of these which meant that America’s relations with the Pakistani military became an important part of the dealing between the two countries.

According to a newspaper account, “a searing report by the US Government Accountability Office last year said that the Bush administration had relied too heavily on the Pakistani military to achieve its counterterrorism goals, and had paid too little attention to economic assistance”.

The US Congress has passed an act for aid to Pakistan that will triple the amount of economic assistance the latter has received in the last few years. Large sums were provided since 9/11 to the government headed by President Pervez Musharraf. Most of the $11bn worth of aid went to the military as compensation for the help it was giving to the Americans in their operations in Afghanistan. Some assistance was also provided for building the country’s capacity to undertake counterinsurgency measures. This was something relatively new for the defence forces in Pakistan since their preoccupation up until now was to protect the country’s borders against possible attacks by India.

This time around, the US is committing itself to helping Pakistan to improve the lives of its citizens. This is being done as a part of the belief that unhappy people are potential insurgents and there are many of those in Pakistan. In this context Washington has come to two correct conclusions.

One, the country with some 170 million people subscribing to the Islamic faith and located in the world’s most sensitive area is too important to be left to its own devices.

Two, given the previous involvement of the United States in Pakistan when Washington abandoned Islamabad suddenly because its own purpose had been fulfilled, there is a suspicion in Pakistan that this time as well the engagement will be there for as long as Afghanistan needs attention. Once the US chooses to downsize its presence in that country for whatever reason, interest in Pakistan will also be lost.

To convince the Pakistani citizenry that this will not happen the Americans are willing to commit themselves for a longer period of time.

The US is now keen to draw a sharp distinction between economic and military aid.

It is the former that concerns me today. According to newspaper reports, the United States has several concerns as it rebuilds its economic presence in Pakistan. It wants to ensure that there will be not a great amount of leakage from the money likely to flow to Islamabad. There are two types of leakages and both give foreign aid a bad name. The first is the amount of money that stays behind in the country that provides assistance.

This is not a new concern. The extent of money that never goes to the recipients can be large. Some estimates were made decades ago by the Organisation of Economic Cooperation and Development (OECD) on the basis of a methodology developed to estimate what was called “tied aid”. Having concluded that the proportions can be large, the OECD went on to develop rules that bilateral donors were expected to follow.

In spite of these rules, the proportion remains large. In an interview given to The New York Times, Shaukat Tarin, Pakistan’s finance minister, said that “foreign contractors absorbed up to 45 per cent of the assistance in the past years”. The proportion can be much larger if aid has a provision that only the goods manufactured or commodities produced by the aid giver can be procured by the recipient.

The other leakage occurs through corruption in the recipient countries. According to the above cited newspaper report, “Obama administration officials are debating how much of the assistance should go directly to a government that has been widely accused of corruption”. However, bypassing the government and giving aid directly to non-government organisations may appear to be attractive over the short-term but would be very counterproductive over the long-term. What the United States should be turning its attention to right away is to build the institutions of government rather than ignore them.

This poses an important question. How should the government be strengthened? For an answer we may look to Pakistan’s own history. In the 1960s when a great amount of money was to be spent on building “replacement works” under the Indus Water Treaty President Ayub Khan had signed with Jawaharlal Nehru the Indian prime minister, the government in Pakistan turned to the Water and Power Development Authority to implement the projects.

Wapda did an extraordinary amount of high quality work over a constrained period of time. It was able to recruit the best talent available in the country, reward it well but hold it to high accountability standards. In business school literature Wapda-type organisations are called “special purpose vehicles” which governments set up in order to implement special programmes and projects. This is precisely the route the US should follow in developing some of the sectors on which it should concentrate.
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  #63  
Old Monday, October 12, 2009
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Policy response to the Great Recession


By Shahid Javed Burki
Monday, Oct 12, 2009


THE “decoupling” hypothesis that the emerging world of which Pakistan is a part is no longer so closely tied to the old industrial world – that whatever happens in the latter would affect the former – became popular before the global economy went into what economists have begun to call, the “Great Recession.” The down turn began in the United States in the summer of 2007. Initially there was a consensus among economists that the downturn’s effect would not be felt by the emerging countries to the extent it would influence the more linked economies of the industrial world. That didn’t happen.
We know from Pakistan’s experience that even in an economy that was not an integral part of the global production system, there were many negative consequences from the economic crisis in the United States and Europe. Pakistan’s exports were affected by the contraction in the global markets. The Karachi stock market, shaken by the rapid deterioration in the security situation, suffered as foreign capital flew out and joined the exit from a number of other emerging markets.

It is important, therefore, for Pakistan’s policymakers to stay abreast of the developing situation in the global economy.Today I will explore some of the current expert thinking on the subject of the Great Recession. I do this in the belief that there are lessons to be learned for the governments in the emerging markets.

How close was the Great Recession to the Great Depression of the 1930s? One answer to the question was provided by Christiana Romer, the head of President Barack Obama’s Council of Economic Advisers. She is one of the two senior officials in the new administration who have a good understanding of the Great Depression. The other, of course, is Ben Bernanke, the Chairman of the Federal Reserve, America’s central bank. Bernanke studied the subject as a graduate student and then published a book about it. He is generally credited with pulling the American economy back from the brink of a depression.

What is an economic depression? What distinguishes it from a deep recession is the paralysing fear of the unknown. That fear leads consumers, investors and business managers to pull back from the market. They begin to hoard cash by sharply cutting expenditure.

According to the students of economic depression, “a devastating loss of confidence inspires behaviour that overwhelms the normal self-correcting mechanisms (lower interest rates, inventory re-supply, cheap prices) that usually prevent a recession from becoming deep and prolonged: a depression.” In other words, economic managers have to try to address the situation by using new tools. As the US economy got close to a depression, Bernanke, having lowered interest rates to near zero, went for what is called the “quantitative easing” of money. This he did by printing enormous amounts of money and gave it to the credit starved sectors of the economy. This was done while hundreds of billion dollars worth of stimulus was being provided to the economy through the budget by way of President Barack Obama’s large stimulus package.

Did the state of the US economy justify these extraordinary moves? A report issued recently by Ms Romer finds that the initial impact on the levels of confidence for all categories of eco nomic actors was much more severe than was the case at the beginning and during the Great Depression.

While it is correct that stock prices fell by one-third from September to December 1929, the beginning of the downturn, it has to be recognised that far fewer people owned stocks then than is the case now. The effect on the economy, therefore, was not as severe as was the case now when the fall in stock prices affected the levels of wealth for many more people. At this time, home prices barely dropped then but fell sharply now. From December 1928 to December 1929, households lost three per cent of their accumulated wealth. This time they lost a much larger proportion – as much as 17 per cent.

There were some policy missteps that accelerated the pace of economic deterioration. Among them was the decision not to support Lehman Brothers, the fourth largest US investment bank. The anniversary of the bank’s collapse inspired much commentary. While there was disagreement about the wisdom of the decision – some argued that even if the bank had not been allowed to fail, some other would have become the victim of the economic malaise. There is a consensus that the decision accelerated the deterioration. As Robert J. Samuelson of Newsweek puts it, by “allowing Lehman to fail almost certainly made the crisis worse. By creating more unknowns – which companies would be rescued, how much were ‘toxic’ securities worth? It converted normal anxieties into abnormal fears that triggered panic.” The economy, in other words, was brought near the state of depression not only by the economy’s own internal dynamics, but by public policy.

The Lehman decision froze credit markets and resulted in the collapse of the stock markets. By year end, the Dow Jones industrial average was down 23 per cent from the level reached before the bank’s collapse and 34 per cent from a year earlier. There was panic in the financial markets which affected general confidence.

In September, the Conference Board’s Consumer Confidence Index was 61.4. By February 2009, it fell to 25.3. Spending on consumer durables fell at the annual rate of 12 per cent in the first three quarters of 2008, accelerating to a decline of 20 per cent in the fourth. Investment by businesses fell by 39 per cent in the last quarter of 2008. This is when the Obama administration decided to act.

The most important lesson to be drawn from this episode in recent American economic history is that public policy plays an important role in the way economies develop and how they should be steered out of the crises into which they can find themselves as they move forward.

This lesson is particularly important for a country such as Pakistan that has allowed economic institutions in the public sector to weaken greatly, has lost the capacity to do serious analytical work on the state of the economy in both the public and the private sectors, and has not developed linkages between the private and the public sectors to develop. The last is particularly important since it provides the policymakers advice from analysts who don’t have political axes to grind. One important step the government could take is to put in place a strategy for undertaking analytical work in economic management in both public and private sectors.
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  #64  
Old Tuesday, October 13, 2009
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Post Troops for Afghanistan?

Troops for Afghanistan?


By Shahid Javed Burki
Tuesday, 13 Oct, 2009


OCTOBER may turn out to be the defining month for the presidency of Barack Obama. This is not only because the US Congress will need to reach a decision on whether it will support the president’s efforts to reform America’s dysfunctional health system.

Nor will solely be because of the progress — or the lack of it — that the Obama administration, working with Congress, is likely to make in reforming the financial regulatory system.

What will really define the Obama presidency is the decision he takes on Afghanistan. A couple of weeks ago, Obama met his National Security Council to review the request he had received from Gen Stanley McChrystal, the top American commander in Afghanistan, to send 40,000 additional American troops to steady the rapidly deteriorating situation in the field. The request was leaked to the press through Bob Woodward, the veteran Washington-based journalist, in an effort to put pressure on the administration to accede to the general’s demand. This was a classic Washington operation with two sides on an important issue involving the public to support the position they were taking.

The military’s efforts to increase the number of soldiers fighting what has come to be known as Obama’s war has been opposed by a powerful group within the administration, led by Vice-President Joe Biden who has strong links in Congress. That is important since there are a number of powerful figures in Congress who let it be known that they would not be in favour of increasing troop strength in Afghanistan. It was awkward for the president that the opposition came from the members of his own party whose support he badly needed.

The McChrystal plan is based on the counter-insurgency strategy the Americans implemented in Iraq as the tenure of President George W. Bush was coming to a close. The strategy had four parts. Additional troops were to be sent to Iraq to secure some of the critical areas in the country, in particular its large cities. A large number of Iraqis were to be trained to man the country’s army and the police force. Alliances were to be made with the insurgents who were prepared to give up their weapons and work with the government and the Americans. And, serious development efforts were to be put in to improve the living conditions of the citizenry.

Even with considerable opposition from the Democrats, President Bush accepted the strategy and allowed a “surge” in American troops. The strategy seems to have worked as the level of violence has declined significantly which has allowed the Americans to begin to pull out their troops from the Iraqi countryside. Gen McChrystal recommended the adoption of the same approach in Afghanistan.

The opposing view as represented by Vice-President Biden also has a number of elements. America’s military operations in Afghanistan would be limited. Ground forces would be used sparingly, most of the work being done by special forces who would have Predators attack high-value targets, picking those who were resolute in their opposition to America and the presence of foreign troops on Afghan soil. Washington would concentrate its efforts on Pakistan that had the institutional capacity to fight the Taliban provided its military was given appropriate training equipment. Both of this could be done by the Americans.

In addition, the Americans would provide Pakistan a great deal of economic support. A bill authorising $7.5bn in economic aid to be spent over a period of five years was passed and awaits the president’s signature.

It will be of concern to Pakistan how President Obama views and acts on the question of the size of the American contingent in Afghanistan. With the debate on the issue heating up in Washington, there have been statements in Pakistan that the country’s military was readying itself for a major battle with the Taliban in South Waziristan. The news that the preparations had been finalised also came via news leaks from the Pentagon.

As has happened in the case of so many other policy disputes, it was The Washington Post that was used by both sides to project their case to the public. Earlier in the month, the newspaper carried an item titled ‘Pakistan plans key offensive’ to report that “Pakistan’s military is preparing what may be one of the most significant offensives in years against a major Taliban stronghold near Afghanistan….The operation in and around the tribal area known as South Waziristan will target Taliban fighters from the powerful Mehsud tribe”. It was revealed by a senior Pakistani official who talked to the newspaper that the military had “made all arrangements, and a full-scale operation against the Taliban could begin anytime”.

Defence experts in Washington let it known that the two initiatives — the increase in the size of the American contingent and the move by the Pakistan military — were parts of the same strategy. The military part of the strategy was to deny the Taliban insurgents the operational space on both sides of the Afghan-Pakistan border. At the same time, there should be a concentrated effort to bring economic development to the people on the two sides. The passage of the aid to Pakistan bill by the US Congress was one important step in that direction. President Obama was prepared to take the time for the two sides to debate the issues. Differing opinions in Pakistan have made it unclear as to which side of the argument the Pakistanis would take.
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  #65  
Old Monday, October 19, 2009
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Policy signals in Nobel prizes ’09 in economics


By Shahid Javed Burki
Monday, 19 Oct, 2009


THE various Scandinavian committees charged with awarding the Nobel Prize for various endeavours continue to send powerful signals for policy shifts.
First the Norwegians awarded the coveted Peace Prize to President Barack Obama of the United States saying that by preferring diplomacy over unilateral action, he had set a new tone in world affairs.

Obama is showing that the United States cannot dictate to the rest of the world what is only in its own interests. Now the committee in Sweden has awarded the Nobel Prize in economics – formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel – to two American scholars who had discarded the rationality and “market is perfect” approach to economics by concentrating on the way the real world works.

The two who were thus honoured are Elinor Ostrom, a political economist at Indiana University, and Oliver Williamson of the Berkeley campus of the University of California. The work done by the two – in particular by Professor Ostrom – is of considerable significance for developing countries such as Pakistan. She is also the first woman to be given the prize in its 41 years’ history. And she is the first winner of the prize whose basic training was in political science rather than in economics.

The Nobel judges, in their description of the work done by the two winners said that economic science should extend beyond market theory and into actual behaviour. The two academics awarded the prize had done that. In a news conference given after the award was announced, Ostrom said that her “work shows the importance of combining ideas from economics, political science, sociology and other fields in order to understand how the real world works”.

Summarising their work, the award announcement said: “Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.” Professor Williamson received the reward for his work on large corporations and for his findings that they exist because, under the right conditions, they are an efficient way to do business. According to Nobel Committee’s citation applauding his work, “large corporations may, of course, abuse their power.They may, for instance, participate in undesirable political lobbying and exhibit anti-competitive behaviour.” What should be done to ensure that large firms use their economic and financial power that does not go against larger social interest?

In reacting to the news that he had won the Nobel Prize, Professor Williamson answered this question by reminding people that the confidence in the selfcorrecting role of the market can be misplaced. “If you believe that markets operate in Alan Greenspan fashion, then you don’t enquire into the details. One assumes that that the outcome is optimal but that assumption cannot be made”.

However, it is the work of Professor Ostrom that has much greater relevance for a country such as Pakistan that is struggling to develop local systems that would protect the economic interests of the less-well-endowed and prevent poaching by the po litically and socially powerful. She works in collaboration with Vincent Ostrom, her 90 year old husband, and has gathered most of the material for her work by undertaking extensive field work.

Her initial focus was on understanding what economists call, “the tragedy of the commons”. According to this line of thinking, it is perfectly rational for people to maximise their own welfare when using common resources even when such an approach would do long-term harm. Thus when there is common ground available to shepherds, the tendency will be to overgraze it even if the land would be damaged over the long-run. There are two ways of handling this problem. One is to have a central authority institute laws to manage the commons. The laws would discourage irresponsible use even when it produces private profit by punishing those who violate it. Such an approach creates powerful bureaucracies that abuse their power in rent seeking behaviour.

The other is to move the common property to private ownership. Ms Ostrom concluded in her earlier work that the tragedy of the commons was an inaccurate concept. “Particularly in the 17th and 18th century England and Scotland, the concept described villagers’ overgrazing their herd on the village commons, thereby destroying it as pasture.’ Privatisation of land that ensued inflicted a lot of damage on the poor. Privatisation of the property held by a community of users often results in harming the majority of its members. According to Joseph Stiglitz, another winner of the Nobel Prize, “conservatives used the tragedy of the commons to argue for property rights, and efficiency was achieved as people were thrown off the commons. But the effects of throwing a lot of people out of their livelihood were enormous. What Ostrom has demonstrated is the existence of social control mechanisms that regulate the use of commons without having to resort to property rights.” Ms Ostrom has applied her findings to a number of different situations. “When local users of a forest have a long-term perspective, they are more likely to monitor each other’s use of the land, developing rules of behaviour. It is an area that standard market theory does not touch,” she has written.

Another example comes from the field of environment. Degradation of the earth’s atmosphere has been caused by the excessive discharge of pollutants such as carbon dioxide into the atmosphere. There is resistance to any attempts to regulate this or to have the pollutants pay the price for their activities. But it has been found that the same people will behave differently when the damage they are doing is obvious and visible. Getting the government to intervene when civic responsibility is not viewed in terms of personal interest is often not very productive.

Translating these findings to the situation in Pakistan, one would conclude the following. First, greater space should be given to the communities to formulate their own rules of behaviour. This means developing institutions of local governance that are flexible so that each community can develop its own way of conducting its business. This would not only lessen the burden on the government but also ensure that the rules are followed by all members of the community.

Second, education should include explaining to the people what are the benefits and costs to them of their everyday actions. In that way they will be able to change their behaviour in a way that brings them long-term benefits.
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Old Tuesday, October 20, 2009
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The bill explained


By Shahid Javed Burki
Tuesday, 20 Oct, 2009


THE reaction in Pakistan to the Kerry-Lugar bill surprised both Islamabad and Washington. Foreign Minister Shah Mehmood Qureshi conveyed to the Obama administration the Pakistani military’s unhappiness with some of the provisions of the bill.

Following the meeting with the minister, the sponsors of the bill agreed to issue a statement clarifying that it was neither the intention of the US authorities to micromanage Pakistani affairs nor to do anything that would subvert the country’s sovereignty.

The bill passed by the US Congress, popularly known as the Kerry-Lugar bill, seeks to restructure Pakistan’s relations with the United States on a more durable basis. In the past these relations were on an ‘on-and-off’ basis; they were ‘on’ when Washington needed Pakistan in pursuit of its strategic interests and ‘off’ when Washington’s attention was diverted away from the region of which Pakistan is a part.

While it is easy to understand why the military high command was upset with some of the provisions in the bill, the reaction of some of the politicians and a section of the press and electronic media is more puzzling. The bill, now the Enhanced Partnership with Pakistan Act of 2009, after President Obama’s signature, covers a fair amount of ground: it defines the objectives the United States would like to see achieved after the large amount of assistance it is planning to provide; it has many expectations from Pakistan and includes provisos for evaluating the performance of the country in the use of the funds released by the United States.

It is worth quoting at some length what are described as the ‘findings’ of Congress in the bill. These usually express the sentiment in the legislative body at a given time. The bill states that “the people of the Islamic Republic of Pakistan and the United States share a long history of friendship and comity, and the interests of both nations are well served by strengthening and deepening this friendship”. Only those would quarrel with this statement who would not like to have a close relationship with Washington.

Then there is the question of the orientation of the earlier help provided to Pakistan. The bill states: “Since 2001, the United States has contributed more than $15bn to Pakistan of which more than $10bn has been security-related and direct payments” to compensate Islamabad for the services provided to the American forces operating in Afghanistan.

One of the criticisms against American assistance in the past was that it concentrated a lot of effort on providing to the military and not for developing the economy. The bill seeks to address this imbalance by providing a much greater amount for economic development. In addition it would support the country’s efforts to move towards democracy. “With the free and fair election of February 18, 2008, Pakistan returned to civilian rule, reversing years of political tension and mounting popular concern over military rule and Pakistan’s own democratic reform and political development.”

Once again, there cannot be any problem with this finding or with the requirement that Pakistan’s continued progress towards putting in place a democratic structure would be periodically reported upon by the administration in Washington to Congress. There are also Congress’s ‘findings’ about the progress Pakistan has made in controlling the increase in domestic terrorism. I will take up this issue in a later article.

The bill is divided into three parts, or ‘titles’ in the language of the American legislature. The first covers economic assistance, the second security assistance and the third accounting and monitoring. What is laudable — and should be seen as such in Pakistan — is that separate provisions are made for the two objectives of the bill: economic development and security.

A total of $7.5bn is to be provided for developing the economy but an unspecified additional amount will be given for aiding the security forces. Neither of the two titles carries the kind of conditionality that comes with loans from the World Bank and the Asian Development Bank or the programmes negotiated with the International Monetary Fund. In those cases, the country usually commits itself to taking a number of specific steps.

Two examples illustrate this point.

When a decade ago Pakistan borrowed from the World Bank some funds to develop its power sector it agreed to restructure Wapda according to a plan essentially developed in Washington. This was implemented but it had the unintended consequence of reducing investment in the power sector. Similarly Islamabad agreed to very specific fiscal and monetary targets with the IMF when it negotiated an agreement with that organisation in November 2008. It is understood that the flow of funds would stop if these conditions were not met. The World Bank sends out supervision missions and the IMF review missions to make sure that their conditions are being met.

The American bill does not have such conditions. The only requirement is that the administration report to the various committees of Congress on the expectations it has of the policies Pakistan will adopt. The bill does not have the provision that economic aid to Pakistan will be terminated or reduced if the country does not implement some of the recommendations made by the US Congress. The World Bank and IMF support comes with this kind of contingency. However, since Congress will authorise expenditure on a yearly basis in the context of the overall bill, it is possible that a change in political system could lead to a reduction in the amounts that would be made available. This is the way the US system works. It is not peculiar to aid to Pakistan.
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Planning for national food security


By Shahid Javed Burki
Monday, 26 Oct, 2009


PAKISTAN’s yo-yo food security situation – years of plenty followed by years of extreme shortages – is the consequence of a combination of several factors. Some of these originate inside the country; some are from the outside. Over some, policy makers have some control; over several others they have to react to external developments.
Over the short term, the availability of food supply within the country is affected by weather, by decisions made by farmers in response to prices they anticipate for their produce, and by price changes in the external markets. Over the long-run, however, food security will be influenced by some of the trends over which policy makers don’t have much control.

I will begin with demography. After having become sanguine about anticipated increase in population, experts have once again begun to focus on the problems created by the unrelenting increase in global population. Several decades ago when population increase was a concern, it was based on the prospect of fairly significant increase in world’s population. This was projected to reach about 12 billion in 2050.

However, unexpectedly the rate of fertility began to decline in most populous countries and the worry ceased about globe’s capacity to feed the population of that size. In 1972 when food and agricultural experts were planning the international food summit, populous countries such as Bangladesh were a serious problem. Now almost four decades later population growth is no longer a concern for Bangladesh.

The country has experienced one of the more profound changes in its demographic situation, with the population’s median age increasing by four years within a couple of decades. Now, concerns have risen more for environmental reasons than for the capacity of the agricultural system to produce the required amount of food.

Once again if Bangladesh were to be used as an example, if global atmosphere continues to increase and ice in the polar regions continues to melt, the rise in the level of sea will have serious consequences for low lying countries. According to one estimate, some 300 million Bangladeshis, or one fifth of the total population, could be displaced.

Returning to the issue of population increase let me provide some numbers. The world’s current population is estimated to be 6.7 billion; by 2050, it is expected to grow by 2.5 billion, increasing to 9.2 billion. Practically all of this increase will be in the developing world. If Pakistan’s population growth averages at 1.6 per cent a year in this period, its population will increase from 175 million in 2010 to 275 million in 2050. At this rate, its share in world population will increase from 2.6 to three per cent. Will the domestic output of food keep in pace with the anticipated increase in population? Unless a significant change occurs in the structure of agriculture and in the way farmers use land, water and chemicals, the answer to this question has to be no. The country has very little virgin land left to be exploited – a situation it shares with most of the developing world For the most of human history, the main way to boost food supplies was to increase the amount of land under cultivation. From 1700 to 1961, global population increased five times. Global cropland also increased by the same magnitude – five times. Largely because of the industrial production of nitrogen and the development of high yield hybrid crops while population increased by 80 per cent from 1961 to 2001, crop land increased by only eight per cent Pakistan is among the several large agricultural systems in the developing world that don’t have much new land to bring under cultivation. Several countries – in particular those in some parts of Africa and Latin America – agricultural production is being boosted by clearing millions of acres of rain forest. This is unfortunate since it has an enormous impact on global warming. That said, even this option is not available to Pakistan. It has already used much of its forests.

Land constraint and damage to land productivity by the excessive use of chemicals are not the only constraints faced by the sector of agriculture. Pakistan has also to face the coming water shortages. These will be caused by the increase in the non-agricultural use of water when the number of people living in the urban areas increase, industry’s demand for water grows, and global warming, by melting glaciers, will first produce floods and then reduce the flow of water in the rivers. These are some of the reasons why experts have called Pakistan as a water stressed country.

Restraining population growth is one way of dealing with the problem of food security. If the rate of fertility was to decline further, quickening the trend that has been established, a significant improvement will occur in the food security situation. Pakistan will have 25 million fewer mouths to feed if the rate of population increase was to drop to 1.2 per cent a year between now and 2050.

That this can happen in a Muslim country has been demonstrated, as already indicated, by Bangladesh. What made it possible was a combination of factors. The country has one of the most impressive NGO activities anywhere in the developing world and a number of these have fixed their sights on family planning. The spectacular growth of the ready-made garment industry has increased female employment. A large number of women have left their homes to work in the garment factories. By working, they have also a source of income that frees them from the control of their husbands and families. This has changed the reproductive behavior of millions of women. This option will become available to Pakistan only if the grip of Islamic extremists can be loosened.

Consumption patterns are changing which will impact the global food economy. As China grows and its people become richer, desire for more dairy and food products will divert cereals to feed animals. With oil prices expected to rise, the use of food crops to produce bio-fuels will increase. These developments have already affected food supplies. In 2007, squeeze on global supplies resulted in an average food price increase of 23 per cent. This trend continued in 2008 with another increase of 54 per cent. These prices rises were felt in Pakistan when food inflation soared.

In view of all these reasons, the challenge before the policy makers is a complex one. In planning for food security, they will need to deal simultaneously with a number of factors: increase in population of between 75--100 million by 2025, not much scope for increasing the amount of land put under crop cover, pressure on the environment, reduced supply of water and highly volatile domestic and foreign prices. The government may wish to appoint an agriculture and food security commission to come up with a set of policy initiatives to deal with a problem that may become difficult with every passing year.
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Ideas can win the war


By Shahid Javed Burki
Tuesday, 27 Oct, 2009


NOW that the military has begun its Rah-i-Nijat operation in South Waziristan, the question has begun to be asked whether it will succeed. We will not know the answer for several weeks, perhaps not even then.

The real victory will come only when the people not just in the tribal areas but in all parts of the country decide that they have been misled by a small of group of extremists.

The people must make clear that they don’t see their country and religion being under assault by the West, in particular the United States, and that it is their own people who are attacking them. In addition to the use of military power, what is required is the use of people’s power. The war being fought in the hills of South Waziristan is not simply a military war; it is more a war of ideas.

There has been much reflection in the American press in recent days about the meaning and ends of war. This was prompted by the on-going review of the options Washington has in the war in Afghanistan. There appears to be consensus among the commentators that no matter what the American president decides regarding the course of the conflict, it will, from now on, be ‘Obama’s war’.

One analyst, Gordon M. Goldstein, writing for The New York Times, drew a number of lessons for the current president based on the experiences of Presidents John Kennedy and Lyndon Johnson in conducting the American war in Vietnam. Kennedy chose the middle course, preferring to concentrate on building the capacity of the state to help the people who had turned to insurgency since they saw no other way to better their rapidly deteriorating economic and social situation. Johnson, on the other hand, was overawed by the military and opted for the military option.

What is the relevance of this debate in the United States for Pakistan’s policymakers as they conduct their operations in South Waziristan? There are several. Of these I would like to focus on the following three. First the civilians must provide credible leadership to this effort by the military. We know from our own history that the military cannot galvanise popular support when it goes into battle to protect the interests of the state.

There was great popular support for troops in the brief war with India in September 1965 but it could not be sustained when the politicians, led by the leadership that had come from the military, were not be able to credibly explain the purpose of the war and its aftermath.

Similarly, while the civil war in East Pakistan was provoked by the military, its aftermath had to be handled by the civilians. In the present context, we should recognise that a good start was made by convening a well-attended meeting of political leaders that authorised the use of force against the entrenched Taliban in South Waziristan.

Second, there has to be only one system of governance in one country. Pakistan allowed the Taliban to run a parallel government in the areas they control. The jihadists in the populous province of Punjab would like to do the same in the areas where they have influence. They will succeed only if the state abdicates its responsibility of providing basic services to the people. This should not happen if the institutions of the state are strong and the government has the resources to provide for the people. The cash-strapped government in Pakistan has to collect more resources to finance its operations and to use the money it spends effectively and efficiently. It is doing neither at this time.

Third, people have also to act. Let me quote at length from a recent article by the journalist Thomas L. Friedman who has written extensively on the developing world, especially on Muslim countries. “In places like Egypt, Syria, Saudi Arabia, Afghanistan or Pakistan you have violent religious extremist movements fighting with state security services. … And while the regimes in these countries are committed to crushing their extremists, they rarely take on their extremist ideas by offering progressive alternatives. And when these extremists aim elsewhere … these regimes are indifferent. That is why there is no true war of ideas inside these countries — just a war.”

This is a correct and insightful observation. “These states are not promoting an inclusive and tolerant interpretation of Islam that could be the foundation of people power,” Friedman continues.

Pakistan, unlike the countries on Friedman’s list has had a ‘people power’ movement when the lawyers demonstrated that by acting with courage and resolution, they could bring about more than regime change. They could also force a strong executive to begin to show respect to the judiciary and its opinions. The same people power needs to be mobilised to rescue religion from the clutches of the extremists.

Those on the margins of Pakistani society have found leadership from the ranks of the people who, although basically illiterate and poorly informed, are able to compensate for their shortcomings by the extremely strong courage of their convictions. The lawyers managed to find leaders from their own ranks. The progressive elements within the Pakistani society must search for those who can lead them in a much-needed people’s movement in the war against extremism.

What is needed at this critical moment in the country’s history is a group of civilian leaders who can galvanise broad support for the difficult journey on which the armed forces have embarked. Also needed is an economic plan for building state institutions to deliver the appropriate services to the people in stress and also improve their access to basic needs. Finally the moderates in Pakistani society need to let it be known that they are not in agreement with the extremists in the way they interpret Islam, the way they see the functioning of the state and the way they would place Pakistan in the international community.
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Food security and small farms


By Shahid Javed Burki
Monday, 02 Nov, 2009


EXPERTS are advising the developing world to focus on ground realities to achieve food security as its population continues to increase. They are not counting on another technological revolution to occur in the near future.

The next technological breakthrough will probably come from genetic engineering but that is not likely to happen any time soon. Even when it occurs its acceptance will not be easy since there are growing health and environmental concerns associated with this kind of tinkering with plants’ genetic material. In the meantime, the global demand for food will continue to increase.

The productivity increases that took place in many Asian countries including Pakistan beginning in the late ‘sixties and going on into the ‘seventies could happen again. But they will not be produced by developments such as the availability of high yielding seed varieties that resulted in doubling grain outputs in India and Pakistan between the late 1960s and the mid-1980s. That episode in the history of agriculture in the developing world is generally referred to as the “green revolution”.

It is now recognised, however, that the green revolution became the victim of its own remarkable and unprecedented success. Adjusted for inflation, food prices plunged by some 60 per cent by the late 1980s. This produced complacency among policy makers in the developing world as well as those in the aid giving agencies that had played a critical role in helping the green revolution to take place.

They turned their attention to the poor people’s other needs such as health care and education. These were called the “basic needs” in addition to food. Food was now cheap and hunger was no longer a big concern.

With the policymakers’ attention turned away from agriculture, farming was starved of investment resources. In 1979, 18 per cent of official development assistance (ODA) went to agriculture; by 2004, a quarter century later, that amount declined to a paltry 3.5 per cent.

During the green revolution years crop yields in the areas that benefited from new technologies saw yields grow routinely by 4 - 6 per cent a year. By the end of the 1980s, the annual increase had fallen to two per cent or less.

Reallocation of land to non-food crops and the continued expansion of urban land have put great pressure on land availability. The rate of increase in the world output of food began to decline significantly. This put pressure on the amount of food reserves available across the globe; they are at the lowest levels since the early 1970s.

By early 2008, there was panic buying by the countries that had the financial resources to spend on food imports which further depleted the stocks. To make matters worse, many large food producing countries, including India, imposed restrictions on grain exports. These constraints drove up prices in the international food markets.

The sharp increase in the price of agricultural commodities and the use of agricultural land for producing crops for the production of bio-fuels along with a continuous increase in population have, once again, raised the spectre of world hunger and starvation. Complacency is gone among both aid providers and as receivers. The last summit meeting of the world’s developed economies – the G8 – held in Italy in July 2009 declared, “there is an urgent need for decisive action to free humankind from hunger” and went on to pledge $20 billion for agriculture.

The Rome-based Food and Agriculture Organisation that had been campaigning for the renewal of donor interest in agriculture was pleased with the result of the Italy summit. “Since 2007, we have seen greater attention from world leaders on food security, in developing and developed countries alike,” said a senior official of the FAO after the G8 issued their communiqué..

But where should this money be invested? This is where the “small is beautiful” approach in agriculture has begun to take some traction. The lead is being given by India and in India by one of the more underdeveloped parts of that country.

When the Indian National Congress defeated the BJP in the elections of 2004, Dr Manmohan Singh, the new prime minister and an economist of some repute, decided to focus his government’s attention on agriculture and on the development of small farmers. Between 2003-04, the last year of the BJP administration, and 2008-09, the last year of Dr Singh’s first term, New Delhi’s budget for agriculture quadrupled.

According to one account, “government schemes built rural roads to help farmers get their produce to market, forgave some of their debt and raised minimum purchase prices on cotton, rice and other crops. In 2005, policymakers launched the Bharat Nirman Programme, aimed at providing electricity, housing and irrigation systems to farmers, and a year later, the National Rural Employment Guarantee Scheme, which promised at least 100 days of work each year for poor farming households often on public works to develop infrastructure in the countryside.

In the latest federal budget, announced in July, funds allocated for the rural jobs scheme jumped 144 per cent from the previous year to more than $8 billion – making it the largest social-welfare programme in the budget – while funding for Bharat Nirman was boosted by 45 per cent.”

What does the evolving global food situation and India’s attempts to deal with it suggest for Pakistan? Given Pakistan’s stretched fiscal situation it is not going to be possible to throw a great deal of public money into agriculture for some time to come. The country will have to be very selective. It should concentrate on improving the productivity of small farmers by using simple technologies that will help small-holder agriculture to produce more from the little bit of land the peasant-proprietors own.

In India, for instance, providing the poor farming communities with small amounts of funding to construct small ponds that can hold rain water has helped to increase the productivity – and hence incomes – of the small farmers.

By introducing the farmers to the internet, it has made it possible for the small holders who have surpluses to market to get the best prices for their produce. The introduction of the internet has provided poor communities to invest in education. They can see right away the benefits to be derived from education.

What is clear is that the Pakistani policymakers will need to concentrate on the development of the agriculture sector to revive the slumping economy. But what is needed is not a large increase in the infusion of public funds since these are not available. What is required is a paradigm shift in the development of agriculture and within agriculture on the development of the small farmer. This way the country may be able to achieve self-sufficiency in food but also alleviate rural poverty.
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Future need not be bleak


By Shahid Javed Burki
Tuesday, 03 Nov, 2009


I HAVE used the ‘perfect storm’ metaphor before in these pages but that was always in the economic context. I have argued on several occasions that the Pakistani economy has been buffeted by simultaneous events and developments that merit some extraordinary interventions by the state.

There will have to be a departure from the conventional wisdom on how to pull an economy out of extreme distress. But what works in normal crises will not work in Pakistan’s case.

The state remains weak, there is still considerable uncertainty about the direction politics could take in the country. There is immense foreign interest in guiding the country towards a future that does not pose a serious threat to the rest of the world.

Pakistan finds itself at the centre of developing events that could produce global upheaval of a magnitude that is difficult to predict. This is the other perfect storm which a developing and still-to-mature political system must face while it is deeply engaged in dealing with an economic crisis without precedence in a crisis-prone country.

The country has been targeted by a number of different forces some of which have shown remarkable resilience. Let us begin with Al Qaeda. The top leadership of this group has shown the ability to survive for many years in dark caves and tunnels in a region which has felt the effects of isolation. The strength of the leadership could have been depleted but it still seems capable of sending its message across to a large number of people scattered across the globe. According to this message the world order has to change in order to serve Al Qaeda’s interests.

Then there are a number of groups in Pakistan who have developed a strong belief that the state has not fulfilled the country’s original purpose, which was, they believe, to create an Islamic entity that would be the centre of the Muslim world. They believe that the Pakistani elite has always stood, and continue to stand, in the way of the realisation of this goal.

Also included in this troubling situation are the interests of the various large countries in the area. The United States is active for the reason that it was from here that the most devastating attack was launched on American soil on Sept 11, 2001. It would not want to see that happen again. China is rising in a way not anticipated by even those who know the country well. India, largely because of the remarkable development of its economy in recent years, has regional and global ambitions which include reducing Pakistan’s capacity to do it harm. And, finally, there are the countries of the Middle East which are in a state of economic, political and social flux that washes onto Pakistan’s shores.

How do we deal with this dangerous situation? Having practised economics all my professional life, it is not surprising that I would suggest that it is in this area that we must search for a way to steer the country out of this storm. International interest in helping Pakistan find a way out of this difficult situation has presented the country with an enormous opportunity. This must not be missed. Cash-strapped Pakistan will have to work closely with the international community that has shown enormous willingness to help with money and advice.

The much — and I believe wrongly — maligned Kerry-Lugar bill was crafted and signed into law with this intention in mind. The fact that it was received with such scepticism in the country can only be ascribed to certain reasons and motives. Those who have adversely commented on it did not familiarise themselves with its content and intent. Also, a small number of critics believe that Pakistan must reduce its dependence on foreign capital flows that always come attached with political strings. But it will take time before the country develops the capacity to wean itself off dependence on foreign money. In the meantime it must not only accept the offered assistance but put it to good use.

How should this be done? The list is long but I will mention three at this stage. The first is to build the capacity of the state to serve the people. This has deteriorated over time. It not only means providing good governance with all that the term implies. It also means bringing the government closer to the people. This can only happen if Islamabad is prepared to devolve authority to the provinces and the provinces to the institutions of local government, particularly in the cities and towns of a rapidly urbanising country.

The second is to remove the obstacles that stand in the way of putting the country on the path of long-term sustainable rates of growth that can begin to reduce the number of people living in absolute poverty. Power shortages must be removed, infrastructure improved and an expanding population provided with modern skills.

The third is to make this rate of growth ‘inclusive’. This term is being used with increasing frequency in economic literature and means helping those sectors of the economy, and within those sectors those activities, that help the poor by providing them with productive employment.

These and several other approaches that cannot be elaborated upon in this limited space must be incorporated into a comprehensive strategy of economic growth and the promotion of human welfare. This may seem like a daunting task but it isn’t. The continually evolving discipline of development economics provides enough knowledge about what works and what does not to put together a strategy that would be credible and pertinent for Pakistan’s current difficult circumstances.
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