Individual initiatives at Copenhagen

By Shahid Javed Burki
Monday, 14 Dec, 2009

NOW that the global community is assembled in Copenhagen and that some initial commitments have been made by America and China – with the indication that India may also adopt the approach China is taking – some agreement on climate change may be a bit nearer.

A number of political advances have been made since then. The United States, China and India are now among the four largest emitters of carbon into the atmosphere. All three have declared their intention to act. China became the largest polluter in 2008, passing the United States. India is in the fourth position. No international agreement could be made unless these countries were on board with serious commitments to act. The change of administration in Washington had made a great deal of difference. The United States is led by an individual who had identified climate change as one of his top priorities.

Each capital seems to have influenced the other two to move in the direction in which the world needed to go in order to avert disaster. Climate change was high on the agenda during the visit to Asia by President Barack Obama in November. He appears to have motivated the Chinese to announce their targets before they sent their negotiating team to Beijing.

After returning from the Asian trip, President Obama, using the provisions in the bill passed by the House of Representatives of the US Congress as the basis, announced a set of targets for his government. He said that his administration would work towards reducing carbon emissions by 17 per cent from the level reached in 2005. This target would be achieved by 2020. A more significant reduction was promised for the year 2050.

The Chinese made some pledges of their own, using a different criterion for indicating the kind of effort they were prepared to make. They based their commitments on what was called “carbon intensity”, the amount of carbon emitted per unit of gross domestic output. China said it would lower the intensity by 40 per cent by the year 2020. This means that China will work on new technologies to reduce the consumption of energy for producing additional output.

These announcements propelled India to make its own commitment to slow the emission of greenhouse gases. This was a significant shift for India which until recently had insisted that the brunt of adjustments in making carbon cuts should fall on developed countries rather than emerging nations. Any cut on the part of emerging economies would slow down their rates of economic growth.

India indicated that it will follow the Chinese approach and adopt a target of its own for carbon intensity. According to a senior Indian official, the announcements made by America and China “signaled to us that the global politics has moved beyond everybody sitting behind the table and doing nothing. So a lot of number crunching is going on now.” When the number crunching is done, the Indian position will be presented at Copenhagen as a domestic initiative, not dependent on international financial or technological support.

However, “we have to be very careful that we are not hustled into a position, inadvertently, where our interest is harmed”, said Shyam Saran, India’s top climate change official in an address to the powerful Conference of Indian Industry.

India, in other words, was taking a position that it would not be bound by an international agreement on climate change. It had taken the same position when it refused to sign the Non-Proliferation Treaty, (NPT), to prevent the spread of nuclear weapons. That left it the wiggle room to develop nuclear weapons. Once again, it was not prepared to surrender national sovereignty to an international body implementing an international treaty.

The real issue at Copenhagen is the role emerging markets are prepared to play. The International Energy Agency points out in its World Energy Outlook report that the commitments announced by the large polluters will fall well below the minimum needed. Atmospheric concentrations of carbon dioxide equivalent to 450 parts per million are consistent with two degree centigrade global temperature increase.

The agency notes that energy related carbon dioxide emissions have increased from 20.9 gigatons (Gt) in 1990 to 28.8 Gt in 2007. This is expected to go up to 34.5 Gt in 2020 and 40.2 Gt in 2030. This is equivalent to an average increase of 1.5 per cent a year over the period. Emerging countries account for all the projected growth in energy-related emissions to 2030, with 55 per cent of the increase coming from China and 18 per cent from India. The issue therefore is whether emerging markets such as China and India are prepared to come up with more aggressive targets.

In debating this issue, emerging economies will emphasise the role trade-offs can play. One example of this is provided by the World Bank in its latest World Development Report. “Poor people emit little”, says the bank. For instance reductions in emissions secured by switching the automobile fleet in the United States of just sports utility vehicles (SUV), into cars with European Union fuel economy standards would provide a cushion for the development of the world’s poorer areas.

It would, for instance, cover the emissions from providing electricity to 1.6 billion people in the developing world that currently don’t have access to electric power. This example suggests a number of areas for public policy. A tax on fuel consumption on cars in the United States would encourage drivers to switch from high consumption SUVs to low consumption hybrid and eventually electric cars which are already available in the market.

A large proportion of the resources generated by the tax could be given in the form of grants to the less developed countries for building fuel efficient power plants and for investing in green technologies. At the same time, some of the tax on fuel could be used to subsidise research in producing low fuel-consumption engines.

According to Martin Wolf of the Financial Times, “tackling the risk of climate change is the most complex collective challenge humanity has ever confronted. Success requires costly and concerted action among many countries to deal with a distant threat, on behalf of people as yet unborn, under unavoidable certainty of the costs of not acting. We have reached the point, however, where a broad consensus exists on the nature of the threat and the sorts of policies we need to follow to deal with it.”

As some of the world leaders recognised when they met with President Obama in Singapore, there is not enough time to work out an international treaty at Copenhagen. While some of the major polluting countries had come up with some targets they could factor in their own economic and environmental programmes, it would take much longer to arrive at a consensus on a document that would have the force of an international treaty. Copenhagen could help to arrive at a political consensus with a detailed treaty to be worked out later.

Roots of terrorism

By focusing on just one aspect — the US pressure to go after the perpetrators of terrorist activities — we will not be able to evolve a cogent response to growing extremism.

By Shahid Javed Burki
Tuesday, 15 Dec, 2009

ALTHOUGH there are still a couple of weeks to go before the new year, 2009 will go down in Pakistan’s exceptionally turbulent history as the country’s bloodiest year — bloodier than the time of ‘Operation Cleanup’ in the early 1990s in Karachi.
The security forces then dealt with a situation that was confined to one city, albeit the largest in the country and that was the result of warring groups seeking to establish their political and economic writ. It was not aimed at destroying the Pakistani state or establishing a new political, economic and social order. It was about control of the city. This time the state is the target. Pakistan is dealing with an insurgency that poses an exis tential threat.

Complicating the situation is the fact that the germs of this insurgency were planted by operators both within and outside Pakistan. According to popular belief the main reason for the development of extremism in the country was the involvement of the US in Afghanistan in the 1980s and the decision by Washington to pull out of the area that, in policy terms, it now refers to as AfPak.

The US left once the Soviet Union withdrew its forces from Afghanistan. But that is only a quarter of the explanation. There were several others. Among these was the social and political engineering of Gen Ziaul Haq who decided on his own and without the aid of public support that Pakistan needed to adopt Islam as the basis of its economic, political and social systems.

Under him, the country went through a wrenching change which was aided and abetted by the several Arab states with which his government had become closely associated. Saudi Arabia was particularly important in pushing Pakistan in that direction. It had helped finance Mujahideen efforts in Afghanistan and also financed the founding and development of a number of madressahs in large cities.

These madressahs taught a version of Islam that was mostly foreign to Pakistan. This is how Wahabi Islam struck roots in Pakistani soil. It flourished in particular in those areas whose people had been exposed to it because of their sojourn in Saudi Arabia.

One relatively less understood reason for the rapid growth of this more orthodox interpretation of Islam is the channel it found through the temporary migration to the Gulf states from Pakistan’s northern areas. This lasted for a decade and a half, from the mid1970s to the early 1990s, and involved several million people from northern Punjab and the NWFP. These workers were hired on fixed contracts, stayed in camps near the construction sites, and spent a good deal of their spare time in the mosques. They thus came under the influence of the local imams steeped in the Wahabi tradition. They brought this interpretation with them when they returned to Pakistan.

Also contributing to the problem is the fact that Pakistan’s political development was arrested because of the repeated involvement of the military in politics. The state’s priorities kept on changing as the leadership provided by the military in politics changed. But there was one thing common in the way all four military dictators governed. They had little confidence in the political will of the people they governed; all knowing, they ruled the country according to their particular whims.

Ayub Khan believed in limited democracy. He called it basic democracy. Ziaul Haq believed in what he thought was the Islamic way — the people should be governed by a pious leader who should not be constrained by the expressed wishes of the people. His only obligation was to consult a group of wise people chosen by the pious leader and assembled in a forum he called the shura.

Pervez Musharraf went back to the Ayubian formula by limiting democracy to a system of local government and a king’s party controlling a largely inconsequential national legislature. Being military men, these leaders believed in strong command and control systems in politics and economics .Since they were distant from the people they could not build popular support for their policies.

By far the most important contributor to the rise of extremism was the way a series of administrations managed the Pakistani economy. For many decades Pakistan experienced one of the sharpest increases in the rate of population growth. The country’s population at the time of independence was only 32 million of which 10 per cent lived in urban areas. It has increased almost five and a half times to 170 million on the eve of 2010.

This implies an average rate of growth of over three per cent sustained over a period of 60 years. Although the country has not held a population census for many years, I believe that nearly a half of this large and growing population is now urban. The urban population has increased at the rate of 4.5 per cent a year, again one of the highest in the world.

Unfortunately these demographic developments were not factored into the making of economic policy. Islamabad should have focused not only in getting the economy to grow rapidly — which it did on occasions and during the periods when the military was in charge – but also on ensuring that the rewards of rapid growth were widely distributed. The result is that the country now has millions of alienated youth with little faith in their future. They have been successfully recruited to jihadist causes. The latest of these is the destruction of the Pakistani state.

In developing an approach towards growing extremism and terrorism it is breeding, policymakers as well as the citizenry must first understand its complex causes. By focusing on just one aspect — the American pressure to go after the perpetrators of terrorist activities — the country will not be able to evolve a cogent response.

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Embedding trade in development strategy

By Shahid Javed Burki
Monday, 21 Dec, 2009

PAKISTAN needs a massive dose of economic adjustment to climb out of the hole in which it finds itself today and to ensure that it will not fall into something similar once again. One reason why the country’s economic history is punctuated with severe crises is that policymakers have not addressed some of the economy’s structural problems.

They have not done this for at least three reasons. One, some of the policymakers who took upon themselves to strategise about the future – this, we should remember was not always the case – took the wrong road to development. That may have produced high rates of growth over the short- term as happened in the ‘sixties, the ‘eighties and the ‘nineties but these growth spurts were always followed by severe downturns. The growth-oriented strategies could not be sustained over time.

Two, the roller-coaster political ride the country has taken since its birth has meant that popular support for pursuing the right agenda for introducing sustainable economic development never really developed. In the absence of such support, policymakers came under the influence of narrow but powerful economic interests that distorted the economic system to provide them with favours.

The power of these groups – groups such as the textile, cement and sugar lobbies or the big landlords – could not be checked by appealing to larger constituencies since the political system was so often dominated by narrow economic interests as well. Change may now be occurring and this may be a good time to begin to reflect on how it could move the strategy for growth and broad development in the right direction.

Three, even when policymakers were inclined to think in terms of the longer-term, they lowered their sights and saw only the opportunities available inside the economy rather than the outside. One consequence of this was the pursuit of what economists call, the “import substitution approach to economic development”. The only exception to this was the period of President Ayub Khan when the government adopted a dual exchange rate policy to promote exports. However, this introduced severe distortions into the economy from which the country is still suffering.

Textiles is one sector which has developed as a result of these policy missteps. It continues to dominate the economy as well as exports, remains dependent on government largesse and public subsidies, is responsible for keeping the economy mired in low-technology output, and continues to direct the government’s effort in increasing exports by concentrating effort on the wrong lines of products – wrong in the sense of the contribution to the economy – and on the wrong markets. It is a testimony to the economic and political power of this sector that this is one of the few areas of public policy in which there has been consistency even with the changes in governments and political systems.

To be more specific, I believe it is inappropriate for Islamabad to spend so much political capital in improving access to the United States’ markets for a small number of textile products. The American textile market is not growing much; if there is growth, it is limited to high-end products which Pakistan does not produce.

For the low value added products such as towels and hotel linen, Pakistan must compete with a number of poor countries some of which have the designation of “least developed nations”. As such they enjoy duty-free access to the American market. Giving Pakistan’s producers an equal access would be a zero-sum game; Pakistan’s gain will be some other country’s loss. This makes it a hard sell. Also, by focusing so much attention on the American market, Pakistan is going against what economists call the gravity model of trade. According to this, mass and distance should be the main criteria for picking trading partners. The United States has the mass, but being thousands of miles away it does not have the advantage of distance. China and India qualify on both counts as the best markets for Pakistan. Focusing on both, however, would mean bringing about fundamental changes in the structure of the economy as well as the way we look at the world.

Take for instance some of the recent economic developments in China. These indicate that the country is becoming a significant global economic player not just as an exporter but also as a consumer of manufactured products. China is overtaking the United States as the world’s biggest market, from cars to refrigerators to washing machines, even desktop computers. Automakers will sell 12.8 million cars and light trucks in China this year, virtually all of them made in China, compared with 10.3 million in the United States. Appliance manufacturers expect to sell 185 million refrigerators, washing machines and other pieces of kitchen and laundry equipment in China this year compared with 137 million in the American market. In desktop computers, China moved solidly ahead of the United States in the third quarter, buying 7.2 million compared with 6.6 million in the United States. China, in other words, while reaming an export powerhouse, is also becoming a global centre of consumption for many products.

The challenge before Pakistan, therefore, is to integrate its economy more fully with that of China’s than continue to try hard to achieve a deeper penetration of low value added products into the saturated American market. But as the experience of other countries in Asia shows, working with Beijing can be difficult. Like Pakistan, Indonesia, for instance, also negotiated a free trade arrangement with China only to find that the growth in bilateral trade created a huge imbalance in Beijing’s favour. In the past four years, Indonesia has swung from more or less parity in bilateral trade to a deficit equal to one-third of its annual exports. The deficit continues to increase.

Pakistan’s experience has been similar. The problem China poses for its trading partners was well described by Jong-Wha Lee, the chief economist of The Asian Development Bank who noted that while Japan and South Korea were also economic juggernauts – and were also criticised – when their state-backed industries increased their exports, the problem presented by China is different. “Not just the size, but the speed of China’s emerging power is really unprecedented in the region. So it creates a lot of issues – not just trade and exchange rate policies.” These include the way the Chinese use the state to manage labour and raw material costs and provide exporters help with transporting and managing their merchandise.

An export strategy directed at exploiting China’s rising economic power, therefore, must cover a number of areas other than those included in the free trade agreement concluded between Pakistan and China. It should incorporate investment by China in both public and private sectors of the Pakistani economy as well as transfer of technology.

The two countries should improve the physical infrastructure linking them. There should be alliances formed between potential suppliers of parts and components to China’s rapidly developing industry.

And, Pakistan should obtain help from China to improve the quality of its human resource. All this needs to be embedded in an integrated development strategy, not just a free trade agreement.

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Radicalisation abroad

By Shahid Javed Burki
Tuesday, 22 Dec, 2009

FOR decades Pakistan has relied on remittances from its workers abroad to finance economic and social development at home. In 2009, one of the most difficult years for the Pakistani economy, the only thing that showed some improvement was the level of remittances.

While exports declined by six per cent and imports by 10 per cent, remittances increased by 22 per cent. Without an increase of this magnitude Pakistan’s external situation would have been even more difficult today. The fact that the State Bank of Pakistan was able to rebuild its external balances to a comfortable level owed a great deal to this steady increase in the then level of remittances. Any disturbance in this trend will have grim economic consequences.

For years the US had become the largest source of remittances from abroad, as the people who traced their origin to Pakistan became more involved with the development of what was once their homeland. However, much to the concern of many, the Pakistan-US link seems to be providing another type of flow: there are some among the Muslim community in the United States who seem to have decided that they should join what they view as the Muslim world’s fight against the Christian West. Some of these misguided people are heading towards Pakistan.

The arrest in Pakistan some time ago of five young men from the suburbs of Washington on suspicions that they were planning to fight against the Pakistani state and the US has raised a number of disturbing issues. They need to be addressed seriously by the people of Pakistan, by the Pakistanis in the United States, by Washington and by Islamabad. If what we are witnessing is a trend it will have worrying economic, political and social consequences for Pakistan. It will, most certainly, isolate the country even more from the world at a time when it needs external support for dealing with an unprecedented economic crisis.

A comforting conclusion was reached by many analysts and possibly also by Washington that there were good reasons why the United States was spared another terrorist attack following 9/11. It appeared that the focus on homeland security kept potential troublemakers out of the country. And there was the belief that the Muslims in the United States were not vulnerable to radicalisation.

Was the latter conclusion incorrect? Are the American Muslims susceptible to the kind of influences and pressures that have driven so many of their co-religionists in Europe to take desperate action against the countries in which they reside? According to one analyst, “the notion that the United States has some immunity against terrorists is coming under new scrutiny”.

The conclusion that the American Muslim community has not been radicalised seems not to be entirely correct although by and large it is better integrated in the US economy and society than is the case with the one in Europe. This is in part because a large number of Muslims in the United States have different socio-economic backgrounds than those who went to Europe.

Are the Pakistanis in America more inclined towards radicalisation than Muslims from other communities? There have been disturbing incidents of terrorism in America lately, as well as apparent intentions of committing them. Many have either involved young men from Pakistan or visits to Pakistan for training to commit violence. The fact that Pakistan has become the hub of global terrorism inspired by various Islamic causes should be of considerable concern to Islamabad.

What are the various choices available to the makers of public policy to stop this situation from deteriorating? First, Washington needs to ensure that in its zeal to protect itself, it should not further limit access to the country to Pakistani youth. It is becoming increasingly difficult for Pakistanis to get visas to attend colleges and universities in the US.

This is unfortunate since Pakistan’s educational system is extremely weak and one way of compensating is to send the youth to institutions in America. Restricting this will alienate the Pakistani youth even more. Washington should also encourage non-radical imams teaching and giving sermons at the various mosques in the country to stop the young from drifting towards extremism.

While the US has a role to play, much of the action needs to be taken by Islamabad and the country’s provincial governments. There are two obvious areas of policy intervention. The first, of course, is improving the educational system. This needs to be done at all levels. Not only has Pakistan neglected primary education, it has also paid relatively little attention to higher education. Without improving the skill base of the vast army of the young in the country — Pakistan with a median age of 18.2 years has one of the youngest populations in the world — the youth will continue to be attracted to radical causes.

Of equal importance is the action by the state against organisations in the private sector that have openly recruited the young for pursuing extremist causes. There is no point in denying that this was being done by the state to compensate for India’s growing military strength. The jihadi groups were being prepared to do battle in case the two countries went to war again.

This strategy has massively backfired. These groups have turned on the Pakistani state and the Pakistani people. The state policy has taken a 180-degree turn. These groups have to be eliminated by the use of all means, including force, available to the state. Keeping them in reserve as insurance against India will not work. This is now the time for Pakistan — the government and the people — to move against extremism. Not pursuing this objective with the full might of the state and citizenry will do the country even more harm.

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Pakistan and the global economy

By Shahid Javed Burki
Monday, 04 Jan, 2010

FOR the global economy, 2009 was a bad year. For the economy of Pakistan it was one of the worst in the last six decades. How will the world and the Pakistani economies shape up in 2010? Will the performance of the former affect that of the latter? Let me begin with the second question first.

In spite of a relatively low share in world trade – relative to the size of the economy – Pakistan is affected by global developments. Two of these are particularly important: the willingness of rich governments to finance from their budgets development expenditures in countries such as Pakistan and the willingness of the private sector to finance investments in the developing world.

Both types of flows depend on the economic and financial health of developed countries as well as those that are gaining economic strength. When developed countries face economic and financial stress, as they did in all of 2009, their financial sectors adopt a very cautious approach in putting money into risky places such as Pakistan. Concerns about security were not the only reason why the Karachi Stock Exchange dived in 2009. Many foreign investors who had bet on the KSE pulled out for financial reasons. Will we see a reversal of that trend? That brings me to the first question.

There is consensus among economists that the financial crisis is over; yet a durable recovery is not yet in place. The recovery that has taken place occurred largely because of the stimulus provided by various governments to their economies. This has resulted in large fiscal deficits and, therefore, that approach cannot be sustained.

According to the Organisation for Economic Cooperation and Development (OECD), the United States will run a fiscal deficit of about 11 per cent of its gross domestic product in 2009 while the current account deficit will be three per cent. By definition this implies that the private sector ran a surplus of eight per cent of GDP. This represents a major shift in the patterns of consumption by the private and public sectors

In 2007 the private sector ran a deficit of 2.4 per cent. This shift of 10.4 percentage points means that consumers are saving a good part of their current incomes and are spending considerably less. This means that there will be a decline in the rate of growth in imports, possibly in their level as well. Developing countries will not be able to rely very much on exporting their way out of the economic slowdown they are experiencing. This is why I have been arguing against Pakistan placing too large a bet on gaining greater access for its textiles on the markets in the United States.

How will developed economies perform in 2010? If the private sector rate of savings drops to three per cent of GDP in the United States and the current account deficit increases to four per cent, fiscal deficit will have to be seven per cent of GDP, four percentage points lower than in 2009. For a lower deficit to sustain recovery and growth, new growth engines must be found. The favourite candidate for that is the consumer in China, notorious for being excessively thrifty. This will mean rebalancing the global economy without which there may be at best a slow recovery or possibly a double-dip recession.

With the developed world still struggling to emerge out of crisis, countries such as Pakistan should shift their attention to China, the new growth pole of the global economy. China has raised its GDP growth estimate for 2008 from nine to 9.6 per cent. The revision results from an economic census that shows a bigger contribution of services to GDP. China’s expected expansion in 2008 compares with the US growth of less than one per cent while Japan’s GDP shrank by 1.2 per cent.

The Chinese GDP grew by 6.1 per cent in the first quarter of 2009, by 7.9 per cent in the second quarter and by another 7.9 per cent in the third. It will increase by more than eight per cent in 2009 when it will overtake Japan as the world’s second largest economy.

The accelerating pace of growth is attracting more foreign direct investment into the country. It climbed 32 per cent in November to $7 billion. Luxury carmaker BMW said last month that it will build a new factory worth $732 million in China to tap an auto market set to overtake the United States as the world’s largest market. General Motors, the largest American carmaker, has announced a deal involving auto producers in China and retailers in India. Small cars manufactured in China will be offered for sale in India as GM brands.

The Indian economy increased by 6.7 per cent in the fiscal year that ended in March 2009. That expansion is likely to continue in 2009-10 fiscal year. The relatively robust performance of the Indian economy and its expanding consumer base is also attracting foreign capital, particularly in the auto sector. Ford Motor Company has announced plans to develop a small car designed by India’s engineers. It will be first offered for sale in the large domestic market and then will become available for export to the developing world.

What do these rapid-fire changes in global structures mean for Pakistan’s struggling economy?

There are three lessons for Pakistan from the experience of other large world economies. One, it may be useful to think in terms of reviving growth. In an article contributed to the Financial Times by Kemal Dervis, my former World Bank colleague, who went on to become Turkey’s finance minister, it is argued that “developing economies, apart from China, should be encouraged to borrow more too. To achieve this, the world will need to promote substantial institutional reforms, including greater insurance against risk of crises, via expanded resources for the International Monetary Fund.” In other words leveraging should be allowed and encouraged in countries such as Pakistan to revive growth. Without growth they will face costly social and political problems.

Two, Pakistan should factor into policymaking the fact that it borders two trillion dollar economies that are not only large but are also growing rapidly. China’s gross domestic product is now estimated at $4.8 trillion while that of India at $1.7 trillion. The two economies are together adding every year about $455 billion to their combined product.

Since that expansion is happening right next door to Pakistan, it should be able to draw some benefit from it. That can be done in a variety of ways which is the third lesson to be drawn. Islamabad should find a way of better integrating some parts of its economy with some of those in China and India. The rapidly growing automobile sector offers an opportunity but that will need the state to give incentives for developing the auto-vending sector.

What all this implies is that Pakistan will have to think creatively and dynamically about the global environment in which its economy must function rather than continue with old habits and old assumptions.

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Economics and extremism

By Shahid Javed Burki
Tuesday, 05 Jan, 2010

THERE cannot be any doubt that there is a relationship between poor economic performance and the rise of extremism and resort to insurgency. That such a relationship exists and should inform counterinsurgency efforts is contested by some experts.

Scott Altran, an anthropologist, has studied the operations that led security forces in Indonesia and the southern Philippines to beat back insurgencies in those two countries. He suggests a different strategy from the one being pursued by the Americans in Afghanistan and the military in Pakistan.

He argues for a different perspective, “one that is smart about cultures, customs and connections. The present policy of focusing on troop strength and drones, and trying to win over people by improving their lives with western-style aid programmes, only continues a long history of foreign involvement and failure. Reading a thousand years Arab and Muslim history would show little in the way of patterns that would have helped to predict 9/11, but our predicament in Afghanistan rhymes with the past like a limerick.”

This line of thinking is based on the view that for some inexplicable reasons the Middle Eastern man — possibly also the man from the Pakistani hills — is different from the rational western man who, economists believe, wants to maximise his welfare.

For some reason the tribal people of Afghanistan and Pakistan are much too interested in their traditional codes of behaviour — the Pakhtunwali — to embrace economic, political and social modernity. “Afghan hill societies have withstood centuries of would-be conquests by keeping order with Pakhtunwali in the absence of central authority,” writes Altran. Such a view would keep the tribes in this part of the world locked in the past, concerned only with looking after their social values.

The areas of Pakistan in which insurgency has taken hold have seriously lagged behind those which have fared better in economic terms. Although Pakistan does not have national income accounts I have developed some rough estimates of provincial gross domestic products and income per head of the population in the various provinces. I estimate that Punjab, the country’s largest province in terms of population, also has the largest economy.

While the province’s share in national population is a little more than 55 per cent of the total, it accounts for 57 per cent of GDP. The province of Sindh, the second largest in terms of population, has almost 23 per cent of the population but 27.5 per cent of GDP. The NWFP has 13.7 per cent of the population but only eight per cent of GDP.

Balochistan, the largest province in terms of area and possibly also the richest once its energy and mineral resources are fully explored and begin to be exploited, is the least dense of the country’s provinces. It has slightly more than five per cent of the population but at this

time only three per cent of GDP.

Although population and national income data for Fata are not very reliable my guess estimates for the share of the two are 2.4 per cent and 1.5 per cent respectively. Islamabad, the last geographical entity in the country has 0.8 per cent of the population, and one per cent of GDP.

Translating these numbers into income per head of population is particularly revealing. Sindh with $1,270 per capita income is the country’s most prosperous province. The poorest is the NWFP with an income per head of only $606, half that of Sindh’s and not much more than half that of the Punjab average.

Fata has an income per head of $663, slightly more than that of the NWFP. The larger Fata income may be explained by the significant amount of remittances received from outside, sent by the workers from the area employed outside the region. Some of the workers are in Pakistan’s large cities and some in the Middle East.

The mobility these people have shown is contrary to the impression of some anthropologists that the Pakhtuns of the hills in Afghanistan and Pakistan shun opportunities to better their economic situation. They would respond positively to attempts made at improving their lives. Not counting those who have taken up arms to pursue ideological agendas a large number of people have been recruited to the cause since they have lost faith in their future.

These income disparities don’t tell the full story. There are considerable differences in the incomes of people living in different parts of the provinces. People in southern Punjab, which has become a centre of insurgency, probably have incomes less than half the provincial average; perhaps as low as one-third of those in the more prosperous districts of the province.

The same is the case in other provinces. In rural Sindh, for instance, income per capita is probably one-fifth that in Karachi. This is not surprising since Karachi is the country’s centre of industry, finance and international commerce.

Political scientists have long worried about the distress produced in societies in which there are sharp income differences. Somewhat belatedly economists have come to the same conclusion. In Pakistan these economic disparities have resulted in great violence against the state and the citizens of the country. Some of the elements within society have been behind violence mostly for ideological, reasons. Insurgency in Pakistan has been caused by the merger of several different streams. If we look at the growth of extremism in the country we see that it is concentrated in the more backward parts of the country.

Any strategy aimed at improving the standard of living in the country’s economically and socially backward areas should recognise the preponderance of the very young in their populations, aim to exploit the resources and skills available in these areas and bring about greater integration of the regions into the national economy. Such a strategy will lead to the pursuit of very different approaches in several troubled parts.

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Balancing regional economic growth

By Shahid Javed Burki
Monday, 11 Jan, 2010

THE chief ministers of the four provinces signed the seventh National Finance Commission award on December 30. The signing ceremony was held at Gwadar and watched by Prime Minister Yousuf Raza Gilani. The award will come into force on July 1. The venue was chosen to reflect the desire of all provinces to end years of deprivation of the country’s largest province by area, Balochistan.

The constitution of 1973, adopted after East Pakistan departed from the federation and became independent Bangladesh, was sensitive to the needs of the smaller provinces – smaller in terms of the shares in the population of the truncated country that emerged in December 1971

Since East Pakistan chose to quit the federation largely because of its unhappiness with the way it had been treated by the centre for providing resources for development, those who framed the 1973 constitution were keen to build into the governing structure mechanisms for dispute resolution.

The constitution provided for the convening of NFC to apportion funds collected by the federation but assigned to a pool called “divisible” since they were meant to be used by the provinces. The NFCs were to be convened every five years. It also provided for the constitution of a Council of Common Interests made up of chief ministers of the four provinces and four members representing the federation and appointed by the prime minister.

The CCI could establish commissions of experts if an issue needed to be explored in depth before a solution could be worked out. The constitution also provided for conducting population censuses at ten year intervals so that the seats in the national assembly could be assigned on the basis of population. Unfortunately these provisions were largely ignored. There was a gap of 26 years between the censuses of 1972 and 1998; there was an interval of a dozen years between the sixth and the seventh awards made in 1997 and 2009.

And the CCI was never convened for the purpose of handling provincial grievances. One reason why the federal provisions of the constitution were not fully followed was the domination of the political system by the military which directly governed for 19 years since the adoption of the constitution 36 years ago. Believing in central command and control, the military has little appetite for power sharing. Happily the adoption of the seventh award may usher in a period of greater say by provinces in their own affairs.

The Gwadar accord will replace the sixth award that was signed in January 1997, negotiated by the care-taker government that succeeded the administration headed by Prime Minister Benazir Bhutto. As the finance minister in the care-taker administration, I chaired the negotiating committee. Then as now there were essentially three issues before the provinces. The first was the provincial share in the pool of resources with the federal government that were regarded as “divisible”, which is to say that they were there available for transfer to the provinces. The second was the formula on which the federal pool was to be divided among the provinces. And third was the extent to which the more developed provinces should subsidise the development of the backward provinces.

Its two main features are; one, a larger share of the provinces in the federal divisible pool and, two, greater allocation to the more backward provinces, Balochistan and the North-West Frontier Province. The provincial share in the divisible pool will increase from 47.5 to 56 per cent. Under the formula agreed by provincial chief ministers Punjab will receive 51.74 per cent of the divisible pool, Sindh 24.55, NWFP 14.62, and Balochistan 9.09 per cent. Punjab’s share is 1.27 percentage points lower than the one received in 1997, Sindh is lower by 0.39 percentage point, and NWFP by 0.26 percentage point. Balochistan is the only province that saw an increase in its share. Compared to the 1997 award, its share will be 1.92 percentage points higher.

These shares were worked out on the basis of a formula that included population, incidence of poverty, collection of revenues, and generation of revenues. Population was given a weight of 82 per cent in the formula, poverty 10.3 per cent, revenue collection 2.5 per cent, revenue generation 2.5 per cent and area 2.7 per cent.

There are several ways of working out the extent of the sacrifice made by the two relatively more prosperous provinces in the federation to promote the development of those that are less advantaged. After all that was the intention of framers of the constitution of 1973. They built several provisions into the political arrangement they devised, if implemented, would have quickened the pace of development of the poorer provinces that were also smaller in terms of their share in the population.

However, these provisions of the constitution were largely ignored with the result that both Balochistan and NWFP have lagged behind Punjab and Sindh in developing their economies. Looked at from this perspective, the NFC 2009 award has made a real breakthrough.

In estimating what the richer provinces are doing for those that are relatively poor, I will look at the award from two perspectives: population and gross domestic products. Population estimates for the provinces are available for 2007 from Pakistan Economic Survey, 2008-09. That unfortunately is not the case for provincial gross domestic products which is probably the reason why the formula used for assigning shares in the divisible pool does not include GDP. I have used provincial shares in irrigated area and in the distribution of enterprises to estimate provincial GDP for the purpose of this analysis. Using the ratio of the shares in population to the shares in the NFC award, Punjab has made a significant sacrifice in providing for the other provinces. Its share in the award is almost nine percentage points lower than would have the case had the distribution been done on the basis of population. From that perspective the most generous terms are for Balochistan that was given 71.7 per cent higher share than its share in population. Punjab is the only province that received a lower share; even Sindh received 3.8 per cent more than its share in population.

Looked at from the perspective of the shares in gross domestic product, a slightly different picture emerges. Both Punjab and Sindh – the former a bit more than the latter – have sacrificed to accommodate the needs of the smaller and poorer provinces. I estimate Punjab’s share in GDP at 60.5 and that of Sindh at 28.2 per cent. Comparing these to the shares in the award suggests the element of sacrifice – or the amount of resource transfers – the two provinces are making to help the poorer areas. Punjab has accepted a share 14.5 percentage lower and Sindh 13.1 per cent lower than would be justified had the award been made on the basis of shares in GDP.

The Gwadar award has thus set the stage for the greater say of the provinces in their own development and for the richer provinces to aid the poorer ones in quickening their pace of development. Those who rule from the center must also take steps to implement other provisions of the constitution aimed at creating a functioning federation.

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Quadrilateral ties

By Shahid Javed Burki
Tuesday, 12 Jan, 2010

ONE important component of the developing global structure is the evolving relationship among four countries: China, India, Pakistan and the US. Three of these countries are in Asia, the fourth is still the only superpower in the global economic and political systems.

The most important of these relations are between the US and China, between India and China, between India and the US, between Pakistan and the US and between India and Pakistan. Each of these has its own dynamics. That said they together form a quadrilateral relationship that is inherently unstable. The challenge for these countries is to bring about stability to this relationship in a way that it serves the interest of all four countries.

Three relatively recent developments and two that go back several decades have created a web of dependency in this quadrilateral relationship. Although Pakistan and the US have worked with one another for decades, the nature of this relationship was transformed by 9/11.

While the attention of the West is likely to shift to Yemen following the botched attack on an American plane on Christmas day by a Nigerian man who was allegedly working for Al Qaeda in the Arabian peninsula, Pakistan is likely to remain the epicentre of global terrorism. At the time of his inauguration as president, Barack Obama made it clear that “our nation is at war against a far-reaching network of violence and hatred and … we will do whatever it takes to defeat them and defend our country, even as we hold the values that have always distinguished America among nations”. Pakistan was at the centre of this network.

The second recent development behind the evolving relationship was the rapid economic rise of China, accelerated by the way it handled the recent crisis in the global economy that experts now call the ‘great recession’. Beijing was able to use the economic power of the state to stimulate the economy much more effectively than was done by the leaders of other large economies. The result of its more successful approach was that 2008 and 2009 saw a mild slowdown in the rates of economic growth and change. The Chinese economy is now returning to the high growth rates that have marked its performance over the last quarter of a century. It is likely to overtake Japan in 2010 as the second largest economy in the world.

The third development was the election of Barack Obama as US president. After his inauguration in January 2009, President Obama has shown remarkable willingness to accept that his country will not remain as dominant a player in the global system as was expected after the collapse of the Soviet Union in 1991. He remarked repeatedly during his November 2009 visit to East Asia that he was willing to work towards a global system in which the US would be closely aligned with China to lead the world towards sustained economic prosperity and peace.

In fact, he began to lay the foundations of a G2 arrangement that will sit on top of other multilateral arrangements such as G20, the World Bank and the IMF. What seems to be evolving is a three-tier global structure with G2 at the top, G20 in the middle and everybody else at the bottom.

The two developments that go back for decades and will inform this quadrilateral relationship involve Pakistan. The first of these is the long enduring hostility between India and Pakistan that is the consequence of the enormous differences in the two ideas of statehood they represent.

The idea of India is the belief that it is possible to construct economic, political and social systems that would provide for different religious, linguistic and social groups in a way that none would wish to opt out. This idea was espoused by Jawaharlal Nehru, the first prime minister of India, but was rejected by Mohammad Ali Jinnah whose idea of Pakistan was built around the belief that the Muslims of British India needed a state of their own to prevent their identity from being submerged by those who followed different systems of beliefs.

To these differences in the two ideas was added the problem of Kashmir that has defied resolution since it is anchored in these two conflicting meanings of statehood.

The other old development that will influence the evolution of this quadrilateral relationship is the ‘all weather friendship’ between Beijing and Islamabad. Its foundation was laid by Zulfikar Ali Bhutto in the mid-1960s to counter the growing influence of the US on Pakistan. Bhutto considered that relationship to be unequal, countering President Ayub Khan’s claim that his country was a friend and the US was not a master in the arrangement that he had worked out. Bhutto said that that claim was a myth. With China brought in to balance the US, it has remained there while the environment in which Pakistan functions has been through several serious convulsions.

These included the break-up of Pakistan when its eastern wing emerged as the independent state of Bangladesh and, more recently, the destruction wrought by the rapid rise of Islamic extremism in the country.It is quite normal — in fact it is expected of nations — for countries to pursue their own interests in working out relations with other states. Economists have a concept they call ‘Pareto optimality’ according to which multiparty relationships can only become stable when all parties gain and none loses.

Applying this to international relations, the question arises as to how this goal can be achieved. One way of doing this would be to get the four countries involved to sit around the table — a G4 arrangement — to work out how they can move forward so that none is hurt but all benefit. Given the centrality of some of the concerns that surround this group of countries, a working relationship between them will bring large dividends to the rest of the world as well.

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China’s shift to new growth model

By Shahid Javed Burki
Monday, 18 Jan, 2010

IT has gone largely unnoticed by most China experts that its rapid economic revival after a sharp slowdown in 2009 is the consequence of Beijing pursuing a different model of economic growth.

The new model once again places much greater emphasis on the role of the state, concentrates much more on increasing domestic demand for the products of the expanding industrial base, relies on building trading ties with the countries in its immediate neighborhood and signals that there will be a major shift in the structure of the economy.

The last two elements in the model are especially significant for Pakistan, a country that has as yet to take full advantage of its close proximity to the fastest growing economy. I will come to this point later in the article.

China’s initial growth spurt that began in the early 1980s and lasted for over a quarter century was influenced by the development of thinking in the West in particular in Britain and the United States. With conservative leaders such as Margaret Thatcher in Britain and Ronald Reagan in the United States politically ascendant, the role of the state began to be redefined.

The government’s influence on policymaking had increased enormously in the periods immediately before the Second World War and for a quarter century after the end of that conflict. Then the Western governments, especially those in the Anglo-Saxon part of the world, had accepted the prescription advanced by John Maynard Keynes, the British economist, according to which the belief of classical economists that man was an entirely rational being who would always work for maximising his welfare was not entirely accurate.

Economic systems build around this belief were expected to produce full employment. That did not happen at the time of the Great Depression which brought Keynesian thinking to the forefront. Keynes developed a point view that economies could operate well below the state of full employment.

In fact, there were reasons why human reaction to unexpected changes in the environment could send the economies into a spin. The only way to prevent this from happening was for the state to step in with large, employment generating expenditures. This is precisely what the administration of President Franklin Delano Roosevelt did in the United States and rescued the country from depression. Other western countries followed the same path.

However, growing prosperity in the 1980s was attributed largely to private initiative and enterprise. Since government deficits had risen in the periods before the economies began to take off, the pendulum of economic thinking swung in the other direction. Now the role of the government was to be constrained. As President Reagan said, “government was not the solution, it was the problem”.

Under the influence of Milton Friedman, the state stepped out of the way leaving much of the economic field to the private sector. This philosophy was also reflected in the advice that was given to the developing world by the development and financial institutions based in Washington. Called The Washington Consensus.

Governments in the developing world were advised to step out of the way of the private sector, provide the private sector expanded markets by opening their economies to trade, and allow private entrepreneurs to obtain funds and technology from abroad.

While China never fully accepted the Washington Consensus approach, it was certainly influenced by it. It allowed much greater freedom of action to the private sector. A large number of state-owned enterprises were shut down and the labour freed by them was absorbed by the rapidly expanding private sector. Large amounts of foreign money flowed mostly in the form of investments.

Exports to the West increased rapidly and China built up large foreign exchange reserves which it deployed mostly to purchase United States Treasuries. The model produced high rates of GDP growth that remained close to double digits for nearly thirty years. The economic and social change that resulted from this has no historical precedence.

However, this model also tied China very closely to the West, particularly to the United States. When the latter was hit by a severe crisis, China was also affected. Consequently in rethinking their approach to development, the Chinese have begun to turn the state once again as the driver of economic change and on linking their economies to those closer to their borders.

They have also decided to solve the problem of the continuing backwardness of the western provinces such as Xinjiang and Gansu by encouraging migration to the east. This will result in China going vertical since most of its cultivable land is located near the east coast. The likely development of its textile industry is an interesting example of what is likely to happen and how it might affect Pakistan. The Chinese would like to import such products as yarn and fabrics – both produced in factories that use a lot of land – to produce garments and other finished products that can be done in high-rise buildings. This may explain why the Chinese demand for Pakistani yarn has increased significantly in recent months. This change in strategy has begun to produce positive results for China. The recently released data on exports in December shows that they rose by 17.7 per cent year-on-year, the first time in 14 months that exports have increased. With this increase, China has surpassed Germany as the world’s largest exporting nation. While sales to the United States and Europe – the two together account for about half of exports – increased by 15.9 and 10.2 per cent respectively, it is trade with the neighbouring countries that made the most impressive gains.

The December figures show a 51 per cent year-on-year increase in processing imports. These are imported parts and components assembled into all kinds of finished products for exports by China. A significant proportion of these come from Asia. China is also becoming an exporter of parts and components. The range of items exported is expanding towards the more sophisticated end of the spectrum. For instance, several parts of the recently launched “Dreamliner” by Boeing in the United States are being made in China.

As Pakistan develops its own export strategy, it would do well if it concentrates more attention on developing markets for its products in China than on continuing to work on gaining and increasing market access in the United States and Europe. By concentrating on the latter two markets, it is likely to stay at the less value-added chain of products. By developing trade with China it can enter into strategic relationships with various industries in China.

There are many industries that could become candidates for this kind of approach. These include defence related industries as well as automobiles, electronics and health equipment. The service sector could also benefit from an approach based on selecting the winners for building a robust trading relationship with China. The most efficient way of implementing such an approach would be for the government to set up a multi-ministry taskforce that could develop proposals for discussion at the high political level.

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New global order

By Shahid Javed Burki
Tuesday, 19 Jan, 2010

AS the world enters the second decade of the 21st century, the global political and economic structures are being reshaped in significant ways. The previous system was the outcome of a major conflict, the Second World War.

It was dominated by the country that played a decisive role in defeating the Nazis in Europe and the Japanese in East Asia. The system that emerged had institutional structures in the areas of economics and international politics. In both the United States, the victor in the Second World War, was the leader. It was challenged for a while by the Soviet Union but its collapse in 1991 left it as the sole superpower.

Some analysts, most notably Francis Fukuyama, labelled this development the end of history, arguing that with communism beaten back so decisively, the world would proceed in one direction. Liberal democracy and capitalism would be the accepted ideologies for managing the political and economic systems.

This triumphalism lasted for about a decade. Two far-reaching developments took place in the first decade of the present century. On Sept 11, 2001, 19 terrorists belonging to an obscure Islamic group not much known in the West struck the United States destroying the twin towers of the World Trade Centre in New York and badly damaging the Pentagon near Washington. Almost 3,000 people were killed, the largest loss suffered by the US on its mainland since the civil war. The US responded by first invading Afghanistan and later Iraq, two Muslim countries in the heartland of Islam.

Was the clash of civilisation predicted by the political scientist Samuel Huntington, asked many analysts? And then six years later the US economy began collapsing and for several months it appeared that the country along, with the rest of the West — perhaps also parts of the emerging markets — was heading towards the kind of economic collapse seen during the years of the Great Depression.

It was in the midst of these crises that the American electorate chose a new president, Barack Obama, sending to the White House the first black American to occupy that hallowed space and the one who won the election promising both change and hope. He brought the first while the second has still not manifested itself. While the US was dealing with these challenges, China began what in an earlier work I called the country’s “second economic rise”. President Obama has reacted to the arrival of this challenger in the field of economics in a surprising way. Rather than attempting to contain China as most of his predecessors would have done, he has expressed a strong desire to work with this new challenger to reshape the global economic order.

One important point that should be made at this stage is that this time around, the global structure is being reformulated as a result mostly of economic developments, not because of the end of a military conflict when power passed from the vanquished to the victorious. This certainly occurred after the end of the Second World War. It was also military defeat that led to the change in the political order in the Middle East when the victors carved up the Ottoman Empire into many pieces with unanticipated consequences. This time the impetus for change is coming from economic developments.

The effort to change and transform the world was begun in some earnestness in November last year when the new American president paid his first official visit to East Asia. What emerged from this visit was a new three-tier system of global governance with America and China at the top, the G20 in the middle and the rest of the world at the bottom of the arrangement. Is this a sustainable arrangement or will it be compromised from within by the powers who have been given a lesser role to play than they believe is their due? Will the new structure be able to deal with some of the area-specific problems such as the rise of extremism in the Islamic world that threatens world peace and prosperity or is it important to add to it some side structures?

As suggested in an earlier article, one important component of the developing global structure is the evolving relationship among four countries: China, India, Pakistan and the United States. Three of these countries are in Asia, the fourth is still the only superpower in the global economic and political systems. Three of these countries are among the five largest economies in the world.

Two of them — China and India — are by far the most rapidly growing large economies in the world. They are also the only two countries in the world with populations of more than a billion people each. Given that, why should Pakistan, an underperforming part of the developing world and a country beset with seemingly intractable economic problems, be included among the other three to define a quadrilateral relationship? This is a fair question to ask and one not too difficult to answer.

For a number of reasons, some of them related to the several models of economic development pursued by Pakistan over the last several decades, the country has created an environment that encourages a significant number of youth in its very young population to adopt extremist ideologies as a way of leading their lives. In 2009, extremism and associated acts of terrorisms took a heavy toll on the economy. There was also a heavy loss of life: more than 600 people were killed in the last three months of the year in dozens of terrorist acts attributed to the activities of extremist groups, especially the Tehrik-i-Taliban Pakistan.

The rise in terrorist activity can be attributed to economic failure especially the inability of the economy to create jobs for the young in the more backward areas of the country. There is a fear that if Pakistan’s economic situation continues to deteriorate it could have adverse consequences not only for the country but also far beyond its borders. One reason for thinking in terms of an arrangement encompassing these four countries is to pull back Pakistan from the abyss towards which it seems to be headed.

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