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Islaw Khan Tuesday, February 24, 2009 09:51 AM

Shahid Javed Burki article
DAWN.... shahid javed burki

THERE is a tendency on the part of many in Pakistan to gloat over India’s misfortunes. The same is true in India where Pakistan’s problems are noted with some satisfaction by many segments of the population including certain influential people amongst the intelligentsia.

This is unfortunate since both countries would benefit by positive developments on the side across the border from them.

I have suggested in these columns on several occasions that Pakistan, being the smaller economy, would gain from the strength of the Indian economy if the two countries could shed their mutual suspicions and open up trade to commerce and their borders to the flow of people. It is in this context that I will look at the latest economic news from India suggesting that that country has also been severely hit by the ongoing global financial crisis.

A few months ago, there was confidence in India shared by officials responsible for the making of public policy as well as by managers in the private sector that India was on its way to climbing up the growth trajectory in the same manner as China. The latter had gone from backwardness to becoming a global economic powerhouse. As one commentator wrote, it seemed that “the Indian century had arrived; growth rates stubbornly stuck at 3.5 per cent for decades were forgotten”. That seems a distant dream now. The government has revised the growth rate for 2009 to 7.1 per cent, the slowest in six years. Other analysts are even less confident. Citigroup expects the rate of growth in 2010 to be only 5.5 per cent, increasing to 6.2 per cent in 2011.

This may appear to be satisfactory given growth rates in the half century after independence when India was stuck at what some Indian economists called the “Hindu rate of growth”. But there was an expectation of a fundamental change in the structure of the economy which would allow the latter to grow at rates achieved by China over a period of 25 years. In the three years before the current downturn, the Indian economy had grown at an annual average of close to nine per cent. This meant an increase in average per capita income of almost eight per cent a year. The large Indian middle class had begun to show signs of prosperity. This class will be seriously affected by the way the downturn is being felt in the economy.

Modern industry has suffered the most followed by the sector of information technologies. These two sectors of the Indian economy along with modern health services were expected to take India towards sustained growth and modernisation. They were expected to help the Indians carve out a large slice for themselves in the global economy. Those ambitions have been checked.

Indian industrial production fell by two per cent in December, the second monthly decline in the last quarter of 2008. Textiles and automobiles are the two most affected sub-sectors within the industry. Both had done well in recent years because of exports. India had been successful in carving out niches for itself in these two relatively crowded parts of the global economy. The IT sector has also been seriously affected.

What is particularly worrying for India is the loss of jobs in the modern sector. More than half a million people were laid off in the final quarter of last year. The rate of job loss is expected to increase in the coming months. This is unfortunate for the long-term prospects of the economy. There was the expectation shared by policymakers as well as the academia that job creation in the economy’s modern sectors would relieve pressure on the countryside where, despite a relatively high rate of urbanisation, most Indians continue to live.

This is the first time that India is experiencing a major downturn in the modern part of its economy accompanied by a loss of jobs. Unlike the situation in China where the people laid off by modern sectors are returning to the countryside, such back-migration is not likely to occur in India. Consequently, there will be greater pressure on the urban areas, in particular on the country’s major cities. This will further deteriorate the social situation in India’s large cities that was so vividly portrayed by the Oscar-winning movie Slumdog Millionaire.

How is the government reacting to the worsening economic situation? Not unlike the circumstances that have dictated public policy response in Pakistan, the Indians also don’t have the fiscal elbow room that would justify the kind of stimulatory route taken by China. Beijing is relying on an economic stimulation programme valued at close to $600bn to revive the economy. New Delhi has taken some steps to pump public money into the economy but its efforts are seriously constrained by the large fiscal deficit that already cramps government activity.

The government’s fiscal target for 2009 was an ambitious one. It had hoped to bring it down to 2.5 per cent of GDP. It is now expected to be 7.5 per cent; possibly higher. It could reach 9.5 per cent. Such an increase will have inflationary consequences. Inflation had climbed to 12 per cent in 2008 but was halved in recent months largely on account of the sharp decline in oil and other commodity prices. But a large fiscal deficit, if financed by borrowing from the central bank, would introduce another type of pressure on prices.

One factor helps India make adjustments. This is also the case in Pakistan. Both countries resisted the pressure from the world at large to completely open up their economies. This advice was taken to some extent but the economies were not as exposed to the outside as is the case in East Asia. One result of this is that the full pressure of the negative side of globalisation has not been felt by these countries. The shocks delivered by the economic downturn in the United States, Europe and Japan have been felt but not to the extent of their impact on the more open economies of East Asia.

Does this mean that once the current crisis has passed both India and Pakistan should selectively open their economies to outside influences? The answer to this question will come but later when the world gets fully engaged with analysing the causes and consequences of the crisis. This exercise is likely to begin with the meeting of the G20 group of countries scheduled to be held in London in early April.


Predator Tuesday, February 24, 2009 10:44 AM

How to fix the economy
[B][CENTER][FONT="Georgia"][SIZE="5"][COLOR="DarkGreen"]How to fix the economy[/COLOR][/SIZE][/FONT][/CENTER][/B]

[B]By Shahid Javed Burki
17/02/2009 [/B]

THAT the country is faced with a serious economic crisis is recognised by the current group of policymakers. It is not certain whether they realise how serious the situation is and what could be its consequences.

Pakistan’s 165 million people of which one-half are under the age of 17 and about 40 per cent live in urban areas are becoming restive because of the deprivation caused by the severe economic downturn.

Security will not return to Pakistan unless the economy is put on a sustainable growth path. That will need considerable work on the part of the government and also help from the community of donors willing to come to Pakistan’s aid. At this time Pakistan’s economy is faced with numerous problems, most of which are a consequence of poor public policy decisions in the past.

The gross domestic product in 2009 is not likely to increase by more than two to 2.5 per cent. With the population growing at 1.5 per cent a year this rate of growth will certainly mean increase in the incidence of poverty to about 40 per cent of the population. This means that 65 million people will be living in absolute poverty by the end of this year, an increase of 15 million. Many of these will be in the urban areas and many in the parts of the country where Islamic extremists are trying to establish their control.

Urban unemployment will also increase sharply especially in large metropolitan areas such as Karachi, Lahore, Rawalpindi-Islamabad and Peshawar. These cities have absorbed a lot of surplus labour from the countryside in the past couple of decades. They have also been the favoured destination of refugees from Afghanistan. Unless jobs are provided to the urban unemployed and incomes are transferred to the urban poor, these developments will lead to restiveness among the urban youth and attract them to extremist causes. What are the options available to the state in these circumstances?

There are several. Of these I will briefly mention four, one immediate and the remaining having an impact over the medium and long term. The government needs to provide cash transfers, targeted subsidies and temporary employment to the unemployed in both urban and rural areas. For all of these there are examples available from several countries around the globe that have successfully implemented such programmes during periods of economic stress.

Several Latin American countries have created temporary employment opportunities when economic crises increased unemployment levels. The countries in the Middle East have achieved impressive levels of social development by spending three to four per cent of GDP on social safety nets during periods of economic stagnation. Pakistan needs to make a comparable level of commitment to these kinds of activities.

Second, government expenditure needs to be significantly restructured in favour of larger amounts of spending on education and primary healthcare. This redirection of public expenditure would require additional government revenues as well as changes in the direction of government spending. The size of the federal government needs to be reduced, non-development public expenditure will need to be drastically curtailed, duplication will have to be eliminated between federal and provincial spending, defence expenditure will need to be reduced.

Third, Pakistan needs to get off the roller-coaster it has been on ever since its birth, with the economy growing at a respectable rate whenever there were large flows of American assistance to the country (in the 1960s, the 1980s, and the early 2000s) and slowing down when the flow of funds from Washington declined.

This reliance on external finance was the consequence of the inability of the country to raise the needed resources from the domestic economy. This has to change. A shift would entail a significant restructuring of the tax system by the expansion of its base and by bringing in all sectors of the economy, including agriculture, into the tax net. The aim should be to double the tax-to-GDP ratio from the current pitifully low 10 per cent.

Fourth, the government needs to focus on developing the sectors and lines of products that could help increase export earnings. Pakistan has not benefited from the process of globalisation that led to a much higher increase in international trade compared to growth in the size of the combined international product. Export-led strategies have helped many Asian countries see sustained economic expansion for decades.

Pakistan will also need to trade more with its neighbours, in particular India and China. It is one of three countries (the other two are the relatively small nations of Bhutan and Nepal) that border on these billion-plus-people countries with dynamic economies. Rather than have the United States as the main trading partner, that position, as suggested by the gravity model of trade, should be occupied by India and China. Restoring trading relations with India should also help to reduce regional tensions.

These structural changes would need not only the full attention of Islamabad. They would also require a considerable amount of additional external resources at least for the next half a decade. This is where the United States enters the picture. It could provide leadership to a group of donors to fund a large programme of structural change (say $50bn to $60bn over the next five years) with one half to be provided by the donors and the remaining by Pakistan. The donor contribution should be front-loaded with Pakistan picking up the bulk of the expenditure at the programme’s tail-end.

How Pakistan will provide funding should be made clear at the very start of the planning process. This will require a major overhaul of the tax structure. The donors should also carefully monitor the implementation of the programme by creating a consortium chaired either by the World Bank or USAID.

Ten to 12 donors interested in associating themselves in this exercise may contribute to the establishment of a group tasked with helping Pakistan develop a plan for the use of the funds made available by the donors as well as overseeing the implementation of the programme. Funding should start only after Islamabad has prepared a medium-term programme of structural reform and sustained development including some of the elements suggested above in this brief article.

Predator Tuesday, February 24, 2009 11:06 AM

The Holbrooke mission
[B][CENTER][FONT="Georgia"][SIZE="5"][COLOR="DarkGreen"]The Holbrooke mission[/COLOR][/SIZE][/FONT][/CENTER][/B]

[B]By Shahid Javed Burki

PRESIDENT Barack Obama has departed in a number of significant ways from his predecessor George W. Bush’s style and substance in managing external affairs. Even in the case of intractable problems the US faced in the global arena, the former president famously relied on his gut feeling rather than deep thought and analysis.

When policymaking is done through gut and feel, there is little need for expert advice. Whereas a number of previous occupants of the White House had appointed “special envoys” to help in the making of policy in difficult areas, President Bush let the established bureaucracy take the lead with some broad guidance provided by him. President Clinton, like some of his predecessors, relied on special envoys. Two of these were remarkably successful in carrying out their assigned missions.

The first of these was former Senate majority leader George Mitchell who worked on the Irish problem that had festered for decades. By being patient and showing willingness to understand the points of view of both sides, Mitchell was able to bring together the rivals. The ground was laid on which it was possible to build a political structure that has since become durable. The other envoy was Richard Holbrooke who worked on the Balkans and was able to have the many contestants agree to what has come to be called the Dayton Accord. That agreement has also served to bring peace to a very difficult area.

Both Mitchell and Holbrooke have been summoned back to duty by President Obama. Mitchell will be the “special envoy” working on the Middle East while Holbrooke has been assigned the task of dealing with the problem created by the resurgence of Al Qaeda and the Taliban in Afghanistan and in the border areas of Pakistan.

Richard Holbrooke begins his mission to Afghanistan and Pakistan at a particularly difficult time for the two countries. Much has been said and written about Afghanistan; relatively less on Pakistan. I will attempt to fill the gap for the latter. At this time Pakistan is faced with a perfect storm: its political system and the structure of its economy are in tatters. Both need to be fixed. Doing one without the other won’t work. I will begin with politics.

The free and fair elections held in February 2008 and the successful outcome of the prolonged struggle to send President Pervez Musharraf into retirement created the hope that the country would be able to put in place a political system that would have people’s elected representatives in charge. The transition from military to civilian rule was completed in September with Asif Ali Zardari becoming president.

While the Pakistan People’s Party and the Pakistan Muslim League, the two main political groupings in the country, had cooperated to force Musharraf out of office, they began to drift apart once Zardari announced his intention to seek the presidency. Zardari won easily. There is considerable political uncertainty at this time with Zardari attempting to consolidate the power of the presidency while the Sharif brothers, Mian Nawaz and Mian Shahbaz, are pushing for a system in which executive authority would be with the prime minister answerable to parliament.

Embedded in this conflict are issues that Pakistan has not been able to resolve for more than 60 years. There are basically four questions to which answers have to be found. The first one relates to the choice of the place from which executive authority should be exercised. There was enormous concentration of power for 44 out of the 61 years that the country has been independent. This was the case when the military was directly or indirectly in power — the years of Presidents Iskander Mirza (1955-58), Ayub Khan and Yahya Khan (1958-71), Ziaul Haq (1977-88) and Pervez Musharraf (1999-08). Even some of the elected prime ministers — for instance, Zulfikar Ali Bhutto — freed themselves from the control of parliament.

There are two ways of resolving this tension. One is to fully restore the constitution adopted in 1973 to its original form. This would mean doing away with the 17th Amendment introduced by Musharraf that concentrated political power in the hands of the president. The 17th Amendment was based on the Eighth Amendment introduced by Ziaul Haq before he allowed civilian leadership to share power with him. The Eighth Amendment was repealed by the National Assembly when Nawaz Sharif returned to power as prime minister in 1997. This is what the Sharif brothers want to do with the 17th Amendment. The other option is to go back to the drawing board and remove the ambiguity that exists by adopting a presidential form of government.

The second question concerns the distribution of power between the central government and the provinces. When strong men governed the country there was an understandable trend towards centralisation. This was the case in particular when the military ruled. It is a strong believer in centralised command and control. However, a country the size and complexity of Pakistan cannot be efficiently and effectively governed from one central point. No matter which system of government eventually evolves, there has to be greater autonomy granted to the provinces and to the institutions of local government. The fact that Pakistan has tried five different systems of local government is one more indication of the state of flux in politics.

The third unresolved issue relates to civil-military relations. What kind of role, if any, should be allowed to the military, particularly in foreign affairs? The military has used its self-perception as a guarantor of national security to repeatedly insert itself in politics. It is unlikely that the armed forces will completely walk away from politics unless the two other issues discussed above get resolved.

The fourth question concerns the role of the judiciary in governance. There is a tradition in the country going back to the mid-1950s when the executive called upon the judiciary to provide ex-post legal cover to its clear defiance of constitutional provisions. It started in 1954 when then Governor General Ghulam Muhammad sacked the National Assembly and had his action endorsed by the Supreme Court under the “doctrine of necessity”. It includes the two attempts made by Musharraf to use unconstitutional means to assert his authority by first firing the chief justice in March 2008 and then imposing a state of emergency in November. The role of the judiciary is now being used by the PML-N to challenge Zardari.

How could Holbrooke help the country make progress in developing a system of governance that is durable and meets the wishes of the people? He could possibly play the role of an intermediary for different political groups. However, as I will suggest in this space next week, it is in economics that the United States could be really helpful.

Predator Tuesday, March 03, 2009 02:44 PM

[B][CENTER][FONT="Georgia"][SIZE="5"][COLOR="DarkGreen"]The sordid side of India[/COLOR][/SIZE][/FONT][/CENTER][/B]

[B]By Shahid Javed Burki
Tuesday, 03 Mar, 2009[/B]

THE British-Indian film Slumdog Millionaire has become a phenomenon in the United States, Britain and other western countries. It was nominated for 10 Academy Awards and won eight of them, including the highly coveted title of the best motion picture of the year.

Not only was the movie a sensation, its three child actors, all plucked from a Mumbai slum inhabited mostly by Muslims were also applauded.

The three kids were flown from Mumbai to Hollywood and attended the award ceremony. The film’s director, an Englishman, said the movie is really a love story — the story of two children who, after going their separate and at times ugly ways, find each other and presumably live happily ever after. The movie ends with a dance and song number — the song also won an Oscar — celebrating the triumph of love over evil.

The Indian reaction to the movie’s triumph was at best mixed. While Manmohan Singh, the Indian prime minister, said that it was a matter of pride for his country that its art and artists had received global recognition, many Indian commentators were less enthralled. Priyadarshan Nair, an Indian filmmaker, wrote in an article published in India Today, that the movie was a poor copy of those made in Bollywood. Besides, it mocked India. He wrote. “India is not Somalia. We are one of the foremost nuclear powers in the world; our satellites are roaming the world. Our police commissioners’ offices don’t look like shacks and there are no blind children begging in the streets of Mumbai.”

There are, of course, blind and crippled children begging not only in the streets of Mumbai but in all major cities of South Asia. To deny their existence is to deny help from reaching them. The political slogan, ‘Shining India’, did not help the Bharatiya Janata Party in the 2004 elections. ‘Incredible India’, the slogan with which India began to draw the attention of the world to its economic and political triumphs, must not be allowed to brush under the carpet the lives lived by hundreds of millions of people who have not been touched by the country’s impressive economic performance of the last couple of decades.

There is a tendency among many Indians to become highly nationalistic when what they perceive as the ugly side of their country becomes news. That is unfortunate since there are many areas where India is not doing well and one of them is the quality of services it delivers to the urban poor. That, in part, was the story of Slumdog. The poor in India feel differently about the film. “A lotus from the swamps” is how a proud father of a child actor in the film describes his son’s achievement.

But there was more to the movie and the story it told. It is not really a love story involving two kids from one of the more notorious slums of Mumbai, who ultimately escape poverty and much else to become rich and famous. What appealed to western audiences was the display of audacity on the part of some kids from the slums, with which they are able to mould their future. The three children in the story don’t opt for fame and wealth based on virtue; one of them becomes a leader of a gang that makes its money by exploiting kids from the slums.

This is not only the story of urban India

but of the entire developing world where the heartless exploitation of the poor by the rich is common and beyond the reach of the state. Not only is the state often a bystander in this form of economic exploitation, it is often complicit in what goes in. The police in particular provide little protection to the vulnerable. It often comes out in support of those who exploit. This happens in the slums of Mumbai, Karachi, Dhaka, Sao Paulo and Lagos — in fact, in all the megacities of the developing world.

It is interesting that those who financed the film, produced and distributed it and who consequently made a good profit for themselves are anxious not to be seen as having exploited the slums, those who live in them and the slum children who are desperate to find some way of escape. They have declared that a part of their profit will be used to help the children who acted in the film. Their school will be improved and once they have graduated from it they will be provided financial assistance to attend institutions of higher learning.

The story of filth and squalor — at one point Jamal, the film’s young protagonist wades through raw sewage to get the autograph of a movie star who has arrived in his helicopter — is the story of millions of children who suffer from the extraordinary environment in which they live. Almost 90 per cent of the two billion projected increase in world population will take place in the developing world by 2050. Of this one-half will live in towns and cities.

About 50 large cities of the developing world will gain an additional 250 million people, 90 per cent of them will find accommodation in the slums of the cities and jobs in the already crowded informal sectors. The probability that one of them will become a millionaire is minuscule. Even the chance of surviving to adulthood and old age is small.

Slumdog is also a vivid portrayal of the environmental degradation that surrounds the people who live in these settlements. Economists have now begun to argue that providing clean drinking water and basic sanitation is an important way for bringing some development to these areas. This is the reason why the Millennium Development Goals adopted by the heads of state in 2000 emphasised not only education but also the supply of quality drinking water and the provision of sanitation to the poor. By focusing on this aspect of life for millions of slum dwellers in India — and by extension in all developing countries — the filmmakers have done a great service.

One likely consequence of public awareness that will definitely result from the success of the film is to attract the West’s civil society to pay some attention to the conditions in the slums of the developing world. Experience has shown that when governments fail non-government organisations step in. This happens in both developed and developing countries. The failure of western governments to increase assistance to poor nations — something they have promised over and over again — has prompted organisations such as the well-endowed Bill and Melinda Gates Foundation to step in with assistance.

Likewise NGOs such as Pakistan’s Edhi Foundation come to the assistance of people in distress when the state fails to reach them. By increasing the world’s awareness of the conditions in which millions of people live, Slumdog did not mock India. It has served the world’s poor well.


Predator Wednesday, March 11, 2009 09:01 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]A possible Kashmir solution[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER][SIZE="3"]Open trade and free movement of the people of Kashmir could be the basis of an agreement since both sides have paid a heavy economic cost keeping the issue alive for so long.[/SIZE][/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday Mar 10, 2009[/B]

I HAVE seen some reports in the American press detailing how India and Pakistan, working through back channels, were close to an agreement on solving the long-enduring Kashmir problem.
It appears that the two countries were about to reach an understanding on creating a new legal and political entity covering the entire state of Kashmir, the parts being currently administered by both Pakistan and India. The state would have been given a fair degree of autonomy and would have been governed by a body with membership drawn from both India and Pakistan. A sort of Kashmir Commission would have been created to manage the state.

The Line of Control, the current border between the Indian-occupied Kashmir and the Pakistani-held Kashmir, would have been turned into a soft border, open to unconstrained trade. The movement of people across this quasi-border would have been free. People’s movement beyond the estab lished borders of the two countries would have been regulated according to the laws of the two states. Although the press reports did not indicate what kind of passports and citizenship the Kashmiri people would have carried, I presume that a separate national identity would have been created.

This near-agreement collapsed after President Pervez Musharraf was forced to leave office. The terrorist attacks on Mumbai last November dealt another blow to the developing understanding. It is presumably lying on a shelf in diplomatic cold storage in New Delhi. Will it ever see the light of day?

The current political turmoil in Pakistan has contributed if not to the demise of the agreement then at least to a considerable delay in its possible adoption. Pakistan today is politically and economically a much weaker state than it was in the early 2000s. It was then that much of the backchannel negotiations were conducted. Especially when longenduring disputes are being looked at for finding possible solutions, progress can not take place when one side has been considerably weakened compared to the other. This has happened to Pakistan.

A government that does not have a sense of a security cannot negotiate when the workable agreement involves moving back from the positions that have been taken for a long time. The solution of the Kashmir problem of the type revealed by the American press would have resulted in Pakistan giving up its long-standing claim to the entire state of Kashmir. Not only that, it would have also agreed to Azad Kashmir to be governed by a joint commission. Only a strong and secure administration could sell this change in posture to the population which continues to be emotionally involved in the Kashmir issue.

India, too, has been weakened by the Mumbai attacks. The government headed by Prime Minister Manmohan Singh has come under heavy criticism for not being able to defend its borders. That a small group of men could penetrate the defence perimeters of such a well-protected city as Mumbai was seen a sign of weakness, particularly on the part of a country that claims superpower status.

That it took so long for the members of the special forces to reach the scene of carnage did not provide comfort to a population that was being fed the slogan of ‘incredible India’. Weak governments don’t settle old and difficult disputes. This does not augur well for the settlement of the Kashmir problem anytime soon. That said, it gives some hope that at least at the official level the contours of a possible settlement have begun to take shape.

A couple of years ago I was commissioned to do a study on Kashmir by the Washingtonbased United States Institute of Peace. The study was published by the USIP and became the subject of a conference hosted by Pugwash in Colombo in 2007. The conference was well attended by non-government representatives from both India and Pakistan as well as by some functionaries from the US think-tank industry.

The conclusions I had reached in the study were similar to those that formed the basis of the informal dialogue between the governments of India and Pakistan. I had suggested that open trade and free movement of the people of Kashmir could be the basis of an agreement since both sides had paid a heavy economic cost keeping the issue on the front burner for so long. This was the case especially for Pakistan.

Using a simple economic model I estimated the economic costs for Pakistan of the continuing dispute, arguing that the country’s economy would have been a couple of times larger had so much not been invested in the Kashmir dispute. It was an economist’s way of arguing that letting Kashmir go unresolved was a tenable proposition for the people of Pakistan.

The costs incurred came not only in the form of large military expenditures that a country at Pakistan’s stage of development could not afford. They also resulted from smaller flow of foreign capital, the closure of large Indian markets for Pakistan’s exports, and periodic troop mobilisations that were costly. Pakistan also allowed Kashmir to become a cause célèbre for Islamic extremism.

Once equilibrium has been restored to Pakistani politics and once general elections in India have produced a new government in New Delhi, the two countries may be able to revisit the problem of Kashmir, continuing the dialogue where they left it when Pervez Musharraf departed from the political scene. A nudge may be needed by both capitals to get back to the ta ble, formally or informally, and begin to lay the ground for moving forward.

The nudge may come from Richard Holbrooke, President Barack Obama’s special representative to the region. Although India was able to exclude Kashmir from the Holbrooke mission at New Delhi’s insistence, this may not prevent the emissary from informally pressing the two governments to move ahead towards resolving the dispute. If further evidence is needed about the way various conflicts around Pakistan are destabilising the country, it was provided by the terrorist attacks on Lahore on March 3.

The Americans must be concerned that unless progress is made in removing the causes that motivate the jihadi groups, this part of Asia will not be stabilised. Wise leadership on both sides of the border should recognise that persistence on Kashmir and the reluctance to move away from established positions comes with very high costs. ¦

Predator Wednesday, March 18, 2009 11:27 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Through the economic prism[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]Wednesday, 18 Mar, 2009
By Shahid Javed Burki [/B]

IT pays politicians to look at politics from the prism of economics. This is precisely what Barack Obama did while he was campaigning as a candidate for the US presidency.

In September 2008, when the first of several meltdowns that have affected the US economy occurred, he concluded that what the people wanted was a calm handling of the rapidly worsening situation. He kept his cool and gave his responses in highly measured terms.

On the contrary, his opponent John McCain responded hysterically. He suspended his campaign for a few days, flew to Washington to assume the leadership of the Republicans in the US Congress, and tried to persuade the lame-duck administration of George W. Bush to take action. These two different approaches were seared in the minds of the US electorate and helped Obama score a landslide victory.

What was true for the US last year is true for Pakistan now. There is much hysteria in Pakistani politics today. This, too, must be affecting the way people look at the politicians in general and at different politicians in particular. The uncertainty created by a charged political atmosphere has an economic cost. I do not believe this has been fully comprehended by the politicians active in the field today. Ultimately, the side that keeps it cool and exacts a smaller economic price from the way the crisis is handled will benefit at the polling booth whenever the people are invited to elect their representatives again.

It does not need all that much elaboration to underscore an important point about the current economic situation. The country is in deep crisis, perhaps the worst it has experienced in the 60-plus years since its birth. A significant part of the cost is being borne by the poor and their situation will get worse if the country’s economic situation continues to deteriorate. But that will not happen for as long as the political situation remains highly uncertain.

It is sometimes useful to calculate the economic cost of political agitation to convince politicians that hysteria may force their followers to look in a different direction. If that were to happen in Pakistan, and if the mainstream political parties choose to fight it out in the streets, those who are economically stressed as a result of political machinations may opt for something different. They may choose extremism.

The other day a politician active in one of the two major parties told me with great pride that he and his followers were able to put 100,000 people in the streets of Punjab’s major cities. That assertion led me to do some simple calculations.

Encouraging a person to take to the street costs that person at least Rs300 if he is fully employed. Getting 100,000 people to agitate means a loss of income of Rs30m. The cost to the economy is perhaps three times as large since the income forgone has what the economists call a multiplier effect. In Pakistan’s case the gain or loss of one rupee of income means at least the gain or loss of three rupees to the economy. We are, therefore, looking at a cost of more than $1m to the economy. Who bears this cost?

Perhaps a good part is met by the political organisation that has ordered its followers to come out on the street. The money that the party spends may come from the savings of

its well-to-do leaders. This amount could be deployed in more productive enterprises than political agitation. Or if it comes from corruption, it produces serious distortions in the economy.

It is well recognised that in most developing countries political expenses are paid from the funds not legitimately collected from donors but from the money solicited from beneficiaries of services provided by those who are in power. This increases the cost of the service provided to the beneficiaries. Those who pay political bribes will pass on the cost to the consumers of the service or the product that is being procured from those who, because of the power they wield, are able to provide either or both of them.

There is another cost associated with the politics of agitation that produces an even greater economic burden for societies where this kind of political behaviour is prevalent. Agitation rather than the use of legitimate means for settling disputes according to the law of the land becomes the norm in those places where the institutional structure is weak. This is certainly the case in Pakistan.

Over time, institutions in Pakistan have weakened to the point at which people have lost confidence in the political system to deliver in legitimate ways. National and provincial assemblies don’t settle political disputes. Courts do not dispense justice. Bureaucrats do not implement decisions taken by policymakers or laws passed by parliaments. Scores are settled by resort to the politics of the street. This results in a vicious cycle. But this is not the only vicious cycle that is taking Pakistan down to unknown depths.

It all began in Pakistan in 1954 when an authoritarian and unelected head of the state dismissed the Constituent Assembly because the latter had begun to assert what was its legitimate right. The governor-general’s action was legitimised by the judiciary. Even after half a century that vicious cycle has continued to define politics. There is an urgent need to break into it.

The economist Douglass North won the Nobel Prize in his discipline by suggesting that economies will not modernise and grow unless they also develop the institutional base that provides the foundations on which the country and society must rest. North’s definition of institutions went beyond organisations that underpin economies. He included in institutions the ways, both formal and informal, in which all human beings interact with one another. These interactions should support the modernisation of economies and societies. Over time, the forms of interactions should move forward from the formal to the informal.

The politics of agitation is by its very nature an informal way of achieving ends that should be pursued through formal means. Doing political business through informal means is disruptive and costly. It may produce immediate results for those who choose to go along this path but it does incalculable harm to society and the economy over the long run. It is imperative that the leaders of Pakistan abandon this path in favour of doing business within an established institutional framework. By bypassing institutions they will bring not only economic ruin to the country. They will also pose an existential threat to the state of Pakistan.

Predator Tuesday, March 24, 2009 03:35 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Faced with five crises[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER][SIZE="2"]On the economic side, we face the possibility of a prolonged slowdown in activity that will probably yield a GDP growth rate of no more than two per cent a year.[/SIZE][/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, March 24, 2009 [/B]

THE fact that Pakistan is currently faced with a crisis that in terms of its scope, reach and likely consequences has no precedence even in our exceptionally turbulent history cannot be disputed.
There are many dimensions to the problem. On the economic side, we face the possibility of a prolonged slowdown in activity that will probably yield a GDP growth rate of no more than two per cent a year. This will mean practically no increase in income per head of the population. That, in turn, will mean a decline in the real incomes of the bottom 60 to 75 per cent of the population. The only segment of the population that may still see some improvement in their economic situation are the rich and the relatively well-to-do.

This will further exacerbate the poor distribution of income. By the end of the year the country may add 10 million new poor to the 50 million who already live in abject poverty. A sizable proportion of these will be in the urban areas, in particular the large cities. This will increase the social restiveness in cities adding to the problem posed by the rise of extremism. This the country cannot afford.

A growing number of people in the country believe that the present structure of society is not serving their interests and presents to them a future they are not prepared to accept. They are willing to resort to almost any means, even to limitless violence and extreme cruelty to disturb the existing social order and usher in a new one. This is the meaning of the rise of extremism which is the second of Pakistan’s many problems. The failure of the economy to provide adequately to the people at the bottom end of the income distribution scale or living in the more backward regions of the country accelerates the rise of extremism.

The rise of extremism in a country of Pakistan’s size and in which the citizens subscribe to a faith which, according to many in the world’s more advanced countries, is seen as a threat poses another challenge, the third in my list. The people of Pakistan may consider possible foreign involvement to be interference in their domestic affairs, but the world, concerned about the impact on them if the Pakistani state fails, will not allow the country to go down. The political and economic order they could impose on the country may not be to the liking of most of the people.

The fourth crisis Pakistan faces is the result of several developments in its external environment over which it has no control. In most of 2008, the country’s economy was under considerable stress because of an unprecedented increase in commodity prices, not only of oil. A number of other commodities that figure prominently in Pakistan’s imports saw substantial increases in their prices. This strained Pakistan’s external payments situation.

In the fourth quarter of 2008, oil and commodity prices fell as sharply as they had risen, thus providing some relief to policymakers in Islamabad. But other strains appeared. There was a spectacular downturn in global economic activity, resulting in the contraction of export markets for emerging countries, including Pakistan. At the same time, severe stresses in international finance resulted in the flight of capital from Pakistan and other developing countries.

The fifth challenge is posed by the inability of the political culture to develop a system allowing a voice to the people, making it possible for them to resolve their differences without resorting to street politics, and creating a structure that could sustain the inevitable shocks in a politically backward society. Pakistan’s plunge into political chaos and possible disaster was narrowly averted on March 16 by an eleventh-hour agreement between two contending forces. One of these used the streets to put pressure on the government, the other used the state’s coercive power to force its will on those who oppose it. Both failed to use the institutions available for democracies to reach accommodative positions.

There is, in other words, a perfect storm which has hit Pakistan. Five different crises have arrived more or less simultaneously. Will the country and its political leadership be able to deal with them? Or will the country succumb and thus create a situation which would lead the people to question the very idea of Pakistan.

That idea, articulated with considerable clarity and passion by Mohammad Ali Jinnah, was based on the assumption that the Muslims of British India constituted a separate nation from the majority Hindu population. Jinnah successfully argued that the people of his faith needed a political space of their own in order to live according to their own traditions, culture and social norms. The space was provided but the people have failed to define a political system in which they could live peacefully, working to better their lives. Of and on, Pakistan has been successful economically. But time and again it has failed politically. It is also failing to be a responsible member of the community of nations.

We know how to deal with each of these five storms separately. The economy’s revival requires a combination of stabilisation policies and the revival of pro-poor growth. Stabilisation on both fiscal and external accounts should be undertaken without disturbing the medium-term growth prospects.

In order to deal with extremism, Pakistan will need a combination of targeted development of the areas that have become vulnerable to it. It will also require ensuring that people, no matter how disaffected they are, do not question the authority of a legally constituted state. It is only with the adoption of a comprehensive approach that the country can deal with this problem.

It will involve economic and social development on the one side and clear demonstration that the state’s authority must be respected on the other. Only then will the country be able to convince the world that it is serious about dealing with the problem of extremism. The stresses on the economy because of the global economic meltdown will require making the country more reliant on domestic resources for development. It will also need the accumulation of foreign reserves to absorb shocks delivered from abroad. Finally, the propensity to use the street and the coercive power of state to settle disputes can only be dealt with by strengthening institutions of governance. These include parliament, the provincial assemblies and the legal and judicial systems.

It is when these crises started to interact one another that we begin to face the possibility of chaos. This was averted on March 16 but much remains to be done. ¦

Predator Tuesday, March 31, 2009 10:07 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Cost of political insecurity[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 31 Mar, 2009[/B]

SEVERAL political commentators have used hyperbolic terms to describe the political developments on and after March 16. It has been said that the concession by the government on the matter of the judges and the decision by the opposition to call off the long march in response has ushered in a new era of Pakistani politics.

It has been described as a revolution, the beginning of a major structural change in the country’s political system. One writer declared that there is no other example in the political history of the developing world where people working together have brought about a political development of this dimension.

This is, of course, an exaggeration. People in several other countries — most notably in several states of the former Soviet Union, were able to force the authorities to take the democratic route. Nonetheless, the significance of the contribution made by those who led the long march and participated in it should not be minimised. It does appear that the Pakistani political system is likely to see a greater balance among the several pillars that support it and the judiciary may be able to exercise an influence that was denied to it for so long. Given all this, do I need to revise arguments I made in this space a couple of weeks ago?

It was then argued that the politicians in deciding to call their followers out on the streets and agitate against the established order would do well to look at their decision from the prism of economics. Working up the street to agitate is economically costly — and not only for those who may lose their daily wage or a part of their income for participating in this kind of political play. It is also costly for the economy to settle political differences on the street.

I then went on to suggest that this approach to politics inflicts damage on the building of durable political institutions which serve the purpose of resolving differences among political players. Even though the long march appears to have produced some positive developments, the main substance in the case I put forward still holds.

There is a close relationship between economic and political developments that economists recognise but politicians and political scientists often ignore. A well functioning political system serves several economic functions. It allows a voice to the people. Those in policymaking positions get to know the aspirations as well as the grievances of the citizenry or a section of the population.

As Amartya Sen, the Nobel Prize-winning economist, suggested in the work that brought him fame and fortune, famines don’t usually occur in democratic societies. Famines, he observed, happen when governments fail to create the economic environment that would provide incomes to the poor to buy the food they need.

When an economy reaches that point, a democratic political system forces the government to act. There are no such compulsions in non-democratic systems. Even a country like China, known for its concern about the welfare of the common citizen, saw millions of people die of hunger when political whims led to the disruption of the economy. The human catastrophes that followed the launch of the Great Leap Forward in the late 1950s and the Cultural Revolution in the late 1960s would not have happened in a functioning democratic system such as the one in India, Sen maintained.

What this suggests is that for Pakistan to gain a political system that works for the masses, its institutions must begin to deliver policies and programmes that work for the citizens. The country must move away from the politics of confrontation and agitation and towards the resolution of conflicts by institutional means.

Bringing about change through agitation has a very high transaction cost. One estimate of the cost to the economy of the use of shipping containers to block the long marchers is Rs1bn. The transaction of the cost of politics is considerably lowered when the political system has strong institutional underpinning. There are several aspects of institutional development that could reduce the cost of transaction in society. One of these is particularly important for a country in Pakistan’s situation. It is also pertinent for the goal the long marchers had before them.

The goal is improving the effectiveness and efficiency of the legal and judicial systems. A country’s legal system is made up of laws that are on the books. The most important of these is the constitution, the basic law of the land. But there are hundreds if not thousands of other laws and regulations. Laws need to be enforced and disputes amongst individuals, economic establishments and between these two and the state resolved. This is the function of the judicial system. Pakistan is weak in both areas.

First take the constitution. Originally promulgated in 1973 as a result of consensus among a number of different groups, it has been repeatedly tinkered with, especially by military rulers. The several published constitutions of Pakistan don’t make an easy read since they are cluttered with footnotes, explanations and amendments that have been incorporated in it over time. Cleaning up the text should receive high priority perhaps through an amendment. A constitution should be an easy document to read and understand; it is meant not only for the legal community but for the people at large. Uncluttering needs to be done for other parts of the legal system as well. Some laws have been there for decades and have lost their initial purpose. Take for instance the various provincial agricultural marketing acts which are derived from the original law promulgated in the late 1930s. Its objective was to protect the Muslim peasantry from the Hindus who dominated agricultural marketing. The acts have been kept alive and now serve to hinder the development of agricultural trade and agro-processing rather than protect the peasantry. In the meantime, new vested interests have developed that draw ‘rents’ from the restrictions the provincial acts place on the modernisation of this important part of the economy. The best way to deal with this situation is to repeal the acts rather than continuously amend them.

I believe the Egyptian government has launched a programme to review all economic legislation placed on that country’s books over many decades, if not over centuries, and modernise the legal system. Perhaps Pakistan could do something similar. The promise of change that has come with the success of the long march should result in improving the structure of governance and reducing the cost of doing political business in the country. I hope this opportunity will not be lost.

Predator Tuesday, March 31, 2009 10:10 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]An approach towards urban policy [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
March 30, Monday 2009 [/B]

PAKISTAN needs to develop an approach towards addressing the numerous problems faced by its urban population. Not unlike other developing countries, Pakistan tends to underestimate the size of its urban population, the size of its large and medium cities and the proportion of the population that should normally be classified as urban.

Other than the usual reasons for the underestimation, there are also political reasons for giving a smaller weight to the urban population. Pakistan was a rural place and a largely rural economy at the time of its birth. Since then, starting with the movement of the population that accompanied the partition of British India into independent states of Pakistan and India, the size of the urban population has increased at rates between two and half times to three times the rate of increase in population.

The country has had one of the highest rates of the urbanisation in the developing world. This should have resulted in the flow of greater political power from the countryside to towns and cities. That did not happen as the powerful landed interests succeeded in preventing the urban areas from gaining a larger space in the political system. This is one reason why population censuses have not been held on a regular basis as provided by the Constitution of 1973. There are at this time no firm estimates of the size of the population overall and its geographic age and gender distribution.

By underestimating the size of the urban population and the size of the major urban areas, the country has not properly provided the needed urban services. There is an urgent need for an urban economic and social development strategy that can provide employment and economic security to its young and growing population. Without it, the urban population will become increasingly restive. This is particularly the case with the urban youth. My guess is that Karachi and Lahore alone have 20 million people who are below the age of 20. For designing an urban strategy it may be appropriate to reflect on the economic and social dynamism that shapes urban areas. Policy makers may distinguish among four different types of urban communities: the large cities; the peripheries of large cities; the medium-sized cities and small towns. Each of these urban centers has its own dynamic.

There are also differences among the large cities.The strategy that might well serve the city of Karachi, Pakistan’s largest, may not exactly be the same as the one that would be relevant for Lahore, the country’s second largest city. Nonetheless, both cities need better supply of water and sanitation, better transport, better education and health care, more focused attention to providing employment to the people who are constantly moving into the cities from the areas outside, more technological advance to increase the incomes of the employed and better integration with the global economy.

While the city centres of Karachi and Lahore and other large cities may need the same kind of public sector attention, their peripheries are very different from one another. Karachi has expanded into its hinter land by extending itself into the essentially empty and desert areas to its south and east.

Those who have arrived in the city in search of jobs, have found or developed slum-like housing in the numerous “katchi abadis” that are located in the city’s periphery. Hundreds of thousands of Pathans are living in these cities making Karachi the world’s largest Pathan city, larger than Peshawar and Kabul.

There are “katchi abadis” in Lahore as well but its expansion has occurred largely by the assimilation of long-settled towns that were all around its ever-expanding periphery. Public policy designed to address the problems faced by the peripheral areas of the two cities, therefore, will have considerable differences in their content and objectives.

The medium-sized cities are the product of economic and social dynamics that are altogether different from those that are operating in large cities. Most medium-sized cities have grown in size for three different reasons. They were either important links in the system of transport and communication; or they were centered on some indus try that used locally available skills; or again, they were supplying important services to the sector of agriculture as it developed in the surrounding countryside.

Two medium size cities, both in the Punjab, illustrate very well how different approaches towards industrialisation can influence the shape and growth of urban areas. Rahim Yar Khan in the province’s south drew a number of large transnational corporations that, taking advantage of the import substitution bias in the first 40 years after independence when they established their operations in and around the city.

The city’s choice as a location was influenced by the impressive agricultural potential in the surrounding countryside. Lever Brothers, a prominent multinational that specialised in the manufacture of basic consumer goods, chose to locate its plant in the city. Engro corporation established a fertiliser plant. But the city failed to develop as an industrial hub especially after the economy was opened to trade and import-substitution lost some of its lustre.

On the other hand, Sialkot in the province’s centre was able to become a vibrant urban centre by opting for what economists now call “cluster development”. By this is meant the location of relatively small enterprises in one area producing same types of goods and services.

Being clustered together makes it possible for them to obtain the inputs, services, physical infrastructure and have access to the markets that, working individually would be expensive and, therefore, uneconomical.

Sialkot is an example of the success of this type of cluster development. The medium-sized cities located in the city built a strong export business based on traditional skills that were abundantly available in the area. The city’s entrepreneurs also decided not to rely on the government for serving their area with the needed infrastructure. Instead they taxed themselves and raised sufficient resources to improve roads and even build an airport. A single urban development approach, therefore, would not work for all medium-sized cities.

Finally, small towns have their own social and economic characteristics. They are much more integrated with the economic and social situations of the surrounding countryside than the other types of urban communities. They will be affected much more by the policies aimed at the development of agriculture and by promoting trade in agricultural commodities.

Urban centres grow and flourish – or decay and perish – by developments that are not strictly part of a state’s urban policy. This should be clear especially to the people of Pakistan. After all, the country was once the site of the oldest urban centers in human history. Mohenjodaro and Harappa disappeared into history not because the rulers of the day did not have appropriate urban policies. They were the victims of circumstances and events over which the ancient state had no control.

That notwithstanding, Pakistan’s urban future will depend to some considerable extent on how the country builds its economy and how it makes it more productive and competitive. For instance, by encouraging the development of retail trade and by facilitating the entry and expansion of multilateral retail chains, the country may be able to develop a number of centres of agricultural processing. This will create new urban poles of economic activity which, in turn, will reduce the pressure on the large cities by holding back some of the surplus workers from the countryside that would have inevitably migrated to the large cities, further crowding them and further putting pressure on weak urban services.

Predator Monday, April 06, 2009 05:13 PM

Trade with India — a small step
[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Trade with India — a small step[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, April 06, 2009[/B]

THE Economic Coordination Committee of the Cabinet in its meeting held on March 19, 2009 took a small step to regularise trade with India.
It authorised the ministry of commerce to start building the WagahAttari crossing near Lahore as an important point of entry and exit for facilitating trade between the two countries.

It also permitted the ministry to increase the number of items that could be exchanged to more than 1938, the currently permitted limit. The ECC announcement promised further liberalisation contingent upon the development of infrastructure on both sides of the border . While this is a positive development, it is still a baby step in an area that could do with some bold initiatives from the leadership in both the countries.

The decision by the cabinet committee was presumably taken under the provisions of the South Asia Free Trade Area agreement (Safta). The agreement was signed in Islamabad by all countries of the South Asian Arrangement for Regional Cooperation in January 2004. Creating a free trade area in South Asia was an important objective of the Saarc initiative when it was launched in Dhaka by the then Bangladesh president General Zia ur Rahman.

No progress was made for almost two decades largely on account of the continuing hostility between India and Pakistan, the region’s two largest economies. The near-war between two countries in 2001-02 when hundreds of thousands of troops were massed on both sides of the Indo-Pakistan border almost killed the entire enterprise. It was saved when the two leaderships recognised that persistent hostility was economically very costly for both the countries.

The Saarc’s leader wished to create a customs union in the region of the type that had propelled the countries of the European Union towards economic prosperity and political tranquility. Given the decades long hostility among the countries of the region, in particular between India and Pakistan, the South Asian leadership wished to be cautious in its approach. The Safta was designed to move slowly towards the creation of real free trade area, allowing time for the participating countries to absorb the gradual opening up that was envisaged.

It was right for the leaders to proceed very deliberately, but not right to be so slow in their movement that the advance they were making did not become apparent to the markets. Markets don’t respond well when signals are weak and subtle. They look to clear public policy guidance.

The Safta, at least in theory has been operational for a couple of years but it has yet to produce tangible economic effects. In a series of articles I contributed to Dawn while the Safta was being prepared for ratification by the governments of the region, I argued that Pakistan, being the smaller economy compared to India, would benefit more from the opening of the Indian border to its producers. That was the experience of all small countries that entered regional of arrangements with their larger neighbors in other parts of the world. Thus Mexico has gained more than the United States from NAFTA, Argentina more than Brazil from Mercosur, the smaller countries of Europe more than the larger ones from the expansions of the European Union. There is no reason why Pakistan’s experience from Safta should be any different.

The decision by the ECC to expand the size of the negative list was indeed a small step; no only that, it is in the wrong direction. By continuing with the “positive list” approach as the way of controlling trade with India, Pakistan is persisting with a practice that trade economists have long argued is inefficient and permits rent-seeking behaviour on the part of those who are authorised to regulate the movement of goods at the border.

The more efficient and active approach would be to go for a negative list by identifying a small number of items. It is not in Pakistan’s strategic interests or in conformity with its cultural norms to import from India. For instance, the import of liquor from India could be banned as it is from other countries of the world. All other items should be allowed, subject to the conditions that govern all international trade. Long negative lists give a great deal of authority to the customs regulators which invariably gets misused and, more often than not, turns into corruption.It is also not advisable to concentrate on the development of one point of entry such as the WagahAttari border.

There should be several crossings that should be encouraged to be developed. That will allow competition among the provinces which would produce with greater efficiency. It may also be economically more efficient to develop a port of entry closer to Karachi, still by far the most significant location for large scale industries. It would be cheaper for some of these enterprises to import machinery and intermediate inputs from India by road.

If the response to this initiative is quick and does not get bogged down in the bureaucracies on both sides or one side, it could begin to have a significant positive impact on the Pakistani side. I have argued on many occasions in this space that it is in Pakistan’s economic interests to build a strong trading relationship with India. No matter how sluggish is the Indian response to the initiatives Pakistan may take, Islamabad should keep on pressing for more openness from the Indian side.

The Indians remain more protective of their markets compared to their neighbours. They are also much more bureaucratic in the way they handle foreign trade. Even when they begin to bring down the tariff rates, they use all kinds of legal constraints to restrict trade. The Safta presents a mechanism where these problems can be tackled.

Trade experts argue that trade facilitation has become a much more potent tool for promoting international trade than the lowering of tariffs. Even in more protective markets such as those in South Asia, the walls of tariffs have come down significantly. Much more is to be gained by improving and simplifying non-tariff procedures for the movement of goods across frontiers.

In this context it is correct for the ECC to ask for the improvement of the facilities on both sides of the Wagah-Attari border. Complaints by countries against their trading partners should be preferably handled by the Safta secretariat rather than the trade authorities of individual countries. India has resisted the attempts to strengthen the SAFTA secretariat. It should be persuaded to change its position.

In conclusion, following points about the use of public policy by Pakistan in promoting trade with India needs to be underscored. It should use the framework made available by the Safta to deal with its much larger neighbour. That way it will be able to deflect the pressures that may come from India if the opening was to be done bilaterally. Within the Safta, Pakistan should be the leader rather than a follower.

It should, for instance, take the lead in forcing India not to use the anti-dumping clause as vigorously as it has done in the recent past. Since it is expensive for the exporting country to challenge the use of this clause, it is almost equivalent to an increase in the rate of tariff. Pakistan should also press other members of the Safta to abandon the positive lists in favour of the negative lists thus limiting the role of custom officials as regulators of the flow of trade. Increasing trade with India within the Safta framework should be an important part of Pakistan’s international trade policy.

Predator Tuesday, April 07, 2009 11:03 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Obama’s Pakistan plan[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 07 Apr, 2009[/B]

WITH his March 27 address televised live from the White House as Secretaries Hillary Clinton and Robert Gates stood by his side, President Barack Obama embarked on America’s fourth venture in Pakistan.

The previous three had not ended happily. This time the Americans may have greater success if they are careful about learning some lessons from their previous engagements.

America’s first deep involvement in Pakistan was in the early 1960s. It was designed to curb the advance of communism into the heartland of Asia. Pakistan signed on to become a link in the chain that the administration of President Dwight Eisenhower was throwing around the communist world. According to today’s rates some $5bn flowed into Pakistan from the US in the 1960-65 period. It included both military assistance and economic aid.

One of the monuments to that engagement is the large cantonment at Kharian built to American specifications. The assumption was that if the American troops needed to move into Pakistan they would have a place from where they could operate. However, this association between the two countries came to an abrupt end when Pakistan went to war with India in September 1965. The US refused to side with its ally and significantly scaled down its involvement in Pakistan. The second engagement came in the 1980s when Pakistan was recruited as an active partner in America’s campaign to dislodge the Soviet Union from neighbouring Afghanistan. This time the American support was directed at achieving three goals: energising and equipping the Mujahideen to fight the Soviets, helping the Pakistani military improve its operational capability just in case the Soviets extended their reach to Pakistan, and providing some support to the economy.

About $12bn of American money, again in today’s prices, flowed into Pakistan. The American effort ended abruptly once the Soviet Union pulled out of Afghanistan.

Washington’s mission had been accomplished and it did not need Pakistan any more. The third American effort was launched after 9/11. It was meant to secure Pakistan’s cooperation to remove the Taliban and the Al Qaeda from Afghanistan. About $12bn worth of assistance was provided to Islamabad over the years between 2000 and 2007.

Although the military was the main beneficiary, Washington helped Islamabad ease its external debt burden. Pakistan’s debt to the US was written off and other western capitals were encouraged to follow suit. These measures created fiscal space for the central government in Pakistan which allowed it to pump money into the stagnating economy.

This engagement has not ended. In fact, it has morphed into a different kind of involvement.

This time President Obama has promised to be involved in Pakistan’s affairs in a different way. The objectives of engagement spelled out by him on March 27 are limited in scope but extended in time. What limits the involvement is the need to ensure that Pakistan’s territory, in particular its wild west, is not used by Islamic extremists of various hues to launch attacks on America and its assets in different parts of the world.

What is likely to be an involvement over an extended period of time is the goal of modernising the Pakistani society, polity and economy.

This will help America with the world of Islam since Pakistan is the second largest Muslim country in the world. Not only that, it occupies an exceptionally delicate geographic space, one that is very important for America’s strategic interests. Obama did not call his enterprise nation-building since that term was thoroughly discredited by President George W. Bush’s unfortunate and ill-advised Iraq adventure.

America’s planned association with Pakistan, this time under the direction of President Obama, comes with the promise of a steady flow of a decent amount of money. As much as $1.5bn a year is being promised and an act of Congress will ensure that it will not be suddenly halted. The initial promise is for five years.

This amount is of about the same order as provided in the three previous periods of American involvement. But there are differences. This time the recipient of aid will be a democratically elected government and the main purpose will be sustained economic and social development. That said, a number of questions await answers. Among them: how will this money be used, who will use it, how will its use be monitored, what institutional mechanisms will be deployed to ensure its effective use?

Pakistan has a good record of using foreign money for implementing large projects. The most impressive example of this are the Indus Water Replacement works executed over a period of 10 years at a cost of $10bn in current dollars. It has, however, a poor record of using external funds for social development and also for bringing about long-postponed structural changes in the economy.

The most obvious example of the failure of a multi-billion dollar soft programme is the World Bank’s Social Action Programme, the SAP, which was expected to significantly increase enrolment of children in primary schools, provide basic healthcare to the poor, and socially and economically empower women.

SAP failed almost totally. The main reason was that those who designed the programme failed to strengthen the institutions that were to bring about these changes. In other words, Pakistan seems to be able to handle ‘hard’ projects but not ‘soft’ programmes. But if President Obama’s speech is an indication of the direction the new American programme is likely to take, it is the soft side of development that will receive very high priority.

The theory behind this approach is simple; it is also correct. It has now been concluded in Washington that the use of force alone will not eliminate the danger posed by extremism in places such as Pakistan. The destructive ideology pursued by a segment of the population is attractive for the youth who have lost faith in their future. This has happened because they have not benefited from the economic growth that has taken place since most of its rewards were captured by a few.

In recent years, interpersonal and inter-regional disparities have widened considerably creating an enormous amount of resentment among those who have been left behind and also in the regions of the country that have done less well. It is these deprived people that have taken up the cause of Islamic extremism and they are most active in the more backward regions of the country.

For the new American effort to succeed in Pakistan and for President Obama to achieve the objectives, the ground will have to be carefully prepared before money starts flowing in. How this should be done is the subject I will turn to next week.

Predator Monday, April 13, 2009 02:37 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The meaning of the G20 deal for Pakistan[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]Since capital-short Pakistan has to repeatedly go to the IMF to be rescued, it has been subjected to the Washington Consensus conditions. Some of these conditions were right. Some others did damage. Foremost among those that hurt the economy were the emphasis on adjustment over growth, opening the capital markets and not putting emphasis on reg- ulating the private sector. After the London agreement to take ideology out of economic advice, countries such as Pakistan should be able to craft their own policy framework.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Monday, April 13, 2009[/B]

WAS the ability of the G20 countries to reach an agreement at their second summit devoted to addressing the problem created by the current economic downturn highly significant? Or was it just a papering over of the differences among the leaders representing the world’s largest economies?

The G20 had met in Washington in November soon after the election of Barak Obama as the president of the United States. The President-elect did not attend the meeting. For that reason alone, the summit was a holding operation, waiting for Obama to settle down in his office. Only then could the world leaders seek to address the problems associated with the global economic downturn.

There was considerable apprehension before the leaders sat down for deliberations in London on April 2 that the summit may not produce significant results. There were great differences in the approaches adopted in particular by the United States and continental Europe about the way crisis was best handled. These could produce, if not a deadlock, an agreement that was not worth very much.

Had that happened it would have been devastating for the markets in the large countries and that, in turn, would have deepened the recession. The world was spared such an outcome. The communiqué signed by the summiteers produced a euphoric market response. Almost all major stock indices around the globe registered major advances.

However, the agreement came short on one important issue: the need for concerted action by the large countries to stimulate their economies. The United States, under Obama, had taken a major step in that di rection by getting Congress to agree to a large stimulus package. The amount of money that was to be pumped into the economy was close to $800 billion following on $750 billion Washington had already earmarked for helping the ailing banking and automobile industries.

Even before the Americans moved, the Chinese had announced a large stimulus package of their own amounting to nearly $600 billion. The Europeans, how ever, declined to take this route, concerned that spending of such amounts would result in inflation. The European resistance was led by Germany which had deep memories of hyper-inflation that had contributed to the break out of the Second World War.

The Europeans wanted the world’s large powers to take a long view.They wanted them to regulate their financial sectors more meaningfully. They not only wanted the strengthening of domestic regulatory mechanisms, they also wanted an international institutional arrangement to keep watch over all major financial systems and ring the alarm bells if there was apprehension that in some part of the global system there were developments that could threaten world financial stability.

The focus on the regulatory systems clearly pointed a finger at the United States that had followed the strategy of allowing the private sector enormous free dom to operate. This was done in the belief that “selfregulation” was much better than regulation by state agencies, in particular in the non-banking sector. If some institutions in this part of the system went off track they will be pulled back by the forces of the market place. This turned out to be a naïve belief and the entire US financial system got caught up in greed and unsound practices.

The Europeans were keen that such behaviour should be caught early before it infected other parts of the globe as had happened this time around.There was an underlying philosophical difference in the two approaches. The continental Europeans wanted to bury for good what they called “Anglo-Saxon capitalism”. The United States did not think that the time had come to write an obituary of the system that had bought it immense prosperity.

In the end a compromise was reached. The United States agreed to strengthen its own system by bringing in non-banking institutions into the regulatory framework. It also agreed to be exceptionally vigilant about the workings of very large institutions that could not be allowed to fail. Citigroup and AIG were two examples of such institutions that had already received hundreds of billions of dollars of government money but were still struggling. Their failure would reverberate all over the world.

What does the G20 agreement mean for a country in Pakistan’s situation? Although Pakistan was not present at the London meeting – it is unfortunately one of the few large emerging economies that have not made it to the list of G20 and thus has no influence over its deliberations– it should closely watch how this group evolves its thinking over time and how it begins to reshape the global economic and financial structures.

Three developments at London hold significance for Pakistan.The first is the large increase in the resources available to the IMF. The Fund was given most of the liquidity that is to be pumped into the global economy. It will receive $750 billion of the $1.1 trillion the group promised to provide for ending the global financial crisis. It will come in two forms.

Large countries will inject new money into the Fund so that it continues to mount the kind of rescue operations from which Pakistan is already benefiting. The European Union, Japan, and the United States will provide $100 billion each while China will give another $40 billion. The Fund will also sell some of its large gold holdings to raise additional amount. In addition the Fund will increase its share capital which will be available to all countries according to the quota they hold at the institution.

The second important development from the perspective of the emerging world is the conclusion reached by the London conference that The Washington Consensus will be buried. This Consensus, developed by the institutions located in the American capital, has guided the World Bank and the IMF in their endeavors in the developing world.

Since capital short Pakistan has to repeatedly go to the Fund to be rescued, it has been subjected to the Consensus conditions. Some of these conditions such as the need to promote exports by keeping an appropriate exchange rate and to reduce fiscal deficits to the level where they did not cause inflation were right.

Some others did damage. Foremost among those that hurt the economy were the emphasis on adjustment over growth, opening the capital markets and not putting emphasis on regulating the private sector. After the London agreement to take ideology out of economic advice, countries such as Pakistan should be able to craft their own policy frameworks.

The third London decision of significance for Pakistan is to provide trade finance where the inability to access credit has affected trade. Pakistan is one of those countries. The G20 decided to provide $250 billion for this purpose. It is yet not clear what will be the conduit for this infusion of capital.

In sum, it can be said that the London summit produced useful results for Pakistan. However, for the country to benefit from London’s outcome, it will have to look carefully at the decisions taken by the G20 and draw up a plan of action to gain access to the additional flows of capital that will soon become available to Pakistan and other emerging markets that are under considerable economic stress.

Predator Tuesday, April 14, 2009 10:50 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Obama must think again[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 14 Apr, 2009[/B]

I CONCLUDED the article last week with a question: how can the American administration headed by President Barack Obama serve America’s strategic interests in the area where Pakistan is located while helping Pakistan to achieve a high rate of economic growth that reaches all segments of the population and all regimes of the country?

The new approach adopted by Washington has already moved in the right direction by ensuring Islamabad and the people of Pakistan that its engagement with them will be for a long time. It has been promised that the United States will not fold up its tent and move on once its immediate interests have been achieved. It will remain engaged apparently for as long as Pakistan remains vulnerable to extremism. That may indeed be for a long time.

However, before Washington begins to disburse a great deal of money to Pakistan it needs to develop a theory that links the absence of the right kind of economic and social progress to the rise of extremism. And before it develops such a theory it needs to acquaint itself better with Pakistan’s history. It should do the latter by asking a simple question: what has happened in Pakistan that has given the opportunity to extremist elements in the society to expand their influence? To answer this question we need to go back to the beginning. Pakistan was created as a state in which the Muslim population of British India would be able to live according to its own social norms. These were deemed to be different from those to which the Hindus subscribed. The Muslims needed political space of their own in which they could define their social and economic priorities. This space was created but repeatedly violated by elites that dominated the political system. Even though the composition of the elites changed over time with some surrender of political authority by the landed interests to those in the urban areas, the political system did not become representative. The common citizen was excluded.

Those who were near the bottom of the income-distribution scale turned to various Islamic ideologies in the belief that these would be able to change the system and ultimately satisfy their unmet needs. There was a certain amount of legitimacy in this move: after all the founders of the state of Pakistan had used the political idiom of Islam to draw popular support for their movement.

In other words, what connects the rise of extremism in Pakistan to the policies pursued by the state is the absence of institutions that give a voice to the people and the disregard by rulers of the people’s economic and social needs. The state’s failure has been across a number of fronts, in particular the legal and judicial fronts, leading to increasing frustration as the legal system had failed to serve them and the judiciary became corrupt and was unable to deliver timely justice.

It is not surprising that two popular movements won the support of the people. There was broad support for the lawyers’ movement to restore the judges fired by Gen Pervez Musharraf. And there was limited — in geographic terms — appeal for the move by one segment of the population to redefine the local legal system according to what were viewed as the principles of Islam. That happened in Swat.

The first priority of any economic and social reform programme, therefore, should be institutional restructuring and development along a wide front. A significant part of the effort should be directed at achieving at least five objectives. First, the political system must be strengthened so that the people’s view of it changes. At this time the citizenry has little confidence that its representatives in the national and provincial governments will work for the interests of the constituents. The legislators must legislate for the benefit of their people and not pursue their own interests.

Second, the legal and judicial systems must be reformed so that speedy justice is delivered by courts at various levels. This would need the modernisation of the system, much better remuneration for officers in the system and greater authority for an autonomous set-up that can watch over their performance.

Third, the state must have the ability to develop strategies for economic growth and social development that will serve the people better. This should see strengthening the planning process that once worked well.

Fourth, the government has to come closer to the people. This would mean the federal government devolving a significant amount of its current authority to the provinces and for the provinces to hand over a significant amount of economic and financial authority to the institutions of local government.

Fifth, a more durable and apolitical system of accountability needs to be established that can begin to cleanse the political and administrative structures of corruption.

A significant amount of American money is likely to be directed at social development, to the education and health sectors and towards improving the situation of women in society. This is good and commendable. But social development should not be interpreted in a narrow sense; its aim should mean more than providing primary education and basic healthcare to all citizens. It should include skill development. It should make it possible for the country’s young population to get employment that fetches reasonable returns and holds promise for rewards in the future.

For that to happen the state will need to work closely with the private sector that is increasingly engaged with the education and health sectors. A plan for such cooperation should be a condition of American support to the country.

For economic development to work for the people, the state needs to create an environment in which sectors that can provide employment to the rapidly increasing work force can grow, develop and modernise. The sectors that can serve this purpose include high-value agriculture and livestock, small- and medium-scale engineering, urban and inter-city transport, information and communication technologies and domestic commerce.

In other words, for America to get involved in developing Pakistan and saving it from the clutches of extremism Washington will need to factor in not just the quantity of money it can give to the country. It also needs to provide quality advice on how that money can and should be used. I have argued before that there is a moral hazard in coming to Pakistan’s help. The country has become used to being pulled back from the brink by its foreign friends. This time the friends should ask for a serious Pakistani effort.

Predator Monday, April 20, 2009 02:12 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Evolving strategies for a new phase of capitalism[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, April 20, 2009 [/B]

SOME crises produce hysteria which leads to inappropriate public responses. Some clear the mind and result in fundamental changes in thinking about critical issues. The Great Depression of the 1930s produced both responses.
The same is true of the financial crisis that began in the United States last summer and has affected all countries of the world, including Pakistan. It is leading to some serious rethinking about the meaning of capitalism, globalisation and the role of the state.

The new ideas and concepts being developed will have enormous consequences for all nations, including emerging economies. It is especially true for a country such as Pakistan which, because of the inability to generate domestic resources to invest in the economy, continues to rely on external finance.

A few days ago after a meeting with the United States’ Senator John Kerry, Prime Minister Raza Shah Gilani said that Pakistan did not want conditions attached to the provision of aid. His reference presumably was to political but not to economic conditions that may accompany the flow of capital to his country.

The community of potential donors that have offered to aid Pakistan would want to see that the money they provide is handled properly; that it gets used within a policy framework that can and should contribute to economic stability and progress. It is in this context that the rethinking on the meaning of capitalism gets to be relevant for Pakistan.

The last occasion when Pakistan had to factor in external views about appropriate domestic economic management and the role of the state was in the early 2000s. At that time – as is the case now – Pakistan had gone to the IMF to save it from a severe economic downturn, even the possibility of default on external obligations. The Fund came to the help of Pakistan but attached a number of conditions to the use of its money.

At that time the policy framework general ly referred to as The Washington Consensus was all the rage in development circles. It called for opening the economy, curtailing the role of state and putting the private sector on the commanding heights of the economy. Pakistan accepted the offered advice and brought about a major change in the way it looked at these aspects of economic management.

The impact of these changes in public policy was to initially slow down the rate of economic growth and allow almost unconstrained role to the private sector in the sphere of economics. Later when the country came out of the Fund’s programme and fiscal and monetary policies were eased, the private sector allocated the savings available to it from the banking sector or from abroad, into the sectors that produced the highest rates of return for it. Real estate, especially luxury housing and shopping malls; telecommunications, in particular mobile phones; and automobiles, both passenger cars and motorcycles, became the favoured sectors.

All three grew at very high rates and helped the economy to pick up the rate of increase in GDP. But the sectors did not generate a significant amount of employment. Consequently, while the GDP increased at an impressive rate in 2003-07, the impact on the incidence of poverty and narrowing of income disparities was insignificant.

Given the way the thinking on economic management is evolving since the financial crisis slowed the global economy, Pakistan will undoubtedly be asked to follow a different approach. What is this change in thinking following the burial of The Washington Consensus announced by Gordon Brown at the conclusion of the meeting of G20? How will this new thinking affect the way the Pakistani policy makers manage the domestic economy?

In answering these two questions, I will also reflect on what I heard from the representatives of the private sector during my most recent visit to Pakistan.

In late February and early April I chaired two sessions of the Planning Commission’s Task Force on Private Sector Development. This was established in December last year with me as its chairman. Its mandate is to advise the government and have it factor in the thinking of the private sector in the making of public policy with reference to reviving economic growth and modernising the economy.

The current economic and financial crisis has led to rethinking covering at least three areas. First, there is a consensus that the neo-liberalism of the Reagan-Thatcher era was not an appropriate policy to be pushed. People don’t always behave rationally, especially if they are using borrowed funds. This can lead to excessive speculation since prices don’t always reflect the risks that are being taken to producing goods and services and doing transactions in them.

Second, unchecked there is a tendency towards monopolistic behaviour as the firms with good contacts with the policy makers or with built-in efficiencies that cannot be matched by rivals, rapidly grow in size. These firms capture a very large share of the market. For instance, in Britain only four grocery chains control 70 per cent of the market, leaving very little space to thousands of small operators.The government should be extremely wary of the strains that can be put the economy if a large firm is considered to have become too large to fail.

Third, globalisation of finance means that domestic regulators cannot always control the operations of firms working in the market place. Domestic regulation has to be supported by an international regulatory mechanism.

The major public policy consequence of this new thinking is to allow a much larger role to the state in managing and guiding the economy than was envisaged by The Washington Consensus. The state must properly regulate the economy by ensuring that there is no excessive risk taking, by preventing the development of monopolies, easing the entry and exit of firms, and protecting the citizenry from the predatory behaviour of enterprises.

The Washington Consensus advocated a minimal role for the state; the new consensus lifts the state’s role towards a much higher profile. The challenge before Islamabad is to redefine the role of the government and make it more effective as well as prominent. How should this be done? This is where the work of the Planning Commission’s Task Force on Private Sector Development enters the picture.

In the discussions we have had thus far, the private sector representatives have made a number of suggestions about the supportive role of the state. Of these the following three are particularly important.

One, those representing large enterprises feel that they confront an exceptionally uneven playing field in the domestic market place. Small operators are able to keep themselves out of the tax net, can avoid labour and health regulations and don’t have to deal with repeated visits by various regulators. As such small businesses can keep their costs low.

Second, they are of the view that their work is inhibited by the absence of appropriate skills in the labour market. Skill development is an important matter but since the government does not have the resources to meet business men’s needs, what is required is a public-private sector partnership. However, for the private sector to invest in skill development, it needs tax incentives.

Third, they are of the view that Pakistan’s unique geographic situation has provided the businesses with opportunities but has also posed problems for them. Economic relations with Afghanistan, China and India are particularly important but need to be carefully an alysed by the government working with the private sector.

Afghan transit trade dumps a lot of dutyfree consumer goods in the Pakistani economy; cheap imports from China are hurting the domestic industry and slow Indian response to Pakistan’s initiatives are not opening up that country’s large market to Pakistan’s producers.

In sum, looking at Pakistan’s economic situation in the context of redefined capitalism and the country’s own somewhat unique circumstances is now a matter of urgent government attention. We will provide an input into these by taking up these matters in the deliberations of Task Force on the Private Sector Development.

Predator Tuesday, April 21, 2009 08:12 AM

The Indian election
[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The Indian election[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 21 Apr, 2009[/B]

EVER since economists began to factor in institutional development as a determinant of economic growth and modernisation, they have begun to emphasise the many links between politics and economics.

The economists’ definition of institutions covers a much wider field than commonly believed. Following the work done by Douglass North, the Nobel Prize-winning economist, institutions are seen to mean more than organisations. They also include cultural and social norms and how people interact with one another and also with the organs of the state. It is by looking at the contribution which broadly defined institutions make towards economic and social change that economics and politics begin to overlap.

According to conventional wisdom, India has succeeded in developing its institutional base to the point where it helps rather than hinders its economic and social progress. After more than six decades of allowing institutions to develop to meet the demands of its citizenry, it has reached the stage where it appears that the political, legal and judicial systems have begun to work for the people. This cannot be said either for Bangladesh and Pakistan, countries that together with India constituted the British India empire.

Institutional and political progress in both Pakistan and Bangladesh has been patchy. Often the two countries have taken a step forward only to fall back by two steps. In both countries the military has been a prominent presence in the political landscape. It was sometimes invited by the people through street agitation to stop the countries from plunging into chaos as a consequence of the politicians’ inability to resolve their differences by using available institutions. Since Pakistan has a longer history than Bangladesh, military interventions were more frequent there than in the latter.

Why did India succeed while its two neighbours seemed to have failed in developing a durable political structure and a strong institutional base supporting it? What is the probability that India will continue to make progress in this important area, providing a model its South Asian neighbours could follow? Both questions are important. The second question is important at this stage because elections in India are under way. They began on April 16 and will be conducted over a period of five weeks. The elections have already generated a fairly rich commentary in the press on their meaning for India’s future, in particular for the development of its political system.

There is a point of view gaining traction both inside and outside India that the prevailing Indian political system may not, after all, be as durable as suggested by conventional wisdom. The strains and stresses that are being brought to bear on the political structure may bring about a deep structural change that will not only affect the country’s politics but also its economy. The Indians have come to believe that they are on the verge of becoming an economic superpower. This belief has been reinforced by the way the world has looked at the country’s remarkable economic progress over the last of couple of years. But that would need a stable political system.

India has shown a remarkable ability to adapt its political institutions to the changes in the country’s social and economic conditions. The Indian constitution is easy to amend and it has frequently changed — in fact hundreds of times — to keep the country’s basic law in tune with changes in circumstances. There have also been changes in practices. Originally the Indians produced a unitary form of government in which most of the power resided with the union government operating out of New Delhi.

However, after the passing of Jawaharlal Nehru, India’s first prime minister, who governed the country for 17 years, it was realised that a commanding political figure did not exist who could run a highly centralised system of governance. Accordingly constitutional changes allowed the creation of more states in order to bring government closer to the people. At the same time the Congress party that had dominated India’s politics for more than seven decades saw its political base gradually whittled away.

This happened first because of the rise of regional parties, particularly in the country’s south, and later by the increasing influence of politics based on caste. Consequently, the Indian political scene is now littered with scores of political parties whose number increases at the time of each election. Neither of the two national parties — Congress and the BJP — is expected to get more than one-third of the 543 seats in the Lok Sabha, the lower house of the Indian parliament. For the last couple of decades, the Indian political landscape has been dominated by “coalition politics”.

There are both pros and cons to this development. The emergence of numerous regional and caste parties has provided a voice to the people, at least during election time. This is why the politics of the street has not been called upon to produce political change as is the case in both Bangladesh and Pakistan. While the multiplication of parties may have brought political stability there is a growing concern in the country that the political system, in the words of a foreign observer of the changing political scene, “is too hamstrung by its diverse parts to agree on a national vision and push through badly needed reforms”.

The elections have given the right to vote to 714 million people. But their choices are likely to further reduce the effectiveness of the political system. The campaign has been light on policy but heavy on communal and caste concerns. Varun Gandhi, a grandson of Indira Gandhi, landed in jail after being caught on tape calling for the massacre of Muslims. The fact that he was punished by the aggressively independent Election Commission and sent to jail speaks volumes for the strength of India’s political institutions.

Hindu-Muslim tension is not the only defining moment of the run-up to the elections. Some other communal fissures have also surfaced. A Sikh threw a shoe at a senior member of the cabinet to show his displeasure that Congress had given tickets to two politicians who were accused of inciting riots in 1984 after the assassination of Indira Gandhi by one of her Sikh bodyguards. The reaction to the killing of the prime minister resulted in the deaths of 2,500 people, mostly Sikhs.

In the weeks ahead, I will return to the issues brought to the surface by the elections in India since they have meaning for the rest of South Asia, in particular for Pakistan which is seeing the birth of a new political order. Pakistan has many lessons to learn from the Indian experience.

Predator Monday, April 27, 2009 02:06 PM

Restructuring IMF for an expanded mandate
[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Restructuring IMF for an expanded mandate[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Friday, 27 Apr, 2009[/B]

PAKISTAN’S presence on the international financial scene will not end with the call it has made on the IMF. Nor will it end with what the finance officials have termed a successful meeting at Tokyo of the “Friends of Pakistan” group.

The world is focused on the country’s economic problems and has recognised the fact that an important way of addressing them is to provide the country with a great deal of additional finance – additional to what the Fund has already provided and what was pledged at Tokyo. As the world’s finance ministers gathered in Washington this week for the “spring meetings” of the World Bank and the IMF, they had a very full agenda. Included in it was the restructuring of the Fund. What was decided here will matter for countries such as Pakistan that will remain financially stressed for many years to come. More IMF resources could become available for Islamabad if it is is able to persuade the organisation that it has developed a strategy for development that will help all citizens. And that it has the capacity to implement such a strategy.

Bowing to the demands from large emerging markets that flexed their economic muscle at the G20 meeting held in London earlier this month, the Fund will begin the process of granting additional powers to likes of Brazil, Russia, India and China. These four countries have a nomenclature of their own – the BRICs.They will have a significantly larger presence on the economic and financial landscape compared to their collective power before the world went into a deep economic crisis. Along with South Africa, Saudi Arabia and Mexico, these seven emerging economies will have a say when countries such as Pakistan appear in the IMF court asking for financial favours.

The process of restructuring that began in London, gathered pace in Washington. When done, it will leave the institution with expanded authority to act as a global banker not just for the world’s poor countries but also for those that are rich. It will have the power to print its own money on a much bigger scale than it is permitted to do at this time. The Fund has the authority to create Special Drawing Rights (SDRs), a currency that serves an accounting rather than a transactional purpose. Some countries would like to see the SDRs become a real currency which could serve as a reserve currency augmenting if not replacing the American dollar. That that should happen was a demand put forward by China before the G20 convened in London.

The most important change for the Fund is the way the developing world is beginning to look at it. This change in attitude was nicely summed up by the Brazilian president Luiz Inacio Lula da Silva, commonly called Lula. “I spent 20 years of life carrying posters that said ‘IMF out’. Now my finance minister says we are going to lend money to the IMF.” Lula was referring to his country’s decision to provide the Fund $4.5 billion as part of the trillion dollar package of resources that was being put into the Fund’s coffers.

This was a remarkable turn-about for a country which received a massive bailout from the IMF in the 1990s. As vice president in charge of Latin America and the Caribbean, I was a member of the team of international negotiators who worked out the deal with the country. Such was their suspicion of the Fund, that the Brazilians insisted that they would only work with the agency if the World Bank and the Inter-American Bank were also involved. The two banks did get involved and Brasilia signed the deal.

There was a reason for Brazil’s unease about going to the Fund unaccompanied by development institutions since the agency had established a record in the developing world that brought it a bad name. That was one reason why President Lula, when he was a trade union leader, went around carrying posters against the Fund. The institution’s current leadership insists that new Fund will be really different from the one that got to be despised in the developing world.

If the Fund does reform itself, it will be going through structural change for the third time in its 64 year history. It was originally conceived as one leg of the three-legged stool that was to underpin the international economic system after the end of the Second World War. It was to maintain stability in the global currency markets under a system of fixed exchange rates. The rates were set against the US dollar; the United States agreed to maintain a fixed price for gold in terms of its dollars while all other countries fixed their exchange rates with reference to the American dollar.

Other countries could alter their exchange rates with respect to the dollar, something that was usually done at the advice of the IMF. In advising the countries to change their rate of exchange, the Fund also provided capital to help them tide over whatever difficulties they were faced with at that time. The Fund stepped in with its help since no other country or market would provide the needed financial resources. As such, it came to be known as the lender of last resort.

The Fund’s mandate changed in the early 1970s as President Nixon delinked the dollar from gold and most countries, in particular those from the developed part of the world, floated their currencies. This was the start of what came to be called the process of “globalisation”. The process exposed developing countries to new forms of risks. Rather than each country getting into difficulties, contagion became common as crises spread from one country to the other. Developing countries that went to the Fund for help had to sign up to undertake reforms that were part of a neo-liberal economic philosophy that came to be called The Washington Consensus.

Governments were required to severely limit their economic role by privatising the assets they held, some of which were acquired by the nationalisation of the properties owned by the private sector. This Pakistan had done in the early 1970s. When Islamabad went to the Fund on a number of occasions in the 1990s, privatisation was one of the conditions to which it agreed.

Countries with Fund programmes were also required to control their expenditures which many did by cutting their spending on social and human resource development. This affected the poor. They also had to open their economies by reducing tariffs which often exposed poor farmers to competition from rich countries. It did not seem to matter to the Fund that many rich agricultural systems were subsidised by the state.

With latest series of reforms, the IMF is entering into the third phase. Dominique Strauss-Kahn, former finance minister of France and now the Fund’s managing director, says that what will emerge after the contemplated reforms have been put in place will be very different from the institution that became controversial in the 1980s and 1990s.

“The IMF is changing, and with it there will be a sea change in the way the world economy is run”, says C. Fred Bergsten, director of the Peterson Institute for International Economics that was responsible for developing the Washington Consensus. “Their role will dramatically shift. You’re talking about monitoring fiscal stimulus, moving toward tighter regulations for financial institutions. You’re talking about global economic management in a way never seen.”

Predator Tuesday, April 28, 2009 08:10 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Battle for hearts & minds[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 28 Apr, 2009[/B]

THE Washington Post headlined a recent story on the latest developments in Pakistan ‘Extremist tide rises in Pakistan’.

The story ran on the front page; its subtitle was even more revealing about the worry that is now consuming many in America and the West about Pakistan’s future.

‘After reaching deal in north, Islamists aim to install religious law nationwide’ read the story’s subhead. The story was built around the statement of Sufi Mohammad, the Swat cleric who had campaigned for decades to bring the Sharia to his part of the world. The newspaper reported that he was now determined to extend his campaign beyond Swat.

The threat was carried out a few days later. On April 22, the western press reported that the Taliban had walked into the district of Buner, south of Swat and nearer Islamabad than the Swat valley. Alarm bells began to ring loudly in Washington. On the same day that the Taliban were reported to have advanced into Buner, Secretary of State Hillary Clinton appeared before the House Foreign Relations Committee whose chairman, Howard L. Berman, had prepared a bill that would allow highly conditional economic and military aid to Pakistan.

Ms Clinton called the Taliban advances an existential threat to Pakistan and called upon its people to put pressure on the government not to continue to cede territory to the insurgents. The government’s lack of resolve was hurting not only Pakistan but could have dire consequences for the rest of the world. She said that Pakistan was becoming a “mortal threat to the security and safety of our country and the world”.

Earlier in the week, The New York Times put on its front page a picture showing a large crowd gathered to hear Maulana Abdul Aziz who was chief cleric at the Lal Masjid in Islamabad before the military action in July 2007. The commando attack killed the cleric’s brother and scores of others. The cleric managed to escape by wearing a burka. The picture showed a bullet- riddled car parked in the middle of the congregation as a symbol for those who had come to listen to the cleric. His attendance at the mosque was made possible by the Supreme Court’s decision to grant him bail. The car was meant to remind the prayer congregation that the struggle to bring Islam to Pakistan would not be easy and that it would be resisted by the state that still had a near-monopoly on power to impose its will. But the state’s will to resist seems to be weakening.

Western newspapers are not the only ones worrying about Pakistan’s future. Policymakers in most western capitals have reached three conclusions. One, that even judged by the standards set by a very violent world that is shaping up in the early years of the 21st century, Pakistan is the most dangerous place on earth.

Two, several influential policymakers are worried that Pakistan’s defences have been lowered to the point where the rest of the country may be overcome by radical Islam. A few days ago Richard Holbrooke, the US envoy to Afghanistan and Pakistan, told a TV audience that Pakistanis need to worry about the government’s decision to compromise with the clerics in Swat. “That ought to be a wake-up call to everybody in Pakistan that you can’t deal with these people by giving away territory as they creep closer and closer to the populated centres of the Punjab and Islamabad.”

Three, that if Pakistan crumbles it will create a tsunami that will hit many distant shores. It is in this context that the statement by President Asif Ali Zardari at Tokyo where he led the Pakistani side at the Friends of Pakistan meeting resonated well in western capitals. The president told his audience that if Pakistan fails the world fails.

All this is a preamble to a simple question: why have the people of Pakistan allowed this to happen? ‘This’ refers to the allowance that has been given to some clerics to openly defy the state, to reject the rule of established law, to show great contempt for most social norms accepted by the vast majority in society. They are doing this in an attempt to establish a social and political order that conforms only to their liking. Why is it that a small group of people believe that they have the licence to impose their will on the country when it has been shown in election after election that a vast majority of the citizenry does not support the point of view these people hold and want to force down millions of reluctant throats?

The answer is as simple as the question. This has happened because the extremists have not met resistance from less radical and saner elements in the country — elements who believe in democracy, the rule of law and personal rights, in particular the rights of women.

Pakistani society can be divided into three parts: the top five per cent or so in terms of income distribution, the middle 50 per cent and the bottom 45 per cent. What has happened in the last couple of decades, as the state failed to provide appropriate services to the citizenry, is that the first class of people have bought insurance for themselves by essentially sealing themselves off from the rest of society. They have their own system of security, their own power supply, their own educational system and their own health services.

The Middle East offers them escape from the country; they go to Dubai to shop and take a vacation. A significant proportion of the middle class, numbering about 85 million, has placed its faith in a democratic system of government. Almost 70 per cent of them voted for the mainstream parties. It was this class that provided the lawyers’ movement the support it needed to battle the state.

There was a moment of extraordinary euphoria after March 16 when this class of citizenry won the restoration of the judiciary. Why is it now showing ambivalence towards the spread of extremism that challenges the social norms to which it subscribes? There are two answers to this question. This class is waiting for leadership to emerge that will mobilise and organise them. But there is also a section in this class that has swung in the direction of extremism. Those who have done so have taken the plunge either because of conviction or because of the failure of the state to provide them with their basic needs. They need to be brought back to the fold.

Then there are the poor, 75 million in all. For them life is a struggle and the state an indifferent and increasingly irrelevant presence. The battle for Pakistan will be fought with the aim to keep the middle class convinced that their best option is to continue to put their faith in the Pakistani state. How can they be persuaded to stay on board is the question for next week.

Predator Monday, May 04, 2009 02:41 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Is the economy recovering?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 04 May, 2009[/B]

[B][I][CENTER]THE economy seems to be on the road to recovery. At least that is the impression one gets from reading the latest macroeconomic data and the reaction of the IMF. Several other observers have reached the same conclusion.[/CENTER][/I][/B]

‘Pakistan is one of the few countries that enjoys more macroeconomic stability today than it did on September 14, the day before the bankruptcy of Lehman Brothers turned the world upside down. In those prelapsarian days, Pakistan’s currency was tumbling; its foreign exchange reserves covered barely two months of imports; and the cost of insuring its sovereign debt against default was almost 1000 basis points (10 per cent ),’ wrote The Economist in its issue of April 25.

The situation has improved considerably since those very difficult days. Foreign exchange reserves (with the State Bank of Pakistan) have climbed significantly, recovering from a low of $3.5 billion on October 31, 2008 to $7.8billion on April 17, 2009.

Fiscal deficit was brought under control although not by raising revenues from inside the country but by drastically cutting development expenditure. Some structural reforms were put in place by removing subsidies on energy. Prices of agricultural products that are still fixed (support price) by the government were raised thus providing incentives to the producers but also reducing the burden on the state.

One consequence of this may be a bumper wheat crop this year. If that happens, the rate of GDP increase may not plunge to the level feared a few months ago. But is this trend sustainable? Will the recovery result in a significant revival of growth, increased employment, particularly for the poor; and, perhaps most important, return in investor confidence?

The answers to these two questions depend upon four factors: continuous availability of external finance, pace of recovery in the global economy, strategic moves by Islamabad to address some of the structural problems the country faces, and the government’s ability to bring the rise of extremism under control.

The Pakistani economic and finance team met with the Fund officials during the recently concluded spring meetings involving the IMF and the World Bank. The Fund, satisfied by the progress Islamabad had made in stabilising the economy, agreed to release the second tranche of its $7.6 billion assistance programme. The programme is to run for two years. There was some indication that the amount available to Pakistan could be increased somewhat if the country continues to proceed on the track it has been following.

Both the World Bank and the Asian Development Bank are interested in expanding their programmes, prepared to provide fast disturbing money as well as project aid. The successful outcome of the Tokyo meeting may provide the country with some additional resources from bilateral sources. However, the real issue over here is Pakistan’s ability to implement the programmes and execute the projects which interest the donors. This will need considerable amount of emphasis on building state institutions.

This brings me to the second question: Would the country’s economic recovery be helped by the recovery in the global economy? There are some faint signs that the global economy may have begun to recover and the recession may be bottoming out.

Pakistan’s economic problems were more the result of internal developments than the cause of the global downturn. That notwithstanding, sharp deterioration in the global economy had an unexpected impact on Pakistan. Most other emerging economies were hurt by the contraction in international trade. Pakistan, with a very small share in global trade, was not as deeply affected. But it was hurt in a different way. The credit squeeze that followed the problems in the banking sector resulted in a sharp decline in external capital flows to emerging markets.

In the case of Pakistan a significant amount of money came into the stock markets. Not only did the flow dry up, the investments that were made were liquidated and capital flew out of the country. Islamabad responded by putting a floor under the prices of individual scrips. This had the effect of suspending trading and further eroded the confidence of foreign players in the markets. It will take a long time for confidence to return.

There are a number of signs that suggest that improvements are taking place. The Economist, the British news magazine, tracks 42 stock markets and in the past six weeks their value has improved by 20 per cent. The slump in global manufacturing seems to be ending and some of the major economies are showing unexpected strength.

The Chinese economy has begun to respond to the large stimulus provided by the state by a sharp increase in infrastructure spending. The German industrial output appears to be reviving. Perhaps by far the most important development is the seeming revival of consumer confidence in America. In the data released on April 28, the index of consumer confidence in the United States touched an unexpected high level. The American consumer is important for the global economy, in particular for global trade.

Sounding less terrified than they were when they met six months ago at the annual meetings of the World Bank and the IMF, finance ministers representing the world’s richest countries, the G7, saw ‘signs of stabilisation’ in the global economy.

This time they had gathered for the spring meetings of the two institutions. According to Timothy F. Geithner, the US Treasury Secretary, ‘there are signs that the pace of deterioration in economic activity and trade flows has eased. These are encouraging signs, but it’s too early to say that the risks have receded.’ In a joint statement the G7 went further and predicted that economic activity should begin to edge up later in 2009, but it is too early to say that the risks have receded.

If Pakistan continues to recover, if the international environment continues to improve, would this set in an attitude of complacency that has overtaken the policymakers in the past whenever the end of a particular crisis became visible?

Foreign capital flows can only provide temporary relief. Foreign direct investment will only come back once foreign players develop confidence that the state has been able to establish its control over all parts of the population and all parts of the country. Sustainable growth can only be achieved if the country begins to raise resources from within the economy. This will need a significant increase in domestic savings rates and a sharp rise – by as much as 50 per cent – in the tax— to— GDP ratio. Both changes will happen only with the adoption of the right set of public policies.

As mentioned above, domestic and foreign investment will return only when there is confidence that the state has established control over extremist forces who, albeit, not very large in number, have managed to scare not only the people of Pakistan but the entire world. For that to happen Islamabad will need to show a combination of resolve as well as imagination. Resolve should aim at reestablishing the writ of the state in all parts of the country. Imagination should be directed at persuading people that the government will do what needs to be done in order for them to develop confidence in their future.

The worst may be over for the economy but sustaining the trend will need a great deal of hard work by the state. The political leadership will have to convince a worried and nervous population that it is up to the difficult task.

Predator Wednesday, May 06, 2009 08:03 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Way out of the conundrum[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][U][CENTER]Public policy will need to be oriented towards ensuring that the economy does not face the same kind of crisis again.[/CENTER][/U][/I][/B]

[B]By Shahid Javed Burki
Tuesday, 05 May, 2009[/B]

IN the article last week, I suggested why it was critical for Pakistan to win the hearts and minds of the people marginalised by the way the economy has developed over the last several decades.
It is these people who have been attracted to extremist causes since they have lost hope in the state’s ability to come to their help.

They have been promised nirvana by the extremists. Those who live in great economic and social stress and see little hope in the future if the state does not change its ways, will go for any alternative, even one that does not have a record of providing people with what they want over the medium and long term.

To get out of this conundrum, the Pakistani state will have to reform and restructure itself. Will it be able to do this? Will it be able to leave behind past behaviour and choose an entirely different approach?

The country is seemingly getting out of the woods. Macroeconomic indicators have improved, foreign exchange reserves have been built up, the fiscal deficit has been reduced, compression in imports has improved the balance of payments, the rise in consumer prices have begun to moderate. Will these trends continue? Will the improvements in the economic situation begin to address the problems, the frustrations of the marginalised people who are seething? These questions could have positive answers if two things begin to happen.

Public policy will need to be oriented towards ensuring that the economy does not face the same kind of crisis again. Foreign resources continue to keep flowing in to help the country tide over the severe financial problems it has had to deal with in the last couple of years. In fact these two contributions to economic survival and sustained and inclusive growth are linked. The donors will continue to provide support if there is comfort that the money being provided is being put to good use.

‘Does aid work?’ is a repeatedly asked question in the corridors and conference rooms of development agencies. It is being asked in the case of Pakistan with a sense of urgency. That is for two reasons that go be yond the normal concerns of development institutions. The first, of course, is the rise of extremism and the threat it poses not only to Pakistan but to the rest of the world. There is now a widespread belief in Washington and other western capitals that the Taliban are only 60 miles from Islamabad. If Pakistan falls it will generate a gigantic tsunami that the world is not equipped to deal with.

The second concern about the use of aid in Pakistan can be understood by the use of a term popular in finance. Called ‘moral hazard’, it refers to the behaviour of the firms that believe that they are too big or important to fail. This pushes them towards taking risks that are hard to justify in terms of conventional cost-benefit analysis. If the risks materialise and push the firm towards bankruptcy, someone will come along and launch a rescue mission. In fact, this is precisely what happened in the case of several large financial firms in the United States that were saved by the state with the injection of large sums of money.

Pakistan has been in that position on sev eral occasions. Each time the country came close to bankruptcy and default it was saved by some foreign provider of finance, more often than not the IMF but on occasion also the US, Saudi Arabia and China. This has happened again with the IMF and the Friends of Pakistan coming to the country’s rescue. However, will the post-crisis period now be any different from those in the past?

The answer depends in part on how the funds provided by the donor community are deployed. There is the traditional way and then there is a new way, the latter based on Pakistan’s own experience with the use of donor assistance as well as the nature of the problems the country faces. The conventional way would be to put a significant amount of money directly into the budget in order for the country to bring its fiscal situation close to a sustainable level.

This is estimated by economists to be four to 4.5 per cent of GDP. To get there from the present seven per cent would need a significant amount of fiscal retrenchment that will hurt the public-sector development programme. The country cannot afford to go on that path. It urgently needs economic growth without which it will not be able to provide support to the marginalised segments of the population.

In addition the donors would like to put their money into social development plans since Pakistan has fallen way behind the countries at its level of development in terms of human development. This calculation led the World Bank a decade and a half ago to develop and finance a Social Action Programme, the SAP, which provided billion of dollars of donor money for primary education, basic healthcare and improvement in the social circumstances of women. These were all worthy causes but almost nothing was achieved by SAP. The bank persevered for more than a decade. It even moved its supervision function to Islamabad. But the results were pitiful. The donors are about to commit the same mistake again.

Why did SAP fail and will a similar initiative succeed? Pakistan has yet to create the institutional infrastructure that can efficiently implement SAP type programmes. What is required is a functioning system of local government that is accountable to the people it serves and represents. Pakistan has tried five different systems of local government in the past 60 years. Each one of these was abandoned for the reason that the political system was not prepared to countenance devolution of power to lower levels of government. Devolution is seen in a zero-sum context; if those who have power at the centre or in the provinces transfer some of it to local governments, the latter’s gain will mean the former’s loss. This is wrong, of course, since bringing the government closer to the people improves overall governance and everyone benefits.

The other reason why a SAP type of initiative will always fail is that the social, economic and political structures in which the poor find themselves trapped don’t allow them to benefit from social development programmes. They need to be in better command of their lives in order for such programmes to work. ¦

Predator Monday, May 11, 2009 02:01 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Cost of power outages to the economy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, May 11, 2009[/B]

THE second annual report of the Beaconhouse Institute of Public Policy offers a menu of options for the policymakers in Islamabad.
Joining me as the authors of the report titled ‘State of the Economy: Emerging from the Crises” are some of the more experienced policy analysts including Sartaj Aziz, Aisha Ghaus-Pasha, Parvez Hasan, Akmal Hussain, Shahid Kardar and Hafiz Pasha.

Here I will deal with one aspect of the analysis offered in the report.The year 2008 witnessed a major increase in the frequency and intensity of power load shedding or outages generally and in particular in the industrial sector. A manifestation of this problem can be seen in the large number of reports in the press of high incidence of outages and protests, by not only the domestic and commercial, but also industrial consumers.

During the course of the year, complaints by the various chambers of commerce and industry and other industrial associations that the level of production in a number of industries has been reduced due to the persistence of outages which apparently have fundamentally disturbed the normal rhythm of the production cycle in a large number of industrial units, especially in electricity-intensive sectors like textiles, non-metallic mineral products, basic metals, leather products, rubber and plastic products, paper and paper products, etc.

The economic costs of power outages in the industrial sector which ac counts for about 28 per cent of total power consumption is having a profoundly negative impact on the economy. The magnitude of cost is a basic indicator of the benefits that could be realised from investment and improved management of the power sector. Major factors contributing to increased power shortages include: growth in demand for electricity, particularly domestic demand fuelled in part by subsidised tariffs; inadequate policy response to the increased demand, reflected in the lack of expansion and upgradation of power plants and the low priority to public sector expenditure on the power sector; lack of improvement/upgradation by the IPPs, partly because of the uncertainty created by the ad hocism in the government’s privatisation policy earlier; overall mismanagement of the power sector, reflected both in the accumulation of over Rs370 billion of circular debt and the heavy line losses and large scale theft; and shortterm supply-demand imbalances due to the seasonality, in particular in hydro power generation.

Costs of outages consist of direct costs which primarily comprise the spoilage cost and net value of lost production and indirect costs incurred by firms to recover at least some of the output lost during and immediately after outages. The particular mechanisms chosen for recovering output lost, will, of course, be based on cost minimisation considerations. Typically, types of adjustments made by a firm include: acquiring self-generation capacity; more intensive utilisation of capacity; working overtime; working additional shifts, and; changing shift timings. A pattern of response by industrial units increasingly observed, is that of development of own sources of energy supply through investment in generators.

Some of the key parameters required to estimate the cost of loadshedding for this report have been collected through a survey of a predesigned and tested questionnaire on a purposive sample, stratified (by city and industry group) of 65 industrial units.

The survey reveals that the average annual hours of outages per unit was 1379 in 2008. The average duration per day was four hours and 36 minutes. The highest incidence of outages in 2008 was between the months of December and January and in June. Industries which have been affected more by outages are textiles, machinery and equipment, food, glass and allied products. Also, continuous-process industries appear to have been less exposed to outages than batch-making industries.

Time losses during the outage plus restart time account for were over 20 per cent of the total time of operation. About 84 per cent of the sample units did make an effort to recover part of the lost production time. The highest proportion, 75 per cent, have done so through self-generation of electricity. Wherever generators have been installed, the extent of substitution has been high, at 85 per cent of the normal power consumption.

Firms which do not have self-generation capacity, either because it is not economically feasible or affordable, have tried to recover some of the lost output through other adjustments identified earlier. However, their level of recovery of lost output is lower, at 29 per cent.

The recovery of lost output is at a higher cost. The average cost of selfgeneration is almost two and a half times more than the cost of acquiring electricity from power utilities. Therefore, the extra cost to the industrial sector due to self-generation of electricity is about Rs32 billion. This is also an indicator of the extent to which profitability of firms is lower because of load shedding. Also, since such firms recovered about 84 per cent of the output, the cost of output permanently lost is estimated at Rs42 billion.

Firms adjusting through other mechanisms also incur additional costs which include overtime/ shift/changing working days premia to labour, additional wear and tear of machinery and spoilage of raw material/inputs in process. These costs aggregated to Rs6 billion at the national level. For such firms, the cost of value added lost is Rs77 billion. Therefore, aggregate cost to the industrial sector of load-shedding is estimated at Rs157 billion. This is equivalent to nine per cent of the industrial value added. The loss of industrial output is estimated at seven per cent of potential production.

Over and above the direct costs on the industrial sector, a change in value added in the industrial sector has secondary or multiplier effects on the rest of the economy. Adjusting for these forward and backward linkages increases the overall costs of industrial load-shedding to the country by Rs53 billion. Overall, power loadshedding in the industrial sector has cost the country Rs210 billion or over two percent of the GDP, over $1 billion of export earnings and potential displacement of 400,000 workers. Costs could be even higher if impact on other sectors like agriculture and services are allowed for, which account for almost the same share in power consumption as industry.

Following are some of the recommendations we have made to deal with this situation. The high economic cost of unsupplied electricity justifies a case for expanding power generation capacity. In fact, there is a stronger case for upgrading existing power generation facilities, which can be accomplished at almost one-third the cost of new plants. This will require development and quick implementation of an accelerated generation investment programme, which includes the project to import 1000 MW electricity from Iran and a comprehensive programme to reduce technical losses and improve the reliability of the distribution system. Simultaneously, the enabling environment has to be improved so that IPPs investment plans can be encouraged and the problem of circular debt has to be resolved on a priority basis Such a strategy should focus on a loss-minimising policy. The load-shedding schedule should reflect clear and transparent priorities, in consultation with stakeholders, and be predictable. Sectors that deserve priority, in particular should include export industries. There is a strong case to develop and implement customer outreach programmes to encourage energy conservation measures, steps to improve the power factor, and methods of limiting peak demand. It is also important that alternative sources of energy, in particular solar energy be explored. Pakistan should enhance its capacity to follow international developments on alternative sources and promote greater use of renewable energy for light, heating, agriculture and smallscale enterprise.

Some of the policy recommendations enunciated above can be implemented immediately while others have a medium-term perspective, given the gestation period required for completion/execution of investments. But one thing is clear. This is a crisis that cannot wait for too long to be sorted. The cost to the economy and to the society are very high and their political consequences could be exceptionally grim.

Predator Wednesday, May 13, 2009 01:35 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]For a new transport policy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]Changes in society and the economy have created the demand for different modes of transport. The situation is highly dynamic and requires both analysis and action by policymakers.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, May 12, 2009[/B]

IT is always useful to reflect on history before planning for the future. I will illustrate this point today by using the case of the transport infrastructure. Three legacies must be recognised to deal with the situation as it exists today and for the adoption of a strategy that would serve the future.
The British, when they constructed the transport system in the area which is today’s Pakistan, had in view an entirely different set of objectives. They wanted the transport system to quickly move troops to the geographical areas that had caused trouble for them as they sought to consolidate their control over the northwestern part of their domain.

Railways were the best form of transport for this purpose. They could transport heavy equipment relatively cheaply to pass through geographical corridors that were not too difficult to protect. Initial costs would be high but so would the returns if the areas the railways reached could be made secure for British rule.

The second British strategic interest was to supply the food-deficit areas in the northeastern part of their Indian domain with the food it needed. These provinces had suffered a number of famines in the 19th century and had caused a heavy loss of life. The British, remembering the 1857 war, were always sensitive to security concerns. They did not want another uprising on their hands produced by hunger. Accordingly, they invested heavily in developing Punjab to produce food grains for the food-short provinces in the east.

They also invested in constructing a network of market towns that could accumulate the surpluses produced, and in building a road and railways network to transport the surplus from Punjab to the northeast. This part of the transport network connected the northwest to the northeast. It was much more extensive in the distance it covered. A railway organisation that went by the name of the North-Western Railway, the NWR, was the backbone of the system.

The third inheritance from British rule was the assumption that the population in what is Pakistan today had neither the wish nor the need to travel long distances. Most of the people lived on the land and if there was need to travel it was to the market towns or, at most, to the administrative centres. By putting in place a highly decentralised system of governance, the British administration reduced the need for travel to a distance of a few miles from the place of residence. These requirements could be easily satisfied by the use of animal-drawn carriages moving mostly on dirt roads.

As against this, the population of what was to become India after independence was relatively more mobile. Those who practised India’s many different faiths wished to perform pilgrimages to various holy sites. This meant that the state had to facilitate the movement of hundreds of thousands of people over long distances. Once again railways served the purpose with the difference that they had to cater not only to the movements of the goods and commodities but also a large number of people. Unlike the Pakistani system, the transport system that supported economic and social life in India was much more complex.

To these legacies, Pakistan added two im peratives of its own to develop the system of transport. The partition of British India resulted in one of the largest movement of people in human history. Within a period of a few months around mid August 1947, some 14 million people moved in and out of Pakistan. Eight million Muslims came from India to Pakistan and six million Hindus and Sikhs went in the opposite direction. Most of the people went on foot but a large number also moved by train. Once the migration was over, there was a dramatic change in the geographical distribution of population.

Before 1947, what is now Pakistan had only one urban pole — the well-appointed city of Lahore. Now there were two; the other, Karachi, having been chosen as the capital of the country, developed quickly and in four years overtook Lahore in size. Two large urban centres, with a combined population of about five million out of a total of 40 million, needed transport to ferry people back and forth.

This was the case especially since the new additions to Karachi’s population came not only from India but also from the northeastern and northwestern parts of the new state of Pakistan. Karachi needed workers to build new offices, to run its industry and to serve its rapidly growing population. A large number of them came from the northern areas of Punjab, from Azad Kashmir and from the NWFP. These people did not initially bring their families with them to Karachi; they commuted from the capital to the places of their origin. They used the railways for this purpose.

The second important change that had a bearing on the sector of transport was the dramatic reorientation in Pakistan’s trade that occurred soon after the country became independent. In 1949 India declared a trade war against Pakistan and the latter had to quickly find new trading partners to survive. With this change Karachi, the port, rather than Lahore, the railway hub, became the epicentre of trade and finance.

While Lahore was the main trading centre for decades before independence, it surrendered this place to Karachi after inde pendence. Commerce through Lahore was dominated by railways. Commerce centred on Karachi became multi-modal involving shipping and road haulage. Since a significant quantity of bulk imports and heavy machinery were needed by the rapidly growing industry in Karachi, haulage over short distances was better done on roads than by railways. At the same time, the main trading corridor pivoted from north to east (from the granaries of Punjab to food-deficit areas in Bengal and Bihar) to north to south (from Karachi to the Punjab). This was a major transformation with which Pakistan is still learning to cope.

Other changes in the economy and society affected the demand for different modes of transport. The capital was moved from Karachi to Islamabad. This created a new urban community with a different set of demands for transport. The two wars in Afghanistan — one in the 1980s, the other still going on — have created new logistics demands.

The current war requires road corridors for supplying American and Nato troops operating in Afghanistan. This demand by foreign troops is also bringing into being new types of transport firms. The situation in other words is a highly dynamic one, one that requires both analysis and action by those responsible for making public policy. ¦

Predator Monday, May 18, 2009 03:25 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Multiple costs of the war on militancy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 18 May, 2009[/B]

In this article, I will discuss the cost to Pakistan of the war on terror, a term used by then President Bush to describe the American effort to beat back the rising threat posed by ‘Islamic extremism.’

The term has been abandoned by the new American administration headed by President Barak Obama. This change goes beyond the use of language. Washington now believes that the antipathy felt by a segment of the Muslim society towards America and the West is the result neither of the envy of the success achieved by these societies nor because of the desire to insulate the Muslim populations from the influence of the western culture.

Instead the conflict has its roots in the loss of hope on the part of some of the Muslim youth in their own future. However, today I will not enlarge upon the motives that have prompted some people to take up arms not only against the West but also against their own governments. I will instead focus on the cost of the conflict for Pakistan.

Until recently, the focus on the ‘War on Terror’ was largely on highlighting the benefits to Pakistan in terms of increased support from the international community, especially the US. But increasingly there is a concern that the costs of participation are rising exponentially and leading to severe dislocation of economic activity and unacceptably high losses of life and property.

The costs can be classified into a number of categories, largely depending on their nature (direct and indirect) and on the time period examined (immediate, medium-term or long-term). Those costs that are short run are more clearly identifiable and potentially less difficult to measure. Estimates covering longer periods of time and focused mainly on indirect costs require numerous assumptions and hence are on less firm ground. The decision to participate in the ‘War on Terror’ did lead to a major outpouring of international support to Pakistan. In 2001 Pakistan was emerging from a tough stabilisation programme with the IMF which, in the process of reducing macroeconomic imbalances had, more or less, ‘suffocated’ the process of growth. Per capita income was stagnant and there was a substantial increase in unemployment and poverty.

Foreign exchange resources were scarce and at the beginning of FY 2001-02, foreign reserves stood at $3,231 million, enough only to finance three months of imports of goods and services. Participation in the war effort led to a substantial increase in the inflow of concessional assistance, especially in the form of grants from the US.

Since 2001-02 Pakistan has cumulatively received $12.2 billion funding from the US. This consisted primarily (almost 70 per cent), of reimbursement for the costs incurred by the military in counter-terrorism operations. Development and economic assistance has aggregated to $3.2 billion. The direct contribution to the growth process in the country was limited. However, the overall assistance, including the funding of military operations (mostly incurred in local currency), contributed to a rapid build-up in foreign exchange reserves.

Direct costs include the value of human lives lost or of injuries, the value of property or infrastructure destroyed or damaged, and costs of enhanced spending on security. Here, the major conceptual issue relates to the valuation of the human cost, either in terms of loss of life or of injuries.

In order to avoid controversy over any assumed value, we simply compute the cost as the (potential or actual) compensation due to affected families as per a prescribed government formula. Indirect costs are diverse in nature and include costs to local economies in the context of areas which are severely impacted by terrorism. In addition, due to the heightened sense of insecurity, loss of livelihood, and damage to shelter, terrorism may lead to internally displaced persons (IDPs) on whom costs will need to be incurred in the form of relief and rehabilitation.

Costs also include greater uncertainty and risk which relates to lost investment, both foreign and domestic, due to heightened risk perceptions, especially arising from ‘mega-attacks’ like the assassination of Benazir Bhutto and the bombing of Marriott Hotel. In addition, travel and tourism is likely to be adversely affected leading to decline in associated services by hotels, restaurants, tourist guides, transport operators, etc. Finally, an important category of costs relates to the higher costs of insurance premium for coverage against acts of terrorism.

Higher transaction costs are those costs which are associated with delays in the movement of goods and consignments. Firms may also incur costs of higher inventories to avoid the possibility of disruption in supplies. In addition, there are enhanced time costs, arising, for example, at airports due to greater security checks, immigration restrictions, etc.

If we look at the direct costs starting with the damage to human lives and property we focus only on the cost of compensation for loss of life or injury. Expenditure on security and defence was higher because of the need to place the armed forces at the western borders and for undertaking counter-terrorism operations, especially in the North. Another aspect of enhanced security is the development of private security arrangements. There was a mushroom growth in this service in recent years.

The total costs of fighting terrorism are high, estimated at Rs380 billion, at the 2007-08 base. The distributional consequences of these costs need to be highlighted. Higher security expenditures run the risk of ‘crowding out’ other expenditures related to the provision of basic social and economic services and thereby having an adverse impact, especially on the lower income groups.

The negative implications for the relatively poor include the loss of property and livelihoods in the affected areas which are among the most backward regions of the country, primarily as a consequence of dislocation of economic activity, including the labour-intensive sector of tourism. The human dimension is manifested most acutely not only in the loss of life but also in the emergence of large numbers of IDPs.

For the relatively well-off, the costs consist of foregone investment opportunities and decline in wealth associated with the fall in share values, due to heightened levels of risk and uncertainty. There are also higher costs to the corporate sector in the form of larger premium for insurance coverage and increased transaction costs.

A number of important conclusions can be drawn from the above analysis. First, as the incidence of terrorist acts and counter-terrorism operations has increased rapidly, the benefits of participation in the ‘War on Terror’ are falling while the costs are rising sharply.

In 2007-08, the inflow of concessional assistance from the US was about $1.9 billion, whereas the cost was three times higher at $6 billion. There was, therefore, substantial under-compensation for Pakistan’s participation in the ‘War on Terror.’

This, at least, partly explains the lack of some ownership of the war effort. The recent commitment by President Barak Obama that the US will pass a bill in Congress to authorise economic aid to Pakistan of $ 1.5 billion per year for the next five years, will raise the quantum of concessional assistance from the US but the level of support will still remain at less than half the cost of the ‘war.’

Second, the past experience with the utilisation of the concessional support is not very positive. From the viewpoint of achieving sustainable higher growth and promoting employment, especially for alleviating poverty, it is perhaps better if Pakistan is also given preferential access to markets, especially for textiles, in the US, EU and Japan.

While the proposal for Reconstruction Opportunity Zones (ROZs) in the affected areas, enjoying preferential access, is worthy of consideration, it is unlikely that in the short run much investment will be diverted to these areas despite the incentive given the prevailing situation. It is important that as an alternative fast-track concessional assistance is provided for public investments in infrastructure and basic services and employment-intensive public works in affected areas which are cleared up through military operations.

Finally, the higher direct costs being incurred on the military and police operations against counter-terrorism of almost Rs130 billion per annum and the concomitant increase in acts of terrorism, highlight the ineffectiveness of the current strategy being followed. There is need for a comprehensive review of the strategy, preceded by the development of a stronger political consensus and broad-based public commitment to participation in this war.

To conclude, the country is paying a heavy price for the delay in the effective resolution of these enormous challenges facing it. Potentially, GDP could have been higher by almost Rs590 billion if the problems of security and power shortage alone were not adversely impacting on the economy. The concomitant repercussions for exports, employment and poverty are also sizable. Any further inaction or inadequate/inappropriate policy action can further frustrate the country’s growth potential, which it can ill afford in these times of increasingly unfavorable global developments.

Predator Tuesday, May 19, 2009 01:34 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Learning from Iraq[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 19 May, 2009[/B]

A GREAT deal has been learnt about insurgency and counterinsurgency from America’s seven-year involvement in Iraq. More will now be learnt as the struggle between the forces representing the state and the Taliban intensifies.

Some of Iraq’s lessons will no doubt be applied to the conflict in Pakistan’s north and in the settled districts of the Malakand division. Let us start with what Iraq has taught us.

The first lesson concerns the use of force. The Americans went in convinced that the use of disproportionate force would deter opposition to their occupation of the country. They called it “shock and awe”. This involved the use of an extraordinary amount of firepower to impress not only the Iraqi armed forces. There was also the expectation that what America could throw at the opposition in terms of bombs and bullets would scare the people into submission. But the strategy didn’t work.

It was only in 2007 that Gen David Petraeus was able to change course and adopt an approach that was to reduce significantly the level of violence and bring relative peace to the country. Iraq has reached a point where the Americans have begun to disengage, political processes have begun to work, and the economy has begun to revive. What was the main difference between the earlier American way of dealing with the insurgency and the approach that has produced a degree of normalcy?

The main difference was that the Americans recognised that it is not fear but hope that would pacify an unhappy populace. The use of force had to be combined with investment in development and institution-building that gave hope to the people that they could expect something better for themselves and for their children.

Initially averse to nation-building, the latter was precisely what the Americans began to do in 2007. They began with what Gen Petraeus called the “surge”. This involved the dispatch of an additional fighting force to the country to add strength to the already large American presence in Iraq. Once the commanders were sure that they would have enough soldiers available to them, they would be able to give confidence to the local leaders that after their areas were cleared of insurgents, there would be a strong enough American presence to ensure that the miscreants did not return. This was the area in which the Americans had failed earlier.

They had earlier used a great deal of force to push back the insurgents from the province of Fallujah, one of the most troubled areas in Iraq. Dominated by fiercely independent Sunni tribes who resented the rise of the Shia leadership in the country, the tribal leaders looked the other way as the insurgents established their control in the area. However, the insurgents brought with them a culture and social norms that were alien to the people of the area and resentment built up as they introduced their values in the system of governance.

When the American push came, the locals watched the developing situation without taking sides. But the US left after scoring a victory over the insurgents. They said they couldn’t stay since they did not have the manpower to keep the place pacified. This was expected to be done by the Iraqis themselves. But Iraq was slow in developing its own security force. This is where the surge in the American presence made a difference.

Once the additional troops came, the locals developed confidence in the American willingness to do more than simply fight. The new troops came equipped with the training and the ability to provide the local population with the services and basic needs it needed. Once these came to be provided, the Americans were able to build alliances with the area’s tribal leaders who came over to the side of the government and lent their support to the counterinsurgency efforts.

The Pakistani Army has to learn the same lesson. It has not only to expel the insurgents who have been defying the state’s authority, it must also stay on in the area while local leaders re-establish control. As is now recognised by most people who have studied the situation in Swat, the Taliban initially won some support from the locals in connection with the legal system that replaced the one that operated before 1969 when the district along with Dir and Chitral were merged to form the administrative division of Malakand.

That was when the old princely states became a part of the province of the North West Frontier and adopted its governance system. With the merger came the established legal system, replacing the one that was based on the Sharia and tradition. The old system was quick in dispensing justice; the one that replaced it was slow, cumbersome and often corrupt.

The demand by some of the religious groups to reintroduce the old system resonated with the people and the Taliban climbed on the bandwagon. Once the state made the concession, the Taliban did not stop at that and they pressed forward putting in place other practices that had no tradition and were not sanctioned by the state or religion. They did not confine themselves to Swat; they began to push ahead and took over Buner and threatened other settled parts of the NWFP. The West became nervous. It was widely reported in the western press that the Taliban were only 60 miles from Islamabad; only the Margalla Hills were in their way before they took over the capital city. That, of course, was nonsense but it got Islamabad to take notice.

With the military operation now underway, those who are managing it must draw lessons from Iraq. Four of these are important. One, the military must go the entire way and rid the Pakistani territory of insurgency. Two, once the military has reoccupied the areas currently controlled by the insurgents it should only leave when the state has developed the capacity to provide security to the local people. Three, an intensive effort should then be launched to bring development to those areas, including programmes and projects aimed at improving women’s welfare. Women were targeted by the Taliban; the state must demonstrate that it has a different set of priorities. Four, a system of local government must then be developed based on tradition as well as the need to provide adequate representation to the people.

A great deal depends on how this phase of the conflict develops. The Taliban have posed an existential threat to the state of Pakistan. The state must respond fully and intelligently.

Predator Monday, May 25, 2009 12:50 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Reshaping the global economy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 25 May, 2009[/B]

THIS is a bad time for the world economy and an even worse time for the western financial system. But this is a good time for speculating about the future shape of the global economic system.

Some economic historians have identified catch up periods in the world economy when some of the national economies that had lagged behind joined the leader, some time even overtaking it.

In the 18th century France caught up with Britain, the country that had launched the industrial revolution. A quarter century later, Germany joined the two leading economies of Europe and became one of them. In the late 19th century it was the turn of the United States. It not only joined Europe’s leading economies but by the time of the start of the First World War it had overtaken most European economies in terms of the size of its economy and income per head of its population.

The 20th century saw more catch up periods. After the Second World War that saw the defeat and devastation of Germany and Japan, the Americans helped the defeated “axis powers” to recover. It did this by launching the Marshal Plan, an unusual response by the victor towards the countries it had defeated Not only did Japan recover, it joined the leading world economies in terms of the structure of economy and income per capita of its population. The pace and style of Japanese economic development caught the eyes of many academics, including Ezra Vogel, the sociologist at Harvard University who wrote a bestselling book titled Japan as Number One.

He saw the dynamism of the Japanese economy so impressive that it could, he thought, overtake the United States within the foreseeable future. Had that happened that would have been a spectacular case of an overtake. Japan with one-half of the US population would have had to double its income per head to overtake America.

The next period of closing the gap took place between 1975 and 1995 when a number of East Asian economies – the World Bank called them the “miracle economies” in a celebrated study of East Asia – achieved rates of economic growth unprecedented in economic history.

Within these two decades four East Asian states – South Korea, Taiwan, Hong Kong and Singapore – saw a remarkable transformation of their economies. Although they did not approach the income levels of Japan and the western economies, they became industrial powerhouses. Even though there was a brief interruption in their progress by what came to be called the Asian Financial Crisis of 1996-97, they resumed economic development at about the pace of the pre-crisis period.

Before the start of the global economic crisis in the summer of 2007, there was much speculation that a new group of “catch up” economies had appeared on the global economic scene. Brazil, Russia, India and China got their own name, the BRICs. They were likely to become major economic players.

Given the large sizes of their populations, some analysts believed that the centre of global economic activity would move to these countries. There was also a consensus emerging in academic circles that we were witnessing another significant change in the structure of the global economy.

“Decoupling” was occurring in the global economy and the BRICs, along with some other large emerging economies, would no longer be affected by the cycles to which the more developed economies were subject. That was not to be so.

As the crisis that began in the United States in the summer of 2007, when it reached other shores, it did not spare the BRICs or other parts of the globe. “The impact of the crisis will be particularly hard on emerging countries: the number of people in extreme poverty will rise, the size of the new middle class will fall and governments of some indebted emerging countries will surely default” wrote Martin Wolf, chief economics commentator of Financial Times for a special issue of the newspaper.

“Confidence in local and global elites, in the market and even in the possibility of material progress will weaken, with devastating social and political consequences. Helping emerging economies through a crisis for which most have no responsibility whatsoever is a necessity.” It is hard to accept this grim conclusion. Some countries in the emerging world will be hurt no doubt, and many of them need the as sistance of the international community. Several, however, will emerge stronger from this experience and continue to participate in the reshaping of the global economic structure. Among those that will benefit and thus lead are several Asian economies. To make this point it might be useful to briefly visit the changes that have occurred in economic thought in the last few decades, especially after the conclusion of the Second World War.

The last half century divides itself neatly into two periods – neat in the sense of the attention given by policymakers the world over for certain ideologies concerning economic management. Several influential world lead ers did not see the war as a triumph of the United States and its allies in Western Europe. They saw it as the victory of socialism and statism over the market place.

The remarkable economic growth of the Soviet Union and the growth of its military might were seen as vindication of the way it had managed its affairs. The admirers of the Soviet Union were not confined to the leaders of what came to be called the Third World – leaders such as Jawaharlal Nehru of India, Gamal Nasser of Egypt, Julius Nyrere of Tanzania, Kwame Nkrumah of Ghana and Soekarno of Indonesia.

Even in the victorious Britain, the voters sent home Winston Churchill and his Conservative party in favour of the Labour party and its leader Clement Attlee. The model these leaders favoured was that of the mixed economy. In John Maynard Keynes, they had their own philosopher for this approach. The man who gave the clearest substance to this line of thought in the Third World was India’s Nehru under whom the state was placed on the “commanding heights” of the economy.

A reaction set in to this approach with the election of Ronald Reagan in the United States in 1980 and the ascent to the British prime ministership of Margaret Thatcher the year before. Other events also contributed to the development of a new approach in which private enterprise was to be left alone to its own devices. These included the shift in China from the plan to the market under Deng Xiaoping and the dismantling of the ‘”licence raj” in India starting in 1991 under the stewardship of then finance minister Manmohan Singh.

“Government,” proclaimed Reagan, “was not the solution to the problem but itself a problem”. The man who gave real substance to this philosophy was Alan Greenspan who served for 18 years as the Chairman of the US Federal Reserve Bank, the country’s central bank.

The fervour with which this economic ideology was supported has been replaced by the fervour with which it is now being condemned.There is now consensus that the state has a large role to play in the management of the economy. Even if it is not placed on the economy’s commanding heights, it must watch over it with great care and diligence.

The countries that will do better in this respect are those that did not dismantle the state as an economic overseer and most of those are in the emerging world. For this reason alone, I find it hard to accept that the entire emerging world has been thrown back almost to the start of the economic race as a result of the economic crisis of 2007-10. Many in this part of the world will recover stronger than the weakened economies of the West.

Predator Tuesday, May 26, 2009 08:17 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Have we turned the corner?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 26 May, 2009[/B]

THERE are two — perhaps three — nation-building ideas that have been in conflict in South Asia since the British left the subcontinent in the late 1940s.

One was espoused by Jawaharlal Nehru, the first prime minister of India who governed the country for the first 17 years after independence in 1947.

This was that even in a country with such diversity as India it was possible to construct economic, political and social systems that would protect all citizens, not only those who constituted the majority. Sunil Khilnani, the Indian historian has called this the “idea of India”.

This idea, however, was rejected with some vehemence by Mohammad Ali Jinnah. He maintained that the land over which the British ruled was not inhabited by one Indian nation but by two — one Hindu and the other Muslim. Jinnah believed that each nation deserved its own political space within which it could order the lives of its citizens according to their religious beliefs and social norms. This came to be called the two-nation theory which became the basis for the creation of Pakistan as a homeland for the Muslims of British India. The American political scientist, Stephen Cohen has called this “the idea of Pakistan”.

However, some revisionist historians, in particular Ayesha Jalal, have suggested that Jinnah was not serious about the idea of Pakistan. His demand for the creation of a separate homeland for the Muslim community of British India was meant to obtain protection from the Hindu majority once India became independent. But the leaders of the Congress party granted him his wish and, in Jinnah’s own words, a “moth-eaten” Pakistan was born on August 14, 1947 a day before Indian gained independence.

But religion as a glue for nation-building turned out to be a weak device. The leaders of West Pakistan were reluctant to fully accommodate the wishes and aspirations of the citizens of East Pakistan. The result was considerable acrimony between the two leadership groups which eventually resulted in civil war. This led to the emergence of East Pakistan as an independent Bangladesh led by Sheikh Mujibur Rehman whose “six-point” formula for the grant of considerable autonomy to the eastern wing had not been not acceptable to the West Pakistani leaders. The six points were in fact the third nation-building idea to take hold in the South Asian mainland. According to this ethnicity and culture are powerful attributes of nationhood, even stronger than religion.These three ideas have contributed to the persistence of tensions in South Asia. These have been very strong in the case of Pakistan’s relations with India. It is not clear from Jinnah’s speeches and the few writings he left behind as to what were his precise intentions with respect to the role of religion in the state of Pakistan. He often spoke about the need to be guided by the teachings of Islam.

This was inevitable since he had used the idiom of religion to make his case for a separate homeland for the Muslims of South Asia. But it appears that he was inclined to lead the country towards a secular democracy, not too different from the one Nehru and his colleagues were able to enshrine in their country’s constitution. Adopted in 1951, the Indian constitution has proved to be a flexible instrument of governance. It has been amended scores of times to keep it current with the demands of a society that has seen rapid economic and social change.

For Pakistan, the case for keeping religion out of politics was weakened by the unanticipated transfer of population that occurred around the time India and Pakistan obtained independence. I have estimated in an earlier work using the censuses conducted by the two countries in 1951 that some 14 million people moved across the border in a few months in the summer and autumn of 1947. Eight million Muslims migrated from India to Pakistan while six million Hindus and Sikhs moved in the opposite direction.

By 1951, Pakistan had been ‘ethnically cleansed’ — a term that was not used then but gained currency when Yugoslavia fell apart in the early 1990s. For Pakistan the event was traumatic; when the country took its first census in 1951, 25 per cent of its population of 32 million was made up of refugees. What was not realised then but proved to be a political trauma in the long run was the ‘Muslimisation’ of Pakistan.

In the late 1940s non-Muslims in the areas that are today’s Pakistan constituted about a third of the population. Today the religious minorities account for less than five per cent. It was inevitable that with Muslims constituting such an overwhelming share of the population religion would become a greater force. However, it needn’t have bred religious extremism as it did starting in the late 1970s.

While the idea of India worked in India, it did not keep religion entirely out of politics. The BJP, one of the two national political parties in the country, traces its origin to the Rashtriya Swayamsevak Sangh, founded in 1925 to protect what were perceived to be the rights of the Hindu population in British India. The party gained ground in the 1990s by drawing upon the grievances of those who believed that the Indian state had given too much ground to the lower castes in the population and to the Muslim minority.

The party drew support in particular from the Hindus who had migrated from what was now Pakistan. L.K. Advani, the party’s leader in the elections of 2009, was born in Karachi and left for India at the age of 20. The party’s overt pursuit of Hindu interests led to the demolition of the Babri mosque at Ayodhya in the state of Uttar Pradesh. The mosque was supposed to have been built on the ground where Ram, one of the most venerated figures in Hindu mythology, was said to have been born. The assault on the mosque led to riots, in particular in the always restive city of Bombay. Thousands of people were killed, many of them Muslims.

The 2009 elections in India have confirmed the longevity of the “idea of India”. The Congress won handily against the BJP-led alliance as well as the alliance of regional parties that would have liked to see the further weakening of central authority. The decision by the elected government in Pakistan to send the military to chase out Islamic militants from Malakand in the north-eastern part of the country may have ushered in a process that could bring the country back towards religious moderation and political modernisation.

It would not be an exaggeration to suggest that the Indian elections in April-May 2009 and the action against Islamic extremists in Pakistan could cleanse the political systems in the two countries of religious influences. It will require leaders from both sides of the South Asian divide to take advantage of these events.

Predator Monday, June 01, 2009 01:06 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Regional integration for sustained ‘national’ growth[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 01 June, 2009[/B]

GLOBALISATION, the process that allowed relatively free movement of capital, trade and information across national frontiers was meant to create a new economic reality.

As the name given to these processes suggests, countries around the globe were expected to come together and begin to work as the constituents of one economic order.

As Thomas Friedman wrote in his bestselling book published in 2002, globalisation had produced a “flat world” in which capitalism had triumphed. After a struggle that lasted for several decades, capitalism won against socialism and communism as the most efficient and effective way for managing economic affairs.

That “globalisation” would reshape the world economy happened but only to a limited extent.This was for at least three reasons.

One, the world’s smaller nations found that they needed economic mass to deal with the countries that had a larger weight in the global economic system.

Two, capitalism may have triumphed but had a number of flaws of its own.These included not enough concern for the less advantaged countries in the world and for the world’ poor.

Three, multilateral institutions were needed to regulate global transactions that went beyond the flow of goods and commodities. This was particularly the case for financial transactions where national regulatory systems did not serve the purpose. Their absence led to the deep crisis of 2007-2010.

The first development that went counter to globalisation was the organisation of hundreds of arrangements involving a limited number of states. Some countries came together because of geographic proximity; some because they shared common history; and some because of shared culture and religion. Geography was the most common reason for the organisation of economic and trading arrangements. By the end of the 20th century, the global economy had acquired another layer by dividing itself into a number of economic trading blocs.

South Asia followed the trend. In 1986, seven countries of the region agreed to form the South Asian Association for Regional Cooperation, the Saarc. This was done at the urging of the then president of Bangladesh, General Zia ur Rahman. His government did a lot of preparatory work before the countries of the region could be persuaded to subscribe to the Saarc idea.

In 1980, the president wrote a letter to all the heads of state indicating why he believed that it was important for South Asia to have a formal arrangement for addressing common issues. He followed up his letter with visits to all the capitals. The countries of the region agreed but reluctantly. It took them six years to endorse the idea when they met in Dhaka in 1986 for the first Saarc.

President Zia ur Rahman wanted the Saarc to launch the process that would ultimately lead to the creation of a free trade area in South Asia. It took 18 years before this process could begin. It was at the Saarc summit in Islamabad held n January 2004 that it was agreed to begin work on the launching of the South Asia Free Trade Area, the Safta.

The Islamabad declaration was nothing more than the beginning of a process for the eventual creation of a free trade area. The first step towards this end was the ratification of the treaty by the member states. That took more time than originally envisaged. It was only on January 1, 2006 that the process towards creating a free trade area in South Asia was begun with the formal launch of the agreement.

I carried out a study for the US AID on the Safta in 2005-06. Washington’s interest in the matter was related to its desire to bring peace to South Asia that had been long torn by strife. As I will discuss a little later I had been active in a similar way in encouraging the South East Asian countries to create an institutional framework within which they could resolve their differences.

The main purpose of the study was to un derscore the benefits the smaller countries of South Asia could draw from the arrangement and why such an arrangement was beneficial for India, by far the largest economy in the area, as well.

The preparation of the study took me to five South Asian capitals – Colombo, Dhaka, New Delhi, Islamabad and Khatmandu. I also met with a number of senior leaders in the capitals I visited, including President Pervez Musharraf and Prime Ministers Manmohan Singh and Shaukat Aziz. The only places where I found some enthusiasm for the Saarc and Safta were Dhaka and Khatmandu; the former because these organisations were, after all, the result of a Bangladeshi initiative and the latter because it housed the Saarc secretariat.

What are the reasons why the Saarc and Safta as two ideas for regional cooperation have not worked? Are there lessons that the countries in the SAARC could draw from the experiences of other parts of the world, in particular from South East Asia?

Some answers to these questions can be found in the gradual and pragmatic development of the Association of South East Asian Nations, the ASEAN. This is now an organisation that includes ten countries; the original five – Indonesia, Malaysia, the Philippines, Singapore, and Thailand – and later, after the end of the war in Vietnam, three countries of Indochina – Cambodia, Laos, and Vietnam as well as Brunei. Myanmar was recently admitted mostly for geographical reasons.

Historians don’t agree as to the original motivation for the five founding members to associate themselves in a supra-national organisation. According to some, it was Bangkok that wished to form a broad coalition of nations in its neighbourhood in order to balance the American influence on the country. Thailand was an important part of the US effort to contain the spread of communism in the Asia.

According to some other, it was in fact the United States that was behind the move. It wanted the non-Communist countries of the region to work together to work out their differences and to present a slid front to block the advance of Communism. After all, the then Chinese president had, in 1965, urged the people of Asia to rise against their rulers and to bring the masses to power. There may not be a consensus among scholars as toe the motivation of the leaders that created the original ASEAN but there is agreement as to what it made it possible for the organisation to develop.

It was the attitude of Indonesia, the largest country in the association in terms of the size of the population as well as the size of the economy that made the organisation to become a an effective regional enterprise. While it was prepared to be treated as an equal, the smaller countries were, at the same time, prepared to treat Indonesia as the first among equals. There is lesson in this for India. While it is a more dominant economy in South Asia compared to Indonesia in South East Asia, it has to lower its profile in order to provide comfort to the region’s smaller countries. At the same time, the region’s smaller nations and economies have to treat India as by far the most prominent player.

The other important lesson to be drawn from the ASEAN experience is the pragmatic response of several generations of leaders that have guided its evolution over time.

The original agreement has spawned a number of other institutions and forums in response to the changes in the external economic and political environment in which the region has been operating. What was the political dynamics that motivated the member countries not only to remain involved but to engineer practical changes for making it more effective?

While the original motivation may have been political in terms of creating the conditions that would prevent the spread of Communism, that threat has disappeared. Now the member countries find that an association that transcends national interests and makes it easier to deal with the growing competition between two global powers, America and China.

Predator Tuesday, June 02, 2009 08:36 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Is South Asia emerging?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 02 Jun, 2009[/B]

IF by ‘emerging’ we mean a geographic entity — a state or a region — that has achieved political and social stability and economic dynamism then the term cannot be applied to South Asia. It can only be used for India.

Over the last five years, specifically from 2004 to 2007, the Indian economy finally shook off a sluggish past when the country did not run but lumbered on.

GDP grew at an average rate of close to nine per cent a year compared to just 3.5 per cent in the 40-year period after independence. Income per head of the population grew by more than seven per cent per annum and the incidence of poverty has declined. Some of the cities and states in the country are showing signs of prosperity. The size of the middle class increased significantly; some 200 million people perhaps fall in this category.

The middle class exerts its influence on many aspects of Indian life, with a taste for consumption creating a large market for luxury goods. Indian movies and writers have developed audiences and readers outside the country’s boundaries.

Foreign investors began to take notice of the country, looking at it as a market they could move into and also as a supplier of trained human resource in a world experiencing demographic declines in several places. Large quantities of foreign capital arrived in the country; some of these went into reserves which increased to an impressive level. In 1991 then Finance Minister Manmohan Singh had taken a load of gold with him to London and Tokyo to borrow money to keep the country afloat and save it from bankruptcy. That is now a distant nightmare.

The IT sector continues to show great strength, making a significant contribution to exports. Some other sectors of the economy have also developed remarkably well, among them the health services and pharmaceutical industry. India has become an important destination of what has come to be called “health tourism”.

But can this progress be sustained? The country faces many problems which will have to be faced and overcome before it achieves the status of an economic superpower.

In an issue giving significant space to the Indian elections recently, The Economist provided a revealing summary of some of the problems that remain. “India is a land of bright promise. It is also extremely poor,” it was stated in the lead article. “About 27 million Indians will be born this year. Unless things improve, almost two million of them will die before the next general election. Of the children who survive, more than 40 per cent will be physically stunted by malnutrition. Most will enrol in a school, but they cannot count on their teacher showing up. After five years of classes, less than 60 per cent will be able to read a short story and more than 60 per cent will be stumped by simple arithmetic.”

Nonetheless, the term “emerging” can be easily applied to India. It cannot be to the rest of South Asia. India at this time has a very troubled neighborhood. The most troubled country in the neighborhood is, of course, Pakistan. Its economy is in a freefall. The Economist in the issue cited above estimated a GDP growth rate of only 0.6 per cent for 2009 compared to five per cent for India. Pakistan’s political system is showing signs of life but has a long way to go before it can become stable. Most important, the country is faced with what its senior officials have called an “existential threat”.

Until recently, the leaders of Pakistan showed

a lack of resolve in terms of dealing with the threat Islamic extremists were posing to the country’s integrity as a state. Islamabad first endorsed an agreement entered into by the NWFP government with a group operating in Swat and then, when it became clear that the group had no intention of abiding by the terms of the agreement that called for its disarming, the political leadership ordered the military to launch an all-out offensive against the militants. In contrast to the Indian society’s outlook on its country’s future is the total loss of confidence by the people of Pakistan in their future

Let’s look at Sri Lanka. The government there celebrated in mid-May the triumph of its military over the Liberation Tigers of Tamil Eelam. The rebel leader Velupillai Prabhakaran was killed in the operation. His fight against the Sri Lankan state and his quest for an independent country for the Tamils took the lives of some 100,000 people. The victory scored by the military after nearly 30 years of struggle can bring stability but the administration of President Mahinda Rajapaksa remains controversial.

At a recent meeting of parliament in which he declared victory over the rebels, 20 opposition chairs in the 225-seat chamber remained empty. They belonged to the Tamil National Alliance, the largest group of parties representing the Tamil minority, elected in the north and east of the island. Without full reconciliation with those members of the Tamil community that are prepared to operate within the political system, Sri Lankans will achieve neither political stability nor sustained economic progress.

Proceeding northeast from Sri Lanka along the Indian border and arriving at Bangladesh, we get to a county that is also struggling to find its feet. There are prospects of positive change after the country was returned to the elected representatives of the people in last December’s elections. For two years Bangladesh had been governed by a caretaker administration that first attempted to factor out established mainstream parties from the political system only to work out an arrangement with them for the transfer of power. This was achieved in January when Sheikh Hasina Wajed returned as prime minister as the head of a coalition dominated by the Awami League.

Nepal is also struggling mightily to define itself after having shed the monarchial system of governance that had gone awry. However, it is finding the road ahead a rocky one. Reconciling various disparate elements in the country is proving to be a more difficult task than was originally anticipated.All this raises an important issue. Can India afford to keep aloof from the rest of South Asia or does it have to help the countries around its periphery to become stable? My strong belief is that the Indians would do well to pause and reflect on how South Asia in peace and stability would help India achieve the big-power status. Without that the country could stumble.

Predator Monday, June 08, 2009 03:08 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Trading ideas with neighbours[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, June 08, 2009[/B]

THE movement of goods and people across borders can be blocked by the use of administrative fiat. This is difficult to do in the case of ideas. This is also true for South Asia.
The region has erected all kinds of barriers to inhibit the movement of people and to discourage trade. This is not just the case for the way India and Pakistan have managed their joint borders.There is not as much trade among other countries of the region as the gravity model of trade will have us believe.

According to the model, trade is determined by two things: the mass of trading partners and the distance among them.The size of India and the fact that it shares borders with all countries of the region save Afghanistan and the Maldives, should have meant that India would be the dominant player in the pattern of international trade for the region.That has not happened; the gravity model has not worked for South Asia.

Politics and bureaucratic hurdles – and to some extent protectionist instincts of the policymakers – have come in the way. India should be the main destination of exports for the countries of the region and also the origin of a significant proportion of their imports. This is not the case for Bangladesh, Pakistan and Sri Lanka.

The only countries where this is true are the landlocked Bhutan and Nepal. For them trade links are the consequence of their geography not necessarily the product of public policy.

The South Asian countries, on the other hand, have looked across their borders and learnt a great deal from one another. Most of this learning was done by watching what was happening in other countries. There was little formal exchange of ideas by policymakers – even by think tanks. The forums from where such exchanges could have been exchanged simply did not exist. This was certainly the case with India and Pakistan.

There are some links between Bangladesh and India but even these are sporadic and relatively infrequent. There are no such links between, say, Pakistan and Bangladesh or between Pakistan and Sri Lanka.

In the domain of ideas, although India has been the main exporter, Bangladesh has also been fairly active. Pakistan also briefly played that role when, during the presidency of Field Marshal Ayub Khan, it had begun to be taken seriously as the model of economic success. This was the line taken by the experts drawn from the Harvard University’s Development Advisory Service who had helped with the development of the Pakistani approach to economic progress. Some of the books they wrote were read with a great deal of interest by the development community.

Pakistan, it appeared, had managed to find a cure to a disease that the Swedish economist Gunar Myrdal called the prevalence of the “soft state” in South Asia. This was the state that neither had the political will nor the bureaucratic competence to deal with the strong vested interests that were not keen to see structural changes take place in their societies.

Initially the main idea imported from India was that of the use of central planning to allocate capital among the users favoured by the state. Jawaharlal Nehru, the first Indian prime minister who remained in that position for 17 uninterrupted years, was enamored of the Soviet style of centralised planning.

He had bought the Soviet belief that the only way time could be compressed for converting an agrarian society into an industrialised one was by allowing the state to manage the economy. This was done by Moscow by nationalising all economic assets owned by the private sector. This included land agricultural as well as urban.

In borrowing the Soviet style centralised planning Nehru did not go that far; he did not nationalise private property. But he did put the Indian state on the “commanding heights of the economy”.

What the phrase meant was that the state had the right and the duty to control and guide the private sector – to determine how much it will invest, where will it invest, what and how much it would produce, how it will obtain the inputs required for production, and how would labour be compensated and what would be the conditions under which the workers would work. Thus was ushered in the “licence raj” in India.

What it actually meant for the Indian private sector was described in vivid detail by Gurucharan Das, one of the senior executives of a transnational corporation that had large operations in India. Das’s book appeared after the “raj” was dismantled by then finance minister Manmohan Singh.

Pakistan borrowed the idea of central planning from India and started work on the First Year Plan for the period 1955-60. The document could not be produced for the reason that politics got in the way. It was only in 1958 that the plan’s draft was produced but it was no longer consequential since the period covered by it was almost over.

However, the military government that was in power at that time empowered the Planning Commission to begin serious work on the Second Five Year Plan for the period 1960-65. This was done and the plan began to be vigorously implemented.

It was a great success in terms of producing an unprecedented rate of growth in the economy. Although the idea of centralised planning came from India, the strategy that Pakistan adopted was not Indian in origin. In Pakistan, the government wished to focus on igniting growth in the economy and placing its faith in the “trickle down effect” for helping the less advantaged segments of the society.

There was a different set of objectives in India. There the constitution obliged the planners to focus on the poor. The constitution had directed “the ownership and control of the material resources [should be] as best serve the common good” and that “the operation of the economic system does not result in the concentration of wealth and means of production to the common predicament.” There were no such constraints on the Pakistani planners.

The government headed by Ayub Khan also bought some aspects of the licensing system from India but it was less vigorous than the one the Indians had operated. Pakistan allowed much greater space to the private sector than the Indians did.

It was only after Zulfikar Ali Bhutto assumed power that the private sector came to be tightly regulated. Bhutto in that sense was a “Nehruvian”. But he went a step further. Nehru had eschewed nationalisation as a way of increasing the presence of the state in the economy, preferring to do it by expanding investment in industry by the public sector. Bhutto, on the other hand, resorted to wholesale takeover of private assets by the government. The two-year nationalisation spree by the government in 1972-74 changed in a fundamental way the structure of the economy.

In the early 1990s, both India and Pakistan changed the way they looked at the state as a player in the economic field. Both adopted a series of measures to reduce the presence of the state in the economy.

In that respect, the policymakers did not borrow from each other but followed what was being advocated by development economists working in a number of Washington-based institutions.

Some of the members of the Manmohan Singh team that instituted reforms in India had worked at the World Bank and had participated in the development of the thinking that came to be known as The Washington Conesus. Later, in the early 2000s there was a significant amount of borrowing from India by the government of President Pervez Musharraf as it gave even more space to the private sector.

The conclusion is clear. While the South Asians may not have traded much with one another, they have been quite active in learning from each other’s experiences. If this were to be recognised explicitly it could perhaps help to improve cooperation in other fields as well.

Predator Tuesday, June 09, 2009 12:52 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]A welcome change[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]With the Swat operation, Islamabad may have initiated a major change in its worldview. But, to succeed, there must be similar changes in the thinking in Washington and New Delhi.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, June 09, 2009[/B]

HE decision by the government to send the military to chase out the Islamic militants from Malakand may have ushered in a process that can bring the country back to the path of religious mod eration and political modernisa tion. The move represents a major change for the army.

According to one analysis, “the coming weeks are a reckoning for Pakistan’s army. …The … force — long primed for another war against the regional rival India — is now fighting an internal conflict”.

Maj-Gen Athar Abbas, head of the army’s public affairs division, was interviewed by the Financial Times in which he indicated the change in focus in the military’s thinking. If this persists — and there is good reason to believe that it would — it would have enor mous consequences for the country’s rela tions with India and, consequently, for the future of South Asia.

“An existential threat in terms of our internal security has grown over time. It needs our attention and an urgent response,” he told the correspondents of the British newspaper. The thinking is changing but the army is aware of the dangers that are involved. “But we have to be very care ful as we are operating against our own people in their own area. We have to separate the militants from the tribes. We can afford to fight the militants; we cannot afford to fight the tribes,” he continued.

The operation is proceeding at the time of this writing and it is taking a heavy human toll. The UN official responsible for looking after “internally displaced persons” has suggested that the displacement of people by the military’s action in the valley of Swat and in the districts surrounding it has reached proportions last seen in the Rwanda conflict in 1994. Relief agencies were warning that the number of refugees is not likely to stabilise while fighting continues. Soon after the exodus of refugees began from Swat, the UN estimated that the country required half a billion dollars to provide relief to the displaced people. A donors’ conference pledged about half that amount. Last month, the US announced an emergency assistance package for $110m.

“President Obama is determined to match our words with our actions because Pakistan’s government is leading the fight against extremists that threaten their country and our collective security,” said Secretary of State Hillary Clinton in a statement issued to accompany the announcement for the aid package.

This assistance from the United States along with that to be provided by other donors will certainly help Pakistan deal with this extraordinary situation. That said three things need to be underscored in this context. One, Pakistan has experienced a large displacement of people in the past. It received eight million refugees from India soon after the partition of British India and the birth of Pakistan. It hosted three to four million refugees that left Afghanistan and sought refuge in the areas on the Pakistani side of the border.

An earthquake in October 2005 in Pakistan’s north produced another flow of two to 2.5 million refugees. All these were near catastrophic situations, but all of them the government was able to deal with and from all of them flowed political, social and economic consequences that were not antici pated when these displacements occurred. There is no doubt that the Swat displacement will also have similar consequences. What is important is that there is a consensus in the country that this is a price worth paying for dealing with an existential threat to Pakistan posed by the rise of Islamic extremism.

The second area of concern is the nature of America’s deeper involvement in what the current set of American policymakers have begun to call the Af-Pak area. From the sixyear long engagement in Iraq, the Americans are developing a new counter-insurgency approach for this part of the world. That involves considerable focus on winning the hearts and minds of the people who are economically and socially very backward. They need focus on human and physical development — work which will involve not only the provision of funds but also technical knowhow and institution-building.

The Obama administration seems keen to move in that direction but by using unmanned aircrafts — the drones — to hunt and eliminate suspected terrorists, it is produc ing collateral damage. David Kilcullen, who has written on the subject of counter-insurgency after having experiencing it firsthand in Southeast Asia while working for the Australian military, sees serious problems with the use of the drones as a weapon of choice. On a recent visit to Pakistan, he was told that 17 militants had been killed by the drone attacks while 700 civilians also died. He called a two per cent hit ratio “not moral”.

Also the use of air muscle reminds the people of this area of the atrocities committed during colonial times. According to the historian Priya Satia, “Only a permanent end to the strategy will win the Pakistani hearts and minds back to their government and to its US ally. They, like Afghans and Iraqis, are less struck by the strategy’s futuristic qualities than by its uncanny echo to the past: aerial counter-insurgency was invented in precisely these two regions — Iraq and the PakistanAfghan borderland in the 1920s by the British. In the memory of [the] colonial and political dynamics of … aerial strategy in the region Pakistanis see the drones as ‘post-colonial’.” The third concern is even trickier than the first one. It is my belief that the rise of Islamic extremism and militancy is one of those areas that call for a regional solution. But calling the region ‘Af-Pak’ does not do full justice to the regional aspect of the problem. The Obama administration’s instincts were correct when the terms of reference it issued for the appointment of Richard Holbrooke as a special representative to the region implicitly included India.

This led to protests from New Delhi and expressions of considerable satisfaction by Indian officialdom and think-tank community when that reference was removed. But the Indian involvement in dealing with the matter is critical not only because that country has suffered from several acts of terrorism, most recently in Mumbai in November 2008, that can be traced to some terrorist groups operating on Pakistani soil . India also needs to ensure that the countries on its periphery are economically, politically and socially stable. Only then would the rise of extremism in the area be checked.

With the beginning of the Swat operation, Islamabad may have initiated a significant change in its worldview. However, for the effort to succeed, there must be similar changes in the thinking in other capitals, particularly Washington and New Delhi. ¦

Predator Tuesday, June 16, 2009 09:36 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Transition to a new world economic order[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]Resource issues will gain prominence on the international agenda. Unpre- cedented global economic growth – pos- itive in so many other regards – will continue to put pressure on a number of highly strategic resources, including energy, food and water[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Monday, June 15, 2009[/B]

FUTURE is notoriously hard to predict but attempts continue to be made. It would be useful for Pakistan’s policymakers to recognise what the current thinking is in some influential quarters about the shape of things to come.
The recent and most authoritative view of the future has come from the United States intelligence community, according to which the world is becoming multipolar but in a different way. In November 2008, the United States Intelligence Council presented its view of the world in 2025 in Global Trends.

“By examining a small number of variables that we judge will probably have a disproportionate influence on future events and possibilities, the study seeks to help readers to recognise signposts indicating where events are headed and identify opportunities of policy intervention to change or lock in the trajectories of specific events”, says the report.

According to it, the international system will be almost unrecognisable by 2025 owing to the rise of emerging powers, a globalising economy, an historic transfer of relative wealth and economic power from the West to the East, and the growing influence of non-state actors. The report accepts the notion that by that time the inter national system will have several poles of economic activity with the United States declining in relative strength.

Historically multipolar systems have been less stable than those that were dominated by one power as was the system since the collapse of the Soviet Union in 1991. What will be the new centres of economic power and how they will interact with one another?

“Growth projections for Brazil, Russia, India and China indicate they will collectively match the original G7 share of the global GDP by 2040-2050” says the report. However, the BRICs are not likely to work as a cohesive group as did the G7 to a considerable extent under the leadership of the United States. One reason why this group will be unstable is that there will not be one leader in the pack, recognised as such, by other members. This is what the United States-dominated G7 did for that group.

One of the important changes likely to take place in the next couple of decades is the replacement of the AngloSaxon model of capitalism with state capitalism that has already produced some remarkable results for the miracle economies of East Asia. State capitalism is a loose term used to describe a system of economic management that gives a prominent role to the state.

There is a possibility that this model of economic management will also be adopted by some of the developed countries that came under heavy eco nomic stress as a result of the very limited role that was assigned to the state when Reaganism and Thatcherism held sway. These two almost identical ideologies lost favour when the global economy went into a deep recession starting in 2007.

The report recognises the impact of demographic change on the relative economic strength of the world’s large economies. “Europe and Japan will continue to far outdistance the emerging powers of China and India, but they will struggle to maintain robust growth rates because the size of their working age populations will decrease.

The US will be a partial exception to the aging populations in the developed world because it will experience higher birth rates and more immigration”. However, in my view, the impact on the shape of things to come as a result of a number of unexpected demographic changes will be more profound than the report recognises.

Given the steep increase in commodity prices – in particular the price of oil – when the report was being researched upon, the authors place shortages of resources at the centre of their analysis of the future.

“Resource issues will gain prominence on the international agenda. Unprecedented global economic growth – positive in so many other re gards – will continue to put pressure on a number of highly strategic resources, including energy, food and water, and demand is projected to outstrip easily available supplies over the next decade or so…As a result of this and other factors, the world will be in the midst of a fundamental energy transition away from oil toward natural gas, coal and other alternatives.” Among the alternatives wind and chemical power seem to hold the most promise. However, this won’t be the first time that the global economic system would be making such a transition. Such transitions occur about every hundred years or so. Each transition produced a new economic order. The industrial revolution saw the transition from wood to coal and thus to steam power as the source of energy. The ability to produce electricity and transmit it over long distances contributed to the rise of the United States as a leading global economic power. The current transition will also shake up the global economic order.

Energy is not the only resource that has come under pressure. Water is another. “Lack of access to stable supplies of water is reaching critical proportions, particularly for agricultural purposes, and the problem will worsen because of rapid urbanization worldwide and the roughly 1.2 billion persons to be added over the next 20 years. Today experts consider 21 countries, with a combined population of about 600 million to be either cropland or freshwater scarce. Owing to continuing population growth, 36 countries, with about 1.4 billion people, are projected to fall into this category by 2025.” This includes Pakistan.

Understandably the report also included climate change as a cause for global restructuring since its consequences will be spread unevenly across the globe. The Bush administration’s skepticism not withstanding, a consensus has been reached among economists as well as scientists that climate change is real. A number of reports have been issued including the one authored by Lord Nicholas Stern on Britain who developed estimates of both the cost of not taking action to arrest global warming as well as the benefits if such actions were taken.The intelligence community gave this matter the attention it deserves.

“Climate change is expected to exacerbate resource scarcities. Although the impact will vary by region, a number of regions will begin to suffer harmful effects, particularly water scarcity and loss of agricultural production.” Climate change will add to the growing food problem; the prospect of regional shortages was real. The World Bank had estimated that demand for food will rise by 50 per cent by 2030 as a result of growing world population, rising affluence, and the shift to Western dietary preferences by a larger middle class.” This also happening in Pakistan.

In the view of the intelligence agencies, future global conflicts would be the result of the pressure on scarce resources because of the shifting pattern of demand for a variety of goods and commodities and not because of ideological differences.

The threat posed by Islamic extremism was downplayed by the report even though “in the absence of employment opportunities and legal means for political expression, conditions will be ripe for disaffection, growing radicalism and possible recruit ment of youths into terrorist groups…In those countries that are likely to struggle with youth bulges and weak economic underpinnings – such as Pakistan, Afghanistan, Nigeria, and Yemen – the radical Salafi trend of Islam is likely to gain traction.” But even then, some of the countries most affected by the rise of Islamic extremism seem to be tiring of it. Those that had large middle classes such as Pakistan and Egypt were anxious to shake off this legacy and join the global economy and the evolving global governance system as responsible players.

In light of all this how was the world likely to structure itself? It seemed unlikely that a big and cohesive world order would emerge and would be centred around the emerging centres of economic power.

“Greater Asian regionalism – possible by 2025 – would have global implications, sparking or reinforcing a trend toward three trade and financial clusters that could become quasi –blocs with the ability to achieve World Trade Organisation (WTO) agreements. Regional clusters could compete in setting trans-regional product standards for information technology, biotechnology, nanotechnology, intellectual property rights, and other aspects of the ‘new economy’. On the other hand, an absence of regional cooperation could help spur competition among China, India, and Japan over resources as such as energy.”

Predator Tuesday, June 16, 2009 09:39 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Cases of state failure in Asia[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 16 Jun, 2009[/B]

EAST Asia, China and India are some examples that demonstrate the successful development of political institutions that created a functioning and effective state.

Without a reasonably efficient state, these three parts of Asia would not have written the narratives of economic success. But right next to these successful examples of statecraft are those of the failure or near-failure of the state.

The most glaring example of state failure is Afghanistan which has not been able to put together a political system that can help the state perform some of its basic functions. These include ensuring security of life and property, protecting territory from foreign intrusion and meeting the people’s basic needs. Some of those who have studied the country suggest that it was never really a functioning state but a collection of autonomous regions in which the central authority was allowed only a very limited amount of authority.

Some external powers tried to impose order on this highly fragmented political system. The Soviet Union attempted it in the 1980s but ended up suffering a major military defeat and withdrawing from the country. This was also the intention of the US after it invaded the country in 2001. However, President Barack Obama, after assuming the American presidency this year, indicated that his administration would follow a very limited agenda in Afghanistan. It would not attempt nation-building and only aim at the total defeat of Al Qaeda.

While the failure of the state is complete in Afghanistan, in a number of other places in South Asia the state is trying to find a firm footing. In Pakistan, both the nation and the state are still struggling to be born. Pakistan’s failure to create a nation based on religion has not worked. I explored this theme in some of my earlier writings. Mohammad Ali Jinnah’s two-nation theory on the basis of which Pakistan was created as a separate homeland for the Muslim community of British India was tested within a few years of the founding of the state.

Less than a quarter century after the birth of Pakistan, the country’s eastern wing parted company and became the independent state of Bangladesh. What was left of Pakistan was at least geographically contiguous but even then a nation and a state were not created. This was in part because the Pakistani people found it difficult to find a basis for nationhood. This is an interesting phenomenon deserving of both deep analysis and explanation.

If Pakistan was founded on the basis of an unworkable proposition it is not unique among the world’s 200 or so states. Many of them exist as a result of a colonial legacy; for them the colonial rulers simply drew lines on the map which cut across well-defined ethnic communities and cultures. One reason why Pakistan still cannot be declared a success is that having been created on the basis of an idea — that the people belonging to one religious identity should have their own political space — it was required to demonstrate that the idea was workable. Israel, the only other country created on a similar idea, is also going through a similar struggle.

A strong Pakistani state could have brought stability to the country. Pakistan could have followed the East Asian model of creating a nation on the basis of a fulfilled promise to deliver economic benefits to the citizenry. This was done not only in the miracle economies of East Asia but also in China. The Chinese leadership is always anxious to keep the economy expanding at a rapid rate so that the rewards of growth are available if not to all segments of the population then at least to most of them.

The pursuit of economic growth as a nation-building objective was followed explicitly by President Ayub Khan in the 1960s and by Pervez Musharraf implicitly in the early 2000s. In his autobiography, published after a decade of rule, Pakistan’s first military ruler indicated that his main reason for throwing out the civilians was their failure to adequately develop the economy. This conclusion was also reached by several prominent development economists of the day, in particular Gunnar Myrdal of Sweden.

In his seminal work, The Asian Drama, Myrdal developed the concept of the “soft state”. This, he thought, was the state that did not have the will or the political muscle to bring about structural changes in the economy and the society without which sustained economic development could not take place. The countries in South Asia had such soft states. They were under the influence of vested interests that did not permit the structural transformation of these countries. Ayub Khan drew comfort from such findings by prominent academicians. They gave him and his form of government — he called it “basic democracy” — legitimacy.

President Pervez Musharraf also wrote his biography when he was confident that his rule had brought economic growth and stability to the country. Both Ayub Khan and Musharraf lost power two years after the publication of their autobiographies. The obvious conclusion is not that military rulers should not write their memoirs. What their separate experiences demonstrate is that high rates of economic growth cannot be sustained unless two requirements are met.

One, the working of the state must draw strength from institutions that will remain in place over time. These institutions need not be based in democratic structures. They can be part of the semi-democratic (or semi-authoritarian) structures as was the case in all the four miracle economies of Asia or as is the case in China. But they must have a reasonable life span. Two, the system must permit the citizenry a voice in it. As the economist Albert O. Hirschman pointed out in one of his important works on development, not allowed a voice those who are unhappy will either exit the system or bring it down. Popular discontent brought down the two leaders, the first by street agitation, the second through the poll process.

Bangladesh is the third example of the weakness of the state and its consequences for sustainable economic progress. Although the country has done reasonably well, there is considerable uncertainty about the future. Some Bangladeshi analysts suggest that the country has still to come to terms with its identity: is it a state created on the basis of ethnicity and culture or on the basis of religion?

There are obvious problems with both suggestions. If the common element is ethnicity then there are a lot of Bengalis living outside the country, especially in the Indian state of West Bengal. If religion is the common element, then why did the country seek separation from Pakistan? The state in South Asia — India being an exception — is still in a formative stage. Much depends on its ability to develop if the region is going to be an economic success.

Predator Monday, June 22, 2009 12:54 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Demographic change and windows of opportunity[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 22 Jun, 2009[/B]

ECONOMISTS have yet to fully recognise the impact demographic changes play in economic development – both retarding or promoting it.
If population has figured in their work, it has done so mostly as an inhibitor rather than a promoter of growth. This was the focus of much attention in the earlier phase of development thinking when high rates of population growth were seen as hurting the prospects of many developing countries.

In the early post-World War II period, as health and hygiene improved in developing countries, there was an immediate impact on the rate of population increase. Mortality rates declined rapidly. In India (which has better statistics than most other developing countries), the death rate fell from 42 per thousand per 1000 at the start of the century to 15 by the early 1970s. There were similar changes in other parts of South Asia.

For decades, this decline was not compensated by reductions in the rate of fertility. There was a belief among many economists that the strong male preference and high rates of infant mortality was the reason why parents chose to have large families. In most developing countries, parents wish to have at least two sons to survive to adulthood and that meant having six to eight children. But the families didn’t seem to notice that decline in the rates of mortality had increased the probability of survival of boys. Inertia and hard-to-break habits made them opt for large families.With the families not reacting on their own, there was a broad consensus that the state had to intervene to reduce family size.

Population explosion became a great worry for development economists in the “60’s and ‘70’s. Governments – in particular those in the crowded South Asia – were encouraged to adopt family planning programmes. The World Bank created a new department to aid this effort in the developing world. Many countries took the advice offered by the bank and other development institutions.

In the mid-sixties, President Ayub Khan ignored the objections of the religious parties and launched an ambitious Family Planning Programme and appointed Enver Adil, a civil servant known for his energy and dynamism, to head the effort. Foreign assistance came pouring into the programme.

It is hard to say whether these programmes worked or whether the de clines in the rates of fertility happened because of other factors. Be that it may, there have been significant declines in the rates of fertility in the developing world including the countries of South Asia. Fertility will continue to decline but at different rates in different parts of the region. In South Asia, the process began in Sri Lanka several decades ago. It started in India in the 1980s, in particular in the states in the south of the country where the level of human development was relatively high, the rates of economic growth were better than in other parts of the country, and that had high rates of emigration. It started in Bangladesh at about the same time as India but for different reasons.

The rapid development of the garments industry resulted in the improvement of the social and economic status of women. Women entered the workforce, had sources of income not dependent on their husbands or fathers and also began to look for opportunities to acquire education. Husbands no longer had the decisive say in determining the size of the family. The move towards fertility decline has also begun in Pakistan. The trend became perceptible in the early 2000s but still has a way to go before Pakistan catches up with other coun tries in the South Asian region. Fertility rates are still high in Afghanistan, a trend seen in other countries experiencing conflict. For obvious reasons a feeling of insecurity leads families to seek larger sizes.

One important consequence of this declining trend in the rates of fertility is that it will create a window of opportunity that will last a few decades during which the number of active workers would far outnumber those who are dependent on them. During this time, the states don’t need to carry the burden of caring for those who can’t be looked after by the working members of the families. The accompanying Table provides estimates of the duration during which the window will remain open. Since the decline in the rates of fertility are slower than other countries that have gone through the same kind of transition, periods of opportunity available to the South Asians are much longer. For India, it will remain open for 60 years--1975 to about 2035-- when the number of people reaching the working age will begin to decline.

Using the same methodology as applied by the World Bank for determining the time over which the windows will remain open for Pakistan, it appears that the duration for the country will be 50 years.The window opened in 1995 and will not close until 2045.

Could Pakistan, using this window of opportunity, build a future for itself and create some space in the evolving global economy by concentrating on the development of, say, modern serv ices? Countries with large and young populations have a comparative advantage in this area of economic activity. Another set of numbers helps us to answer this question.This is on the median age of the population. Pakistan has by far the youngest population of all large countries. As population growth rates increase, the median age of the population – meaning the age at which the number of young is the same as the number of older people – begins to decline. This is what has happened in Pakistan. The median age in 1950 was 24.2 years. By 1990 it had dropped to only 18.2 years, a decline of five years.

The population had become much younger. The median age in 1990 was almost three years less than that of India which was 21.1 years and almost the same as that of Bangladesh which was 18.2 years. The rapid demographic transition that has occurred in some parts of South Asia, saw significant increases in the median age. Between 1990 and 2005, it increased by 1.8 years in Pakistan, by two years in India and by an impressive 4.4 years in Bangladesh.

If the changing character of the economies of today’s rich countries is any guide, much of the future growth in the global economy will come from services. These are labour intensive to produce and provide, and some of the more modern ones need highly developed skills.

Both the state and the private sector will need to invest in the youth to draw the most benefit from the widows of demographic opportunity that have opened up in recent years in many countries. Those that have serious resource constraints – as is the case in Pakistan – the private sector will need to play a more active role.

But the state needs to take the lead in factoring this development into the making of public policy. As the Planning Commission turns its attention towards the preparation of another development plan, it would do well to use this window as an opportunity to bring growth back to the economy and to alleviate poverty and improve the distribution of incomes.


Predator Tuesday, June 23, 2009 07:48 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Budget in tough times[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 23 Jun, 2009[/B]

THESE are extremely difficult times for Pakistan. It is not only the challenge thrown at the state by Islamic extremists that has caused so much anxiety inside and outside the country.

Many people that have influence in shaping world politics have called this challenge an “existential threat” for the country, with high-ranking US officials issuing the warning that unless Islamabad realises the enormity of the threat extremism poses to the very existence of the country, Pakistan could simply unravel.

There is certainly some exaggeration in this assessment; it was made, most probably, to draw the attention of policymakers in Islamabad. It seems to have served that purpose. Last month the military was ordered into Swat and it seems to have taken the area back from the extremists. The armed forces have now been told to go after the leadership of the Taliban.

There is a reason why I have begun this article on the budget with a reference to the ongoing struggle between the state and non-state actors and why I said that extremism is not the only problem the country faces. There is also the problem of an economy that has suffered perhaps the most severe shock in the country’s history.

The budget is supposed to address that situation and bring the economy back to health — or at least set the stage for its recovery. In an earlier article in this space a few weeks ago I had suggested that the gross domestic product is not likely to grow by more than 2.5 per cent in 2008-09, half the rate that was then predicted by the government. Now the government’s own estimate is that the rate of GDP growth will be only two per cent. I am recalling this in order to underscore an important way in which downturns grip economies. When a decline occurs it usually takes the economy down fast. This is precisely what has happened in Pakistan. When the final numbers for 2008-09 are posted, I will not be surprised if the GDP growth is even lower than the one indicated in the Pakistan Economic Survey 2008-09, released a few days before Hina Rabbani Khar made the budget speech in the National Assembly. In fact, the economy may not show any increase at all.

Reviving the economy, therefore, is an urgent task for the government. If it succeeds, this will aid its efforts against extremism. If it fails it will only drive more young people towards extremist causes. This is one reason why the two struggles — against extremism and economic stagnation — are tied so closely together. Failure of one will lead to the failure of the other.

Although Ms Khar in her speech tried to draw some cheer from an otherwise cheerless situation, it was a sombre message she communicated to her audience. What she thought should bring comfort to those who were desperate to see Pakistan modernise rather than be shoved back into the Middle Ages was the fact that she was the first woman in the country’s history to present the budget in an Assembly presided over by the first-ever woman to serve as speaker. “These are important milestones in our quest for women empowerment and gender equality,” she told the Assembly.

Does the budget reveal a strategy aimed at economic revival? I believe given the grim situation the country is confronted with, the government has done a credible job of focusing on the right areas. I can identify six of them, two of which I will discuss today and the others later.
First, the government has pointed out to the people the enormous cost to the economy of continuing terrorism. This should certainly help in building support for the action by the army. According to Ms Khar, the cost to the economy is of the order of $35bn since 2001-02, an average of $6bn a year. And it is increasing. “We have to meet the maintenance and rehabilitation costs of almost 2.5 million brothers, sisters and children displaced as a result of the insurgency,” she said.

The government has allocated $6.25bn for “relief, rehabilitation, reconstruction and security” as part of its relief effort. This is equivalent to 3.4 per cent of GDP. Adding that to the cost of terrorism means that the fight against extremism is costing the country 6.7 per cent of GDP. Commitments from its own resources notwithstanding, the government is banking on receiving a fairly generous amount of assistance from the international community. The message from Islamabad, in other words, is clear. The war against terrorism is not just Pakistan’s war. It is a war being fought on Pakistani territory on behalf of the world. The country is prepared to sacrifice but it is incumbent upon its many friends to be generous in providing financial assistance. The country did not need foreign soldiers but foreign aid.

This indeed was the second message of the speech. Pakistan recognised that it had not done enough to raise domestic resources for investment and growth. “In the outgoing year we were only able to attain tax revenues equivalent to nine per cent of our GDP,” said Ms Khar. A number of actions were indicated that would be taken to remedy the situation but that would take time. Read any speech by a Pakistani finance minister over the last two to three decades and one can find many references to the need to increase the tax base and reform the tax collection system. Many development agencies have written reports on how the tax-to-GDP ratio could be improved.

None of this has worked. The trend continues to be downward which means that growth in the economy depends upon the ability to raise resources from outside the country. This is what has produced a roller-coaster ride for the economy. The economy does reasonably well when large amounts of external flows are available. The growth plunges when external savings decline. The fact that this time around the rate of increase in GDP has declined significantly despite the flow of large amounts of foreign money is even more worrying.

Some simple arithmetic would illustrate Pakistan’s dependence on foreign flows. If the war against terrorism is costing the country 6.7 per cent of GDP and if the expenditure on one of the programmes aimed at caring for the poor — the Benazir Income Support Programme — is to cost 0.6 per cent of GDP, then not much is left with the government — only 2.3 per cent of GDP —– even if it raises the tax-to-GDP ratio to 9.6 per cent. The situation, in other words, is grim from the perspective of government finance.

Predator Monday, June 29, 2009 01:12 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Rethinking about foreign trade[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 29 Jun, 2009[/B]

THE current economic crisis shows no sign of easing. It has demonstrated a number of structural flaws in the economy. Two of these are significant and they are related to each other.
The first is the excessive dependence of the economy on foreign capital flows and the other is an export sector that lacks dynamism in the sense that it has concentrated on the selling of the products that don’t have a growing demand in the international market place. The latter flaw has led to the first.

If there was a dynamic export sector it would be able to pay for the imports it needs through exports. That has not happened and is still not happening. Consequently, the country continues to run large balance of payments deficits which require whoever occupies the seat of power in Islamabad to go to the donor community for financial support.

Another consequence of this way of running the economy is to make Pakistan extraordinarily susceptible to foreign influences in managing the country’s external affairs. The conclusion that one reaches after making these observations is clear: a way must be found to increase the exports.

How this could be done will become apparent once one views the structure of international trade. There are a number of problems with the basic structure. The first one is the concentration of exports in a few product groups. At the product level, using the fourdigit classification in trade statistics, we see that 45 products account for 83 per cent of exports with 10 products representing more than one-half. Lack of product diversity is always a problem. It is a greater problem if the concentration of the products is in the areas in which there is not much scope for increased demand or in which there is intense competition.

In Pakistan’s case, basic textiles and cheap garments account for about one-half of total exports with food and leather products adding another 10 and four per cent respectively. (See table.) As a recent World Bank paper puts it, while textile and engineering account for six per cent and 60 per cent of global trade respectively, their share of Pakistan’s exports is in reverse proportions, 55 per cent and less than two per cent respectively.

That said, there have been some positive developments even within these product groups. Pakistan was once a major cotton exporter and a large exporter of cotton yarn. It is now using a significant amount of the domestic production of these two items in its own industry. The share of textile exports fell from 68 per cent in 2003-04 to 55 per cent in 2007-08. At the same time, shares of manufactures increased from 16 to 20 per cent.

The direction of exports is also concentrated. The United States is the largest importer of Pakistani products. In 2008, its imports accounted for 19 per cent of Pakistan’s total exports. Most of the US purchases are of textile products although, because of the rising incomes of the Pakistani diaspora in America exports to what are referred to as the ethnic markets are picking up.

The direction of Pakistani exports flies in the face of the “gravity model of trade,” according to which the mass of the trading partners and their distance from the concerned country are the two most important determinants of the quantum of exchange. Applying this model to Pakistan would suggest that India and China should be the largest trading partners for the country, not the distant United States. The burden of history has a great deal to do with the small amount of trade between India and Pakistan.

When the two countries achieved independence in 1947, the areas that became today’s Pakistan had India buying 60 per cent of the total exports and was the source of more than 50 per cent of imports. That changed suddenly because of the trade war between the two countries in the late 1950s. The structure of the Pakistani economy would have been very different had the relations between the two countries not deteriorated to the point that they ended up fight ing two major wars – in 1965 and 1971 – and near-wars in recent years.

How could Pakistan tackle its precarious resource situation and in dealing with it how could it use the export sector to provide the resources the economy needs? This is a big question which will take more than a newspaper article to answer. Nonetheless, some of the critical issues that need to be handled can be easily identified. Today, I will focus on three of these. First is the role of the state.

Although the state has been involved in the making of trade policy, it has not been as actively engaged in trade promotion as was the case, say, in East Asia. Promotion of trade requires a number of activities including identification of the products in which the country has advantage, providing details about the potential markets for the products, developing technological support for the production and development of the products, facilitating access to finance for private entrepreneurs who may be interested in producing the product lines, and keeping watch over the international markets for the demand in the product lines being promoted.

Some of these initiatives were taken by some agencies established by the government, including the Export Promotion Board, but without the benefit of a detailed strategy. Much of the emphasis in the past was on tax incentives of various kinds offered to the export sector. These have created serious distortions in the allocation of resources and is one reason why the textile sector has failed to include high value added items to the list of its exports. The present government has decided not to issue annual trade policies but to work on a more comprehensive and multi-year framework for developing international trade. This is a move in the right direction.

The second important area needing government attention is the promotion of regional trade, in particular trade with the large neighbours. Pakistan has treaties in place to promote trade with China and India. In the case of the former, it has concluded a free trade agreement but it appears that it has not helped a great deal in promoting Pakistani exports to that country.

In the case of India, Pakistan is a member of the South Asia Free Trade Area, the SAFTA, which has done little to promote trade among the member countries. Neither Pakistan nor India – South Asia’s two largest economies – seem committed to using the SAFTA framework for increasing intra-regional trade.

Pakistan seems much more focused in developing the markets in Europe and North America for its traditional exports while India is keen on working out an arrangement with the countries in Southeast Asia. Thus distracted they seem much less interested in their immediate neighbourhoods.

The third area for government attention is what experts call, “trade facilitation”. The argument for this is that the steady declines in the rates of tariff mean that duties on imports and exports have lost their significance in promoting (or retarding) trade. There is much to be gained by turning attention to facilitating trade. This includes such activities as improving infrastructure, handling of trade at the borders, computerising the handling of custom documents, studying what causes delays at the borders and removing or lowering the obstacles.

There are several other issues that need to be addressed. The important point to make here is that the government needs to attend the question of expanding trade in a comprehensive fashion and in a way that results in the adoption of a long-term approach. Discontinuities that are inherent in the issuance of annual trade policies don’t help to develop a steady approach towards trade promotion.

Predator Tuesday, June 30, 2009 08:31 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Caring for the poor[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 30 Jun, 2009[/B]

HOW should Pakistan care for its poor whose number is increasing at an alarming rate? With very little GDP growth in 2008-09, there may not be any increase in income per head of the population.

We know from the empirical work done at some development institutions that the GDP must increase at a rate equal to twice the rate of increase of population for the incidence of poverty to remain unchanged. For the incidence to decline, GDP increase has to be higher, perhaps as much as three times the rate of population growth. It needs to be even higher when income distribution is inequitable, as is the case in Pakistan.

For Pakistan this translates into a growth rate of six to seven per cent a year. The economy is failing in this respect. This means that the dismal performance of the economy in 2008-09 must have added to the number of people living in poverty. The incidence may have increased from 50 million to 55 million.

As was indicated in the budget for 2009-10, only a small increase in GDP is likely in 2009-10 and for a couple of years after that. If these estimates hold, there will be a further growth in the number of poor, perhaps by 10 per cent a year. This rate of increase is more than five times the increase in population which means that the proportion of poor in the population will increase significantly.

The increase will be even higher in the less developed parts of the country. This is clearly an untenable situation, which could have severe political and social consequences. A rising incidence of poverty means a higher rate of unemployment, particularly in the country’s large cities.

In Pakistan’s case, there is a very young population — the median age now is 18.2 years. This means a very large number of young people are without productive jobs. The problem Pakistan faces today has two dimensions. The state needs to assist the poor to meet their basic needs. And it needs to engage the youth in productive work. How does the government plan to address the problem? An answer was provided in the budget. Islamabad is adding additional resources to a number of programmes aimed at alleviating poverty as well as providing relief to the poor.

Much of the effort will be focused on a relatively new mechanism created by the present government and called the Benazir Income Support Programme (BISP). Under this, the government is providing direct cash transfers to the poor.

This is in keeping with the approach developed in institutions such as the World Bank that favour cash payments rather than subsidies directed at the poor. Development institutions have learnt through experience that subsidies, more often than not, don’t reach the intended beneficiaries. In countries such as Pakistan, where the state is weak, there are enormous leakages in such programmes. Cash transfers can be better monitored.

The component of “conditional cash transfers” is being added to the BISP, I suspect at the urging of the World Bank that has tried this approach in several countries in the Middle East that have fallen behind the rest of the developing world in terms of human development. The idea is to provide cash to families in return for taking action such as sending girls to school; keeping children in school for periods that are long enough not only for them to learn to read and write but also to make them responsible

citizens; and immunising children against communicable diseases. There is one additional advantage to adopting this approach. It encourages people to use the private sector for obtaining some of the services on which cash flows are conditioned. In this the burden is not placed on the public sector which is very weak in countries such as Pakistan.

Some of this has already begun to happen. Over the last couple of decades, the private sector has become actively involved in the sectors of education and health which were previously the concerns of the state. While much of this is being done for profit, there is also the active involvement of the non-government sector in education and health.

Even when the private sector is doing this for generating incomes for itself, it is not targeting its activities at the relatively well-to-do. Since the poor even in the vey poor areas are prepared to pay for health and education, the private sector is bringing services to them. The conditional cash programme the government is now including in its on-going efforts will provide the poor additional income to spend on these services. This will encourage further private enterprise in the social sectors.

The government is making a very large commitment to the BISP. “During fiscal year 2008-09, Rs22bn was distributed to 1.8 million families,” said Ms Hina Rabbani Khar, state minister for finance, in the budget speech. “During fiscal year 2009-10, it is proposed to increase the allocation to BISP to Rs70bn ...this would constitute more than a 200 per cent increase … and five million families would benefit.” Each eligible family would receive, on average, Rs14,000 of cash in 2009-10. This is 14.5 per cent more than the Rs12,222 provided in the previous year.

As is the experience in other parts of the world where such programmes have been tried — they are popular in Latin America and the Middle East — care needs to be taken to ensure that money reaches the right pockets. A number of targeting mechanisms have been tried and some of them have worked.

Those that have succeeded are based on good information about the poor. This is done by building what are called ‘poverty maps’ based on censuses and household surveys. The government seems to be moving in that direction. According to Ms Khar, “a census would be completed within three months in 16 districts of Pakistan as a pilot to benchmark incomes. This would be extended to the entire country within the calendar year. The Benazir Income Support cards would serve as vehicles of transparent management and addressing the needs of the vulnerable.”

The government has also indicated the willingness to commit resources to public works programmes in both rural and urban areas in order to provide temporary relief to the urban unemployed. These programmes work well when there is good oversight. In Pakistan’s case this could be provided by the local government institutions.

All these are palliatives, however. The real solution to the poverty problem lies in getting the poor engaged productively in the economy as wage earners and that will need both a high rate of GDP growth as well as the development of labour-intensive sectors of the economy.

Predator Monday, July 06, 2009 02:54 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Setting priorities for industrialisation[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 06 Jul, 2009[/B]

THIS may be a good time to reflect on some of the basic assumptions that have governed the making of public policy with respect to industrialisation.
It is now recognised by economists and policy analysts that industrialisation – its pace, scope and content – responds to public policy.

This is one reason why Islamabad, working closely with the private sector, should carefully define the content of public policy in order to determine the direction the country should take. The focus should be on three aspects of structural change in the sector of industry. As industrialisation gathers pace, what should industries produce?

Where should industries be located; should industrialisation be used to lift the more backward regions of the country as was attempted during the period of President Ayub Khan (1958-69) or should the question of location be left to the private sector?

And, where should the products of industrialisation be sold? The last question leads to another issue: how much emphasis should be placed on export promotion as an objective of industrialiation?

Economists have also begun to recognise that since countries have different histories and different structural characteristics, appropriate policies will differ and evolve differently. There is no one-side-fits all public policy approach to industrialisation.

In Pakistan’s case, the initial direction of industrialisation was influenced by the trade war with India that broke out in 1949 over the issue of the rate of exchange between the currencies of the two countries. For legitimate reasons, Pakistan had refused to devalue its currency with respect to the dollar, a step that was taken by all countries of the British Commonwealth.

That changed the rate of exchange between the two currencies from parity to 144 Indian rupees for 100 Pakistani rupees. This was not acceptable to India. When trade with India stopped, Pakistan was forced to industrialise quickly by emphasising the production of basic manufactures.

Since the Pakistani state at that time was weak and was short of funds, it relied on private initiative to lead the industrialisation drive. This had a profound consequence for the development of the structure of the industrial sector. Unlike India, Pakistan focused on consumer industries and on private initiative while India put the public sector on the commanding heights of the economy and invested heavily in heavy industries.

The other significant historical influence on the industrial development was the decision by the administration of President Ayub Khan to spread the ownership of industrial assets by using the government’s licensing mechanism for inviting new comers and by encouraging them to locate the sanctioned units in the underdeveloped areas. This approach checked the growth of Karachi as the country’s industrial hub.

This policy also had a profound consequence for the structure of industry, particularly of textiles. By sanctioning new units of no more than 12,500 spindles, the country developed an industry that did not have the scale to become competitive. It also restricted most weaving activities to cottage industries.

The structural consequences of Prime Minister Zulfikar Ali Bhutto’s nationalisation of large-scale industries are another historical fact that needs to be factored into the understanding of the character of the Pakistani industrial structure.

With this as the background, we will begin to find answers to the questions posed above. Analytical work done at the UNIDO has established a strong relationship between industrial sophistication, structural change and growth.

According to the institution’s latest World Industrial Report, “research findings confirm that diversifying and moving up the production sophistication ladder in industry are important drivers of development.” But sophistication need not imply the production of a large number of final products in a number of different sub-sectors. With the changes in the international industrial structure that have resulted from the remarkable development of information and communication technologies, the production process has been decomposed into a series of tasks which can be apportioned according to the comparative advantage of various production centres.

For countries such as Pakistan that have missed out in the initial phase of industrialisation that produced a number of economic miracles, particularly in Asia, it may be more appropriate to concentrate on building a task based industrial economy.

Researchers who have studied the development of this approach to industrialisation and compared them to structures that produce total products, the conclusion reached is that the concentration on tasks is no less sophisticated than the one where industries concentrate on start-tofinish production.

That is said even when an entire product is produced in one location – men’s shirts in Bangladesh for instance – there is still some reliance on imports. The garment producers, for instance, buy buttons from China which are most probably produced in Qiaotou, often called the button capital of the world. The world is moving rapidly towards greater integration of industrial processes.

The next issue is of location. Manufacturing industries and service activities tend to concentrate in geographic areas, often in or close to major cities. According to UNIDO, “the economic literature on high and middle income countries provides persuasive evidence of the existence of agglomeration economies…industrial agglomeration is also important for developing countries. Productivity is higher if manufacturing firms cluster together.” Cluster economics has become an important subject of study ever since the pioneering work done by Michael Porter of Harvard University. Pakistan has some examples of clusters whose development was not induced by public policy but by organic growth. Sialkot, the home of sports goods and surgical industries, is one example of a cluster. Gujranwala (electric motors and electric fans), Gujarat (furniture), Peshawar (fruit processing) and Kasur (leather) are some other. Qiaotao, China’s (and the world’s) button capital is the most intensively analysed case of a cluster.

As indicated, the development of clusters in Pakistan was not the outcome of public policy directed at them. It happened naturally. For the government to help the industries located in the clusters, it will need to provide help to upgrade technology, provide market information, and also introduce them to new sources of finance such as private equity and venture capital funds. The most important contribution the state could make is in the area of knowledge development.

Some of the more successful clusters in the developed world are located in close proximity to the institutions of higher learning. It was the close-at-hand presence of Stanford University and the Berkeley Campus of the University of California that resulted in the development of the software industry in the Silicon Valley. Given the close proximity of Sialkot, Gujranawala and Gujrat, the government could work with the private sector to locate a school of engineering somewhere in the area.

The third question concerns the link between export and industrial development. Both macro evidence as well as the evidence gathered from individual case studies suggest a strong association between the two. Trade in manufactures has continued to grow much more rapidly than manufacturing output. And the share of developing countries has increased. Their manufacture exports increased from $1.4 trillion in 2000 to $2.5 trillion in 2005.

The growth in the trade in tasks was even more impressive. In the period 1986-1990, imported intermediary products accounted for 12 per cent of the world’ manufacturing output and 26 per cent of total intermediate imports. By 2000, these figures had risen to 18 and 44 per cent respectively. By 2009, more than one-half of the intermediate products going into final production are imported. The proportion is much larger for East Asia. The conclusion is clear. Pakistan by focusing on tasks rather than the production of final products will not lose out on the rewards of industrialisation even if it has been delayed.

The need for sophistication brings together the three factors we have discussed above. There is plenty of evidence to show that the countries that have done well economically have left behind low-sophistication export sectors and entered into more sophisticated ones. Slow growers either stayed in the same place or have moved in the opposite direction. The challenge faced by the policy makers is clear: they need to move the industrial sector towards sophistication. In Pakistan’s case the sophistication will be in developing tasks rather than final products.

Predator Tuesday, July 07, 2009 08:31 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]America’s new reach[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 07 Jul, 2009[/B]

AMERICA’S sometimes on and sometimes off relationship with Pakistan is set to change. This is likely to happen in three significant ways.

The legislations that have worked their way through the two chambers of the US Congress will place the structure of America-Pakistan relations on new foundations. The roller-coaster ride should end and greater certainty should be introduced in the way Washington conducts business with Islamabad.

The bills that have cleared the House of Representatives and the Senate promise a long-term US commitment to Pakistan. The house version has a five-year time horizon during which assistance will be provided at an annual rate of $1.5bn. In the Senate version the commitment is for the same annual amount but the time frame is open-ended. The two bills will be reconciled by a conference committee that will be established by the two chambers.

The second significant departure from past practices is the clear division — each with its own set objectives — between economic and military aid. More conditions will be attached to the former; far fewer to the latter. In fact the Senate version of the bill is practically conditions-free while the bill passed by the house has several conditions attached to the timing of disbursements as well as their amounts.

The house bill reflects the work of the various lobbies that have an interest in the outcome. The most active one in this respect is the Indian lobby, made up of non-resident Indians, the NRIs. This lobby has emerged as a well-organised and well-financed endeavour that seeks to advance the perceived interests of the homeland. This lobby worked effectively in getting Congress to support the administration of President George W. Bush on the nuclear agreement it signed with the Congress party government headed by Prime Minister Manmohan Singh. I will return to the role played by the diasporas in the American political system a little later in this article.

The third important difference between this approach and those followed in earlier periods is that the negotiations are with a civilian government in Pakistan rather than with an administration dominated by the military. The three previous periods of large US involvement with Pakistan was when the military was in charge of politics. This was the case during the periods of Ayub Khan (1958-69), Ziaul Haq (1977-88) and Pervez Musharraf (1999-2008) when large amounts of American assistance flowed into the country. A significant proportion of this was used for military purposes. It will be different this time.

Neither of the two bills will actually spend the money; they authorise the maximum spending limit and also specify key purposes and conditions of that spending. The actual spending levels and possible further conditions will be determined by the relevant sub-committees of the appropriations committee in each of the two chambers and the final appropriations bill. It is the sub-committee process that will be subjected to a great deal of pressure by the interested lobbies active on the Hill.

The Senate version of the bill has the support of the White House. In its original formulation, it was signed on by then Senators Barack Obama, Joe Biden and Hillary Clinton. It passed the Senate by a unanimous vote, a relatively rare occurrence in the American legislative process. The house bill

was approved by a narrow margin, reflecting the fact that some of the representatives more subject to the pressures from their constituents were not convinced about the form and scope of the aid that was being offered to Pakistan by the US.

The Senate version would triple non-military aid to Pakistan to $1.5bn a year as a long-term pledge to the people of Pakistan. The title given to the bill — the Enhanced Partnership with Pakistan Act of 2009 — reflects the overall objectives of the senators. The bill authorises $7.5bn over the next five years (2009-13) and clearly de-links military from non-military aid.

In the past, security assistance overshadowed development aid. The Pakistani military could bypass civilian authorities to focus resources provided on its own institutional development. Rather than locking in a level now for military aid which might not be in line with rapidly changing Pakistani capabilities and commitment, the bill buys flexibility for the US administration by leaving the quantum and content of military support to be determined on a year-by-year basis.

The final shape of US assistance to Pakistan will be determined by the political process in which ethnic lobbies will play an important role. It is therefore appropriate to discuss the political roles of the various South Asian diasporas in the US.

South Asia now has a large number of people living and working in several parts of the world. Formed over several decades, these diasporas now have about 40 million people, 23 million from India and 16 million divided almost evenly between Bangladesh and Pakistan.

Given the size of the diasporas and their economic strength, it is not surprising that they have begun to exert their political weight. The Indians have a considerable political presence in all the continents of the world, while the Pakistani community is better organised in the US. It is in that country that the economic presence of the Pakistani community is considerable. Numbering about a million people in Canada and the US, immigrants from Pakistan have a combined income of $50bn, a savings rate of $10bn a year and economic assets of about half a trillion dollars.

Some of this income and some of these assets are being put to use for both economic and political purposes. There are some two and half times as many NRIs as the Pakistani community. Their assets and incomes are proportionately larger. Unfortunately the two diasporas often clash as they seek to influence US politics. This has happened in particular with reference to the US approach towards Kashmir and is now happening in the case of American assistance to Pakistan.

It is important for the two diasporas to recognise that aid to Pakistan legislation as drafted by the Senate is in the interest of both countries since it focuses on the economic and social development of the country. The main US purpose as reflected in the draft bill is to contain the spread of extremism in Pakistan. That should also be the Indian concern.

Predator Monday, July 13, 2009 02:03 PM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Industrialisation — ensuring level playing field[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, July 13, 2009[/B]

THE Planning Commission may have to look at a number of issues as it begins to focus on providing the country with an industrial sector that meet its needs. To begin with, what kind of direction and help should the state provide to the industrial sector in the light of developments taking place in the global economy and the evolution of the world’s industrial production system?
In its most recent report, the UNIDO has indicated that concentration on “tasks” rather than on the production of final products provides better opportunities to the countries such as Pakistan that have been left behind in the process of industrialisation. By “tasks,” the UNIDO is referring to the assistance in producing the final products rather than the products themselves. If there is some substance in this advice how should Pakistan go about it?

In focusing on the future structure of the industrial sector, policy makers must bear in mind the competitive pressures under which the country is operating. Of these none is more important than the competition emanating from China. Trade with China is an area of enormous interest for Pakistani businesses. Some have concerns while some others see opportunities. The conclusion is obvious: the dynamics of this trade needs to be studied carefully by the public and private sector working together and recommending policy actions for the state. By focusing on tasks, policy makers could achieve better integration between the Chinese and Pakistani industrial systems.

Businesses in Pakistan also believe that an important aspect of the trade policy is the PakistanAfghanistan Transit Trade Agreement. While providing Kabul with an outlet to the sea is important, the agreement should not create opportunities for enormous leakages that have occurred in the past and continue to occur at present. The modalities of this trade needs to be determined in a way that Pakistan’s economic interests are protected.

Large businesses feel that the growth of the black economy is hurting development of the industrial economy. There is an urgent need to develop a level playing field for enterprises of various sizes. At the moment, small enterprises, by avoiding to pay taxes and by avoiding a number of fairly stringent regulations, have increased their market share in the local market place at the expense of large firms. The large producers find it difficult to compete with SMEs.

The SMES can also deal with energy and water shortages by making under-the-table payments to officials responsible for providing these services. While the development of the SME sector is vital for the country’s economic future it should add to the overall efficiency of the economy. Operating in an uneven field reduces the economy’s efficiency. How can a level playing field be produced for all businesses?

One way of doing it is to review laws and regulations that are in place. Such a review will reveal that many of them are no longer needed; the purpose for putting them on the books was to realise a particular goal or solve a certain problem. For instance, the Agricultural Marketing Acts in the provinces were originally written to protect the Muslim peasantry and small landholders from the non-Muslim shopkeepers. They have lost their original purpose but they remain on the books. A review done jointly with the private sector would indicate that many laws and regulations only create rent seeking opportunities for the regulators. They serve no particular economic or social interest.

Taxation and revenue generation is one particular area where a great deal of cleansing of laws and regulations needs to be done. As was recognised in the recent budget speech, it is of vital importance for increasing the tax to GDP ratio. Many among the private sector feel that the regulations in place should be carefully studied by a joint working group of officials and private sector people.

It is also important to develop international trade as an important determinant of efficient industrialisation. There is an anti-export bias in the traditional approach to policy making.This is another area where the private sector could work with the govern ment to; (a) identify changes in policies that would create a pro-export orientation and, (b) identify the institutions that need to be improved or established to realise the government’s objectives.

Businesses are deeply concerned about the state of physical infrastructure which has lagged behind the development of the economy and does not meet the needs of a trading nation. They have taken cognisance of the fact that India, having lagged behind Pakistan in developing its highway system, is rapidly catching up. Indians have developed an ambitious programme for developing a national highway system closely involving the private sector. The users will be required to pay for the facilities they use. The private sector should be asked by the government to present it with the contours of an action plan that would involve it in the development of this vital sector of the economy including the prospect of raising additional resources for investment in the sector.

Belonging to the sector of infrastructure but demanding a separate treatment is shipping, an area in which a decent beginning was made in the 1960s but has allowed the industry to run it down.

Absence of appropriate shipping facilities imposes enormous burdens on exporters, adding significantly to costs. How could this situation be remedied?

The businesses recognise that Pakistan has not given the sector of agriculture the attention it deserves. Properly developed, agriculture could be a major source of exports, not only of grain and other low value- added products. Pakistan could carve out a decent space for itself in processed foods. But this will need investment by the state in infrastructure (cold chains, for instance), technology to increase productivity as well as the quality of products, finance and market advice. Once again, the public and private sectors could be partners.

Given the serious shortages that have developed in recent years in supply of energy, the government needs to develop a well thoughtout strategy to ensure that supply keeps up with demand. It is clear that the gap between supply and demand cannot be closed by the government alone making investment from public funds. There has to be a partnership between the public and private sectors.

Pakistan has seriously lagged behind developing the technological base of the economy. There was eloquent talk in the Planning Commission’s Vision 2030 statement about providing the economy a strong technological foundation. That goal is still searching for an operational answer. What kind of strategy is needed and how could the private sector support it? Should the development of e-government be given more attention than it has received and whether egovernment could serve as the catalyst for advancing the pace of technological development?

Predator Tuesday, July 14, 2009 09:23 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The Pakhtun conundrum[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 14 Jul, 2009[/B]

[B]IT[/B] was not empty talk — pure electioneering, as many believed — when Barack Obama declared that he would treat Afghanistan differently if he were to win the election and become America’s next president. He had rejected his predecessor’s approach.

For George W. Bush, the war in Afghanistan was a sideshow; for him the real war was in Iraq. His administration had only limited goals in Afghanistan. After having quickly overrun the country in the fall and winter of 2001, and placed Hamid Karzai as the liberated country’s president, the administration thought the job was done. The main objective then was to keep Karzai in place in the hope that the Afghan president would be able to create an environment in which a limited number of western troops would be able to keep the Taliban at bay.

For some time the strategy seemed to work and Afghanistan — at least compared to Iraq — was in relative peace. There were bombings, killings and kidnappings but these were seen as the products of a violent society learning to adjust to a different way of living and a different way of being governed. The economy began to revive with GDP increasing at double-digit rates. The Afghans once again began to trade with the world outside their borders. The long-standing transit arrangement with Pakistan began to work once again as the traditional route that connected the landlocked country through Karachi with the outside world was revived. The term normal has always been difficult to apply to Afghanistan but the country seemed to be returning towards some kind of normal functioning.

While the central government’s power was limited to Kabul and while the provinces were largely in the hands of powerful chieftains to whom the epithet ‘war lords’ could be comfortably applied, this way of governing was not much different from what the country had known for centuries.

And the Taliban were lurking in the wings. At one time Pervez Musharraf, then Pakistan’s president, had suggested that not all those who chose to call themselves the Taliban should be painted with the same brush; not all Taliban were terrorists. Many were the Pakhtuns who were not happy with the way Hamid Karzai was managing the country. Because of the circumstances of the liberation of Afghanistan from Taliban rule, the share of power held by non-Pakhtuns far outweighed their proportion in the population and their economic strength.

Musharraf argued for separating the Pakhtuns opposed to the Karzai government in two groups: the Taliban whose ideology was clearly not acceptable to any civilised society, and those who could be made to work in the system that was evolving. But by then Washington was accustomed to looking at the world from the perspective of ‘good’ and ‘evil’. This approach only helped strengthen the diehard elements in the Taliban community.

By the time the American election campaign was entering its final phase, Afghanistan had begun to unravel. More foreign troops were dying in that country than in Iraq where the counter-insurgency strategy developed by Gen David Petraeus had begun to work. The main component of this approach was to give space within the new system to elements in the Sunni community, in particular those who had violently opposed the occupation of their country by the Americans.

Once this approach was accepted, it became clear that a large number of Sunni insurgents were prepared to cross the line and come over to the American side. Once the switch was made, the level of violence in Iraq began to decline rapidly.

The same approach could have worked in Afghanistan but for the long-enduring problems between the Afghan governing elite and the political elite in Pakistan. The two had always pursued different objectives. Kabul, under the traditional elite, wished to bring the Pakhtun living on the Pakistani side of the border — the Durand Line — under its control. Pakistan, always fearful of India’s designs with respect to its integrity as a nation state, wished to end the old Afghan-India entente in its favour. This conflict, therefore, gave the Kabul regime under Hamid Karzai the excuse to use Pakistan as an explanation for its own failures.

There was some substance in the Afghan belief that unless the border between Afghanistan and Pakistan was not sealed they would not be able to win the escalating war against the resurgent Taliban. The sealing of the border was needed to stop the Taliban insurgents being pursued by the Americans from withdrawing into their sanctuaries on the Pakistani side of the border. Once there, they could rest, regroup, rearm and attack. But there were elements within the Taliban community that Pakistan did not wish to give up since it was one way of retaining influence in the country against what were perceived as India’s designs.

There are, therefore, four features of the Pakhtun conundrum that need to be addressed in order to bring peace to this area. The first is to recognise that there are many genuine grievances felt by this community concerning the way power has been apportioned by the Karzai regime among different segments of the Afghan society. Second, Pakistan has to show resolve that it will not allow those now generally referred to as stateless actors to pursue their own agendas against the country’s neighbours. Third, it also needs to make sure that the law of the land is respected by all segments of society. This means that the country will not allow itself to be fragmented to accommodate those not happy with the current political and legal orders.

Finally, there must be a clear understanding with India on what are its legitimate interests in Afghanistan. Pakistan has to recognise that India is a regional power with regional interests. At the same time India has to pay heed to Pakistan’s security interests.

Predator Tuesday, July 21, 2009 09:44 AM

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Global crises: discussions without end[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, July 20, 2009[/B]

[B][I][CENTER]The G20 communiqué’s issued after the two meetings showed considerable understanding of the nature of the problem but not about the ways to manage a more diversified global economy with many more national and regional interests than was the case in 1944[/CENTER][/I][/B]

THE Group of Eight assisted by the Group of Five has just concluded its meetings in Italy. The first group is made up of the world’s developed countries, the second of the large emerging markets.
They did not achieve much other than the promise to provide aid to the developing world for food production. Why are the world’s large economies failing to act in unison to find a cure for the ailing global economy?

The economic crisis that began in the United States in the summer of 2007 and quickly spread to the four corners of the world underscored three important developments that have taken place since the inauguration of the Bretton Woods system.

One, the world was much more integrated now than was the case in 1944. Shocks are quickly transmitted as well as the knowledge about the opportunities that are available in the various parts of the world is quickly made known.

Two, there are now more contenders within the global economic system than was the case at the end of the Second World War. At the Bretton Woods, the conversation was between the United States and its European allies with the other participants taking the back seat. There are many more active participants at this time.

Three, despite the creation of stabilisers in the global economic system – the International Monetary Fund, the World Trade Organisation, the World Bank Group and the associated regional development banks – economic and financial crises spread fast and produce devastating effects.

How to manage the system as it existed in the early 2000s, therefore, has become the primary concern for the world’s leaders – at least for those that lead large economies. As the economic crisis deepened, tremendous energy was consumed to find an answer to that question which would be as profound in its institutional imperatives as was the result of the deliberations at Bretton Woods 65 years earlier.

This time around, however, the world leaders chose not to summon a meeting of the large powers as they did in 1944. Instead they decided to use the forums that already existed. The initial deliberations began in Washington in November 2008 when the group of 20 largest economies was convened to discuss what could be done to resolve the crisis and to ensure that it did not occur again. The G20 met again in April in London and is to meet in Pittsburgh for the third time in September.

The communiqué’s issued after the two meetings showed considerable understanding of the nature of the problem but not about the ways to manage a more diversified global economy with many more national and regional interests than was the case in 1944.

Soon after the April meeting of G20, the World Bank and IMF met for their usual “spring meetings”. Once again there were more deliberations and exchange of ideas but no concrete results were produced about the structure of the global economic order.

In June 2009, the Shanghai Cooperation Organisation (SCO) held its annual summit in the Russian city of Yekaterinburg. The SCO is an interesting case study of an effort by the non-traditional world economic pow ers to find a voice in the international system. It is a product of the pursuit of a number of conflicting interests on the part of Asia’s major powers.

The fact that it has survived is a good indication of how countries are attempting to find a way of resolving their conflicting interests through dialogue and institution building. The SCO began life in 1996 as the Shanghai Five – China, Kazakhstan, Kyrgyzstan, Russia and Tajikistan – but later changed its name after Uzbekistan joined the group in 2001.

That Russia would have agreed to have China make such a bold move into the geographic area it considers as its traditional sphere of influence, was an extraordinary development. It reflected Russia’s weakness at that point and China’s growing assertiveness not only as an Asian but also as a global power.

Russia sought to dilute China’s influence by persuading other SCO members to grant observer status to India, a country with which it had been closely associated for decades. This was agreed to on the condition that Pakistan was also given the same status.

Iran and Mongolia are the two other observers. Both countries had for decades strong connections with Russia but had succeeded in detaching themselves from Moscow. Mongolia had drawn closer to China since the collapse of the Soviet Union.

A third category was created to bring in Belarus and Sri Lanka as “dialogue partners” while the “guest status” was given to Afghanistan, the ASEAN and the CIS. The SCO is an interesting case of how the non-traditional economic powers are improvising to get their voice heard.

The 2009 SCO meeting was significant since on its sidelines the four largest emerging markets – Brazil, Russia, India and China, the BRICs – held their first summit. This group has its origin not in any political or economic imperative as do most other groupings of nations but in a finding in a 2001 Goldman Sachs study that these four will have a commanding presence in the global economy in the next few decades. At the beginning of 2000s, these four countries had 40 per cent of the world’s population and 25 per cent of the world’s area. The study estimated that their combined GDP by 2050 would exceed that of the present rich countries.

More meetings were held after the two G20 conclaves, the SCO gathering and the first summit of the BRICs. The G8 met in Italy on July 8 to 10 and once again attempted to redesign the global economic system. The Italians pressed for the expansion of the G5 that had become associated with G8 in order to make the original grouping more representative. The original G5 was made up of China, India, Brazil, Mexico and South Africa.

The Italians wanted to bring in Egypt as a representative of the Muslim world.

Very little of substance was achieved at the G8 meeting in spite of the strenuous efforts by Barack Obama, the new United States president. For him, this was the first G8 meeting and he and his associates felt it was important for him to establish his – and therefore his country’s leadership – of the global economy.

But in spite of the crisis that all countries assembled around the table faced, they were not able to define a course of action for the global community. The effort goes on.

04:15 PM (GMT +5)

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