INFLATION may broadly be under control, the foreign currency reserves may be growing, corporate governance may be improving and the budget deficit may generally be contained. However, all this (other than the deceleration in the rate of inflation) does not amount to much for the population at large. The economic revival that was supposed to generate economic opportunities continues to elude us.

Exports, especially after the events of September 11, have been badly hit as we enter the third year of drought. Both farmers and industrialists view the future with scepticism and are reluctant to invest. Few perceive (more important than managing the economy is the management of the perceptions regarding the economy) that the industrial slump will work its way through quickly.

The government appears to be helpless about what to do and periodically assembles entrepreneurs in Islamabad to ask them the same question, coupled with exhortations to increase investment and enhance production. There are no clear answers, leaving large segments of civil society wondering whether the reforms imposed by the IMF and the donors have brought us to such a pass.

After reading newspaper articles and public statements of a whole range of opinion makers, representatives of a variety of interest groups one gets the impression that we seem to believe that there is either a magic wand, a wave of which will make our problems disappear, or that undertaking reforms is like fixing an electricity fuse or a leaking tap at home. Call an electrician or a plumber to fix the fault. Moreover, reform is viewed more as a change of rules and procedures, that the same individuals who either established, or had grown up in, the control-oriented and rent-extracting environment can be called upon to implement. Hence, our approach to reforms, energy sector reforms, labour reforms, education and health reforms, financial sector and capital market reforms, if carried out, will make Pakistan’s economy attractive for investment.

Unfortunately, however, most of us seem to fail to realize that the economy is like a machine and not a house. All things within it are interconnected. To be able to fix a leak in one place we have to see the economy as a whole. Moreover, the economic machine is highly complicated and moves slowly; the impact of measures taken today will become visible and felt much later. In a liberalized environment, and the IMF breathing down the government’s neck, there are hardly any significant policies and instruments to kick start industrial revival.

Such a conceptualization of reforms also raises the need to guard against the danger of expecting too much from the current set of reforms. To an extent donors are also to blame; since they are strapped for resources, they have a natural inclination to exaggerate the outcome of prescribed policies. Such expectations can result in inadequate and poorly sustained support that can abort programmes that are essentially on the right course. The transmission mechanism through which policies lead to expected outcomes is not that straightforward. There are several steps in the process, each of which is subject to uncertainty and delay. So, quite often it may be necessary to adopt supplementary policies later to achieve expected outcomes. Without them the final outcomes may fall far short of expectations.

Since the 1970s the failure of the economic system can be traced to a deficiency of governance at one level or another, the most crucial of which was the desire of the state machinery to regulate every activity — a task that it carried out through the creation of both visible and invisible roadblocks. A survey conducted by the World Bank highlights the huge costs of doing business in Pakistan. It reveals that 12% of the time of entrepreneurs is taken up in dealing with the bureaucracy (with 42% feeling that there were far too many regulators and regulations) compared to 5% in Latin American countries.

Similarly, close to 56% of the respondents complained about the rising costs of doing business because of the government’s tax policies, while 40% mentioned the contribution of corruption to the growth in costs. The theological principle to regulate economic activity based on a complete distrust of the market and a belief in the state’s omnipotence have determined not just the role of the state but also the space within which the private sector could operate.

Next, the decision to deregulate industrial investment before trade liberalization and withdrawal of import subsidies (e.g., the provision of subsidized cotton for the yarn manufacturing sector until the first half of the 1990s) was a case of wrong sequencing. The result was that a major portion of Pakistan industry continued to focus on the domestic market. This market had not changed, supported as it was by the state stepping in, whenever necessary, with protective measures or other assistance under what later came to be known as the ‘SRO culture’.

The economy, despite the smuggled goods and the goods brought in by Pakistani migrants under the baggage allowance schemes, continued to be a closed one, as parts of the industrial sector that could not compete internationally survived, if not flourished, through the protection provided by general, or less transparent, specific SROs. Resultantly, the growth of one domestic industry created the market for another, thus all such markets grew together with hardly any signs indicating which ones would continue to grow or shrink over time. Such is the weakness of closed economies. Growth is neither influenced by, nor predicated upon, international comparative advantage.

Therefore, all kinds of industries operating with varying degrees of efficiency or lack of it flourished. The crisis of the industrial structure today, especially the one plaguing the traditional sectors, is an outcome of this piecemeal opening up of the trading sector followed by too rapid an adjustment when this sector was eventually liberalized under IMF pressure, not giving industry adequate time to adjust to this change. Import duties were lowered at a pace more rapid than in the case of industry.

The latter was admittedly heavily protected till then, had time to adjust, and this was accompanied with a slower speed of rationalization of import tariffs (because the impact on revenues would have been dramatic and not acceptable to the Fund), i.e., duties on raw materials at significantly lower rates than on finished imported goods affecting the competitiveness of domestic industry.

In my view the worse is yet to come, as tariffs, under IMF tutelage, are lowered further. And unless the phasing of this lowering of protection is slowed down further, something which the Fund, or for that matter the WTO, will not permit, the fortunes of the industry will continue to be uncertain, in the near future.

The way-out is to improve the profitability of industry through closures, consolidation and mergers - rather than keeping them all alive, sick and unable to withstand competition without repeated doses of artificial stimulants in the shape of protection from competition, tax and utility tariff concessions (e.g. the fertilizer industry through the subsidized price of gas), debt rescheduling and subsidies in one form or another, which are not only distortionary but also unsustainable.

Much of the industrial boom in the late eighties and the first half of the nineties was financed by government-owned financial institutions — they played a major role in the development of what now constitutes industrial sickness, since the financial viability of a large part of the textile manufacturing sector had depended on government policies. When the demand for credit was soaring and credit was scarce banks naturally preferred to lend to the old, large and established enterprises or groups — a rational approach for large, risk-averse providers of finance.

What was also critical in this was the huge reliance on debt finance rather than on equity. Whereas total equity investment in the economy is substantial, most of it has been made in small and medium enterprises by their owners, who, for a variety of reasons, are unable to attract risk capital. The result was predictable.

These small entrepreneurs became rentiers, who built a large home for the joint family and lived on the income of the enterprise, spending a lot of effort and resources to avoid the taxman, unable to invest in technological development. The fear in the ability of the taxman to close down and ruin businesses is a numbing one for the entrepreneurs — a feeling difficult to explain. They bribe(d) him to avoid being included in the tax net. Thus, the link between the government’s chronic budget deficits and the intense dislike and fear of new or foreign investors in the minds of key actors, in particular, and of civil society in general, is on account of such a financial system.

So, where do we go from here? The discussion above has attempted to argue that the first and foremost reform needed is the dismantling of the overextended regulatory framework and huge regulatory apparatus that is controlling (as opposed to regulating) and strangulating private sector economic activity. To illustrate the point, there are 27 labour laws. However, incremental changes will not work and the best way to address the issue of over-regulation would be for the government to announce that all regulatory laws stand suspended and each law would become operative only after its continuation can be justified.

Next in importance would be the lowering and rationalization of the tariff structure pertaining to plant and machinery and the withdrawal of import duties on raw materials and intermediate goods. The latter step would not only make the duty drawback regime for exports redundant but also facilitate import-based production of exports, without seeking the permission of the most formidable enemy of exports, the tax structure and the related systems and procedures.

Next, there is a need to broaden the equity market — an objective that cannot be achieved through the market sanitization being pursued by SECP. The SECP proposed reforms to address the needs of large, respectable enterprises with a credible track record. But such entities cannot bring about the industrial turnaround needed. What is required is external or internal equity for young entrepreneurs and small companies though venture capitalists.

Then, there is the high cost of transportation that affects cost competitiveness, which results in the cost of shipping wheat (including port handling costs in Pakistan) from Australia to Karachi being lower than transporting it by train from Lahore to Karachi.

Finally, the high cost of energy produced through Wapda and KESC will continue to accentuate the difficulties of industry in its efforts to compete internationally, especially the energy-intensive ones. The sooner we dismantle and privatize them the better not just for the competitiveness of agriculture and industry but also for the government budget through savings that will come from stopping the monthly haemorrhaging (leakages) caused by their losses. To begin with, the law should be changed to allow free entry into the distribution of power. Competition would spur reform by bringing down the risk of investing in generation (even after the HUBCO fiasco), since power producers would no longer be obliged to sell their power exclusively to the bankrupt Wapda and KESC.

ABDULLA Malik may have turned 81, but to this day, were he to hear a crowd of protesters chanting slogans and waving red flags on the street that runs in front of his house in Lahore’s Model Town, he would drop whatever he was doing, run out and join them. What is more, he would not be among the stragglers, but out in front, ready for the steel-tipped lathi, the noxious fumes of tear gas and even the trigger-happy Punjab policeman.

He has little respect for the established order which in his long career as an agitator and revolutionary he has always found to be indistinguishable from the mills of injustice that grind the poor and the defenceless of our land without respite. A passage in his just-published autobiography covering the first 27 years of his life — 1920 to 1947 - says, “The 27 years that this story covers were like a turbulent, shoreless sea which carried thousands of rising and falling tides inside its vast bosom. I lived those 27 years to the hilt. I felt reverentially drawn to the great religious scholars of the day. Then I fell under the spell of the firebrand leaders of the Majlis-i-Ahrar.

“I also clearly recall the impact of the worldwide economic downturn of 1930-31 and its impact on these men and their lives. When I joined Government College, the air was thick with the socialist slogans of Jawaharlal Nehru and how the world was to be changed into a better place for the downtrodden. I am a witness to the emergence of Communism among the students of my day. I joined the Party and volunteered to become a full-time worker for the cause. It is all here in these pages, as are the great writers and journalists of those days whom I came to know.”

Only Abdulla Malik, who is as Red today as the day he joined the Party, can look back on his eventful life and say, “I am 81 years old and I can declare with pride that the commitment that I first made to socialism I still wear on my chest as a medal. I dream of a democratic, socialist Pakistan. This is my only manifesto because it negates no religion or way of life. Neither is it a revolt against God. It is a message of love for all men, a love that goes beyond religion, creed, system of belief. There is no greater love than love for your fellow men.”

Born in the old city of Lahore in 1920, Abdulla Malik, who is gifted with a phenomenal memory, still remembers what came to be known as the Mughalpura Agitation which was aimed at the ouster of the British principal of the Engineering College on the charge that he had insulted the Holy Prophet, on whom be peace. What a familiar ring that charge has because to this day, and since Zia-ul-Haq’s time especially, it is regularly flung at someone or the other. Abdulla Malik writes that it later turned out that the principal had done no such thing. His guilt lay in his refusal to admit certain Muslim students because they did not qualify. Abdulla Malik also remembers that a wrestling pit in Chowk Rang Mahal was inaugurated by Maulana Shaukat Ali himself because it was meant to physically prepare Muslim youth against a new wave of Hindu militancy.

Ghazi Ilm Din who killed the blaspheming Hindu author of a book about the Holy Prophet, and was hanged, also came from Abdulla Malik’s neighbourhood. When Nehru came to Lahore once, he was taken in procession through city streets on a white charger. The Sikhs, in order to be one up on the Hindus, made their leader Baba Kharak Singh, who arrived a day later, ride an elephant. One can only wonder what they would have done had Nehru been put on an elephant.

When Abdulla Malik joined the Communist Party as a full-timer in June 1942, he entered a new world. “We all worked together, people from different religions. There were no distinctions among us on the basis of faith. Everyone worked for the Party. We were all Communists,” he recalls. Most Muslims, however, believed that Communism was a godless creed, but Abdulla Malik found it no more than political propaganda. Earlier, he had worked as the Party’s secret messenger. He also sold the Party’s three newspapers on the streets of Lahore. Since the Communist Party favoured self-determination for the Muslims, Abdulla Malik found it doubly acceptable. He campaigned for the Muslim League during the Pakistan movement as a good, card-carrying Communist - and a Muslim.

When Abdulla Malik was asked by the Party to move to Bombay he did so. He also lived where he worked, the Party office, sleeping on the floor. The rented flat belonged to Shakir Ali, the painter. Abdulla Malik shared the room with Sibte Hasan and Ali Sardar Jaffrey. They all slept on the floor. Saadat Hasan Manto, who knew Malik from Lahore, was in Bombay also. One day he dropped in and urged Abdulla Malik to move in with him. “Here you will only starve,” he said. But the loyal Party member preferred to starve and sleep on the floor rather than move to the relative comfort of Manto’s flat where he would have enjoyed Safia’s home cooking.

Abdulla Malik was among the first to join the Progressive Papers Ltd. in 1947. He remained with Imroze until he was let go during the final shake-up. Not long after the newspaper group was annexed by Ayub, it was decided to remove Abdulla Malik and Syed Amjad Hussain from Imroze and the Pakistan Times respectively. However, Altaf Gauhar, who was now information secretary, saw to it that the two “dangerous communists” (Syed Amjad Hussain, chief reporter of the Pakistan Times, was never one) were sent not to Kalat or Quetta but London and Colombo. Abdulla Malik spent a number of eventful years in London, forming a lifelong friendship with the late Athar Ali of BBC. I used to write letters to Abdulla Malik, though I barely knew him at the time. I came close to him — and have remained so — when after getting myself out of government service, I joined the Pakistan Times in 1967.

The only man in Lahore, few will now remember, who protested against army action in 1971 in East Pakistan was Abdulla Malik. In a speech at the Engineering University, he declared, “Hum Bangladesh ke mazloom awam ke saath hain.” (We are with the oppressed people of Bangladesh).

He was arrested and tried under martial law. I remember the day the judgment was announced. The hearing was brief, the judge a young and very jumpy major. The “court” was adjourned after an hour or so, the major earlier having ruled that he simply did not have the time to have all the defence witnesses testify. We were shown out of the room and we all sat under a shady pipal tree, Abdulla Malik in his handcuffs.

We were then pushed into the “court” room where the major announced that he had considered all the evidence and come to a decision. Then he produced a sheaf of neatly-typed papers and began to read his “judgment” which had obviously been written for him long before the case was “heard”. Abdulla Malik was sentenced to a jail term of several months with hard labour and a heavy fine. The major said the “mulzim” was not to be lashed because of his age. Abdulla Mali