The civil-military equation

ONLY the naive would believe that “true democracy” would be borne out of the womb of a military regime. But with experience of over five decades of military and civilian misrule the people surely expected from the present leadership that the least they could do was not to play with the Constitution in such a cavalier fashion and put the nation on a wrong and dangerous course.

The underlying thread in the proposal for the formation of a National Security Council (NSC) or enhancing the powers of the president is to make the government subservient to the military — an elected body answerable to a non-elected body with a dominance of military presence.

The politicians and the people at large are not against the concept of a National Security Council, which would periodically deliberate and formulate policy on security issues under the prime minister. They would in fact welcome the creation of a body that minimizes the chances of repeating the mistakes of the Afghan policy or the weaknesses in our Kashmir approach and help formulate national policy keeping all major domestic and external factors in view. What they are against and unwilling to concede to the NSC is its bloated role as the guardian of the nation. Justifiably, there is strong opposition to the institutionalization of the military’s role in the body politic that will permanently deform the structure of the state.

Indeed, there is need for vastly improving the existing system to keep the rapacious politicians from going berserk. But this has to be achieved by strengthening the role of the parliament and its committees and of the judiciary, ensuring the freedom of the press and delegating appropriate autonomy to the election commission, auditor-general, State Bank of Pakistan, finance commission and the Federal Public Service Commission.

Inextricably linked with the shifting of the power centre from the parliament and the government to the NSC is the fact that the whole process of the evolution of democracy would be seriously undermined. There is already a serious dearth of political leadership in the country and any further marginalization of the political forces will make it even more difficult for new leadership to emerge, leaving the country at the mercy of the military. Equally detrimental would be its impact on the professionalism of the armed forces.

While our armed forces are recognized for their professional excellence, with an overstretch of high command as a result of its involvement in civil affairs this cannot be taken for granted in future. Deeper and wider involvement of the military in civil affairs will inevitably affect its efficiency and integrity. Already hundreds of coveted civilian posts are being held by serving or retired military officers which is causing alienation and resentment among those civilian officers and technocrats who justifiably aspire for these positions in the course of their careers. Clearly, institutionalizing a dominant role for the military in the area of governance will further militarize society, strengthen praetorian trends in country and unleash centrifugal forces in the smaller provinces.

General Mushrraff’s somewhat simplistic explanation that the power will vest in the prime minister and that the president will only exercise a “check” on him is based on a false premise that the military elite is the sole custodian of national interest and has the monopoly of wisdom and integrity. This speaks of a highly self-serving and warped view of an elite isolated from the national mainstream. Furthermore, individual and institutional interests are all being confused with national interest.

There is considerable confusion about the need for checks and balances. It is generally perceived that these checks and balances are being designed for satisfying the power ambitions of the military as an institution. As has been pointed out by many eminent writers and analysts, there are more checks in the proposed package and less of balance, giving an impression of a one-way accountability process. Firstly, if the military were genuinely interested in checks and balances, then it would not want to ram through its constitutional package without waiting for the next parliament to be in place and decide on its content and without the approval of the mainstream political parties. Similarly, at the operational level they could have evolved a bipartisan agreement on the choice of an election commission.

Experience of the past has shown that the armed forces are seldom willing to subject themselves to any mode of wider accountability. The 1971 tragedy, explosions at the Ojhri Camp and the Kargil episode never went through a genuine process of scrutiny and answerability. Not even a parliamentary inquiry was instituted to know where we went wrong and what lessons are to be learnt from those debacles.

How can the present government justify the political support it is extending to politicians who have a highly dubious past with cases of corruption and maladministration against many of them being deliberately held back? All this reinforces the belief that when vested interests are involved, this government, like its civilian predecessors, manipulates to skirt the rule of law and is driven by the considerations of power and not morality. This simply is not the way to make the people feel that things will be any different, particularly when there are hardly any defined accountability parameters for the NSC, the president and military top brass in the proposed system.

It is also advisable not to apply military terms to political reality. The oft-repeated phrase “unity of command” by General Musharraf is desirable in the military context but cannot be applied to the functions of the government, the president or the prime minister. It must be realized that political parties are not army units. In a polity one does not need unity of command; what one needs is consensus on a given issue or a set of political or legal proposals and that too arrived at by democratic means. The objective of any government should be the enforcement of the rule of law and to actualize the maximum potential of the nation and not to foster unity of command.

During his three-year term General Musharraf is generally perceived to be taking collegial decisions on important national issues with the help of his corps commanders although of late his reliance on an inner circle of confidants may well have been increasing. With the contemplated amendments in the Constitution, it will be interesting to see what linkages would develop between the NSC and the corps commanders in regard to decision-making as well as the vertical and lateral flow of power. Will the president still exercise power in the NSC through the support of the corps commanders or will he rely essentially on the politico-military NSC for taking tough decisions, including those relating to the fate of the prime minister and the parliament.

Needless to point out that the envisaged power structure will be pulled in different directions breeding cynicism and despondency among the parliamentarians, which ultimately will find resonance in the public mood. If elections do not reflect public interests there will be a lot of frustration among different sections of society and forces opposed to the military would exploit it. Without genuine democracy the nation’s international credibility could be equally affected and Pakistan would find itself disadvantaged while pursuing national policies and interests abroad.

Only a civilian government commanding a national consensus can bring about a social, political and strategic shift in policies and actions that is desired. The army must leave this task to the people ad their representatives to accomplish even if they stumble in the process many times over.

The writer is a retired lieutenant-general of Pakistan army.

The spark that Pakistan lacks: LETTER FROM NEW DELHI

YOU can have Kashmir provided you give us Nehru. A Pakistani intellectual made this remark while we were debating post-partition events many years ago. By then India had introduced the constitution and the Lok Sabha and the state assemblies had begun functioning after free elections.

Pakistan, on the other hand, was always in the throes of some political crisis or other. It had lost both its founders, Mohammad Ali Jinnah, and his deputy, Liaquat Ali Khan. One prime minister after another was resigning. The country itself was alternating between the scheme of One Unit and a federal pattern of empowered provinces.

What the Pakistani intellectual tried to convey was that it was Nehru who had established democratic institutions in India and that if someone like him had been there in Pakistan he would have done the same thing. He added Kashmir to show that they would even sacrifice their dearest thing provided they got democracy.

Much water has flown down the Indus since then. Democracy, let alone its institutions, is a relic of the past in Pakistan. The military has ruled the country for most of the time since independence. Even when the soldiers have gone back to the barracks they have seen to it that the “elected” prime minister would visit the military headquarters to “talk things over.”

Even today, Pakistan remains under tight military control. But it is exhilarating to see free and open debate raging in the country on the restoration of democracy. The appraisal of political changes that President Pervez Musharraf wants to bring about is both candid and critical. The media is vociferous and politicians unsparing in their attack. One, however, wonders whether all those who are articulating their opposition to Musharraf’s political package are doing so without bothering about the consequences or whether Musharraf has allowed them the leeway to have their pent-up feelings off their chests.

But the ventilation is at best a catharsis, an emotional release. Media men and political elements are speaking out because they did not when it was necessary. They probably regret that they never put up even a semblance of a fight whenever their democratic institutions were demolished before their very eyes.

In an interview a few months before General Ziaul Haq staged his coup d’etat, I asked Zulfikar Ali Bhutto: “How would he ensure that the military did not return to power? “People would come out on the streets to defy the tanks if ever the army dared to take over,” he said.

Nothing like that ever happened. Even after Bhutto’s execution, not a dog barked in Pakistan. In contrast, India saw the countrywide protests, a big one right in New Delhi. People criticized the then Morarji Desai government, which was diffident to say anything official against Bhutto’s hanging.

My reading is that military regimes in Pakistan have found little resistance because the atmosphere in the country has always been that of mai baap, of acceptance and not defiance. There is no tradition to challenge big landlords and vested interests, much less martial law rule. I have found no popular movement — it could have been called jihad since this word goes down well in an Islamic state — against either General Ayub, General Zia or, for that matter, General Musharraf.

During Ayub’s time, even the Quaid-i-Azam’s sister, Fatima Jinnah, who had stood by her brother in the making of Pakistan, was defeated when she ran for president. True, the election was rigged but the nation pocketed the humiliation without demur.

I do not say that there has been no agitation in Pakistan. Some of my friends have gone to jail. But those agitations were of a political nature, one party opposing the other in power. There has never been any movement worth the name to get democracy back.

The question is why Pakistan has been under martial law rule for decades and why India has escaped such travails. We are similar in so many ways. We both resent dictation and love freedom and liberty.

Perhaps what is lacking in Pakistan is the ferment that a national struggle builds up among its people to make them stand up to dictatorships or martial law administrations. India went through fire while fighting the British. That movement steeled it to challenge anti-people rule. Mrs Indira Gandhi was routed at the polls for imposing the emergency (1975-77).

During the national struggle the Congress Party attracted ordinary people who were willing to sacrifice all to wrest freedom from the hands of foreign rulers. The Muslim League, on the other hand, was a party of big landlords, tribal leaders and confirmed toadies. Its approach was not that of protest or opposition. Punjab, Sindh, Balochistan and the North-West Frontier Province, which constitute today’s Pakistan, joined the League only a couple of years before independence.

East Pakistan was far more in tune with the national struggle. One saw agitations in support of Pakistan’s demand. And when it came to their own freedom or identity, the Bangladeshis fought an equally ferocious battle to free themselves from the ‘exploiters’ in West Pakistan. Bangladesh, with all its ills, has done far better than Pakistan in keeping the armed forces out of politics. True, India’s biggest asset is that its military is apolitical. When the emergency imposed by Mrs Gandhi was losing its edge, she reportedly approached the then Chief of Army Staff General Raina for help. He refused point blank, observing that the armed forces were meant to support the constitution, not to supplant it.

A few years ago when the governments at the centre were falling like ninepins, none in India thought that the army would take over. We watched on TV the governments proving or not proving their majority in the Lok Sabha. Democratic institutions have taken roots in India - one of the few countries in the Third World where this has happened.

The National Security Council (NSC), which President Musharraf is contemplating to establish, is not foreign to India. But its role is advisory and the cabinet is supreme. Pakistan’s NSC will be superior to the cabinet, an apex body of elected government. It will become active when the military feels that democracy has gone off the rails. Its job will be over when it has restored democracy. Who will decide? The whole thing is undemocratic because the NSC, which is not a duly elected body, cannot be the authority to decide on the intervention.

General Zia mooted the idea first. He did not constitute it because he probably found the political opposition to it too strong. When I asked him once during an interview for his insistence on constituting such a body, he said that it was the only way to stop military takeover. I told him that the armed forces had walked in whenever they had felt like it and nothing had stopped them. Then why the council? I asked. He had no convincing answer except that some set-up, other than the elected one, had to be there to protect democracy.

India can feel proud that it has succeeded in preserving democratic institutions. Our failure, however, is that some political parties have tarnished the secular ethos for which we fought during the national struggle. When incidents like the Babri masjid demolition and the Gujarat carnage take place in states where we have elected governments, the question arises whether our polity is truly democratic. Democracy is a system of governance by the people, of the people and for the people. But people do not mean only the majority community.

The writer is a freelance columnist based in New Delhi.

Post-Enron reform package

TWO MONTHS ago the post-Enron reform package crafted by Sen. Paul Sarbanes, D-Md. lacked the votes to pass the Senate Banking Committee. Last week Mr. Sarbanes emerged victorious, having steered his bill not only through the Senate but also through a perilous conference with hostile House negotiators.

The final bill now has to be ratified by both chambers and signed by the president, but these steps ought to be easy. Mr. Sarbanes soon should be able to take credit for one of the most important overhauls of American capitalism since the creation of the Securities and Exchange Commission seven decades ago.

The Sarbanes bill, however, does not end the battle for post-Enron reform. Some of the provisions in the bill will prove effective only if the SEC implements them well: The commission will have to choose tough and qualified people to sit on the new audit oversight board, and it will need to use its power over the board to steer it in the right direction. Moreover, there are two important subjects that the Sarbanes legislation fails to cover.

The first of these is stock options. Companies that grant options to employees ought to report their cost as an expense, just as they report the cost of salaries. Anti-reformers claim variously that options have no value (in which case, why do employees want them?) or that their value is too difficult to calculate (a claim that is belied by the fact that companies already calculate the value of options in order to claim tax deductions). But the anti-reformers’ real aim is to conceal the cost of options from shareholders.

Tom Daschle, the Senate majority leader, has promised to bring up an amendment directing the Financial Accounting Standards Board to look into this game of disguise. Mr. Daschle must keep his promise, and the House must not seek to impede his efforts.

The second remaining big issue is pensions. Many Enron employees lost not only jobs but their retirement security as well, because the company directed their pension investments into Enron stock and restricted their ability to sell it.

Up to a point, this is an abuse that the market will correct: People now know to mistrust pension plans that require large holdings of the employer’s stock, and so managers will be under pressure to offer more attractive schemes in order to retain good workers.

Still, there is a limit to how well this market mechanism can work. There is therefore a role for modest government regulation of corporate retirement schemes _ although Congress must avoid extremes that drive firms to stop offering them.

The succession of corporate scandals has created an opportunity for progress on both stock options and pensions. But it will be important to distinguish real reforms from fakes _ particularly in the area of pension reform, which has not received much public scrutiny.

For example, both chambers of Congress have prepared legislation that would allow employees to be guided in their retirement planning by investment advisers, which sounds like a good idea. But the House would allow these advisers to be representatives of the mutual-fund industry _ so the advice would hardly be objective. — The Washington Post

Impact of reserves on the economy : Why forex reserves?-III

THOSE who believe that the increase in remittances flowing through the inter-bank market in post-September 11 period is unsustainable are mistaken. It was simply a shift in the source of mobilization of these remittances — from the open market to inter-bank market but the overall volume has remained largely unchanged during the last three years.

Looking forward, the grant assistance received from the US and other donors this year was of a temporary nature and should be discounted. Assistance from the IMF (approximately $500 million annually) should also not be counted upon after 2004 when the present agreement is concluded. Beyond 2004, exceptional financing of the type received in the past two years should not be included in any calculations but the reprofiling of Paris Club debt has been secured on a long-term basis.

The volume of assistance from the World Bank and the ADB will depend upon the implementation of various structural reforms agreed with them. To the extent we continue to remain on track, their concessional loans will remain available. But as soon as we break these commitments these flows will disappear.

FDI flows will depend on the macroeconomic environment, a hassle-free and liberal regulatory regime, improved law and order and geopolitical situation. Exports are expected to increase at an average of 10 per cent annually but it needs to be recognized that no developing country is expected to build up reserves by simply increasing exports because its imports will always be higher than its exports. In other words, its exports will not be sufficient to finance its imports and its net exports will be negative. What the country can do is to minimize the gap between its exports and imports and this is exactly what has been accomplished during the last three years and should be pursued in the future too.

It may be relevant to point out that the biggest quantum jump in our reserves had taken place between July 2000 and June 2001 i.e. well before September 2001. During this one year period the reserves increased by 138 per cent to $3.1 billion. The rate of increase during July 2001 and June 2002 was 105 percent. Thus it should be noted that the perception that the windfall gains of September 11 helped build up Pakistan’s reserves is highly exaggerated and the real turnaround had in fact begun to take place a year before that. The major reason for this improvement was rescheduling of debt by Paris Club and purchases of workers’ remittances by the SBP.

To sum up, the question whether the reserves will continue to accumulate in the future also will depend on the record of the country in adhering to macro-economic objectives, pursuing good economic management and implementing structural policies. In case the progress is on track the reserve accumulation will be durable and sustainable.

(c) How does the level of reserves affect the real economy? As explained in earlier parts of this discussion, foreign reserves management is an important tool for monetary policy and exchange rate determination. The situation can be contrasted for fiscal years 2001 and 2002. In financial year 2001 when the reserves were low, there was a steep depreciation of rupee as a result of a speculative attack and flight of capital. The SBP used interest rate as a tool for stemming this onslaught. Although low inflation and a narrowing of the current account deficit did not justify an escalation in the interest rates, the free fall in the foreign exchange market and the inability of the SBP to use sufficient reserves to avert this fall left it with no other choice but to raise interest rates.

The discount rate had to move up from 11 to 14 per cent in 2000-01 primarily to support exchange rate. The costs to the real economy in the form of a higher lending rate was thus quite substantial. In contrast, the reserves had reached a comfortable level of Rs 3.05 billion by June 2002. The exchange rate remained stable around Rs 64 for the next three months and there was very little speculative activity as the markets were assured of the availability of foreign currency as and when they required.

As a matter of fact and quite unusual for Pakistan, the rupee appreciated by 6.6 per cent after September 11 and again remained stable at the new level of Rs 60 for the next nine months or so. Consequently, the SBP was in a position to ease the monetary policy stance and by January 2002 the discount rate was cut by 5 percentage points and brought down to 9 per cent.

Government’s debt servicing costs were also reduced as the T-bill rates declined from 12.9 to 6.4 per cent. The weighted average lending rate of the commercial banks has also gone down to 12 per cent from 14 percent without any serious effect on deposit rates. Export finance rate was also adjusted downwards from 14 percent to eight per cent, thus providing a large boost to exporters. Although the real interest rates are still high in the economy, the beneficial effect of lower interest rates is quite significant.

Another way to examine the impact of reserves on every-day life is to pose the counterfactual question: what would have happened in post-September 11 or post-May 8 or 13 period in the absence of such a high level of reserves? Although this is a purely hypothetical question and the critics can always find faults with the scenario we are going to sketch, the past empirical evidence from previous episodes in Pakistan is quite strong to support a higher probability that such an outcome would have materialized.

In the absence of a strong reserve position, the currency would have again suffered a free fall to Rs 70 per dollar or more and would have continued on a downward slide. The SBP would have intervened by raising interest rates and thus increasing the cost of borrowing for both the public and private sectors. The prices of raw materials, inputs and other imported commodities would have jumped up and scarcities would have also surfaced. Petroleum and petroleum product prices, which are linked to import parity prices, would have been raised with a consequential effect on domestic prices of fuel oil, diesel for transportation, kerosene, etc. As fuel oil is used for power generation, by cement industry and other industries, the profitability of these sectors would have been hit hard.

Electricity and gas prices which are already resented by the middle class consumers would have jumped to unbearable proportions. Increase in the prices of medicines would have caused an uproar in the society. Higher transport costs as a result of a rise in diesel prices would have pushed the prices of essential commodities up and also resulted in higher tariff for low income travelling public which uses public transport. Even the vocal higher middle class which uses cars would have felt the pinch. As the budget deficit would also have expanded because of higher rupee costs of external and domestic debt servicing, the SBP would have been forced to expand money supply.

The cumulative effect of these price adjustments and monetary expansion would have meant double-digit inflation in the country, loss of profitability of many businesses and shutdowns of firms and industries, particularly those based on imported raw materials and inputs. Downsizing by the private sector would have added to the ranks of unemployed in the country. The flight of capital by well-to-do Pakistanis who are able to convert their domestic assets into foreign currency would have put more pressure on the money and foreign exchange markets. The chaos and disorder in the economy would have proved highly disruptive.

The above scenario or its variant has been avoided during the last one year in the face of exogenous shocks such as September 11, Afghan hostilities, attack on Indian parliament, the bomb blasts in Karachi, etc. This can be attributed to the resiliency of the external sector achieved mainly through a high level of reserves while the domestic economy is still under a low investment, low growth, low aggregate demand cycle.

There is an inherent trade-off in the short run between a debt reduction strategy and a public sector-led growth acceleration strategy. As the country was under a heavy debt burden and faced with an acute liquidity shortage, it was decided to reduce this vulnerability and secure the external sector of the economy.

The stability in the exchange rate, the reversal of flight of capital, the arrest in dollarization of the economy, low inflation, the reduction in interest rate and lowering of debt ratios have been made possible by pursuing this strategy. Building up reserves through an active intervention in the market also ensured that the competitiveness of Pakistani exports is not eroded and the share of Pakistan in the world market is maintained.

Since the alternative strategy to draw down reserves and allow the government to prime pump the domestic economy will prove short-sighted, expose Pakistan once again to the enhanced risk of default on its external debt and liabilities in the future and generate uncertainties and turbulence in the markets, the more viable way to accelerate growth is by inducing private sector to invest.

This will require, in turn, political stability and consensus by all political parties on a long-term economic policy vision and direction for Pakistan, a more business-friendly environment, a less contentious and adversarial relationship between the bureaucracy and the businessmen, improvement in internal and external security situation and the continuation of structural reforms and governance agenda. The tools of economic policy are geared to achieve the set objective. The same tool — reserve accumulation — cannot be used as a defence against external vulnerability and as a stimulus to domestic economy at the same time.

Concluded

The writer is Governor of the State Bank of Pakistan.