A world stood on its head

GENERAL Pervez Musharraf has said repeatedly that he will transfer all executive authority to the person who will be sworn in as Pakistan’s next prime minister. This will happen some time after the elections scheduled for October 11. The general will stay on as president and promises to keep a close watch on the performance of the elected prime minister.

He told The New Yorker magazine a few days ago that he is “going to shed all power to the prime minister. So what’s left for me? I have to make sure that Pakistan is governed well. Is that unrealistic? I will give him full authority. If he does not do well, I will check him.” In watching the elected prime minister’s performance General Musharraf will no doubt look at the way the country’s new chief executive handles Pakistan in a world very different from the one the politicians dealt with when they were last in charge.

In the fall of 1999 the world was a neatly arranged place. There was no conflict over economic ideologies. It was widely accepted that capitalism, moderated by some control by the state, was the best way to manage economic affairs. That belief was applied by the Washington-based international financial institutions — in particular the International Monetary Fund and the World Bank — in their dealings with the developing world.

Most world economies were being brought together by a process usually referred to as “globalization.” Global output and trade were increasing at unprecedented rates and a “new economy” supported by the rapid development of information technology was changing the way the world worked. The new economy seemed not to be subject to the laws that had governed the old economy.

A prolonged period of growth, particularly in the United States, seemed to have overcome the trade cycle according to which every period of growth was checked by a slowdown. Most countries seemed willing to shed some sovereignty in order to accommodate an internationally accepted code of behaviour that protected, inter alia, basic human rights, rights of women and children, rights of minorities, the physical environment. And then the terrorists struck America and changed the world.

Since October 12, 1999, when General Musharraf dismissed Prime Minister Nawaz Sharif, the world has been stood on its head. A great number of assumptions about the way the world was moving are no longer valid. Pakistan’s own position in the global political order has changed dramatically. Poor governance, a weakening economy and growing domestic violence had reduced Pakistan to a near-failed state. The military takeover had further marginalized the country. The world had little appetite for military coups when General Pervez Musharraf overthrew an elected prime minister.

That is probably the reason why he is still shy of calling his action a coup. It is also the reason why it took him several months before assuming the title of president. “The world saw me as a dictator, an aberration to democracy,” he complained in his interview with The New Yorker. But the world’s view changed when the general decided to support the war on international terrorism led by the United States. Suddenly the doors that had been closed to Pakistan and its military leaders were opened. General Musharraf found himself to be a respected member of the leaders of the world.

Will this welcome survive the transfer of power from a military government to the one likely to be dominated by politicians? The answer to this question depends in part on the understanding the politicians, about to assume power in Islamabad, will develop of the world in which they will begin to operate.

September 11 redefined the global political system. Its most pronounced consequence was to bring out the administration led by President George W. Bush from behind the high walls of isolation that he had begun to build right after assuming power in January 2001. Instead of going its own way, America decided to lead the world against what it labelled the “forces of evil.” But the American-led war against global terrorism was not the only development that reoriented the world.

That was one but not the only reason why the world has been stood on its head, why what was expected from the evolving global political, social, and economic order will not come to pass and why a country in Pakistan’s situation will have to be exceptionally vigilant to draw benefit from the new direction in which the world is now proceeding.

Will Pakistan’s politicians, new and old, be equal to this task? To answer this question we must first define the task. To define the task we must understand the environment in which it will be performed. I will attempt to do all this in this series of three articles beginning with the one today.

In fact, it is now clear that the world began to change even before the terrorists struck New York’s World Trade Centre and the Pentagon. The change began in March 2001 when the technology bubble burst sending the American economy into a virtual tailspin. All bubbles eventually collapse but the bursting of the one associated with technology was especially significant. Its significance lay in the fact that a great deal of what was expected from the world economic order was predicated on the technology revolution continuing unabated.

The decade of the 1990s was an extraordinary period for the global economy for a number of reasons. The first of these was the clear emergence of the United States as the leading force in global economy. It acted as an engine that pulled the rest of the world behind it. America’s predominance was the consequence of many factors. Two of these were especially important — largely unfettered capitalism which allowed private entrepreneurs a great deal of freedom and the emphasis on information technology that, when applied to the workplace, began to change in many profound ways the way the economy worked.

The United States, it was said, was developing a new economy. The new knowledge-based economy was producing an unprecedented increase in the productivity of the American workforce. With population still increasing at close to one per cent a year — largely helped by a continuing flow of new migrants into the country — and with productivity growing by at least three per cent, the American economy was expanding at close to four per cent a year. There seemed no reason why this rate of growth would slow down. The exponents of the new economy celebrated when the rate of unemployment dropped to an all-time low of 4.5 per cent and there was no pressure on wages and hence no increase in inflation.

The other feature of the American economy — relatively unrestrained capitalism — also came under pressure with the bursting of the technology bubble. It transpired that a number of large corporations had indulged in various forms of corrupt behaviour, sometimes described as “aggressive accounting.” The Financial Times recently estimated that “the barons of bankruptcy — a privileged group of top business people — made extraordinary personal fortunes even as their companies were heading for disaster.” While these companies crashed, destroying hundreds of billions of dollars of investor wealth and losing 100,000 jobs in the process, their executives walked away with gross earnings estimated at $3.3 billion.

What is the relevance of all this for a country such as Pakistan? There are a number of reasons why the collapse of the technology bubble, the slowdown in America’s GDP growth, the attendant decline in world trade, and the loss of confidence in corporate America matter to Pakistan. Had the boom in technology continued, Pakistan with a large population could have benefited by exporting skilled workers to the US and Western Europe. Pakistan’s fledging IT industry would have also taken a share of what was then a rapidly developing market for software. In fact, the IT policy introduced by the Musharraf government in early 2000 was predicated on the continuation of the technology revolution in the industrial world.

The shadow that has been cast on corporate America will also impact the developing world. Pakistan, short of domestic savings and dependent on external capital flows, had hoped to become an attractive destination for investments by transnational corporations (TNCs). In the new world, the TNCs may prove to be much more cautious in committing their resources for investment in emerging markets. Just to take one example, the difficulties encountered by AES (the American Energy Company) will have an effect on Pakistan. This company had heavily invested in the developing world, including Pakistan. However, the Enron episode followed by the investigations that have been launched involving a number of other energy companies, have slowed down all investments by the enterprises operating in this sector.

The sharp increase in global trade was also seen as a sign of the new international economic order in which mercantilism of the past was giving way to open trading systems, particularly among the industrial countries. In 2000, world trade increased by an astounding and unprecedented 12 per cent. The countries that had well-developed export sectors took advantage of the explosion in world trade. It would have taken a great deal longer for the economies of East Asia, devastated by the currency crises of 1997-98, to recover and go back to growth again had global trade not expanded as fast as it did.

However, the world today is much more protectionist than in 1999. The United States has slammed import duties on steel and has legislated a new farm policy that provides additional favours to the farming community. The European Union has responded with initiatives of its own. These developments also matter to Pakistan. Because of the poor management of the economy in the 1990s, Pakistan did not take advantage of the expansion in global trade. It could have done that with the right set of policies had world trade continued to grow.

By dwelling on these changes in the direction in which the world economy is now moving I want to underscore an important point. The world in which the politicians will begin to operate in October will be much more difficult with fewer opportunities for the developing world than the one they knew a few years ago.

How to curb ‘kleptomania’

Power and property may be separated for a time by force or fraud — but divorced never. For as soon as the pang of separation is felt ... property will purchase power, or power will take over property. And either way there must be an end to free government.

— Benjamin Watkins Leigh

IN the history of post-colonial development, the political system, or in pure legalese, “the state” has always played a critical role in creating and sustaining a wealthy class whether under a dictatorship or a democracy. The system is moulded in such a way that members of the wealthy class get selected or elected to govern.

One of the manifestations of this function in a democracy is the price tag on a seat in the assembly. An honest person who has worked hard all his life, knows his people’s needs and is capable of fulfilling the duties required of a representative, is barred from running for his area because his opponents have sacks full of money and are easily disposed to buy out votes.

No matter how tough the terms and conditions laid down by the election commission, the wealthy candidate finds ways and means of spending money over and above the ceiling set by the commission.

The end result is that the assemblies are filled with people whose only motive to get elected is a lust for the pelf and a ride in a flag-bearing car. Since they have a very vague idea what politics is all about, or what they have been elected to do, they often cannot resist the temptation to use their political power to acquire wealth often with blatant venality.

If one were to doff the puritan cap for a while, then it doesn’t look like a bad idea at all: the state creates a wealthy class, the money thus generated is invested in industry and agriculture which generates employment, money trickles down and viola! we have a growing consumer society. This has happened when the modern industry in Japan was created from scratch by the state and then sold for a song to young entrepreneurs.

The development model of “incubator capitalism” which worked in Japan and elsewhere has not worked in Pakistan for reasons that are embedded in our collective psyche which essentially suffers from a straitjacket of religious morality, fatalism; serious paucity of national pride and lack of a will to succeed. While these are reasons best left for political psychologists to ponder upon, the over-arching reason is the birth of kleptocracy which hoards wealth in foreign banks.

After a decade of grappling with democracy, it would not be totally out of place to assert that while the society has not been democratized as would have ideally been the objective, kleptocracy has grown leaps and bounds. As the economy gets shovelled into a ditch and society blown up like Mount Chaghi, the rulers who have stolen billions from the state coffers are jostling for re-entry into politics. Ironically, civilian and military officials as well as politicians who stole the money and were caught with their hands in the till have entered into a plea bargain and are free citizens. Should they not have been behind bars or assigned to the death squad?

In the early days of post-colonial existence, development economists prescribed several mechanisms whereby bureaucracies were to be used as conduits for the development of an economic base: incentives to set up industry by providing fiscal, credit and infrastructure support; tax holidays; tax-free industrial sites; awarding pioneer status to certain industries; favourable tariff relief; cheap credit through state-run investment banks and so on, all in the name of industrialization.

But what happened in reality was that incumbent governments were taken hostage by a league of kleptomaniacs including politician-capitalists who chewed up public funds allocated for development. Obviously, because the rightful owners of development funds — the people — are powerless. Dubious highly-inflated and lucrative state contracts for supply and construction of infrastructure facilities brought into vogue the culture of kickbacks and bribe.

Whatever the motive and modus operandi of creating and sustaining wealth, the outcome was devastating. Developing countries including Pakistan suffered from an unabated capital flight rather than money stolen from the public kitty staying home and being reinvested in industry and agriculture as was expected. It may be argued that this was not entirely the fault of the local wealth owners. The foreign banks offered better interest rate and better security for their money. So, rather than a trickle down effect, the peripheral countries witnessed a “trickle out” effect.

However, what has trickled down is the league of kleptocracy and the result is that after five decades of independent existence, corruption has become a ubiquitous part of our administration from the highest level to the lowest.

Another negative outcome of such a political gathering that is deprived of political consciousness is their weak position in that they can be bought off at the perils of losing their independent status as true representatives of their constituency to become lackeys. The last political set-up wherein the ruling party was held at ransom by a small coterie was although a direct outcome of a Machiavellian stratagem (14th Amendment, for instance), but what facilitated this in the first place was the members’ sunken moral position.

That the governments had to allow as much as 20 per cent for kickbacks in its development programme and the country is surviving on black money (51 per cent of the economy) shows the dire predicament this country is in. It is not hard to imagine where the money goes in the absence of a viable and fair accountability procedure. By extrapolation one can add up the amount of money that might go walk-about in other budgetary allocations including defence.

The consequence is economic anarchy and collective plunder of the highest order that adds to the burden of collective guilt and lends credibility to the assertion that Pakistan is a failed nation, or a failing nation at best. If the continuing financial seepage leading to economic anarchy is not fixed in time it will undoubtedly keep the country in the whirlpool of poverty and misery with attendant social malfeasance.

In a nascent democracy coagulated with an overdose of emotions, we cannot expect the government to eradicate public corruption from inside. Despite pressure mounted by the media commentators and editors, the civilian government appears reluctant to act thus far it has not been able to take substantive steps in the right direction. Nor has the opposition placed an effective demand, or come up with remedy, to curb rampant corruption.

Independence Day, 2002

THOSE who were adults on August 14, 1947 are now old men and women, those that have not passed away. Then on August 14, 1947, they were yearning to breathe free. Now they are yearning just to breathe.

Fled is the vision as they contemplate the harshness of the truth that it is better to travel hopefully than to arrive. It has been a long haul for that generation and they have seen it all, a little bit of this and a little bit of that, a patch-work quilt of frayed dreams. Pakistan has not been able to get its act together and that system that best suits the genius of the people has remained elusive and the country has been ruled (as opposed to being governed) by those who have applied their own genius to feed their own perception of what is the common good. Let us end this bleating and simply say that it has not worked.

As we set out to observe yet another anniversary, we do so against the backdrop of a horrendous but, no less cowardly, attack on a Murree missionary school by assailants who were able to strike, do their deed and walk away on foot. Of course, there was an outcry and the usual expressions of outrage and the usual promises of leaving no stone unturned to bring the killers to book.

How often have we had to play this scene? We have no idea who carried out this attack but since the target was a Christian missionary school, there is an impulse to give it a religious dimension. It is entirely possible that that was precisely the objective of the killers, to spread the falsehood of the violent intolerance of Islam that seems to have become the conventional wisdom after the September 11 terrorist attacks in New York and Washington. The starting point of any criminal investigation is Cui Bono, who benefits?

In all the terrorist attacks of recent occurrence, the Islamabad church, the bombing of the Navy Coaster carrying French engineers, the US Consulate in Karachi, the murder of Daniel Pearl, there seems to be some terrible method in the madness, to slander Pakistan. It is too simplistic to say that it is pay-back for Pakistan allying itself with the United States in the war against terror.

Why should innocent Pakistanis have to die at the hands of their co-religionists? Whoever these murderers are, they are enemies of Pakistan. Nothing justifies the killing of innocent people and there can be no love in the hearts of such people, only hatred. The Indians take the easy way out. They blame Pakistan or Pakistan-based terrorists for all acts of violence in occupied Kashmir and elsewhere.

There is never any mention of thousands of Hindu civilians that have been armed by the Indian authorities in Kashmir. “There is mounting evidence that some of the militias are using their power to intimidate unarmed Muslim civilians, to drive them from their home and, in, at least three reported cases, kill those who resist,” says Tapan Bose, secretary-general of the South Asia Forum for Human Rights.

For good measure, he adds that in some villages the militias, known as village defence committees, are commanded by outsiders who belong to the Hindu extremist movement Rashtriya Swayamsevak Sangh or RSS. I bet these militias do not come under discussion when someone like Colin Powell or even Jack Straw comes calling.

There is too the back drop of President Musharraf’s visit to Bangladesh and the regrets he expressed for the actions and events of 1971 and he applied a closure to something that has troubled us and shamed us. There was, as to be expected, some semantic nitpicking, whether regrets constituted an apology. Does it matter? “The dead have died” (Garcia Marquez). But it has brought to the fore many opinions and appraisals about the events that led up to the creation of Bangladesh.

Mercifully, it has not opened old wounds, “dead veins to bleed again” (Graham Greene). The discussion has provided a priceless opportunity to re-think the errors made without the hysteria of apportioning blame, disproportionately, on one side or the other. What had started as a clash of mindsets turned into a civil war, to Indian military intervention and finally the emergence of Bangladesh.

I have fond memories of the then East Pakistan and had many friends there. I returned there when it had become Bangladesh and in the eighties, I took a private cricket team, with Imran Khan as captain, to Bangladesh. The cricket team was warmly received and I was able to catch up with friends that were still around and they turned the occasion into a homecoming.

We were careful, however, not to mention any events of the past that had caused so much pain. I met the then President of Bangladesh, General Ershad and he gave me a copy of his book of poems. It seemed to be a metaphor of some sorts, a military man who was a poet. Not being a political person, I did not discuss politics but had no doubts that the former East Pakistanis were more comfortable with me as Bangladeshis. I got the impression, also, that the past was something that had happened a long time ago.

There is, finally, the backdrop of the coming elections. The newspapers are agog with reports and counter-reports of political alliances, of constitutional amendments and innovations, of eligibility and disqualifications, as if, something momentous is about to happen, until it dawns on one, that there is something of a deja vu about it. Democracy is more than a political system. It is a state of mind, a way of life, an awareness of the common good and an instinct when it is not being pursued.

In what category would one place the gang-rape at Meerwala? Perish the thought that I am against elections. I am for them but my expectations are not that high. We seemed to have spent a lifetime in building a civil society and find ourselves, always, returning to the beginning. But Pakistan, as an ideal, lives in our hearts, this August 14, 2002.

The Saudi factor

THE discovery that 15 of the 19 hijackers of Sept. 11 were Saudi Arabian was a shock to Americans who had seen the kingdom as a solid ally despite its deep cultural differences with the United States. The alliance remained after 9/11, but the US view of the Saudis began to shift.

Last week’s disclosure that a briefing for a Pentagon advisory board called the kingdom an adversary of the United States and a backer of terrorism strains the ties even more. The Bush administration hurried to distance itself from the comments and reassure the Saudis. But that doesn’t mean either nation can entirely dismiss the harsh views in the briefing, given by a Rand Corp. analyst.

The analyst, Laurent Murawiec, told the civilian Defence Policy Board that “Saudi Arabia supports our enemies and attacks our allies” and is “the kernel of evil, the prime mover, the most dangerous opponent” in the Middle East. Those statements are 180 degrees from the long-standing policy of the US government, but they do reflect the beliefs of a number of influential conservatives.

The Defence Policy Board, which advises the Defence Department, consists of former government officials including Henry A. Kissinger, who, according to the Washington Post, disagreed with the analysis. The briefing said that if the Saudis did not do more to crack down on terrorism, their oil fields and overseas financial assets should be “targeted.” What that would amount to was not specified.

A Western diplomat in Saudi Arabia said recently that both Riyadh and Washington had high-level diplomats trying to hold the relationship together at a troubling time. The diplomat acknowledged that there was some “cultish feeling” among Saudis for Osama bin Laden as a man who forsook vast wealth to fight Soviet invaders in Afghanistan. The envoy also said the Saudi government, which stripped Bin Laden of his citizenship several years before the attack on the World Trade Centre, had tried to preach a message of “tolerance and moderation” to its subjects since Sept. 11. That message needs much repeating.

The Saudi government views itself not just as a civil authority but as a custodian of the holy places of Islam, the religion that began on the Arabian peninsula. There are different brands of Islam just as there are different branches of Christianity. —Los Angeles Times

Challenges of globalization for developing countries

REGIONAL cooperation within South Asia, the goal of SAARC, has long captivated me. Thirty-three years ago, as a student of economics in my native Belgium, I became enthralled by Professor Gunnar Myrdal’s epochal work “Asian Drama”. In this fascinating book of over 2,000 pages, Myrdal pointed to weak institutions combined with deep-seated attitudes as the root cause of poverty in South Asia.

Rapidly modernizing institutions and mindsets, which had taken Europe centuries, made development not only a monumental challenge but also potentially very rewarding. There is another reason. I am a guest in the subcontinent. But it is disheartening to witness the inability of India and Pakistan to transcend mutual suspicion and hostility and see the common humanity. SAARC can build bridges and advocate the win-win gains that come with economic exchange. My theme is globalization. I like to reflect on how we can make globalization work for the benefit not of a select few, but of everyone in all countries.

I will argue that a market economy that is integrated in the rest of the world offers the best prospect for improving the standard of living of ordinary people, provided — and that is an exacting requirement — that the government puts in place the right supporting policies.

Globalization has helped deliver better living conditions for billions of people around the world. But it does bring risks and costs that need to be confronted. Our job in the IMF is to help our 184 member countries reap the benefits of globalization, not to oppose it.

People have been trading goods, services, capital and information for centuries across national boundaries. But what distinguishes globalization over the past decade is the enormous impact of new information and communication technologies in lowering costs. These cost reductions have led to new investments, new jobs, higher productivity and improved welfare.

Free trade permits countries to specialize in activities in which they are relatively more efficient. The export of millions of ready-made garments from South Asia enables the region to import aeroplanes. Engineers in the United States and Europe design aeroplanes instead of stitching their own shirts. The ladies in the garment factory enjoy a better standard of living than if they stayed jobless at home. Trade is a win-win activity. And trade subjects firms to the healthy discipline of foreign competition forcing them to raise productivity, and thus income and economic well-being.

World prosperity in the past fifty years is based in large part on the rapid expansion of international trade in goods and services which year after year has grown more rapidly than production. Open economies prosper. Every country that has grown fast in the last half a century did so through a strategy of integration with the world economy centred on enhanced exports. Think of China.

Does globalization make the poor poorer? There is no single answer.

On the positive side, some highly successful countries that followed an export-led strategy such as South Korea and Chile prove beyond doubt that globalization can raise the income of the poor. Life expectancy has increased in major parts of the world after the recent decade of globalization. The percentage of the population — although not the absolute number — living in extreme poverty has declined in many regions.

But there is negative evidence as well. The countries of the former Soviet Union saw rising poverty during the 1990s, at a time when they liberalized their trade regime. But this coincidence can be explained. These countries opened up their economies to international competition while they were grappling with massive distortions they inherited from the earlier era of a command economy.

Surely, globalization will not automatically or inevitably eliminate poverty. Poverty is also caused by war, corruption, exploitation of the poor, lack of basic education and preventive health care. These adversities can nullify the positive influence of globalization.

Pakistan, unfortunately, offers negative as well as positive evidence. The percentage of the population under the poverty line increased during the 1990s while Pakistan opened up its economy. The 1990s was a bleak economic decade. But economic growth declined in the 1990s mainly because large fiscal deficits raised the public debt to such a height that the interest burden pressed down public investment.

More encouraging, Pakistan’s 55-year record since independence shows that a three-fold increase in the standard of living of the poor — admittedly from a dismal level — went hand in hand with the growing importance of exports and imports.

The finding that economic growth can benefit the poor should not surprise. Economic growth is the single most important source of poverty reduction. And it is crucial to any sustained increase in the standard of living. But the poor do not share automatically in the increased wealth created by globalization. They do so only if the right supporting policies are implemented for improving the workings the market economy. Only the well-functioning market economy will capture the full benefits of globalization. Only smoothly running economies are likely to attract the high-quality investment that is so important to achieve solid economic growth.

Millions of young people seek jobs. Employing them productively will require substantial investment by the private sector, both domestic and foreign. Nowadays, countries vie for foreign direct investment. Foreign investors bring not only financial resources but also modern technology and access to export markets.

South Asia has attracted less foreign direct investment than East Asia or China. In the case of Pakistan, the impediments include political uncertainty, inconsistent economic policies until recently, deficient law and order, and inadequate utilities and infrastructure. Poor governance deters foreign investors in many countries. Complex and opaque regulatory, fiscal, legal and judiciary-related conditions raise the cost of doing business and increase uncertainty for investors. Enterprises need to be shielded from arbitrary decisions that disrupt their activity.

Obstructionist bureaucracies must be transformed into an efficient civil service. Courts need to protect ownership rights by settling disputes promptly and professionally in a predictable manner independently of the executive branch. Taxation should be simple and rule-based and tax officials must be adequately remunerated and supervised to help bring down corruption. In Pakistan, the IMF has helped the Central Board of Revenue to set up an efficient office for large taxpayers in Karachi, and to modernize the income tax code.

Such key judicial, administrative and fiscal improvements in the market environment are essential for encouraging investment and economic growth. They also improve the security and well-being of ordinary citizens in their daily lives.

The IMF does not advocate a laissez-faire economy. Markets should be supervised. Judicious regulation is essential to help conserve the environment, protect consumers and workers, and prevent monopoly power by encouraging competition. Well-conceived regulation helps win social acceptance for the market economy.

The IMF advises states to leave the actual production in industry, agriculture, banking, etc, to the private sector. But the government should not abandon the economy. On the contrary, the market economy requires enlightened regulation of markets to allow the private sector to flourish.

The need for regulatory supervision is compelling in the financial sector — a key lesson of the Asian crisis of 1998. Prudential safeguards are needed to protect the soundness of banks and to stave off the risk of large-scale deposit withdrawal with potentially severe bankruptcies and deflation. Banks need to provide reliable information on the extent of nonperforming assets and on their own solvency. Bank customers must adopt internationally accepted accounting methods and be audited. Countries require sufficient banking supervisors who are politically independent and impartial.

Accounting scandals in the United States have reconfirmed that any efficient stock exchange requires trustworthy and timely disclosure, and rules against insider trading and market manipulation.

The Asian crisis taught that countries which choose to avail themselves of the advantages of free capital movements should be prepared to accept greater exchange rate flexibility.

The IMF has worked with the State Bank of Pakistan to strengthen banking supervision and unify the foreign exchange market.

Macroeconomic stability through disciplined fiscal and restrained monetary policies is of the essence. Large macroeconomic imbalances risk triggering a foreign exchange crisis which may tempt the government to respond by imposing ad hoc foreign exchange restrictions that can ruin an otherwise profitable investment.

Also, inflation distorts relative prices and harms the poor the most. They miss the skills to protect whatever financial assets they may have and lack the bargaining power in the labour market to maintain their real wages.

Anyone in front of a crowd of voters who asks whether the government should enhance budgetary outlays, and cut taxes, and bring down the deficit, is assured a thunderous yes. Never mind the impossibility of achieving all three simultaneously.

In Pakistan, the IMF is routinely berated for, ‘dictating increases in electricity tariffs and causing poverty by requiring that hitherto exempted items be brought into the tax net.’ But vilifying the news bearer does not alter the message. Persistently high fiscal deficits over many years have fed an inexorably rising public debt that Pakistan eventually could no longer service once shifting geopolitical considerations cut bilateral aid inflows. Retrenching expenditure to match more closely available income hurts.

Pakistan’s private sector does not share the high-saving culture of some other Asian countries. There is a limit to the external debt forgiveness the country can obtain. Military expenditures are large. The elite resists taxation, including a levy on agricultural income. The middle class has turned the page on the spartan consumption level of their parents and is fixed on rising expectations. The very poor have suffered, and now the IMF and donor agencies insist on their protection.

Courage and leadership are needed to form a consensus on how to apportion the adjustment burden in a manner that strengthens the overall sense of belonging in a nation still being constructed.

A well functioning free-market economy requires well targeted social expenditures if the benefits of globalization are to be widely shared. Laissez-faire competition will not likely produce a socially acceptable outcome. Technological change favours employment of the skilled over the unskilled. And those without assets risk being left behind.

For this reason, the IMF urges social consideration in its advice to member countries on budgetary expenditure. More and better basic education and preventive health care should empower the poor to gain the human capital they need to become productive members of society and contribute to economic growth.

Equally, the IMF highlights the need for social safety nets to facilitate adaptation of workers and enterprises to increased competition and market exposure and to protect them against temporary surges in unemployment and income loss.

The consumption of the poor has risen in absolute terms but upper income groups have benefited more. Growing inequality breeds resentment and risks undercutting the political acceptability of an open, private-sector-led and market-based economy. The need here is to design protection of people efficiently so as to minimize its costs to society. Well focused social expenditures in the budget do this better than trade protection.

The mutual gains of exporting textiles from South Asia while importing passenger planes are obvious — for now. But over time, the girl in the factory may wish to graduate beyond stitching shirts and hope, perhaps for her son, to become an engineer himself one day. Skills and endowments shift over time and so does the pattern of specialization in production.

Following the demise of colonialism, the newly independent states resisted exporting raw materials: “Let’s prohibit or put a tax on the export of timber so as to encourage local production of plywood for export, or even better, furniture,” they would say. Why export hides and skins and furnish raw material to tanneries in Europe? We should employ our own people here to produce leather and shoes. And instead of importing, let’s industrialize rapidly and produce locally under tariff protection.

I endorse the natural progression whereby developing countries move into higher-value-added activities, pay higher wages to their workers because their output grows in value and become themselves eventually uncompetitive in producing simple goods and services against countries with even lower wages. Thus, over the past fifty years we have seen shipbuilding, electronics, and IT software migrate from Western Europe via Japan, then Korea and Taiwan, and toward South Asia. At issue is not the process or its outcome, but whether reaching the destination is facilitated or hindered by trade protection.

Until 1990, South Asia remained one of the least integrated regions in the world economy. India led the way in pursuing inward-oriented policies that accorded the state a dominant role in directing economic development toward heavy industry and limited the development of the private sector, particularly in so-called strategic areas. A vast network of government controls and subsidies emerged to manage economic decision making comprising overvalued exchange rates, quantitative restrictions and tariffs, and industrial regulations associated with import substituting industrialization.

The centrepiece of this strategy was the infant industry argument: “Our industry needs import protection, temporarily, until we have acquired the necessary skills to confront international competition.”

The problem with high trade protection was not the objective. The wish for rapid industrialization can be understood. And admittedly, the strategies that were followed did produce some qualified economic successes: higher economic growth than during the colonial period, and some diversification and development of an industrial base.

But for many countries, the cost of the inward-looking strategy became excessive. Economic growth rates faltered. Subsidies and loss-making public enterprises inflated fiscal deficits. Overvalued exchange rates nipped the development of a diversified and internationally competitive export sector. In smaller countries, the narrow domestic market precluded the cost reductions from economies of scale that would have come with producing for the world market.

This led to unsustainable external debts and payment crisis. Industries remained dependent upon the pampers of protection until well into adult age. Consumers paid the price in the form of expensive imports or lower-quality local fabricates Commercial banks grew weak or insolvent as political leaders forced them to finance well-connected but loss-making industrialists. Protection bred privilege and administrative discretion fostered corruption.

Thus the system of import substitution based on excessive controls and subsidies was gradually replaced by: lower and more uniform import duty tariffs; a market-based and more competitive exchange rate for exports; and a more hospitable environment for foreign investors.

We accept competition in sports and arts where we recognize that it can spur performance and lead to excellence. But in the economic realm, competition has a bad name. Industry in Pakistan has been exposed to greater competition but is still often seen as asking financial relief and protection, oblivious to the question who will pay. The preferred course in my opinion is to identify the key institutional failings that depress profitability and insist with the government and society at large on their resolution.

Developing countries rightly demand greater access for their agricultural products and textiles to the markets of the US, Japan and Europe. Import protection in the rich countries favours their large farmers and textile workers at the expense of consumers who pay higher prices. Particularly harmful are the agricultural support prices and export subsidies that encourage overproduction of sugar, wheat, cotton and other products. Export of these surplus commodities depresses world market prices to the detriment of producers and exporters in developing countries.

What is the stance of the IMF? We urge the rich countries to lower import barriers and to provide social safety net protection and reschooling for workers who lose their jobs. We acknowledge the desire in those countries to preserve the rural landscape but stress the need to redesign protection in a manner that does not encourage overproduction in agriculture.

Free trade advocates are typically a minority. They are easily overwhelmed by lobbyists for protection because the benefits of free trade tend to be diffused over a large number of consumers and many potential exporters. By contrast, the cost of removing trade barriers is concentrated in a few producers and therefore more visible and surely more audible.

In the end, the issue comes down to the optimal pace at which countries and different economic actors within countries are forced to adjust. Will more rapid dismantling of import protection be accepted by industries in rich countries? Surely, the population of poor countries should not be told to just exert more patience and hold back their expectations.

The pace of change — whether fiscal retrenchment within one country or trade liberalization among countries — needs to be accepted. Ultimately, people and countries must work towards a vision of how their societies can better interact to unfold their true potential. SAARC is eminently important to this effort. In my earlier work at the IMF in other continents, I invariably stressed the superior economic benefits that come with multilateral trade liberalization, such as under the WTO, over those derived from regional or bilateral free trade agreements. But in our current predicament, genuine cooperation between the largest member countries of SAARC would be unimaginably rewarding.

Looking ahead, the countries of South Asia face attractive prospects. Their young populations will meet a growing demand for labour from the rich countries which are greying rapidly. In turn, South Asia’s economies should put to good use the capital which the rich countries will need to invest to fund their pension benefits. Trade with neighbouring China offers further possibilities. The internet creates undreamed of learning opportunities. Human talent from South Asia is found at top levels in universities and other institutions across the world. Countries do move up in rank. Labelling Singapore or South Korea a developing, let alone underdeveloped, country now sounds bizarre.

In conclusion, globalization has undeniably provided enormous opportunities for transfer of technology, investment and economic growth. It has brought unprecedented economic expansion, but has also widened the divergence of opportunities. Turning back the clock will not restore tranquillity. globailization will not go away. Like wind and water it can be destructive. But like these forces, globalization can be bent and made to work for all. that is the challenge we face.

The writer is the senior resident representative of IMF in Pakistan.