GERMAN-American relations have been thrown into crisis by the way Germany’s election campaign was conducted by its governing party. Other allies have had reservations about American policy on Iraq. None has chosen the road of confrontation.

The cause for this sudden deterioration is complex. Some ascribe the sudden and quite unexpected shift of German policy to electoral opportunism. But Chancellor Gerhard Schroeder’s motives are not the issue. For the anti-American campaign clearly appealed to a constituency large enough to transform Schroeder’s expected defeat into victory. Hence a kind of anti-Americanism may have become a permanent feature of German politics.

This is especially painful for those of us who actively nurtured what we consider one of the proudest achievements of American post-war foreign policy: the return of Germany to the community of nations as an equal, respected and indispensable member. It was a journey marked by the Berlin airlift; the Marshall Plan; support for Germany’s membership in NATO and the European Community; close cooperation in two further Berlin crises; American support (overcoming initial doubts) for the German reconciliation with the East (Ostpolitik); American leadership in negotiating a final agreement on access to Berlin; and, finally, American unconditional support for German unification despite the hesitations of other allies, not to speak of the Soviet Union. Germany’s contribution was the courageous decision to postpone unification, when Stalin offered it in return for Germany’s rejection of NATO, and its decision instead to tie its future to European unity and Atlantic partnership.

This forging of a common destiny did not prevent occasional disagreements regarding specific policies. But up to now, they were based on differing interpretations of, and responses to, unchallenged common interests.

This explains the shock when suddenly, without warning or consultation, an election issue was made of American policy on Iraq. German participation in a military conflict with Iraq was rejected and the use of German bases proscribed, even if backed by a UN vote and whatever the other members of the European Union or NATO might decide. This dramatic refusal in the name of a so-called “German way” was proclaimed despite the fact that no request for a German military contribution had been made or was likely to be made. The policy was accompanied by sharp criticism of a speech by Vice-President Dick Cheney and of the alleged unilateral tactics of President George W. Bush.

In this atmosphere, the word “American” occasionally turned into an epithet, even when applied to American domestic economic policies. The comparison of President Bush’s domestic methods to those of Hitler by a cabinet minister was an aberration, but it grew out of a mood that had been deliberately fostered. A leading official of the Social Democratic Party compared the American ambassador to the Soviet special representative to East Germany Abrasimov; others described American policies as Caesarean. And the tone-deafness vis-a-vis American sensitivities continued after the election when the newly designated state secretary in the German foreign ministry, Klaus Scharioth, described the new American doctrine released by the White House as reminiscent of the Brezhnev Doctrine.

The impact of this campaign on the German electorate is shown by the fact that Schroeder’s opposition, the historically pro-American CDU, did not dare refute the attack in substance. Though it warned against basing a campaign on offending Germany’s most powerful ally, it went reluctantly along with the refusal of military cooperation and of the use of NATO military bases located in Germany. This suggests that the causes of the existing rift go deeper than electoral opportunism, American unilateralism and disagreement over Iraq policy.

The end of the cold war has removed the fear of a common danger. For four decades, German governments treated the American alliance as the key to German security and to the political legitimacy of the new Germany. Neither condition obtains to a similar extent today. There is no sense of overriding danger, and Germany rightly no longer feels the need to pay a price to vindicate its legitimacy. Thus the issue of Iraq has become a pretext for a re-orientation of German foreign policy in a more national direction.

The generation that created the German-American relationship is passing from the scene. On the American side, its members came from the Eastern establishment, leavened by some emigres. Both groups had formed personal relationships that enabled them to understand the spiritual crisis through which Germany moved, and they believed in the great positive potential of the German people.

On the German side, the post-war leaders had consciously turned away from a past in which Germany had overreached, partly as a result of totalitarianism but even before that because of an inability to establish national priorities that related German aims to its capabilities. That German generation saw its primary goal in establishing a reputation for reliability and constancy within Europe and the Atlantic Alliance.

The new leadership groups that have emerged on both sides of the Atlantic have not shared in the experience of the war and of post-war reconstruction. They are either not preoccupied with foreign dangers or, to the extent that they are, believe themselves capable of dealing with them unilaterally. The Atlantic Alliance, once the centrepiece of policymaking, now concentrates on expanding its membership — even de facto including the erstwhile adversary — and thus on expanding its reach without redefining its purpose. In the United States, the political centre of gravity has shifted to the centre of the country, a region whose leaders have fewer personal connections with Europe and less experience with its challenges than their predecessors, who created the post-war structure. And they are in power in a United States that enjoys unquestionable military supremacy and thus has modified its approach to alliances.

As the victim of 9/11 and as the dominant military power, America feels itself responsible for global security. But in Europe, the focus is on domestic politics rather than on international affairs. European leaders spend an enormous amount of their time on the technicalities of European unification — an arcane subject for most American leaders. This emphasis on bureaucratic, constitutional and legalistic arrangements contrasts with a US that emphasises its exceptional character and the applicability of its institutions to the rest of the world.

Germany is challenged by these realities in an especially acute fashion. It achieved national unity later than any European country and acquired its present dimensions and structure only a little more than 10 years ago. It therefore has less of a tradition of global foreign policy than the other major countries of Western Europe. Its domestic problems are more severe. It is governed by a coalition whose leaders had their formative experience in the protest against American policy on Vietnam, even participating in some of its more violent phases.

To be sure, farsighted leadership in both coalition parties enabled them to govern with programmes sustaining Atlantic ties, if not with passion at least on the basis of realistic assessment. But it did leave a residue on the left wing of each party, which could be easily mobilized by appeals to traditional anti-Americanism.

This situation is compounded by the special psychological condition of the eastern part of Germany. East Germany was liberated as much by western pressure as by the actions of its own internal resistance. And its economic reconstruction has taken place under West German aegis. As a result, the East German population takes less pride in economic accomplishments, is more conscious of lingering unemployment and is less tied to the West than the populations of, say, Poland, the Czech Republic or Hungary, which, also being more afraid of Russia, veer more toward the United States. East Germany went from Nazism to communism without any experience of democracy. Its population tends to view itself as victims of history and, to some extent, of western globalism.

Thus, at the end of the German election campaign, the margin of victory may well have been supplied by a combination of pacifism, left and right nationalism, and an evocation of a specifically German way reminiscent of Wilhelmine Germany.

Foreign policy expert Karsten Voigt, in charge of American relations in Germany’s foreign office, summed up this new attitude: “We do what makes sense to us; we do nothing with whose substance we disagree.” But foreign policy rarely permits such absolute distinctions. No country should be asked to act against its interests or its notions of common sense. But neither should it conduct a foreign policy that makes no allowance for the views of other societies — and especially of close allies — particularly when it is located in the centre of the continent.

Thus the new self-proclaimed German way is a challenge not only to the US but to Europe as well. It implies an end to the acceptance of French political leadership on European matters, which was the hallmark of German policy before unification. It raises questions of a claim to European leadership, perhaps in cooperation with Russia, that hearkens back to some Prussian ideas of the 19th century. And it raises questions about the direction of the expanded Atlantic Alliance. Germany is too important for Europe and America not to work on overcoming the existing tensions. But there is a need to recognize that the rift was not an accident, and it cannot be remedied by pretending that it can be overcome on the basis of personal relationships.

The various schemes in the German media by which Germany could make up for the conduct of the campaign by new financial contributions, such as paying for civilian reconstruction in Afghanistan, are beside the point. Nor should the United States make any effort to enlist Germany in its Iraq policy; those decisions should be left to Berlin without pressure or persuasion. The international environment will produce enough situations where both sides can test their ability to develop common approaches, and not only in the Middle East — especially as Germany assumes the chairmanship of the UN Security Council in February. A sober, realistic approach on both sides is indicated. There is no point in recrimination but equally no sense in denying that some confidence has been lost.

A major effort should be made to deal with the conditions from which the explosive mix of the German electoral period emerged. Both sides should take seriously the other’s concern regarding unilateralism. They should attempt to answer the basic issues of the direction of the Atlantic Alliance, the relations of Europe and America, and a definition of the German way that draws the appropriate lessons from history.

—Dawn/Tribune Media Service

THE architecture of international finance created by the Bretton Woods conference held in 1944 while the Second World War was still being fought has served the global community very well. It was able to change and adjust as the global economy evolved. It became truly universal as Russia and its former satellite states gained membership in the early 1990s. Cuba and North Korea are the only relatively large countries that have yet to enter the system. Nonetheless, not everybody is happy with the way the system is working.

The original Bretton Woods institutions — the IMF and the World Bank — came under a great deal of pressure following their advocacy of policies of economic liberalism to the countries in economic distress. At their annual meetings in Madrid in 1994, a group of organizations assembled under the umbrella of an entity that took the name of “Fifty years is enough” began the campaign aimed at dismantling the two institutions. Most of the ire of the demonstrators was directed at the IMF.

However, the criticism of international financial institutions was not limited to the Fund. The World Bank group also came under heavy fire from a number of groups who were troubled by some of its policies. There were those who did not approve of the IFIs continuing to receive repayments of both principal and interest from the countries that were heavily in debt. The agitation by these critics, with a non-government organization called Jubilee 2000 the most active participant, was to lead to the adoption by the IFIs of the ‘Heavily Indebted Poor Countries Initiative’. The HIPC programme aimed at providing relief to the countries for whom servicing debt had become particularly onerous.

There were also criticisms that the international financial institutions had contributed to the degradation of the global environment by not focusing on the impact of the investments the developing countries were making under their watch and with their financial support. These complaints led to the creation of an external panel on the environment at the World Bank which was given the mandate to receive reports from all those who feared the adverse environmental impact of the projects financed by the institutions. The panel could pronounce judgment on the complaints and cause the Bank to take ameliorative action.

The panel’s work had some consequences. For instance, it was the strong resistance on the part of several communities living in Nepal that led to the withdrawal of funding by the World Bank from a large and ambitious water management and hydroelectricity project in Nepal. Located at Arun, the main beneficiary of this project was to be India that was — and continues to be — seriously short of electric power.

This attention to the environmental consequences of large projects — in particular dams — was to seriously inhibit the involvement of the World Bank and other multilateral and bilateral development institutions in these projects. For the last several years international financial institutions have been unwilling to finance the construction of large dams. For instance, while the feasibility study of the immensely large Three Gorges Dam on the Yangtze River in China was endorsed by the World Bank in 1988, the institution chose not to participate in its financing. The Chinese decided to go ahead with the construction of the dam without waiting for the multilateral development banks to join the effort.

There are a number of irrigation and hydropower projects around the globe that are on hold because of the reluctance of the donor agencies to provide for their planning and construction. The Kalabagh Dam on the Indus River in Pakistan is one example of such a project. Numerous studies carried out on the Indus River Basin, some with the support of the World Bank, have shown how critical this dam is for managing the water supplies in this large river and its many tributaries. However, a resource short country such as Pakistan would find it hard to proceed with the construction of the dam without the financial support of a major aid agency such as the World Bank.

The Bank’s new policies and its reluctance to finance large dams has placed Pakistan in a serious dilemma. Should it give up its efforts to secure foreign aid for the construction of a dam considered vital for the growth of its economy, in particular the development of the sectors of power, irrigation and agriculture? Or, should it follow the route taken by China, which went forward with the construction of the Three Gorges Project but without foreign aid? The Chinese have found finance for their project by tapping the relatively more expensive “supplier credit” markets. Or, again, should Pakistan undertake the project by starving the other sectors that are also desperately short of finance? The last two options would add enormously to the expense and, therefore, to the economic return of the project.

In other words, by largely succumbing to the pressure of civil society and adjusting their policies to save themselves from a great deal of often uninformed criticism, multilateral development institutions like the World Bank have hardened the choices that countries such as Pakistan must make.

The institutions created as part of the Bretton Woods consensus have made adjustments in their original mandate to accommodate not only the changes in the global economy but also to soften some of the criticism levelled against them. The flexibility displayed by the IFIs no doubt created a level of comfort with a multilateral approach to economic management at the global level to set the stage for the eventual establishment of the World Trade Organization (WTO).

The conferees at Bretton Woods wished to rest the post-war international economic order on three pillars — the IMF, the IBRD, and the WTO. It took the world close to half a century before an international trading organization could be created with the mandate to adjudicate disputes among member nations. The dispute resolution mechanism was the most important part of the WTO’s charter. Established in 1995, following the successful conclusion of the Uruguay Round, the organization now has 144 countries. China is one of the newest members, gaining admission into the Geneva-based organization in January 2001.

By the close of the 20th century, it appeared that the international financial institutions had matured to the point where they could comfortably balance the various — and often conflicting interests — of the different segments of the global society. The original purpose of the Bretton Woods institutions — reconstruction of the war-torn economies and the development of the former colonies of Europe — was now replaced with a much broader mandate. It included human resource development, formation of social capital, improvement in the quality of governance, saving the physical environment, and protecting the more vulnerable segments of the societies in the developing world. However, the leaders and policy makers of the international financial institutions did not anticipate an assault on their very existence from an unlikely source — the government of the United States.

When the administration led by George W. Bush came into office in January 2001, it found an international financial system that did not conform to its highly conservative views. The new leaders of America were deeply wedded to the markets as the only place where economic decisions should be taken. Their approach towards the World Bank group and regional development banks had been articulated at considerable length by a commission headed by the economist, Alan Meltzer. The commission was established during the waning years of the administration of President Bill Clinton. Its conclusions surprised the development community. It proposed a sharp scaling down in the operations of multilateral banks.

According to the commission’s view these institutions, if they had any role at all in global finance, should provide resources to poor countries who did not have the creditworthiness to access capital markets. For these countries, resource flow should take the form of grants rather than loans. Lending by multilateral agencies, even on below-market rates, had created a serious debt problem for poor nations. It was important to prevent that from happening over and over again. The IFIs had no reason to be involved in the countries that could borrow from the markets.

In so far as the Fund was concerned, the Bush administration was not in favour of large multi-billion rescue packages the institutions had put in place over the last several years. If countries could not meet their obligations, then the creditors who had lent them the money in the first place should suffer the consequences. Country defaults should not be treated as developments the global markets did not have the capacity to bear and absorb. There was no need for the Fund to step in to resolve such crisis. The Fund’s role should be to prevent crises from happening not to address them once they occurred.

This attitude towards the IFIs was reflected in the initial approach of the Bush administration towards the World Bank group and the IMF. As the World Bank began to negotiate the 13th replenishment of IDA, the US Treasury demanded that a significant proportion of the money the donor countries were to provide should be given out as grants, not as loans. This approach would have bankrupted IDA over time since the amount of development assistance provided by the world’s rich countries has steadily declined. An increasing proportion of IDA has been financed from “reflows” — the money repaid by borrowers. In fact, today a sizable amount of lending by IDA comes from reflows from India and Pakistan which were the two largest borrowers from the institution for many years.

If IDA resources were to be provided as grants rather than as loans, reflows would eventually dry up and the Institution will become dependent entirely on fresh flows from the donor. Since the donors have not been generous with new money for aid, the approach advocated by Washington would seriously reduce the size of IDA. But this fear did not seem to have concerned the officials of the Bush administration. They pressed ahead with their demand that a greater proportion of IDA funding should take the form of grants and ultimately forced an agreement among the donors according to which a significantly large share of the total amount of resources will be committed in this way by the institution.

The Bush administration’s highly critical view of international financial institutions was a part of its broader scepticism about development aid in general. It was not persuaded that billions of dollars of assistance that had gone to 150 nations in the developing world had done much good. How should this problem be solved — by being selective? We will get to that subject next week.

IN the sense that the foreign policy objectives of a country depend on the correlation between its perceived interests and the realities abroad, the post-Sept. 11 developments have opened up new avenues for Pakistan-US relations.

Next only to America and Afghanistan, it is Pakistan which has been affected more than any other country in the aftermath of 9/11, causing significant changes in its regional and domestic policies. The reversal of the policy towards the Taliban following the decision to join in the US-led war against terrorism changed the course not only of Pakistan’s regional policy, but also of its domestic orientation.

While a policy of support for the war against terrorism extended by the government has been warmly appreciated by the US and the West, the nature and extent of this involvement continue to be circumscribed by popular sentiments against the ravages of US bombing in Afghanistan and the killings of innocent Afghans in the anti-Taliban and Al Qaeda operations there.

The tragic events of 9/11 have given Washington an opportunity to go after elements and groups resorting to violence as a mode of political action or are perceived to be actually or potentially hostile to the interests of the US or its allies.

To enable Pakistan to implement the reforms initiated during the past three years, with particular emphasis on containing religious extremism, it is imperative that serious efforts are made to revive the economy.

Positive factors having a bearing on the relevance and significance of Pakistan for the US include this country’s role in the war against terrorism and Pakistan’s cooperation in the crucial task of restoring peace and security in Afghanistan and in re-building its shattered infrastructure. Longer-term considerations for the US would include Pakistan’s geo-political significance; the access that Pakistan and Afghanistan together can provide to the energy resources of Central Asia and the strategic relevance of Pakistan to any future conflict in the oil-rich Gulf region. Pakistan’s traditionally moderate and active role in the Muslim world and the renewed interest of its leaders and elite in setting the example of an enlightened and progressive Muslim state as a stabilizing force in a volatile region are other positive factors of interest to the US and the West.

The latest US national strategy paper refers to “relations with Pakistan as having been bolstered by Pakistan’s role in the war against terrorism and [its] willingness to move towards a more open and tolerant society.”

A brief review of Indo-US relations would be relevant in view of their impact on the course and conduct of Pakistan-US ties. perceived convergence of US-Indian interests in many important areas derives primarily from the post-cold war world order and more recently from the post-Sept. 11 situation. This includes a shared interest in containing China, in combating Islamic militancy, sharing reciprocal benefits of markets and transfer of technology and in safeguarding the oil transporting arteries of the Indian ocean and Arabian sea. Praful Bidwai has written recently of the “loyal Indian ally escorting US warships up to the Straits of Malacca.”

The US must look beyond terrorism to its long-term role in South and Central Asia. Promotion of relations with India should not be at Pakistan’s expense. Since two-thirds of Pakistan’s budget goes to debt servicing and defence, a proactive role by the US in the resolution of the Kashmir conflict would lessen Pakistan’s financial burden on account of defence, apart from serving the interests of peace South Asia.

Implementing the decisions taken at the revived US-Pakistan Defence Consultative Committee meeting in Islamabad recently would serve the interests of regional stability by redressing the imbalance in the conventional defence capabilities of India and Pakistan. The extent to which the US would actually be willing to redress the conventional military imbalance between India and Pakistan will be clear from Washington’s response to Pakistan’s request for major weapon systems.

With the formal acceptance of India and Pakistan’s nuclear capabilities and the lifting of sanctions, the US should act to prevent any action by India that is likely to spur a race in the missile and related fields, in the light of Pakistan’s repeated proposals for strategic restraint. Any transfer to India of US technology relating to missile defence would increase the chances of Indian aggression and of a threat to peace in South Asia.

(c) Stemming flow of new NPLs: The banking sector reforms implemented since 1997 have improved the quality of assets. The flow of NPLs has been significantly contained. The ratio of NPLs to total loans disbursed since 1997 has remained around five per cent — much lower than international norms. This will ensure that the future ratios of NPLs will look much better than the historical or current ratios.

It has also been observed that the NPLs and their ratios to advances are much lower in case of domestic private banks and foreign banks. As the nationalized commercial banks (NCBs) and DFIs are privatized or liquidated or merged the incidence of new non-performing loans will be reduced significantly.

There has been a perceptible change in the credit culture of the NCBs which now pay increasing attention to more rigorous credit appraisal, proper credit documentation, monitoring and follow-up. Their managements have also developed mechanisms for better risk management and discontinued lending on political considerations.

This new credit culture, of course, has some negative aspects in that credit officers have become more averse to risks in recommending new loans and the potential borrowers have become more cautious in contracting new loans. A decline in private sector credit can be partially attributed to this risk aversion among the bank credit staff. The SBP is trying to mitigate this by asking the banks to diversify their portfolios and open up new lines of business — consumer financing, mortgage financing, SME lending, microfinance, agriculture credit and thus manage the aggregate risks better. This diversification and risk management strategy should help meet the broad credit demand of the various segments of the economy and also contain the volume of non-performing loans.

(d) Policy and regulatory environment: The State Bank’s policies and regulatory environment have also been revamped to resolve this problem. Interest rates have declined significantly and low interest rates should help borrowers in repaying their stuck-up loans. Information on exposure to various individual companies and groups will now be available to the banks on-line to help them in making informed decisions on credit extension.

The protracted and cumbersome legal processes and prolonged litigation for execution of decrees have been a major stumbling block in the recovery of loans. An important development has been the enactment of a new recovery law in 2001 which enables the banks to repossess the collaterals without recourse to litigation. A new bankruptcy law is also in the offing to permit orderly resolution of debtor obligations under distress.

The SBP has also strengthened its supervisory capacity by shifting to risk-based supervision and by assessing the strengths and weaknesses of internal controls, systems and risk-management mechanisms within the financial institutions. The supervisors make a more prudent evaluation of the provisioning requirements and take corrective actions to enable the financial institutions to set aside the right amounts of provisions.

The introduction of market-based instruments, swap desks, development of a yield curve, allowing the banks to raise second-tier capital through subordinated debt and matching their asset and liability maturities are some of the additional steps which have been taken by the SBP to facilitate the banks to manage their risks in a more prudent manner.

To sum up, while significant progress has been made in dealing with the old stock of non-performing loans of the banks and DFIs, the SBP is still not satisfied with the existing situation. The good news is that the proportion of NPLs among the new loans approved since 1997 is shrinking while a combination of policies aimed at cash recoveries, rescheduling, restructuring, sale of assets to third parties, execution of legal decrees, write-off of aged and irrecoverable loans are being pursued to reduce the quantum of old stock.

For a variety of reasons — legal, accounting, valuation, prudential and regulatory — while the stock may continue to show an upward rise as mark-up is added over time to overdue principal, exchange rate revaluations are effected and more rigorous standards are applied by the SBP in classifying and reporting these loans. This rise should, therefore, be seen in the correct and overall perspective, as explained here.

(Concluded)

The writer is the governor of the State Bank of Pakistan.