Bureaucrats in business
By Shahid Javed Burki
TO understand what happened to the financial sector in Pakistan during the period of President Ziaul Haq — which is the subject of today’s article — we must take a look at the progressive bureaucratization of the economy. This process was begun by Zulfikar Ali Bhutto but brought to fruition by the Zia administration.
“Bureaucrats in business,” a study published by the World Bank in 1995, arrived at a number of conclusions that surprised few practitioners of development. “Bureaucrats are still in business,” lamented the World Bank. This was the case despite more than a decade of divestiture efforts and the growing consensus that governments perform less well than the private sector in a host of activities. The World Bank found that state-owned enterprises (SOEs) accounted for nearly as large a share of developing countries in the mid-1990s as in the mid-1970s.
The Bank also discovered that the size of the SOE sector had diminished only in the former socialist economies and a few middle-income countries. In most developing countries, particularly the poorest, bureaucrats ran as large a share of the economy as ever. The bureaucrats were engaged in a variety of activities for which they were not well suited nor well trained. “Government employees operate a casino in Ghana, bake cookies in Egypt, assemble watches in India, mine salt in Mexico, make matches in Mali, and bottle cooking oil in Senegal,” reported the World Bank. “In many developing countries that continued to support large SOE sectors, inefficient state-owned firms generated deficits that hindered economic growth, making it more difficult for people to lift themselves out of poverty,” concluded the World Bank.
All this, of course, was also true for Pakistan. Following the spate of nationalizations carried out by the regime of Prime Minister Zulfikar Ali Bhutto, civil servants were managing commercial and investment banks, insurance companies, cotton and rice trading corporations, and a host of industrial enterprises. There was a tremendous irony in the way Bhutto had implemented his programme of socializing the country’s economy. His programme extended the arm of the government to the sectors of the economy with which the bureaucrats were not familiar.
All this was done while the administration was busy in weakening the civil service, destroying its institutional base and making it totally beholden to politicians. In Pakistan, under Bhutto, a weakened and dispirited bureaucracy was given the task of running a variety of businesses. It is not surprising that the bureaucracy failed in this mission.
The bureaucracy staged a come-back during the Zia period. It did not reach the commanding heights it had occupied during the time of Ayub Khan but, under Zia, it gained a great deal of strength and salience. In this it was helped by the hold it now had over the part of the economy owned by the state.
Let us place Pakistan’s situation in perspective by looking at some numbers about the importance of the SOEs in the developing world. In 1978, one year after the military’s return to power, SOEs accounted for 9.4 per cent of Pakistan’s gross domestic product. This was slightly higher than the average for all developing countries (9.1 per cent), considerably higher than the average for Asian countries (8.8 per cent) but significantly lower than the average for all poor countries (11.3 per cent). What is interesting — and revealing — is the fact that this share increased in Pakistan under the rule of military’s second coming to 9.4 per cent in 1978-85. In the same period, the share of SOEs in GDP for all low-income developing countries also increased somewhat (to 12.4 per cent) but not as much as was the case for Pakistan.
The state-owned enterprises were much more active in the non-agricultural part of the economy in all developing countries, including Pakistan. For this part of the economy, these enterprises continued to increase their share in gross domestic product. In 1978, they accounted for 12 per cent of GDP but in 1978-85, their share increased by nearly 20 per cent, to 14.3 per cent. The state sectors onward march that had begun under Zulfikar Ali Bhutto continued unchecked during the administration headed by General Ziaul Haq.
The SOEs continued to do well in the late 1970s and early 1980s since they were allowed to claim an extraordinarily high share in domestic investment. In 1979, two years into the Zia period, the enterprises owned by the government accounted for nearly 53 per cent of gross domestic investment, more than four times their share in GDP. For the 1978-85 period, the government-owned entities were able to garner 35.8 per cent of gross domestic investment. The Pakistani state used a variety of resources — from the public sector as well as the private sectors of the economy — to provide financial resources to the SOEs.
These enterprises were funded directly from the budget. They were also provided resources by the numerous development finance corporations that operated in the country. They received finance from the commercial banks that were now under the control of the government. With the SOE sector in competition for national resources with the private sector, it is not surprising that the latter did so poorly in the 1970s and 1980s.
The only positive feature of the expansion of the state enterprises in the 1970s and 1980s was its relatively small dependence on external savings. In 1978, they accounted for less than four per cent of Pakistan’s total external debt. However, the average for 1979-85 increased somewhat to 4.6 per cent.
It is quite apparent from the way Pakistan’s four military presidents dealt with economic development that what matters more are the beliefs and the values of the man in power. Ayub Khan and General Pervez Musharraf were deeply interested in economic development and were personally involved in economic decision-making. Generals Yahya Khan and Ziaul Haq, on the other hand, delegated most responsibility for economic management to civil servants. M.M. Ahmad oversaw the economy under President Yahya while Ghulam Ishaq Khan was the economic czar under Ziaul Haq.
Had Ishaq Khan been so disposed, the military government that he served may have been inclined to privatize the enterprises over which the state had established its control during the Bhutto period. But the advice that was given to him extolled the virtues of the public sector. He was told that Pakistan had not been well served by the private sector. Private entrepreneurs had used government resources for personal advantage rather than for social gain. The government had to step in time and again to rescue failing, privately-owned, industries. Accordingly, Zia was advised that it was much better to let the government manage the economy than to place its trust in the private sector.
Multilateral development banks had also come to the conclusion in the 1980s that public sector management of some parts of the economy may not be undesirable provided the bureaucrats who ran state-owned businesses followed some well tested principles of management. They advised governments to subject public sector managers to greater competition and hard budget constraints. And they suggested that the bureaucrats who managed SOEs should have their compensation linked to performance.
In sum, the Zia administration stayed with the course the Bhutto administration had adopted. It made no attempt at divestiture and privatization. Scarce government resources continued to be committed to the expansion of the public sector, in particular in industry and finance. In fact, the increase in the power of the bureaucracy as the manager of the economy — at any rate, of the dozens of enterprises in the financial, industrial and commercial sectors that were of vital importance to the health of the economy — brought about a fusion among different sectors. This was dangerous since such a close association between industry and finance, with the bureaucracy in the driving seat, excluded the discipline of the market. The Zia administration could have achieved its goal of keeping some of the more strategic sectors if the economy under its control had it reformed the financial sector.
A well developed financial system plays a number of important roles that contribute to the successful operation of state-owned enterprises. An efficient financial sector allocates its resources to enterprises with high expected returns. The managers of financial institutions evaluate firms, managers, sectors, and business trends in order to choose the most promising and creditworthy ventures. In such a system, SOEs such as PIA, Wapda, the Sui Gas Companies, the Karachi Steel Mill, etc. will have to compete not only with one another but also with the enterprises in the private sector. The better the financial system is at obtaining and analyzing information the better the allocation of capital.
The financial sector raises capital from disparate savers through banks, insurance companies, pension funds, investment banks and capital markets. By accumulating these resources, financial institutions can raise funds for large SOEs and projects. A well developed financial system can also help improve corporate governance in the public sector. Managers of SOEs will take care to ensure that their enterprises are being run according to the expectations of the financial institutions from whom they have borrowed or obtained money.
While, during the Zia period, some attention was given to improving the working of non-financial SOEs, the financial sector remained unreformed. Consequently, its efficiency deteriorated. We made the point in an earlier article that the performance of the economy, including its rate of growth, depends to a considerable extent on the efficiency of the financial sector. If what we have said above about the working of the financial system during the Zia years is correct, then how do we account for the high rates of growth during this period? The economy expanded by more than six per cent a year, a rate of growth similar to that of the Ayub era.
This question has an easy answer. The growth rate during the Zia years was almost entirely the consequence of large inflows of foreign capital, both as remittances sent by the Pakistanis working abroad and also the generous assistance provided by the United States to compensate Pakistan for the help it was then providing in Afghanistan.
The financial sector had little to do with the high rate of GDP growth. The full impact of the neglect of the financial sector was felt in the 1990s, the period we will cover next week.


Chirac under pressure
By Paul Michaud
IN SPITE of opinion polls that show the overwhelming majority of the French opposed to a war with Iraq — with the most recent polls indicating that three out of four are against war — there is a growing pressure from corporate sector on Chirac government to reconsider its position.
The apprehensions are that opposition to war could eventually result in France being deprived of important defence and construction contracts if ever a war is declared, and won, under the leadership of the United States and Britain.
France has repeatedly stated since last fall when it was one of the principal architects of United Nations Security Council Resolution 1441 that war against Iraq can be authorized only through a new resolution by the Security Council, and that it behoves Iraq to come clean with United Nations inspectors who should, France is now saying, be accorded more time to be able to thoroughly carry out their investigation. President Jacques Chirac, probably the most consistent and forceful voice opposing war in France, has himself indicated in recent weeks that “war should remain, let us not forget, nothing but a last resort.”
Nevertheless, US Secretary of State Colin Powell, speaking the other day at Davos, did let it be understood that the United States, if necessary, could very well decide to go to war unilaterally, and not await a green signal from the Security Council. Mr Powell also indicated that several other countries — without naming them — were prepared to go to war on the side of the United States.
French daily Le Figaro, which is controlled by the family of Serge Dassault, chairman of Groupe Dassault and one of the kingpins of the French military-industrial complex, who is probably best-known as the manufacturer of the Mirage and Rafale jets, has in recent days been increasingly relaying growing opposition to Mr Chirac’s position which, says Le Figaro, definitely exists in French political and military circles. The newspaper has repeatedly quoted French military officials as noting that France may very well be making a mistake in sticking to a position which is described as being hardly realistic.
The daily quotes French military officials who, it says, are “calling into question” France’s opposition to participation in a US-led coalition. One “superior army officer” quoted by Le Figaro goes so far as to suggest that in not wanting to go to war, “the French army might be considered as indicating that it just does not have the means to do so, and that if it were to participate in a war, it would have to do so symbolically, which is why it might be perceived preferring to abstain.” Other officials say that “we should really take part in a war effort if only because it would give some ‘punch’ to our military and accredit the idea that we remain a major European power.”
In a story appearing in the Jan. 27 issue of Le Figaro, its author Luc de Barochez notes that in maintaining its anti-war position, France “has a lot to lose” and especially risks further exacerbating its traditional ties of friendship with Washington which, he notes, “could consider that its ‘strategic’ contract with France has been broken.” In which case, he adds, “France would risk being excluded not only from a major western military operation, but also important commercial and petroleum-related ‘perspectives’ in an Iraq to be reconstructed.” Moreover, he notes, “on a larger basis, its (France’s) continued ability to have its say in the affairs of the Middle East might very well be affected.”
But having said that, admits Mr de Barochez, in maintaining its opposition to a unilateral US-led war against Saddam Hussein, France “is far from being isolated (on the question). She does dispose of influential allies in the Security Council, notably Russia and China. Her position, moreover, is shared by several countries in Europe. But then, with regard to the United States, the bridges would admittedly be difficult to reconstruct.”
The issue of whether it might not be in France’s best interest to put aside its principles and think of pledging itself before it is too late to the US-led war effort resulted in a heated exchange during the Jan. 30 daily press briefing at the French foreign affairs ministry.
The dialogue — which some characterized as being ‘of the deaf’ — between official spokesman Francois Rivasseau and some of the journalists allowed the French government to let it be known loud and clear that even if France did not take part in an allied war against Iraq, it still expected to play a role in the post-war reconstruction of the country as well as have its own say on a post-war political settlement. “It’s a situation,” said the Quai d’Orsay spokesman, that is “unavoidable.”
The spokesman, badgered by journalists who wanted to know whether France might be considering changing its position on taking part in an allied attack on Iraq, let it be known that “as far as we are concerned, we are still in a period of inspection (by Hans Blix and his UN inspection team), and that it is on such things that we are now concentrating our attention and our efforts.”
Reflecting another point of view that holds that France is holding back its participation in a war simply because it is not equipped militarily to take part in an allied attack on Iraq — and this because it has had to provide more than 2,000 troops to the Cote d’Ivoire alone — the foreign ministry spokesman, Francois Rivasseau, simply referred journalists to the French defence ministry as being “in a better position to provide an answer.”
And, with regard to a question as to whether France, if it did not take part in the war effort, might be kept out not only of the formulation of the post-war political settlement for Iraq, but would not also qualify for contracts that would evidently be awarded to companies belonging to the countries (e.g., the United States and Britain) that would have taken part in the war, the Quai d’Orsay spokesman noted that “the presence of France, as of all the international community, would be evidently unavoidable,” adding that “such a position is not of the order of wishful thinking, it is a reality, an evident fact.”
Finally, asked point blank by one journalist as to “how can France dare speak of ‘winning the peace,’ especially when it keeps its distance from the conflict?,” the spokesman noted that “winning the peace does not necessarily mean having to go to war. This is what have been stressing, on all our partners, notably in the Security Council.”
The writer is a former teacher at the Harvard University, and now Dawn’s correspondent in Paris.

