| 06 April 2004 | Tuesday | 15 Safar 1425 |
Terrorism: mixture as before
Is there fiscal space?
China's rise as a global economic power in recent years will be as consequential for the global economy as was the rise of the United States after the Second World War. But it is unlikely China will ever dominate the world as completely as the United States does today.
For one, the US will remain the world's dominant economy for a number of decades to come even if it loses to China the status of being the largest. Even if China's GDP overtakes that of the US in the next few decades - something that is likely to happen sometime in the next half century - its income per capita will still be only a fraction of the American - no more than about one-twentieth of the US.
Global economy also requires military prowess. It is unlikely that China will be able, any time soon, to deploy the amount of resources the Americans are committing to defence and developing new military technologies.
Also, China, even as a global economic power, will not be able to equal the American social and cultural influence. For that, the English language is now a pre-requisite. If there were ever a lingua franca, it would not be an exaggeration to say that English is now one such language. It is the language of global culture and the language in which the world communicates over the internet.
Even where English is not the mother tongue - as is the case in continental Europe and Latin America - it is being learnt at an increasing rate. However, the Chinese have a long way to go before they acquire the kind of facility the Indians and other South Asians have in English. China will have to compete with the South Asians in the modern service sector much of which relies on communicating in English.
All these caveats notwithstanding, the Chinese presence is being profoundly felt in the global economy. There are several reasons for this; all of them the consequence of China's amazing rate of economic growth. The country's economy continues to expand at an impressive rate.
It grew at a blistering pace in 2003. The gross domestic product - the total output of goods and services - soared at an annual rate of 9.9 per cent during the fourth quarter of last year compared to the same quarter in 2002.
For the entire year, the economy expanded at a faster than the previously estimated rate of 8.5 per cent announced only recently. The new estimate places GDP growth rate in 2003 at 9.1 per cent.
This rate of increase was 14 per cent higher than the rate of growth of just over eight per cent in 2002. Growth rate in 2003 was China's best economic performance since 1996, when the Asian financial crisis halted the trend. But that pause - as the slight dent caused by the severe acute respiratory syndrome (Sars) crisis last year - proved to be short-lived and China has resumed its journey along the trajectory of high growth rate.
Li Deshui, head of the country's National Bureau of Statistics, has predicted that China would maintain rapid growth during the first quarter of 2004 and through the rest of the year but perhaps not at the rate of expansion for 2003.
China's official statistics indicate that its economy is growing much faster than those of the industrial world. The US economy was doing better than that of many other developed countries. In the third quarter of 2003, it surged at a rate of 8.2 per cent but the rate of expansion slowed down considerably, to only 4.3 in the fourth quarter.
For 2003, the US expansion was less than one-half of that of China's. Other large industrial countries continue to experience weaknesses. The Germans recently reported that their economy shrank slightly in 2003. Although Japan, still the world's second largest economy, has begun to grow again, the questions remain whether it has really turned the corner.
In announcing the results for 2003, Li Deshui said that China had crossed a milestone by the end of the year. Its GDP is now estimated at $1.43 trillion, or $1000 per head of the population. It is, in other words, no longer a poor country. It had entered the ranks of middle income nations.
Not only did China cross the $1,000 threshold in income per head of its very large population, growth also brought about a number of structural improvements.
By the year's end China had built an additional 4,600 kilometers of motorway, bringing the network's total to 30,000 kilometers, second only to that of the United States. During the year, 112 million people obtained phones, bringing subscribers to 532 million, and about 30 million kilowatts of power capacity had been installed. In 2003, China also had the second largest internet system in terms of the number of domestic subscribers. It is likely to soon beat America in this area.
Of great significance is the subtle change taking place in the Chinese countryside. The breakneck speed at which the urban economy is growing has created an income and wage differential between cities and towns on the one side and thousands of villages in the middle part of the country.
This is drawing workers away from the country and into the urban areas. The number of workers who have left their fields and gone to better paid jobs in cities climbed to 120 million in 2003, up from around 94 million in 2002.
This means that within the space of one year some 26 million people have migrated within China. This must count as one of the largest movements of people within such a short period of time anywhere in the world at this time.
The Chinese researchers estimate that these workers typically send about half of their annual salaries to their families back home. This amounts to an infusion of $70 to $80 billion of capital to the countryside, translating into a significant improvement in the standard of living in what is still a fairly impoverished part of the world.
In spite of this rural-urban migration, China still has 800 million people living in its villages. The Chinese authorities have already indicated that they plan to move as many as 500 million of them to the urban areas. If these plans materialize, a large majority of them will go to China's eastern coast.
It is not inconceivable that in the next half century, some 750 million people will live on the Chinese coast, from the city of Dalian in the north to Hong Kong and Macao in the south. Their incomes will be several times the average income of that area today.
In today's dollars, the east coast Chinese by 2050 may be earning $20,000 a year, which will translate into an aggregate income of $15 trillion, about one and a half times the GDP of America today but produced in a space less than one-two-hundredth of that of America.
That transformation in and of itself will have enormous consequences for the global economy. For the moment, it is industrial growth that has begun to reshape the country's own economy but that of the rest of the world as well.
The Chinese growth was the consequence, in large measure, of the very sharp increase in industrial output, not an unusual event for a developing economy with the exception of India where services constitute the leading sector. Industrial output accounted for nearly two-thirds of economic growth in 2003 with heavy manufacturing - chiefly steel, petrochemicals and machinery-building - making up more than one-half of the increase in industrial production.
The rapid increase in industrial production has put considerable pressure on the use of natural resources. Given the size of the economy and given also the fact that China is importing most industrial inputs, the rapid expansion in industrial output has put pressure on global commodity markets. The country has already become a large consumer of raw materials.
It consumed 30 per cent of global production of coal. Most of it came from its own mines. This is the only major industrial input in which China has abundant supplies of its own, but that may not last for very long. For most other products, China is now dependent upon outside suppliers.
In 2003, China consumed 36 per cent of the world's steel and 55 per cent of the world's cement. It has overtaken Japan to become the world's second largest consumer of crude oil after the United States.
Latest estimates from the International Energy Agency show that the Chinese consumed 5.46 million barrels of crude oil a day compared with Japan's 5.43 million. Oil demand is increasing fast because of rapid growth in electricity generation and the dramatic increase in the number of vehicles on China's rapidly expanding road and motorways networks.
Sales of new cars and light trucks in the country increased by 86 per cent in 2003, and is estimated to grow by another 36 per cent in 2004. China's auto production has surpassed that of South Korea but, given the increase in demand, its imports of cars as well as auto parts is rapidly increasing - by as much as 84 per cent in 2003. China spent $14.45 billion on these imports, with $5.25 billion on new cars.
Just over 10 years ago, the country was a net exporter of oil. It also had large quantities of untapped coal reserves. Chinese customs figures show that the country imported a record 91 million tons of crude oil in 2003. This was 31 per cent more than in 2002.
However, by 2030 China's net imports of oil are expected to reach 10 million barrels a day, which would meet as much as 80 per cent of its demand compared with only 35 per cent in 2000. Surprisingly for the Chinese, the country may also become a net importer of coal.
China's enormous appetite for industrial raw materials has already produced a boom in commodity prices across the world. No major commodity has been left untouched and no major exporter of commodities has not reaped large benefits.
However, the pace with which the Chinese economy continues to expand will have an enormous bearing on global energy supplies, on the prices of major energy products, and on the distribution of income and wealth across the world.
What China is about to do to in the world energy market is not short of what the Middle East did in 1973 and 1979. The main difference is that the twin oil price shocks of 1973 and 1979 were delivered by the exporters curtailing output. This time around, the shock will be the consequence of an enormous increase in demand occasioned by the rapid expansion of the Chinese economy.
The increasing dependence on raw material imports is already affecting China's external relations and its view of the world. The politics of oil - and, ultimately, also of coal - will shape how China relates with the rest of the world.
To take one example, China's president Hu Jintao travelled in late January to three African countries - Algeria, Egypt and Gabon - all oil exporters. These countries did not figure predominantly in China's foreign relations in the previous half century. To take another example, China has begun to show interest in developing the large coal deposits in Pakistan's Sindh province.
Terrorism: mixture as before
If an interim survey was to be carried out about the state of the world, would it show that it is a safer place after 9/11? An answer may be found in these few lines of Thomas Hardy:" Aspects are within us, and who seems most kingly is the King."
The answer too would depend on who is the hunter and who the hunted. The war on terror is being won we are being solemnly told. At the same time the reach of Al Qaeda has extended and Europe feels threatened and Nato foreign ministers have agreed on stringent measures to strengthen its fight against terrorism. In a statement that is meant to convey a unity of purpose and resolve the measures " provide an essential transatlantic dimension to the response against terrorism, " which on the face of it is gobbledegook or fist-shaking at shadows.
There is a commission in the United States that is looking into the 9/11 attack and whether any steps could have been taken to prevent it. This is an election year and the hearings have turned into a slanging-match between those who were in charge during the Clinton years and those who are in charge now.
There is first and foremost the damning accusation of Richard Clarke who was the White House anti-terrorism czar and who has written a book Against All Enemies. The book is a broadside against the Bush administration, the most serious allegation by an insider that counterstrategies against terrorism were shelved in order to invade Iraq. He is all but saying that the Iraq war had been pre-planned.
All this seems to be water under the bridge and lacks relevance. A post-mortem may be useful to medical science but it does nothing for the corpse. No one wonders what happened to the weapons of mass destruction any more. They were never found. Anthropologists excavating in Iraq may find them a hundred years hence but they provided just the sort of imagery needed to cheer-lead a rush to war.
At the time of Pearl Harbour, Franklin Delano Roosevelt had rallied his people by declaring that " we have nothing to fear but fear itself. " Now fear was used to rally the people and it could have been said by the war-mongers that only did they have military might on their side but also fear as an ally.
Richard Clarke provided his own mea culpa in what seemed like an apology, if not a prayer for forgiveness: "Your government failed you. Those entrusted with protecting you failed you. And I failed you, " he said. There is no such admission by Bush and Blair, much less contrition. They simply moved on from weapons of mass destruction to regime change to democracy.
Iraq has been pacified. It had already been liberated. Last week there was the horrific killings of four private US security contractors by an angry mob in Fallujah. Video tapes of the killings and the mutilation of their bodies were considered too gruesome to be shown on television. This was no ordinary rage, this was pure hatred that emanates from the depths of one's despair, visceral and savage. What dark forces have been unleashed?
A military spokesman was only able to say that things will get worse before they get better. There was an echo from Vietnam. There too things would get better. We are told that Vietnam provides a false analogy. Has there ever been a war with a happy ending? The World War-1 produced Hitler, World War-2 gave us the cold war and the collapse of the Soviet Union with the help of Osama bin Laden and his Mujahideen created Al Qaeda.
The sub-title of George Crile's book My Enemy's Enemy is "The Story Of The Largest Covert Operation In History: The Arming of the Mujahideen By The CIA." By some strange alchemy these same Mujahideen became Islamic militants and are hunted all over the world as terrorists. Why is the 9/11 commission not investigating how and why this happened? Who turned Osama bin Laden from a friend into a mortal enemy?
The reverse has happened in the case of Colonel Qadhafi. Ronald Reagan had called him a "mad dog." US bombers had taken off from bases provided by Margaret Thatcher's Britain and had bombed Qadhafi's home in order to assassinate him. He escaped but not so lucky was his daughter.
Qadhafi has seen the light as surely sinners see the light and he has surrendered his weapons of mass destruction, no inventory of them is available, and he has been rewarded by a visit from Tony Blair himself. He has renounced terrorism and is now in the good books of the coalition of the willing and is a member in good standing in the fight against terrorism. Chalk one up to Tony Blair. Could the same pressure and the same diplomacy not have been used on Saddam Hussain?
By a stroke of the pen, the war on terror suffered a major setback. This was the US veto of a Security Council resolution condemning the targeted assassination of Sheikh Ahmed Yassin, the Hamas founder. Emboldened, Ariel Sharon now has Yasser Arafat in the cross-hairs. Is the war on terror simply a smoke-screen to advance the ambitions of Israel?
Ariel Sharon is the major stumbling block to peace in the Middle East and if he is to be molly-coddled then there can be no light at the end of the tunnel. Only the United States can make Israel come to its senses. It is for the friends of the United States, including Tony Blair to persuade it that its patronage of Israel poses as deadly a threat as does Al Qaeda.
The ranks of the terrorists are not diminishing. The enemy is getting stronger and the world is not getting to be a safer place. Every time the Israeli tanks move, more terrorists are born. You don't have to be a rocket-scientist to work this out.
Is there fiscal space?
There are two distinct schools of thought in the country today on whether the time is right for the government to increase its developmental spending to fuel economic growth. This article will attempt to summarize this debate.
A viewpoint being strongly advocated these days is that (a) since industry has still some excess capacity (even after the improved utilization over the last two years) that was created in days of higher growth rates and relatively elevated levels of public sector development expenditure and budget deficits; and (b) since there are record levels of foreign exchange reserves, it should be easier to stimulate growth through additional government expenditure - through pump priming of the economy.
It is argued that since interest rates are the lowest in recent memory, at levels below inflation and at levels lower than the growth rate of the economy, there is enough fiscal space, especially with the increase in revenues at rates above the rate of inflation and the growth rate of the economy.
This makes it possible to partially relax the fiscal deficit targets and place the macroeconomic stabilization agenda on the back burner for two years or so. Inadequate government spending on key physical and social infrastructure like roads, ports, railways, cost and reliability of electricity supply and skill development, critical for complementing private initiative, is shackling investment and private enterprise.
Additional fiscal space can come from reducing the bloated expenditure on the defenders of our ideological boundaries luxuriously ensconced in Rawalpindi by the rapid divestment or closure of the public sector enterprises continuing to incur large losses or pushing up the costs of doing business, like Wapda and Pakistan Steel.
This school of thought also argues that there is no conclusive evidence, even from the international economic scene, that interest rates rise because of higher government borrowing or fiscal deficit, thereby affecting growth and employment by crowding out private investors from the market for credit.
However, the counter argument to such a strategy is that government debt levels and debt servicing costs, even after the expected sharp declines in debt-to-GDP ratios and the share of debt servicing in total expenditures, are still at unsustainable levels (say compared with India that has significantly lower debt to GDP ratios although a substantially higher budget deficit vis-a-vis GDP ratio) that limit government role in fiscal expansion to accelerate private sector growth.
According to this point of view, the composition of government expenditures has still not improved to the extent desirable to ensure fiscal sustainability. Space availability continues to be constrained by the high level of interest payments, even in the present low interest rate environment, since the bulk of the stock of domestic debt was contracted at rates that will keep the average interest rate on total debt (stock plus new debt) still high.
Also, although the high level of exchange reserves will provide the insurance for exchange rate stability and serve as a cushion against the perennial foreign exchange crisis that we experienced throughout our history prior to the turnaround of our fortunes post-September 11, a fiscal crisis could still occur, since with the recovery of the global economy, interest rates are likely to rise. The increase in reserves has improved liquidity but not necessarily solvency, especially of the State Bank, as it raises domestic debt to buy reserves.
The lowering of interest rates on fresh borrowings helps, but in view of the maturity and interest rate structure of the large stock of outstanding debt, the average rate would decline sharply enough to make a significant difference to the spending on debt servicing only if low rates of interest persist for a long period.
Moreover, since the current low rates of interest co- exist with a low rate of inflation, the net overall impact on government finances is still painful because of the high interest rates on the stock of debt obtained in earlier years.
The low rates of interest today are partly because of the weak global environment and large capital inflows and not necessarily because of strong and stable macroeconomic fundamentals. So it could be argued that it would not be prudent to relax the stabilization efforts gambling on an indefinite or permanent nature of such risky flows.
A major issue concerns the low efficiency of public sector expenditures in terms of the higher costs per unit of public sector construction projects because of corruption, inefficiency and delays.
Other than this factor pertaining to the weak cost effectiveness of government spending, there is also the standard argument of those opposing the expansion of development programme spending of poor utilization of the existing allocations owing to implementation capacity limitations at all levels of government.
However, the weakness in this argument is that it fails to acknowledge that adequate capacity to implement programmes is a function of resources. The capacity to implement projects in a timely and cost-effective manner has to be built and nurtured for which both hardware and software resources are required.
Without strengthening the existing capacity, the criticism regarding capacity limitations acquires a credible note. Therefore, some prior or simultaneous investment is necessary for creating the absorptive capacity required to implement larger-sized programmes.
Furthermore, the issue is not just that the government is overstaffed and that the total salary bill is disproportionately large with respect to the population and the country's GDP. The bigger problem is the imbalance in the mix of skills. The bulk of the civil servants comprise those with low skills who are paid more than what the market/private sector pays for comparable skills.
While there is a minority of positions requiring higher skills that are not only small in number but the occupants of these posts are also less well paid than their counterparts in the private sector. It is these skills that are critical for prudent fiscal and financial management and efficient service delivery.
Admittedly, this school of thought argues that there is no immediate fear of a fiscal crisis but the temporary suspension of the strategy to keep the budget deficit under tight control could impact adversely on the sustainability of growth in the long run.
By staying on the course of fiscal adjustment the composition of spending could be improved to ensure faster growth. However, creating a political environment for reforms is more difficult today with no obvious crisis that requires tackling.
The writer is a former finance minister of Punjab.