Can growth be sustained?

Has Pakistan turned the corner in terms of climbing on to a high growth trajectory for its economy? Recent macroeconomic data seem to suggest that might indeed be happening. For two years - in financial years 2002-03 and 2002-04 - GDP growth exceeded five per cent each year. When the final figures are in for the fiscal year ending June 30, the growth rate may cross six per cent.

Exports have also done well in the last two years and, with a fair amount of space having been created in the country's balance of payments by debt re-scheduling, it is now possible to spend much more on imports.

A larger amount of imports will be required when the economy really begins to revive and domestic investment begins to pick up on a sustainable basis. Again, there are indications that might be happening.

The latest quarterly report from the State Bank of Pakistan indicates a significant expansion in domestic credit. While some of it has gone into consumption - in particular for the purchase of new cars and motorcycles - a significant amount is reported to be going into industry, commerce and housing.

All this is good news for Pakistan's struggle to arrest the increase in the size of the pool of poverty. There are several estimates available from different researchers to indicate that some 35 to 38 per cent of the population may be living in absolute poverty.

Absolute poverty is generally defined in terms of income per capita of the population. The most commonly used poverty line is one dollar of income per day - or $365 per year.

Since income per head of the population in Pakistan in purchasing power parity terms was $1,800 in 2004, it is not surprising to find that such a large number of people are now absolutely poor. The pool of poverty may have some 55 million people trapped in it.

It is my estimate that this pool increased at the rate of 10 per cent a year in the late 1990s largely because of the stagnation of the economy. Empirical evidence from the World Bank suggests that an economy must grow at a rate twice as high as the rate of increase in population to arrest the increase in the size of the poverty pool.

Since Pakistan's population is now increasing at the rate of 2.5 per cent a year, the GDP growth rate of five per cent should result in stopping any further increase in the number of people living in poverty.

It needs a GDP increase of three times the rate of growth of population to have the poverty pool shrink by 10 per cent a year. If Pakistan manages a growth rate of 7.5 per cent in its GDP in the period 2005-10, the number of people living in poverty should decline to 34 million, or under 20 per cent of the expected size of the population of 172 million people in 2010.

Persistent high levels of poverty breed social unrest. Social unrest can result in diverting the attention of those affected towards radical political behaviour which, in turn, can lead to terrorist activities.

While several analysts have argued that they don't find any direct relationship between poverty and Islamic terrorism and while this conclusion may be supported by the fact that the terrorist events in America and in Madrid were perpetrated by young men from middle class backgrounds, poverty sets in place a dynamic that can lead communities of people towards anti-social and anti-state behaviour.

It is, therefore, gratifying that the Pakistani economy, having gone through a fairly long period of stagnation, has begun to grow. If what we have learnt from the experience of other countries holds true for Pakistan, we should begin to see a decline in the incidence of poverty.

How rapidly the pool of poverty shrinks will depend on how fast economic growth takes place in the future and for how long a high growth rate can be sustained.

We should recall at this point that Pakistan has experienced growth spurts in the past. In two past periods - it so happens that in both of them the military was in charge - Pakistan's GDP grew by more than six per cent a year. During the 11 years of the period of Ayub Khan, GDP increased at the rate of 6.7 per cent a year. In the Zia ul-Haq period, which lasted also for 11 years, GDP grew at 6.4 per cent a year.

This should not imply that the Pakistani economy does well when men in uniform are in control. What it does show though is that during the periods of military rule Pakistan was able to draw significant amounts of foreign capital which augmented its low rate of domestic savings, and produced reasonable amounts of investment.

During the period of Ayub Khan Pakistan invested 21.1 per cent of its GDP. In the Zia period, the rate of investment was 18 per cent. These rates fall significantly when the flow of foreign capital declined as it did beginning in 1965 and again in 1989.

Should we attribute the more recent increase to GDP growth to a larger flow of external savings? There is no doubt that the inflow of foreign capital increased after 9/11.

This happened for three reasons. Considerably larger amounts of American aid became available after General Pervez Musharraf took the decision to side with Washington in its war against international terrorism.

The US also cracked down on the remittances sent by Pakistani expatriates through the hundi system. And, the government was able to negotiate a significant amount of reduction in the stock of debt which helped it to save large amounts of money that was used for servicing it.

If the Americans pull out of Afghanistan and if aid flows from Washington cease once again as they did in 1965 and 1989, would the rate of economic growth plummet to the levels of the 1990s? That need not occur. In fact, it may not happen.

The management of the economy under Musharraf has resulted in a number of structural changes that should provide the basis for sustainable growth. These include the transfer of most commercial banking from public to private hands.

Now less than one-fifth of banking assets are with the government-owned banks and even in that rapidly shrinking sector the government has a programme to increase the share of private ownership.

The State Bank of Pakistan has gone through a period of significant reforms. It has improved not only monetary management but now keeps a watchful eye on the performance of the banking sector with the help of strengthened supervisory and regulatory mechanisms.

The regulation of the banking and the non-banking sectors is now in the hands of separate agencies - the State Bank and the Security Exchange Commission of Pakistan. The SECP has introduced a number of reforms to strengthen the internal management of the corporations listed on the various stock exchanges.

There have been a number of reforms in the area of fiscal management. The government has reduced the fiscal deficit to below four per cent of GDP thus creating a non-inflationary economic environment.

With the government's financing needs reduced significantly, there is little need for it to go to the banks or the capital markets to borrow money. This has reduced pressure in the money markets and made it possible to lower interest rates.

One of the most important reforms introduced by the Musharraf regime was to rationalize the National Savings Scheme - the NSS. The rates offered on various NSS instruments have been brought close to those on offer to savers by the market.

At the same time, banks and other financial institutions were barred from investing in the NSS. This has forced these institutions to make their resources available to the private sector.

From what we have heard from the finance minister over the last several weeks, it appears that he plans to increase expenditures on public sector development in the budget for the financial year 2004-05 that begins on July 1. The PSD will focus on both human resource development and on improving the country's physical infrastructure. These would be steps in the right direction. Nonetheless, the Musharraf government should recognize that it needs to develop a consistent strategy for ensuring sustainable increase in the size of the economy if it wishes to avoid the sputtering out of growth. This happened in the past when, for some reason or the other, external capital flows declined precipitously.

In addition to continued dependence on external flows, Pakistan's economy suffers from three other structural weaknesses. It has a weak human resource, it has poorly developed physical infrastructure particularly in the sectors of electric power, railways and ports; and the quality of governance remains poor in spite of the efforts made at bringing some sense of accountability to the upper levels of decision-making.

There has to be concerted efforts in all these areas in order to set the stage for sustainable growth. My preference would be for the government to formulate four "action plans", each dealing with the four structural weaknesses I have identified above.

The first plan should clearly spell out the kinds of institutional developments that need to be undertaken and the kinds of incentives that need to be provided to get the people to save more.

We know from the experience of some Latin American countries that the creation of private pension plans resulted in significant improvements in domestic saving rates.

At the moment Pakistan has pension schemes that cover the employees of the public sector and those working for large private companies. Nothing is available for other workers. This gap needs to be closed.

Establishment of private equity funds would also help small and medium enterprises scale up. These enterprises are funded by the owners; another source of capital such as private equity would draw more resources into these companies.

This, in turn, should promote savings. The government's plan should indicate not only the institutional initiatives it will promote and incentives it will provide. It should clearly lay down targets that can be monitored and that can be achieved in, say, the next five years.

A similar plan needs to be developed for improving the quality of human resource. This should cover not only primary education and basic health care. It should also deal with secondary, tertiary, and technical education and the capacity to do research and development. Once again the plan needs to touch upon all institutional improvements the government will indicate or promote with the help of the private sector.

The other two areas - improving the country's physical infrastructure and the quality of governance - need to receive an equal amount of government attention. Exactly what kind of government support will be required is a subject I will return to in this column next week.

Man's inhumanity to man

The Allied governments are fortunate that Lord Russell of Liverpool is not alive to document their atrocities in Iraq. Edward Russell, later Baron Russell of Liverpool, was a soldier, a military lawyer and later, combining these skills, he compiled a damning indictment of the brutality of the Axis powers - Germany and Japan - during the Second World War.

His book on the Nazi crimes against humanity was published in 1954 under the title "The Scourge of the Swastika", followed a few years later by a companion volume on the Japanese atrocities in the East titled The Knights of the Bushido. Had Lord Russell been alive, he would found it difficult to resist completing a hat-trick with a third volume, this time on the unspeakable, indefensible behaviour of the Allied troops against their Iraqi captives.

The pictorial disclosures during the past few days in The New Yorker magazine and in Britain's The Daily Mirror newspaper have been an assault on the senses of every decent-minded human being, whichever side of the Iraqi divide they happen to be on.

The cumulative effect of each horrific image, piled one on top of the other, like the naked Iraqi prisoners forced to create a human pyramid for their captors to surmount, has been to release a reservoir of revulsion against a war that had no cause, and brutality shown to defenceless prisoners that has no precedent, except during the days of the Nazis and their infamous concentration camps.

No Iraqi, however gullible, could have been satisfied to hear the evasive, bland, almost callous admission of responsibility by Secretary of Defence Donald Rumsfeld during his testimony before a Congressional hearing on Capitol Hill on May 7. It was less an admission of guilt than a forewarning that the Pentagon had yet more horrific photographs and even videos up its sullied sleeve.

Only the Pentagon would know what they contain. It might be best that only the Pentagon knows. Any more images, however cathartic they may be for the psyche of the Americans or titillating for viewers, could only serve to inflame human consciences. Mankind is not wood nor stones, but men.

Never in the history of human conflict has there been a clash without pain or suffering, a wound without blood, a death without grief. What has been happening at Abu Ghraib prison outside Baghdad though has nothing to do with human conflict.

Everything that happened to the inmates in the jail was not the result of impulsive behaviour by bored prison guards. It was deliberate, it was organized, it was orchestrated, and then systematically photographed and filmed, a soft-porn S & M video set in an Iraqi jail.

That it was done - as Secretary Rumsfeld has explained - not by US regular troops but by prison security guards hired by the Pentagon to do their dirty work has been offered as a sop to the American people. That is a specious, callous evasion.

In effect, the Pentagon is saying that it has, as it has other services during this war (profitable for profiteers), subcontracted acts of inhumanity. It has used the US taxpayer's dollars to pay for perversion.

After 1945, the German people claimed that they knew nothing of the horrors being perpetrated in their name within the concentration camps. They never knew of the Jews arrested in their neighbourhoods.

They never heard the trains transporting them to Auschwitz and Buchenwald. They never saw the smoke from the chimneys of overworked crematoria. They never smelt the corpses left rotting for the Allied soldiers to find and bury, using bulldozers to push stacks of bodies into mass graves.

The American public will never be able to make that excuse. Every atrocity has been photographed and filmed for their benefit. Sixty years ago, in July 1944, there was a botched assassination attempt by a Col.

Count von Stauffenberg and his accomplices on the life of Hitler. The conspirators were hanged from hooks, using piano wire to prolong their agony. Their suffering was filmed by the Gestapo to show Hitler. The humiliation of the Iraqi prisoners is the modern equivalent.

It is clear that the use of subcontractors in this war has not been out of operational exigencies, nor to free fighting troops for the front. It is part of a strategy that extends from the United States to Iraq and Afghanistan, with a stopover at Guantanamo Bay in Cuba, a stratagem to hoodwink the American public and keep justice blindfolded. It is the headstone of a policy to keep everything indefensible about the war out beyond the jurisdiction of the US or international courts.

The American base at Guantanamo Bay was obtained by the United States as a quid pro quo for withdrawing its forces from Cuba in 1901. The Platt Amendment, as it is known, under which the base was acquired was repealed in 1934, but for the past 70 years the United States has remained there, an unwelcome tenant. That base is now like Monaco or Liechtenstein, a legal haven, providing legal immunity to those who need it, which in this case is the United States government that can keep citizens of any country (including Pakistan) beyond the reach of any authority save its own arbitrary one.

The wars in Iraq and in Afghanistan, no matter what western leaders may maintain, are not for the rights of the Iraqi or the Afghani people. Power may well come though the barrel of a gun. Democracy does not, as every military discovers to his own cost and the cost of his hapless nation. The traumas in Iraq and Afghanistan are one-sided sallies, the unrestrainable actions a strong bully intimidating a weaker victim. They are not even media wars. They are wars fought to catch the attention of the media. The pen may on occasions be as mighty as the sword, but the mightiest weapon of all in modern warfare obviously is the tell-tale camera. Through its images, the world has become more than a distant participant; it has become a voyeur, an accomplice in man's deliberate inhumanity to fellow man.

Time will never erase the image of a hooded Arab prisoner, arms held akimbo, like some figure of in a crucifixion, with electrodes attached to his hands in place of metal nails. Two thousand and four years ago Pontius Pilate was required to adjudicate in a case on a matter of jurisdiction. Like Rumsfeld, he washed his hands of culpability in public. US Gospel singers once sang a Negro spiritual reminding their audience of that earlier atrocity: Where were you when they crucified my Lord?

Will future generations of mankind ask of us: Where were you when they electrocuted an Iraqi?

The ghost of Vietnam comes haunting

Last week the 50th anniversary of Dien Bien Phu was commemorated in Vietnam. Dien Bien Phu marked the end of French control of Indochina, an epic battle that stirred the imagination and gave great heart to those who were still trying to shake off colonial rule.

Ho Chi Minh may have been a communist but he was also a nationalist. The Viet Minh had fought the French, not for an ideological abstraction, but for the inalienable right to be their own masters in their own homeland.

Dien Bien Phu turned out to be a false dawn for a new and stronger enemy emerged to take the place of the French and the Vietnamese people were at war once again.

It would be a savage war and would claim millions of Vietnamese lives, three to four million at a guess-estimate, and bring untold hardships to a poor peasant-people, those who were children when the war had started had become young men and women when it ended.

Vietnam has all but been forgotten, its memory is not even an embarrassment. But it is being increasingly recalled to provide an analogy as more and more people are fearing that Iraq could become "another Vietnam."

Winning the hearts and minds of the Vietnamese people was also one of the objectives and there too it was felt that this laudable objective could be speeded up by B-52 bombers dropping napalm on villages and hamlets, by using Agent Orange to clear the jungles and, of course, good, old fashioned combat which could lead to some unavoidable massacres as My Lai but it was all in a noble cause.

The South Vietnamese had to be saved from themselves, saved too from the old man who sat in Hanoi who wanted to exchange the freedom of the Vietnamese people for the slavery of communism.

There would have been much to reflect upon as the 50th anniversary of Dien Bien Phu was commemorated. On display, along with other memorabilia was some heavy American guns. They were a soft reminder that the hearts and minds of the American government at that time was with the French and not with a people who were fighting for their freedom.

In 1964, I had taken leave from PIA and in the company of a then relatively unknown Swiss photographer, Rene Burri, had gone to China. After a few weeks in China, I had gone to Japan, to see the difference between the two systems.

Socialism seemed to be working for the Chinese and capitalism for the Japanese, a point I made to Edwin Reischauser, the American ambassador to Japan. I had met him through the good offices of our own ambassador, the late Lt-Gen Khalid Shaikh.

Reischauser had made it clear that he could not spare more than half an hour. The meeting lasted much longer than that. After some polite formalities I asked him point-blank: "Why are you in Vietnam? ". I told him that I wanted Reischauser the scholar to answer the question, not the ambassador.

I didn't want to know about the domino theory nor how the spread of communism could be halted through the use of military force. He gave me a long, rambling answer but he didn't seem convinced himself."

International politics has a logic of its own," he said. I could not help feeling that he was uncomfortable with the standard line that Washington DC was putting out.

There are similarities between Vietnam and Iraq. The mistakes of Vietnam are being repeated in Iraq. I happened to be in New York when Robert S. McNamara's book In Retrospect came out in 1995. I bought a copy of it. I read it in one go, on the long flight back. I have re-read the book. McNamara was an even more powerful secretary of defence than Donald Rumsfeld.

He was a hawk on Vietnam in the Kennedy and Johnson administrations, he passionately believed that the fight against communism was worth the sacrifice of American lives, he saw it as a divine mission, some God-given right to spread the gospel of democracy.

He seemed to be at peace with his conscience even as the slaughter continued but he writes, "something changed my attitude." He felt a need to unburden himself, to free himself.

In Retrospect is an acknowledgment of his errors and those of the administrations he served, a mea culpa, the apology that the United States did not offer officially.

"We of the Kennedy and Johnson administrations who participated in the decisions on Vietnam acted according to what we thought were the principles and traditions of this nation.

We made our decisions in the light of those values. Yet we were wrong, terribly wrong. We owe it to future generations to explain why," he writes in the preface of the book. He quotes the ancient Greek dramatist Aeschylus: "The reward of suffering is experience."

The reward of suffering may be experience but what good is experience if it is erased by a new set of circumstances or what appear to be a new set of circumstances? Though there is still the same divine mission, the same God-given right to spread democracy, the same theology of good guys and bad guys.

I watched Donald Rumsfeld's appearance before the Senate Armed Services Committee on television. The bluster was not there and he seemed suitably contrite which is different to being actually contrite.

Since the abuse of Iraqi prisoners at Abu Ghraib prisoners took place on his watch, he accepted the responsibility but it was a vague, distant, a token acceptance like the chairman of Japan Airlines taking the responsibility for the crash of one of its aircraft.

The thought crossed my mind whether Donald Rumsfeld too would write a book like Robert McNamara did and admit that "We were wrong, terribly wrong." It also struck me why the Iraqi prisoners had not been declared "illegal combatants" that unique condition that sends prisoners into a legal limbo, beyond the reach of any law. There would not then be any photographs and videos and other sundry evidence of acts of cruelty beyond the call of patriotic duty.