25 October 2004	Monday	10 Ramazan 1425

The tensions generated from an uneasy power sharing between extra-constitutional and civilian institutions impacts on governance, raises questions about future political landscape and sovereign risks for investors.

And the perceived absence rule of law and political instability has deterred foreign and local investors from making long- term investment despite the impressive economic growth for the past 2-3 years. It is now widely recognized that investment and social spending are two key issues in economic development.

Many reckon that day- to- day political issues encroach upon so much time of the decision makers that they cannot focus adequately on the country's economic development. In the absence of functional institutions, programmes and policies are not effectively executed. And now the opposition is threatening to unleash street power against the government on the uniform issue. Some view the manipulated ruling coalition as much a problem as the opposition for the defacto rulers.

Over time, the country has suffered immensely from economic growth restricted to much below its potential and weak political institutions (if not defunct) gasping for breath. In the decade of 1990s, poor governance was the outcome of frequent changes in governments.

The just published history of the State Bank of Pakistan 1988-2003 notes that "the regimes were (then) more pre-occupied with the battle for survival than with medium or long- term policies." It lists names of seven presidents and eleven prime ministers who ruled the country during those fifteen years.

Despite all this, it can be argued that Pakistan has all the ingredients that go into the making of a constitutional and civilian rule. First, it is the economics that is now driving politics. The over-regulated economy has turned into an emerging market, which can be made prosperous only by rule of law and pluralism. The share in Gross Domestic Product (GDP) of agriculture, which suffers from lack of modernization, has fallen to a mere 23 per cent.

Big defence spending, seen as a major factor in extra-constitutional intervention, is being trimmed. It's share in the GDP has fallen sharply. In overall government expenditure, the share of defence spending has declined from 24.8 per cent in 1990-1991 to 18.3 per cent in 2000-2001. To quote State Bank Governor Dr Ishrat Husain, the defence spending went up in the 1980s when Pakistan was engaged in Afghan resistance against Soviet Union. Now, it is increasing because of the logistic support being provided to the US troops. It was at 19.5 per cent of the total expenditure in fiscal 2004.

With reduced share in the national purse in a market economy,the role of the army in the country's politics cannot be so pervasive. Although President Musharraf calls the shots, he did not seek recourse to Martial Law like Zia and Ayub. He held elections after three years as promised. The mainstream political parties were not banned. Though ineffective, it is the parliament that needs to be empowered. The problem lies in the presidential-cum-parliamentary system currently being experimented.

Pakistan's transition from semi-military rule to democracy has been made more difficult because representative form of democracy has lost its social utility.The UNESCO direct- general Koichiro Matsuura says "Whereas representative democracy seems in crisis in many countries, associative democracy is developing rapidly." Pakistan is trying to develop participatory democracy through district governments though these continue to be denied fiscal and administrative autonomy.

And Dr Ishrat Husain, governor of State Bank says that "the tension between democracy and good governance was not satisfactorily resolved in Pakistan".

But Teresita C. Schaffer, the director of the Washington-based Center for Strategic and Policy Studies (CSIS) for South Asia Programme, where the SBP governor made these observations, does not agree with him. "Unless Pakistan finds path to an independent government and a civilian leadership capable of moving the country to govern without the army, she says "it will wrestle inconclusively with unresolved problems of governance and state authority."

Normally, the political process is stabilized by effective land reforms, that creates a strong middle class in the countryside, as is evident from the experience of Bangladesh. These reforms were spearheaded during the mid-1950s by Mr Mahmud Ali, provincial revenue minister of the United Front government, though the Muslim League government had got the zamindari abolition bill passed in 1950-51. Ayub's 1962 Constitution was preceded by 1959 land reforms and Bhutto's 1973 constitution followed the 1972 land reforms. The 1973 Constitution is the rallying point for politicians. The 1977 land reforms were aborted by Zia military coup.

The World Bank studies show that small farms are more intensively cultivated and are therefore more productive. That the existing crop sharing system serves as a disincentive for investment.Corporate farming with official offers of fiscal incentives and state lands has not made any headway. The creation of a market for farm lands with clear titles is more of a rhetoric than reality. Agrarian reforms of any kind is not on the official agenda. Agriculture suffers from stagnation but for brief cyclic booms, as is indicated by deficits of a million or more tons of wheat.

Economic and social progress is deeply linked with political processes. Dr Ishrat Husain says an orderly transition of government under democracy removes all elements of uncertainty among investors, lays down a predictable course for the future, clarifies the rules of the game under which business can be carried out and assures the rule of law.

The reforms introduced in the past five years have been narrow and shallow as is indicated by the quick reversal of positive economic trends whether it be inflation, interest and exchange rates or trade deficits.

And how much governance has improved, as claimed officially can be judged by the observations from the study on Pakistan's future and US Policy Options prepared by CSIS after inter-action with eminent Pakistani personalities.

The report says: Rebuilding institutions is the first and most fundamental step towards restoring the vitality and the credibility of the Pakistani state. Democracy depends on these but also on the vitality of political institutions like the parliament, political parties and election commission.

The United States should increase the share of its economic assistance to Pakistan for specific projects of which at least $50 million per year should support a major Pakistani effort to rebuild institutions. The assistance should be given regardless of Pakistani performance in other areas of interest to the United States.It is the principal support that United States can provide for the domestic rebuilding on which rest of the US agenda for Pakistan depends.

The key beneficiaries of this aid should include the judiciary, the civil service, the institutions that administer water and power, the policy , provincial governments, inter-provincial co-ordination and the election commission. Judicial reforms should include a re-examination of the relationships among Pakistan's different court systems.

Key to Pakistan's future will be two elements that have lagged behind this otherwise encouraging economic performance. The first is investment which remains stagnant at 15 per cent of the gross domestic product (GDP) leaving job creation woefully inadequate for Pakistan's growing population. The second is social spending, specially on education and health. Both have increased but they continue to lag significantly behind budget allocations and behind defence spending.

Even if the economy improves, the continuation of today's trends will keep investment and job creation below their potential.