Elusive foreign investment

Top officials are convinced that Pakistan is one of the best countries in the world for foreign investment, if not the very best. And they have been driving home this point to foreign visitors who partly agree with them.

All sectors of the economy, they are told, are open for investment. They can invest 100 per cent of the capital of their enterprise, price their products as they deem fit and repatriate their profits and capital in full whenever they desire.

Corporate taxes, our officials say, are rather moderate and official polices are tailored or modified to meet the needs of the investors. And now special steps are being taken to protect foreign investors and their expatriate staff from kidnapping and other major crimes, and enhance their security.

But while these steps are essential to reassure the foreign investors, these alone are not enough. That is what their countries too say forthrightly. In the absence of such a more helpful environment foreign investment is not exceeding one billion dollars a year. In 2003 it was 850 million dollars. The expectation in 2004 is it would touch one billion dollars.

India received four billion dollars as foreign direct investment last year and the foreign investment in China averages between 40 to 50 billion dollars despite its ideological differences with the West.

China has revolutionized the concept of foreign investment. In the past foreign investment went to a country with a view to manufacturing goods for the consumers of that country and its neighbours. But now China has become a factory for the western world. Foreign firms manufacture goods in China to export them to the whole world. Industrial inputs in China are cheap, skilled workers are in plenty and wages are low even for educated workers. Japan did that on a small scale in the past in some countries of South East Asia but now China does that on a global scale.

As a result, the Philips Electrical company of the Netherlands which went to China to set up a factory to manufacture its goods for a billion consumers of that country ended up establishing 28 factories to manufacture and export its products to the world from there. The US companies, too, have done likewise. The prices of its products have dropped and its sales have gone up.

Now the US and European Union have come up with a long list of factors which deter adequate foreign investment in Pakistan and have asked the government to remove them.

They see prospects of much larger investment on the basis of a liberal investment policy pursued by the government and the strong support it is giving to the US-led war on terror. They have also called for distinct improvement in the security situation in the country.

The Board of Investment in Pakistan and the Japan International Cooperation Agency had earlier conducted a joint study of the factors deterring foreign investment in Pakistan.

Their conclusions were almost similar to the ones the US and European Union have arrived at now. The study said that political instability, unsatisfactory law and order situation and bureaucratic red-tape are major obstacles in the way of attracting adequate investment. The study asked the government to look into the obstacles seriously.

The study said that as a consequences of the political instability the law and order situation suffered. It said that as a result of rapid changes in government, new policies were announced even before the old policies had time to deliver. And it stressed that stability in government contributed to stable policies. The study also underscored the fact that red-tapism and bureaucratic hurdles did exist in government. And to overcome that the government had attracted a number of personnel from the private sector.

It stressed the fact that Pakistan is deficient in adequate infrastructure, and land and power had become expensive. Not only foreign investors, Pakistani industrialists too have been complaining that input cost here are heavy and the cost of doing business is high. Soaring land prices even of that sold by the government is a new factor.

The US and European Union have also asked the government to take into account a large number of expensive litigation proceedings amounting to 800 million dollars pending against it. Foreign investors feel peeved by the easy report to litigation against them by the government which costs a great deal. And the cases go on for a long time.

The US says investment in Pakistan by its nationals or companies now stands at only 300 million dollars a year and that needs to be enhanced following Islamabad's support to Washington in its war against terror.

The reports appreciate the steps taken by the government to improve investment climate and promote good governance. But the government has been urged to join the New York Convention and strengthen the foreign investment laws rather than sign restrictive bilateral treaties with different countries.

The reports have also appreciated the steps taken by the government in the areas of deregulation, privatization and liberalisation. But the overall investment in the country last year was only 16 per cent of the GDP which is very low for a developing country with a population growth of 2.5 per cent per annum. It ought to be at least 20 per cent while the ultimate target should be not loss than 25 per cent. But the emphasis in the country today is on consumption of luxurious products, in fact imported luxuries. The banks are financing that consumption in a big way instead of taking special steps to promote savings and reduce consumption of imported luxuries, including large cars.

Such conspicuous consumption may give the illusion of prosperity but does not strengthen the economy or help expand the industries and provide a large number of jobs.

Even the roaring success of the Karachi Stock Exchange indeed which touched the peak of 62.18 is the result of high spirited speculation with borrowed funds. Hence, the Badla rate has jumped to 18 per cent in a period of low interest rates and the total of Badla borrowing exceeds Rs. 38 billion.

All this frenetic activity does not reflect genuine investment in the shares traded on the KSE with these market capitalisation of Rs. 1,723 billion or 29 billion dollars.

In spite of this roaring prosperity on the KSE investment by foreigners and even speculation through short-term holdings is very small. Many of them sold their share holdings much earlier and got out. As they found the KSE operations then not rational.

When it comes to foreign investors they are influenced by the kind of newspaper headlines the country makes from day to day. Are they positive and reflect progress and success or are they negative and reflect regressive trends which discourages foreign investors?

Most of the time the headlines we have are negative; They include sectarian killings, karo-kari killings of women, traffic accidents in which a large number of passengers die. In recent times businessmen have been kidnapped and two sessions judges have not been released even after over a month of their kidnapping.

There are other problems for foreign investors which the news reports in these countries do not mention. Among them is the problem of finding suitable partners with the requisite capital and the readiness to pursue modern methods of business.

Then, there is the problem of corruption, more common at the lower levels of government. Industries in the country have to deal with about 40 agencies which are however, being reduced but rather slowly.

Power is too costly and the supply is undependable. They can have their own means of power production and that adds to the capital cost. Power in China is cheap and the supply is dependable.

Between the day work on a project begins and the one it is ready to commence production there is a long gap. To shorten the long start-up period the Asian Development Bank has come up with technical assistance for 450,000 dollars.

The purpose of the assistance is to enable the federal and provincial governments and the Asian Development Bank streamline production and operational modalities during the start-up phase between loan approval and actual implementation of the development projects. The ADB is anxious for quick results as it is now financing 55 projects with loans totalling 5.2 billion dollars.

The labour laws are antiquated and not helpful to higher productivity. Wages are low in monetary terms but in relation to productivity they are high as most of the workers are not educated and highly skilled.

Foreign investors speak of the too many holidays, particularly non-scheduled holidays which hamper production and delay exports. There are political and lightning strikes for one reason or another which upset the production schedule. Then there are transport strikes which prevent the workers from reaching the work site. To add to that all, there can be strikes at the port.

The problem with the worsening crime situation is that policemen, including police officers, are involved in too many crimes. And when private security agencies are hired their personnel too take to crimes, including bank robberies.

A good part of the investment of 850 dollars made in the year 2003 and the one billion dollars expected in 2004 is to finance privatization like that of the Habib Bank and United Bank.

Privatization does not usually add to the production capacity but replaces the domestic capital with foreign capital. If the investors bring additional capital and expand the capacity of the enterprises acquired, that is indeed very welcome. And that is the need of the times. Overall we have to take the complaints of foreign investors seriously.

Iraqi insurgents' strategy

General John Abizade, CENTCOM's commander, recently observed that the main objective of the insurgents and terrorists is to break the will of the American forces, thereby bringing about an American withdrawal from Iraq.

On December 21, by killing 19 American soldiers and injuring scores of others in Mosul, they seem to have edged close to their objective. Not that the Bush administration has started discussing the timetable of its withdrawal from Iraq, but, according to the calculations of the insurgents, America will not be able to absorb losses of that magnitude for long and stay put in Iraq.

Americans are registering their displeasure with the developments in Iraq. An ABC News/Washington Post poll released on December 20th suggests that a majority of Americans now believe the war in Iraq was not worth fighting.

President George W. Bush admits, in the post-election environment of candour, that Iraqi security forces are inadequately trained, as if he discovered that reality for the first time. Even this fact that the Iraqi forces would not do much fighting for quite awhile plays well into the hands of the insurgents.

There is little doubt that the insurgents wish to do their best to bring about the cancellation of the impending elections. Even if that doesn't happen, they are still determined to terrorize the population enough so that the elections would create a government whose legitimacy remains highly questionable.

The insurgents seem to have concluded that, since the Iraqi elections cannot be stopped, they should be preceded by a high degree of mayhem and bloodshed. If the intensity of terror is heightened by attacking or killing the Iraqi forces, Iraqi civilian workers, and American troops, then the level of popular participation would decrease.

That, in itself, would create ample problems for the legitimacy of whatever government emerges. There also seems to be a calculation on the part of Sunni insurgents that no Shia government should be allowed to function effectively.

The US problem at present is to assess which of these descriptions best illustrate the ground realities in Iraq. Such a calculation would enable the Americans to take counter-measures. But there is another problem related to counter-measures.

The American forces increasingly feel like they are operating in the dark. If the terrorists intend to create nothing but chaos, and if they are willing to go to any extreme to create chaos, how does one go about neutralizing their potential?

The US forces went into Samara and Fallujah with a view to destroying the "terrorist sanctuaries." That was also part of psychological warfare of signalling to the insurgents that the United States would take all measures to fully eliminate safe havens from the different regions of Iraq.

However, the insurgents knew better than to stand and take on the awesome power of the American military. They did what they have done best thus far: They ran only to pick another time and a better place to continue their battle. The unfortunate attack in Mosul was one such place of their choosing.

As much as the American forces are geared to fight urban warfare, they know that when the entire country becomes a battlefield, they are likely to face an enormous disadvantage.

Mao Zedong was right when he advised the guerrilla fighters to become like fish in water in terms of their manoeuvrability and low visibility in guerrilla warfare, no matter where such battles are fought - rural or urban areas.

One of the not-too-explicit, yet a highly potent advantage, of the guerrillas is that whatever force the outside fighters use to deal with insurgents, their actions result in the escalation of hostility among the local population towards them. That, in turn, would further help the guerrilla fighters. This is essentially what has been happening in places like Samara, Fallujah, and even Mosul.

Speaking of Mosul, the Ansar al-Sunnah Army has claimed responsibility for the attack in that city. This Sunni group also has taken responsibility for attacks that have caused more than 1,000 deaths in the past 15 months. Even if their past claims had questionable veracity, their claim of responsibility for the attack in Mosul should be taken seriously.

The goal of this group is to create a hardline Islamist state in Iraq, something like Afghanistan had under the Taliban. Even though the Kurds are part of this group, it is also targeting this ethnic group because of its overall friendly posture toward the Americans. Last month, the Ansar al-Sunnah Army declared that it is working in coordination with Al Qaeda, the Musab al-Zarqawi group, and the Islamic Army in Iraq.

Ideologically, all these groups are hard line Islamist-Wahhabi. As such, their intention is to turn Iraq into a Sunni Islamist state. Thus, they are on a collision course with the Shias of Iraq.

The fact that there is an enormous amount of alienation and anger among the Sunni populace of Iraq toward the American occupiers, Ansar and other Sunni groups are operating with considerable ease, along the lines suggested by the late Mao Zedong.

On the Shia side, the Bush administration may not have a serious problem, at least for now. The Shias of Iraq are likely to show their preference for the kind of government they desire through the elections.

It appears that three models of government are feasible. The first one is the Iran-style Islamic government; the second is along the lines suggested by the powerful Grand Ayatollah Ali al-Sistani which is moderate Islamic democracy; and the third would be a hybrid of the al-Sistani model with some accommodation for western-style secularism, without calling it such.

The Kurds would prefer a secular model, since that holds better promise for autonomy for them than any other. However, they are likely to live with the al-Sistani model, especially if it has a high preference for moderation. The Sunnis seem to have concluded that they would lose in any case.

Unless some sort of explicit guarantees for the safeguarding of their rights, their attitude toward the proposition of living under a Shia-dominated government will remain antagonistic.

In this sense, the insurgents might also be registering the Sunni anger. Any serious attempt to resolve this inter-sectarian antagonism and tension requires a peaceful environment, which is totally lacking in Iraq.

What should the US government do now? Well, the Bush administration has declared its intention to go ahead with the elections, whatever the circumstances. That is the only sensible action that the US can pursue, while raising its security alert in order to minimize the chances of violence.

The unstated reality in Washington is that there are no high hopes regarding the post-election Iraq. Even if Iyad Allawi were to be elected and to form a government, that development would not become the harbinger of democracy and stability in Iraq. That is precisely what the terrorist-insurgents want.

A question of credibility

Apropos an understanding reached with the Muttahida Majlis-i-Amal (MMA) to break the impasse on the 17th Amendment, Gen Pervez Musharraf gave what amounted to a solemn pledge in a prime time televized address in December 2003 that he would retire as COAS on or before December 31, 2004.

On December 30, a day before the appointed dated, the president resiled from his public commitment. This self-inflicted hit on his credibility may not affect him immediately but it will certainly be a problem in the future.

Gen Musharraf has not heeded the lessons learnt from late Gen Ziaul Haq's notorious "90 day commitment" to hold elections which Zia did not keep (and had no compunction about it) or the referendum Zia carried out to declare himself an elected President.

So, the public cannot be blamed for being sceptical about military rulers making any promises. Gen Pervez Musharraf should have refrained from making any public pledge in the first place and if he had to he should have clearly linked the doffing of his uniform conditional on the MMA keeping their part of the bargain.

While it is true that a majority of the people in the country do not care whether he stays in uniform or not, responsible leaders do have a moral obligation to support the rule of law by personal example. While for some time democratic process had to be compromised in Pakistan because of circumstances beyond anyone's control, there has to be an end to it.

Gen Pervez Musharraf is popular but not popularly elected. His tenure as president (and remaining a "popular" leader) is wholly dependent on his continuing as COAS, Pakistan Army.

Given his personal security situation, he is riding a tiger and is quite happy about not getting off it. The moment he doffs his uniform, the "movers and shakers" in Pakistani politics, bureaucracy, business and the armed forces will start trekking to the door of the newly incumbent COAS, whoever he is.

Musharraf made out a good case of our internal and geopolitical circumstances being an extenuating factor, but this was skating on rather thin ice. Almost all countries face some crises at one or other time, but given Pakistan's penchant to be almost always in crisis, one does not see how Pervez Musharraf can ever take off his uniform.

In a way by pressurizing him for it the MMA helped Gen Musharraf not only to make up his mind to keep the uniform but also to convince the US and other western countries that his presence is imperative to counter the growing fundamentalist threat to peace and stability. So why should Musharraf go platonic when we are past-masters at frequently sacrificing morality at the altar of necessity?

When questioned about Gen Musharraf not leaving the post of COAS as per his public promise, the US secretary of state referred to the parliamentary process that had allowed Gen Musharraf to keep both the posts of president and COAS.

To quote Powell, "it is not a matter for the US but of the Pakistanis" to decide. Our present mode of "uniformed democracy" fits into their scheme of things.

Though western logic is satisfied that Gen Pervez Musharraf holding both the offices is necessary because of the security environment, will they countenance generals running western democracies because of the threat of international terrorism? In the face of Islamic extremism breeding terrorism in and around Pakistan and its vicinity, the West has decided that to be logical is not to be always right.

President Pervez Musharraf has certainly made his share of mistakes, a major one being the holding of the referendum when there was no need to do so. The second was the failure to transfer power to those elected, even after a grossly manipulated election.

The net result, being forced to become beholden to the very party his intelligence men artificially created in the first place from a motley lot of politicians.

Heavens would not have fallen if the PPP came to power in Sindh and led a coalition government at the federal level. Retaining the defence ministry (and thus control of the ISI) and the NAB, he would have remained an all powerful non-executive head of state.

Regretfully, his personality does not allow him to remain above the fray as a bystander. However Gen Pervez Musharraf's ability to compromise where and when necessary is a great asset to him personally, and by extension, to the country.

Politics is the cost of compromise; the late Ziaul Haq (and now Musharraf) have made compromise into an art. There are strong indications of the possibility of a national government in the making in the future - a coalition of liberal forces to politically take on the religious parties that are ascendant in some areas on our western and northern borders.

Gen Pervez Musharraf can rightfully claim success (with great help from 9/11) in the macro-economic field where growth rate is exceeding six per cent and indications are of reaching the ambitious target of eight per cent in 2005-2006.

Spare a thought for successive PML and PPP regimes that enacted sound economic policies but were hampered in implementing them because of political considerations.

After all, late Moinuddin Khan, Shaukat Tareen, Zubyr Soomro, etc, came back to re-vitalize the banking industry during Mian Nawaz Sharif's regime. Inflation at nine per cent is a matter of concern as is the much touted "poverty alleviation programme" with benefits still not "trickling down" to the downtrodden and hopelessly poor despite huge foreign interest in the real estate and housing sector.

In not imposing martial law publicly, Musharraf gave a perception to the people of his benign authority, which he reinforced by allowing unprecedented freedom to the media.

Allowing the letting off of steam avoided a pressure cooker situation ready for exploitation by recalcitrant politicians, so that widespread street protest never materialized.

Allowing such freedoms is probably a first for military rule; it has contributed to Pervez Musharraf's acceptability by both the intelligentsia and the masses in Pakistan, and by western democracies. It kept the country stable for foreign investors.

One of Musharraf's big achievements is the initiation of accountability one only wishes it were across the board and not applied by selective targeting. By sparing the shamelessly corrupt among the superior judiciary and the armed forces who have a vested interest in maintaining the present status quo, the credibility of the National Accountability Bureau (NAB) has been badly tarnished.

Moreover, the "plea bargain" concept is a gilt-edged invitation for legalizing corruption and white-collar crime. Which brings us to the question of trust. All officers in senior rank - brigadier onwards in the present army hierarchy - have been personally selected and promoted to their present rank by Gen Pervez Musharraf, albeit mostly on merit, maybe with a few exceptions.

What is indeed strange is that a man possessing such abundant self-confidence as Pervez Musharraf should display such a lack of confidence in those he has personally promoted.

As compared to earlier rulers, Musharraf has done reasonably well in governance. But the Catch-22 is that this is certainly not a happy situation. "Uniformed democracy" a la Musharraf may have been suitable for a short period, but it may prove counter-productive for the country's political and democratic future.

Can Gen Musharraf guarantee that the next military ruler will not be a tyrant? A president in uniform creates an unhealthy precedent for adventurers. The next military ruler may declare martial law, call the assemblies into session and get himself elected at gunpoint and rule arbitrarily.

While acknowledging that he has been good for this nation at a crucial time in our history, particularly since 9/11. Gen Pervez Musharraf must come to terms with the reality that "uniformed democracy" is not sustainable.

Outlook for 2005

Readers keep asking me what the big stories of 2005 will be. So I have consulted a not-always accurate crystal ball and come up with some early trends. The biggest problem the world faces this new year is the continuing fall of the US dollar.

The Bush administration's reckless spending, ruinously expensive wars in Iraq and Afghanistan (now costing as much as the Vietnam war), America's galloping trade deficit and credit-spending frenzy are creating a very dangerous economic storm.

Japan and China's central banks may give up trying to artificially shore up the US dollar by buying US currency and securities. A plunging dollar could cause foreign investors to start dumping US securities and assets.

The result: a potential world wide financial crisis that could collapse the housing bubble, cause interest rates to soar, send securities markets into free fall and wreck Pakistan's shaky finances.

China's banking system is a house of cards. Uncontrolled credit expansion has fuelled China's property boom and international buying spree. Banks are swamped by bad, non-performing loans made to huge, money-losing state-owned corporations. The collapse of China's insolvent banking system would threaten world financial markets.

The US-led occupation of Iraq and Afghanistan is a disaster for all concerned. Both wars are slowly being lost. The big question in 2005 is if and how George Bush will extricate the US from this $6.5 billion per month catastrophe. January elections in Iraq won't resolve this huge mess, any more than rigged elections did last year in Afghanistan.

'Terrorism' - the insurgency against US domination of the Muslim world and its resources - will intensify even if Osama bin Laden is captured or killed. He has created a new, powerful ideological movement that will continue to shake the Muslim world and challenge its corrupt, autocratic rulers and their foreign masters.

As the Bush administration gets sucked ever deeper into its disastrous crusade against the Muslim world, it may - possibly with Israel - attack Iran's nuclear infrastructure, or invade Syria. An attack on Iran would leave the already over-stretched US garrison in Iraq trapped amid a sea of hostile Shia - as well as Sunnis.

A real, viable peace between Israel and the Palestinians seems unlikely. Israel's Prime Minister Ariel Sharon already has everything he wants, and, according to US National Security Advisor Brent Scow croft, has 'wrapped George Bush around his little finger.' So why make concessions? Palestinians will remain trapped in their giant, open-air prison.

Now that Vladimir Putin has crushed all domestic political and business opposition, his control over Russia is absolute. Only the courageous Chechen Mujahideen have resisted Putin's restoration of Kremlin autocracy.

Putin is determined to rebuild the old Soviet Union, starting with Ukraine which, in spite of the recent victory of pro-western forces, will come under intense pressure from Moscow. The Bush-Putin anti-Islamic alliance will strengthen, with China an increasingly active member.

The European Union, for all its growing pains, economic doldrums, and bureaucratic obesity, has replaced the United States as the world's champion of human rights and support for civilized world order.

By contrast, under George Bush, the US has become a reactionary power devoted to protecting the status quo in league with Britain, Russia, China and India. In short, a re-run of the Holy Alliance of 1815 in which Europe's autocrats sought to protect their power and privileges, and halt the rise of bourgeois democracy may be witnessed.

Look for an increasingly independent-minded Europe and China to draw closer strategically as a result of the Bush administration's aggressive, unilatera list policies. Russia will play both sides, backing the US in its anti-Islamic campaigns, and, more discreetly, China, in opposing US influence in East Asia. European arms may begin to flow to China in 2005.

The outlook for Pakistan is not positive. India, now strongly backed by Washington, has Pakistan on the run over Kashmir, even forcing Islamabad to disavow the Kashmiri jihad. Sensing Pakistan's weakness, India is pressing ever harder.

Meanwhile, Pakistan, created as the standard bearer for Islamic democracy and good government, is headed ever deeper into crude, Third World-style military rule while India rightly crows that Pakistan is unfit for democracy and cannot be trusted. Washington will increasingly call the shots in Islamabad. - Copyright Eric S. Margolis 2004/2005