BUOYED by the impressive growth prospects for this year official circles are already talking about growth rates of eight per cent and beyond in future years, raising the question whether such rates of growth are sustainable, given current investment rate of around 20 per cent of GDP? This discussion attempts an answer to this conundrum.

Maintenance of soaring growth rates requires a combination of high levels of national savings and investments and noteworthy growth in productivity. Historically, Pakistan’s rate of domestic savings (comprising savings of households, retained earnings of the corporate sector and the government’s net savings — its revenues greater than its recurrent expenditures) has been perceptibly lower than the level and rate of investment. This gap between domestic savings and investment levels had to be met by borrowings from abroad.

Although in the last three years the level of national savings has been roughly equal to investments there is heavy dependence on remittances of overseas Pakistanis — close to four billion dollars a year — and other inflows in the form of external assistance from donors like the World Bank and Asian Development Bank, aid from bilaterals like USAID and DFID and direct foreign private investment (these three sources contributing close to three billion dollars per annum). These external inflows make up 7.7 per cent of the GDP. In other words, a substantial part of the funding for the investment required for stimulating growth has come from external sources, highlighting the shaky foundations on which the present economic growth rests.

Although a major share of the remittances of overseas Pakistanis has been prompted by the greater scrutiny of transactions undertaken, and accounts held, by Muslims abroad, some of the inflow is also on account of greater returns on investment within Pakistan either in real estate or in the country’s capital markets (now hurtling down a steep slope and in the process rendering many small investors penniless).

However, with interest rates firming up in international financial markets and rates of return on the financial instruments floated in these markets improving (and the real rates of interest in Pakistan markets falling along with a severe decline in confidence in domestic capital markets) the situation could result in a marked deceleration of capital inflows.

And even if there is greater flow of remittances through formal channels and Pakistanis abroad may be beginning to have more confidence in the future of the Pakistan economy and in the financial markets and systems, it would not be wise to develop a strategy that is heavily dependent on such inflows to push up the growth rate. The willingness of the donor community to continue to assist Pakistan has a lot to do with the political climate internationally and the present US interest in supporting Pakistan, hardly a situation on which a longer-term growth strategy can rest.

In this regard it is also significant that a high proportion (almost 50 per cent of this year’s flows into Pakistan) of the direct private foreign investment to date is not new investment. It is buying up the existing investments under the privatization programme of the government and the potential for attracting large volumes of it will continue to be constrained by issues and investor perceptions pertaining to political stability, law and order, country image, contract enforcement structures and mechanisms, the regulatory framework, the consistent application of rules and laws, the pace of decision making, the availability of an adequately skilled work force, etc. Can a growth strategy be built on a somewhat heroic assumption that there will be continued annual inflows of seven billion dollars from abroad — which would contribute at least a third of the investment flow?

A sustained increase in the rate of national savings can increase the rate of growth of the economy by providing the resources required for investment. Pakistan’s past presents little comfort on this score, nor can it, even on present showing, provide a basis on which to build hopes for sustainability that will ensure a prosperous future. The limitations of a strategy based on capital inflows from abroad have been discussed above. If non-debt-creating external funds do not flow into the economy in adequate amounts, the savings required to maintain high rates of investment will have to come from domestic agents, the government, the corporate sector and households.

Pakistan’s experience suggests that the contribution of the government to national savings will be nominal even in the most auspicious circumstances. These can only come from a large revenue surplus, that is, its tax revenues and other earnings, like dividends from its holdings in state owned enterprises (the latter will decline with the privatization/dilution of the government holding in public sector enterprises like PTCL, PSO, OGDC, PPL, etc.) would have to be substantially higher than its non-development expenditures.

In view of the nature of our tax base and our taxation structures and systems, it would be too much to expect a major breakthrough on the revenue front in the foreseeable future. Some savings could come from reduction in expenditures through the privatization of the loss-making public sector enterprises or by compression of non-development expenditures.

The latter route is also not likely to release much by way of resources in view of the massive spending that has to be made in education, health and drinking water and the huge backlog of expenditure needed to maintain installed infrastructure in basic working condition, the continued heavy demands for defence and the servicing obligations of the stock of internal and external debt.

As for the corporate sector, with the pressure on it from payout dividends, it will find it difficult to finance its own investments from retained earnings, even though improved profitability and a better outlook for the retail sector will certainly increase the investible resources available with the corporate sector.

Finally, it is difficult to see how household savings can rise astronomically to make up for this shortfall. Not only is the propensity to save as high as it is likely to get considering the large numbers of dependents on households and the high incidence of poverty, household saving rates are also unlikely to rise following the better access to consumer finance that is fuelling consumption, all this despite the improvements in the range and quality of financial instruments available in the capital markets for investment savings. Moreover, such savings are in themselves a function of growth and only sustained growth can push up the propensity to save appreciably.

The other possibility of raising the growth rate of the economy could be a lowering of the incremental capital output ratio (the investment in rupees as a proportion of the national output/GDP required for the economy to produce an additional percentage of national output), enabling the production of a higher output from fewer resources. This ratio can decline either by the adoption of more labour-intensive techniques of production because of a fall in the wage rate compared to the rate of interest or by the increase in the productivity of labour due to technological changes or improvement in the quality of skilled labour.

The former possibility can be ruled out since interest rates today are lower than the rate of inflation and most of our technology is imported from abroad which tends to be capital intensive and labour saving, being produced in economies where labour is an expensive, and scarcer, factor of production.

With the present investment rates and an incremental capital output ratio (ICOR) of around three in the last three years or so (having fallen from the average ICOR of four over the 20-year period to 2001/02 because of better capacity utilization and not because of greater efficiency in operations) and, thanks to good weather, bumper cotton and wheat crops, a growth rate in excess of seven per cent for this year can be explained. But now there is little by way of under-utilized capacity left to accelerate a high growth rate from the existing stock of machines and equipment; we have run out of steam on this score. For pushing up the growth rate, higher rates of investment in equipment, infrastructure and skills will be required.

To ease the impact of the key constraints on growth and productivity improvement — in the shape of inadequate human skills and infrastructure — will take time. Moreover, in view of the huge investments that will be required in infrastructure connected with energy, roads, rail transportation, ports, irrigation storages and networks, etc., (which invariably have longer gestation periods) to reduce the private sector’s cost of doing business and remain competitive, the ICOR will rise to nearer four.

This will mean that unless investment rates rise to beyond 25 per cent of GDP (at least a six percentage point increase on the present levels of under 19 per cent — a highly ambitious target) and national savings rise in the same proportion, the average growth rate of the economy for the next five years is likely to hover between six and 6.5 per cent notwithstanding the contribution to savings and investments by the informal/black sector not picked up by official statistics. Also, the realization of these growth rates will be influenced by the manner in which the crisis in Balochistan is resolved.

The writer is a former finance minister of Punjab.

THE much-anticipated Delhi summit has concluded, with President Pervez Musharraf describing it not only as “very successful”, but also as having gone “beyond expectations”. World leaders have hailed the results of the president’s “yatra” to Delhi, with the Americans leading the chorus of praise. Major figures in the Bush administration have been positive in their appraisal of the joint statement issued at the conclusion of the Musharraf-Manmohan talks.

Secretary of State Condoleezza Rice had earlier given clear evidence of her thinking when even before the talks had started she welcomed the resolve of the two sides to proceed with the current normalization process. United Nations Secretary-General Kofi Annan hailed the results of the Delhi talks, though his appraisal was more accurate, for he rightly described the statement as outlining “additional confidence-building measures aimed at achieving durable peace in the region”.

Not surprisingly, the Delhi summit has raised expectations among the people of the region that the political leadership of both India and Pakistan is now irrevocably committed to the peace process, and that they could look forward to a peaceful relationship and productive cooperation. However, one should closely analyse the joint statement and examine the comments of the leaders, in particular the press conference of the Pakistan president, before jumping to conclusions.

The joint statement affirms that the “peace process was now irreversible” — a very bold declaration meant to send out a clear message to not only the Indian and Pakistani leaders’ own people but to the world as well. No wonder, it has been welcomed with such enthusiasm. But when the statement lists the achievements, the menu appears either meagre or stale. There is no measure that can be considered as breaking new ground or demonstrating the “new thinking” the president has been repeatedly calling for. Instead, it goes over a lot of old ground, presenting old items with a new shine.

Additional meeting points for divided families, increased bus services, routes, setting up of the Khokhrapar-Munnabao service, cooperation in trade, oil and gas pipelines, the establishment of consulates in Mumbai and Karachi, enhanced economic and commercial cooperation — these are all welcome, people-oriented measures. But on the contentious issues, the statement has little to offer, other than to reaffirm the commitment of the two countries to the joint statements issued on January 6, 2004, and September 24, 2004. In fact, if analysed carefully, it will be seen that on none of the eight items identified as forming the agenda of the composite dialogue between the two countries, has any forward movement taken place.

More specifically, on what Pakistan has called the “core issue” — the issue of Jammu and Kashmir — the statement merely states that the two leaders “agreed to continue these discussions in a sincere and purposeful and forward looking manner for a final settlement.” Well, these discussions have been going on the past 50 years and they have all been sincere and purposeful, but as yet there has not been even a hint of rethinking on India’s part.

On the issues of Siachen and Sir Creek, the statement states that the leaders “instructed that the existing institutional mechanisms should convene discussions immediately with a view to finding mutually acceptable solutions to both issues expeditiously”. This is as meaningless a phrase as can only be drafted by diplomats who have mastered the art of saying nothing, while spouting out a lot of verbiage.

Admittedly, the preparations as well as the ambience at the Delhi summit were radically different to the one at Agra. Whereas the former had been undertaken without the kind of detailed and intense exchanges that must always precede meetings at the level of leaders, we gather that the two sides had been engaged, for the past many weeks, in quiet diplomacy, through their foreign offices, as well through the two special envoys.

The atmosphere, too, was qualitatively different. The president’s commitment to the peace process was no longer suspect. His credentials were not being questioned. Nevertheless, it does appear that the situation lacked an accurate reading as far as the Pakistan side was concerned. How else does one explain the hint that the visit was likely to provide unexpected results? If the summit was merely to reaffirm earlier declarations and identify a few more confidence-building measures, then what was the need for the hype orchestrated by the government spokesmen?

In fact, measures should have been taken to dampen the euphoria that accompanied the Delhi visit. The president was right to seize the opportunity provided by the cricket match to visit the Indian capital. He was also on the right track when he pointed out that while the confidence-building measures were helpful and he was supportive of these, the CBMs by themselves would not resolve the issues, which were both complex and highly emotive.

However, he should also have known that his repeated suggestion that the two sides consider abandoning their long-held positions on Kashmir and engage in thinking outside the box, would fail to evoke appreciation. In fact, it led many Indian political analysts to the conclusion that the Pakistani leadership was prepared to make a strategic compromise, on an issue as sensitive as Kashmir. It also created confusion and disarray in the ranks of the Kashmiri freedom movement. Surely, the president was not served well by those of his advisers and counsellors who had recommended this approach.

It goes against well-established and tested diplomatic practice that no concession should ever be made outside the negotiating room and certainly not by the weaker party, for it is immediately perceived as a sign of either weakness or an intense desire for success, however temporary and ephemeral it may eventually turn out to be. As a student of strategy, the president would have known that any act of unsolicited generosity is pounced upon by an adversary as a platform from which to ask for and expect fresh concessions.

We have seen both these scenarios play out. The best known example of one would be the resolve and tenacity with which the Vietnamese negotiated, though with a weak hand, with Dr Kissinger, possibly the finest political strategist of the last 50 years. An example of the other dimension was the ease with which the PLO leadership capitulated at Oslo, to terms that damaged their case abroad, while causing fissures within the Palestinian polity.

That the Indians were in mood for serious negotiations on any of the political issues was abundantly clear to any political observer, who had taken the trouble of reading carefully the statements and remarks of the Indian leaders.

In fact, during my visit to Delhi, only days before the summit (as a member of a delegation of Pakistan ambassadors), the Indian foreign secretary made it clear in a detailed briefing at a breakfast meeting that there was little to discuss about Kashmir other than to pursue confidence-building measures and identify new ones to reinforce the current process.

Even on Siachen, he made it clear that the earlier draft agreement (gathering dust for over a decade) negotiated between the two defence secretaries could no longer be revived because of what Pakistan had done in 1999 — a clear reference to the Kargil episode. The foreign minister, skilled politician that he is, followed a totally different script in our meeting with him. He agreed with everything said by our side while pointing out that it was possible to resolve all our problems if only we would continue to build on the CBMs so that there would be an atmosphere of trust and confidence between the two sides. The problem would thereafter simply fade away.

Indian refusal to countenance a discussion on Kashmir was also evident in our meetings with major Indian think tanks. No wonder, Indian journalist Kuldip Nayar gave expression to his “disappointment” (in a recent article) at the suggestion made by our delegation in Delhi that there could be no meaningful peace between the two countries, unless there was a resolution of the Kashmir problem. He felt that even raising this issue was in bad taste as it was evidence of the time warp that we were living in.

The Indians believe that the only solution to the Kashmir problem is to freeze it in the way the Sino-Indian frontier has been frozen. Meanwhile, the increasing scope and dimension of the CBMs would weaken the will of the Kashmiris, creating disillusionment among them regarding Pakistan’s sincerity of purpose. Finally, with better and more benign governance, the Kashmir issue would be resolved. This, of course, totally ignores the fact the Kashmir issue is not territorial, but one that concerns the destiny of millions of people. But Indian confidence is so high that they now advocate, as they did at Delhi, that there is no need to redraw the LoC, because eventually all these borders and lines of control would simply fade away.

The president’s remarks at the press conference in which he brought the focus back on the urgency of finding a mutually acceptable solution to the Kashmir problem was, therefore, the right approach to disabuse the hosts, as well as the general public, of any false impression that there could be durable peace or meaningful cooperation between the two countries, without a satisfactory resolution of the Kashmir problem.

With new developments, age-old concepts of state sovereignty and independence have been consigned to the dustbin of history, courtesy the Bush administration. We must also accept that the legitimacy of extending support to national freedom movements (as provided for in the UN charter) is no longer countenanced. Moreover, we are now nuclear powers and therefore our conduct must not only be responsible, but also above reproach. We also appreciate that India is an “emerging power” and is being courted by both the US and China, for they recognize that the region is undergoing a major upheaval and both are counting on having India on their side.

We also know that it is Washington’s will that we resolve our differences with the Indians, so that the US can go about its oft-repeated objective of creating a strategic relationship with India. These are all harsh realities. The temptation for quick fixes must, however, be eschewed and foreign entanglements avoided. All issues need to be evaluated clearly and dispassionately and with patience, reinforced by unity and consensus at home.

The writer is a former ambassador.

THE recent violent protests in China against Japan, two countries with huge trade surpluses against the United States, marking an all-time low in post-war Sino-Japanese relations, are most unfortunate.

Pakistan enjoys extremely cordial relations with both countries, and the foreign office must be wondering what triggered off this orgy of violence just when the Asia-Africa summit in Jakarta was around the corner.

Atrocities committed during the Second World War have been cited as one of the reasons for the protests. The question nevertheless remains: why did the Chinese wait 60 years to express their extreme displeasure?

Political disturbances create all sorts of problems for diplomats which agitators at home appear to be totally unaware of. One remembers the time when Zulfikar Ali Bhutto, in a highly charged and emotional speech, gave the whole hearted support of his government and people, without of course consulting them, to Turkey which was then embroiled in a bitter dispute with Greece over Cyprus, and there was talk of war.

One felt sorry for the poor Greek ambassador in Ankara, the Turkish ambassador in Athens, and the Pakistan ambassador in the land of Homer, Plato and Cavafis, who had to stare down through heavily fortified bullet-proof windows at the street below thronged by banners of “Zeeto e Hellas” and “Zeeto e Enosis”. His colleague in Ankara, on the other hand, was sitting on cloud nine and had difficulty getting his feet on to the ground.

Everybody knows that local administrations are supposed to guard diplomatic missions against agitators of various political persuasions, who can fly off the handle at a moment’s notice. During the last few years, the police in Pakistan has been particularly effective and has managed to control riot like situations, inevitably succeeding in wounding a few journalists in the bargain.

But in the past, there were two glaring examples of gross ineptitude or deliberate connivance on the part of the authorities. One occurred in Islamabad when President Ziaul Haq who, it was believed , had just seen a film on how commuters in Amsterdam went about their business, decided to try out his new bicycle on the streets of the capital.

Every policeman from the pot-bellied, Pancho Villa-like motor-cycle sergeant, barking into his walkie-talkie while twirling his handle-bar moustache, to the emaciated foot soldier scouring the trees for signs of a sniper, was on guard duty on the main thoroughfares of the capital. Meanwhile, a fiery mob, led by a religious fanatic, stormed the US embassy. It was not the Islamabad police but the US marines that held the fort and averted what could have been blown into an even uglier diplomatic incident.

The second incident took place in Karachi during the tenure of the last Indian consul general to set foot on this soil. An angry mob stormed and looted his official residence in Clifton, while he was in his office on Fatima Jinnah Road. The next day a Dawn reporter wrote that the few policemen who were doing guard duty outside the building stood by helplessly as the mob went about its business systematically and unhindered.

Mob violence is a dreadful thing whether the motivation has a religious, ideological or historical base. While Pakistan’s relations with Japan, one of the world’s biggest donors, have an economic base, the links with China are structured on deep friendship, mutual respect and military considerations. Old Cathay might have been something of an enigma to a former British foreign secretary, Sir John Simon, who once described the country as ‘a mere geographical expression.’

But to Pakistan China is more than a country. It is a friend whose friendship has stood the test of time — a colossus that has come a long way since the Nationalists were driven to Taiwan and the communists replaced the Kuomintang government. What was of particular interest to China watchers in Pakistan was how the country handled its agricultural problem, for this is a subject that has never ceased to fascinate local economists.

The need to modify Stalinism to fit the contours of Chinese society came as early as 1950, and was a factor that stimulated the Sino-Soviet cleavage. With its huge sprawling agrarian society impinging upon already overcrowded metropolitan centres, there was no way China could inflict the sacrifices upon the agrarian class that had been a prominent feature of the Soviet drive towards industrialization.

Nevertheless, experiments were carried out, and the ill-conceived commune system represented an early Chinese response to the problem. Then came Deng Xiaoping, the architect of modern China who pledged socialism with what he called Chinese characteristics. He dismantled the commune system and replaced it with contractual agreements between family units and the government. This fundamental retreat from collectivization brought significant production gains in agriculture and gave rise to the mushrooming of small and medium sized industrial units.

Agrarian reform was not without its problems as economists in Pakistan noted at the time. It is easier for societies to share poverty rather than wealth. Faced with a choice the peasant would prefer to ignore subsistence crops like grain, and cultivate crops that have a commercial value and promise greater profits. To offset this, the government dished out agricultural subsidies at extremely high levels.

Though many of the rough edges have been smoothed out after the early days, Chinese officials occasionally face other formidable problems like the delicate balance between centralization and decentralization, between manager and party cadre and the need for price reform. Because of these and other problems wages throughout the country remain distorted. Though modern technology and transport have made the hugeness of the country graspable, reforms continue to take on the attributes of campaigns, the rhetoric of planning notwithstanding, and out of exhortation and mobilization often comes overkill.

The story of Nippon is altogether different. There was a time when library shelves in gentlemen’s clubs in Karachi were groaning under the weight of books on Japan. So many learned tomes had been written on the Japanese economic miracle, on the Japanese system of management, on how the factory manager in Yokohama or Kyoto solved problems which appeared incapable of solution, that one was led to the humbling awareness that one could no longer make an original or useful statement about the most successful among the world’s major industrial societies.

Nevertheless, it would be safe to surmise that the secret of Japan’s success was its ability to unite the authority of the state and the energy and creativity of the citizenry in a manner both different from and more successful than either a modern socialist country like China or an old ‘capitalist’ economy like Britain. We still have a lot to learn from the Japanese.

The goals for the future came into focus some time ago among Japanese planners. These included a rapid advance in high technology and service industries accompanied by greater interdependence with foreign economies; the expansion of the domestic market to lessen the trade imbalance and the further opening of commercial markets.

These goals are being implemented in varying degrees. However, quite a few uncertainties remain. Having become a global economic power the country is confronted with the need for sweeping cultural changes to conform to internationalist policies. This is not going to be easy, because Japanese society, in spite of globalization, is still governed largely by hierarchical principles. The Japanese people are basically introverted, comfortable within small group living and acting in accordance with long-established rules.

The last time I visited Tokyo was in 1980 and even then was quite bowled over by what I saw. These were a quiet, well behaved, extremely hard-working and disciplined people where taxi drivers opened car doors for customers by remote control and neon fluorescence lit up the night sky for miles around.

Although the bureaucracy in Japan on occasion retreats in the face of a strong self-confident private sector, government and industry still work together as a team, unlike in Pakistan where the relationship has often resulted in friction with accusations of bribery and kickbacks. Japanese industries — in whole or in part — continue to be transferred overseas to take advantage of lower costs of labour or resources and to fend off protectionism. This is accompanied by even greater interdependence with foreign economies.

Fortunately the protests are far less than they were a week ago; and one can only hope that sense finally prevails on both sides of the Yellow Sea. China and Japan are the two stars of Asia. All other Asian countries look up to them.