A resurgent private sector

I HAVE now reached the end of the list of the positives I said I would explore in this series of articles. What I had set out to do was to list and discuss some of the more visible positive elements in the structure of the Pakistani economy which could be incorporated in public policy. Only then would the current administration’s claim that it has set the economy on a trajectory of high rate of growth that could be sustained over the next several decades ring true.

Until that is done — and it has not thus far — there is a real danger that the rate of expansion of the Pakistani economy will decline to the level allowed by its structure in which the weaknesses dominate the positives. My reckoning is that at this time the structural growth rate is of the order of 4.5 per cent a year which would allow an increase of no more than two per cent in income per head of the population. The structural rate is a bit higher than in the first 50 years, largely because of some of the reforms introduced by the military administration since 1999. But the increase is no more than half a percentage point, not three to four per cent as implied by the senior officials of the regime.

In identifying the positives in the economy, I started out by discussing the role a vibrant banking sector had begun to play in helping the economy to develop and grow. I then briefly discussed the sector of agriculture and the way it had begun to be transformed. It was now moving towards the production of higher value added crops rather than continued emphasis on grains and cash crops that need a lot of land and a lot of water to produce. I then discussed the benefits that a large and young population could bring to the economy.

I differ from those economists who treat a growing population as a burden rather than as an asset. But a large and growing population can only become an economic asset if the youth are educated and trained to help modernise the economy and earn foreign exchange by serving the parts of the world that are becoming increasingly short of people. My fourth positive was the large Pakistani diaspora spread over three continents that had begun to increasingly interact with the homeland. It was not only remitting large amounts of money to relatives and friends, but also investing in the economy.

The fifth on my list of positives — the one to which I will turn today and continue with its discussion next week — is the presence of a private sector much more confident than ever and considerably energised. This has happened because of the freedom of opportunity and economic space it was granted by the government headed by President Pervez Musharraf. As I will discuss later, the Musharraf government was building on the foundations laid in the early 1990s. It was also responding to a profound change in thinking about development. By the time the team of technocrats appointed by the new military leader began its work in Islamabad in late 1999, the ideological wheel had turned if not full circle then at least three-fourths of the way.

To fully understand the role the private sector can play in developing and transforming the Pakistani economy, I would take the reader through two detours. One, to trace some of the thinking that has guided a number of other countries in transition in other parts of the world. Two, to draw a parallel between the evolution of successful democratic systems and economic structures that rely on private entrepreneurship as the driving force.

In both what the economists call an “enabling environment” is as important as the constraints placed on the actions of the various actors involved. I will start with a brief discussion of the approaches recommended and adopted in other parts of the world to make the transition from controlled to more open economic and political systems.

After a decade of crises in many parts of the developing world and the collapse of the Soviet Union in a spectacular way in 1989-91, there was a consensus among development thinkers that the state had only a limited role to play in managing the economy. Markets had to take the lead in allocating resources among different players in the economic system; they had to encourage innovation, technological improvements and human development to increase productivity; they had to find a balance between demand and supply by using the price mechanism; and they had to find ways to self-regulate the various components of the economic system.

By assigning these roles to the markets, development thinkers were transforming the functions previously assigned to the state. The state, according to this line of thinking, must not endeavour to occupy the “commanding heights of the economy.” It should play a supportive rather than a leading role.

The really big question in the early 1990s was the pace at which the economies must transform. Those that had for long been managed by the state had to be returned to the care of the markets — the private sector. How fast should this transition take place? Three different answers were provided to this question. There were those who believed in the “big bang” approach to reform and they found willing listeners among several political groups that were gaining power in Eastern Europe as well as in Russia. The big bang approach was also encouraged by the United States and by the IMF and the World Bank. Its attraction was easily explained: there were many who were anxious to reform quickly in order to create as much distance between the economic policies of the Soviet era and the demands of capitalism.

“A chasm,” said this group, “could not be crossed in two leaps.” By taking a running start, the economies could jump from the Soviet style of controls and planning to the free play of the markets. The leap across the chasm was to be taken not only in economics but also in politics. As the economy moved towards market-capitalism from socialism, the political system was supposed to jump from party-dictatorship to participatory democracy.

The second group of development thinkers — and I include myself among them since I then had the responsibility for the World Bank programme in China — believed that the reform had to be relatively slow and had to be undertaken at a measured pace. We also had our own slogan. “What ain’t broke, needn’t be fixed.” China’s economy, as well as those of other communist countries of Asia, were working well, moving towards market dominated economics, but not doing it in one leap.

The third group became preoccupied with the growing economic malaise in South Asia. The economies in this region had not gone the distance taken by the Soviet Union and Eastern Europe in terms of imbibing socialism as an instrument for bringing about economic change and development. They had, over time, increased the role of the state and did not fully trust the market place.

India, starting with the thinking of Jawaharlal Nehru, its first prime minister, had taken the lead in constructing an elaborate system of state controls over the economy. This had come to be called the “licence raj.” By the early 1990s, for reasons that had little to do with the collapse of the Soviet Union and more to do with the beginning of the process of globalisation, the South Asian economies had come under pressure. It had become clear to two finance ministers — Manmohan Singh in India and Sartaj Aziz in Pakistan — that the system of state controls had to be dismantled. But political imperatives and pragmatism would permit not a big bang approach but a relatively slow move that could be accommodated politically and socially.

The reformists met with limited success in Eastern Europe. Two countries — Poland and Hungary — were able to leap from socialist controls to market-capitalism, while all others faltered, some of them badly. Russia, in particular, made an uneasy transition. The advice given to it and its experience of moving from one type of economic model to another, became a highly contentious issue among economists. Nobel Prize winner Joseph Stiglitz held the IMF responsible for rushing change in Russia. The critics of the big bang approach now suggest that the recent slippage in Russia towards state controls in economics and constraining of political freedom would not have happened had the country been allowed time to absorb change.

Russia has now begun to challenge the West, not in the way the Soviet Union did during the Cold War, but by using its energy resources and a growing market as levers of power. “Today Russia’s president Vladimir Putin, flush with surging oil and gas prices, is crushing domestic opponents, renationalising major energy companies, throwing out western human rights groups and generally making himself the big man campus in Europe,” wrote Thomas Friedman in a recent column for The New York Times.

The pragmatic approach followed by China and Vietnam produced impressive results. Neither country gave up the Communist Partys monopoly over power while ushering in, albeit with considerable caution, markets for providing most signals to the economy. While China’s extraordinary performance is well known and has received intense academic and policymakers’ scrutiny, Vietnam’s emergence as an economic power of some significance is less appreciated. As The New York Times noted in a front page story on October 25, “in the three decades since Vietnam has gone from communism to a form of capitalism, it has begun surpassing many neighbours. It has Asia’s second fastest growing economy, with 8.4 per cent growth last year, trailing only China’s, and the pace of exports to the United States is rising faster than even China’s.”

The South Asian process of reform has taken the countries of the region through several paces — small steps, really. The reforms introduced were aimed at taking the state out of the direct management of economic assets. The state’s role as an owner of industrial, commercial and financial enterprises had developed under Prime Minister Nehru right after India gained independence. The first generation of Indian leaders had no trust in private entrepreneurship. Pakistan, South Asia’s other large economy, was a relative late comer to this model of development. It was only in the early 1970s under the direction of President (later Prime Minister) Zulfikar Ali Bhutto, that the country moved towards a predominantly socialist economy. Until then, it had allowed the state to plan and guide, leaving a fair amount of space for the private sector.

In fact, under Ayub Khan, the country’s first military leader, the economy had come to be dominated by a few industrial and financial houses. Their domination was not as pronounced as claimed by Mahbub ul Haq in his famous “22-family speech” delivered in 1969, but it was the most significant feature of the economy.

What prompted these three groups of economies to abandon most aspects of socialism? This is a question I will take up next week, focusing in particular on the case of Pakistan.

Decline of trust in the United States

IN 1995 Francis Fukuyama came out with a book called “Trust,” in which he argued that a society’s capacity for cooperation underpins its prosperity. The same year, Robert Putnam’s famous article, “Bowling Alone,” lamented that the United States was depleting its stock of precious social capital.

The question of trust — in government and also in communities — preoccupied politicians too. “It Takes a Village,” Hillary Rodham Clinton urged in the title of her 1996 book, which became a best seller. You don’t hear much about trust these days. Instead, we want accountability.

You see this most viciously in politics. In the mid-term campaigns, nobody has time for trust. The name of the game is to hold opponents accountable by attacking their records — for failings, real or imagined. If the Democrats capture one or both chambers, it will be largely because they promise to hold the president accountable.

This reflects a shift somewhere around 2003 or 2004. In the 1990s, after academics and pundits began talking about trust, the nation did actually become more trusting. The share of Americans saying they trust government “most of the time” or “just about always” rose from 21 per cent in 1994 to 56 per cent in 2002. Equally, elections became less abrasively focused on accountability. In 2000, according to John Geer of Vanderbilt University, a relatively low 40 per cent of the messages in presidential TV spots were negative, down from 47 percent four years earlier.

But some time after the Iraq invasion, these trends reversed. In 2004 the share of Americans saying they trusted government fell to 47 per cent, and this month a CBS News-New York Times poll put it at a rock-bottom 28 per cent. Meanwhile Geer’s measures show that in the 2004 election negative messages jumped to 50 per cent of the total, and he guesses that this year’s congressional races are the most negative in history.

There’s been a similar change in corporate America. In the late 1990s, the new thing for corporate managers was to trust ordinary employees. Company hierarchies were flattened so that people in the middle could demonstrate initiative rather than suffocating under bureaucratic controls. In 1999, the Harvard Business Review reported that 30,000 articles on trusting and empowering middle managers had appeared in the business press over the previous four years.

That paradigm ended in 2002 with Enron, WorldCom and dozens of lesser corporate scandals. Suddenly nobody wanted to trust managers; they wanted to audit them. Instead of the era of management empowerment, we entered the era of mandatory online ethics training. Meanwhile private-equity firms are raising record sums to take over companies on the premise that incumbent managers need to be kicked rather than trusted.

What to make of this shift? Holding people accountable is a good thing: This season’s negative campaigning can be seen (admittedly, with many despicable exceptions) as a healthy reaction to poor congressional performance. Equally, the 2002 scandals justified the Sarbanes-Oxley reforms of corporate governance. There are reasons we hold teachers accountable for failing schools and put travellers through metal detectors.

But trust, when not abused, is nonetheless an asset. Accountants, lawyers and online training sessions impose costs on businesses; it would be cheaper to trust people if that were possible. Likewise, as Marc Hetherington of Vanderbilt University has demonstrated, government is constrained if nobody trusts it. The Great Society programmes were possible because Americans trusted government in the 1960s; the creation of the Medicare prescription drug programme arguably reflected the peaking of trust in government in 2003.

But Bill Clinton’s health care reform was thwarted in the low-trust early 1990s, and nobody now trusts government to modernize entitlements. Meanwhile President Bush had enormous foreign policy momentum in 2002-03 because Americans trusted him. Thanks to the Iraq mess, Americans are now focused on holding Bush accountable, and his options are limited.

There are powerful reasons trust tends to decline and accountability advances. Mobile societies tend to have weak bonds; the Internet makes it easier to hold people accountable and encourages acerbic negativity. And the absence of trust can feed on itself. Leaders function under stifling oversight; this causes them to perform sluggishly, so trust continues to stagnate. But occasionally there is a chance to escape this trap: A shock causes trust to rise, leaders have a chance to lead and there’s an opportunity to boost trust still further.

We’ve recently had a double opportunity. The boom of the 1990s boosted trust in business; the 2001 terrorist attacks boosted trust in government. But CEOs and politicians abused these gifts with scandals and incompetence. Such is the cost of corporate malfeasance and the Iraq war: Precious social capital is destroyed by leaders’ avarice and hubris. — Dawn/Washington Post Service

Ways of reducing poverty

THE usual wrong-guy-got-the-prize claims have followed the Nobel Peace Prize for Dr Muhammad Yunus and the Grameen Bank. But one of these claims stands out in its will to miss the point: that Wal-Mart’s legendary founder Sam Walton is a better candidate for the Nobel Peace Prize than Dr Yunus and Grameen.

As John Tierney argued in the New York Times (October 16), no-one has done more for reducing Third World poverty than Wal- Mart and that getting a job at Wal-Mart is the best way to a better life for the world’s poor.

It sounds polemical, even comical. But it is probably best intended as a stylised version of the argument that globalisation is helping eliminate poverty. The mainstay of this argument is job creation by foreign direct investment (FDI) in developing countries by multinational corporations such as Wal-Mart. In China, Wal-Mart may be responsible for creating an estimated half a million jobs a year for more than a decade. Even stated this way, the claim shows how ill-understood Dr Yunus, Grameen, poverty alleviation and, indeed, the Nobel Peace Prize remain.

Dr Yunus is not your average do-gooder. He has that rare distinction of having contributed an innovation to the field of finance and of establishing a gargantuan machine for attacking abject poverty — the Grameen Bank. Wanting to lend to the poorest of the poor, Dr Yunus was faced with a foundational problem: how to create an incentive against loan default. He cracked the puzzle with the idea of a five-person loan group. Each loan is given to an individual but five borrowers bound into a loan group are jointly responsible for each repayment instalment.

Dr Yunus went on to provide a larger forum to translate this idea into reality: the Grameen Bank. Grameen’s business model aims solely to provide credit to the poorest for income- generating work. The Grameen model is: one-year loans (of $150, on average — micro-credit), equal weekly instalments, an annual interest rate of 20 per cent (competing with the rural money- lender’s 120 per cent or more) but no collateral and no paperwork — just the loan group and a relationship with a loan officer who stays in good touch.

The Grameen Bank has over 6.7 million borrowers in Bangladesh — over 90 per cent of them poor women. And lending to women is a business decision, not an ideological one. Grameen found them to be more responsible borrowers and more likely to invest in their own families than men from the same backgrounds. Take an average of five persons per Bangladeshi household and you get over 30 million lives influenced by Dr. Yunus and Grameen in Bangladesh alone. That is one in every five people in Bangladesh. And the Grameen model has been replicated in over 100 countries. That ought to catch Wal-Mart’s envy.

With all this said, Dr Yunus is not just a pioneer of finance and Grameen is not just a lender. Their mission is to give meaning and purpose to the lives of the poor while putting “poverty into the museum”. Each Grameen borrower also agrees to make Sixteen Decisions which inculcate simple values such as discipline and hard work as well as practical undertakings for Bangladesh’s rural setting such as growing vegetables, using pit- latrines, not giving or receiving dowries, earning to pay for children’s education, etc.

More than this, Dr Yunus and Grameen have proved what is still considered counter-intuitive by most people on this planet: that the poorest are bankable. The loan default rates for the poor are less than 10 per cent practically all over the world. Dr Yunus and Grameen have placed the onus on the rest of us to answer the question: what business model have you come up with to pull the poor out of poverty? That is what deserves the Prize.

The Nobel Peace Prize is not an annual performance bonus. And its prize money is not an investment for generating employment. Despite some controversial awards, the spirit of the Nobel Peace Prize has been to recognise a lifetime spent in the selfless pursuit of a better, more peaceful world. The laureate is lauded for giving an inspiring new vision of such a world not just to us living in the world today but to generations to come. Dr Yunus and Grameen meet these criteria without competition from Sam Walton and Wal-Mart.

Dr Yunus and Grameen are focused on providing a dignified way out of poverty for the poor. Wal-Mart and other multinational corporations are focused on maximising profits and job creation is a by-product of this pursuit. Beyond these definitional arguments, FDI cannot be expected to reach the poor in every country anytime soon. According to the World Bank, in 2004, 60 per cent of the net FDI flow of $165 billion to developing countries went to only five countries: Brazil, Russia, India, China, and Mexico. By comparison, Bangladesh received $449 million dollars of FDI in 2004. That is some $3 per Bangladeshi compared to Grameen’s $150 per borrower. Grameen’s focus on the poorest is clearly much sharper than Walmart’s.

All told, the debate about whose numbers look better is useful mainly to those who are blind to the complex ways poverty alleviation works. Only people whose contact with the poor is restricted to global poverty statistics are likely to take an “either you’re with us or with the poorest” approach. To grow out of poverty, the poor don’t just need jobs at Wal-Mart facilities. They also need institutions tailored to serve their aspirations and to channel the non-poor world’s immense wealth to fuel the productive activities of the poor. The Wal-Mart factory worker can well use a micro-loan to start a small new operation to supply the factory. In this respect, Dr Yunus and Grameen have shown that the poor are not that different from the non-poor. Both need jobs where they get training and credit for starting new operations where they apply their training.

Both Wal-Mart and Grameen are needed to eliminate world poverty. Who knows, there may be a couple of future Sam Waltons hidden among Bangladesh’s poor.

kazimsaeed@hotmail.com

Alienation of Europe’s Muslims

A YEAR ago this week, riots erupted in mostly Muslim suburbs of Paris and other French cities, underlining the alienation of a subculture that makes up 8 per cent of the country’s population but has suffered from chronic unemployment and discrimination.

One year later, that alienation — and the threat of violence that comes with it — appears to have worsened, not only in France but across Western Europe.

French police are facing what some call a “permanent intifada” in Muslim neighbourhoods, with nearly 2,500 incidents of violence against officers recorded in the first six months of the year. Some of these now take the form of planned ambushes: On Sunday a gang of youths emptied a bus of its passengers, set it on fire, and then stoned the firefighters who responded.

In Britain, the London bombings of 2005, which were executed in part by native-born Muslims, have been succeeded by this summer’s arrest of another group of native extremists who allegedly plotted to blow up airliners. Two Lebanese residents of Germany were accused of trying to bomb passenger trains. The threat of violence by Muslims angered by perceived insults, whether from the German-born pope or the director of a Mozart opera, has become more frequent.

Europeans are slowly growing more aware that a major part of the global struggle against Islamic extremism must take place in their own countries — and not just in faraway Afghanistan or Iraq. But their governments, media and political elites still appear to be a long way from coming to grips with the challenge. Rather than seeking to address the larger alienation of mainstream Muslims, European leaders often appear to do the opposite — by challenging the culture of Muslims and defending gratuitous insults of Islam.

One recent but hardly isolated example came from Britain’s House of Commons leader, Jack Straw, who criticized Muslim women for wearing veils and said he asked those who visited his office to remove them, on the grounds that they impede “communication.” It’s hard to believe that veils are the biggest obstacle to communication between British politicians and the country’s Muslims; and it’s even harder to imagine Mr. Straw raising similar objections about Sikh turbans or Orthodox Jewish dress.

True, the Labour Party MP was reflecting — or maybe pandering to — the concern of many in Britain about the self-segregation of some Muslims. But veils — which are also under government attack in France and Italy — are not the cause of that segregation, much less of terrorism. Attacks on Muslim custom by public officials are more likely to reinforce than to ease the community’s alienation.

Mr Straw and other European politicians could contribute far more to combating radical Islam if they focused on those who actually foment intolerance among European Muslims — as well as those in the mainstream community who promote prejudice against Arabs and South Asians and their descendants. Muslims in Europe should be invited to embrace the countries where they live on their own terms. They should be expected to respect laws and freedoms. But politicians would do better to work on dismantling the barriers Muslims face in getting educations and jobs rather than those that distinguish Islam from the secular majority.

— The Washington Post