More of Keynes, again

WE in Pakistan — and by that I mean those who make economic policies and those who comment on them — are not given to deep reflection. Why? There are several reasons. The country’s colleges and universities don’t teach economics, political science, sociology and anthropology the way they should be taught.

Consequently, those who enter public service either as politicians or government servants are poorly equipped to handle economic and social issues. Those who write on these issues from outside the government are equally ill-equipped to correctly analyse the situation or events on which they comment.

Perhaps culture is another reason. In a celebrated book, The Argumentative Indian, Nobel Prize winner economist Amartya Sen, suggested that India’s better performance in both economics and politics was owed to the pursuit by its people of a deeply ingrained habit: to argue. Arguments to be continued over long periods of time need reflection and research. Those who argue and persist in discourse also need patience and tolerance. These attributes have made India what it is today. It is a country that values and respects dissent, encourages education and scholarship, fosters an appreciation about its history, and has shown a remarkable ability to reinvent itself.

Pakistan, on the other hand, has become increasingly prone to the “declarative” in disclosure. To say that a particular thing is revealed truth is enough to stifle dissent and those who persist in disagreement are condemned as deviant and disrespectful. To become an argumentative Pakistani is to invite danger to life and property.

There is no better evidence of this line of thinking than the debate conducted recently in newspaper columns and over radio and TV airwaves on the subject of women’s rights. Those who believe in giving women less rights than those men ascribe to themselves have prevailed once again. The National Assembly, after a lot of heaving and panting, brought forth a bill that cannot make Pakistan proud.

The partial satisfaction over the result on the part of those who stand for human rights — defining “human” as both men and women and not just men — is simply because they believe that they could not achieve anything better. The most desirable outcome, of course, would have been the repeal of the hudood ordinances and not just a few amendments to bring them a bit closer to the norms of civilised behaviour.

All this is a lead into the worry that I have. The worry is that training (or lack of it) and temperament (too much of the wrong kind) have brought Pakistan towards a situation of near-crisis. My reference is not to politics, nor even to the way that society is reshaping itself. I refer to the state of Pakistani economics. Why am I writing a string of articles discussing several positive attributes in the economy and coming to such a negative conclusion? I have two answers to this question.

One answer I have already provided at the conclusion of the series on the “positives.” I concluded the article that appeared last week with the assertion that all the positives about which I had written will not result in economic advance since they had not been incorporated in intelligent and visionary public policy.

Current economic public policy — if indeed there is one — is based on some simple propositions. The first of these is the one argued with considerable passion by the recently deceased Milton Friedman. The Nobel Prize winner (he was honoured in 1976) died in San Francisco on November 16, 2006, at the age of 94. A lot has been written since his passing about him, his views and his influence on public policy.

Friedman was one of the most influential economists of the 20th century and founded perhaps the most talked-about and written-about “school of economics” — the Chicago School. He gained his reputation by arguing against the main tenet of what had come to be called Keynesian economics — that public policy should be used to change the direction that economic development is taking.

John Maynard Keynes had won the argument while much of the western world, because of government inaction, had become stuck in a deep depression. Looking at the misery wrought by government apathy and ineptitude, Keynes argued for action. He said that the principles of economics should not be used to accept a low level equilibrium trap in which economies get stuck at high levels of unemployment, low levels of aggregate incomes, and correspondingly low levels of output. These work on one another to produce and perpetuate human misery. This was the case during the Great Depression in the 1930s.

Keynes suggested that in situations such as those faced by governments in the industrial world in the 1930s, it was not only legitimate to pump public money into the economy but a dire necessity. Since without government intervention, the situation would continue to deteriorate, policymakers could and should act by increasing aggregate demand. This they could do by increasing public expenditure particularly in the activities that were labour intensive. Budgets need not be balanced and budgetary deficits should be tolerated if government programmes created employment and put money into the pockets of consumers. President Franklin Roosevelt built his economic programme around proposed Keynesian remedies and brought his country out of depression. And, as was then said, all economists became Keynesian.

Milton Friedman argued against the Keynesian approach and convinced a number of policymakers that inflation was a greater curse for economies than unemployment. However, to control inflation, countries had to manage money supply rather than tweak budgetary outlays and adjust fiscal deficits. He also argued that there was no trade-off between inflation and unemployment, tolerating high levels of the first did not ensure low levels of the second. He was joined in this finding by Edmund Phelps, an economist of high repute who was belatedly honoured with the Nobel Prize this year.

Friedman profoundly influenced the economic policies pursued by Ronald Reagan in the United States and Margaret Thatcher in Britain. What came to be known as Reaganomics was, in fact, Friedman-economics. He also influenced public policy in the developing world through institutions such as the International Monetary Fund and the World Bank. This was particularly the case in countries such as Pakistan which were obliged to follow the IMF in return for the badly needed resources that only that institution could provide.

Among the policies advocated by the Fund, Pakistan pursued aggressively a programme that curtailed government expenditure and tightened money supply, and in the process, limited the size of the public sector development programme. In other words, the government neglected to provide for the poor and for the services they need. The programme also placed the economy under private influence.

We accepted this approach without much reflection and without developing a clear understanding about its long-term implications for growth, poverty and income distribution. We were responding in large part to the way in which we have always taken foreign advice; not to question it much. But the leaders were satisfied with what they perceived were the results of this approach.

As President Pervez Musharraf writes in In the Line of Fire, his recently published memoir, his administration’s policy succeeded in bringing stability to the economy and in initiating growth. However, his assertion that the approach adopted at the start of his tenure and still being followed will yield a high level of sustainable economic growth, deliver the poor from poverty and narrow the wide gaps in inter-personal and inter-regional incomes is hard to accept.

Pakistan, under Musharraf, has done well to place the private sector on the commanding heights of the economy. He and his associates became Friedmanites in the process. What they have not done is to add a bit of Keynes to the broth they were stirring. In this lies a real problem for the country’s economic future.

As I argued in a couple of columns that appeared as a part of the “positives” series, it made sense to provide incentives to the private sector to lead the economy. Today, the private sector has a larger role in Pakistan’s economy than it has in the economy of India. In Pakistan’s case, private entrepreneurship has been provided with incentives it was denied for more than two decades. But while celebrating the increased prominence of the private sector in the economy, it has to be recognised that the incentives provided to it should not be at the expense of society. Even those who became Friedmanites later in their professional careers, as did Larry Summers who was President Bill Clinton’s treasury secretary before becoming Harvard University’s president, want to take the role of the private sector with a pinch of public sector salt.

In his obituary of Friedman in The New York Times — one of the several published by that and other newspapers — he wrote: “To my mind, his thinking gave too little weight to considerations of social justice and was far too cynical about the capacity of collective action to make people better off. I believe that some of the great challenges we face today, like rising inequality and global climate change, require that the free market be tempered instead of venerated. And like any economist, I have my list of areas where I believe Mr Friedman oversimplified or was simply wrong.”

And that brings me to my second worry about the state of the Pakistani economy. This has to do with the problems being created by growing inequalities. Inequality is affecting not only the distribution of income and wealth across different segments of society but also the availability of economic opportunities.

It is also having a grievous influence on regional income and wealth disparities. And yet this subject has received little attention from Islamabad’s policymakers.

Admittedly there has been considerable debate in the country about the incidence of poverty and the change in it over time. According to the Economic Survey, 2005-06, “real GDP has grown at an average rate of over 7.5 per cent per annum during the past three years. With population growing at an average rate of 1.9 per cent per annum, the real per capita has grown at an average rate of 5.6 per cent per annum.”

The government maintains that its policies and pick up in economic growth since 2003 has had a significant impact on reducing the extent of poverty. A number of economists outside the government’s fold believe that not much has happened and that a very large number of people continue to live in abject poverty. Both conclusions are correct. But there is an equally important question: has this growth lessened the woes about inequality of various kinds? I will attempt an answer to it next week.

Chinese diplomacy in South Asia

THE recent visit of President Hu Jintao to India and Pakistan reflects the finesse, restraint and sensitivity that guide China’s diplomacy, following the principle that its bilateral relations remain independent of its ties with other countries.

It was the first visit by a Chinese president to the two countries in a decade, and was choreographed with extreme attention to the political nuances and to the recognition that balanced relations with New Delhi and Islamabad would be an important determinant of regional and global peace and development.

The last decade has been characterised by economic resurgence both in China and India. Since the demise of the Cold War, security issues have been sidelined and replaced by a strategy of close economic cooperation. Accordingly, China’s foreign policy is crafted to maximise its gains from globalisation and quicken the pace of economic development through inter-linking the domestic and world markets. The new economic stature has pushed China on to the middle of the world stage, pursuing “peaceful development” with an active role in regional organisations such as Apec and SCO. In regard to India, Beijing recognises the importance of a resurgent and self-confident India for close economic cooperation, and hence will not permit any contentious issue to be an obstacle in this path.

The true importance of this visit becomes manifest when viewed in the context of their chequered history. India and China, have regarded each other as adversaries in the wake of the 1962 war over Nefa (Northeast Frontier Agency). Until 1998, China was regarded by India as its number one threat. Following nuclear tests in May 1998, the then Indian prime minister, Atal Behari Vajpayee, had sought justification for India’s nuclear tests, in the context of a threat perception from China.

During this cold period, both India and China, however, maintained a restrained outlook towards each other in recognition of mutual potential and promise. China’s unstinted support to Pakistan during the 1965 war, and later in 1971, contributed further to its estrangement with India. However, with the passing away of Zhou Enlai and Mao Zedong, the new leadership cut itself loose from ideological constraints and followed a policy of realism and pragmatism. Deng Xiaoping was the embodiment of this policy. He introduced sweeping reforms to put the economic development of China in the top priority slot, indicating a shift from “proletarian internationalism to the pragmatic exigencies of the capitalist global economy”. This policy continues until today, with adjustments according to the prevailing political situation and economic relations, both internal and external.

On its part, India also made a reappraisal of its China policy. Rajiv Gandhi’s visit to China in 1988 after 25 years of the war melted the ice and subsequent regimes, both in Delhi and Beijing, have since followed a policy of reconciliation. Manmohan Singh has charted an imaginative foreign policy and discarded the traditional concepts of Third World solidarity, non-alignment and imperialism that guided Indian foreign policy for five decades. He believes that shared values and growing economic links could generate strategic engagements with both the US and China. He sees no contradiction in this policy, as Beijing and Washington need not be looked upon in an adversarial role.

The normalisation of relations with China demonstrates this very pragmatic and conciliatory approach and has opened up prospects of a major transformation in the regional political landscape.

The visit of Chinese Premier Wen Jiabao in April 2005 proved a watershed in the relations between these two Asian giants. The realistic approach by India to issues obstructing closer relations has paid rich dividends. The chronic border dispute and India’s distrust of China that had plagued relations till now have finally been overcome by the mutual desire to bury the past, as manifested in Hu’s visit.

Both India and China have embarked on a pragmatic policy of seeking normalisation and fostering wider cooperation. President Hu Jintao’s visit to India has put the entire gamut of their relations on mutual trust and cooperation, ignoring the past. The signing of 13 agreements covering economic relations, trade, cooperation in education, science and technology and cultural exchanges reflect the broad range of cooperation that the two countries are seeking. Bilateral trade between the two countries has reached 20 billion dollars and recognising the enormous potential between the two fast-growing economies it was agreed to raise the level to 40 billion dollars by 2010.

A 10-pronged strategy to intensify a “strategic and cooperation partnership” for peace and prosperity was announced in the joint declaration issued on the conclusion of the visit. The two countries affirmed their resolve to settle the boundary issue through “peaceful means and in a fair, reasonable, mutually acceptable and pro-active manner”. The two leaders also underlined that they were “not rivals, but partners for mutual benefit” and that existing differences would “not be allowed to effect the positive development of bilateral relations”.

Specific areas and issues were identified to boost relations. To boost trade and tourism, consulates in Kolkata and Guangzhou would be opened. Other measures included agreement on holding regular summit-level meetings, intensifying high-level visits and fortifying institutional linkages. China also agreed to provide free of cost a 5,000 sq metre plot to India to construct its consulate in Shanghai. China also announced that it would not be an obstacle to India’s bid for permanent membership of the UN Security Council.

The broad spectrum of agreements and the mutual desire of forging ahead, despite boundary disputes, signify a realignment of the balance of power in Asia. The visit has vastly improved the regional standing, both of India and China. It was in this context that Hu declared that Sino-Indian cooperation would make the 21st century an Asian century. Indian premier Manmohan Singh echoed similar confidence stating that the India-China cooperation had “global significance” and was “irreversible”.

The implications for Pakistan of the growing Sino-Indian detente are obvious. So far, our relations with China have rested on a very strong emotional platform and in many ways this friendship has been taken for granted. In the fast changing international scenario, economic and commercial links alone provide a strong element in bilateral relations. We need to have a more practical worldview and must reshape our foreign policy based on a realistic assessment of our potential, and anchor our relations on the mutuality of interests and economic interaction. Reciting the mantra of “higher than the Himalayas and deeper than the Indian Ocean” to describe the Sino-Pakistan friendship, without expanding and deepening the economic base and mutual stakes will not secure our national interests, or provide durability and strength to Sino-Pak friendship.

The deepening of the Sino-Indian axis need not be a source of worry. Bilateral relations are not a zero-sum game. We should also make an honest and dispassionate assessment of factors that drive Delhi and Beijing to an unprecedented and multi-faceted level of relationship, to invest more heavily in our relations with China.

The Chinese president in this visit has again assured us that the emerging relationship with India has its own compulsions and in no way will it affect Beijing’s relations with Pakistan.

The comprehensive and substantive measures agreed upon during President Hu’s visit are satisfying, yet they need to be nurtured and implemented with alacrity and imagination.

The visit notwithstanding, its enormous gains should not make us overlook the fact that the bilateral relationship is anchored in enlightened national interests at the given time, nor should it blind us to the reality that the changing political landscape and economic factors guide these relations in a particular direction.

The results of President Hu’s visit to Pakistan need to be assessed in this background. The reinforcement of our bilateral relations as reflected in the agreements signed need not make us sit on our laurels. Chinese diplomacy should provide us with a realistic model to fashion our relations with our neighbours without compromising on our national interests.

The writer is a former ambassador.

Saying sorry

APOLOGISING is easy but real sorrow should hurt: regret is an emotion, not just a form of words. So when politicians say sorry, as Tony Blair has just done for slavery, voters are right to ask why.

A few really mean it: Bill Clinton did about Monica. FW de Klerk did when he expressed “deep regret” for apartheid. But such moments are rare and there are least three lesser forms of political apology.

The first is used by Cameron Conservatives for the brutalities of Thatcherism. What they mean is “someone had to do it but people got hurt and it is polite to show regret”. Others apologise for something they did but might not do again, now they know more: Mr Blair came close in his neat half-apology for Iraq in 2004, “I can apologise for the information that turned out to be wrong”.

Or leaders can say sorry for something that nobody blames them for, yet the victims or their descendants deserve an apology from someone who can speak for this generation. Mr Blair relishes this form, apologising recently for the Irish potato famine as well as slavery. Both were obviously evils and both (to some extent) were Britain’s fault. It does no harm, and perhaps some good, for someone to admit it. At the very least this is decent manners.

In politics, defiance is easy. Confessing to error is tougher and more impressive. Leaders who learn the art of apology on the nursery slopes of apologising for the mistakes of others may graduate to the challenge of saying sorry for their own errors and meaning it.

—The Guardian, London

Seeking an honourable exit

THERE will be no victory or defeat for the United States in Iraq. These terms do not reflect the reality of what is going to happen there. The future of Iraq was always going to be determined by the Iraqis — not the Americans.

Iraq is not a prize to be won or lost. It is part of the ongoing global struggle against instability, brutality, intolerance, extremism and terrorism. There will be no military victory or military solution for Iraq. Former secretary of state Henry Kissinger made this point last weekend.

The time for more US troops in Iraq has passed. We do not have more troops to send and, even if we did, they would not bring a resolution to Iraq. Militaries are built to fight and win wars, not bind together failing nations. We are once again learning a very hard lesson in foreign affairs: America cannot impose a democracy on any nation — regardless of our noble purpose.

We have misunderstood, misread, misplanned and mismanaged our honourable intentions in Iraq with an arrogant self-delusion reminiscent of Vietnam. Honourable intentions are not policies and plans. Iraq belongs to the 25 million Iraqis who live there. They will decide their fate and form of government.

It may take many years before there is a cohesive political centre in Iraq. America’s options on this point have always been limited. There will be a new centre of gravity in the Middle East that will include Iraq. That process began over the past few days with the Syrians and Iraqis restoring diplomatic relations after 20 years of having no formal communication.

What does this tell us? It tells us that regional powers will fill regional vacuums, and they will move to work in their own self-interest — without the United States. This is the most encouraging set of actions for the Middle East in years. The Middle East is more combustible today than ever before, and until we are able to lead a renewal of the Israeli-Palestinian peace process, mindless destruction and slaughter will continue in Lebanon, Israel and across the Middle East.

We are a long way from a sustained peaceful resolution to the anarchy in Iraq. But this latest set of events is moving the Middle East in the only direction it can go with any hope of lasting progress and peace. The movement will be imperfect, stuttering and difficult.

America finds itself in a dangerous and isolated position in the world. We are perceived as a nation at war with Muslims. Unfortunately, that perception is gaining credibility in the Muslim world and for many years will complicate America’s global credibility, purpose and leadership. This debilitating and dangerous perception must be reversed as the world seeks a new geopolitical, trade and economic centre that will accommodate the interests of billions of people over the next 25 years. The world will continue to require realistic, clear-headed American leadership — not an American divine mission.

The United States must begin planning for a phased troop withdrawal from Iraq. The cost of combat in Iraq in terms of American lives, dollars and world standing has been devastating. We’ve already spent more than $300 billion there to prosecute an almost four-year-old war and are still spending $8 billion per month. The United States has spent more than $500 billion on our wars in Iraq and Afghanistan. And our effort in Afghanistan continues to deteriorate, partly because we took our focus off the real terrorist threat, which was there, and not in Iraq.

We are destroying our force structure, which took 30 years to build. We’ve been funding this war dishonestly, mainly through supplemental appropriations, which minimises responsible congressional oversight and allows the administration to duck tough questions in defending its policies. Congress has abdicated its oversight responsibility in the past four years.

It is not too late. The United States can still extricate itself honourably from an impending disaster in Iraq. The Baker-Hamilton commission gives the president a new opportunity to form a bipartisan consensus to get out of Iraq. If the president fails to build a bipartisan foundation for an exit strategy, America will pay a high price for this blunder — one that we will have difficulty recovering from in the years ahead. To squander this moment would be to squander future possibilities for the Middle East and the world. That is what is at stake over the next few months.—Dawn/Washington Post Service

The writer is a Republican senator from Nebraska.