RECENT economic data for the year suggests a mix of both good and bad tidings. First, the pleasant news. The rate at which prices were rising appears to be declining, albeit not dramatically. Although it may be too early to predict that this trend can be maintained, since there continues to be a sharp growth (in excess of 11 per cent) in the price level of food items, there is reason to look forward to a period of a more subdued rate of inflation.

The inflation rate in respect of food items is expected to fall over the next quarter, as a result of an improved supply position and the reduction in demand for some items witnessed after Ramazan. However, the slowing down in the pace of inflation will not bring much joy to the poor for whom the rise experienced in the price level is of a permanent nature that they have difficulty in supporting with the purchasing power at their command.

The efforts of the State Bank to raise interest rates to check the unbridled increase in private credit and reduce overheating of the economy through the demand pull pressure on prices also seem to be bearing fruit. We are witnessing a deceleration in the rate of inflation. Although the annual target of 6.5 per cent for the inflation rate may be difficult to achieve (especially with reserve money continuing to grow at almost a double-digit rate), the directional shift, provided that it is maintained with determination, should be appreciated.

External conditions have also continued to be favourable in terms of availability of concessional aid, reduction in debt liabilities following the restructuring of existing debts, the surge in remittances and low world interest rates, which enabled Pakistan to float bonds and raise foreign currency relatively inexpensively (even if these bonds ended up being picked up largely by the underwriters).

Another welcome development of the State Bank’s tightening policy is the deceleration in the rate of an increase in imports. This has been due in no small part to the downslide in the international price of oil and to some slowing down in imports of investment and other goods, the latter partly owing to a sharp decline in the rate of increase in exports. However, the adverse impact on the balance of payments will not be reduced substantially because, as already indicated above, the growth in exports has also reclined. We are likely to still encounter the prospect of a huge trade deficit by the end of the financial year. This gap in the external account will have to be financed by remittances and external borrowings at nominal interest rates, with the rest of the chasm to be filled by GDRs of OGDC, UBL, etc and proceeds of some other privatisations, the latter clearly not being a sustainable option when we run out of assets to sell.

This brings us to some of the bad news. Export earnings from textiles (our principal export) have actually declined by 10 per cent, the brunt of this having been borne by the value-added sector (particularly the knitwear industry, a large chunk of which, if not having virtually closed down, near to pulling down its shutters). This has been happening despite oil prices having dropped, which should have made it possible for our trading partners to import other products.

Although the value-added sector has been hit badly, the yarn manufacturing sub-sector, despite its complaints and recent battles with the government the lack of public sector support in maintaining its competitiveness in international markets, appears to have managed to increase its exports,. This outcome suggests that perhaps one way of reducing the value-added sector’s cost of doing business and improving its competitiveness would be to make yarn imports duty-free.

There is little doubt that some of the woes of the manufacturing sector are because of poor planning and managerial and other practices (affecting their international competitiveness) and for failing to have revamped their organisations to be able to operate under the new international trade regime fashioned by the WTO-driven world order.

However, the public sector must also share a large part of the blame for the less than desirable results that has led to the private sector’s cost of doing business continuing to be high, and thereby affecting its competitiveness. It either administers the prices of some key inputs like that of oil (which it has maintained at a high level although its international price has fallen) or actually provides/produces them, like energy and fuel (electricity and gas) whose availability, prices and quality are critical ingredients in the cost structure of industry.

It also guides a taxation system of non-adjustable turnover and withholding taxes, which raises the cost of production. Also required are timely decisions by the government in a rapidly changing global trading environment — another area in which Islamabad fares poorly.

While the value of the rupee has depreciated over the course of the year against other currencies, and despite the pressure in the international currency market on the US dollar, the rupee continues to be overvalued against the dollar. To this end, the claim of the State Bank that the value of the rupee is determined by market forces while making amusing reading (considering the decline in foreign exchange reserves — from covering 11 months of imports not that long ago to under four months of imports — in spite of external borrowings, donor funding and foreign investment inflows) brings little comfort to the export sector. The latter’s cost curve, for reasons mentioned above, has shifted to a higher level with a rising gradient.

The other area of concern is the government’s budgetary deficit. It has borrowed over Rs200 billion in just three months. This has happened despite the decision not to lower prices of oil following the decline in its world price to cover earlier revenue losses when domestic prices were not raised to fully reflect the increase in world prices, use of privatisation proceeds to fund the deficit, increasing resort to ad hoc borrowings from the State Bank (reflecting poorly on the latter’s claims of independence), as well as from the banking and non-banking sectors. The example of the latter is the use of national savings schemes to raise money from institutions, ostensibly to force commercial banks to pay higher interest rates on deposits).

In the opinion of this writer, the availability of consumer finance and the possible ill-advised easing of interest rates sometime in early 2007 (on the plea that the inflation rate has fallen to more manageable levels) will ensure continued healthy growth in the manufacture of durable goods financed from this source of funding. Hence, we are likely to soon see the production of motor cars rise to 350,000, that of motorcycles to one million and TV sets to one million and beyond, and a similar spurt in the demand and supply of refrigerators and washing machines.

The progress of the domestic manufacturing sector producing other consumer goods will depend on a number of factors. These include the ability of domestic industry to compete with imports by lowering its operational costs through efficiency improvements, entrepreneurial willingness to narrow gross profit margins and rely on turnover instead to increase overall profits (through fundamental changes in managerial practices which are beginning to become visible) and the ability of the CBR to check under-invoicing of imports, etc.

That part of the domestic retail sector providing luxury goods and services to the more privileged households, which have made lots of money in the last few years (from the temporary boom in the real estate and stock market and the increased production of goods funded by consumer finance), will also continue to thrive in the near future.

The real unknown is what has been happening to the poor. The evidence on the growth in their real incomes and purchasing power is at best anecdotal. There appears to have been some growth in demand for labour, including that of the unskilled variety. Industry has been complaining about the severe skill shortages, which is reflected in the rise in real wages of certain types of skilled manpower. Incomes in the agriculture sector for landless and casual/seasonal labour have also apparently risen.

However, much of this improvement in real wages has been in Punjab and the main urban centres in Sindh. The picture of what has been happening to real wages in the rest of the country is somewhat murky. Anecdotal evidence suggests little improvement, if not some worsening, especially in rural Sindh and most of Balochistan. In the country today there are huge and widening disparities in incomes and wealth between the rich and the poor (which also seem to be polarised along ethnic and regional lines).

This has been the major cause of the deterioration in the law and order situation, growing alienation, disaffection and social discontent. In this context, it is important to bear in mind that the greater the income and wealth inequality the more difficult it will be to reduce poverty through economic progress, since the benefits of growth at rates of around six per cent will largely flow to the more privileged segments of the population.

The writer is a former finance minister of Punjab.

WITH President Musharraf terming the next general elections as the “mother of all elections”, the outcome of the 2007 polls will determine the extent to which the controversy regarding their fairness can be put to rest. Pakistan’s electoral history is replete with instances when the mandate of the people has not been honoured.

A resounding victory for the Awami League was the result of the 1970 polls. But the party was denied power by the military regime. Similarly, in 2002, the PPP, despite having won the bulk of the vote, was not invited to form the government either at the centre or in Sindh. Rather, disparate elements coalesced to form a set-up of the general’s choice.

More than four years down the road, the same question again haunts the nation: will elections be free and fair in 2007, and will there be a smooth transfer of power to the party winning the mandate of the people? Democracies around the world hold polls regularly. The exercise is never questioned because the system provides cast-iron safeguards against electoral fraud and tampering. If there is a problem, the aggrieved parties can always knock on the doors of the judiciary. But this not a common practice in Pakistan though the Constitution provides for a detailed poll mechanism, superior to that in neighbouring countries.

Unlike the Indian Constitution, the Pakistani Constitution of 1973 envisages a caretaker government to oversee elections during its period of 90 days. Constitutionally, the election commission of Pakistan holds the polls, although the general perception is that it is the government that does so.

The Constitution provides for the establishment of a caretaker government as well as separate election tribunals under Articles 48 and 225 in order to hold free and fair elections and provide easy and quick justice to those who allege electoral fraud and tampering. But despite these provisions, doubts have always been cast on the character and neutrality of the caretaker set-up whereas the provision of the separate tribunals for dealing with election petitions has not proved to be very effective.

In 1990, when the PPP government was dismissed, the Jatoi-Jam duo ensured that the elections would be rigged. Conversely, in 1993, when Moeen Qureshi was inducted as caretaker prime minister and the army was called out to assist the election commission and the executive authorities, people could easily perceive that the elections would be held in a relatively free and fair manner. Now it all depends upon the intentions of the president. The kind of caretaker set-up he brings in will decide the fate of the next elections.

If the executive and judiciary adhere strictly to the above-mentioned provisions of the Constitution, holding free and fair elections would not be such a Herculean task. Since both the provisions are always sacrificed at the altar of expediency, the result is widespread resentment because the people’s mandate is not respected.

Political parties complain of rigging at all levels — at a national and provincial (“macro”) level as well as the (“micro”) level of the polling and police stations. It is very strange that despite the conduct of elections by judges and judicial officers the electoral exercise has not won the confidence of the public. The administration reigns supreme because it has the necessary tools to obtain the desired results and the judiciary personnel are left as silent spectators. The whole election staff comes from the administration whereas only the returning officers are appointed from the judiciary. How is it possible that the judicial officers are outsmarted by the administration though they wield vast powers? This question has to be examined closely at the micro-level.

Macro-level rigging involves official support for certain parties by boosting their chances of victory through manipulation. Alliances are cobbled together to counter political parties that are likely to win. For example, General Hamid Gul put together disparate elements to form the IJI in 1988 to counter the PPP through government funds.

Likewise, President Musharraf’s support for the Q League at the national level can be deemed as macro-level rigging as the president’s role is supposed to be above party interests as he represents the unity of the federation. He is not supposed to favour one or the other party. But when the president also has a stake in the system, his neutrality becomes a question mark during the elections. Political parties and civil society must ensure that the elements of both macro- as well as micro-rigging are eliminated in order to foster democratic traditions.

We have witnessed that when the mandate of the people was not respected in 1970, the country lost crucial territory. Again in 2002, when the same principle was violated, we saw widespread violence in Balochistan and Wana that is still going on. Violence is a necessary offshoot of an illegitimate political system that is a manifestation of contradictions. It is in this context that the elections of 2007 should be seen as the mother of all elections. If properly conducted, they can heal the wounds of people whose mandate has been stolen.

In these polls, the stakes are very high. The president intends to get another term on the basis of these elections and the whole world will be watching the Pakistani elections with interest. It is the first time since 1977 that the assemblies will be completing their term under the shadow of the military and the outcome may make or mar the chances of power for political parties.

For the above reasons, the parties are playing their cards very cautiously. Despite several warnings and threats of resignations, the MMA and the MQM have not translated these into reality and have reconciled themselves to the system. The PPP is reluctant to launch street protests against the government and wants rapprochement with the general in order not to miss the bandwagon of power as it did in 2002 by a hair’s breadth.

The people must now hold their breath and watch the character of the coming caretakers. In Bangladesh, where the same provision has been provided in the constitution, the opposition has staged widespread protests and riots in order to press the president to induct a neutral chief election commissioner and head of the caretaker set-up. As a result of these protests, the election commissioner has bowed out, allowing people’s power to prevail in the country. But the political parties in Pakistan have shown no signs of taking to the streets on this issue. This speaks volumes for the poor state of our democratic health where parties are more concerned with power than with democracy and the rule of law.

barrister_zamir@hotmail.com

ON the eve of the Baker-Hamilton commission’s report, a top Iranian official set a tough condition for his country’s help in stabilising Iraq, saying that Tehran isn’t interested in such cooperation unless the Bush administration sets a timetable for withdrawing its troops.

Ali Larijani, Iran’s national security adviser, said in an interview that a US plan for removing “occupation forces” from Iraq would be considered “a sign of a change in strategy.” In that case, he said, “Iran would definitely extend the hand of assistance and would use its influence to help solve the problem.”

The Iranian official made his comments after a speech on Tuesday to a conference in Dubai called the Arab Strategy Forum. His remarks were the clearest statement I’ve heard of how Iran views its role in the region following what he described as the failure of US intervention in Iraq, Afghanistan and Lebanon. His tone was triumphalist: In his view, America is bogged down in Iraq and “in dire need of change,” while a newly confident Iran is positioning itself as a dominant power for the region.

“When we face a strategic stalemate, we can break it only by changing the strategy itself,” Larijani said in his speech. He explained that America’s choice was to stick with a failing strategy of unilateralism, tinker with it to “retard the process” of defeat, or replace it altogether with a new strategy of “interdependence” that recognized Iran’s primacy as a regional power. By embracing a new strategy, he said, the United States “would bring psychological calm to the region and help America to behave in a more rational way.”

When I asked Larijani later at a news conference what Iran would regard as evidence that the Bush administration was indeed changing its strategy, he said, “the clearest sign would be the exit or evacuation of US forces,” adding: “Should there be a timetable presented, that would serve as a positive sign.” On the nuclear issue, Larijani said that a UN Security Council sanctions resolution reportedly drafted this week by Russia and France would not stop Iran’s uranium-enrichment efforts. “I announce: This is not effective,” he said.

After these public comments, Larijani talked one-on-one about the changes he thinks have been set in motion by the Republican Party’s defeat in last month’s congressional elections. He wouldn’t talk in detail about the likely recommendations of the Iraq Study Group, headed by former secretary of state James A. Baker III and ex-representative Lee Hamilton. But he indicated that if the Bush administration embraced a call for gradual withdrawal, Iran would agree to join discussions on Iraq and Afghanistan. Though he called repeatedly for a US withdrawal plan, Larijani didn’t explain how the resulting vacuum would be filled in a way that avoided all-out civil war.

Harvard professor Graham Allison, who had a private talk with Larijani following mine, said: “In discussing Iraq after US withdrawal he didn’t seem to have a credible idea of what comes next.”

As for the idea of a regional peace conference involving Iraq’s neighbours, Larijani told me he favoured a smaller group of countries that are committed to the “new paradigm” in Iraq flowing from its democratic elections and constitution — both of which enfranchised Iraq’s Shia majority. “We are against a tribal democracy,” he said.

Larijani said President Bush’s statement in an interview with me in September, in which Bush recognized Iran’s status as an important nation in the region, was “the first sign of having any respect for the long history and cultural background of Iran.” But Larijani said the administration needed to accompany such rhetoric with a halt to its “adventurous moves” against Tehran. “The Iranian people might be great and gracious, but not naive,” he said.

Larijani isn’t proposing a grand bargain but a ruthlessly pragmatic one shaped by Tehran’s view of current realities: Iran is up, America is down, and any post-Iraq settlement should reflect those facts. That’s the steep price of Tehran’s help. — Dawn/Washington Post Service