Development & capital flows

WITHOUT meaning to, Pakistan seems to have stumbled on to a new model of economic growth. For half a century, the country relied on official development assistance to bridge the gap between domestic savings and investment. Domestic savings, both public and private, remained low partly because various administrations that were in power made no effort to increase it.

Investment increased whenever there was a large flow of external finance, which came in mostly as assistance provided either by development institutions or friendly countries. The reverse happened when foreign flows, for whatever reason, declined. The economy travelled on a roller coaster; moving up fast when external capital was available, plunging deeply when it declined or ceased.

It was for this reason that Pakistan had to tailor its foreign policy in order to remain in the good books of the countries that were large donors. The United States was by far the most important development partner and Pakistan made every effort to cultivate friendly relations with Washington. But Washington was prepared to give economic assistance only when it received something in return.

In the years of the Cold War, it wanted the countries it supported with development finance to be closely aligned to it in its competition with the Soviet Union. Pakistan obliged and entered into a number of alliances sponsored by the United States. The GDP growth rate responded to the flow of assistance from Washington. It increased at the annual rate of 6.5 per cent during the Ayub period.

This relationship was disturbed by the civil war in East Pakistan and by the independent-minded administration of Zulfikar Ali Bhutto that took office after the end of the long military rule. The conflict in what was then the country’s eastern wing alienated most western donors, and Bhutto’s relatively independent foreign policy stance made the Americans uneasy.

Consequently, Pakistan saw a dramatic decline in the assistance it received. Left to its own devices, the country saw a sharp decline in GDP growth during the time Bhutto was in power.

The country was back in favour when Washington needed Islamabad’s help in getting the Soviet Union to vacate Afghanistan. For a decade, Pakistan assisted America’s efforts against the Soviet Union, and, in return, it received a copious amount of aid. The economy picked up, and the rate of GDP growth increased to 6.5 per cent a year.

The end of the Soviet occupation in1989 brought about an end to America’s involvement with Pakistan. American aid declined and the rate of GDP growth also fell.

America’s war on terrorism following the terrorists attack on September 11, 2001, placed Pakistan in the frontline again and aid from Washington began to flow once more. The economy responded positively and the rate of GDP growth increased significantly. In 2002-07, it has averaged seven per cent a year, one of the highest rates over a reasonable span of time.

This association of the quantum of aid flows with the rates of growth in national product is, of course, simplistic since a number of other factors were also in play.

During the Ayub period, the economy was reasonably well managed and there was emphasis on putting in place institutions to guide public sector investments. During the Bhutto period, wide scale nationalisation of industry and finance administered a sharp jolt to the economy. It was during this period that the banking sector began to be corrupted.

In the 1990s, frequent government changes created considerable uncertainty for the investment community. The extent of corruption also increased. In the early Musharraf period, the economy was squeezed much more than was indicated by the prevailing circumstances which caused a delay in its revival. The increase in national income in recent years has been supported in part by investments in sectors that don’t create jobs for the poor. While all these factors contributed to the performance of the economy, the most important determinant of growth by far was the availability of foreign capital.

Will Pakistan, still on a roller coaster, plunge if official development assistance is reduced for some reason? There is now debate in the country according to which Pakistan is no longer dependent on American largesse as it was in the first 50 years of its independence.

The discussion on this subject was initiated by Ishrat Hussain in an interesting article contributed a few months ago to the business pages of this newspaper. His main argument was based on the contribution non-American capital flows of various types are playing in developing the Pakistani economy.

Pakistan, like many other emerging markets, is now caught up in a new web of relationships involving various providers of capital with various recipients in the developing world. These relationships are part of the process of globalisation that has opened a number of developing countries to capital flows from international financial markets.

In addition to being subject to foreign policy concerns, official development assistance more recently has come under a different set of pressures. There is now considerable interest in directing most of it towards Africa which desperately needs foreign funds to avoid further deprivation. The only foreign money available to that continent is from official sources.

The leadership of developed countries is increasingly interested in focusing budgetary resources on Africa. Gordon Brown, the new prime minister of UK, is especially interested in launching a Marshall Plan type of effort in sub-Saharan Africa. An Asian state such as Pakistan may not have a choice but to depend on foreign flows that originate in private capital markets.

To understand what is happening in the field of global finance and how this is affecting a developing country such as Pakistan, we should perhaps begin with a bit of history. The financial sector which was tightly regulated after the Great Depression was unchained in the last quarter of the 20th century. The consequence was an explosion in the flow of finance across national boundaries.

According to the McKinsy Global Institute, the ratio of global financial assets to annual world output has soared from 180 per cent in 1995 to 303 per cent in 2005. The United States is in the lead. There the ratio has increased from 303 per cent to 405 per cent in the same period.

With this increase has also come the restructuring of finance. It is now much more transaction-oriented which means that new instruments are being developed to fit the need for money. Banks are no longer at the centre of the activity. In 1980, bank deposits made up 42 per cent of all financial securities. By 2005, their share had fallen to only 27 per cent.

Economists are now trying to determine the impact of private capital flows on growth and economic management in the developing world. In attempting to understand the nature of this association, they have, over the years, changed their mind. In 2003, four economists, Eswar Prasad, Ken Rogoff, Shang-JinWei and Ayhan Khose — all with some association with the IMF — argued that there was no robust proof that financial globalisation helped countries to grow more quickly.

This was an extraordinary finding on the part of economists associated with the IMF. At that time Ken Rogoff was the chief economist at the institution. However, according to Frederic Mishkin, another economist of note — he is one of the governors of the American Federal Reserve system — the flow of foreign capital into stocks, bonds and banking in emerging markets is lifting these economies and, in the process, is also modernising them.

In fact, according to his analysis, the easy movement of capital is going to have a greater impact on the economic performance of the developing world than the relatively easier flow of trade. He calls this the “next great globalisation” which is also the title of his recent book in which he elaborates on this point of view.

Perhaps influenced by the Mishkin book, the IMF economists who had earlier written on this subject have revisited their findings and come to the same conclusion. In the new research done by them, they filtered out the influence of other factors that might lift growth — such as macroeconomic stability, institutional development and the development of human resource — and studied the impact of capital flows. They came to the conclusion that foreign capital does more than augment domestic savings as has been the case in Pakistan on so many occasions.

There are, in fact, a number of indirect effects. These include the creation of financial depth, better run private companies and macroeconomic stability.

The first is particularly important. Countries open to the free flow of capital enjoy bigger, more liquid, stock markets and lower cost of capital. When the cost of capital declines it encourages private entrepreneurship. Open financial systems also allow the development of the banking sector.

Foreign banks are often better managed and more innovative than their local counterparts. “They introduce new products and know-how and they give dissatisfied depositors somewhere else to take their custom, forcing local banks to raise their game. Moreover, foreign banks accustomed to sound regulation, prudent oversight and honest accounting in their home countries may lobby for the same things abroad.”

These theoretical developments point to the need for better management of the economy — and that includes institutional development that provides comfort to those who bring in foreign capital — in order to draw full benefit from the globalisation of finance.

Economies can benefit from large financial flows, especially when the source is foreign capital markets and not official aid-giving agencies. But there is a problem on relying heavily on private capital markets.

It takes time to get foreigners to develop confidence in the domestic economy and the political system that supports it; it takes no time at all for that confidence to be lost. The Asian financial crisis of 1997 was a good example of the vulnerability to which developing countries expose themselves when they rely very heavily on foreign financial markets. In this context, the behaviour of the Karachi stock market in recent days is instructive. It showed no concern at all during the weeklong stand-off in the Lal Masjid case.

A lot of foreign capital is said to have come into the country in this period, encouraged that the government of President Musharraf had taken a tough stand with respect to the rise of Islamic extremism in the country.

That was one important aspect of political management that was deterring foreign investors from coming into Pakistan. However, the mood changed suddenly when Iraq-like tactics were used by Islamic militants not only in the tribal belt but also in the heart of Islamabad. The markets interpreted the move against the Lal Masjid as a positive development; it saw the use of suicide bombers in the tribal belt, the areas adjacent to it, and in Islamabad as a sign of long-term instability.

Just as Pakistan was getting ready to free its foreign policy from the need to obtain official finance, Islamic extremists may have forced the country back into the arms of those who provide this kind of flow.

Failure to tackle militancy

THE Lal Masjid saga is another endorsement of the fact that Pakistan is fighting the war on terror without having a solid strategy in place. Terrorism is being fought half-heartedly and in a stopgap manner.

A few military operations here and there in the tribal belt adjoining Afghanistan and the capture of a handful of mid-level Al Qaeda members for subsequently handing over to American authorities around the time of visits of important US officials to Islamabad has been our strategy.

This has not only failed to impress the international community, it has strengthened suspicions about the seriousness of Pakistan’s resolve in fighting terrorism.

A week after the end of the Lal Masjid episode, the US stated it could launch direct attacks in the tribal region to destroy extremist hideouts. “We never take options off the table, and if we find actionable targets, we’re going to hit them,” said White House press secretary Tony Snow, who felt that there was no doubt “that more aggressive steps” were needed against Al Qaeda sanctuaries in Pakistan.

A couple of days later, George Bush termed the regime’s peace agreement with the tribal elders of North Waziristan a failure, endorsing an intelligence report that Al Qaeda had established a safe haven in the tribal areas of Pakistan.

The Lal Masjid episode can be cited as a classic example of our absurdity in dealing with Islamic extremism. For more than five months, the government encouraged the students of two seminaries — Jamia Hafsa and Jamia Fareedia — associated with Lal Masjid to commit serious offences. These included the hijacking of a state-run children’s library, the abduction of alleged prostitutes and policemen on duty, vandalisation of music shops, setting up of a qazi court in Islamabad, the issuance of a fatwa by the same court against a woman minister after she was pictured hugging a parachuting instructor and the kidnapping of Chinese women from a health clinic on the grounds that it was a ‘brothel’.

The law would have swiftly come into force had the same crimes been committed by the average person. But it was helpless before the students and the Lal Masjid administration. The state was reluctant to use even a modicum of force for fear of a backlash. So, it let the clerics loose on the citizens.

Discontinuation of electricity, gas, telephone and water services to the mosque and seminaries could have been an effective counter move. Similarly, ration supplies could have been cut off by blocking the area. This strategy could have protected the people from the atrocities that the Lal Masjid brigade unleashed in the name of Islam. But the state was with Lal Masjid, not with the people of Pakistan. It did not seem to matter that militants and heavy weapons in bulk reached the mosque, but it was of importance that no information about the judicial crisis should reach Indian diplomats. This was the mission that the intelligence agencies were assigned, not the mosque and militants’ surveillance.

The Lal Masjid clerics — Maulanas Abdul Aziz and Rashid Ghazi — were able to host their website, initially in Pakistan and later abroad. It was blocked by the authorities after some time. They set up an FM and Internet-based radio to spread their misleading version of Islam.

This convinced the world that the Lal Masjid quandary was a drama scripted by the state to protect its ulterior motives — to divert attention from the judicial crisis and the May 12 bloodbath in Karachi; to contain the rising popularity of Chief Justice Iftikhar Chaudhry; to signal to the US that the war on terror should be continued and that Musharraf’s services should be renewed with a pay-raise; to justify the imposition of emergency, the postponement of polls and Musharraf’s re-election as president from the current parliament and extension as army chief.

During this period, the state employed only one strategy — talks with Aziz and Ghazi through Chaudhry Shujaat Hussain, Ejazul Haq and some clerics. All they would do is to beg Aziz and Rashid not to take the law into their own hands. The state became more and more submissive as Lal Masjid fundamentalists intensified their Sharia drive. The world did not doubt that Ghazi and Aziz were the sons of the establishment. After all, they had been used in the 1980s’ Afghan war.

The Aziz-Ghazi duo acted flawlessly according to the script until last month. They had enthralled everyone with their performance including the media. The state ensured the media’s obsession with Lal Masjid by banning the live coverage of the Chief Justice’s caravan and speeches.

This publicity and state submissiveness went to the head of the duo and their boys and burqa-clad girls, who thought that they could do anything in the name of religion because the state feared them. They went overboard. When they abducted some Chinese men and women, China sprang into action, like the US after 9/11, and the so-called Mujahideen were annihilated by the same submissive state.

The Lal Masjid saga has many lessons. One, the state can effectively fight terrorism if it wants to. The state’s overarching policy believes in supporting jihad to weaken democratic institutions — after all, save for a few spells of democratic rule, Pakistan has been a military state almost since its inception.

Two, the state’s jihad policy has boomeranged. Those who were nurtured to ‘conquer’ the Red Fort, occupied Islamabad’s Lal Masjid instead, and made the life of their own people miserable.

The jihad policy needs to be completely abandoned. It has maligned the movement of Kashmiris. It has failed to secure strategic depth in Afghanistan. The latter is closer to India even though the two countries don’t share a border. It has not caused a single dent in India whose economy is booming and which is respected internationally. The world refers to India as the biggest democracy and to Pakistan as an exporter of terrorism.

Three, it is time to discard the present education system which nurtures hatred and extremism, and work, instead, towards one that is completely secular. A sizeable proportion of the resources available should be spent on education and health so that there is no need for seminaries and so-called relief outfits like the Jamaat-ud-Dawah that have given this country nothing but international ignominy.

Four, if the US and its allies seriously want world peace, they should stop supporting military dictators and authoritarian regimes as peace and dictatorship negate each other.

It’s agenda, not gender

AT its heart the American dream has always been the triumph of possibility over probability –– the idea that anyone could do anything trumps the reality that the overwhelming majority have only limited choices. Hope defeating cynicism and often masquerading as delusion.

That contradiction seems most stark when displayed on the chests of young black boys with T-shirts announcing: "Future President of America." In a country where every president has been a white man and, at current rates, one in three black male babies born in 2001 are destined to go to prison, a more realistic T-shirt would read: "Future inmate of Riker's Island." But who would want to dress their child in that? When the probabilities are so bleak and the possibilities so remote, hope and delusion can start to look like two sides of the same coin.

But if the polls are anything to go by, then those T-shirts may finally come into their own next year. Hillary Clinton leads the Democratic field with the black Illinois senator, Barack Obama, mounting an impressive challenge in second place. The most recent surveys show that if you pit either one against any of the Republican candidates, Clinton or Obama would win.

The symbolic importance of such a victory should not be denigrated. According to the Inter-Parliamentary Union, the US stands 67th in the world league tables for political representation of women. Less than half a century ago, black Americans endured certain humiliation and risked death just so they could vote. Both Clinton and Obama stand on the shoulders of giants. Their personal achievements are their own. But without the collective struggles of civil-rights activists and feminists, their talents could never have taken them this far –– a fact they both recognised in Selma, Alabama, in March.

But it should not be overestimated either. What they are should not be mistaken for what they might do. It's neither their race nor gender that makes them progressive –– it's their agenda. There is no suggestion that either of their platforms will benefit the lives of black people or women any more than those of some of their Democratic counterparts.

Their victory would give them the keys to the White House. But there is little evidence to suggest that other women and black Americans would be following them in, for the same reason that Tiger Wood's ascent has not produced more black golfers. The symbolic achievement is the proof that such things are now possible; the substantive fact is that, for the time being, they remain improbable. This is not an argument against supporting either candidate; it's a case against supporting them for the wrong reasons. Symbols are important, but they should not be mistaken for substance.

The viability of both candidates at this time is no coincidence. The optimism that drives the American dream has stalled and needs a jump start. Just a third of people believe the country's best days are yet to come –– the most pessimistic results yet, according to pollsters at Rasmussen. The number of those who believe the US is viewed unfavourably in the rest of the world has more than doubled since 2000, and now stands at 54 per cent. More than two-thirds think the country is on the wrong track. And when it comes to setting it right, they have little confidence in the nation's political class. George Bush struggles to keep his approval ratings above 30 per cent; support for the Democratic-led Congress is not even that high.

The more elusive substantial change appears, the more attractive symbolic advances become. Having a woman and a black man in the running helps restore the nation's self-image as the home of opportunity and unstoppable progress. "It's the old idea that anyone can grow up to be president," wrote Michael Kinsley in Time recently. "Not just that, but that even at age 230, we are still young enough and flexible enough to be expanding our notion of who we mean by 'anyone'." That notion now includes "anyone", of any race and either gender, with access to tens of millions of dollars. "Anyone", in other words, still refers to a tiny minority.

That doesn't stop the commentariat going into overdrive. They gush about Obama's "post-racial candidacy" as though Hurricane Katrina never happened, and question whether Clinton can balance "tough" and "tender" as though feminism never happened.

Earlier this year, a CBS interviewer asked Obama, who was raised by his white mother and grandparents: "At some point, you decided you were black?" They compliment him on being "articulate" and profess amazement that she has breasts. "The neckline sat low on her chest and had a subtle V-shape," wrote the Washington Post last week. "There wasn't an unseemly amount of cleavage showing, but there it was. Undeniable." Melanin and mammaries: centuries of struggle have come to this.

But then, such crude emphasis on identity was always a dead end to a dangerous place. If the advancement of black people and women is all you're after, why not go for the double whammy and start a write-in campaign for Condoleezza Rice?

For all its fulminations about affirmative action, the right can play this game just as well –– if not better –– than the left. In January 2005, a Texas Republican senator, John Cornyn, introduced "a man from Humble, Texas". "The son of migrant workers, his childhood home was built by his father and uncle," crooned Cornyn. "As a child, he sold soft drinks at Rice University football games –– where he dreamed of one day going to school. [He] is the first person in his family to go to college."

Cornyn was introducing Alberto Gonzales at his confirmation hearings to be the first Hispanic attorney general. By then Gonzales had already referred to the Geneva conventions as "quaint" and "obsolete". He is currently embroiled in a scandal after firing a number of district attorneys, some of whom were shown the door because they would not tighten voter registration laws that would exclude more Hispanics. With enough cynicism, even torture and disenfranchisement can be coated in the American dream. But to gain a true sense of what is possible in America, one should look no further than Gonzales's boss. The C-student, former alcoholic and failed businessman who displays not a scintilla of charm, charisma or oratorical flair. The man whose big idea for fundraising when he started out in politics was: "Have your mother send a letter to your family's Christmas-card list! I just did, and I got $350,000." If Bush can be president, then surely "anyone" can.

––The Guardian, London

Nativism’s toxic cloud

TOXIC fallout from the Senate's failure to enact immigration reform is drifting over the Northern Virginia suburbs. This month, Prince William County approved a resolution whose purpose is to make life unpleasant for illegal immigrants by denying them services and using local police to hound them.

Now neighbouring Loudoun County is moving in the same direction, spurred by a member of the Board of Supervisors who contends that immigrant "hordes" are ruining the county. In both cases, the favourite fantasy of elected politicians is that the pressure on undocumented residents will drive them out of the county and into the waiting arms of the feds. Not likely.

Illegal immigrants are in Northern Virginia for the same reason that they are in so many other parts of the country: Their labour is in demand. That's not going to change, unless the powers that be in Prince William and Loudoun have discovered a way to defeat market forces.

In both places supervisors have been quoted as saying that local law enforcement will work with federal officials to deport immigrants who lack the proper papers, including immigrants who might be stopped for traffic violations and other routine offences. Here's a reality check: US Immigration and Customs Enforcement has a finite number (27,500) of detention beds nationwide.

They are apportioned among asylum seekers, fugitives awaiting removal, border-crossers, ex-cons, those who have committed violent crimes and others. Given limited resources, ICE's priority is to detain people who are threats to national security and public safety, which leaves little room for the undocumented gardeners, home builders and restaurant workers whose presence in Northern Virginia has so annoyed local politicians.

The truth is, ICE simply does not have the time, personnel or capacity to do what local politicians want: return vast numbers of illegal immigrants to their country of origin. The fact that supervisors in Prince William and Loudoun say they are forcing the immigrants out will not make it so.

Prince William's police chief has said publicly that ICE will accept the handover of a very limited number of undocumented aliens from the county each month. An educated guess is that more undocumented immigrants -- possibly a lot more -- will arrive each month than can realistically be removed.

Local politicians are under growing pressure from constituents whose neighbourhoods are afflicted by flophouses, poor sanitation, cars parked on front yards, loiterers and other ills they associate with illegal immigrants. The complaints are understandable — nobody wants to see their neighbourhood go to seed — and counties are within their rights to urge tougher enforcement if laws are broken.

—The Washington Post