What the economy holds

ANY objective assessment of the true state of Pakistan’s economy at this juncture will throw up many paradoxes and contradictions. The economic managers of the past eight years have been claiming enormous success in achieving economic recovery, attracting foreign investment and building up large foreign exchange reserves.

But critics point to high inflation, rising unemployment and growing inequalities and also emphasise that the growth achieved in recent years is not sustainable.

There is always some gap in the achievements claimed by different governments and the assessment of their critics, but we have hardly ever seen such a wide gap in perceptions about the state of the economy that we see today. That is why it is important to make an objective assessment. That will automatically lead to the identification of certain critical elements that are required for sustainable growth and for inclusive development that is necessary for improving the quality of life of the common man.

A careful analysis of the factors leading to higher growth rates in the past four years would show that these were largely the result of a confluence of certain favourable, external factors and not due to any significant improvements in the internal structure of the economy. Pakistan is not therefore on a sustainable trajectory of high growth, as claimed by the outgoing economic managers.

The most important factor in Pakistan’s economic recovery was the substantial inflow of external resources following the events of Sept 11, 2001. As Pakistan assumed a wide range of dangerous responsibilities for the international campaign against terrorism, it received substantial amounts of bilateral and multilateral assistance (about $20m in six years since 9/11). Pakistan’s debt was rescheduled for 28 years, providing relief of about $1bn a year in debt servicing or $6bn in six years. As the foreign bank accounts of Muslims in western countries came under scrutiny after 9/11, Pakistanis started shifting their accounts back to Pakistan, mainly through official channels. As a result, ‘remittances’ went up from about $1bn in 2000-01 to $4-5bn a year after 9/11 – totaling about $25bn in the past six years.

Many private investors in the Middle East also felt that it would be safer for them to invest a part of their surplus capital in a neighbouring Islamic country, rather than in Europe and America. About $15bn has therefore come in as private investment mainly through privatisation of telecommunication, the financial sector, oil and gas, real estate and construction sectors in the past six years.

This exceptionally large capital inflow of about $60-65bn in this six year period after 9/11, averaging about eight per cent of the GDP, has added at least two percentage points to the rate of growth during this period. Another one to 1.5 per cent has come from recovery in the agriculture sector, following the drought cycle of 2000-2002. But a very small percentage of these inflows has gone into the manufacturing sectors.

In this context, it will be useful to recall the experience of other countries like India, China and Brazil which enjoyed a similar fiscal boom during this period. They expanded their high value productive sectors with export potentials to provide a stronger base for sustained growth. In comparison, the exceptional capital flows into Pakistan went largely in consumption, rather than investment, through consumer financing, and through speculative investment in real estate or the construction sector. This strategy has not only increased inequalities between the rich and poor and between urban and rural areas, but also created future liabilities that the country will have to meet on account of dividends and profits that the new foreign investors will repatriate in foreign exchange.

Another crisis which tops the list of legacies which will be inherited by the new government is the shortage of electricity and gas. With no new investment in new power plants, there is a serious energy shortage which is not only affecting the lives of the common man but also slowing down industrial growth and increasing the cost of doing business. The atta crisis of the past few months has been unprecedented. It was partly the result of mismanagement and partly the unbelievable inability of economic managers to monitor the rising trend in international wheat prices.

The new government which will take over after these historic general elections of Feb 18 will not find it easy to deal with a multiplicity of problems it will inherit from the past – double digit food inflation, record trade deficit, higher fiscal deficit the energy crisis and growing unemployment. But it must move quickly to address the structural weaknesses that must be overcome if a sustainable growth rate of seven per cent plus is to be achieved in the coming years.

In the short run, special attention must be paid to the agriculture sector and within agriculture to high value food crops like pulses, edible oils, and vegetables, especially to the supply chain of transport, storage, processing and marketing for these crops. Improvements in these sub sectors will not only sustain the growth rate but also help to curb inflation. In the medium term, serious deficiencies in infrastructure must be addressed especially in electricity, gas, port facilities and railways.

In the industrial sector, new sub sectors with comparative advantage and export potential must be identified to reduce Pakistan’s dependence on the textile sector for its exports and to provide gainful employment to people in rural areas.

The domestic saving rate must be increased to reduce Pakistan’s dependence on external flows. Currently while the investment rate has increased to 23 per cent, the domestic saving rate is only 17 per cent. New institutions that can channel pension funds and attract equity in the housing sector, for example, would be needed.

Finally, Pakistan’s best resource for sustained growth is its human capital. Every secondary school in Pakistan should become a skill training centre and improved primary health care can ensure that the time for which almost every bread winner in a poor family is sick, can be cut to half – from 60 to 30 days in a year.

While sustaining the growth rate is important, it is even more critical that the growth is inclusive and benefits the poorer segments of the population. The poor have not been able to benefit significantly from the recent spurt in economic growth. Today, 60 per cent of the people do not get clean drinking water and 80 per cent live in unhygienic conditions with limited access to health services.

A viable poverty reduction strategy will have to reverse the vicious circle of unfavourable social and economic factors through a series of measures and policies. The manifestos of PPP and PML-N, the two major winning parties, contain detailed proposals on poverty reduction. These must be implemented on a priority basis.

Finally, an open democratic system is always more responsive to the needs and aspirations of the poor. That is why the advent of genuine democracy has rekindled the prospects for equitable and inclusive growth in the coming years.

The writer was finance minister in 1990-93 and 1997-98 in Nawaz Sharif’s governments.

Offer of more US aid

WE have been there before. But the question for Pakistan’s new leaders as they head towards Islamabad is whether they want to go there again?

Senator Joseph Biden, a powerful Democrat who heads the Foreign Relations Committee of the US Senate, issued a statement from Islamabad that suggested that the Americans were prepared to significantly increase economic assistance to Pakistan.

Senator Biden’s statement was made as he concluded his visit to Pakistan. He had come here to observe the elections of Feb 18 and was accompanied by two other senators, John Kerry and Chuck Hagel. Senator John Kerry was the Democrat’s candidate for the presidential elections of 2004, while Hagel, although a Republican, had parted company with President George Bush over the issue of Iraq. In other words, the three senators represented the voice that will be heard from Washington once the administration changes there in January 2009.

Why should we read so much significance into a statement made by a single US senator? The answer lies in the way the American system works. Under the country’s constitution, the government’s purse strings are controlled by Congress and nothing can be spent by the executive branch of the government unless it is first appropriated and then authorised by the legislator.

Those who have seen Charlie Wilson’s War, a recent movie about the role played by a single Congressman in providing billions of dollars worth of aid to Pakistan and the Afghan mujahideen in the fight against the Soviet invasion of Afghanistan, would appreciate the point I am making.

And, moreover, Biden is not an ordinary Congressman as was the case with Charlie Wilson. He heads the powerful US Senate Foreign Relations Committee that can sway the stance Washington adopts towards another country. This is especially the case if the Congress and the White House are controlled by the same political party as is likely to happen after the elections in the United States later this year.

This is what Biden had to say after he and other senators observed the elections: “We should give the new government a democracy dividend above our annual assistance to jump start progress.” The senator had said earlier that he would be prepared to recommend tripling of the amount of aid Pakistan was receiving under the agreement signed by President Pervez Musharraf and President George W. Bush at a meeting a few years ago at Camp David, the retreat in the Maryland mountains, where the US presidents entertain only those whom they really care about. According to that agreement Pakistan was to receive a total of $3bn spread over six years, or $500m a year. The senator was prepared to take that amount to $1.5bn a year.

Why this generosity? Senator Biden was clearly impressed by the way Pakistan was marching towards democracy. He had said before leaving for Islamabad that if the Pakistani elections were fair and open, he would be prepared to recommend that Islamabad be rewarded with a large increase in American assistance. However, if it became clear that the government had interfered with the electoral process to help the PML-Q, the party that had supported President Pervez Musharraf, he would be prepared to recommend the suspension of all assistance to Pakistan. That, clearly, had not happened and the senator was prepared to offer the new government a ‘democracy’ dividend. But giving support to restarting the democratic process in Pakistan was not the entire reason for adding significantly to the support Washington was providing to Islamabad. “That happens to be the best way to secure their active support for the things we care about, including taking the fight to Al Qaeda and the Taliban,” said the senator.

But the award of additional money the Senator was willing to recommend to which ever president took office in Washington following the US’s own elections of November 2008, was not entirely for military purpose. According to one newspaper report, “The initiative would buttress recent US strategy emphasising education and economic development as keys to stabilising society and weaning away tribal and rural support for extremists…The United States has already allocated about $400m for economic aid in fiscal 2008 in a bid to address public grievances.”

In the way Washington wished to address the problem of Islamic extremism in Pakistan reflected the lessons it had learned in Iraq: that ‘shock and awe’ delivered by dropping bombs from aircrafts flying 30,000 to 40,000 feet above their intended targets do a lot of what is euphemistically called collateral damage and thus creates more enemies. The other strategy – that of winning the hearts and minds of the population – while not likely to move fast enough to satisfy the impatient American, was better suited to fighting Islamic militancy.

Before accepting large doses of American economic aid, policymakers in Islamabad should carefully reflect on two issues. One, how much dependence should there be on economic assistance that comes tied with all kinds of non-economic conditions? Two, while the rise in Islamic militancy has become a problem for the country, should the strategy for dealing with it be crafted by the people and leaders of Pakistan or should that be left to Washington and other western capitals?

On several occasions, I have discussed why it is not healthy to depend so much on external assistance for supporting economic progress. This has been done on several previous occasions and each time Pakistan has paid a heavy price. The price comes in the form of shock when the assistance is curtailed or withdrawn for reasons that have more to do with the preferences of the policymakers who provide aid and not because of Pakistan’s needs. Easy access to large amounts of external capital is usually problematic.

Economists have a term for it; they call it the ‘Dutch disease.’ It is so called since several decades ago the Netherlands, having discovered natural gas, exported large amounts of it. The money that came in distorted the Dutch economy by raising the value of its currency to the point where the country lost competitiveness in most other exports.

This disease has hurt many other countries that were similarly placed as the Netherlands. This hurt Indonesia in the 1975-1995 period and is still hurting Nigeria, Angola, and several other oil exporting countries in the African continent. While Pakistan’s access to easy foreign capital was not the result of oil discovery or export of some other natural resource, aid also produced some of the results associated with the Dutch disease. Pakistan has not been able to change the structure of its economy to become more self-reliant. Instead it is constantly in search of new sources of finance, allowing its foreign policy to be dictated to some extent by these efforts. This is not a healthy approach towards statecraft.

More to the point is the issue of developing an approach towards dealing with the rise of Islamic extremism. The way Pakistan should deal with this phenomenon will not always fit with the priorities of the United States and other western nations. It would, therefore, be wrong to make the economy hostage to the national strategic interests of other countries no matter how much money is on offer. Pakistan is still paying the price for Charlie Wilson’s Afghan war.

Turkish winter of secular discontent

TURKEY’S parliament has voted to lift a ban on headscarves at universities. This has been termed as a major victory for Justice and Development Party (AKP) in defiance of Turkish secular ideals. The constitutional reform package tabled by the ruling party and backed by opposition secular Nationalist Action Party (MHP) received 411 yes votes in a house of 550.

The package amends the constitution to read that the state will treat everyone equally when it provides services such as university courses and that no one can be barred from education for reasons not clearly laid down by law, an allusion to young women who wear headscarves. The Turkish President Abdullah Gul, a former AKP member, is expected to sign the bill into a law. The main opposition Republican People’s Party has shown its intent to challenge the law in the Constitutional Court on grounds that it violates a key article of the constitution that protects secularism.

Secularists, including the army, the judiciary and progressive intelligentsia, see the headscarf as a political symbol that signifies the death of secular republic founded by Kamal Ataturk more than eighty years ago. Interestingly, it was not Ataturk who banned headscarves from Turkish universities, though he actively promoted the adoption of Western dress and showed his dislike for anything remotely associated with Turkey’s Islamic past. By and large, this new thinking remained confined to the emerging bourgeoisie. Traditional Anatolian families continued to favour headscarves tied loosely below the chin. Headscarves were banned after the 1980 military coup when the army, the patron and protector of Turkish secularism, found it a threat to Turkey’s image as a modern secular state. These bans were strictly enforced in universities in Turkey.

However, not all universities went along. The rector of Bogazici University, for example, consistently welcomed students wearing scarves and supported their right to education. She is not an Islamist. She is a scientist and a feminist who believes that a university should welcome students of all ethnic and religious backgrounds.

The new legislation brings to the surface fault lines that have existed between Islam and secularism as long-standing rivals in modern Turkey. Secularism remained a deeply ingrained ideology for decades. However, to many western observers the vote is an acknowledgment that Turkey has become a more religiously conservative society. The right of religious women to enter universities with their heads covered is to them a severe blow to Western enlightenment. However, polls consistently show that about 60 per cent of people in Turkey favour allowing women to wear traditional head scarves in public.

The fact is that Turkey has changed dramatically in recent decades with economic prosperity increasing the ranks of the middle class which began to outnumber Western-looking elite in the cities. This process started in the 1950s, when people began migrating from the Turkish rural areas. Initially the impact was limited since these neo-urbanites were poor and had little voice. Their educational level was also low.

However, new generations born in the cities have inherited the Islamic outlook from their elders and tried to reconcile this with modern secular Turkish urban society. Tensions mounted when they tried to enter universities and took public sector jobs. Their headscarves were seen by the secular elites as an affront, symbol of a ‘decadent’ Turkey mired in its Islamic past. So they were banned. The class divisions emerged leading to the revival of Islamist parties like Rafah in secular Turkey. Secularism, however, has continued to take centre stage. Even this recent change in the constitution has been made in the name of secularism.

Turkish secularism, especially in the post 1980 ban on headscarves, has a distinct French flavour that precludes intellectual pluralism. The more austere French version prohibits personal display of religious symbols or conventions in state institutions, focusing respectively on neutrality between religions, and (more, if not equally, importantly) prohibition of religious associations in state activities.

It was the ‘prohibitory’ aspect that was the central issue in the French decision to ban head scarves worn by Muslim women students, on the ground that it violates secularism. It can be argued that such a prohibition can not be justified specifically on the grounds of secularism, if we accept its ‘neutrality’ interpretation that has powerfully emerged in some other European countries.

Being secularly neutral demands that the state be ‘equidistant’ from different religions and need not discriminate for or against any person individually based on his decision what to wear, so long as members of different faiths are treated symmetrically.

A constitutional or legal binding (like the one in France or Turkey) on an individual about what to wear and what not to wear violates the principle of neutrality between religions as long as the members of other religions do not impose it on others. However, being equidistant between different religions does involve a rejection of favouring one over another.

Turkish parliament has also taken a similar stand when it invoked the principle of secularism, the principle of the right to education, individual rights and freedoms and democracy while passing the constitutional amendment. After passing the bill, petitions were signed on both sides of the political divide. Those who supported the proposed legislation belonged not only to the Islamist AKP, but also were many others belonging to the democratic networks that supported it on the principle of secularism based on state neutrality. They also made a distinction between ‘religion as faith’ and ‘religion as identity’, something not understood by the secular Turkish elitists.

The Wall Street Journal in its article dated Feb 11, 2008 has called the constitutional amendment “a sign of Turkey’s democratic maturity”, referring to the fact that both Islam and secularism can co-exist by respecting each others space. In case it fails, Turkey will be left with secular authoritarianism practiced by its military in the name of protecting of the secular republic.

The writer is a Visiting Fulbright Scholar from Islamabad, currently based in the University of Florida, USA.