March 10, 2008	Monday	Rabi-ul-Awwal 1, 1429

Pakistan’s food inflation rate in the first seven months of current fiscal year has hit nearly 17 per cent – the highest in Asia, its exports growth has stalled and the budget and current account deficits are reaching one of the highest levels among the major developing economies. The fundamental and structural imbalances and weaknesses – and not the just the high oil price – have contributed to the gradual but predictable deterioration in the country’s macro economic fundamentals over the last two years.

Do we need continuity or a change in our economic policies? Many businessmen and bankers argue that the successive governments have followed basically similar economic policies since 1988 and it is a reassuring factor for domestic and foreign investors. This argument is convenient but simplistic and dangerously flawed.

Pakistan does not have a comprehensive energy policy; it has made limited progress in agricultural productivity; its main industry – textiles – is struggling to compete in global markets; its real interest rates remain negative; and the domestic capital markets do not have the depth to mobilise capital to meet its development needs.

The local stock markets have thrived mainly on trading activity in the large companies of the public or privatised sector. During 2006 and 2007, the new capital raised at the Karachi stock exchange was just around $170 million or less than 0.1 per cent per annum of GDP.

The foreign direct investment (FDI) remains significantly less than its potential particularly if we exclude mobile telephone and financial sectors. During the seven-year period from 2001 to 2007, Pakistan received about $10 billion ($64 per capita) in foreign direct investment (excluding privatisation) compared to $26 billion by Indonesia ($117 per capita) and $53 billion by Turkey ($736 per capita). Pakistan’s two close friends - China and Saudi Arabia - who are also two of the world’s largest sovereign investors, have not invested much in commercial projects in Pakistan. Why?

Pakistan has privatised and liberalised its financial sector but both China and India were able to make great economic strides before they even started to privatise or liberalise their financial sectors just a few years ago. In both Taiwan and Korea, the privatisation of the financial sector started only in the late 1990s, that is, much later than the beginning of the boom in the real sectors of their economies in the 1970s and the 1980s.

The policy makers in Pakistan do not appear to have carefully studied or drawn lessons from the economic development in East Asia. These economies – small or big- attached the highest priority to the development of the real sectors – underpinned by infrastructure and human resources development – and manufactured exports played a pivotal role in their growth.

In Pakistan, the economic managers privatized the ‘low-hanging’ fruits – principally to finance budget and current account deficits - but did not address the fundamental challenges of today’s global economy. Any further delay would only exacerbate our economic woes because we can no longer afford to continue policies that do not take into account the global economic slowdown, tight liquidity environment and the tug-of-war between globalising and protectionist forces.

The world faces an unprecedented energy crisis, record high prices of agricultural commodities, and global competitive markets for manufactured products. We are short of energy, low in agricultural productivity and have a small and uncompetitive manufacturing base that is responsible for stagnant exports – a major cause of the trade deficit.

There is an urgent need to redefine our national economic priorities and formulate our development strategy. While agriculture, energy, and exports must be our top economic priorities, we must take cognizance of the following:

1. Despite all the rhetoric about free trade, major producers of agricultural commodities continue to follow protectionist policies that include the use of subsidies. The European Union’s subsidies on agriculture alone exceed an amount that is twice the GDP of Pakistan.

2. The governments and not private sector companies control 80 per cent of world’s oil resources. India and China are not selling their oil companies but buying oil assets abroad.

3. Only those manufacturing industries that have the scale and expertise to compete on a global scale can succeed in a world of low trade barriers.

Agriculture: The government must try to develop a consensus among the provinces on water and hydro power issues. Regardless of the reservations of small provinces, they all must come to an agreement on what our long- term needs are.

A recent World Bank report says, “without adequate irrigation resources, power, and transport infrastructure, the very sustainability of Pakistan as an independent nation may be at stake as shortages could lead to increased social discontent and disharmony amongst the federation and the provinces.”

While massive investments are needed in water and power, the key to improving to agricultural productivity in the near to medium term may lie in technology and crash adult education programmes.

According to a study by Zhejiang University of China, “technology is at centre of the “advancement of agricultural productivity growth in China. Many studies have shown that institutional technical changes accounted for most contributions to the increase of total factor productivity of Chinese agriculture.”

The first step should be to upgrade the ministry of water and power and staff with it top quality personnel. Traditionally, the foreign and finance ministries have attracted the best talent but water, power and agriculture ministries need to be radically reorganised and upgraded to meet the enormous challenges ahead.

Energy: Despite the growth of free markets and globalisation since the early 1990s, the state continues to play an important role in agriculture and energy. In agriculture, the primary objective has been to ensure low food prices. In the field of energy, all countries, including the United States, Russia, China and India, have treated energy as a matter of economic and national security and have comprehensive energy policies.

Pakistan does not have an overall energy policy. It has been working on ‘pipelines’ for over a decade. Its policy makers while making the current year’s budget assumed an oil price of $60-$65 while major investment banks had predicted the oil price to hit $100-level as far back as May 2005. This writer in some articles – published by Dawn in 2006 – called for the development of energy policy in view of the growing energy crisis but the policy makers continued to focus on privatisation. The only meaningful progress has been the on Iran gas pipeline, an initiative taken before 1999.

We have privatised some refineries, plan to sell the biggest oil marketing company and have attracted merely $300-$350 million in foreign direct investment in the energy sector. India and China are not selling their oil companies. On the contrary, they are busy making and exploring overseas acquisitions with the government playing a lead role. A private Indian company – Suzlon – has emerged as one of the largest global players in wind energy in the last four years.

There is an urgent need to develop an overall energy policy including for alternative and renewable energy sources. As a practical measure, it would make sense to combine different divisions and departments to form a ministry of energy as some countries, for example the United States – have done to formulate and coordinate energy polices at national and international levels.

Exports: The scarcity of energy resources has driven the state to play a central role in the world energy politics and has encouraged protectionism but globalisation – in the form of export-led growth – has been the principal driver of growth in East Asia.

The lower trade barriers provided a boost to trade and manufacturing and the old philosophy of ‘producing for the home market and exporting the surpluses’ became obsolete. The manufacturers must have the necessary economies of scale, competence, and technology to survive and compete in a global market place. The Asian countries played the game well and took advantage of globalisation, without being taken advantage of by globalisation.

China followed expansionary macro-policies (contrary to the wisdom imparted by the IMF) and the government invested billions in setting special economic zones (SEZs) in the coastal areas and in railroads to facilitate low cost transportation. Taiwan and Korea followed similar policies.

China built these SEZs near the sea ports to attract foreign direct investment and about 80 per cent of the FDI into China went into these zones during the 1990s, mainly due to liberal economic framework and integrated infrastructure at very competitive prices. Another reason was their ability to facilitate production on a mega scale at globally competitive costs. China’s largest SEZ in Shenzhen region was set up in 1981 and has achieved nearly 50 per cent per annum GDP growth rate. Following the success of China, there are more than 3,000 projects taking place in SEZs in 120 countries worldwide.

Pakistan is far behind its competitors and needs to make giant strides to become globally competitive in manufacturing. A patchwork of fiscal and financial incentives for industries that are inefficient and a drain on the economy will not help grow its exports.

Some interest groups feel these policies should be continued but Pakistan does not need to continue the policies that failed to address important national priorities even in the benign global economic environment that lasted from 2000 to 2007. Faced with energy and food shortages and a highly competitive globalised markets for goods and services, Pakistan does not need to reinvent the wheel. It only has to look East to see what has worked for the rest of Asia.