Beyond the IMF

ONCE again Pakistan is about to adopt an economic stabilisation programme under the auspices of the IMF.

There is little doubt that it is necessary, given the balance of payments crisis and the danger that a collapsing exchange rate could feed off the inflation rate to result in hyperinflation. The looming prospect of default gives urgency to the need for immediate balance of payments support by the IMF, and the associated policy package of economic contraction to address the financial crisis.

However the design and scope of the programme must take account of Pakistan’s geostrategic context: Pakistan is fighting a war of survival against the Al Qaeda-Taliban combine whose outcome could profoundly impact security in the region and the world. At the same time Pakistan’s fragile democratic structure through which the war is to be prosecuted is threatened by rising poverty and unemployment. In addressing these strategic issues Pakistan’s economic stabilisation programme must go beyond the traditional IMF programmes which are simply based on acute monetary contraction.

Pakistan’s experience of economic stabilisation during the 1990s is relevant at this point. The contraction undertaken was so acute that it proved counterproductive to the objective of reducing the budget and balance of payments deficits: the GDP growth rate was pushed down so sharply that the twin deficits reappeared near the end of the decade as the result of low revenues. At the same time the stipulated public expenditure cut fell predominantly on development expenditure rather than the government’s unproductive expenditure, thereby removing both the stimulant to growth and cushion for the poor. Thus Pakistan got the worst of both worlds: the GDP growth rate plummeted and poverty levels soared.

Thus the lesson of the 1990s was that while a financial crisis makes economic contraction necessary, this has to be done prudently so as to minimise the adverse effect on GDP growth and the vulnerable sections of the population. What does this mean for the programme design?

In undertaking an economic stabilisation programme two strategic considerations ought to be kept in mind: (i) the economic stabilisation programme must be accompanied by policy initiatives to establish the institutional framework for structural changes in Pakistan’s economy and thereby lay the basis of sustained GDP growth in the post-economic stabilisation phase; and (ii) since an economic contraction policy will inevitably lead to increased poverty and unemployment, therefore social protection measures must be simultaneously undertaken to provide adequate income support and employment to cushion the blow to the poor.

Let us now articulate the structural constraints to sustained growth and their institutional underpinnings in Pakistan. This will be done within the perspective of a theoretical postulate that is central to the new economics even though it has not yet entered mainstream thinking in the IMF.

The new institutional economics pioneered by Douglass North and others has now established that institutions are the fundamental factor in sustained growth and the efficient functioning of markets. An institution is a set of formal rules and informal norms (values, culture and consciousness). Since rules embody incentives, therefore institutions play a crucial role in shaping production organisations at the micro level and thus determining economic performance at the macro level.

In Pakistan the institutional structure of the economy provides rents for the elite by restricting competition through the exclusion of the majority of the people from the process of quality education, training, investment and governance. It is this narrow base of investment and restricted competition that underlies endemic inefficiency and lack of innovation and export competitiveness, and hence recurrent balance of payments crises.

My research for the UNDP, ‘National Human Development Report 2003’, provides evidence to suggest that the poor have unequal access compared to the rich to markets for land, labour and capital. The institutional structures of power at the local level engender asymmetric markets for inputs and outputs which deprive the poor of almost one-third of their income. Furthermore my research for the ‘Drivers of Change Study (2008)’ shows that Pakistan’s institutional structure constrains both sustained growth as well as poverty reduction.

It is Pakistan’s institutional framework and the associated incentive systems which have shaped the structure of its economy. By structure I mean the design format of the economy which determines the essential features of its growth process. I had argued in 2006 (Daily Times, May 1 and 8) that Pakistan’s high GDP growth observable at the time was not sustainable and was likely to hit a balance of payments constraint which could force a slow down. Unfortunately this indeed has come to pass.

Four structural constraints to sustained growth can be identified. First, the domestic savings rate (12 per cent) is far below the target investment rate (28 per cent) required to sustain a target GDP growth rate of seven per cent. This is because the institutional structure provides incentives for consumption rather than savings and investment.

Second, the export growth is unable to finance the foreign exchange requirements of imports associated with a high-growth trajectory. This is because the incentive systems have engendered inefficiency, lack of technological change and associated lack of international competitiveness in much of Pakistan’s textile industry. At the same time the policy framework provides disincentives for diversification towards high value-added exports.

Third, Pakistan’s physical infrastructure including electricity, transportation and irrigation is grossly inadequate to meet the requirements of both industry and agriculture for a high-growth trajectory.

Fourth, the quality and coverage of higher education and vocational training do not provide the necessary skill base for sustaining growth in the high value-added sectors. Each of these structural constraints are located in an institutional framework of governance within which the process of decision-making with respect to economic policy is distorted in favour of rents for the elite, rather than public welfare.

I have argued that unlike the 1990s, on this occasion the scope and design of the stabilisation programme must be widened to take account of two new features. First, the contraction must minimise both the time span and magnitude of its adverse effect on growth and poverty. Second, a new institutional framework must be put into place as an integral part of the stabilisation programme so as to lay the foundations of sustained and equitable growth in the post-stabilisation phase. This time Pakistan is fighting a war for survival. There is no room for mistakes on the economic front.

The writer is distinguished professor, Beaconhouse National University.

Obama’s touchstone

TOUGH old army men such as Colin Powell and hard-nosed TV anchors choked when the unbelievable that was happening actually happened, and even Virginia went to Obama, but that moment belongs firmly to the past. It is the morrow of the Obama triumph, rather than its extraordinary character, that should occupy us.

Before looking at what the world can expect from Obama, we must ask whether America’s financial and economic crisis will permit Obama to take more than a fleeting glance at the world. To do so he will have to shake off the blanket of domestic issues — debts, deficits, unemployment numbers and more — that will envelop him from day one.

He will have to meet America’s domestic challenges. He says he will do so as a uniter. This urge flows from his family history and personal make-up. But it will be hard. Democrats, including some with presidential ambitions of their own, will resist Obama’s evident intention to rule from the centre rather than from the left. Many Republicans will continue to insist that Obama is ‘a liberal from the left lane of the Democratic party’.

The Republicans are exhausted just now and lack a clear leader. Though continuing to attract a fierce loyalty from religious conservatives and blue-collar white Americans who fear the black or immigrant ‘other’, Sarah Palin seems to have discredited herself with the rest of the Republicans. Romney, Huckabee and Giuliani now seem stronger than her. Other Republican hopefuls include the young Louisiana governor with parents from India, Bobby Jindal.

Obama is well aware of a world beyond America. Telling this world, in a carefully prepared victory speech in Chicago, that “a new dawn of American leadership” was at hand, Obama promised “defeat” to “those who would tear this world down” but “support” for those seeking “peace and security”. America’s strength, he added, came “not from the might of our arms or the scale of our wealth” but from its commitment to “democracy, liberty, opportunity and unyielding hope”. Just words, of course. Yet they may be significant. It is the foes of “this world” rather than the enemies of America that Obama warns; and he suggests that military force is not going to be his first crutch. It is hardly the Bush doctrine.

Already the right in America is complaining that his opposition to the cowboy approach will make Obama passive if not soft. In fact, however, Obama’s refusal to be rushed or panicked into a decision is an asset for America that the world too will welcome.

Exit polls conducted with over 16,000 voters (a large sample) showed that Obama was seen as possessing better than McCain the ‘judgment to make a good president’. A clear contrast was provided in September, when the financial crisis struck America. McCain responded with gut reactions that seemed both risky and stunt-like, while a sober Obama consulted advisers and deliberated.

It would be reasonable to expect a similar response from President Obama — the calm, collected manager, as he is being called — to any sudden international crisis. Yet we don’t know enough about Obama’s understanding of the world, or his intentions for it. True, he has promised a careful withdrawal from Iraq, a more effective Afghanistan operation, and a readiness to pursue identified Al Qaeda militants along the Pakistan-Afghanistan border. He has also spoken (if only in passing) of wanting to improve India-Pakistan relations and to help if possible over Kashmir.

Some of his other foreign policy goals (spelled out on Obama’s website) are: securing loose nuclear materials and arresting nuclear proliferation; renewing alliances and diplomacy; and pursuing tough, direct diplomacy to discourage Iran from acquiring nuclear weapons. Obama has to be cross-examined on these mostly ambiguous pronouncements before we can know what he intends to do. Already concern has been expressed over his selection of the Illinois congressman, Rahm Emanuel, as his chief of staff. A seasoned congressman who played a pivotal role in the Democratic party’s electoral successes in 2006, Emanuel has however been criticised on the Amy Goodman show for an alleged hard stance in support of Israeli positions on the Palestinian question.

On the other hand, several of his critics from the right have charged that Obama’s love for the American flag is as weak as his hatred of America’s enemies, adding at times that they miss a spontaneous passion in Obama’s defence of Israel or attacks on Israel’s foes.

Such critics fail to see that America can only be strengthened by Obama’s apparent sensitivity to injustices in the world, even when committed by America or its friends, and his apparent willingness to understand the points of view of other countries. I say apparent because these aspects of Obama’s make-up have not been in the foreground lately. Yet we have been given to understand that they exist. At the least, Obama’s Kenyan and Indonesian links enable him to identify with the world more naturally than a Bush or a Clinton can, and enable the world to identify with him.

In the lonely if seemingly glamorous outpost called the White House that Obama has won for himself, who or what will he consult when he gets that 3 a.m. call or even a sobering 9 a.m. assessment from intelligence chiefs, or when distant victims of overwhelming force ask for America’s support for justice? As he figures out a response, what will be Obama’s touchstone?

He may face a personal temptation to prove that despite his supposedly skinny legs he can be as tough as they come, that despite his reputation for warmth he can be as cold as necessary, that the real Obama is the very opposite of someone “palling around” with terrorists, as Sarah Palin had alleged. Many around the world (and in America) will hope, however, that at testing moments Obama will dismiss every inferior consideration and search solely for what is wise and just, for America, yes, but also for the world.

I will end, however, with a wholly different question. What change on the subcontinent can match this transformative American event? And how do we work for it?

The writer teaches at the University of Illinois at Urbana-Champaign.

Against the law of popular politics

THE mere locking of horns with the government is no more acceptable to lawyers in Lahore. They locked up the lower courts in the city on Nov 4. The Lahore High Court has taken suo motu notice of the extreme action and has angrily asked the Punjab government to do its duty of standing by the law. On Friday the case was adjourned for an indefinite period.

The lawyers are looking to revive their movement. Their campaign, initially for the restoration of the judiciary but later on aimed at the return of Justice Iftikhar Mohammad Chaudhry as the chief justice, had lost some of its steam. The government had managed to contain the lawyers’ advance by bringing back many of the judges who had been deposed by the November 2007 Provisional Constitution Order issued by Gen Pervez Musharraf.

Even the leaders of the ‘free judiciary’ caravan appeared worried by the government’s approach which was spearheaded by Law Minister Farooq Naek and Attorney General Latif Khosa. Chastened by the increasing control of the pro-PPP lawyers over the powerful Pakistan Bar Council, Messrs Aitzaz Ahsan, Hamid Khan and Ali Ahmed Kurd came up with a national coordination council of their own to run the movement.

The move may have been liable to criticism since it amounted to creating a parallel, even if pro-judiciary, system of command among the lawyers. It could also have been interpreted as an attempt by a few to monopolise the lawyers’ leadership, guarding against the Pakistan Bar Council as well as against the possibility of a government nominee somehow managing to succeed in the election of the Supreme Court Bar Association which was around the corner.

The step didn’t generate any controversy in the legal circles — no debate was sparked off — mainly because of the sheer number of lawyers willing to fight the government on this one. The strength of the anti-Zardari, previously anti-Musharraf, lawyers was reflected in the SCBA election late last month.

While some observers were expecting a real battle between Ali Ahmed Kurd and PPP-sponsored M. Zafar for the SCBA presidency, it turned out to be a tame affair. The fears of rigging expressed by Aitzaz Ahsan proved to be a false alarm as Mr Zafar failed to make too much of an impression — even in areas where the pro-PPP lawyers were supposed to wield some influence. The big margin of victory provided Justice Iftikhar Chaudhry’s soldiers the strength needed to ward off the onslaught of the government.

On the other hand, the inaction of the government is a boon for lawyers. Stability has been lacking ever since Syed Yusuf Raza Gilani took oath as the prime minister in March this year and those who had been hoping for a turnaround in fortunes with the rise of Asif Ali Zardari to the presidency have been frustrated.

The government has failed to come up with certain popular measures that could have pushed the issue of the judiciary into the background. The PPP government is yet to come up with a plan for the general good of the people. Instead it has been caught up with the task of creating and strengthening alliances inside the parliament.

It has also drawn flak from the general public for being obsessed with blessing its own people — from those who had the good luck of accompanying Mr Zardari to jail in the past to the so-called political appointees given jobs by the previous PPP governments and sacked by subsequent regimes. If that was not evidence of parochialism on the PPP’s part, we now have in the garb of ministers people who have the nerve and the audacity to defend in the parliament acts as horrendous as honour killings.

This is where the reconciliation initiative that Mr Zardari inherited from his wife has badly gone wrong, and it will most certainly contribute both to the negative image his party is fast building for itself and the lawyers’ movement which remains a big challenge for the government. The tribal-like relationship that Mr Zardari seeks to establish with those he wants to appease disenfranchises the people at the heart of his party. PPP leaders have been repeatedly pleading for time to set the affairs of the state right. They must realise that no amount of time can benefit them if the job was entrusted to the wrong hands. In the meantime causes that Mr Zardari, Mr Naek and their associates seek to drown in ‘other important matters’ will continue to draw a large number of people.

If there was a Naekian scheme to neutralise the lawyers by the side of Justice Iftikhar Chaudhry, it has not only failed, it has also further jeopardised the PPP’s chances of sailing smoothly in government. Today there is no shortage in Lahore of people who are justifying the locking up of the courtrooms by referring to a leadership that has a habit of going against public sentiment, of continuing in the footsteps of Gen Musharraf. An alternative strategy for Mr Zardari would be to approach the people at large rather than concentrate on the good of only a group on the basis of political affiliation.