MR Shaukat Aziz probably wanted the Pride of Performance medal by appearing to achieve a GDP growth of 8.3 per cent.
It was supposed to be based on the Washington Consensus, namely deregulation, liberalisation and an independent central bank responsible for monetary policy and inflation.
Mr Aziz replaced the concept of an independent central bank with `privatisation`. The whole process is supposed to be based on the belief that markets correct themselves automatically. When Keynes challenged this concept the defenders maintained that it happens in the long run. In response, Keynes is said to have quipped In the long run we are all dead.
Anyway, Mr Aziz is a smart individual. He is also personable, plausible and persuasive. He managed to convince the general of his capabilities and succeeded in converting Musharraf into a faithful disciple. He negotiated foreign debt rescheduling which helped to build up our foreign exchange reserves. He managed to bring interest rates down by a highly expansionist monetary policy.
The banks had large amounts to provide as credit and increase their profits. Consumer demand was encouraged by the availability of credit from banks and further supported by import liberalisation.
Domestic industries providing consumer durables like cars, refrigerators, air conditioners, etc. operated at full capacity. Two-thirds of growth was provided by what is technically called services, i.e. value added through sales by importers, retailers etc., provision of services by banks and financial institutions and other services like telephones etc.
This resulted in current account deficits in our balance of payments over many years which were financed by remittances from abroad and what was called foreign direct investment except that it was not in industry. It led to our foreign exchange reserves being frittered away and has finally resulted in the sudden drop in the value of the rupee, partly the result of excessive criticism of Gen Musharraf`s economic policies — which were, of course, those of our prime/finance minister.
The former president mentioned in one of his speeches that he had asked Mr Shaukat Aziz to come to Pakistan three times to explain his economic policy but he had not responded. Mr Aziz is an intelligent man, why should he have taken on unnecessary risk?
These policies had been in contradiction with the normal approach to development in developing countries which are trying to move away from total dependence on agricultural exports. In Pakistan these were originally jute and cotton.
Development has become almost synonymous with industrialisation. The approach is defined as an increase in savings, investment in industry, export promotion through the diversification of products, import substitution for the transfer of technology. The paradigm is import-import substitution-export. It doesn`t happen all the time but it does happen.
Some years ago at a party, I asked the governor of the State Bank what he thought he was doing by promoting consumerism instead of investment in industry. He replied that they were following the American model. Since I couldn`t think of any polite response to this statement I walked away. The governor was a sensible individual I realised that he was under pressure from the prime minister and the dutiful president.
In the last year or so the problems were further accentuated by providing subsidy for petroleum products and borrowing from the State Bank to meet budget deficits.
There were other methods of financing deficits such as floating government bonds sold to investors, revamping the National Savings Scheme — but that probably meant that people would start questioning the budget deficit. Why shouldn`t they? This expanded the money supply and, together with the continuing current account balance of payments deficits, the devaluation of the Pakistan rupee was more or less inevitable.
In the early years, the building up of foreign exchange reserves was against US policy. I recall when I moved over from the ministry of information to the ministry of finance Pakistan had made a windfall gain of about $50m in export earnings. The Harvard Advisory Group descended on the ministry of finance and insisted on the amount being immediately spent on imports, which was done.
Some years later, a lady from the US embassy called on me to check the foreign exchange budget. I showed it to her — it was no secret. I asked what it was that she wanted to check. She said that they wanted to make sure that we were not increasing our reserves. I said, `Shouldn`t we in order to compensate for changes in donor support?` She said, `You have to spend your own money before we can support you.` Probably this is not US policy any more.
Input in economic development is also dependent on good governance, education and, in the case of Pakistan, concern over the rate of population growth. Gen Musharraf`s concept of good governance was primarily to further degrade the District Management Group through what was called the introduction of democracy in the local government. This was further enhanced by the induction of the army brass into as many civilian jobs as possible. The results are before us.
As far as education is concerned, he was taken in by Dr Ragman`s vision of producing PhDs and his vision of creating new universities. What is important in education is the production of good undergraduates — they can go on to become PhDs should they so desire. In order to produce good undergraduates existing universities have to be improved. It is a tough job but it is practical compared to the vision of creating new universities in thin air.
With respect to population growth, there was some additional availability of financing but there was no serious political commitment. As a result, there was some talk but no serious work. The recent report on population produced by the National Institute of Population Studies (NIPS) in collaboration with a US consultancy provides some relevant but a lot of irrelevant information; it has, however, not mentioned any estimate of population growth. It has admitted that there is no increase in percentage of contraceptive use, in fact probably a slight decrease.
The problem about the provision of statistics is that an organisation such as the Federal Bureau of Statistics is controlled by the ministry of finance. NIPS is under the ministry of population welfare. Instead of being an independent autonomous organisation they have to take care of their controlling ministry. The result is simply the affirmation of Disraeli`s famous remark, `Lies, damned lies and statistics.`
