‘It is not justified on the part of the IMF to pressure us to reduce tariffs, while the developed countries protect their own industries and agriculture. But, surely, it could not do that had we not gone to it for aid and assistance,’ says A.R. Kemal

PAKISTAN’s economy is not at a take-off stage at the moment as propagated by the authorities, because the investment level has not improved although macroeconomic fundamentals are strong, believes Dr A.R. Kemal, Director of Pakistan University of Development Economics (PUDE), which has recently been upgraded to the status of university from being an institute as was the case earlier.

In a recent interview with Dawn Magazine, Dr Kemal, who spent over five years as the Chief Economist at the Planning Commission, said that due to the prevailing political instability, the domestic investor is not coming forward, and would perhaps start investing only when this uncertainty is over.

He also believes that Pakistan has missed the opportunity to take full advantage of the IT revolution, as the government took a bit too long to take a proper initiative in this regard.

The following are the excerpts of the interview:

Q. Do you think Pakistan is now at a take-off stage as being claimed by the government, and is in a position where it will not need IMF programmes to support its economy?

A The policy-makers have to think very hard as to how Pakistan could reach a take-off stage and then achieve sustainable development. When we are at the critical mass of investment, and if the macroeconomic stability leads us to a higher level of investment, only then can we think of taking off. At this moment, regardless of what the government or anyone else says, I cannot say that we are at a take-off stage.
 

Q. If so, why do we follow IMF dictates? It continues to pressurize developing countries, including Pakistan, to encourage foreign investment, create free trade and to reduce tariffs, while the developed countries, notably the US and the UK, themselves had imposed extremely high tariffs to protect their own industries in their infant stages. How should we respond to the challenge, and protect local interests?

A. First of all, the International Monetary Fund, or, for that matter, any international donor agency, did not come to us. No one can pressurize us if we don’t go to it. Pakistan had to approach the IMF when the reserves were dangerously low, as was the case when we went to it the last time when our reserves were as low as $3 billion, and we thought that the scheduled debt servicing would evaporate those reserves.

The Poverty Reduction and Growth Facility, PRGF as it is generally called, provided Pakistan funding at a very low interest rate and we signed an agreement to follow its conditionalities. But it would be bad politics to say that we don’t need to go back to the IMF so we should not follow its economic guidelines.

You would remember that Pakistan had refused to include all the conditionalities that were placed on the table by the IMF back in 1985 when our reserves were abysmally low, but had soon fallen into deeper trouble and later had to agree to even more strict policies.
 

Q. Do you think the governments in Pakistan are now responsible enough to continue prudent economic policies on their own, and would not resort to popular policies without IMF supervision?

A. It would be very unfortunate if the authorities do not behave in a financially responsible manner without the IMF. It is time the government decided what was good, what was not-so-good, and what was downright bad for the country. Policies should be made in the light of those findings, and then the government must stick to it in the long run.
 

Q. History suggests that the now developed countries used a whole range of protectionist policies ranging from export subsidies, rebates on inputs for exports, monopoly rights, cartel arrangements, credit extension, investment and manpower planning etc to develop their industries. Why should Pakistan follow neo-liberal and free-trade policies to benefit the industries of the developed countries?

A. It was not justified on the part of the IMF to pressurize developing countries like Pakistan to reduce tariffs while the developed countries like the United States and the United Kingdom, and regional blocs like the European Union, protect their industries and agriculture. But, surely, it could not do that had we not gone to it for aid and assistance. When we made the initial move, we had to face the consequences, and the IMF asked the government to carry out certain policies. As for the issue of tariff reduction, well, Pakistan should go for it, but it should be a gradual process and not done abruptly.
 

Q. What about the budget for the running fiscal? Is it a development budget?

A. A banker, that the finance minister basically is, is not per se interested in macroeconomic stability. He goes for the profitability of the project. Unless there is a stable environment, when capacity is lying idle, when the private sector is not forthcoming, when there is little build-up of inflation and agreements with IFIs that don’t go beyond four per cent of the fiscal deficit, growth in the long run would naturally be compromised.

The implementation of IMF policies have given credibility to the government, and this should lead to higher levels of investment because it has remained static at 13 per cent of the GDP for the last two years.
 

Q. It is generally believed that strategies followed by the developed countries, like unequal treaties and international agreements, are not allowing the under-developed countries to climb the development ladder. Do you agree to this?

A. Absolutely. The strategies of the developed countries like unequal treaties and international agreements are not allowing the under-developed countries to climb the development ladder and are rather damaging Pakistan a lot.

Pakistan’s total exports of around $11 billion have a $7 billion share of textiles, and if there are quota restrictions on Pakistan then we cannot have any competitive advantage, especially when they provide subsidy to their agriculture.

Developed countries like Japan and the United States have developed behind the steep walls of protection, but then they reduced tariffs when their market potential exhausted, and created incentives for export orientation.

The problem with Pakistan was that we did not go for export orientation and export diversification. Pakistan still produced one quarter textile of total exports, one quarter food and then cement and so on. Besides, we provided protection and for too long which resulted in inefficiency. This was followed by nationalization, then the energy crisis, and then we did not devalue currency for a long period and when we did it, it was abrupt, instead of being a gradual process of devaluation.

In my view, textile and leather sectors no more required protection although some other sectors were in need of it, but under the WTO we could not give protection beyond 17 per cent.
 

Q. Do you agree that while the developing countries continue to lower barriers to foreign investors, the developed countries have started raising their tariffs, and the US has even refused to adhere to agreements on pharmaceutical patent rights?

A. The developing countries want investment, and the developed countries insist that there should be no restriction on the kind and level of investment they want to make. It is upto the developing countries to decide what kind of investment they want to protect.

The prudent way is to rationalize the tariffs before foreign investment comes in, so that they know that this is going to be the policy. But if you change the policies once foreign investment is already in, then they would simply run away, and that would hurt your credibility in the long run as well. As a general principle, somebody who has developed a specific technique or knowledge should get its benefit, but the user should also get new techniques at reasonable rates and there should be no exploitation of patent rights.
 

Q. Do you think there could be scope for Pakistan to pursue reverse engineering for advanced machinery like some of the developed countries did during their early stages?

A. The situation has now changed a lot with the emergence of the WTO agreement. One form of reverse engineering Pakistan had adopted through local input, but we have not been successful in the past and now we have no hope in view of the TRIMS agreement. Under the TRIMS, a foreign investor cannot be asked to produce parts locally or procure them from abroad.

However, the government could devise policies so that Pakistani companies could go for reverse engineering, but then there is a need for skilled manpower which we always left for the outsiders.
 

Q. Do you agree that Pakistan has missed to take full advantage of the IT revolution, and its share is basically limited to doing the manual work like data entry on softwares designed and patented by others?

A. This is true. Pakistan has missed the chance to take full advantage of the IT revolution like the automobile and telecom revolutions in the past. The IT initiative should have been taken earlier. Former deputy chairman of the Planning Commission, Ahson Iqbal, had been insisting since 1996 that we should work to have our slice of the knowledge revolution, but we took far too long and missed the chance.

We took a long time reducing bandwidth rates, for instance. About the software side of the deal, the less said, the better. By the time the government took notice of it all, it was way too late and Pakistan could not take much of an advantage that it should have. Although we have now developed some credible IT institutes, but now there is recession in the global IT market. Pakistan should now go for such areas which are in demand like e-commerce and e-governance, and jump immediately to such areas instead of following the old methods.
 

Q. Finally, do you believe that a country cannot develop without democracy, as is being propagated by international donors and lenders?

A. Any government that enjoys the respect of the population can develop the country because the people would invest on the basis of results achieved in terms of production, growth and employment. It does not really matter what kind of government is in place if it enjoys respect and credibility. We have the example of Korea which developed under an authoritarian regime, but it fulfilled the basic requirement which, in my view, is stability.

Democracy is preferable because it brings in transparency, and all matters can be debated upon in parliament which brings in the element of collective wisdom which is always good. Debate the issues, formulate the policies, and then implement them. But if this is not done, then there is no point in having democracy just for the sake of it.