Let us begin with good news: (1) Pakistan has successfully completed the requirements of the standby facility of the IMF and has been issued a certificate of good house-keeping by the international financial establishment; (2) inflation is down; (3) foreign exchange reserves are up, even though thee is a bit of window-dressing; (4) poverty reduction and growth facility successfully negotiated with the IMF and (5) there prevails, a generally friendly international environment.

And now the bad news: (1) Pakistan has to further open up its economy by lowering import duties. It has some advantages but normally does not stimulate industrial development - as a matter of fact, it depresses it; (2) GST at the retail level is an administrative nightmare, and needs to be replaced with something more manageable; (3) inability to lower interest rates because the IMF wants it done through the market and the market is not responding fast enough. Anyway, this is a somewhat complex business; (4) no clear government thinking is available on long-term lending by financial institutions for larger projects; (5) and excessive dependence on the market mechanism, when market failure is almost endemic in developing economies.

The three main government institutions for formulation of economic policy are the ministry of finance, the State Bank of Pakistan and the Planning Commission. The State Bank and the Planning Commission are headed by those who have had experience of working in the World Bank. The ministry of finance is headed by a highly successful banker from the private sector.

The Finance Minister, Mr Shaukat Aziz, is bright enough to have scaled the dizzying heights, which he reached in Citicorp. He is personable and very articulate. The only chink in his armour, if such a thing is possible, is that most of his career has probably been spent in retail and commercial banking. I have personally found him very helpful in my present preoccupation of attempting to reduce the rate of increase in Pakistan’s population. It is still linked to the development process through the simplistic identity. Growth in GDP-growth in population = (average) growth in per capita income.

The related development ministries that are directly involved are the ministry of commerce and industry and the ministry of agriculture. The ministry of commerce is headed by a well- known educationist and businessman. In spite of all this talent, (rather like our cricket), there is something missing which is not allowing this assembly to merge as a successful team.

The problem as one sees it is the habit of the finance ministry to hide behind the skirts of the Fund and the Bank. While these institutions are well-disposed towards us, nevertheless, we have to choose our own destiny. As per my experience, the Bank is far more amenable to reason than the Fund, which tends to be extremely dogmatic. In accordance with the Fund philosophy, we have accepted the requirements of living within our means, leaving everything to markets and hoping for the best by doing so.

In a statement made by the minister for commerce, he bemoaned the fact that Pakistan lost Rs450 billion because of poor quality control. He did not say what he planned to do about it. It is a well-known fact that thee is a tendency amongst Pakistani exporters to provide a good sample and fill the export order with a product of inferior quality. Corrective measures can be, (a) special export houses, (b) inspection by professional inspection agents, (c) insurance, (d) dispute settlement procedures.

The Export Promotion Bureau (EPB), which was created for the purpose of diversifying and expanding exports is dead: actually it was stillborn. All that it did was to dish out export quotas to the textile industry under political direction and organize a few tawdry exhibitions for Pakistani goods abroad. It was neither staffed by proper people nor given a mandate to proceed in any particular direction. To compound matters, Pakistan’s trade representatives abroad reported to the commerce ministry where their reports were never read. In theory, the trade representatives were supposed to be the eyes and ears of the EPB. The restructuring of the bureau should not be an impossible task but it has to be done.

The President gave a rather long talk at the Development Forum, but he seemed a bit unclear about the distinction between economic growth and employment. If the economy grows at a satisfactory rate employment is also created. On the other hand artificial creation of employment does not normally lead to growth; it generally leads to inflation. For employment creation purposes he talked about IT, the Khushhali scheme, micro-credit and probably small and medium enterprises. If we are lucky, IT would create some employment and forex earnings as a lot of back office work can be done quickly and cheaply in developing countries. May be we can also produce competent programmers but that would be the next step up.

Micro-credit can play only a minor role in this process. It is essentially a missionary behaviour change model. To make the community recognize the importance of savings and investment and the importance of credibility in repaying loans. I am told that to get a loan from the Grameen Bank, it takes potential borrowers about eighteen months to prove their eligibility.

The Khushhali scheme is a nice idea. It grew out of the Aga Khan Rural Support Programme (KRSP) in Gilgit and Chitral. As it was talked about a lot, I visited it sometime in the early 1980s. The community work was quite impressive, beautifully laid out water-courses, flat ploughed fields without a stone in them. I visited about three little projects. The only problem was that there was nothing growing in any of the fields. I inquired why? The peasants claimed to have no money to buy seeds.

The Aga Khan’s “financial controllers” at head office wherever it was, were not prepared to provide funds for this purpose. It was an impasse. It was difficult to predict what would happen in this tug-of-war. The worst case scenario, would be loss of interest by the people and failure of the project. To help avoid this I offered an interest free loan of about $500,000, at the then prevailing exchange rate, for trying a pilot scheme providing the essential inputs, seeds, fertilizer etc.

There was no collateral except the evidence of what had already been achieved, my faith in Shoaib Sultan’s commitment and last but not least the faith of the people in their “Hazir Imam” which had already brought them so far. Fortunately, the results of this input were highly encouraging and on seeing this other donors poured in money and the project took off. It has now been converted into a sort of a national programme. But let us be clear: it improves the life of some poor people but it is not a basis for rapid economic growth of the country.

The SMEs (small and medium enterprises) will play a role in economic growth and employment creation. But their supervision and credit assessment is difficult. The organizations best placed to discharge this task are the commercial banks through their knowledge of their own customer network of borrowers. But they would have to strengthen their branch management to undertake this work. The SMEs buy raw material and convert into finished products for direct consumption or form a supply chain for large industries such as provision of components for assembly.

The gap still exists in the area of lending to larger projects. The commercial banks have still not developed the expertise. They appear to be thinking of hiring so-called experienced investment bankers from the existing ‘investment banks’. They plan to buy a leg here, an arm there, a torso somewhere else and fit a beautiful head on it. At the end of the day they will probably have an interesting looking dead body on their hands but not a functioning organization. The core competence of organizations is usually their culture. I would suggest that they simply buy an existing investment bank and start building it up.

The State Bank has always been a bit confused about ‘investment banks’. I discovered this in my discussions with the State Bank when I was running an investment bank in the private sector. Their handling of the recent CresBank liquidity left much to be desired. It was an unnecessarily harsh and botched rescue.

What Pakistan actually needs is reverting back to the growth capabilities of the 80s of around 6 per cent per annum and to increase the rate of growth and diversification of our exports. This is not likely to come about by simply sitting back and hoping for the best.

For that we have to plan or at least have some idea of the requirements of infrastructure, the nature of manufacturing likely to develop and the growth of value added in agriculture. Under the fashionable influence of current economics we have opened up Pakistan’s economy too much too soon. A somewhat more dirigiste approach would serve us better.

One of our major concerns these days is shortage of water. There are various ways of dealing with this:

a) increase supply - not entirely within our hands and in any case,it will need a long lead time; b) decrease wastage through seepage and evaporation; c) use available water for growing crops with higher value added(preferably at international prices); d) improve techniques of irrigation and provide the physical facilities and the technical know-how to the farmers to achieve this.

To round off the argument let me quote Professor Stiglitz who has just won a Nobel prize for his study on market failure. Amongst other things, he also served as the chief economist at the World Bank. He pointed out that unfettered free markets in Asia’s tiger economies were based on the imperfect assumption that these economies had efficient markets, honest banks and hence the ability to profitably absorb huge flows of foreign loans. When the crisis occurred, he also argued against excessively tight monetary and fiscal requirements required by the Fund, which made matters worse.

The Bank and the Fund are reported to have admitted that Stiglitz was right but only after the Bank had sacked him for insubordination. As he himself puts it, “my research does not indicate we should have a big government over markets. It does prove that we need astute active government to make private information and transactions efficient where they are failing .... I still do two cheers for the markets. But I do two cheers for government”. The only problem is, how do we find such a government?