Thursday, July 3, 2008

Shaukat Aziz's Economic Legacy


Is Shaukat Aziz to Blame?

Former Prime Minister Shaukat Aziz is frequently blamed in Pakistani media and political and economic circles for the rapid decline of Pakistan's economy during the last six months. The critics say the economic boom under Mr. Aziz was short-lived because it was achieved by easy, plentiful consumer credit, massive borrowing and construction spending in public and private sectors. They further charge that Mr. Aziz promoted the service sector while ignoring large infrastructure projects to enhance Pakistan's agricultural and industrial sectors. They also claim that, if Mr. Aziz had done a good job, the economy would have continued to perform well in spite of all the changes that have transpired since he quit. Some go to the extent of claiming that there was no real economic boom and the whole boom story was a fabrication.

How Do Modern Economies Work?

To examine the validity of the charge sheet against Mr. Aziz, let us try and understand how modern economies work. Modern economies are all consumer driven and cyclical. To manage growth in modern economies, there are a number of tools and policy options deployed by economic leadership consisting of government and central bank officials. Controlling money supply is a key tool. When the economy is slowing, the governments resort to deficit spending, and central banks lower interest rates to encourage consumer borrowing. Government and consumer spending then produce increased demand for goods and services which encourage more investment in plant, equipment and real estate etc. These investments create jobs which further stimulate demand.

Can the Economy run on Autopilot?

There is no such thing as an economy on autopilot that continues to perform well by itself over long periods of time without competent human intervention. As the economy overheats, the inflation starts to become an issue which then requires the central banks to raise interest rates and tighten money supply to cool growth. The governments act in concert with the central banks to reduce spending and limit money supply in the economy. The monetary and fiscal policies must be coordinated. Pakistan's latest 2008-2009 budget should not have massive deficits with 30% increase in spending to cancel the effects of the central bank raising interest rates to tighten money supply.

Wise stewardship by country's economic leadership helps reduce the severity of the economic cycles. But it does require close monitoring and constant tweaking to keep the economy performing well.
The confidence of business and investor community in the economy also plays a significant role. If the businessmen and investors feel the government and central bankers are managing the economy well, they continue to play their role to maintain economic health. On the other hand, if they lose confidence in government's economic team, they begin to slow or even withdraw their investments which hits the economy hard.

How Did Shaukat Aziz Do?

Unlike many of his critics, Shaukat Aziz is a banker by training and extensive experience in New York. He is not an academic. His credentials are similar to those of the successful US treasury secretaries such as Bob Rubin and Nick Brady who did well under Clinton and Reagan administrations. He understands the role of banking, finance, investment and consumer credit in economic growth of a nation. He carried out basic structural reforms and focused on building strong banking, investment and finance sectors in Pakistan to underpin its economy. He strengthened capital availability, an essential and increasingly important economic input, in addition to labor and land improvements. With higher education budget up 15-fold and overall education spending up 36% in two years, he focused on education to improve the availability of skilled labor to fill new jobs. He pushed land development and public and private construction spending to improve infrastructure and facilities to attract greater business investment, creating more jobs. Mr. Aziz was largely successful in his efforts.

Taking a leaf from the US housing policy to stimulate the economy, Mr. Aziz introduced low-rate mortgages in 2003. This initiative led to a construction boom and expanded housing for the growing middle class in Pakistan, contributing significantly to the GDP growth and job creation.

Pakistan's tax base grew with rapid economic growth over the last 9 years. The Federal Board of Revenue's tax collection surpassed Rs 1 trillion in 2007 from Rs. 500 billion in 1999. This effort was essential in managing the current account deficit during Shaukat Aziz's term in office.

When Shaukat Aziz took over as finance minister and later as Prime Minister, Pakistani economy was in shambles. In 1999 Pakistan’s total debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% & 264.8% respectively in 1998) and India (44.0% & 358.4% respectively in 1998). Read more about it here.
Most recent figures in 2007 indicate that Pakistan's total debt stands at 56% of GDP, significantly lower than the 99% of GDP in 1999. It also compares favorably with India's debt-to-GDP ratio of 59% and Sri Lanka's 85% in 2007. From being the highest debtor nation in South Asia, Pakistan has, in fact, become the lowest debtor nation in its region and achieved economic growth rate of about 7% a year during the last 6 years.

The Economist magazine in its June 12 issue comments on Pakistan's current and past Economic Performance as follows:" (The current) macroeconomic disarray will be familiar to the coalition government led by the Pakistan People's Party of Asif Zardari, and to Nawaz Sharif, whose party provides it “outside support”. Before Mr Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. But since then, as the IMF remarked in a report in January, there has been a transformation. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01. The government's debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4 billion as recently as in October."

The turn-around engineered by Shaukat Aziz was applauded around the world. A 2005 Bloomberg headline, as reported by China's Peoples Daily, proclaimed as follows: "The world's second-fastest growing economy after China is no longer India. It's Pakistan."

The Wall Street Journal did a story in September 2007 on Pakistan's start-up boom that said, "Scores of new businesses once unseen in Pakistan, from fitness studios to chic coffee shops to hair-transplant centers, are springing up in the wake of a dramatic economic expansion. As a result, new wealth and unprecedented consumer choice have become part of Pakistan's volatile social mix."

Here's an excerpt from a UN Economic Survey 2008 report: "Pakistan’s economy maintained its momentum in 2007, growing by 7%, slightly more than the 6.6% for 2006. Agricultural sector growth recovered sharply, from 1.6% in 2006 to 5% in 2007, while the manufacturing sector growth continued at 8.4% in 2007, slightly more moderate than the 10% for 2006. Services grew at 8% in 2007, down from 9.6% in 2006. But exports were sluggish in 2007, with economic growth largely driven by strong domestic demand. Investment overtook consumption, helped by a surge in domestic private investment and record foreign direct investment (FDI) flows. In 2007, investment in real terms increased by over 20%."

The strong consumer demand in Pakistan drove large investments in real estate, construction, communications, automobile manufacturing, banking and various consumer goods. Millions of new jobs were created. By all accounts, the ranks of the middle class swelled in Pakistan during Shaukat Aziz's term in office. According to Tara Vishwanath, the World Bank's lead economist for South Asia, about 5% of Pakistanis moved from the poor to the middle class in three years from 2001-2004. In 2007, analysts at Standard Chartered bank estimated that Pakistan has a middle class of 30 million which earns an average of about $10,000 per year. And adjusted for purchasing power parity (PPP), Pakistan's per capita GDP is approaching $3,000 per head.

The one sore spot that sticks out in Shaukat Aziz's record is his lack of attention to the rising energy needs of the country. Appropriate planning should have comprehended new power plants to support growth forecasts. There were other mistakes as well, such as the decision to export wheat in 2007 that created shortages and price hikes that helped bring down the PML (Q) government.

What Comes Next?

As the PPP and PML leaderships continue their political posturing, the larger story is the massive loss of confidence by business and investment communities in Pakistan. There is no one in charge of the economy at the moment.

It is worrying to see a sudden halt to foreign investments and the flight of capital by Pakistani investors to investments elsewhere in the world. Foreigners bought just $97m-worth of Pakistani stocks in the first ten months of this fiscal year, compared with over $1.5 billion in the same period a year earlier. No amount of blaming and escape-goating of Shaukat Aziz can be a substitute for real action by a competent economic team to stabilize the economy. Instead of shifting blame, Shaukat Aziz's critics should help fix the current mess Pakistan finds itself in. The first step toward fixing the economy is to put an experienced and competent leader in charge with a few smart technocrats on the team.

Here's a video clip of world leaders, including Shaukat Aziz, at the World Economic Forum in Kuala Lumpur talking about Global Food and Energy Crises:



Related Link:

Haq's Musings

Structural Reforms in Pakistan's Economy

Memorandum of Economic and Financial Policies in Pakistan 2008

Video: Who Says Pakistan Is a Failed State?

50 comments:

anas imtiaz said...

I'm not well versed in the theory of economics and therefore keep myself limited on the subject. But a layman, such as me, fails to comprehend the blame on Shaukat Aziz as to how the economy crumbles ONLY WHEN Shaukat Aziz ends his tenure and not before him? Why there were no talks of capital flight during that time? And how did he manage to transfer minimum effects of international petrol prices and gas prices on the common man while the new government fails to do so? What has changed so suddenly?

I firmly believe that the blame on Shaukat Aziz is politically motivated, and needless. A man with credentials as his, and the remarkable way in which he diverted the direction of economy in Pakistan from gloom to glory should rather be celebrated. I'm also sure that people will begin to understand this very soon.

Riaz Haq said...

Anas,
You may not be well versed in economics but your analysis is poignant. I personally think that much of the criticism of Shaukat Aziz is politically motivated. But some of it based on ignorance inspired by the media. I also see an element of jealousy of theoretical, academic economists who have never actually dealt with the nuances of modern economies. These economists are truly practitioners of "dismal science" focused on dividing a small pie rather than enlarging it and then dividing it.

Tazeen Javed said...

good post riaz sahab

Razz said...

Unfortunately the masses will never understand the nuances of economics and how figures can be turned around and manipulated to place the blame on a specific person. This is where the new administration - like all previous ones - is using this tactic to defame him, his policies and just about everything done by the previous government.

Ahmed Quraishi said...

Excellent article Me no economist but reached similar conclusions. I salute Mr. Haq's Pakistani patriotism which is discernible in all his writings. God bless you.

Riaz Haq said...

Dear Mr. Quraishi,
Thanks for your comments.
I enjoy reading your regular column that appears in Pakistan Link. Please keep sharing your insightful thoughts.

Anonymous said...

hello are any of u people in pakistan.that stupid person is responsible for all the cartelization in pakistan.since he came ther was on crisis after the other.a sugar crisis cement crisis etc,there waas no growth only inflation and still he and his stooges had the audacity to say that pakistan is the cheapest country in the region.he completely deregulated the econmy adn made sure that pakistan economy goes down the drain once he left.he should be tried and sentenced to life imprisonment for ruinung our country financially.Have u forgot the stock market fiasco. i have heard that calls were traced to him as he was ordering the crash of the stock market.so that he and his cronies could benefit from it.

Ammar Faheem said...

Excellent Riaz Sahib! You have indeed highlighted key facts! The blame game is only to cover up their own incompetence and inability to handle a rapidly growing economy! May Allah Bless us all!

Riaz Haq said...

Dear Anonymous,
It seems you are ignoring all of the data and the facts I have laid out in my post. By doing so, you are unwittingly participating in the blame game being played in Pakistan by people trying to cover up their own malfeasance or incompetence or deliberate ignorance. Stocks markets going up and down in reaction to news of the day is a common occurrence. It happens in India, China, US, etc. But only in Pakistan is every market move linked to a conspiracy theory. This thinking ignores the fact that Karachi market rose 10X in 8 years under Shaukat Aziz's leadership and became the top performing market in the world. If it was being manipulated by Aziz & co, why would the professional investors and international institutional money managers continue to have confidence in it?
Let's think rationally and not be swayed by the nonsense being pedaled in Pakistani media. Democracy requires a thinking and questioning public, not blind acceptance of rumors and innuendo.

emagine said...

This is an excellent analysis of the Aziz government's successes. Today's "democratic" government is more interested in passing off the blame of their inability to perform as legislators and lack of industry knowledge.

I think the question that needs attention is well pointed out in the article "Why did the economy collapse AFTER the Aziz government left?" At no point during the Aziz government did the Karachi Stock Exchange lose USD 22 billion in 2 months. While the crash of 2005 is still a bone of contention, I don't see it being on par with the capital lost during this government.

Also, I think it would be fair to point out that many of the crises that Pakistan sees are due to its own internal "politics." Government officials turning a blind eye to hoarders because of their connections to political parties and politicians and looking to make a quick buck while starving Pakistan are norms of the day.

He did a stellar job of turning around a demoralized economy to provide the masses with more opportunities to own assets through credit. The financial services sector of Pakistan saw massive growth and numerous banks were purchased, merged or expanded during this same government. Pakistan saw a boom that would have trickled down to everyone in the country over time.

My 2 cents...

temporal said...

I fully agree with this:

No amount of blaming and escape-goating of Shaukat Aziz can be a substitute for real action by a competent economic team to stabilize the economy.

Shaukat Aziz is a 'polished' person who excels in PR...a smooth talker...and a banker with desired connections...

Pakistan's could have used his likes...

but

the big mistake was to put all the eggs in his basket

those in the know attribute the current political mess at his feet...it was his half baked and half cooked atttempt to privatise the steel mill that resulted in the suo moto ation by SC...

that in tutrn resulted in Aziz's infamous 'reference' against Iftikhar Chaudhary

The wave of Musharraf's blunders started with Mar 09 reference against Iftikhar Chaudhary...and then rapidly afterwards his administration semingly unravelled

For that AND for the power generation mess both Shaukat Aziz and Musharraf cannot escape the blame...

Riaz Haq said...

Dear Temporal,
Shaukat Aziz is not politician and Musharraf did not hire him for his political skills. It is naive to think Shaukat Aziz was the cause of the CJ's firing and subsequent fall-out from it. As far as the steel mills case is concerned, it was primarily a valuation dispute and privatization process issue. It is not unusual for people on the outside to second-guess valuations and process, particularly in an acrimonious environment. What is unusual is an activist judge anxious to get involved in suo moto actions. Such a thing would probably not have happened anywhere else in the world.

Asim said...

Finally i read some sensible writing. Thankyou. Shauket Aziz was a thorough professional, who had facts, figures straight and on his fingertips. He could talk about economy, art, architecture, telecoms, heritage, sports, PTV etc. not from gut feeling but facts. I had the pleasure of meeting the man a few times at social events and was impressed with his knowledge, his social skills etc etc. I remember being at a dinner a little over a year ago where he was introducing his son visiting from Bahrain to President Musharraf. We need such professionals to return and run the country. We need their vision their charisma, and their hard work for the next 20 years if Pakistan is to get anywhere.

Az said...
This comment has been removed by the author.
Az said...

When Musharaf came to poser he recruted his own Judges and Fired Justice Taqi Muhammad Usmai sahab because he wrote the decision against Interest based economy.
These judges reversed that decision, and Mr. Shokat Aziz and Co. drowned our economy and people in Loans and interest.
All the economies in the world are going crazy and since we are so dependent on policy and economy of USA+$ that we are falling like a rock behind USA.
Interest based economy may work for them but it is not for us since there is no trust and law enforcement in Pakistan beside the point that it is Haram and war against Allah.
In my view leader of the country is to blam for everything going wrong in it. Aziz and Mush both are to blame. Then old judges who are now paying the price of making war against Allah.

Riaz Haq said...

Dear Az,
I admire your strong faith and commitment to your beliefs. But let me ask you the following:
Are you suggesting that Pakistan is entitled to engage in trade, investment and finance in today's world on terms set by Justice Taqi Usmani? Do you think Pakistan or any other nation in the world can unilaterally decide how they want to do business with the rest of the world?

Let me suggest to you that this is not only arrogant, but crazy to even think in this way. No nation, not even the US, can set such rules for the entire world, unless it is willing to isolate its economy. If you are serious about Islam and the Shariah laws, do some serious research and Ijtihad to figure out how Muslims can deal with the world as it is, not as you wish it were.
Just look at your own life in the US. How can you survive without dealing with the businesses and the banks that you must deal with to live here?

Shafiq said...

Mr. Riaz, well said. I am an MBA student here in the UK and had a chance of doing some research work as part of my dissertation during last 4 months. As I had plans to go back to Pakistan, I chose my research in the banking sector of Pakistan. I conducted my research on the topic that reforms during his regime has transformed the banking sector into a very well organised and efficient banking sector. It was pleasant to conduct so many reports from UN, WB, IMF, ADB and few others and see that he did remarkable work. So much other to mention. I will not say that he did everything right. If it were so, I would have doubted his being a human being. He did mistakes too but he did so much which no other economist in any previous government did.
As has been discussed in earlier posts, it is such a shame that by being motivated politically (or even jealousy by some other economists), we don't even recognize someone's good work

Riaz Haq said...

While disagreements on policy are understandable and can be debated in a serious manner, it is the attacks on Mr. Aziz's personal integrity and patriotism that are particularly deplorable. In a sea of mediocrity in Pakistani political leadership, military and bureaucracy, the need for smart expats like Shaukat Aziz is particularly acute. Such attacks are likely to have a chilling effect on any Pakistani expats in the West thinking about returning to Pakistan to serve their country.

Yawar said...

Excellent synopsis. But I couldn't disagree more with you. What people say about Shaukat Aziz now isn't a myth, it's reality. Yes, the economic boom was short lived. Credit availability and credit borrowing rules were relaxed so much that default was commonplace. I myself know more than a handful of people who refuse to pay their credit cards, car loans and mortgages because getting the credit was easy and not paying back had no consequences. Yes, SA did ignore infrastructure. A sound economy is built on infrastructure and spending on infrastructure during his rule was at a minimal. Flyovers and a mushrooming of banks does not mean that the foundations are stable. No money was spent in agriculture to the point that we have to borrow wheat, our primary cash crop, from other countries. There was an economic boom but it was on shaky legs and with the global food crisis and credit collapse, the Pakistani economy is in shables.
There is no way that you can compare the Pakistani economy to the American economy. Our economy has a large flight of capital taking place. FDI will always keep America at #1 for the simple reason that countries know how stable the economy is. Your comparison to the US economy and using it as an example leaves much to be said. Finally, to keep this short, your talking about Shortcut Aziz as the fact that he was a banker places him on a pedestal to work wonders with our economy. Completely wrong. The present collapse of Lehman Brothers and AIG shows that credit always carries a risk. Also, please do not forget the $12 billion cash infusion by the US into our economy to fight their war for which we are already paying the consequences.
PS: Again, well written sir and you are entitled to your opinion as I am to mine. Good day.

Riaz Haq said...

Yawar,
I think you're making the same mistake many of Shaukat Aziz's critics make: You don't understand that Aziz did everything very methodically to revive Pak economy based on extensive experience in finance and banking. He understood the basics of land, labor and capital as the key factors in any economy. He paid meticulous attention to each which resulted in making Pakistan one of the fastest growing economies from 2003-7.

As I explained in my post, consumers are the backbone of any modern economy. Unless consumers have confidence in the economy and access to credit, nothing else works. Everything else, including business investment, jobs, and infrastructure investment comes because of consumers.

Aziz boosted consumer confidence and credit to stimulate the economy that brought in the bankers, the investors, the businesses, the communications boom, the construction boom etc. The fact that some people didn't pay their debts is not unusual. Every society has their deadbeats. That doesn't mean all consumer credit should come to a halt.

You assume that, because of a couple of bank failures in the US, that all bankers are stupid and do not understand risk. You couldn't be more wrong. Look at the overall benefit to society.

All economies are cyclical. Times change, conditions change and new ways of dealing with it are required. Economies have to be constantly managed. In Pakistan, there is complete absence of economic leadership right now. Some of the reported remarks of Zardari, such as "I am the expert" and "print more notes" are down right scary.

As to the $10-12b of mostly military US aid over 7 years, it is peanuts compared to Pakistan's annual GDP of $144b and $5b of FDI in 2007, alone. This happened because of investor, business and consumer confidence in Aziz-Musharraf leadership. That confidence has vanished since the PPP government took over.

We should distinguish between opinions and facts. You are entitled your own opinion but you are not entitled to your own facts.

Anonymous said...

thank you riaz for the informative and well balanced blog on shaukat aziz and his economic legacy. i am of the firm opinion, as you are, that shaukat aziz being maligned in our press and media was a result of underlying jealousy and politically motivated because he was part of the musharraf regime. its a shame when pakistanis refuse to actually learn and listen to facts before making their judgements. and unfortunately, we made our judgement on shaukat aziz MUCH to early. i think along with dr. ishrat hussain, salman shah, and ashfaque hassan khan, shaukat aziz managed to turn an almost defaulted economy into something more vibrant. the PPP governments ineptitude in handling daily economic procedures has compounded the problem we are facing. the C/A deficit has skyrocketed, our rupee is now at 77 to the dollar, and the stock market is at levels not seen for 7 years. i feel ashamed we can point fingers at him and musharraf for doing the job they did. the people will soon realize the reality of it all.

Riaz Haq said...

Here's a recent news report regarding Aziz's comments on current global financial crisis:

Former prime minister Shau kat Aziz accused the International Monetary Fund on Thursday of failing to show leadership during what he described as a "historic" global financial crisis.

As world leaders met to shore up distressed financial institutions, Mr Aziz charged that "this global institution which is supposed to look at everything going on was not even in the room where meetings are going on."

Speaking at an international business conference in Manila, the former Citigroup banker said interest rate cuts, recapitalisation of banks and liquidity injections, while helpful, would not solve the problem.

"The very fabric of the global financial system is under threat," Aziz said.

Mr Aziz said there was a need to boost the IMF's regulatory powers and create a more powerful body.

"The world is becoming increasingly specialized," he said, adding that existing systemic threats beyond the agency's traditional monetary policy role must be addressed. "A robust regulatory regime must touch all the stakeholders," he said, with reference to the credit rating agencies that have come in for criticism amid the crisis.

SAJJAD said...

SALAM,

Mr Riaz Huq,

You have really explained in detail about his achievments.I agree totally shaukat aziz was the brain behind reviving pakistans bankrupt economy and after 8 months of this government people should realise that he was the one which engineered our economic revival, dont understand people how they can just blame shaukat aziz and dont see the situation getting worse in this government, simply becasue they have not bothered to do anything about it.I am a great fan of musharraf and shaukat aziz and i have to say that you dont find many people recognising and admitting what shaukat aziz did for us but riaz huq you truely are a great pakistani and a very intelligent person, theirs not many who really understand what he did for us, but have to say that alot of people are beginning to realise it now that he was the one.......

Anonymous said...

Dear Raiz Haq ,

I thank you for clearing the issue and actually taking your time out in explaining to the people what work Mr Shakhat Aziz done for the country.
We know have a government who chose to be enter the elections on the their own accord and are doing nothing to bring the economy in control but instead blame the past leaders. I say to such people if you knew the present government could not steer the country in a better direction then why did they choose to come in power. People Mr Musraff and Shakhat Aziz were people who could explain their plans on the finger tips on who to get the country on its feet. Instead we now have leaders who when asked a question give a general answer not specific or related to the problem. How many times I have seen Mr Zardari when asked a serious question he begins to show his teeth and giggle. trying to divert the question and come up with a humorous answer. These people who are degrading the likes of Mashraff and Aziz actually have no answers infact a lot of the times they do not understand the questions they are asked. What a joke and belive me the joke is on the people of Pakistan who elected them.

Anonymous said...

Dear Mr. Riaz,
i myself am a student of economics and keep an eye over our country's economic affairs. Recently i read a book by noted economist shahid javed burki in which he has analysed the economic performance of Musharraf regime. in his book, Mr. Burki points out that GDP grew at an average of 8.5% in Pakistan during shaukat aziz's tenure, however, 1.5% was due to foreign direct inflows in the form of aid for the war on terror and by expats, another 1.5% of it was due to the monetary expansion (printing of notes)etc pursued by Aziz,and 2% was of the 'lost' agricultural output which was recovered after the serious droughts that plagued the country in the years before musharraf took over. Therefore, 5% of this GDP growth was of due to external factors and not as a result of Shaukat Aziz's policies. the actual growth which can be attributed to his efforts is the remaining 3.5% which is equal to those achieved during the Benazir and Nawaz governments in the 90's. So what is your take on that? Plus, Mr. Aziz was also blamed of pursuing a consumer driven consumption economy, encorugaing the real estate boom, and thus speculation, by many sectors, who allege that he did not focus on increasing agricultural output but on increasing consumer demand by printing notes etc. He also is also accused of exporting the surplus wheat we had last year, causing wheat shortage in our country now. Regarding the enrgy crisis, Shaukat Aziz's statements that he could not forecast the current upsurge in demand are ridiculous in my view. I mean then what else was he the finance minister for, for all these years? he had all the data and statistics at his disposal and therefore, he cannot make any excuse. Please correct me if I am wrong in this case. With the current global situation and financial crisis, the foreign investment in Pakistan has decreased, therefore our GDP has declined and less credit is available now. Recently members of Shaukat Aziz's economic team, like Daniyal Aziz for example, have come out and openly criticized his policies, arguing that they were strictly told by the government high upsd to keep quiet when they witnessed this "russian roulette" being played with our economy.
So please Mr. Haq let me know what you think and how would you justify and explain all these allegations.
thank you.

Riaz Haq said...

It's much easier to criticize than to deliver. Critics and analysts are dime a dozen. Doers and deliverers are few. Especially the economists, the practitioners of dismal science, who never agree among themselves on anything. Aziz and Musharraf delivered the fastest ever growth in Pakistan, regardless of how you analyze it. Their policies created millions of jobs and a large, thriving middle class. A lot of the investments, production and trade are driven by confidence of the business community, the investors and the consumers. All of that confidence has now completely vanished with Zardari in charge. No one trusts him domestically or internationally. Finally, he's had to resort to appointing Shaukat Tarin, a protege of the much-maligned Shaukat Aziz, to help get the world to take them seriously.

As far as consumer economy is concerned, I have already explained how consumers form the backbone of any economy, including US, China and India. Without consumption, why would any one invest in an economy or a country? To export? Even exports are driven by consumption in other countries.

Shaukat Aziz is not infallible. He made mistakes and I have acknowledged those in my post. But he delivered results. And that's what matters.

Muhammad Saad Faruqui said...

Dear Mr.Haq,
Thank you for your reply. I still have not formed my opinion about Shaukat Aziz yet as I am still researching about his economic legacy. However,with due apologies, I am not fully convinced with your reply, It is true that Economists are often ridiculed for arguing amongst themselves, however they are the experts in this field who know the facts and figures and so it is unfair to criticize them. Shaukat Aziz was a banker, not an economist, and thus I think he pursued the policy of attracting consumer expenditure by fiscal expansion and monetary easing which created high demand, which, compounded with not enough supply, has led to the current inflationary pressure on the economy. Plus, do you think that his policies of lowering duty on luxury export items, which fuelled the consumer boom, was a good move because this is what is perceived responsible, along with the high oil prices, for the current huge balance of trade deficit, which has forced the government to go to the IMF? I clearly remember Shaukat Aziz making emotional statements, whenever he was presenting a budget in the parliament that we have "forever shed the begging bowl" atleast 10 times throughout his tenure. He and Musharraf firther used to claim that Pakistan will never go to the IMF or ask for a loan from anyone because of the reforms they have introduced. You have said that Shaukat Aziz did make some mistakes, but dont you think those few mistakes if they were so small in their magnitude,have led us on the brink of bankruptcy and achieved more bad than good?

Riaz Haq said...

Dear Saad,
In spite of your statement to the contrary, it seems from your arguments that you have already concluded the Aziz policy of encouraging consumer spending was wrong and he is responsible for the current economic mess. So, you and I have a fundamental disagreement on how to stimulate a dormant economy and encourage new business investment and spending by creating confidence among businesses, investors and consumers. Aziz brought Pakistan's banking and investment sector and economy from the dark ages into the modern age.

As to the IMF, Pakistan did break the bowl as it was considered good risk by commercial lenders and investors as long as Musharraf and Aziz were in charge. In fact, 2006 and 2007 were banner years for FDI in Pakistan. All this capital that flowed had a multiplier effect in creating even more growth and jobs than the FDI itself.

It takes a long time to build trust and confidence which can be lost by irresponsible leadership in charge. Within a very short period after Musharraf's departure, credit default swaps on Pakistan's debt have more than quintupled to almost a million dollars per year for $10m loan over 5 years.

In spite of whatever flaws Aziz has, I'd rather have him manage Pakistan's economy than the current lot which has brought nothing but disaster.

Muhammad Saad Faruqui said...

PS: Sorry I mistyped when I said "Plus, do you think that his policies of lowering duty on luxury export items," I actually meant import items like luxury vehicles etc not export items.

Thank You.

Muhammad Saad Faruqui said...

Dear Mr. Haq,
It is true that encouraging a consumer driven economy attracted business and investor confidence, but an analysis by many eminent economists, whose views which you seem to have so ruthlessly dismissed, suggests that the consumer boom, as mentioned in my earlier posts, led to an attraction of investment in the stock markets and real estate sectors etc. These were really high, and this was also registered in the GDP growth, however, the agricultural and manufacturing sectors in the economy were devoid of any solid investment, and when the global financial crisis came, the investors took out their investments from the economy, leading to a massive forex and stock exchange crisis. The Aziz government also gave a subsidy of as much as Rs.40 on every litre of Oil at a time when the oil prices skyrocketed, but because of this policy, the prices did not increase as fast in Pakistan during his tenure. However, when the new govt. came, they were not left with enough money in their reseves to pay for this subsidy, leading to a massive increase in oil prices in the country, which could not be decreased even when the international oil prices nose dived!! Thus, a look at the new govts. problems and every crisis they are facing can evetually be traced back to Mr. Aziz's policies, be it the massive trade deficit, high prices , forex scandal and even the IMF loan. Therefore I am indeed compelled to believe that Mr. Aziz's policies were certainly flawed depsite my sincere efforts not to do so.
I must mention here that I am not a fan of the 'current lot' either and i dont think many people are. But i think that we must rise above our personal likes and dislikes and analyse things from a neutral's perspective in order to avoid jumping to unwarranted conclusions, and so far, with whatever i have read about Mr. Aziz's policies, it has failed to convince me to change my opinion about him.

Riaz Haq said...

Saad,
Please read carefully the following excerpt from the UN Economic Survey 2008 report I have cited in my post:

"Pakistan’s economy maintained its momentum in 2007, growing by 7%, slightly more than the 6.6% for 2006. Agricultural sector growth recovered sharply, from 1.6% in 2006 to 5% in 2007, while the manufacturing sector growth continued at 8.4% in 2007, slightly more moderate than the 10% for 2006. Services grew at 8% in 2007, down from 9.6% in 2006. But exports were sluggish in 2007, with economic growth largely driven by strong domestic demand. Investment overtook consumption, helped by a surge in domestic private investment and record foreign direct investment (FDI) flows. In 2007, investment in real terms increased by over 20%."

There is a difference between portfolio investments and foreign direct investment(FDI). Pakistan attracted both but the FDI far exceeded portfolio investments. FDI was invested in plant and equipment that created jobs in industrial and manufacturing sectors which experienced double digit growth 2004-6 and declined slightly in 2007.

As to the economists, they are theoretical/analytical people not considered the best managers of the economy. In the US and Europe, economists are mostly in advisory roles, not management roles in government.

Muhammad Saad said...

Dear Mr.Haq,
Thank you once again for continuing this discussion. I hope it can help us to gain a better understanding of our economy and aid us in discovering where we are going wrong in deciphering our leaders' economic policies. This debate between us seems to present one thing, either one of us is being biased in our assesment of Mr. Aziz's policies.

You had made a valid point when you said that Economists throughout the world have not been given managerial positions, but are mainly used in an advisory capacity by governments. This is also true in the case of Pakistan where Gen. Musharraf, and even the current government have formed an economic advisory council to advise the government on policy matters. But, as I even mentioned earlier, economists who were part of Gen. Musharraf's team like Daniyal Aziz and Nadeem-ul-Haq have openly come out on national television and declared that they completely disagreed with the economic policies during his tenure and had even warned the govt. of that day about these policies' after effects, for which they were strictly admonished and told to keep quiet! Maybe, had the previous govt. taken heed to their advice we would not have been facing this situation today.

In the excerpt which you have taken from the UN report, it has been mentioned, and rightly so about the growth in the manufacturing sector, however, it may be mentioned here that this was largely due to the 50% growth in the automobile sector, which in turn grew astronomically due to the policy of the State bank in conjunction with the govt. to introduce consumer car financing loans to the general public, which led to a huge increase in demand for automobiles, and thus the growth in this sector and even the GDP was one-sided.

With regards to the agricultural sector growth, I admit the fact that we had a surplus in wheat and cotton, but then if the agri sector registered such growth, then why are we facing a massive shortage of essential items in the country now? Maybe the answer lies in my first post where i mentioned the reason for the wheat shortage.

In the UN report, it has been mentioned that exports were sluggish, reinforcing my contention about the massive trade deficit which is so ruthlessly eroding our foreign exchange reserves today. Plus it has also been said in the report that growth was largely due to the high domestic demand, which in my view, is due to the policy of massive govt. borrowing from the state bank, which increased money supply leading to huge demand, which in turn countered by short supply, has led to hyper inflation today.

I may again mention here that although the current govts. policies are also not very inspiring, however, it would be unfair to blame them for this mess in its entirety.

Riaz Haq said...

The growth in manufacturing sector, which you now accept, was not entirely due to the automobile sector which would not be bad either. In fact, there was manufacturing and export growth all around. Motorcycles were manufactured with almost 100% of the parts indigenously, and the sales grew rapidly, creating lots of jobs. The massive roll out of the wireless and Internet infrastructure required the manufacturing and installation of basic stuff like metal cabinets, routers/switches and cell towers. It also boosted the skills of young engineers and technicians. Leather and Textile sector flourished and exports grew to more than 200% between 2003 and 2007. Revenue collection doubled to over 1 trillion rupees.

The fundamental change in the last year is one of massive loss of confidence that has driven away businesses and investors. This change is reflected in Pakistan's sovereign debt major downgrade and rapidly rising cost of default swaps.

Again, you and I disagree very fundamentally on how to revive and stimulate a moribund economy. It can not be done without a strong consumer sector. Consumer sector accounts for more than 2/3rds of the US economy. And curreently, that's the sector that US government is trying to stimulate with interest rate cuts and easing of lending and money supply. Unless the consumer is willing to spend, no one wants to manufacture products, build real estate or invest.

The government's primary job is to pursue policies that create confidence in the country and the economy for investors to invest, businesses to produce (and create jobs) and consumers to find jobs and spend what they earn.

I don't think I can convince you that Aziz and Musharraf did a good job because you are so determined to believe otherwise.

opinion786 said...

Foreign reserves Phenomenon: Shaukat Aziz versus PPP

By October 2007, at the end of Prime Minister Shaukat Aziz’s tenure, Pakistan raised back its Foreign Reserves to a handsome $16.4 billion. His exceptional policies kept our trade deficit controlled at $13 billion, exports boomed to $18 billion, revenue generation increased to become $13 billion and attracted foreign investment of $8.4 billion.

http://presidentmusharraf.wordpress.com/2008/08/21/foreign-reserves-phenomenon-shaukat-aziz-versus-ppp/

Riaz Haq said...

Thanks to Shaukat Aziz's efforts, Pakistan has been ranked 34 out of 52 countries in the World Economic Forum's first Financial Development Report, which was released in Pakistan through the Competitiveness Support Fund (CSF) Thursday.

The report is a comprehensive analysis of financial systems and capital markets in 52 countries that explores key drivers of financial system development and economic growth in developing and developed countries and serves as a tool by which countries can benchmark themselves and establish priorities for financial system improvement.

Arthur Bayhan, Chief Executive of the Competitiveness Support, said: "I am very happy to see that financial system in Pakistan is well reformed and competitive vis-à-vis Asia and Europe. Pakistan is ranked ahead of the Russian Federation (35), Indonesia (38), Turkey (39), Poland (41), Brazil (40), Philippines (48) and Kazakhstan (45)."

The United States narrowly edged the United Kingdom to take the top position in the Financial Development Index. The United Kingdom was second while China ranked 24 and India 31.

The rankings are based on over 120 variables spanning institutional and business environments, financial stability, and size and depth of capital markets, among other factors, in assessing the complex financial systems of the 52 countries studied.

An important and unique measure captured by the Index includes the degree to which businesses feel they can easily access capital. The Financial Development Index is based on three main pillars - Factors, Policies and Institutions, Financial Intermediation and Capital Availability and Access. These are further divided into sub - pillars.

Pakistan ranks 49th in institutional environment, 50th in business environment and 37th in Financial Stability. In the Financial Intermediation Pillar Pakistan ranks 25th in banks, 42nd in non-banks and 17th in financial markets. Under Capital Availability and Access, Pakistan ranks 33.

Indicators showed that in business environment Pakistan had development advantage in cost to export, ranking 6th. In Financial Stability Change in Real Effective Exchange rate Pakistan is at 20th, External debt to GDP 10th, Frequency of banking crises 1st, stability index 15th. In corporate governance Pakistan ranked at the very top in shareholder rights index, 14th in strength of investor protection. In the Non-banks pillar, Pakistan ranked 9th in the real growth of direct insurance premiums. In equity market movement Pakistan ranked at the top again.

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Riaz Haq said...

Here's a Dawn story about the duplicity of Pakistan's "democratic leaders" published Jan 16, 2009:

ISLAMABAD: While publicly it criticizes former President Musharraf for the present economic mess, the government in its official documents has appreciated the economic policies of the previous regime that became a strong base for seeking loans from multilateral donors and friends of Pakistan.

The PPP-led coalition partners have been blaming Musharraf regime in public speeches for fudging economic figures to paint a rosy picture, while its overall policies pushed the country into economic crisis.

The letter of intent (LoI), on the basis of which, Pakistan sought the much-needed $7.6 billion bailout package from the International Monitory Fund (IMF), has bit by bit appreciated the Musharraf policies since 2000.

During the past one decade (1999-2007), the LoI says Pakistan’s economy witnessed a major economic transformation from substantial increase in the volume of gross domestic product (GDP) to greater international trade.

Talking to Dawn on Thursday former Finance Minister Ishaq Dar said whatever he said about the health of economy was based on the balance sheet existed on March 31, 2008. He said the balance sheet was dully approved by the then cabinet headed by Prime Minister Syed Yousuf Raza Gilani.

He said no body denied the contents of the balance sheet. The focus of the previous economic policy was on promotion of consumerism without supporting the industrial base.

Apparently not willing to agree with the LoI contents, he said though he has a different view of the past economic growth but quickly added the same was destroyed in the last 15 months of the military led dictator.

An official source requesting not to be named said the economic wizards in the finance ministry are not politicians to make only speeches but they have to look into ground realities. ‘We reported to IMF whatever is factual and based on evidence,’ the official added.

The LoI said the country’s real GDP increased from $60 billion in 2000-01 to $170 billion in 2007-08 with per capital income rising from under $500 to over $1000. During the same period, the volume of international trade increased to nearly $60 billion from $20 billion.

For most of this period, real GDP grew at more than 7 per cent a year with relative price stability. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Buoyant output growth, low inflation, and the government’s social policies contributed to a reduction in poverty and an improvement in many social indicators.

Former Finance Minister Dr Salman Shah told this scribe the government has made the 170 million people fool while telling them pack of lies in the past nine months about the economic policies of the Mushrraf regime.

He said that as the present government acknowledged in black and white, the impressive past growth made their way easier to make access to the new facility of the IMF for emerging markets hit by the crisis to support the balance of payment problems.

Had growth not been achieved, Pakistan would have to apply for other long term IMF financing facilities like poverty reduction, structural adjustments etc, Shah said adding government should tell truth to the nation if they have confidence.

‘The recruitment made so far for running the finances of this country is very depressing. This shows this government has neither commitment nor capabilities to take the country out of the current crisis,’ Dr Salman said.

Riaz Haq said...

The economic results of the decade of 1999-2009 speak much louder than any denials of the reality by the naysayers and Mush bashers, who are highly politicized but mostly clueless about good governance, economy, investing and business.

They are unaware of the best kept secret that Pakistani markets significantly outperformed those in the much hyped BRIC nations by a wide margin.

Pakistan's key share index KSE-100 was just over 1000 points at the end of 1999, and it closed at over 9727.40 on Dec 31, 2009. Pakistan rupee remained quite stable at 60 rupees to a US dollar until 2008, slipping only recently to about 80 rupees to a dollar. In spite of the currency decline, Pakistan's KSE-100 stock index surged 55% in 2009 in US dollar terms and 65% in rupee terms, after the IMF bailout that forced the current government to acknowledge the good policies and achievements during Musharaf years.

During the same period of 1999-2009, Mumbai Sensex index moved from just over 5000 points to close at 17,464.81. If you had invested $100 in KSE-100 stocks on Dec. 31, 1999, you'd have over $900 today, while $100 invested in the Mumbai's Sensex stocks would be worth $274. Investment of $100 in emerging-market stocks in general on Dec. 31, 1999, would get you about $262 today, while $100 invested in the S&P500 would be worth $91.

Pakistan's KSE-100 stock index surged 55% in 2009 in US dollar terms and 65% in rupee terms, in a year that also saw the South Asian nation wracked by increased violence and its state institutions described by various media talking heads as being on the verge of collapse. Even more surprising is the whopping 825% increase in KSE-100 from 1999 to 2009, which makes it a significantly better performer than the BRIC nations. BRIC darling China has actually underperformed its peers, rising only 150 percent compared with energy-rich Brazil (520 percent) and Russia (326 percent) or well-regulated India (274 percent), which some investors see as a safer and more diverse bet compared with the Chinese equity market, which is dominated by bank stocks. This is the kind of performance that has got the attention of some of the top investors and investment firms around the world.

While such obviously breath-taking results may not mean much to those determined to deny the achievements of a "dictator", they are not lost on smart investors, like those at Goldman Sachs and Franklin Templeton, both of whom are bullish on Pakistan, in spite of its current difficulties. Musharraf's legacy will live on with the investors' faith in Pakistan.

http://www.riazhaq.com/2010/01/karachi-tops-mumbai-in-stock.html

Riaz Haq said...

Dr. Ashfaque H. Khan, Dean of NUST Business School, has written a guest post on this blog. Here are some excerpts from it:

" Pakistan positioned itself as one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging 7.0 per cent per year for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating almost 13 million jobs, halving the country's debt burden, raising foreign exchange reserves to a comfortable position and propping the country's exchange rate, restoring investors' confidence and most importantly, taking Pakistan out of the IMF Program.

The present government inherited a relatively sound economy on March 31, 2008. It inherited foreign exchange reserves of $13.3 billion, exchange rate at Rs62.76 per US dollar, the KSE index at 15,125 with market capitalization at $74 billion, inflation at 20.6 per cent and the country's debt burden on a declining path. The government itself acknowledged in the same document that "the macroeconomic situation deteriorated significantly in 2007/08 and the first four months of 2008/09 owing to adverse security developments, large exogenous price shocks (oil and food), global financial turmoil, and policy inaction during the political transition to the new government". (Para 3 of the MEFP, November 20, 2008)"

Riaz Haq said...

Here's an interesting except from analysis of Pakistan, calling it the Next BRIC, by theglobalguru.com:

...much like Russia, Pakistan also has been one of the top-performing stock markets over the past decade. Had you been able to invest in the Karachi Stock Exchange at the turn of the millennium, you'd be sitting on a much bigger pile of profits than, say, if you had invested in the “China miracle.” Pakistan offers yet another lesson in how gleaming skyscrapers offer little guidance in predicting future stock market performance.

Investing in Pakistan: Surprisingly Big

Teeming with 169 million souls, Pakistan is the world's sixth-largest country by population. That makes it smaller than Brazil , but larger that Russia, as well as the “Next BRIC” candidates, Turkey, Mexico, South Korea and Egypt. Bordered by Afghanistan and Iran in the West, India in the East and China in the far Northeast, Pakistan is just about the size of France and the United Kingdom combined.

Pakistan's real per capita GDP of about $1,250 makes your average Pakistani slightly poorer than his counterpart in India -- and far behind the average in booming China. One third of Pakistan's population lives in poverty, and only half of the population is literate. Yet, Standard Chartered bank estimates that Pakistan has a middle class of 30 million that now earns an average of about $10,000 per year. And adjusted for purchasing power parity (PPP), Pakistan's per capita GDP approaches $3,000 per head. But take away that bit of economic affirmative action, and Pakistan's economy drops from the size of New Jersey's down to that of Alabama.

Investing in Pakistan: Edgy Relations with Uncle Sam

In the bad old days of the Soviet Union, Pakistan was a major U.S. ally. That relationship soured after the United States imposed sanctions on Pakistan after it refused to abandon its nuclear program. The “War on Terror” changed all that. After Pakistan ended its support of the Taliban regime in Kabul, American economic and military aid to Pakistan soared to more than $4 billion within three years of the 9/11 attacks. Indeed, American aid has played no small part in helping Pakistan's economy flourish over the past decade or so.

But as with most forms of handouts, gratitude is the least heartfelt of emotions. Anti-Americanism in Pakistan’s free media is just about as virulent as neighboring Iran. The Wall Street Journal’s Pakistan correspondent was ejected from the country after being charged with spying for the United States and Israel. The U.S. State Department advises U.S. citizens not to visit the country and has forbidden the families of its diplomats in Pakistan to visit since 2002.

Investing in Pakistan: A Solid Start to the Millennium

Economically, the first decade of the 21st century has been good to Pakistan. Thanks to economic reforms introduced in 2000 by the former Musharraf government, Pakistan has privatized $5-billion worth of assets, simplified its tax system and attracted large amounts of foreign direct investment (FDI) compared to its GDP. By mid-2005, the Pakistani economy was growing by 8.6%, and the World Bank named Pakistan as the top reformer in its region and among the top 10 reformers globally.

That changed abruptly with the onset of the “Great Recession.” Pakistan's ensuing balance-of-payments crisis and runaway inflation forced the IMF to step in, and offer a $7.6-billion emergency financing package in late 2008. To its credit, the Pakistani government kept its side of the bargain, maintaining its foreign exchange reserves above target and its fiscal deficit below. The Pakistani economic crisis has eased substantially, and in 2010, the economy is expected to grow at least 4%.

... The stock market index in Karachi has risen by more than 1,000% since 1999. And in 2002, Pakistan was the top-performing stock market in the world.

Riaz Haq said...

Along with healthy economic gowth, the Musharaf era also saw significant reduction in hunger and poverty in Pakistan, according to recent IFPRI and World Bank data.

This reminds us of the whole reason why Dr. Mabhub ul-Haq argued for using social indicators, not just the GDP, as a measure of a nation's well-being.

There is a description of Mahbub ul-Haq's thinking on page 12 of the Human Development Report 2010. It is titled "From Karachi to Sorbonne--Mahbub ul-Haq and the idea of human development".

Dr. Haq was Pakistan's planning commission's chief in 1960s which was seen as a time of great progress because of rapid GDP growth in Pakistan, and every one expected Dr. Mahbub ul-Haq to crow about it and pat himself on the back.

But, as the report puts it, "The young economist shocked his audience by delivering a stinging indictment of Pakistan's development strategy" for favoring the elite at the expense of the poor. A few years later, Mahbub ul-Haq persuaded UNDP to push for research reports and social indicators as an alternative to single-minded focus on GDP.

Riaz Haq said...

What a difference 3 years under PPP-led feudal democracy have made.

The failure of the recent bond offering is a serious setback that proves yet again the utter incompetence of the economic team and lack of international investor confidence in the current PPP govt.

It stands in sharp contrast to Pakistan's multiple successful bond offerings from February 2004 to May 2007. Each time the Pakistani paper was oversubscribed substantially. Pakistan emerged as one of the few countries which successfully floated a 30-year bond. This simply reflected the confidence of global investors in Pakistan’s leadership under President Musharraf.

Riaz Haq said...

Here's a report on Fortune magazine's interview with Pakistan's former leader Shaukat Aziz:

Despite the regular eruptions of bad news from Pakistan, Shaukat Aziz, a former finance and prime minister there, remains cautiously bullish about his country's prospects, including the peace dividend that could come with the orderly exit of U.S. troops from Afghanistan. But that depends, he says, on a Marshall Plan-like reconstruction of Afghanistan -- and the U.S. delivering on tribal economic development plans.

That might seem overly ambitious for distracted Western capitals with tapped out coffers. But the 'mostly-sunny' technocratic vision is not unusual for Aziz, a former Citibank (C) executive who presided over strong growth as finance minister after General Pervez Musharraf staged a coup in 1999. (Musharraf just announced he would shortly be returning to Pakistan -- and risking arrest -- from Dubai where he has been since leaving office.)

Aziz, 64, was elected prime minister in 2004 (surviving an assassination attempt while campaigning) and was the first of 23 predecessors to serve out a full term, until 2007. He took up residence in London soon after and now serves on the board of the British hotel chain Millennium and Copthorne Hotels, and as an advisor to the Blackstone Group (BX).

Aziz recently spoke with Fortune about the state of Pakistan's economy, how to rebuild Afghanistan, and why Pakistan deserves a free trade agreement with the U.S. Below is an edited transcript of that discussion.

It's been more than six years since Goldman Sachs (GS) recognized Pakistan among the Next Eleven newly industrialized countries -- inflation is up, investment is at a 40-year low, and infrastructure is deteriorating, particularly in the power sector. By just about any measure things are not particularly good, so what is the source of your optimism about the Pakistani economy?

The problems of the world economy have obviously leaked to Pakistan. Yes, investment is down, trade also, but in Pakistan's case a lot of this is due to the security situation, the war on terror. We have to pay a huge price in terms of damaging our investor confidence -- both domestic and foreign.

On the other hand, we should bear in mind that more than two-thirds of the population lives in rural areas and agriculture has done well, especially in cotton -- prices and exports are up and the farmer is relatively more comfortable.

The country's human capital is a strong suit, the Pakistani people are very talented, their skills levels are impressive and they are hard-working. There's a huge number of Pakistanis working overseas and we can export a few more million and there won't be an iota of difference because there is a whole pipeline of trained – and untrained - people coming.
-------------


http://finance.fortune.cnn.com/2012/01/09/pakistan-shaukat-aziz/?section=magazines_fortune

Riaz Haq said...

Here's a report on Fortune magazine's interview with Pakistan's former leader Shaukat Aziz Part II:

You mentioned the need for good management. How would you assess the current management of the economy? I ask that in light of the lapsing of the stabilization plan with the IMF.

Being out of the IMF -- obviously this reflects the desire of the government to have more flexibility to pursue its reforms. The IMF program does bring with it certain macroeconomic discipline and that's beneficial, but I also believe in economic sovereignty. You need good governance and good management, but abdicating the economy to the IMF is not the way to succeed. What we need is growth and job creation, like every other country in the world.

The disagreement with the IMF is at least in part related to tax collection, which has been notoriously weak in Pakistan. There is a lot of concern whether Pakistan can muster the political will to make tough reforms, partly because of self-serving elites among the political class that have brought the country to the point of being nearly a failed state.

No, I think that's not true. The country is large -- roughly 180 million people -- and it's functioning. It has many challenges -- governance issues, transparency and management issues -- on top of the security issues that have cost us dearly. But the country is functioning. Obviously it could function better, but it's not come to a grinding halt. Life is going on.

Don't expect an Iranian oil crisis

Clearly, the country is facing a challenging situation financially, and tax reform has been an issue. It's true there is low tax compliance, but you have to look at the political impact -- not just the economic impact -- of taxes. The tax system has been around for a long time. Trade-offs have to be made; indirect taxes -- sales tax and customs duties -- have grown because of that, quite handsomely. Income tax is also up, but that is mostly out of big corporations' profits.

The key question is: How do we get growth? The pie has to get bigger for you to collect more taxes. You can't squeeze the lemon if there's no juice in it.

Moving on to Afghanistan, the U.S. is being more realistic about its transformative agenda and the Obama administration seems to be determined to wind things down. How do you see this playing out?

I think this is the right way to go. The presence of foreign troops generates ill effects and the sooner they are gone, the better. But the exit strategy has to be very carefully choreographed.

We need a Marshall Plan-like approach, a massive program for reconstruction. The World Bank, the Asian Development Bank, the sovereign banks, and many individual countries, have to be involved. There was a very successful meeting recently of Turkey, Pakistan, Afghanistan and others in Istanbul. People need to see a future, that tomorrow will be better than yesterday. The people of Afghanistan will have to work hard themselves to leverage this opportunity. It's a good thing that the U.S. and the Taliban are talking -- all stakeholders have to be included. I'm cautiously optimistic that adversity can be changed into an opportunity if it is funded well.

U.S.-Pakistan relations are generally refracted through the prism of Afghanistan but also through the fact that Pakistan is a nuclear power.

I think certainly the relationship is opportunistic on both sides. But I think the U.S. is pursuing a policy of both engagement and containment of Pakistan at the same time. We are both a friend and an adversary. Therein lies the conflict in the relationship. There is a trust deficit and when it comes to the nuclear issue there is a fundamental problem.....


http://finance.fortune.cnn.com/2012/01/09/pakistan-shaukat-aziz/?section=magazines_fortune

Riaz Haq said...

Here's a report on Fortune magazine's interview with Pakistan's former leader Shaukat Aziz Part III:

Investing after the Arab Spring: Unfinished business

When India was drawn into the Nuclear Suppliers Group (a multilateral anti-proliferation organization) Pakistan should have been included too. The United States has to decide: are we in the tent or outside? That was a major missed opportunity. Inclusion in the NSG comes with a lot of responsibility and obligations. Engagement becomes more formalized, providing a forum for all key players to be around the table to discuss and solve issues. We are a nuclear power – there is no such thing as a halfway house here - and to deny it doesn't help anybody. It's not too late to rectify this. It would help the whole atmosphere in South Asia. If you keep people out of the tent, things can suddenly move the other way.

You've said that Pakistan would be better off with a free trade agreement with the U.S., instead of aid, but given the state of US-Pakistan relations that seems very unlikely.

I'm not optimistic about a free trade agreement because even when Congress was very friendly, they couldn't get things through, even things which were promised like the Reconstruction Opportunity Zones in the border area of Afghanistan and Pakistan, which was important for all three countries. The idea was to give duty-free access to the U.S. market for any goods produced in the tribal areas. Obviously when you put up a factory there the cost of production will be high, initially at least, because there is no infrastructure. This was a well-conceived and well-designed way of creating jobs. Otherwise they will have no incentive to put down their guns. Congress has approved other special market access programs like this for Haiti and Jordan, and maybe others. It was promised by the U.S. five or six years ago but nothing happened.

We really need to re-focus on these things so that when peace returns in the area, especially in the border areas, people will have alternatives for making a living. Security is not a big issue. It can be done by local people. You don't need expatriates; there are already plenty of entrepreneurs in that area. You're talking about very small numbers for the textile market, but symbolically it's very important because it will give people hope. This would be a good way for the U.S. government and Congress to send a message to people in the border areas: we want you to have a better, peaceful future.....


http://finance.fortune.cnn.com/2012/01/09/pakistan-shaukat-aziz/?section=magazines_fortune

Riaz Haq said...

Here's a News report of losses at sta6e-owned Pakistan Steel Mills:

The Federal Cabinet that met here on Wednesday with Prime Minister Yousaf Raza Gilani in the chair turned down the loss making Pakistan Steel Mills’ (PSM) request for Rs9 billion to bail it out of financial crisis.



PSM, a few days ago, had moved a summary to the federal cabinet through the Ministry of Production to seek a Rs9 billion bailout package from the government as it was in severe financial crisis; and the Mills was running below 20 percent of its capacity. The cabinet deferred the Mills request until the next meeting of the cabinet.



It is worth mentioning that PSM remained a profit-making entity for seven years, from 2000 to 2007, but as the PPP-led coalition government came into office, the entity started accumulating billions of rupees losses and continues to nosedive. The Mills is spending about Rs1.2 billion a month under different heads, whether it is making profit or raking up losses. The giant holds a constant burden of 21,000 employees despite suffering from low productivity.



The Ministry of Production is also now distancing itself from this politically sensitive entity and believes that the Mills is more in control of the Cabinet Committee on Restructuring of State-Owned Enterprises, headed by the Finance Minister Dr Hafeez Sheikh, well-placed sources told The News.



Interestingly, last year in November, the federal minister for production Chaudhry Anwar Ali Cheema also gave a blatant statement by calling the Mills “nothing but a burden on the economy of the country” and had advised the government that it is better to get rid of it rather than feeding it with billions of rupees every year.



Official sources, while giving a blue print of the Mills performance, said that during 2007-08, PSM production attainment stood at 82 percent of its capacity utilisation and after that, it took a declining course to 64 percent in 2008-09, 40 percent in 2009-10 and 35 percent in 2010-11.



This year too, due to shortage of raw material including iron ore and coal, the Mills is running on less than 20 percent of its capacity.



As far as the sale of PSM products is concerned, it was recorded at Rs42.938 billion in 2007-08 and has been on the decline since then, with Rs34.340 billion in 2008-09, Rs23.832 billion in 2009-10 and Rs27.379 billion in 2010-11.



The last time PSM had fetched Rs2.38 billion in profit was in 2007-08, while after that it continuously racked up losses. In 2008-09, its losses were 26.53 billion in 2009-10 it was Rs11.52 billion and in 2010-11 it was Rs11.49 billion.



According to PSM data, during the first quarter (July-September 2011-12) it accumulated losses of about Rs4.3 billion.


http://www.thenews.com.pk/Todays-News-3-102456-Pakistan-Steel-Mills-denied-Rs9bn-bailout-package

Riaz Haq said...

Here's a Daily Times story on higher education growth in Pakistan:

Shaikh also highlighted the performance and achievements of government during last 10 years. He said that there are 71 universities in Pakistan in 2002, but in last 10 years, 66 new universities have been added in Pakistan. Previously, female enrolment was 37 percent, now it is 45 percent. Previously, numbers of PhDs were 1,500, now 10,000 new students have been enrolled in PhD, added the minister. He also mentioned that federal government has spent Rs 160 billion on promotion of higher education in the country. The federal minister said that federal government has transferred additional Rs 800 billion to provinces during the last four years to enable the provinces to provide their population best social services like health education. He also advised students to be proud and loyal Pakistanis. Shaikh said that it is a great day for the degree holding students, so they must thank their parents and teachers. He also assured that the government is doing every effort for the promotion of education sector in Pakistan.

http://www.dailytimes.com.pk/default.asp?page=2012\05\20\story_20-5-2012_pg5_1

Riaz Haq said...

Here's a Bloomberg story titled "Pakistan, Land of Entrepreneurs":

On a warm Sunday morning in November, Arif Habib leaves his posh home near the seafront in southern Karachi and drives across town in a silver Toyota Prado SUV. About half an hour later, he arrives to check up on his latest project: a 2,100-acre residential development at the northern tip of this city of 20 million. He hops out, shakes hands with young company call-center workers who are dressed for a cricket match, and joins them at the edge of the playing field for a traditional Pakistani breakfast of curried chickpeas and semolina pudding. After a quick tour of the construction site, he straps on his leg pads, grabs his bat, and heads onto the field. “The principles of cricket are very effective in business,” says Habib, 59. “The goal is to stay at the wicket, hit the right balls, leave the balls that don’t quite work, and keep an eye on the scoreboard. I feel that my childhood association with cricket has contributed to my success.”

Habib, who started as a stockbroker more than four decades ago, has expanded his Arif Habib Group into a 13-company business that has invested $2 billion in financial services, cement, fertilizer, and steel factories since 2004. His group and a clutch of others have become conglomerates of a kind that went out of fashion in the West but seem suited to the often chaotic conditions in Pakistan. Engro (ENGRO), a maker of fertilizer, has moved into packaged foods and coal mining. Billionaire Mian Muhammad Mansha, one of Pakistan’s richest men, is importing 2,500 milk cows from Australia to start a dairy business after running MCB Bank, Nishat Mills, and D.G. Khan Cement.

These companies have prospered in a country that, since joining the U.S. in the war on terror after Sept. 11, has lost more than 40,000 people to retaliatory bombings by the Taliban. Political violence in Karachi has killed 2,000 Pakistanis this year, and an energy crisis—power outages last as long as 18 hours a day—has led to social unrest. Foreign direct investment declined 24 percent to $244 million in the four months ended Oct. 31, according to the central bank.

At the same time, some 70 million Pakistanis—40 percent of the population—have become middle-class, says Sakib Sherani, chief executive of Macro Economic Insights, a research firm in Islamabad. A boom in agriculture and residential property, as well as jobs in hot sectors such as telecom and media, have helped Pakistanis prosper. “Just go to the malls and see the number of customers who are actually buying in upscale stores and that shows you how robust the demand is,” says Azfer Naseem, head of research for Elixir Securities in Karachi. “Despite the energy crisis, we have growth of 3 percent.”

Sherani of Macro Economic Insights estimates the middle class doubled in size between 2002 and 2012. “Those who understand the difference between the perception of Pakistan and the reality have made a killing,” Habib says. “Foreigners don’t come here, so the field is wide open.” The KSE100, the benchmark index of the Karachi Exchange, has risen elevenfold since mid-2001. Shares in the index are up 43 percent this year alone. Over the past decade, stocks have been buoyed by corporate earnings, which were bolstered in turn by rising consumer spending.
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Today, Habib has 11,000 employees and annual revenue of 100 billion rupees. He plans to expand into commodities trading and warehousing. “I’ve created all my wealth in Pakistan and reinvested all of it here,” says Habib, who drives himself to his cricket matches and is never accompanied by security guards. In 1998, when Pakistan’s share index fell to a record low after the government tested nuclear weapons, Habib bought shares even though “people thought I was mad.”...


http://www.businessweek.com/articles/2012-11-29/pakistan-land-of-entrepreneurs

Riaz Haq said...

Here's an ET report on social sector development during Musharraf years:

According to the report’s HDI list, between 2000 and 2007, which roughly corresponds with General Pervez Musharraf’s regime, the Human Development Index rose 18.9 per cent — an annual average of 2.7 per cent.

From 2007 to 2012 it only went up by 3.4 per cent, just under 0.7 per cent per annum. Somehow, things got even worse in the last three years of that time frame, with HDI increases crashing down as low as 0.59% — a negligible average annual increase of under 0.20 per cent.

The 2013 Human Development Report “The Rise of the South: Human Progress in a Diverse World” is instrumental in the context of Pakistan, especially given the challenges faced today due to poor policy choices that have been confronted in the report.

Meeting a small group of journalists here, Marc André Franche, UNDP Pakistan’s Country Director launched the report and said it is important for what it says and there are lessons to be learnt from countries with preconditions similar to Pakistan.


http://tribune.com.pk/story/527474/human-development-report-2013-the-rise-of-the-south-as-others-rise-pakistan-parks-the-bus/

Riaz Haq said...

Here's Daily Times review of "Pakistan: Moving Economy Forward":


Ultimately the economic or material base of a society determines its politics and other societal forms and manifestations. Most certainly this adage is as true today as it was in the past, and nobody put it better than Bulleh Shah:

Panj rukan Islam de te cheyaan tukk/Cheyaan jai na hovey te panje jaande mukk.

(Islam comprises five pillars of faith, but the sixth is food/If the sixth is not available the five pillars crumble.)

Two of Pakistan’s senior most economists, Rashid Amjad and Shahid Javed Burki, have in cooperation with a galaxy of respected experts — Parvez Hasan, Afia Malik, Hamna Ahmed, Naved Hamid, Mahreen Mahmud, Hafiz A Pasha, Aisha Ghaus-Pasha, Ehtisham Ahmad, Shahid Amjad Chaudhry, Ishrat Husain, Khalil Hamdani, M Irfan, G M Arif, Muhammad Imran, Sara Hayat, Eric Manes, Azam Chaudhry, Theresa Chaudhry, Muhammad Haseeb, Uzma Afzal, Akmal Hussain and Khalid Ikram — taken up cudgels on behalf of the citizens of Pakistan for a programme of change and transformation. This if pursued with sincerity and discipline can help Pakistan achieve the necessary break with the sordid past of missed opportunities and spoilt chances of the last 66 years. No doubt Pakistan is in dire straits at present.

The book under review is a comprehensive, all-round evaluation of the Pakistani economy. It identifies its weaknesses and bottlenecks as well as proposes practical solutions imperative for sustainable recovery. The clarion call is for fundamental structural change. I have yet to see something comparable in terms of quality scholarship assembled in a brief that favours the primacy of economics over vain ideological state building.

I was pleasantly surprised to learn that even in the worst of circumstances the Pakistani economy had been growing at 5.2 percent annually during 1960-2010. The situation is bad since then but there are some impressive developments. Pakistan is performing better than even Bangladesh when it comes to microfinance while private initiative is helping education go forward significantly.

However, investment has fallen dismally. Therefore, the investment climate and the constraints imposed by a woefully bad energy crisis have to be tackled with determination in order to attract foreign and domestic investment. The article on energy is rigorous and informative, but the need to tap alternative renewable energy sources is not sufficiently emphasised. Pakistan should be ideally suitable for solar energy technology. Needless to say, proverbial corruption and mismanagement of our meagre resources are a great shame. Defence expenditure has to be reduced. It is a huge drain on national resources. A very strong emphasis is laid by the experts on the rule of law, transparency and institution building. Equally, a very powerful argument is developed in favour of inclusive growth by Akmal Hussain.

Attention is also given to the menace of unbridled population growth. Strong emphasis on an effective taxation policy is also made. Regional disparities need to be addressed in the light of the 18th Constitutional Amendment, which presupposes a greater role of provincial economic managers, argues Khalid Ikram. Shahid Amjad Chaudhry highlights the urgent need to tackle the issue of water scarcity and replenish the Indus Water Irrigation System, the “heartthrob of the Pakistan economy”. This is a most timely intervention indeed....


http://www.dailytimes.com.pk/default.asp?page=2013%5C08%5C18%5Cstory_18-8-2013_pg3_4