Wednesday, July 20, 2011

Political Patronage Trumps Public Policy in Pakistan

Pakistan's economy is suffering from stagflation, a very unhealthy combination of very slow growth and high inflation, since 2008. These three years have also seen significant turnover in the nation's top economic management team.

Pakistan is now on its third finance minister, Dr. Hafeez Shaikh, in three years. Mr. Shahid Kardar, the third central bank governor since 2008, has just quit amid serious policy differences with the PPP-led government. Kardar is the second central bank governor to leave in just over a year and the third senior policymaker to quit in less than 18 months. During this period, the IMF has also suspended its loans to Pakistan on concerns about lack of progress on budget deficit reductions through revenue enhancements committed by the government in 2008.

"Differences of opinion on policy actions and on the implementation of certain directions that I, in my best judgment, did not consider to be judicious have compelled me to resign from office," Kardar told Reuters in response to questions about the reason for his resignation less than a year after he was appointed.

"Such differences are impeding the State Bank from discharging its mandate to safeguard its own integrity and autonomy, to ensure prudent conduct of monetary policy and to maintain the safety and stability of the banking system."

In simple terms, the biggest problem Mr. Kardar had with the government was sustained and excessive borrowing from the central bank to fill the large gap between revenue and spending. This has fueled inflation, and made a mockery of the central bankers' tight monetary policy. Rather than accept the advice of his own team of experts, it seems that President Zardari has essentially been following his own economic policy of "print the notes", a quote attributed to Mr. Zardari by the New York Times in a 2008 story.

In February 2010, there were rumors that the ruling PPP politicians, particularly President Zardari and his inner circle, ignored former Finance Minister Shaukat Tarin's key recommendations to address the acute power shortages in the country. Zardari's insistence on pushing rental power projects, rather than fix the huge circular debt problem in the energy sector first, specially frustrated the outgoing finance chief, when he first reportedly threatened to quit 2009.

To put it all in perspective, let's recall how late Dr. Mahbub ul-Haq, the renowned Pakistani economist who is credited with the idea of UNDP's human development index (HDI), explained the corrosive impact of political patronage on economic policy in Pakistan.

In a 10/12/1988 interview with Professor Anatol Lieven of King's College and quoted in a recent book "Pakistan-A Hard Country", here is what Dr. Haq said:

"Growth in Pakistan has never translated into budgetary security because of the way our political system works. We could be collecting twice as much in revenue - even India collects 50% more than we do - and spending the money on infrastructure and education. But agriculture in Pakistan pays no tax because the landed gentry controls politics and therefore has a grip on every government. Businessman are given state loans and then allowed to default on them in return for favors to politicians and parties. Politicians protect corrupt officials so they can both share the proceeds.

And every time a new political government comes in they have to distribute huge amounts of state money and jobs as rewards to politicians who have supported them, and short term populist measures to try to convince the people that their election promises meant something, which leaves nothing for long-term development. As far as development is concerned, our system has all the worst features of oligarchy and democracy put together.

That is why only technocratic, non-political governments in Pakistan have ever been able to increase revenues. But they can not stay in power for long because they have no political support...For the same reason we have not been able to deregulate the economy as much as I wanted, despite seven years of trying, because the politicians and officials both like the system Bhutto (Late Prime Minister Zulfikar Ali Bhutto) put in place. It suits them both very well, because it gave them lots of lucrative state-sponsored jobs in industry and banking to take for themselves or distribute to their relatives and supporters."

To summarize, there is insufficient revenue collected by the state of Pakistan, and the diversion of this very limited revenue to political patronage fosters dependence on foreign aid and impinges on the nation's sovereignty. It also seriously harms Pakistan's ability to invest in education, health care and infrastructure development in terms of school and hospital buildings, roads, rails, and water and energy projects for Pakistan's future.

Discussing the politics of patronage in Pakistan, Professor Lieven, the author of "Pakistan-A Hard Country", sees a silver lining to it by describing the difference between Nigeria and Pakistan in the following words:

"Rather than being eaten by a pride of lions, or even torn apart by a flock of vultures, the fate of Pakistan's national resources more closely resembles being nibbled away by a horde of mice (and the occasional large rat). The effect on the resources, and on the state's ability to do things, are just the same, but more of the results are plowed back into the society, rather than making their way straight to bank accounts in the West. This is an important difference between Pakistan and Nigeria, for example."

I personally see no better explanation for the boom under President Musharraf in 2000-2007, followed by current economic crisis since 2008, than the prevailing system of political patronage continuing to trump good public policy almost 23 years after late Dr. Mehboob ul Haq described it so well.

Related Links:

Haq's Musings

Pakistan's Tax Evasion Fosters Aid Dependence

Finance Minister Shaukat Tarin Resigns

Musharraf's Legacy

US Fears Aid Will Feed Graft in Pakistan

Pakistan Swallows IMF's Bitter Medicine

Shaukat Aziz's Economic Legacy

Power and Patronage in Pakistan

Pakistan's Energy Crisis

Karachi Tops Mumbai in Stock Performance


Mohammad said...

Riaz: Good blog. Is there anything good left in Pakistan except food -:)

Mayraj said...

I knew this would happen. It is only matter of time.
Maybe Commissionerate system was also imposed to hide this issue?

Shams said...

"Print the Notes" --- How is it f--- different in the United States?

Barrack Obama bin Laden has printed TWO TRILLION DOLLARS over the last two and a half years in bailout money, and he is now fighting to increase the debt ceiling.

Poor Zardari has no place on this "print the money" totem pole.

Riaz Haq said...

Mohammad: "Is there anything good left in Pakistan except food -:)"

Professor Anatol Lieven, the author of "Pakistan-A Hard Country", sees a silver lining to it by describing the difference between Nigeria and Pakistan in the following words:

"Rather than being eaten by a pride of lions, or even torn apart by a flock of vultures, the fate of Pakistan's national resources more closely resembles being nibbled away by a horde of mice (and the occasional large rat). The effect on the resources, and on the state's ability to do things, are just the same, but more of the results are plowed back into the society, rather than making their way straight to bank accounts in the West. This is an important difference between Pakistan and Nigeria, for example."

Mayraj said...

He misses out on fact that this is why Pakistan ends up in IMF lap. In the end when you cannot pay your bills, it doesn't matter whether money gets plowed into society or not. Society also begins to starve when there is no money.
This is why military intervenes and is welcomed time after time.
The difference between Pakistan and say Turkey or Brazil is that they are capable of having politial parties that manage the economy properly. Heck even an Islamist party in Turkey is capable of that.
This is missing in Pakistan.
As Karachi is the main earner return of Commionerate system is the way to deprive Karachi while pockets of PPP cronies are filled. It isn't as if the money gets spent in Sindh either. From my trips in interior Karachi looks like paradise compared to the poverty stricken hell of Sindh! Only the landlords do well. Remember parts of Sindh have the poorest of Pakistanis! There is also a reason why some of them used the floods to escape the cruelty of these landlords.

muse said...

Mr. Haq

Given Mr. Maqbool ul Haq's comment on the issue of patronage, which I agree are accurate - how do we correct this? Is it even possible? For instance, if patronage and the electoral process are intertwined, then we have a fundamental, structural problem or is that the making of laws has to be separated from control over the purse string and will that not bring about greater lack of accountability??

Riaz Haq said...


Political patronage is not unique to Pakistan. It exists in almost every society in various forms to varying degrees. So I think ending political patronage is not going to be possible.

However, it should be possible to strike a better balance by growing the economy and the public revenue to leave sufficient money for education, health, defense and infrastructure.

To begin with, it is necessary to privatize some of the state-owned enterprises that are a huge drain on public treasury.

For example, the govt subsidy to PIA alone exceeded the entire federal education budget last year, according to the findings of a govt commission on education.

The commission on education found that public funding for education has been cut from 2.5% of GDP in 2005 to just 1.5% - less than the annual subsidy given to the PIA, the national airline that continues to sustain huge losses.

Haq's Musings: Brits Offer $1 Billion to Aid Schools in Pakistan

Pakistan Railway is another badly run inst that sucks up lots of public funds and provides horrible service.

Taking some basic steps to cut unnecessary expenses, plus levying a modest income tax on farm income exceeding Rs 1 million, and a few paisas of fees on service sector transactions, can make a significant difference.

Mohammad said...

"but more of the results are plowed back into the society, rather than making their way straight to bank accounts in the West."

I know of even mid-level business people hoarding their money in Dubai, let alone upper echelons. So the theory does not ring true.

Riaz Haq said...

Mohammad: "I know of even mid-level business people hoarding their money in Dubai, let alone upper echelons. So the theory does not ring true."

Although long-term FDI in Pakistan is down significantly, but it seems that FII portfolio investments in Karachi stocks are up as foreigners see more opportunity to make money in Pakistan than locals.

Pakistan's main shares index KSE-100 rose 28% (26% in US dollar terms) in year 2010, as profits registered 14% growth and dividend yields of 5.2% in the companies making up the index.

The market gains were driven by significant foreign buying, particularly by insitutional investors after the massive summer floods in KP, Punjab and Sindh provinces. Foreign institutional investors bought $1.2 billion worth of shares, and sold about $687 million, with the net FII capital inflow of $522 million during the year. One example of renewed foreign institutional buying after the post-floods market is Mark Mobius of the Templeton Asset Management Ltd, as reported by Businessweek. “There will be an impact on growth but company valuations are very, very attractive now and therefore we continue to invest in Pakistan despite all the negatives,” Mobius said in an interview in Singapore. “The bottom line is that Pakistan is not going to go away. We want to buy stocks that look cheap as prices come down as a result of the flood.”

The highest performing sectors were food and beverage (65%), oil and gas (40%), chemicals (30%) and personal goods(20%). These were followed by smaller gains in electricity, fixed-line telecom, automobiles, and construction materials, according to JS Global research. Oil and gas shares now make up 36% of KSE's total marke cap, a major shift from 2007 when financial services made up 31% of the Karachi Stock Exchange market cap of about $40 billion.

Even with lower than historic average gains in a challenging year, KSE-100 easily beat the performance of Mumbai(+17%) and Shanghai(-14.3%) key indexes. Among other BRICs, Brazil is up just 1% for the year, and the dollar-traded Russian RTS index rose 22% in the year, reaching a 16-month closing high of 1,769.57 on Tuesday, while the rouble-based MICEX is also up 22%.

After the 26% gain in 2010, the KSE-100 shares still trade at PE ratio of just 8, significantly discounted relative to KSE's historic price-earnings multiple of 10, and other regional markets of Shanghai and Manila at 15, and Mumbai at about 20.

And after all is said and done, KSE has been a far better investment for investors than BRICS over the last ten years, and it continues to be very attractive this year.

Hence bigger FII inflows in Karachi and than Mumbai, as reported by India's Financial Express recently.

Mumbai: Whether Dalal Street likes it or not, India is now the worst-performing market in the world as dark clouds have started cluttering the economic, investment and political horizons. Worried foreign institutional investors (FIIs), who came to India in droves last year, have been pulling out funds with such alacrity this year that even a much smaller — and significantly more volatile and unstable — market like Pakistan has got more foreign inflows in the last six months.

Riaz Haq said...

Here's an interesting review of Anatol Lieven's book "Pakistan-A Hard Country" by Ahmad Ali Khalid published in Dawn newspaper:

Pakistan is hence not a “failed state’’, but it’s not democratic either. In many ways, it is not a modern nation-state at all, but a social conglomeration defined by the ideals of patronage and kinship. It is this durable socio-economic glue that has kept Pakistan going over the last 63 years. It is not a state in the modern sense at all but awkwardly combines the deep rooted customs of patronage politics with the outer trappings of a democracy. Democracy isn’t a philosophy of life in the country because that space for social deliberation and political negotiation is taken up by pre-modern paradigms of negotiation and conflict resolution. There is no space for democracy in the Pakistani public sphere, not because of radicalism but because of traditionalism.

Pakistani policy makers are in a fix. Advocating reforms of traditionalist feudal structures may pave the way for liberalisation, but as Lieven warns, it may opena Pandora’s box where provincial nationalism ultimately fragments and breaks up any hope of a universal Pakistani narrative. The clientele of the feudal lords to the authority of the Pakistani state is paramount to its continued existence.

Furthermore, the appeal of the Islamist parties does not stem from deep theological commitment to the political project of the “Islamic state’’. On the contrary, it is actually the deep seated aggravations and frustrations with the fragile and anaemic civic, juridical and political organs of the nation’s nascent democracy. It is the failure of the westernised “liberals’’ of Pakistan through their acquiescing to the feudal leadership that has created a space for Islamist protest.

The theocratic Islamist project is one born out of protest, frustration, alienation and anxiety — it is an ideology of “resistance’’. In the words of Khaled Abou El Fadl it is “an orphan of modernity’’ that struggles to find certainty and justice in the messy aftermath of colonialism. In this respect Alaistair Cooke’s study, Resistance — The Essence of Islamist Revolution complements Lieven’s work on this topic.

In many ways Lieven argues that Pakistan is closer to 18th century Europe in terms of its political culture rather than Somalia. Pakistan’s socio-political conservativism also provides the foundations of economic transactions. The resources of the state are not redistributed through modern means, such as welfare politics, as in Europe for instance, but through the same traditional institutions that have loomed large over sub-continental life over the last few hundred years. But stagnation has set in — the landowners of Sindh have kept such monopolistic control over politics that any hope for the emergence of creative enterprise or economic liberalisation is squashed in the rural hinterland. The big landowners are perhaps the most serious obstacle to democratisation, universal education and other cherished virtues of meaningful politics.

The challenge for Pakistan is to develop a distinctly indigenous and organic discourse of democracy that reconciles the conflicting political psychologies at play when operating in a democratic framework and in a feudal framework. But such suggestions in the past have come only from dictators and never from elected representatives.

The challenges, Lieven mentions, are not unique to Pakistan but are rather symptomatic of the post-colonial experience. In fact, the most grievous challenges to Pakistan’s social organisation do not emanate from Islamists but from the brutish forces of mother nature itself. Lieven writes that, “Over the next century, the possible long-term combination of climate change, acute water shortages, poor water infrastructure and steep population growth has the potential to wreck Pakistan as an organised state and society’’.

Anonymous said...

Actually riaz political patronage trumps public policy is ALL maor countries.

Its the people who finance politicians in different countries that matter.

In India for instance politicians are financed by industrialists which is why India takes its industrial policy very seriously.

A by product is rapid industrialization and a financially solvent state.

In Pakistan the problem is political power is with the feudals which is a recepie for ruining a country which is what is happening.
The deathblow was dealt with son of a prostitute(this is a fact) Bhutto culling the power of a nascent industrialist class in the 70s...

The laws of political expedience did the rest.

Anonymous said...

The increasing demand of the government to fund its deficits have resulted in a total debt of Rs10 trillion (up from Rs5 trillion in 2007). Mr. Haq whats wrong with our country. At this rate will be survive another 10 yrs. Political patronage seem to be taking a big toll on our economy and our country.

Dr. Amjad Khan

Riaz Haq said...

It seems that the latest 2011-12 budget passed by the PPP-led coalition pleases neither the right nor the left. Here's a view from the World Socialist Forum:

The $31 billion budget was passed, without amendment, by the National Assembly in June after months of maneuvering by the PPP. Attempts by rival parties to posture as opponents of IMF austerity, especially on the part of Nawaz Sharif’s Pakistan Muslim League (N), produced a months-long political crisis for the PPP. Although the entire political establishment supports austerity, privatization and other pro-business reforms, the PPP’s rivals have sought to distance themselves from the implementation of policies that they know will incite opposition from the working class and rural poor.

Had the National Assembly rejected the budget, the coalition government would have been forced to resign. Ultimately, the PPP was able to get the budget passed with the support of the Pakistan Muslim League (Q) and the Karachi-based Muttahida Quami Movement (MQM).

The MQM had previously left the coalition in May forcing the PPP to invite the PML (Q)—which served as a civilian veneer for the Musharraf dictatorship— to join the government so as to provide it with the parliamentary votes needed to adopt the budget and share the burden of imposing unpopular measures. The MQM subsequently rejoined the government and helped pass the budget.

The PPP-led government is determined to narrow the budget deficit in order to bring an end to a freeze on IMF credit. The IMF has refused to disburse any money to Pakistan since May 2010, citing the government’s failure to implement draconian pro-market reforms, including a Goods and Services or VAT-type tax. The government is desperate to secure the remaining two tranches of an $11.3 billion loan originally issued in 2008, about $3.2 billion. It has also indicated it will soon be seeking additional IMF funding, at least in part so it can begin paying back the 2008 loan.

During the past year, the state has increasingly relied on borrowing from the central bank to fund its budget deficit, stoking inflation to 13 percent. According to Finance Minister Abdul Hafeez Shaikh, the government hopes to reduce the deficit to 4 percent of gross domestic product during the 2011-2012 fiscal year, down from 5.7 percent of GDP for the financial year that ended June 30. It plans to achieve this by decreasing its expenditure and broadening the country’s tax-to-GDP ratio, which, at around 9 percent, is one of the lowest in the world.

After failing to secure the requisite political support to impose a new goods and services tax, the government created a Reformed General Sales Tax (RGST), ending sales-tax exemptions on about 500 items. This is expected to bring in additional revenues of about 200 million Pakistani rupees, even while the government lowers the sales tax rate by one percentage point from 17 to 16 percent.

The RGST and other indirect taxes whose burden fall most heavily on the working class and toilers are supposed to raise 64 percent or close to two-thirds of the government’s 2 trillion rupees ($23.2 billion) in tax revenues

Riaz Haq said...

Here's a Washington Post story titled "Pakistan's Only True Living Hero" about Abdus Sattar Edhi:

His name is Abdul Sattar Edhi. He is a legend in Pakistan, where he has been hailed as a Mahatma Gandhi and Father Teresa — and denounced as an infidel, communist and madman. In a patronage-based nation where wealth and bluster often pass for leadership and cruelty is more common than mercy, he may be Pakistan’s only true living hero.

I first found my way to Edhi’s office in the summer of 2010. I knew little of him then, except that he had founded a free ambulance service for the public. At the scene of every train crash or terrorist bombing, Edhi Foundation ambulances always rushed about. I knew many Pakistanis admired him, and I had seen photos of an old man with the flowing white beard of a wise elder or a Muslim cleric.

I was not expecting the slyly subversive and cranky octogenarian who sat at his desk under a portrait of Pakistan’s founder, Muhammad Ali Jinnah. He didn’t say much at first, but he handed me some photographs of a tiny girl with gashes in her face. She had been found in a garbage pit, partly eaten by dogs, and was rescued by his volunteers. Later she was sent abroad for surgery and adopted by a family in Canada.

“Some people strangle illegitimate children. Others just dump them to die. We believe there is no such thing as an illegitimate person,” Edhi said. Indeed, he had spent 40 years helping social outcasts, from unwanted infants to the unclaimed dead. He had opened programs for abandoned girls, AIDS patients and senile shut-ins. Far more than an ambulance service, it was a philosophy.

I asked whether he was a religious man, and he shook his head. “My religion is humanity. It is the only religion that matters,” he said. This was a startling statement to hear in an Islamic republic. Later, I learned that some Muslim clerics had banned mosques from helping Edhi, but that admirers greeted him as “maulana sahib,” a term of religious respect.

There were other contradictions: Edhi was the product of a prominent business clan, but he had been drawn early to a humbler calling. After serving briefly in Parliament, he grew disillusioned with politics and rejected organized charity as placating rather than empowering the poor. In the 1960s, he turned full-time to his fledgling mission in the slums.

“I decided not to knock on the door of the industrialists and the landlords, because they are the root cause of all our social problems,” he told me. “The rich have deprived the people of their rights, and the state does not take responsibility for their welfare. It is my dream to build a welfare state in Pakistan, but I have not seen it come in my lifetime.”
He is not an easy man to be around, demanding that his acolytes give up even small luxuries. Yet his army of volunteers and ambulance drivers, some rescued from lost lives, revere him, and Bilquis, after four decades at his side, remains his tireless partner and ally.

Edhi, ever the crusader, still dreams of building a modern welfare state that will be at least another generation in the making, but his wife’s greatest joy is in saving one child at a time, and in pampering brides whom no one in Pakistan would once have thought fit to marry.

Riaz Haq said...

Here's an interesting comparison between the coffee elite of Central America and sugar elite of Pakistan by Dr. Adeel Malik in The News:

In his famous book, Coffee and Power, Jeffrey Paige provides a vivid illustration of how a single commodity, coffee, is sufficient to explain the power structure of Central America. Despite the varying political complexions of its regimes, Central America has one thing in common: they are all ruled by coffee elites. For decades, Central America's coffee elites have thrived on state patronage, rent seeking, and distortion of private markets. As Jeffrey Paige concludes, these elites have generated in this process "unprecedented wealth for the few at the expense of the general impoverishment of the many". Despite this, the coffee elites have been remarkably resilient in Central America, surviving periods of both revolutions and authoritarian rule.

In terms of its links with political power, sugar is Pakistan's parallel for coffee. Sugar industry is Pakistan's second largest agro-based industry. Its linkage with politics, patronage and protection sets it apart from other industries. Available evidence suggests that it is economically inefficient, enjoys one of the highest rates of protection, and is dominated by a small number of political influential owners, making it an excellent illustration of the interconnection between business and politics. The analysis of sugar markets in Pakistan, and their manipulation therefore opens up a fascinating window into how the economic interests of our political elites are strongly entrenched in the current power structure. The operation of sugar markets in Pakistan offers a telling story of how both markets and public policy are routinely captured by vested political interests.

Riaz Haq said...

Here are some excerpts from Forbes story on Pakistan's electricity crisis:

Analysts say Pakistan's chronic electricity shortages are largely the result of the government not charging consumers enough and of customers, including the government, not paying their bills. There are also problems with outdated transmission systems and bureaucratic infighting that has stalled power generation projects.

The U.S. is working with the Pakistani government to increase the power supply by constructing and rehabilitating six power plants, according to the U.S. Embassy. This extra energy will eradicate 20 percent of Pakistan's existing energy shortage, it said.

But many analysts say a lasting solution to the country's power crisis must involve politically painful increases in electricity prices and forcing customers to pay their bills.
The country's main opposition leader, former Prime Minister Nawaz Sharif, lashed out at the government over the electricity shortages.

"The country is facing a severe power crisis, but the government is sleeping and doing nothing for the last 15 months over this issue," Sharif told reporters in Bahawalpur, another city in Punjab.

Pakistani Prime Minister Yousuf Raza Gilani sought to deflect blame away from his government in an address to parliament on Monday, pointing his finger at the United States. He said that the U.S. should help Pakistan solve its energy crisis if it wanted better ties.

Pakistan and the U.S. are nominally close allies in the war against Islamist extremists, and Islamabad has received billions of dollars in military and civilian aid over the past decade, including money to help the country's energy sector.

But the two countries have often clashed, and Pakistani officials regularly criticize the U.S. to divert attention away from their own government's performance.

Mayraj said...

Today I had a conversation with someone who told me he was in Karachi for 6 years.
He was born and raised in Canada and went there for a job with Barclays. He does seem to have parents who were from Pakistan, however. He worked there and was involved in other banking industry orgs and also helped an NGO out.
I asked him for his impressions about the local system and the present state of the country. He has just returned home to Canada a few weeks ago.
He told me the system worked well and the mayor was a good mayor. He said he thought he did a very good job.
He also said right now country is in a deep mess. People in power seem to just want to take what money they can out of the system. he said this happening at all levels!

Mayraj said...

I would like you to be cognizant of the fact that now in Pakistan, corruption is at a scale that boggles the mind - at least it should boggle the mind. We are talking no longer millions but BILLIONS. We are talking about Pakistan's external debt shooting up by ten billion dollars in a short span of 3 years with nothing to show for it. I suspect the borrowed dollars have been purchased with corruption billions and transferred abroad. In the next 2 years huge repayments are maturing to the IMF and other lenders. The oil price may shoot up. Our exports reduce and our water supplies may stunt our agriculture. I don't see how we will be able to cope.

Billions are 'spent' by the government and as much as 40-50% if not more is diverted for pay-offs. There is hardly any development or relief going on anywhere. debt service has gone through the roof, being the biggest item in the budget. Poverty is rising, employment growth is nonexistent. Spending on social services had collapsed as there is no fiscal space.

Corruption is a HUGE component in both out fiscal and current account deficits. It has made a huge increase in both our domestic and international debt. it can corrupted the moral fiber of the country, especially the bureaucracy. Now the younger generation is actually embracing corruption as a perfectly acceptable way of life, looking at the leadership, the tycoons and the senior government officers as role models. They are actually openly defending the corruption of their families and expressing their intention to indulge in the same.

Riaz Haq said...

Here's a Daily Times report on Pakistan's Planning Commission's efforts to improve economic governance:

ISLAMABAD: Planning Commission of Pakistan with the support of Department for International Development (DFID) and assisted by Governance Institutes Network International (GINI) has initiated the process of consultative workshops in all provincial headquarters and major business hubs to involve stakeholders for economic literacy and local ownership to facilitate the implementation of framework for economic growth of Pakistan - a strategy that seeks accelerated and sustained growth and development formulated by the Planning Commission.

Planning Commission of Pakistan has developed a framework for Economic Growth of Pakistan, which has been approved by National Economic Council (NEC).

Framework for economic growth is informed by the latest in economic thinking and seeks to strengthen both government and markets. It is not a ‘government versus markets’ approach but a ‘government and markets’ approach. An efficient government underpins a vibrant market. Much of the proposed reforms are to get the role of government and market in balance to develop efficiency within and between the two. At the first stage, efforts will be undertaken to revive the economy to its short-term potential GDP growth rate of about 5-6% a year. If issues regarding energy governance are resolved and some credible macro stability is reached, this could be achieved in a short time.

The strategy also suggests deep and sustained reforms - in areas such as public sector management, developing competitive markets, urban management and connecting people and places - as a way forward for accelerating growth to above 7%. The major themes of the Framework for Economics Growth are vibrant and competitive markets, governance, urban development, youth and community and energy.

Six critical changes have been identified that need to be introduced to strengthen the linkage between the Planning Commission and government performance. These changes are: strengthen the Medium-Term Development Framework (MTDF) and the Medium-Term Expenditure Framework (MTEF) for setting medium-term priorities in line with growth strategy and reforms agenda, support a unified result-based budget preparation process, decentralise responsibility for projects to line ministries, redefine the Planning Commission’s role and processes in respect of major capital projects and establish a results-based monitoring and evaluation system.

Planning Commission should lead the reform and change process through identification and advocacy of critically required amendments in policies. The commission has urged all stakeholders to own the policy and become agent of change, as until and unless they put force behind this growth framework, it may not be implemented in its true spirit.\12\20\story_20-12-2011_pg7_15

Riaz Haq said...

Here's an Express Tribune report on TI findings in Pakistan:

The latest perception report from Transparency International Pakistan (TIP) shows a limited number of respondents see centres of corruption in Pakistan in the following descending order, of being perceived as the most corrupt to the least: 1) land administration; 2) police; 3) income tax; 4) judiciary; 5) tendering & contracting; 6) customs, plus state corporations and the last is the army. Once again TIP has expressed its shock at the mounting lack of honesty in public affairs and has listed some of the reasons why the graph of evil is creeping upwards every year.

It is not surprising that land administration is the first among the perceived culprits. It is vastly the domain of the provinces where the politician has yet to begin to take responsibility for sorting-out maintenance and collection. Land record is still in primitive shape and the low bureaucracy that handles the sector is not upgraded and made competitive. Most of the trouble takes place away from the big cities because the writ of the state languishes in smaller districts and abdicates to three power centres: the feudal landlord (often a politician), the police and the judiciary. It will take a long time to sort-out this mess and it will not happen at the same speed in all the provinces. The police has endemic ills that most states in the Third World have failed to tackle. The recruitment of policemen has been pegged to good education only recently, but the provinces — whose domain this is — have been remiss in making the kind of allocations needed to upgrade the institution’s performance. The ratio of policemen to population is abysmal, training standards — though imitative of the army — are nowhere near being practically useful and low status has kept the average policeman tied to slavish behaviour towards the seniors and a brutish one towards the common man.

But the police may not be intrinsically as bad as the circumstances of its functioning make it. State policies favouring non-state actors involved in terrorism on the side have hamstrung the police. Unwillingness to prosecute has instilled in the department a habit of not trying too hard to convict, say, terrorists from a shady jihadi organisation simply because it is being clandestinely supported by the state. Because of this ambience of state-backed criminality, many policemen themselves indulge in crime and get away with it. Many senior policemen live beyond their means and own properties they could not have bought with honest money. As for the tax administration, if one were to look at the statistics, things may be getting better — and that is why it is no longer number one in corruption. Pakistan’s revenue collection is one of the lowest in the world (with the tax-collection machinery believed to be riddled with corruption and inefficiency) and that impacts directly the capacity of the state to spend on development. The reigning theory is to erect a system in which the income tax officer comes into least contact with the taxpayer.

Riaz Haq said...

Here's an Op Ed by Prof Anatol Lieven published in the Guardian:

If Pakistan's chief justice, Iftikhar Chaudhry, manages to press his charges of corruption against the president, Asif Ali Zardari, he will bring down the existing Pakistani government. If he extends his anti-corruption campaign to the political elites as a whole, he will bring down the entire existing political system – and replace it, his critics say, with a dictatorship made up of an unelected (and equally corrupt) judiciary.
The truth is that Pakistani politics revolves in large part around politicians' extraction of resources from the state by means of corruption, and their distribution to those politicians' followers through patronage. Radically changing this would mean gutting the existing Pakistani political system like a fish. Nor is it at all certain how popular the process would really be with most Pakistanis.

For while the greater part of this process of extraction and redistribution is illegal according to Pakistani law, how much of it is immoral in Pakistani culture is a much more complicated question. Every Pakistani politician accuses his rivals of corruption but, equally, the perception that he himself is "generous" and "honourable" to his own supporters is likely to be central to his own local prestige. If a public monument is ever erected to the Ideal Pakistani Politician, the motto "He dunks but he splashes", originally coined by Mayor Richard Daley of Chicago, should be inscribed on its pedestal.

And this is not just a matter of cynical politics. It also obeys a fundamental moral imperative of local culture to be loyal to one's followers and, above all, one's kinfolk. The politician who is really despised is the kleptocrat who both steals immoderately and does not share the proceeds. As a result, a good deal of the proceeds of corruption does get distributed through parts of society, thereby helping to maintain what until recently has been the surprising underlying stability of the Pakistani political system.

The military is widely seen as relatively immune to corruption, and when it comes to its own internal workings, this is largely true – though it usually ceases to be true when generals go into politics. However, it is vitally important to note that this is in large part because for many decades the military as a whole has acted as a kind of giant patronage network, extracting a huge share of Pakistan's state resources via the defence budget and other concessions, and spending them on itself. Because – to its credit – it has distributed the resulting benefits in an orderly if hierarchical way among its generals, officers, non-commissioned officers and even to a degree privates, it has managed to keep a lid on corruption within the military itself. However, a belief is growing among ordinary soldiers, not just that the generals' perks are immoderate but that in some cases their families are using their connections to make huge corrupt fortunes outside the military.

As for Zardari, it seems highly doubtful that he can hang on much longer. The chief justice is pursuing him with bulldog determination and the letter of the law is on his side. The military has been infuriated by what it believes are his attempts to ally with Washington against it. It does not want another military government, but it does want a civilian regime that is much more responsive to its wishes. And the opposition want him out before, not after, senate elections that might just enable him to cling to the presidency even if as expected his Pakistan People's party is defeated in general elections due by early 2013. Whether getting rid of Zardari will fundamentally change Pakistani politics, however, is a very different matter.

Riaz Haq said...

Political patronage in the US, called the "spoils system" reached its peak under President Andrew Jackson beginning in 1828. Here's an excerpt of Wikipedia entry on the Spoils system:

Before March 4, 1829, moderation had prevailed in the transfer of political power from one presidency to another. President Andrew Jackson's inauguration signaled a sharp departure from past presidencies. An unruly mob of office seekers made something of a shambles of the March inauguration, and though some tried to explain this as democratic enthusiasm, the real truth was Jackson supporters had been lavished with promises of positions in return for political support. These promises were honored by an astonishing number of removals after Jackson assumed power. Fully 919 officials were removed from government positions, amounting to nearly 10 percent of all government postings.[4]:328-33

The Jackson administration attempted to explain this unprecedented purge as reform, or constructive turnover, but in the months following the changes it became obvious that the sole criterion for the extensive turnover was political loyalty to Andrew Jackson. The hardest hit organization within the federal government proved to be the post office. The post office was the largest department in the federal government, and had even more personnel than the war department. In one year 423 postmasters were deprived of their positions, most with extensive records of good service. The new emphasis on loyalty rather than competence would have a long term negative effect on the efficiency and effectiveness of the federal government.[4] :334

President after president continued to use the spoils system to encourage others to vote for them. But by the late 1860s, reformers began demanding a civil service system. Running under the Liberal Republican Party in 1872, they were harshly defeated by patronage-hungry Ulysses S. Grant.

After the assassination of James A. Garfield by a rejected office-seeker in 1881, the calls for civil service reform intensified. The end of the spoils system at the federal level came with the passage of the Pendleton Act in 1883, which created a bipartisan Civil Service Commission to evaluate job candidates on a nonpartisan merit basis. While few jobs were covered under the law initially, the law allowed the President to transfer jobs and their current holders into the system, thus giving the holder a permanent job. The Pendleton Act's reach was expanded as the two main political parties alternated control of the White House every election between 1884 and 1896. After each election the outgoing President applied the Pendleton Act to jobs held by his political supporters. By 1900, most federal jobs were handled through civil service and the spoils system was limited only to very senior positions.

The separation between the political activity and the civil service was made stronger with the Hatch Act of 1939 which prohibited federal employees from engaging in many political activities.

The spoils system survived much longer in many states, counties and municipalities, such as the Tammany Hall ring, which survived well into the 1930s when New York City reformed its own civil service. Illinois modernized its bureaucracy in 1917 under Frank Lowden, but Chicago held on to patronage in city government until the city agreed to end the practice in the Shakman Decrees of 1972 and 1983. Modern variations on the spoils system are often described as the political machine.

Riaz Haq said...

Pakistan holds enormous potential for economic growth, said State Bank of Pakistan (SBP) Governor Yaseen Anwar, according to Daily Times:

“I’m, personally, optimistic about the country’s future, and confident that our economic managers – who have steered the country through much choppier seas – will guide this resilient economy to the path of stability and prosperity,” the governor said. Delivering his key-note address on ‘The State of Pakistan’s Economy’ at a seminar organised by the Management Association of Pakistan (MAP) at a local hotel in Lahore on Thursday, he emphasised that our economy’s resilience may well be unparalleled as we have survived two major floods; one catastrophic earthquake; a war on one border; and a balance of payments crisis – all in the past decade without any bouts of hyperinflation, a run on bank deposits or a deep recession.

“This only goes to show the enormous potential for growth that the country holds,” he added. He said that while Pakistan’s economy is going through some testing times, the challenge in front of us can scarcely be classified as daunting. “Our twin deficits are, in my opinion, the most significant challenge at the moment. Even then, it is not the size that’s the problem; it’s the situation. And unlike the problems that engulf the economies of the West, we know precisely what needs to be done. In that regard, we are extremely fortunate,” the SBP governor added.

Anwar said, “We know what our problems are. Unlike many other countries, the solutions to our problems are straightforward. All they require is a good measure of willpower and the determination to see reforms through these interesting and challenging times.”

He said that despite the fiscal deficit, the country’s debt-to-gross domestic product (GDP) ratio has not increased substantially; in fact, it has declined in the last three years. “To put this in perspective, Pakistan’s debt-to-GDP ratio is half that of most European countries and one-third that of Japan, he said, adding that most of the country’s debt is denominated in rupees and the external debt is long-term in nature. Thus, I believe there is absolutely no chance that Pakistan will be facing a Greece-like debt crisis anytime in the near future,” Anwar added.
The SBP governor said that it is the financing of the current account deficit that will remain a challenge this year. ‘Net financial inflows have slowed down to only $1.9 billion in FY11 after peaking at $8.7 billion in FY07. To manage the situation, the bank has entered into currency swap agreements with Turkey and China in order to mitigate the pressure of any adverse development in the developed world on our external accounts and reserves,’ he said, adding that other such arrangements are in the pipeline with other countries that could relieve pressure on our external accounts.\03\02\story_2-3-2012_pg5_15

Riaz Haq said...

Is India losing its mojo because of bad politics? asks BBC's Soutik Biswas. Here's an excerpt:

It's an obvious question to ask at a time when powerful - and populist - regional parties are again flexing their muscles at a fickle federal government, key economic reforms are seemingly stuck in the bog of messy coalition politics, and the government is struggling under an avalanche of corruption charges. Economic growth and investment have cooled and inflation remains high.

So is it surprising that The Economist magazine, in its latest issue, says the politics is "preventing India from fulfilling its vast economic potential"?

Or when Fareed Zakaria, editor-at-large with Time magazine, tells an audience in Delhi this week that India's politicians are "out of touch… they try to portray India as a victim, not the victor".

With uncharacteristic exaggeration, The Economist even invokes a return to the stifling days of the controlled economy.

"Lately, like a Bollywood villain who just refuses to die, the old India has made a terrifying reappearance," says the magazine. It blames a "nastily divisive political climate" for the crisis and believes that India requires "energetic, active leaders, plus politicians who are ready to compromise".
'Corrupt and corroded'

Both the magazine and the pundit are right and wrong.
“Start Quote

Reformers need to be patient; there are no shortcuts in India”

The quality of India's politicians, many argue, has declined drastically, as in many parts of the world. Most of them seem to be out of sync with modern day realities - expectations have fallen so ridiculously low that an iPad carrying politician is described by the media as a modern one!

Most are also seen as greedy, corrupt and disinterested in serious reform. The increasing number of politicians with criminal records and the brazen use of money to buy party tickets and bribe voters erodes India's ailing democratic process.

It is not a happy picture. "Today the Centre is corrupt and corroded," historian Ramachandra Guha wrote recently. "There are allegedly 'democratic' politicians who abuse their oath of office and work only to enrich themselves; as well as self-described 'revolutionaries' who seek to settle arguments by the point of the gun." Only serious electoral reform can ensure a better breed of politician.
Public consensus is harder to come by in an awfully unequal society where the middle class and the rich root for further opening up of the economy, while the poor want the state to invest in health and education and check corruption. The elitist biases in public policy is made easier by a poorly-informed and often unlettered electorate with low expectations.

Many would argue that India never got any magic going, so there is no question of losing it.

Consensus is painfully slow in such a society, and sometimes only a crisis can provoke the government - and the people - to bite the bullet. Reformers need to be patient; there are no shortcuts in India.

Riaz Haq said...

Here's David Brooks' New York Times' column on inadequacy of democracy in solving problems:

The people who pioneered democracy in Europe and the United States had a low but pretty accurate view of human nature. They knew that if we get the chance, most of us will try to get something for nothing. They knew that people generally prize short-term goodies over long-term prosperity. So, in centuries past, the democratic pioneers built a series of checks to make sure their nations wouldn’t be ruined by their own frailties.

The American founders did this by decentralizing power. They built checks and balances to frustrate and detain the popular will. They also dispersed power to encourage active citizenship, hoping that as people became more involved in local government, they would develop a sense of restraint and responsibility.

In Europe, by contrast, authority was centralized. Power was held by small coteries of administrators and statesmen, many of whom had attended the same elite academies where they were supposed to learn the art and responsibilities of stewardship. Under the parliamentary system, voters didn’t even get to elect their leaders directly. They voted for parties, and party elders selected the ones who would actually form the government, often through secret means.

Though the forms were different, the democracies in Europe and the United States were based on a similar carefully balanced view of human nature: People are naturally selfish and need watching. But democratic self-government is possible because we’re smart enough to design structures to police that selfishness.

James Madison put it well: “As there is a degree of depravity in mankind, which requires a certain degree of circumspection and distrust: So there are other qualities in human nature, which justify a certain portion of esteem and confidence.”

But, over the years, this balanced wisdom was lost. Leaders today do not believe their job is to restrain popular will. Their job is to flatter and satisfy it. A gigantic polling apparatus has developed to help leaders anticipate and respond to popular whims. Democratic politicians adopt the mind-set of marketing executives. Give the customer what he wants. The customer is always right.--------
Western democratic systems were based on a balance between self-doubt and self-confidence. They worked because there were structures that protected the voters from themselves and the rulers from themselves. Once people lost a sense of their own weakness, the self-doubt went away and the chastening structures were overwhelmed. It became madness to restrain your own desires because surely your rivals over yonder would not be restraining theirs.

This is one of the reasons why Europe and the United States are facing debt crises and political dysfunction at the same time. People used to believe that human depravity was self-evident and democratic self-government was fragile. Now they think depravity is nonexistent and they take self-government for granted.

Neither the United States nor the European model will work again until we rediscover and acknowledge our own natural weaknesses and learn to police rather than lionize our impulses.

Riaz Haq said...

Here's Daily Times on USAID effort to enhance rural productivity in Pakistan:

US assists rural Pakistan increase productivity

Staff Report

ISLAMABAD: United States Agency for International Development (USAID)’s Pakistan Strategy Support Programme (PSSP) launched a 2-day First Annual Conference entitled ‘Productivity, Growth and Poverty Reduction in Rural Pakistan’ on Thursday.

The aim of this conference is to review the first year’s results from PSSP activities. The International Food Policy Research Institute (IFPRI) implements the PSSP. This is a four-year USAID funded, multi-dimensional, multi-partner initiative under the Pakistan Planning Commission’s framework for economic growth.

USAID is proud to support the Planning Commission’s efforts to achieve high standards of excellence in policy formulation and research through capacity building of researchers and analysts in Pakistan, said USAID Deputy Director Rodger Garner at the inaugural session of the conference. These efforts will contribute to a stronger, brighter future for all Pakistan, he added.

A National Advisory Committee chaired by Dr Nadeem ul Haque Deputy Chairman of the Planning Commission of Pakistan with members including Abdul Wajid Rana, Principal Officer and Secretary of Finance government of Pakistan supervises PSSP.

USAID assistance will enable Pakistan to modernise its policy formulation by improving research based policy analysis. This will create a more favourable enabling environment for investments and enterprise growth, Dr Nadeem ul Haque said.

USAID’s other economic growth activities include creating over 200,000 acres of irrigated land by the end of 2013, as well as increasing the incomes of 250,000 farmers and female agricultural workers by increasing their production and connecting them with markets throughout the country to improve sales and ultimately expand their businesses.\12\14\story_14-12-2012_pg5_14

Riaz Haq said...

Here's an excerpt from Time magazine on anti-corruption initiative in Pakistan:

(LAHORE, Pakistan) — Corruption is so pervasive in Pakistan that even Osama bin Laden had to pay a bribe to build his hideout in the northwest where he was killed by U.S. commandos.

Ordinary Pakistanis complain they have to grease officials’ palms to get even the most basic things done: File a police report when they have a traffic accident. Obtain copies of court documents. Get permission to see their relatives in the hospital.

Now, an enterprising group of Pakistani officials is cracking down on this culture of graft with an innovative program that harnesses technology to identify corruption hot spots in the country’s most populous province, Punjab.

The initiative, which leverages the ubiquitous presence of cell phones, relies on the simple concept of asking citizens about their experience.

The program — run by the Punjab Information Technology Board — uses telephone calls and text messages to get feedback from citizens conducting transactions with a dozen different government departments, including those dealing with property, health and emergency response.

Many of the reported cases of corruption involved low-level property officials known as patwaris, who are notorious for demanding bribes. One man in the city of Multan sent a text message saying he had to pay a patwari about $170 to get his new property registered. Another man in Sheikhpura district reported paying about $15 to a patwari and his assistant and said “they should be removed from their jobs.”

Bin Laden’s courier, who built the al-Qaida chief’s compound in the town of Abbottabad, had to pay roughly a $500 bribe to a patwari to purchase the required land, according to Pakistani intelligence officials, who spoke on condition of anonymity because they were not authorized to talk to the media.
The low level of corruption reported could be partly driven by citizens’ reluctance to tell government officials the truth, said Michael Callen, an assistant professor of political science at the University of California, Los Angeles, who is conducting research on the program. That could improve as the program becomes more widely known, the anonymity of individuals is protected and more punitive action is taken against corrupt officials, he said.

The initiative’s scale and proactive solicitation of feedback differentiate it from other anti-corruption efforts around the globe, such as the “I Paid a Bribe” website run by an Indian non-profit group. The website and other similar schemes rely on citizens to take the initiative to complain. That can produce fictional accusations made to blackmail honest officials, said Umar Saif, head of the Punjab technology board.

The Punjab government already has used data from the program to pressure officials to clean up their operations.
While the initiative does not attempt to tackle the millions of dollars thought to be involved in high-level government corruption, it faces significant challenges since much of Pakistan’s political system is based on patronage. Politicians hand out jobs to their supporters in exchange for votes. It’s not the salary or benefits, but the chance to solicit bribes that makes the jobs highly coveted.

Riaz Haq said...

Here's a Dawn story on Nawaz Sharif govt's privatization plan:

The government directed the Privatisation Commission on Thursday to immediately start the process for sale of 31 public sector entities (PSEs) through initial and secondary public offering and transfer of 26 per cent shares, along with management control, to the private sector.

The decision was taken at a meeting of the Cabinet Committee on Privatisation, presided over by Finance Minister Ishaq Dar, to comply with a structural benchmark agreed to under the IMF programme.

Minister of Water and Power Khawja Asif, Minister for Petroleum and Natural Resources Shahid Khaqan Abbasi, Minister for Planning and Development Ahsan Iqbal, Minister of State for Privatisation Khurram Dastagir, federal secretaries, the governor of the State Bank of Pakistan and chairmen of the Securities and Exchange Commission of Pakistan and the Board of Investment attended the meeting.

An official said the Council of Common Interests had approved these transactions in 2006, 2009 and 2011 and the CCOP just reiterated the government’s approval to go ahead with the ambitious privatisation programme.

The meeting considered a list of public sector companies submitted by the Privatisation Commission.

“After thorough deliberations, the committee agreed to initiate the process of privatisation and directed the commission to ensure that the interests of employees were to be protected at all cost,” said a statement issued by the ministry of finance.

“Most of the PSEs will be offered to the private sector through strategic divestment, including up to 26pc stakes along with management control, while shares of other companies will be offloaded through public offering,” an official told Dawn.

He said the committee did not take a decision on which companies be sold through strategic disinvestment because this was something the Privatisation Commission would propose after in-house deliberations and consultations with financial advisers.

The companies cleared for divestment include the Oil and Gas Development Company Limited, Pakistan Petroleum Limited, Mari Gas, Pak-Arab Refinery, Pakistan State Oil, Sui Southern Gas Company Limited, Sui Northern Gas Pipelines Limited, Pakistan International Airlines, PIA-Roosevelt Hotel, New York, Pakistan Railways, Gujranwala Electric Power Company, Lahore Electric Supply Company, Islamabad Electric Supply Company, Faisalabad Electric Supply Company, Northern Electric Generation Company, Pakistan Steel Mills, National Power Construction Company and Pakistan National Shipping Corporation.

The financial sector entities selected for sale in the first phase include National Bank of Pakistan, First Women Bank, Small and Medium Enterprises Bank, National Investment Trust Limited, National Insurance Company Limited, Pakistan Reinsurance Company Limited, State Life Insurance Corporation and House Building Finance Corporation.

The Civil Aviation Authority, Karachi Port Trust, Port Qasim Authority and National Highway Authority are also on the list.

The government has made a commitment with the IMF to announce a strategy for the sale of 30 firms by the end of September as a benchmark for disbursement of second tranche of the IMF loan. Under the commitment, the government is to announce privatisation plans for remainder of total 65 entities by the end of 2013.

“We are developing medium-term action plans to restructure the PIA, Steel Mills and Railways. The action plans include partial privatisation of companies through initial or secondary public offering,” the government had told the IMF....

Riaz Haq said...

Pak Supreme court should stay out of economic decisions like fixing prices for electricity. Targeted subsidies should be given to low income households to help with energy costs. General subsidies for electricity and petrol take 34% of government's revenue ,bust budget and raise deficits and drive inflation (by printing more money to pay) hurting the low-income people the most.

But I also believe Supreme Court's record on economic decisions like canceling steel mill privatization in 2005 is really bad. I want Chaudhry court to stay out of it

Energy subsidies in #Pakistan take up astounding 34% of gov revenue.Table A.3 of impressive IMF book:

Riaz Haq said...

There are some who are concerned that Nawaz Sharif will gift state-owned companies like PIA and Pak Steel to his buddies like Mian Mansha.

Regardless who they are sold to at whatever price, Pakistani taxpayers will be better off. These state-owned companies are used by politicians for political patronage by hiring large numbers of incompetent and corrupt people. These enterprises are sucking up a lot of tax money year after year.

Riaz Haq said...

Here's a book review of "How Asia Works" by Amb Maleeha Lodhi published in The News:

An important new book explains why some countries have become economic tigers in East Asia while others are relative failures or paper tigers. ‘How Asia Works’ by Joe Studwell is a bold and insightful work that is essential reading for anyone interested in understanding the ingredients for economic success in this continent.

It challenges much conventional wisdom in the development debate. Most significantly the book questions key tenets of the so-called Washington consensus, which prescribes free market ‘solutions’ for all economies regardless of their level of development. Studwell establishes that a nation’s development destiny is shaped most decisively by government action and policies. History, writes the author, shows that markets are created, shaped and re-shaped by political power.
At the very outset, Studwell identifies three critical interventions that successful east-Asian countries and China (after 1978) employed to achieve accelerated economic development. The first, “often ignored”, and now “off the political agenda” in developing countries, is land reform. This restructured agriculture into highly labour-intensive household farming. In the early phase of development, with the necessary institutional support, this helped to generate a surplus, create markets and unlock great social mobility.

The second intervention, as countries cannot sustain growth only on agriculture and must transition to the next phase, is to direct entrepreneurs and investment to industrial manufacturing. Manufacturing allows for trade and technology learning. And trade, says the author, is essential for rapid economic development. Studwell then demonstrates – while challenging the champions of free trade – how nurturing and protection, along with instituting “export discipline”, builds the capacity to compete globally. Manufacturing policy is a key determinant of success he says, as an infant industry strategy offers the quickest route to restructuring the economy towards more value-added activities.

Holding that development is quintessentially a political undertaking, the author sees the relationship between the state and private entrepreneurs as a critical variable. History, he writes, teaches that governments should not run everything themselves. But governments have to use their power and the right policy tools to make private entrepreneurs do what industrial development requires.

The third intervention necessary for accelerated development is in the financial sector, aimed at directing capital initially to intensive, small scale agriculture and to manufacturing rather than services. Studwell argues persuasively that it was the close alignment of finance with agriculture and industrial policy objectives that produced north-east Asia’s economic success.

Detailing the role of financial policy, he illustrates how premature bank deregulation exacted a high price in Thailand and Indonesia. China, on the other hand, and other north-east Asian countries resisted that, instead using financial management to serve development needs and an accelerated economic learning process.

Riaz Haq said...

Here's a WSJ report on Pakistan's privatization plans:

From India to Bangladesh to Afghanistan, much of South Asia this year will be focused on elections and uncertain, sometimes violent transfers of power. An exception is Pakistan, where Prime Minister Nawaz Sharif took office last summer in the country's first transition from one elected government to another. This year Mr. Sharif has the opportunity to deliver on a longstanding promise to privatize Pakistan's state-dominated and inefficient economy.

Pakistan's problems are legion, from terrorism and lawless territories to power shortages and polio. Privatizing state-owned dinosaurs isn't the sole solution, but the sooner Islamabad can stop hemorrhaging 500 billion rupees (nearly $5 billion) annually on budgets, subsidies and bailouts for failing enterprises, the better.

Spurred by a $6.6 billion loan from the International Monetary Fund, Mr. Sharif's government committed in September to begin privatizing more than 30 public energy, transport and infrastructure corporations over three years. These include Pakistan State Oil, Pakistan International Airlines and Pakistan Steel Mills.

To lead the process, Mr. Sharif appointed a 15-member privatization commission last month headed by Mohammad Zubair, formerly IBM's IBM +0.26% chief financial officer for the Middle East and Africa. Mr. Zubair should have the expertise and political independence to push his mandate aggressively, starting with the partial privatization of Pakistan International Airlines by December.

Reform prospects further improved last month when Supreme Court Chief Justice Iftikhar Chaudhry reached retirement age and left the bench, ending a career distinguished by aggressive interventions in politics. In 2006 he blocked the privatization of Pakistan Steel Mills, arguing that the government wanted to sell the enterprise for less than its true value.

That helped lead to a showdown with then President Pervez Musharraf, who tried to banish the chief justice from power but ended up provoking a popular backlash that cost him the presidency in 2008. Reinstated in 2009, Mr. Chaudhry became more aggressive, reliably quashing or deterring government attempts to cut subsidies or reform state-owned enterprises.

Even assuming a less powerful and more business-friendly high court, Mr. Sharif's reforms will still face resistance from organized labor and Pakistan's two major opposition parties. "We are against privatization 100 percent. This is not privatization, this is personalization," says Pakistan People's Party chief Bilawal Bhutto Zardari, who accuses Mr. Sharif of plotting to enrich his fellow industrialists.

Overcoming such opposition will be a challenge, but the prime minister has the bully pulpit and economic arguments that can resonate. In September, Gallup Pakistan found 70% of the population in favor of privatizing Pakistan International Airlines....

Mr. Sharif also has to reassure investors that if they bid on properties their ownership rights will be protected. One cause of continuing concern is the unresolved spat between the Pakistani government and Etisalat, the United Arab Emirates' largest telecom firm, over payments from a 2005 privatization. Resolving that dispute could help make future privatization tenders more appealing.

Little noticed amid headlines about terrorist horrors and slowed economic growth, Pakistan's benchmark stock index rose 49% in 2013. More economic good news will likely follow this year if Mr. Sharif can deliver on his privatization promise.

Riaz Haq said...

Here's WSJ on State Bank Governor Yaseen Anawar resignation:

The head of Pakistan's central bank, Yaseen Anwar, resigned Thursday, the government said, on the eve of a review of the country's performance by the International Monetary Fund.

"He has resigned for personal reasons," said Shafqat Jalil, a Finance Ministry spokesman. He didn't give any further explanation, and Mr. Anwar didn't return calls seeking comment.

Mr. Jalil said an acting governor would be appointed Friday.

Mr. Anwar had been governor of the State Bank of Pakistan since October 2011. His resignation comes as the economy faces soaring inflation and a sharply weaker currency.

Foreign-exchange reserves are critically low. The country missed its target for foreign-currency reserves at the previous IMF quarterly review and was given a waiver on the issue.

The IMF agreed to a $6.7 billion bailout in September, but has released only roughly $1.1 billion of the three-year loan.

Officials from the central bank are to meet IMF representatives starting Saturday in Dubai, to begin the second quarterly review, a process that would involve the head of the central bank in the coming days.

The IMF's quarterly reviews are designed to ensure the country meets its bailout conditions.If the IMF finds Pakistan is failing to meet its bailout targets, future tranches could be in jeopardy, which would put the economy further at risk.

"The timing of this resignation is unprecedented, just before the second review," said a retired senior official. "It affects the credibility of the whole process."

A focus of the review will be Pakistan's net foreign-exchange reserves. The volatility of the rupee has been a source of tension between the central bank and the government, analysts said.

Mr. Anwar was widely criticized for his handling of the foreign-currency markets, an issue on which Finance Minister Ishaq Dar has personally intervened.

Mr. Anwar, a former investment banker, was appointed by the previous government, of the Pakistan Peoples Party.

The current administration, led by Prime Minister Nawaz Sharif took office in June.

In recent years, heads of the State Bank have come under pressure to increase lending to successive governments, to finance their budgets, an issue that may have contributed to the departure of previous recent central bankers.

"The Ministry of Finance does whatever it likes and the State Bank is expected to accommodate," said Zubair Khan, a former finance minister. Mr. Khan said Pakistan urgently required the IMF to increase the rate of disbursal of its loan.

, saying the current program was based on "unjustified optimism."

Pakistan is struggling with economic and security challenges. While Mr. Sharif's administration is considered business-friendly, analysts say its economic plans require an improvement in the security situation.
Farrukh Khan, head of research of KASB, a brokerage based in Karachi, said that inflation was now steadying, while other indicators were also more positive.

"The ship is turning around. It will take some time," said Mr. Khan. "There are definite signs of improvement."

The IMF, after its first quarterly review, found Pakistan's performance "mostly satisfactory." It is forecasting GDP growth of 2.8% for the current financial year. However, the IMF had also found that "the balance of payments outlook has worsened and firm action is required to address critically low foreign-exchange reserves."

Riaz Haq said...

Here's Reuters on Pakistan's ambitious privatization plan:

ISLAMABAD (Reuters) - Mohammad Zubair was on a cruise dinner with Pakistani Prime Minister Nawaz Sharif in Thailand when he was offered the hardest job of his life: privatizing a huge chunk of the economy while fighting resistance from the opposition and trade unions.

When the prime minister left the table, a colleague of former IBM executive Zubair rushed to his side.

"Are you mad? Three privatization ministers have gone to jail and most have corruption cases hanging over their heads," he said. "Don't take this job."

But Pakistan's new privatization tsar is determined to find buyers for 68 public companies, most of them loss-making, including two gas companies, an oil company, about 10 banks, the national airline and power distribution companies - all within the next two years.

The government sees the sell-offs as a life saver for Pakistan's $225 billion economy crippled by power shortages, corruption and militant violence. Successful privatization is Sharif's top political and economic goal.

"We lose 500 billion rupees ($5 billion) annually because of failing enterprises," Zubair told Reuters. "Every day a file lands on a bureaucrat's desk and he has to take a decision he isn't qualified to. This can't go on, no matter what."

Pakistan can raise up to $5 billion in privatization revenue in the next two years to ease pressure on strained public finance, Zubair said.

Last September, the International Monetary Fund saved Pakistan from a possible default by agreeing to lend it $6.7 billion over three years. In return, Pakistan must make good on a longstanding promise to privatize loss-making state companies.
Asad Umar, an opposition lawmaker and former chief executive of one of Pakistan's largest conglomerates, said privatization was being pursued on an unrealistic time frame and the criteria for identifying entities was inconsistent.

For Umar, it makes no sense that on the list with a bleeding airline are Oil and Gas Development Co. Ltd and Pakistan Petroleum Ltd , which made profits of 91 billion and 42 billion rupees respectively in 2013, and have zero debt.

Not all sell-offs are expected to go smoothly.

A nine-year dispute between the government and Etisalat, the United Arab Emirates' largest telecoms firm, over payments from the privatization of Pakistan Telecommunication Company Ltd, is seen as a discouragement for investors.

But Zubair says no plan is without risk.

"There is no magic wand to ensure that all these ventures will be successful," he said. "But the bottom line is that I'm not going to hold off privatization for anyone."

Riaz Haq said...

From NY Times on the role of money in Indian elections:

This is the new world of Indian elections, where costs have soared in recent years; overall spending this cycle is expected to reach $5 billion, second only to the amount spent on the 2012 presidential election in the United States. This increase has a number of causes, and far-reaching consequences.

First, as India’s population has grown, so too has the size of its political constituencies. The average parliamentary constituency in 1951-52, when India held its first post-independence election, had roughly 350,000 voters; today that figure stands at 1.5 million. More voters mean more money spent on outreach and handouts.

Second, elections have become more competitive. In 2009, when India last held national elections, the average margin of victory in a parliamentary contest was 9.7 percent, the thinnest since independence. Candidates in close races have become locked in an arms race of campaign spending.

Third, the scope of elections has broadened. Thanks to constitutional amendments in the early 1990s that established new tiers of village and town governments, India went from having some 4,000 elected positions to nearly three million virtually overnight. Funds must be raised for every rung on the political ladder.

Fourth, since 1971, when Indira Gandhi called an early national election, state and national election cycles have been uncoupled. As a consequence, parties and politicians must collect money more frequently while contributors can no longer get away with a one-shot gift for all elections.

Finally, Indian voters expect more handouts as parties compete to outdo one another with costly pre-election “gifts.” This practice is, of course, explicitly forbidden yet routinely pursued. Gifts range from the obvious (cash and liquor) to the surreal (opium paste or bricks for home construction).
One evening in Andhra Pradesh, I asked a candidate from the Y.S.R. Congress Party whether the huge expenses he was incurring would be worth it. He paused, and then said that he did not know: “If I am lucky enough to win, next time, I’ll need even more money. How does one remain honest and succeed in politics in this country?”

Riaz Haq said...

Here are a couple of excerpts from "Playing with Fire" by Pamela Constable:

"Sugar is critical commodity in a country (Pakistan) where people consume vast amounts of sweet tea, soft drinks, and cakes, using about 4 million metric tons of sugar a year. .....Sugar is also very profitable. Pakistan is among the top five producers of sugar cane in the world, employing more than two million seasonable laborers at harvest time, and sugar refining is the second largest agribusiness after flour milling. According to National Accountability Bureau, a majority of country'd eighty-plus sugar mills are owned by political families, including Sharifs and Bhuttos, as well as members of parliament and several military-controlled enterprises."

"In Pakistan, the sugar industry is actually a political industry in which powerful politicians on all sides are involved", said a 2009 statement from the Sugar Mills Workers Federation that described how the big millers cheat mall growers through fake middlemen, then manipulate sugar prices by pressuring the government to stimulate or discourage exports depending on how much cane has been harvested."

"Throughout the 1990s, during two periods of rule by Sharifs and two by his archrial Benazir Bhutto, the privatization process became a game of grab and run. Investing of investing in solid projects, many business groups colluded with corrupt officials to make quick profits. They borrowed huge sums (from state-owned banks) without collateral, created and dissolved ghost factories, purchased state assets at token prices, avoided paying taxes, defaulted on shaky loans, or deferred paying them indefinitely....Major defaulters and beneficiaries of loan write-offs, granted by both the Bhuttos and Sharif governments, included some of Pakistan's wealthiest business families-- Manshas, Saigols, Hashwanis, Habibs, Bhuttos and Sharifs......using the National Accountability Bureau (NAB), the (Musharraf) regime (after year 2000) went to prosecute eighteen hundred cases of corruption to recover nearly $3.4 billion in assets."

Riaz Haq said...

PPP ticket the most sought after: survey

Syed Khurshid Shah, a PPP stalwart, said he could not tell the exact number, but could confirm that his party had received an unprecedented 7,000 applications from Sindh alone. The PPP had formally invited applications for party tickets in February asking the candidates to deposit a fee of Rs40,000 for a National Assembly seat and Rs30,000 for a provincial assembly seat.

The PML-N had asked the candidates to deposit Rs50,000 for a National Assembly seat and Rs30,000 for a provincial assembly seat.

The PTI had divided applicants in three categories. It had charged Rs10,000 fee from the applicants below the age of 35 seeking a ticket for an NA or provincial assembly seat whereas those over the age of 35 had been asked to deposit Rs30,000 for NA and Rs20,000 for a provincial assembly seat.

The PTI’s Zohair Ashir, however, said credit must be given to the PTI as it had invited applications through courier service, instead of asking the candidates to keep visiting the party offices to know the status of their applications. He said it was for the first time in the country’s history that a party had invited applications even from general public through courier.

The PML-N is the only party which has charged separate and exorbitant fee from those seeking tickets for seats reserved for women and minorities as it collected Rs100,000 for the National Assembly and Rs75,000 for the provincial assembly.

Justifying the decision to receive fees from ticket-seekers, PML-N’s deputy secretary general Ahsan Iqbal said his party did not collect funds or receive donations from its members on a regular basis and general elections were the only opportunity for it to collect funds. He said the funds collected through application fees were spent only on party functions and activities.

In response to a question about collection of higher fees from the candidates vying for reserved seats, Mr Iqbal said these people did not spend any money during the election campaign and became legislators merely on the basis of nomination. On the other hand, he said, the contestants on general seats had to spend time and money. Therefore, he said, there was no harm in charging higher fees from candidates for reserved seats.

The Punjab coordinator for President Asif Ali Zardari and a PPP candidate for an NA seat from Lahore, Naveed Chaudhry, said the highest number of applications received by his party showed that the ground reality was different from that portrayed by some media groups.

He claimed PPP’s popularity had increased, particularly in the rural areas, where media had no influence at all. He admitted that the party’s popularity graph had been affected in some urban areas of Punjab because of the media campaign and the energy crisis, but said that PPP’s support in the rural areas was intact due to a number of steps taken by the previous PPP government.

Riaz Haq said...

A political machine is a political group in which an authoritative boss or small group commands the support of a corps of supporters and businesses (usually campaign workers), who receive rewards for their efforts. The machine's power is based on the ability of the workers to get out the vote for their candidates on election day.

Although these elements are common to most political parties and organizations, they are essential to political machines, which rely on hierarchy and rewards for political power, often enforced by a strong party whip structure. Machines sometimes have a political boss, often rely on patronage, the spoils system, "behind-the-scenes" control, and longstanding political ties within the structure of a representative democracy. Machines typically are organized on a permanent basis instead of a single election or event. The term may have a pejorative sense referring to corrupt political machines.[1]

The term "political machine" dates back to the 20th century in the United States, where such organizations have existed in some municipalities and states since the 18th century. Similar machines have been described in Latin America, where the system has been called clientelism or political clientelism (after the similar Clientela relationship in the Roman Republic), especially in rural areas, and also in some African states and other emerging democracies, like postcommunist Eastern European countries. Japan's Liberal Democratic Party is often cited as another political machine, maintaining power in suburban and rural areas through its control of farm bureaus and road construction agencies.[2] In Japan, the word jiban (literally "base" or "foundation") is the word used for political machines.


Theodore Roosevelt, before he became president in 1901, was deeply involved in New York City politics. He explains how the machine worked:

The organization of a party in our city is really much like that of an army. There is one great central boss, assisted by some trusted and able lieutenants; these communicate with the different district bosses, whom they alternately bully and assist. The district boss in turn has a number of half-subordinates, half-allies, under him; these latter choose the captains of the election districts, etc., and come into contact with the common heelers


The corruption of urban politics in the United States was denounced by private citizens. They achieved national and state civil-service reform and worked to replace local patronage systems with civil service. By Theodore Roosevelt's time, the Progressive Era mobilized millions of private citizens to vote against the machines

Riaz Haq said...

If you score more than 33% on Hans Rosling's basic facts quiz about the state of health and wealth in the world today, you know more about the world than a chimp

Read more at:

Excerpt of Factfulness by Hans Rosling

Page 201

This is risky but I am going to argue it anyway. I strongly believe that liberal democracy is the best way to run a country. People like me, who believe this, are often tempted to argue that democracy leads to, or its even a requirement for, other good things, like peace, social progress, health improvement, and economic growth. But here's the thing, and it is hard to accept: the evidence does not support this stance.

Most countries that make great economic and social progress are not democracies. South Korea moved from Level 1 to Level 3 (Rosling divides countries into 4 levels in terms of development, not the usual two categories of developed and developing) faster than any other country had ever done (without finding oil), al the time as a military dictatorship. Of the ten countries with the fastest economic growth, nine of them score low on democracy.

Anyone who claims that democracy is a necessity for economic growth and health improvements will risk getting contradicted by reality. It's better to argue for democracy as a goal in itself instead of as a superior means to other goals we like.

Riaz Haq said...

Winning #Elections In #India: #Food price #Inflation not double-digit #GDP growth, determines the fate of incumbents. Local issues trump national issues. #Corruption charges hurt more than convictions. Voters sympathize with jailed leaders. #Modi via @ndtv

One of the most important lessons I have learned on the road is that ideas - particularly economic ideas - do not play the same role in India that they do elsewhere. In more advanced democracies the main ideological divide involves the role of the state versus the free market in distributing wealth. In India everyone is a statist. ....

Of all the numbers I have run on what determines the outcome of Indian elections, one of the most surprising to me is how little political lift chief ministers get from palpable economic success. Even when their state has been growing faster than 8 per cent-a rate that normally puts an economy in the 'miracle' class-their chances of re-election improve only slightly, from one in three to 50:50. Often, voters in mofussil India do not feel a dramatic lift even from a rate of growth that makes the Mumbai's stock market bubble and the capital elite assume that everyone feels the fizzy good times. Growth helps at the margin, but even spectacular growth is no guarantee of victory - particularly when the rural majority is not feeling the boom.

The number more likely to decide the fate of incumbents is inflation, particularly food price inflation. Unlike double-digit GDP growth, the impact of double-digit inflation rarely goes unfelt or unremarked by voters. Often they can recite recent price increases for onions or ghee down to the rupee, because these numbers determine what - or whether - their family eats. High inflation has presaged the fall of leaders from Rajasthan Chief Minister Shekhawat in 1998 to Prime Minister Manmohan Singh in 2014. But deflation can have the same effect. Lately, farmers have told us they planned to vote against their incumbent government out of frustration over depressed crop prices.

Local issues often trump national ones, and vary dramatically from state to state. While a prohibition state like Gujarat demands that visitors reveal 'the name of the drunkard' seeking to buy alcohol, Tamil Nadu struggles to wean its alcoholics off booze and its state bureaucracy off alcohol tax revenue. Today the clouds of smog stretching across the subcontinent are a big issue in Delhi, a nonissue in provincial cities and towns, where voters are less focused on air quality than more pressing concerns such as finding a functioning school for their children. Even the national corruption scandals that periodically consume Delhi matter less outside the biggest cities than scandals involving state leaders.

Alongside inflation, corruption is the other big incumbent killer, though it works in strange ways. Leaders rarely make it five years without facing some charge of corruption, and many of them can survive so long as the charge doesn't come to dominate the election storyline. But sweeping corruption charges have been contributing to the defeat of leaders at least since Rajiv and the Bofors case, and we have seen scandal help topple Vasundhara Raje on her ties to a flamboyant 'super chief minister', Mayawati on the self-indulgence of her own statues and palaces, and many others.

Excerpted with permission of Penguin Random House India from 'Democracy On The Road' by Ruchir Sharma.

Riaz Haq said...

Some questions about public policymaking in Pakistan
By Shahid Javed Burki

Serious public policy work was put on track by president Ayub Khan soon after he took over the country in October 1958. He developed the Planning Commission into a well-endowed policymaking institution. Told that Pakistan did not have the skills that were needed to staff such an institution, he turned to the United States for help. That came in the form of advisers mostly from the Harvard Development Service who were appointed in the Planning Commission in Karachi and in the Planning and Development Departments in East and West Pakistan.

When Ayub Khan surrendered his office in 1969, the Planning Commission began to wither. A series of blows were delivered to the planning process by the government headed by Zulfikar Ali Bhutto, who ably led Pakistan to recover from the loss of East Pakistan in December 1971 but destroyed much of what Ayub Khan had done for the country. Bhutto, an arrogant man, had much greater confidence in his ability to develop the country on his own and bring about social change than base his moves on institutional advice. He had no use for the Planning Commission.


What follows is a brief discussions relating to some of the questions asked above. Taking all of them in detail would take up a more than one newspaper article.

One, our leaders must recognise that a negative narrative prevails about Pakistan in the foreign press. Whenever a story appears about Pakistan in the western media, its content and tone are negative. This situation can only be remedied if the current leadership comes forward and presents to the world a believable plan of action that would restore people’s confidence in their future as well the future of their country. As economists emphasise all the time, confidence is an important driver of growth, confidence leads to increase in domestic and as well as foreign investment.

Two, there is an urgent need to strength the Federal Board of Revenue. Those who don’t pay taxes or pay only nominal amounts must be made to fear the revenue collector. It is that fear that has made the Internal Revenue Service the most feared part of the United States government. In America, April 15, the day taxes are due, is by far the most important day on the calendar.

Third, we need to focus on three sectors as the future determinants of economic growth and social change: they are high value-added agriculture, small- and medium-scale industries and modern services. Development of the human resource would be an important part of this strategy. CPEC could play an important part in this endeavour.

Fourth, our policymakers need to recognise that Pakistan is no longer a rural place but an urban country. No single urban policy would serve the purpose. We will need separate policies for the metropolitan areas, peripheral areas of large cites, medium-sized cities and small towns.

Fifth, the government must get closer to the people and this requires the formation of a multi-tiered system of local government on the lines of Ayub Khan’s system of ‘basic democracies’.

And sixth, working with Afghanistan, we should use the local system of government to bring economic and social development to these areas. It is only then that we will be able to prevent the tribal youth from being attracted to extremist causes.