Monday, May 20, 2013

Looking Back at Military Rule in Indonesia and Pakistan

General Suharto stepped down 15 years ago tomorrow. Here's an excerpt of today's New York Times story on the Indonesian strongman's legacy:

"Mr. Suharto’s spirit continues to loom over modern-day Indonesia. He brought the country back from the brink of political, social and economic calamity in the mid-1960s, dramatically reduced poverty and by the early 1990s had turned Indonesia into one of the Asian tiger economies. But he also governed with an iron fist, sending his jackbooted military into separatist-minded regions, jailing and exiling political enemies, quashing democratic institutions and the news media, and presiding over what some claim is one of the most corrupt governments in modern history.....Tuesday is the 15th anniversary of Mr. Suharto’s resignation as president.  .... Since then, Indonesia has undergone a dramatic transformation toward democracy and now has open elections and the world’s 16th-largest economy. Yet corruption remains endemic, crime is higher than during Mr. Suharto’s “New Order” regime, and Jakarta and other large cities have chronic traffic problems".

Both Indonesia and Pakistan have each seen about 30 years of military rule.  So why has Indonesia become an Asian tiger economy and Pakistan has not?

One possible explanation is that while there was 32 years uninterrupted military rule with sustained development in Indonesia, Pakistan has seen three stints of high growth under military generals in 1960s, 1980s and 2000s separated by  three periods of slow or very slow growth under civilian rule in 1950s, 1970s and 1990s. Pakistani military rulers have also been less ruthless and more benevolent than Gen Suharto.

Pakistan has also experienced economic and social progress comparable to Indonesia's during periods of military rule. There has been much better governance and significantly faster rates of economic and social development during military rule than under civilian leaders. Many economists persuasively argue  that Pakistan would have developed as fast as South Korea had the Ayub era policies continued uninterrupted for another decade or two.

Pakistan's first  military dictator General Ayub Khan's period is labeled by Pakistani economist Dr. Ishrat Husain as "the Golden Sixties". General Ayub Khan pushed central planning with a state-driven national industrial policy.  Countries like Malaysia and South Korea saw Pakistan as a model for export-led growth, according to Prof Stephen Cohen. In fact, South Korea sought to emulate Pakistan's development strategy and copied Pakistan's second "Five-Year Plan".

Here's how Dr. Husain recalls Pakistan of 1960s:

"The manufacturing sector expanded by 9 percent annually and various new industries were set up. Agriculture grew at a respectable rate of 4 percent with the introduction of Green Revolution technology. Governance improved with a major expansion in the government’s capacity for policy analysis, design and implementation, as well as the far-reaching process of institution building. The Pakistani polity evolved from what political scientists called a “soft state” to a “developmental” one that had acquired the semblance of political legitimacy. By 1969, Pakistan’s manufactured exports were higher than the exports of Thailand, Malaysia and Indonesia combined. Though speculative, it is possible that, had the economic policies and programs of the Ayub regime continued over the next two decades, Pakistan would have emerged as another miracle economy."

Pakistanis have found that each time a military ruler has been forced out and replaced by a civilian government led by politicians, both the economic and the social indicators have suffered. For example, Pakistan's decade of 1990s under the PPP and the PML rule is remember by economists as the lost decade. It was followed by a rebound of robust social and economic development during the Musharraf period from year 2000 to 2007.

In the 1990s, economic growth plummeted to between 3% and 4%, poverty rose to 33%, inflation was in double digits and the foreign debt mounted to nearly the entire GDP of Pakistan as the governments of Benazir Bhutto (PPP) and Nawaz Sharif (PML) played musical chairs. Before Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. In 1999 Pakistan’s total public debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% & 264.8% respectively in 1998) and India (44.0% & 358.4% respectively in 1998).

The year 1999 brought a bloodless coup led by General Pervez Musharraf, ushering in an era of accelerated economic growth that led to more than doubling of the national GDP, and dramatic expansion in Pakistan's urban middle class. Pakistan became one of the four fastest growing economies in the Asian region during 2000-07 with its growth averaging 7.0 per cent per year for most of this period. As a result of strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating almost 13 million jobs, halving the country's debt burden, raising foreign exchange reserves to a comfortable position and propping the country's exchange rate, restoring investors' confidence and most importantly, taking Pakistan out of the IMF Program.

The above facts were acknowledged by the last PPP government in a Memorandum of Economic and Financial Policies (MEFP) for 2008/09-2009/10, while signing agreement with the IMF on November 20, 2008. The document clearly (but grudgingly) acknowledged that "Pakistan's economy witnessed a major economic transformation in the last decade. The country's real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during 2000-07". It further acknowledged that "the volume of international trade increased from $20 billion to nearly $60 billion. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and improvement in many social indicators". (see MEFP, November 20, 2008, Para 1)

In addition to faster economic growth, Pakistan's human development index (HDI) also grew at an average rate of 2.7% per year under President Musharraf from 2000 to 2007, and then its pace slowed to 0.7% per year in 2008 to 2012 under elected politicians, according to the 2013 Human Development Report titled “The Rise of the South: Human Progress in a Diverse World”. Overall, Pakistan's human development score rose by 18.9% during Musharraf years and increased just 3.4% under elected leadership since 2008. The news on the human development front got even worse in the last three years, with HDI growth slowing down as low as 0.59% — a paltry average annual increase of under 0.20 per cent.

Going further back to the  decade of 1990s when the civilian leadership of the country alternated between PML (N) and PPP,  the increase in Pakistan's HDI was 9.3% from 1990 to 2000, less than half of the HDI gain of 18.9% on Musharraf's watch from 2000 to 2007.

Acceleration of HDI growth during Musharraf years was not an accident.  Not only did Musharraf's policies accelerate economic growth, helped create 13 million new jobs, cut poverty in half and halved the country's total debt burden in the period from 2000 to 2007, his government also ensured significant investment and focus on education and health care. In 2011, a Pakistani government commission on education found that public funding for education has been cut from 2.5% of GDP in 2007 to just 1.5% - less than the annual subsidy given to the various PSUs including Pakistan Steel and PIA, both of which  continue to sustain huge losses due to patronage-based hiring.

Why is it that the military rulers have consistently delivered better economic and social results while the politicians have not been able to mach them? 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.

Having just voted and elected new leaders in general elections on May 11, it is important that the voters demand an explanation from the new leadership for their extremely poor performance in the social sector in the past. Without accountability, these politicians will continue to ignore the badly needed investments required to develop the nation's human resources for a better tomorrow. Forcing the political leaders to prioritize social sector development is the best way to launch Pakistan on a faster trajectory.

Here's a video discussion on the subject recorded on Pakistan's independence day:

Wide Angle Zoom: Formation and Future of Pakistan by wbt-tv

Related Links:

Haq's Musings

General Suharto Passes On

The Idea of Pakistan By Stephen Cohen

Saving Pakistan's Education

Political Patronage Trumps Public Policy in Pakistan

Dr. Ata-ur-Rehman Defends Pakistan's Higher Education Reforms

Twelve Years Since Musharraf's Coup

Musharraf's Legacy

Pakistan's Economic Performance 2008-2010

Role of Politics in Pakistan Economy

India and Pakistan Compared in 2011

Musharraf's Coup Revived Pakistan's Economy

What If Musharraf Had Said No?


Mayraj said...

Indonesia is a resource rich country and benefitted from commodities. It also has benefitted from business oriented Chinese diaspora. It hasn't done as well as Taiwan or Malaysia because its population is much bigger. It could have done much better if it had a bold risk taking leadership like China;but it didn't/'doean't. In fact Malaysia needs more potent policies to continue growing. It has stagnated.[When I was working on my chapter on Chinese decentralized I did some research on the Asian Tigers.]
Had Bhutto not nationalized industry, Pakistan could have been in a different. Yes govt owned factories like those operated by TVEs in China can be successful;but they were incentivized to succeed-not the case in Pakistan.
Note: Philippines has a feudal-large landlord problem like Pakistan and yet its economy is picking up. It has finally earned to take advantage of its English seeking population-at home. And see how policy of improving corruption has been a boon. It is being done under Aquino-now why couldn't a Bhutto be like that?
Getting Globalization Right: The East Asian Tigers,-say-analysts
Philippines and Indonesia: the new 'tigers'
Philippines Beats Indonesia in Gaining S&P Investment Grade
Philippines Economy: Booming, But Poverty and Unemployment Remain Problematic

“At 6.6 percent, the Filipino economy's current GDP growth rate is the second highest in Asia, behind only China's.”
“These economic improvements are in part due to President Benigno Aquino, whose steps to increase transparency and address corruption sparked renewed international confidence in the Filipino economy even during the global slowdown.”
“Filipino economist Cielito Habito calculated that the increased wealth of those families was equivalent in value to a staggering 76.5 percent of the country's overall increase in GDP at the time. This income disparity was far and away the highest in Asia”
The Grim Reality Behind the Philippines' Economic Growth
The country is being heralded as the new Asian success story, but only an elite few reap the rewards.
High unemployment rate in Philippines despite strong economic growth
Despite strong economic growth, the unemployment rate in the Philippines remains the highest in Southeast Asia. The government hopes to create employment by drawing in more investments.

“Not everything is rosy however. For instance, although workers are increasingly returning home, the economy still has an abnormal number of “remittance” workers abroad, which constituted about 8 percent of GDP last year. What’s more, in the same report mentioned above, the IMF warned that Manila will need to continue improving its institutions and invest more in infrastructure.
Despite these challenges, Fitch and now Standard and Poor’s positive outlook for the country has demonstrated that Aquino administration is on the right track with its “good governance is good economics” philosophy.”
Asia’s Rising Economic Star: The Philippines?

Riaz Haq said...

Mayraj: "ndonesia is a resource rich country and benefitted from commodities."

Policies and governance are much more important than the riches of commodities. If natural resources mattered much then African countries would be among the richest and Japan and South Korea among the poorest.

Hopewins said...

Mayraj says: "Malaysia best. Indonesia next. Philipines so-so. Pakistan is not up the mark. This is because..feudal..population.. risk..resources..english..blah..blah..blah."

Here is a simpler explanation of why the growth in Malaysia > Indonesia > Philipines > Pakistan:

Hopewins said...

^^RH: "Policies and governance are much more important than the riches of commodities. If natural resources mattered much then African countries would be among the richest and Japan and South Korea among the poorest"

True dat. True dat. Well said.

Mayraj said...

Indonesia benefitted from Chinese business people and being the 'right' neighborhood.
The story is still commodities (note it is no longer a major oil producer like it was before):
"Indonesia has indeed successfully overcome several setbacks in the last 15 years. In addition to the Asian financial crisis, the country underwent a political re-structuring, the devastating 2004 Tsunami and periods of domestic unrest and instability. Yet Roubini has identified several key asset markets in which Indonesia is attracting serious foreign investment. These include coal (much of which competes with Australian coal in China), palm oil and timber. The country’s population is also large – at 230 million, the 4th largest in the world – and thus has some of the "large market" allure that favors well-peopled economies when investment and expansion decisions are made.
Nouriel Roubini is not alone in his optimism about Indonesia. The IMF and the OECD have both recently issued favorable reports on Indonesia’s economy (albeit pointing out a need for some reforms)."
The Next Asian Tiger

Thing are looking up for African countries.

Riaz Haq said...

Mayraj: "Indonesia benefitted from Chinese business people and being the 'right' neighborhood."

I agree that Indonesia benefited from its entrepreneurial ethnic Chinese minority. But it was only possible because Suharto managed to protect them from the tyranny of the majority which killed many Chinese and deterred investment.

In addition, Suharto was one of the architects of AEAN along with Lee Kwan Yu of Singapore and Malaysia's Mahathir Muhammad. Both of them made a visit to his deathbed and wept openly.

"Lee, 84, and Mahathir, 82, paid what they knew would be their final respects to a former comrade-in-power, in a moment pregnant with symbolism as the curtain was drawing on a key regional actor. The death of Suharto, the most senior of the three ASEAN octogenarians, marks the beginning of the end of a defining generation of regional leaders", said Yang Razali Kassi of Pacific CSIS.

BTW, Pakistan, too, has a very entrepreneurial Gujrati minority who were badly hurt when Bhutto hit the so-called "22 families" hard which deterred further private investment in 1970s.

Riaz Haq said...

A 2010 UMich study found that misinformed people exposed to corrected facts rarely changed their minds

Riaz Haq said...

Here's a New Op Ed by Sayem Ali:

We are cautiously optimistic on growth outlook for 2014. Investor confidence has improved due to a smooth political transition in the May 2013 general elections and a new IMF loan to support the balance of payment position. The KSE 100 index has rallied 50 percent in 2013, as inflows from Foreign Portfolio Investors (FPI) increased to $372 million in 2013, compared to $114 million in 2012. While growth is likely to remain subdued at 3.5 percent in FY14 (ending June 2014), a stronger pickup is expected in the second half of 2014 on improved energy supply and higher private sector investment spending. In our view, growth will rise to 4.5 percent in FY15 (starting July 2014).

Growth is led by higher manufacturing sector output, which posted a strong 8.4 percent year-on-year growth in the second half of 2013, led by stronger growth in textile and leather exports. Improved energy supplies have led to higher output in the petroleum, fertiliser and food and beverages sectors. Private sector credit growth has also picked up, rising Rs82 billion during the second half of 2013, after declining by Rs20 billion in FY13. Credit growth will pick up in 2014 as government reins in large fiscal deficit under the IMF stabilisation program.

Key risks to growth arise from a deteriorating security environment, energy crisis and sharp rise in inflation. Inflation has accelerated in the second half of 2013 on cut back in energy subsidies and a weaker Pakistan rupee. Inflation has increased to 9.1 percent year-on-year in October 2013, a sharp increase after declining to 5.1 percent in May. Sharp rupee depreciation of over 8.5 percent in the second half of 2013 on widening balance of payment deficits has also fuelled inflation. We forecast CPI inflation to average 10 percent in FY14.

The biggest short-term challenge for policymakers is to avert a balance of payments crisis. Foreign exchange reserves have declined to dangerously low levels of $3.6 billion on November 13, which is equivalent to only one month of import cover. Large debt payments are looming on the horizon and a significant dollar liquidity injection is required to avert another balance of payment crisis. It will be hard for the economy to recover from another balance of payments crisis, similar to the 2008 crisis that led to the rupee depreciating 28 percent and forced the economy into a downward spiral of stagnant growth and record inflation.


The government has outlined an ambitious reform agenda under the IMF programme. The target is to reduce the fiscal deficit to 5.8 percent of GDP in FY14 from 8.8 percent in FY13. Reform agenda includes cutting back on power subsidies, implementing new tax measures and privatising public sector enterprises (PSEs). The government cut energy subsidies by 30percent for households and 50 percent for commercial users in November. A new tax on gas consumption is planned for December. The government has also shortlisted 31 state enterprises for privatisation, which will include IPOs for banks and oil and gas companies in 2014.

Riaz Haq said...

Democracy in #Pakistan: GDP grew avg 2.9% rate since 2008, less than half of 7% on @P_Mushharaf's watch until 2007.

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."