Monday, September 27, 2010

Pakistan's Economic History 101



Pakistani economy grew at a fairly impressive rate of 6 percent per year through the first four decades of the nation's existence. In spite of rapid population growth during this period, per capita incomes doubled, inflation remained low and poverty declined from 46% down to 18% by late 1980s, according to eminent Pakistani economist Dr. Ishrat Husain. This healthy economic performance was maintained through several wars and successive civilian and military governments in 1950s, 60s, 70s and 80s until the decade of 1990s, now appropriately remembered as the lost decade.



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).



After a relatively peaceful but economically stagnant decade of the 1990s, 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.

Per Capita PPP GDP



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 current 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)


 
The decade also cast a huge shadow of the US "war on terror" on Pakistan, eventually turning the nation into a frontline state in the increasingly deadly conflict that shows no signs of abating. Along with the blood and gore and chaos on the streets, there are hopeful signs that rule of law and accountability is beginning to prevail in the country with the restoration of representative democracy and independent judiciary, largely in response to an increasingly assertive urban middle class, vibrant mass media and growing civil society.



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



Why is it that Pakistani economy has done well under military governments and performed poorly when led by politicians? 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:


"..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."




Here is how Pakistani economist and NUST Professor Ashfaque Husain Khan explains the current situation:

What went wrong? Why one of the fastest growing economies in the Asian region until two years ago has been totally forgotten in the region? Firstly, the speed and dimension of exogenous price shocks (oil and food) were of extraordinary proportions. Secondly, the present government found itself totally ill-prepared and clueless in addressing the challenges arising out of the shocks. While rest of the world was taking corrective measures and adjusting to higher food and fuel prices, Pakistan lurched from one crisis to another.



Despite peaceful election and a smooth transition to a new government, political instability persisted. For a protracted period there were no finance, commerce, petroleum and natural resources and health ministers in the country. The government lost six precious months in finding its feet. It gave the impression of having little sense of direction and purpose. A crisis of confidence intensified as investors and development partners started to walk away. The stock market nosedived, capital flight set in, foreign exchange reserves plummeted and the Pakistani rupee lost one-third of its value. In short, Pakistan's macroeconomic vulnerability had grown unbearable. It had no option but to return to the IMF for a bailout package. There were no Plan A, B and C. There was only one plan, that is, to return to the IMF.

While the country was moving rapidly towards the IMF, the ministry of finance had prepared the plan to bring $4 billion by June 30, 2008 through four transactions. A kick-off meeting was scheduled on April 23, 2008 at the ministry to give a final touch to the various roadshows. These transactions were canceled on April 20, 2008. Who ordered the cancellation of $4 billion transaction? This cancellation prompted balance of payment crisis and the rest became history.

The economy continues to remain in intensive care unit and is barely breathing thanks to the injection of funds from the IMF, World Bank and Asian Development Bank. The economy is not on the radar screen of the government and as such the economic managers have no relevance in the current political set up. The exit of Shaukat Tarin is a classic example. At least he tried his best to inject financial discipline but paid the price of teaching prudent financial management.


Since Tarin's departure, Abdul Hafeez Shaikh has assumed the position of finance minister. It is still early to judge him, as the economy has suffered yet another major jolt from the widespread devastation caused by recent floods. This has added to the already extreme challenge Pakistan's leadership faces in bringing political and economic stability to the nation.

Here's a video titled "I Am Pakistan":



Related Links:

Haq's Musings
Ishrat Husain: Structural Reforms in Pakistan's Economy
Role of Politics in Pakistan Economy

Pakistan's Economic Performance 2008-2010

Incompetence Worse Than Corruption in Pakistan
Pakistan's Circular Debt and Load Shedding
US Fears Aid Will Feed Graft in Pakistan

Pakistan Swallows IMF's Bitter Medicine

Shaukat Aziz's Economic Legacy

Pakistan's Energy Crisis

Karachi Tops Mumbai in Stock Performance

India Pakistan Contrasted 2010
Pakistan's Foreign Visitors Pleasantly Surprised
After Partition: India, Pakistan and Bangladesh

The "Poor" Neighbor by William Dalrymple
Pakistan's Modern Infrastructure

Video: Who Says Pakistan Is a Failed State?
India Worse Than Pakistan, Bangladesh on Nutrition
UNDP Reports Pakistan Poverty Declined to 17 Percent

Pakistan's Choice: Talibanization or Globalization

Pakistan's Financial Services Sector

Pakistan's Decade 1999-2009

South Asia Slipping in Human Development
Asia Gains in Top Asian Universities

BSE-Key Statistics
Pakistan's Multi-Billion Dollar IT Industry

India-Pakistan Military Comparison

Food, Clothing and Shelter in India and Pakistan

Pakistan Energy Crisis

IMF-Pakistan Memorandum of Economic and Financial Policies

Friday, September 24, 2010

India, Pakistan and UN MDG Goals

In year 2000, leaders of rich and poor nations pledged to build a better world by 2015. Among their key goals now called Millennium Development Goals: halving extreme poverty and hunger from 1990 levels, reducing by two-thirds the child-mortality rate and slashing maternal mortality by three-quarters and achieving universal primary education.

The good news is that the share of people living on less than $1.25 a day seems on track to meet the goal of halving the extreme poverty rate. However, the bulk of those gains have occurred in China and other East Asian countries. In fact, East Asia, Southeast Asia and North Africa are all on track to achieve almost all of the MDGs by 2015, but South Asia and the rest of the developing world have made insufficient progress so far, according to the current assessment by UN agencies.



The three-day summit to press world leaders to meet U.N. MDGs by significantly reducing poverty by 2015 concluded Wednesday with new financial pledges from countries but no guarantee that there will be enough money and political will to meet the targets. With many countries under financial stress from the effects of the global economic crisis as well as rising food and energy prices, Secretary-General Ban Ki-moon has asked member nations not to abandon the 1 billion people living on less than $1.25 a day. While the MDG goals encompass a variety of areas including education, health and gender parity, the first and the most important of these goals is to reduce poverty

With South Asia as the region with the largest share of the one billion global poor, the world will not meet its targets unless there is much greater focus and strong commitment to meet MDG goals in India, Pakistan and Bangladesh. In fact, even South Asia has a better chance of meeting the poverty and hunger reduction goals excluding India. Let's discuss the status of South Asian nations to assess where they are and what needs to be done.



India alone has the world's largest population of poor, hungry and illiterate people living within its borders. A new multi-dimensional measure of poverty confirms that there is grinding poverty in resurgent India. It highlights the fact that just eight Indian states account for more poor people than the 26 poorest African countries combined, according to media reports. The Indian states, including Bihar, Uttar Pradesh and West Bengal, have 421 million "poor" people, compared to 410 million poor in the poorest African countries.

OPHI 2010 country briefings on India and Pakistan contain the following comparisons of multi-dimensional (MPI) and income poverty figures:

India
MPI= 55%,Under$1.25=42%,Under$2=76%,India_BPL=29%

Pakistan
MPI=51%,Under$1.25=23%,Under$2=60%,Pakistan_BPL=33%

Lesotho MPI=48%,Under$1.25=43%,Under$2=62%,Lesotho_BPL=68%

China
MPI=12%,Under$1.25=16%,Under$2=36%,China_BPL=3%

Among other South Asian nations, MPI index measures poverty in Bangladesh at 58 per cent and 65 per cent in Nepal.

On poverty in Pakistan, World Bank economist Sanket Mohapatra has said in a recent post that remittances by overseas Pakistanis have played a significant role in Pakistan's economic improvement. Not only have such remittances contributed to significant poverty reduction in Pakistan "by an impressive 17.3 percentage points between 2001 and 2008 (from 34.5 percent in 2001-02 to 17.2 percent in 2007-08)", but "continued strong growth in worker’s remittances in the past few years has also contributed to improvements in the external current account balance” and “have facilitated improvement in the country’s external position”, according to a World Bank report released on July 30, 2010.

There are now fears, however, that some of the gains made in poverty reduction have reversed due to widespread devastation in massive floods and Pakistan's economic woes since 2008 for which the poverty rate of 17% was reported by the World Bank. Thousands of schools and clinics have been destroyed in the recent deluge, setting back Pakistan's efforts toward meeting health and education related millennium development goals by 2015.

In addition to lagging in poverty reduction, South Asians are also doing poorly in terms of hunger and health indicators.

According to a recently-released FAO report's highlights as published in The Guardian, there are 847.5 million undernourished people in the world. India tops the list with 237.7 million, followed by China with 130.4 million, Pakistan 43.4 million, Democratic Republic of Congo 41.9 million, Bangladesh 41.7 million, Ethiopia 31.6 million and Indonesia 29.9 million.

A recent report by World Health Organization (WHO) claims that India accounts for most maternal deaths in the world, with at least 63,000 such deaths taking place in 2008 alone. In fact, India fared worse than even Nigeria (50,000 maternal deaths in 2008), Congo (19,000), Afghanistan (18,000), Ethiopia (14,000), Pakistan (14,000), Tanzania (14,000), Bangladesh (12,000), Indonesia (10,000), Sudan (9,700) and Kenya (7,900). An estimated 65% of maternal deaths globally occurred in these 11 countries in 2008, with India contributing the most.

As South Asians lurch toward the 2015 deadline for meeting the MDG goals, it is important to recognize their governments' role and the need for help from rich donor nations to significantly increase spending on human development for poverty reduction. However, the South Asian governments alone can not do it. The private sector organizations, NGOs and civil society have to come forward to make their contribution toward meeting the important MDG goals to reduce poverty and hunger and improve health and literacy.

In Pakistan's case in particular, the overseas Pakistanis and Pakistan's middle class need to step forward to do their part in rebuilding the shattered lives of millions of their poor fellow citizens affected by the recent floods.

Related Links:

Haq's Musings

MDGs in Pakistani Village

UN Millennium Development Goals Report 2010

India Poorer Than Africa

India is Home to the World's Largest Population of Poor, Hungry and Illiterate People

Can Global Pakistanis Invest $10 billion in Reconstruction?

Friday, September 17, 2010

Pakistan's Challenge: Raise Exports, Attract Foreign Investments

Gross domestic product (GDP) is calculated by adding up public and private consumption, investments and net exports (exports-imports). Some of the major world economies, most notably Germany and China, are led by exports, while others, such as United States, United Kingdom, India and Pakistan, are primarily domestic consumption driven.

With almost 80% of its GDP from consumption, Pakistan has particularly heavy reliance on domestic public and private spending for its economic health. This is much higher than the US consumption accounting for over 70% of its economy, and India's 60%.

As Pakistan's GDP has more than doubled over the last decade, its FDI has increased dramatically and its exports have grown at 16% CAGR till 2007, the consumption component has continued to be stubbornly high at about 80%, with about 20% of it coming from investments and exports. By contrast, India's consumption component has declined from 80% to 60% with its investment and export components rising to more than 30% during the same period.

While the rest of the developed economies stagnate, the German formula seems to be working well, with exports driving the nation’s strong recovery. The German economy grew 2.2 percent in the second quarter from the first, yielding an annualized growth rate of about 9 percent that puts it on a footing with emerging markets like China and India.

In spite of the fact that about 80% of Pakistan's GDP depends on domestic consumption, the nation has been highly vulnerable to external shocks related to the need for imports, particularly the oil price volatility. Energy accounts for about a third of Pakistan's imports, and as the speculators drove oil prices to over $150 a barrel in 2008, the nation found itself unable to pay for imports, and sought bailout by the International Monetary Fund in 2008.

While the country was moving rapidly towards the IMF, former economic adviser Prof. Ashfaque Hasan Khan recalls that Pakistan's ministry of finance had prepared the plan to bring $4 billion by June 30, 2008 through four transactions. A kick-off meeting was scheduled on April 23, 2008 at the ministry to give a final touch to the various roadshows. These transactions were canceled on April 20, 2008. Who ordered the cancellation of $4 billion transaction? This cancellation prompted the latest balance of payment crisis and the rest became history.

Since the major missteps by the Zardari government in 2008, the economic crisis has worsened as the investors have pulled out and business confidence plummeted amidst serious security concerns raised by the Taliban insurgency in the country. It has also hurt Pakistan's exports. The recent devastating floods have added to the already serious economic woes. The only positive news has been the rising remittances by overseas Pakistanis which increased to nearly $9 billion last year.



Several East Asian and South East Asian nations faced a similar financial crisis in 1997 which required IMF bailout. Since the 1997 crisis, most of these Asian nations have significantly expanded their exports and built up large dollar reserves to deal with external shocks effectively. In addition, the Association of South East Asian Nations (ASEAN) has banded together with China, South Korea, and Japan to form the "ASEAN Plus Three" financial grouping. This arrangement is designed to enable member countries to swap reserves if speculators again target their currencies.

In addition to reviving the national economy from its current slump, the biggest long-term challenge for Pakistan's economic leadership is to improve the nation's ability to deal with external and internal shocks. This will require learning from the experience of India or other Asian economies in building sufficient internal revenue base for public expenditure, attracting greater foreign investment, expanding and diversifying exports and strengthening hard currency reserves. Inability to deal with these challenges will doom Pakistan to perpetual dependence on IMF and consequent loss of sovereignty to it.

Related Links:

Haq's Musings

Incompetence Worse Than Corruption in Pakistan

Pakistan's Circular Debt and Load Shedding

Pakistan Swallows IMF's Bitter Medicine

Shaukat Aziz's Economic Legacy

Structural Reform in Pakistan Economy

Pakistan's Energy Crisis

Soaring Food and Fuel Prices

Karachi Tops Mumbai in Stock Performance

India Pakistan Contrasted 2010

Pakistan's Foreign Visitors Pleasantly Surprised

After Partition: India, Pakistan and Bangladesh

The "Poor" Neighbor by William Dalrymple

Pakistan's Modern Infrastructure

Video: Who Says Pakistan Is a Failed State?

India Worse Than Pakistan, Bangladesh on Nutrition

UNDP Reports Pakistan Poverty Declined to 17 Percent

Pakistan's Choice: Talibanization or Globalization

Pakistan's Financial Services Sector

Pakistan's Decade 1999-2009

South Asia Slipping in Human Development

Asia Gains in Top Asian Universities

BSE-Key Statistics

Pakistan's Multi-Billion Dollar IT Industry

India-Pakistan Military Comparison

Food, Clothing and Shelter in India and Pakistan

Pakistan Energy Crisis

IMF-Pakistan Memorandum of Economic and Financial Policies

Saturday, September 11, 2010

Doubling Foreign Remittances to Rebuild Flood-Ravaged Pakistan

Members of Pakistani diaspora must remember their compatriots in distress as we celebrate Eid today.

While there have been high-profile recent efforts by overseas Pakistanis to raise millions of dollars to fund rescue and relief efforts after the recent devastating floods, it is now time to begin to shift focus on to the much longer term and significantly more expensive reconstruction phase that will requires billions, not millions, of dollars.

World Bank economist Sanket Mohapatra has said in a recent post that remittances by overseas Pakistanis have played a significant role in Pakistan's economic improvement. Not only have such remittances contributed to significant poverty reduction in Pakistan "by an impressive 17.3 percentage points between 2001 and 2008 (from 34.5 percent in 2001-02 to 17.2 percent in 2007-08)", but "continued strong growth in worker’s remittances in the past few years has also contributed to improvements in the external current account balance” and “have facilitated improvement in the country’s external position”, according to a World Bank report released on July 30, 2010.

World Bank's Mohaptra adds that "there is now a risk that devastating floods that have hit Pakistan, killing more than 1,200 people and leaving 2 million people homeless, could reverse some of the gains in poverty achieved in the last few years, which were already believed to have been weakened in the wake of the recent financial crisis and rise in food prices. During past natural disasters, migrants have sent additional remittances to help their families and friends in need – for example, during the Pakistan earthquake in 2005, in Philippines after typhoons Ondoy and Pepeng in 2009, after an earthquake in Haiti in early 2010, and in other countries in Asia, Africa and Latin America. It is likely that the Pakistani diaspora will send additional financial resources to help their family, friends and even larger communities. These person-to-person transfers could complement official aid efforts".

The cost and the task of post-flood reconstruction may appear to be monumental, but I feel confident that global Pakistani community is equal to it. Already, non-resident Pakistanis have been sending home nearly ten billion US dollars a year in remittances to their home country. And their invested assets are estimated to be in hundreds of billions of US dollars in different parts of the world. I believe Pakistani diaspora can double their remittances in the next twelve months, thereby boosting Pakistan's overall economy by a $10 billion stimulus for reconstruction.

If a significant part of this additional $10 billion in remittances goes into special, professionally managed, investment funds specifically for post-floods reconstruction and rehabilitation, it will be an even greater boost to Pakistan's overall economy. To put it in perspective, the $10 billion in a year would be 5 times the annual foreign aid, and twice the peak FDI Pakistan received in 2007, the last year of healthy economic growth in 2007-2008.

Here's a video clip of Pakistan's billionaire real estate developer Malik Riaz Husain pledging $2 billion of his own wealth to help the flood victims rebuild:



Related Links:

Haq's Musings

Pakistani-Americans Extend Help to Flood Victims

World Bank Report on Pakistan released on July 30, 2010

Pakistan's Economic Performance 2008-2010

Aid, Trade, Investments and Remittances in Pakistan

World Bank Blog on Impact of Remittances in Pakistan

Thursday, September 2, 2010

$500,000 Raised at Silicon Valley Iftar For Pakistan Flood Relief

For every Pakistani hit by floods, there are eight who are still standing and ready to help. That was the theme that guided the recent Silicon Valley Iftar and Fundraiser organized by Organization of Pakistani Entrepreneurs (OPEN Silicon Valley) at the Computer History Museum in Mountain View, California.

About 300 attendees contributed over $500,000 at the event. It was specially gratifying to see that my fellow NED alumni were at the forefront and donated $60,000, with a pledge to give another $40,000 to match any additional contributions made within a week of the event. There was another offer of $70,000 match by an unknown contributor.

In addition to various fundraisers to aid twenty million flood victims, Pakistani-American employees have persuaded their high-tech employers to make significant matching contributions for flood relief. For example, Cisco is matching over a million dollars in employee contributions, and Intel's Pakistani employees expect their employer to contribute about $250,000. Google has announced $250,000 grant for flood victims, and set up a special page for additional fundraising.

While each of these reported amounts at individual events and companies in the valley appear too small to meet the massive challenge ahead, I believe that it will all add to up to a substantial amount of several million dollars for at least the initial phase of rescue and relief effort.

Beyond that, the community and their friends and neighbors will need to be energized to support the much bigger and longer term effort required for the reconstruction and rehabilitation phase for about twenty million victims.

Here is a list of some of the organizations actively raising funds for flood relief:

- Imran Khan Flood Relief Fund

- Edhi Foundation

- IMANA

- HumanityFirst

- Developments in literacy

- HOPE USA

- Human Development Fund

- Naya Jeevan

- APPNA

- The Citizens Foundation

- Hidaya Foundation

- American Red Cross

- HelpingHands

- UNICEF

- Islamic Relief

- Relief International

As Pakistan faces the worst natural disaster of its 63 year history, the failure to aid the victims could perpetuate the misery of the poor victims and play right in to the hands of the extremist forces of intolerance who are actively taking advantage of the human misery amidst social inequities of Pakistan's rural feudal society.

As heart-wrenching and destructive as this deluge has been, I believe it could also be a blessing in disguise for the millions of poor peasants who have have been toiling on the feudal lands from time immemorial. If the reconstruction and rehabilitation effort is designed and implemented to help the victims escape the degrading life as slaves of their feudal lords, Pakistan could see a new beginning toward greater human development and a prosperous future that is free of violence and terrorism.

Here is a video clip showing scenes of great devastation and widespread human suffering caused by the unprecedented flooding in Pakistan:



Related Links:

Haq's Musings

Pakistan's Middle Class Responds to Challenge

Taliban Target Landed Elite

Disaster Dampens Spirits on Pakistan's 63rd Independence Day

Feudal Power Dominates Pakistani Democracy

Failure to Aid Pakistan Flood Victims Will Be Costly

HDF Silicon Valley Fundraiser For Pakistan

Aid versus Trade, Investments and Remittances

Microfinancing in Pakistan

HDF Silicon Valley Fundraiser 2008

Aid to Pakistan Bill 2009

Light a Candle, Do Not Curse Darkness

Facebook Group-Zimmedar Shehri

Helping Children Become Responsible Citizens

Orangi Pilot Project

Three Cups of Tea

Volunteerism in America