Perils of Pakistani Politics of Patronage

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

Comments

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


http://wsws.org/articles/2011/jul2011/paki-j22.shtml
Riaz Haq said…
Here's an interesting opinion by economist Jeffrey Sachs. about budget politics in America:

..Every part of the budget debate in the U.S. is built on a tissue of willful deceit. Consider the Republican Party's double-mantra that the deficit results from "runaway spending" and that more tax cuts are the key to economic growth. Republicans claim that the budget deficit, around 10 percent of GDP, has been caused only by a rise in outlays. This is blatantly untrue. The deficit results roughly equally from a fall of tax revenues as a share of GDP and a rise of spending as a share of GDP.
On both sides of the ledger -- spending and taxes -- part of the shift results from the weak economy ("cyclical factors") and part from long-term trends. Spending, for example, is higher in part because of unemployment compensation, food stamps, and other federal spending to help the downtrodden in a weak economy. That's the "cyclical" component. Part of the higher spending reflects long-term patterns, such as rising health care costs and an aging population, as well as America's chronic addiction to wrongheaded wars and military occupations in Africa, the Middle East and Central Asia.
Taxation is lower also because of short-term factors and long-term factors. The short-term factors involve reduced federal revenues in an economy with high unemployment. The long-term factors involve repeated tax cuts for companies and high-income individuals that have systematically eroded the tax base, giving unjust and unaffordable benefits for America's millionaires, billionaires, and multinational corporations.
The Republicans also misrepresent the costs and benefits of closing the deficit through higher taxes on the rich. Americans wants the rich to pay more, and for good reason. Super-rich Americans have walked away with the prize in America. Our country is run by millionaires and billionaires, and for millionaires and billionaires, the rest of the country be damned. Yet the Republicans and their propaganda mouthpieces like Rupert Murdoch's media empire, claim with sheer audacity that taxing the rich would kill economic growth. This trickle-down, voodoo, supply-side economics is the fig leaf of uncontrolled greed among the right-wing rich.
The truth is that we need more federal spending to create good jobs and remain globally competitive, not as some kind of short-term "stimulus" but as a long-term investment in education, job skills, science, technology, energy security, and modern infrastructure. I travel around the world as part of my job, and I can say without doubt that America has failed to modernize the economy and is steadily losing its international competitiveness. No wonder the good jobs are disappearing and the pay is stagnant, unless of course you are a CEO who can keep grabbing stock options and profits from the shareholders (who are anyway enjoying record incomes because of stagnant wages and high profits earned overseas).
The Democrats of the White House and much of Congress have been less crude, but no less insidious, in their duplicity. Obama's campaign promise to "change Washington" looks like pure bait and switch. There has been no change, but rather more of the same: the Wall-Street-owned Democratic Party as we have come to know it. The idea that the Republicans are for the billionaires and the Democrats are for the common man is quaint but outdated. It's more accurate to say that the Republicans are for Big Oil while the Democrats are for Big Banks. That has been the case since the modern Democratic Party was re-created by Bill Clinton and Robert Rubin.
Thus, at every crucial opportunity, Obama has failed to stand up for the poor and middle class. He refused to tax the banks and hedge funds properly on their outlandish profits;...
Riaz Haq said…
Here are some excerpts from a Dawn Op Ed by former SBP governor Shahid Kardar:

One particularly bad example of privatisation, the KESC (a subject that requires a separate treatment and discussion), is repeatedly brought up not just by vested groups but also the general public to oppose the divestment of a host of poorly managed, loss-making enterprises.

This perception persists and continues to find supporters despite overwhelming information on outcomes following privatisation or the opening up of economic sectors like telecom, banking, etc that were hitherto closed to private entities. An array of stakeholders has latched on to this outlier example (the KESC), contrary to all available proof of the immense contribution of privatisation towards bolstering Pakistan’s economy.To start with, take the case of the banks. The lessons learnt from the recent experience with the Bank of Punjab and that of banks like MCB, Habib, UBL and Allied (the last three with huge holes at the time of their privatisation) until their privatisation began in the early 1990s should be a sobering reminder on the need to protect the interests of depositors and to maintain the soundness and stability of the banking system by saving the remaining public-sector banks from the fate of the Bank of Punjab.

It would be naïve to expect the State Bank as the regulator to be able to initiate timely, corrective measures to prevent such abuse.

Can anyone deny the quality of services and products, the outreach to those outside the banking system and the increased employment opportunities provided by the rapidly growing private banking industry? Add to this the part it has played in the expansion of the country’s GDP and to government tax revenues to value the nature and scale of its contribution to overall public welfare.

From an after-tax loss of Rs9.77bn in 2001 (when they were government owned) the earnings of these privatised banks rose to a profit after-tax of Rs73.115bn in 2007. Higher earnings resulted in increased tax payment by banks to the government from Rs10.8bn in 2001 to Rs33.8bn in 2007. In the same vein, it is instructive that in 2008 and 2009 the average loan write-off per borrower in public-sector banks was more than twice that per borrower in the case of private banks. Therefore, the sooner we privatise the remaining public-sector banks the higher and quicker the economic and social returns to the nation.

Next, let’s take the case of the telecom sector. Does anyone seriously believe that had PTCL continued to have a monopoly in this sector we would have been able to get this variety of choice and quality of services and products and, more importantly, at such alluring and competitive rates? Also, hasn’t PTCL’s service improved since its privatisation? No bribes now needed for new connections and for getting your landline fixed — all seamless with little, if any, human contact. It wasn’t that long ago that we had to suffer all this. Either our memories are short or conveniently selective.

Next, take the case of the electronic media. Could PTV ever have provided such a variety and quality of programmes and also raised public awareness and knowledge of a whole range of constitutional, political, economic and social issues to such heights, and in a society with an abysmal literacy rate?

---

... it is this same set of politicians and bureaucrats and their collaborators who continue to oppose privatisation because of the resulting reduced opportunities for ‘patronage’ (an appropriate all-embracing term in our context) or earnings as fees or junket trips as directors of these banks and publicly owned entities.


http://www.dawn.com/2011/08/14/case-for-privatisation.html
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.


http://tribune.com.pk/story/314181/pakistans-perceived-corruption/
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.
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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.


http://www.guardian.co.uk/commentisfree/2012/jan/19/pakistan-culture-honourable-corruption?newsfeed=true
Riaz Haq said…
Pakistan is a resilient country, says Anatol Lieven according to Dawn:

In Pakistan’s diversity lies a measure of its resilience. This was argued by distinguished journalist and author Anatol Lieven during his talk at the Oxford University Head Office on Saturday.

Mr Lieven’s talk basically gave a sketch of his book ‘Pakistan: A Hard Country.’ He began by asserting that Pakistan was not a failed state and said the people who had gathered to listen to him were proof of it. Pakistan was not Afghanistan, Chechnya or Somalia. He maintained that his book was about the sources of resilience in Pakistan, which could be sources of stagnation as well (in terms of development). To explain his point, he said he had used the expression ‘Janus-faced’ many a time in the book, and that the editors had made 18 deletions of the phrase, leaving just half a dozen. The book was an attempt at discussing power in the country, how it is exercised and what are its roots – religious, cultural etc. This central theme was set against the background of the war in Afghanistan and the rise of militancy in Pakistan. He told the gathering that when an American publisher read it he was taken aback because he had thought that it would be about the Taliban and an impending Islamic revolution in Pakistan. He added that it also discussed the role of the military and the four provinces and the difference within those provinces.

Mr Lieven said he had spent a lot of time talking about the diversity in Pakistan. For example, how Karachi was different from the rest of Sindh and how Punjab was an immensely varied region. Also, the important role that kinship played in the country’s politics and power struggles. In his view, a measure of its resilience lay in the country’s diversity, because of which, however, it was sometimes difficult to get things done. He argued that Pakistan couldn’t have an Iran-style revolution because it didn’t have a monolithic culture.

Mr Lieven said that as he was a journalist he got quotes from the Pakistani people in their own words. The problem with the West was that it didn’t listen to people directly and therefore had a flawed understanding of things. If you were to know about the tribal justice system in Balochistan, you had to talk to a Baloch sardar, he pointed out.

With respect to militancy in Pakistan Mr Lieven said that although the fear of terrorism was pervasive, and that it had claimed numerous victims, the insurgency was limited, particularly after the 2009 Swat operation in which militants were driven back. However, he added that insurgency was common in the region and, except for Bangladesh, every country had faced it.

Mr Lieven said sympathy for the Afghan Taliban in areas like Peshawar was similar to the support for the mujahideen in the ‘80s. It did not necessarily mean an Islamic revolution. He argued that up to a certain point the situation did appear perilous but the post-Musharraf scenario proved that if the state and the army made a concerted attempt things could be done. He said his book also took issue with the US foreign policy. The US should realise that Pakistan is a much more important country than Afghanistan and that it needs to tread lightly here. He said however that the Osama bin Laden operation had impacted public opinion in the US, and if there was a terrorist attack in the US or India in future, US retaliation could be severe. It was important for Pakistan to continue visible cooperation against international terrorism, he remarked.

Replying to a question, Mr Lieven said one of the reasons he used the word ‘hard’ in the title of the book was that he would often hear the phrase ‘Pakistan is a hard country’ from the locals. He gave the example of a Chaudhry in Punjab who, explaining the killing of his detractors, commented that Pakistan was a hard country....


http://www.dawn.com/2012/02/05/pakistan-is-a-resilient-country.html
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.


http://en.wikipedia.org/wiki/Spoils_system
Riaz Haq said…
PIA, Pakistan's national airline, is a victim of corruption and incompetence from political patronage. Here's a Reuters' report on it:

PIA (PIAa.KA), like Pakistan, always seems to be on the brink of disaster. But now that seems closer than ever for the national flag carrier, once a source of pride for the country.

The airline is haemorrhaging hundreds of millions of dollars a year while being pummelled by competition from sleek Gulf giants like Emirates EMIRA.UL, Etihad and Qatar Airways.

A quarter of its 40 aircraft are grounded because the airline can't find enough money to buy spare parts. Flights are regularly cancelled and engineers say they are having to cannibalise some planes to keep others flying.

"The situation has worsened to the extent of rendering this airline almost financially unviable," said the State Bank of Pakistan in a report on the state of the economy.

In many ways the airline mirrors the way Pakistan -- a strategic U.S. ally often described as a failing state -- is run.

The same inefficiency, nepotism and corruption that critics say have prevented the government from tackling a Taliban insurgency, crippling power cuts, ethnic violence and widespread poverty also threaten to bring down the airline.

PIA lost 19.29 billion rupees in the first nine months of 2011, almost double the losses in the same period in 2010.

The airline, like the Pakistani economy, has relied on bailouts to stay in the air, and is negotiating with the state for another rescue package.

"Just like PIA has the potential to do well, Pakistan's economy does too. But both haven't because of mismanagement. In the end that is the story -- mismanagement," Salman Shah, a former Pakistani finance minister, told Reuters.

PIA officials were not available for comment on the challenges facing the airline despite repeated requests.

HUGE WORKFORCE WEIGHS DOWN AIRLINE

Over the years, critics say, governments have manipulated state corporations like PIA for political and financial gain, giving jobs to so many supporters that the size of the workforce has become unsustainable in the face of mounting losses.

"We don't have people in the right places in typical Pakistani fashion. It's about who you know not what you can do," said a PIA pilot, who like other employees asked not to be identified for fear of being fired.

Today, PIA has a staggering employee to aircraft ratio of more than 450, more than twice as much as some competitors. In the first nine months of 2011, employee expenses drained 16 percent of turnover.

"Politically motivated inductions have been the major cause of the significant increase in human resource burden in this organisation," said the central bank.

"It cannot be corrected without taking drastic steps for rightsizing and increasing operational efficiency."

That is unlikely in a country where political expediency and interests often undermine efforts to make everything from governments to corporations successful.

Frustrations with those realities are palpable at PIA.


http://www.reuters.com/article/2012/02/14/uk-pakistan-airline-idUSLNE81D02820120214
Riaz Haq said…
Here's an excerpt of Businessweek piece on the cost of India's system of political patronage:

India’s government, and especially its state governments, have always run large deficits, partly because regular elections are an invitation to profligacy. Corruption has been rampant for decades, though today’s scandals—such as the furor over the nation’s allocation of 2G telecom licenses—are shocking for their brazenness and the sheer sums of money involved. They are in many ways the fruit of India’s rapid prosperity and the brand of robber-baron capitalism it has bred.

Gurcharan Das, an author and former businessman, has written that while China succeeded because of the state, India thrived despite its government. For a while that seemed like a workable formula: Companies bought generators to get around frequent blackouts, hired their own security, and even maintained roads to compensate for the shortcomings of public facilities.

The country’s recent travails, however, have shattered the illusion that the private sector can thrive without a functioning state. Policy and regulatory confusion, and rising social and environmental problems, are all reminders that sustainable growth isn’t possible without an ecology of sound institutions and responsive government. In many ways it is now apparent that the advances of the last couple of decades were built on shallow foundations.

Yet there’s a danger in overstating today’s weaknesses. Given the global financial crisis it was probably unrealistic to expect India’s economy to remain unscathed. At least part of the decline in foreign direct investment is due to a general tightening of credit and a flight to safety around the world. The Indian stock market’s downturn reflects a broader investor wariness of emerging markets.

Investors are also reacting (and arguably overreacting) based on incomplete information. Jessica Seddon, an economist who is writing a book about data and Indian policymaking, argues that a full picture of India’s economic health remains obscured by unreliable and patchy data. For example, an astounding 93 percent of India’s workforce is employed outside the formal economy, which means that unemployment estimates are inevitably inaccurate. Some of the most important statistics on consumption and demographics come out infrequently, often years after the fact. Similarly, poverty measurements are politically charged, contentious affairs; there exist a multitude of competing methodologies and wildly varying figures for the number of poor.

Seddon emphasizes that the bulk of the evidence does suggest India is slowing, but the severity of that slowdown isn’t clear. Analysts of the Indian economy, she adds, are often “grasping at straws.” Pessimists make their case for Indian decline without full information; optimists use the poor quality of information as an excuse to argue that the country is in fact doing far better than suggested by leading indicators. Reality, as is so often the case in India, probably lies somewhere in between.


http://www.businessweek.com/articles/2012-03-01/india-miracle-interrupted
Riaz Haq said…
Here are excerpts of a David Brooks' NY Times column on why political participation is important for idealistic youth:

Often they are bursting with enthusiasm for some social entrepreneurship project: making a cheap water-purification system, starting a company that will empower Rwandan women by selling their crafts in boutiques around the world.

These people are refreshingly uncynical. Their hip service ethos is setting the moral tone for the age. Idealistic and uplifting, their worldview is spread by enlightened advertising campaigns, from Bennetton years ago to everything Apple has ever done.

It’s hard not to feel inspired by all these idealists, but their service religion does have some shortcomings. In the first place, many of these social entrepreneurs think they can evade politics. They have little faith in the political process and believe that real change happens on the ground beneath it.

That’s a delusion. You can cram all the nongovernmental organizations you want into a country, but if there is no rule of law and if the ruling class is predatory then your achievements won’t add up to much.

Furthermore, important issues always spark disagreement. Unless there is a healthy political process to resolve disputes, the ensuing hatred and conflict will destroy everything the altruists are trying to build.

There’s little social progress without political progress. Unfortunately, many of today’s young activists are really good at thinking locally and globally, but not as good at thinking nationally and regionally.

Second, the prevailing service religion underestimates the problem of disorder. Many of the activists talk as if the world can be healed if we could only insert more care, compassion and resources into it.

History is not kind to this assumption. Most poverty and suffering — whether in a country, a family or a person — flows from disorganization. A stable social order is an artificial accomplishment, the result of an accumulation of habits, hectoring, moral stricture and physical coercion. Once order is dissolved, it takes hard measures to restore it.

Yet one rarely hears social entrepreneurs talk about professional policing, honest courts or strict standards of behavior; it’s more uplifting to talk about microloans and sustainable agriculture.

In short, there’s only so much good you can do unless you are willing to confront corruption, venality and disorder head-on. So if I could, presumptuously, recommend a reading list to help these activists fill in the gaps in the prevailing service ethos, I’d start with the novels of Dashiell Hammett or Raymond Chandler, or at least the movies based on them.

The noir heroes like Sam Spade in “The Maltese Falcon” served as models for a generation of Americans, and they put the focus squarely on venality, corruption and disorder and how you should behave in the face of it.

A noir hero is a moral realist. He assumes that everybody is dappled with virtue and vice, especially himself. He makes no social-class distinction and only provisional moral distinctions between the private eyes like himself and the criminals he pursues. The assumption in a Hammett book is that the good guy has a spotty past, does spotty things and that the private eye and the criminal are two sides to the same personality.

He (or she — the women in these stories follow the same code) adopts a layered personality. He hardens himself on the outside in order to protect whatever is left of the finer self within.


http://www.nytimes.com/2012/04/13/opinion/brooks-sam-spade-at-starbucks.html
Riaz Haq said…
Here are some excerpts of an interesting Op Ed in The Nation newspaper by former finance minister Shaukat Tarin:

Despite all the gloomy news and events that has started to define Pakistan, our national resilience remains intact. However, the question that is one every one’s mind is for how long?

Let’s start with the positives (yes there are always some!) of Present Day Pakistan;

• CP Inflation while high is showing signs of becoming range bound;

• Foreign Remittances continue to rise (the PRI scheme launched under my stewardship has borne fruit with remittances expected to cross the $l2b annual mark this year);

• We have finally started to debate/define our role in the devastating ‘War on Terror” and the end game of Afghan conflict has started to be played out.

• Pakistan’s banking system remains insulated from the Western banking meltdown.

• Booming Agrarian economy, despite devastating floods; with corporate sector moving into dairy, live-stock and value added processing.

• While most of the rest of the world is ageing our population is getting younger

• Democracy is still holding on!

However, we are far from the country we all aspire. The negative list (so to speak) is long, makes a somber reading, but largely includes:

• Lack of governance and transparency (lack of meritocracy).

• Unrelenting and crippling energy shortages.

• Lack of Scale/infrastructure to support GDP growth.

• Security and Law and order situation (Perception twice as worse as reality with the reality bad enough especially in Karachi and Quetta)

• Weak Social Sector reforms/indicators.

• Increasing friction amongst state institutions.

---
... the economic and social sector performance of Pakistan has also been severely impacted by the following:

1) Inability of the successive governments to balance their budgets by increasing tax to GDP ratio, reducing non-development expenses and losses of the Public sector enterprises.

2) Negligible expenditures on education and health sectors to develop our most important asset i.e. human resource.

3) Creating a competitive environment of high economic growth by focusing on the productive sectors of our economy such as agriculture and manufacturing, and

4) Focusing on infrastructure and energy sectors to facilitate the economic growth.

Whereas, we have seen efforts in the past to address these weaknesses they have been at best weak and far between.

The present economic scenario is again infected by the same weaknesses i.e. large fiscal deficits, low expenditure on education and health, chronic electricity and energy shortages, lack of focus on the productive sectors resulting in high inflation, high unemployment and low economic growth. We all want a Pakistan which is economically prosperous, institutionally resilient and strategically oriented. In essence, we want to make Pakistan an economic welfare state. In my view, a key pre-requisite for an Economic Welfare State is to ensure that a country experiences equitable and sustainable growth for a prolonged period of time. Look at the examples of India and China where uninterrupted economic growth has changes the whole value proposition of these countries.
------------
To reduce our fiscal deficit we will have to increase our taxes. As I have said it many a times, all incomes will have to pay taxes and there cannot be any sacred cows. Agriculturists will have to pay their taxes and so should the retailers, real-estate developers stock-market and all professionals. Our tax to GDP is woefully inadequate at 9pc, where Sri Lanka is 17pc, India 19pc, China 21pc and Turkey 33pc. Before I left the government, there was a tax plan in place, which needs to be implemented. It will require a strong political will.....


http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/business/25-Nov-2012/economic-challenges-for-pakistan-going-into-2013
Riaz Haq said…
Here's an FT report on Nawaz Sharif's plans to revive economy:

Nawaz Sharif, Pakistan’s new prime minister, will appoint private sector managers to run state companies in efforts to revive an economy starved of investment, say leaders of his party.
Mr Sharif, who has been prime minister twice before, launched a similar policy in 1997 when he appointed commercial bankers to run three large public sector banks. All three became profitable and two, Habib Bank and United Bank, were privatised.

The plan faces a backlash from trade unions. Mr Sharif’s aides compared the process to the privatisations in the UK by Margaret Thatcher after she became prime minister in 1979.
Sartaj Aziz, former finance and foreign minister and a leader of Mr Sharif’s Pakistan Muslim League-Nawaz, told the Financial Times: “The formula is simple. You appoint good people, you allow them to appoint their people and you empower them. The government helps wherever it can.”

Officials said Ishaq Dar, a confidant of Mr Sharif, would take up his former post of finance minister in the new government.
Final results have yet to be declared but business leaders have welcomed a vote that will probably allow Mr Sharif, a wealthy Punjabi steel magnate, to have an absolute majority in parliament without the need for coalition partners.
Investors in Pakistan said they were tired of grappling with power cuts of up to 20 hours a day, widespread corruption in public life and an inefficient public sector. Mr Sharif has identified rescuing the economy as his number one priority.
A central bank official said public sector companies in power, rail transport and aviation run up huge losses each year amounting to more than 2.5 per cent of gross domestic product. “These are clearly white elephants,” he said.
Mian Muhammad Mansha, the Lahore-based owner of a Pakistani conglomerate who is reputed to be the country’s richest man, approvingly quoted a reference to Thatcher as a “modern Joan of Arc” and said Pakistan needed structural reforms similar to hers.
“First you need to get all these public sector companies out of government control,” he said. “This will release so much money that they are losing and it will make politics clean.”

The 1997 bank plan saw Mr Sharif’s government dismiss some 20,000 employees who were all given large redundancy payments. The current reform plan may meet resistance not only from unions but from politicians who are used to arranging contracts for their businesses from public sector companies.

“Mr Sharif will have to keep his own politicians under control if he wants his plan to succeed. In the past, many have thrived on patronage,” said Suhail Jehangir Malik, an economist. “Public sector companies are a huge drain on our national economy. Reforming them must be a primary objective for the new government.”
The plan is likely to win support from international donors, including the International Monetary Fund, which is expecting to begin negotiations shortly on a new $9bn loan to stave off a balance of payments crisis. Pakistan’s foreign reserves are equivalent to the value of two months of imports.
“The problem with Pakistan is both macroeconomic weakness and long-term structural issues,” said one person involved in preliminary talks with the interim government in power over the election period. “Given the severity of the economic problems, we do need to have a government that is going to undertake quite serious economic reforms.”
Under a so-called extended fund facility of up to four years, Pakistan would be expected to cut its budget deficit by increasing tax revenues, directing subsidies more accurately towards the poor and introducing policies to encourage foreign direct investment.


http://www.ft.com/intl/cms/s/0/374bc1a6-bbe8-11e2-a4b4-00144feab7de.html
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.


http://www.thenews.com.pk/Todays-News-9-211468-Asian-tigers-and-paper-tigers
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.


http://online.wsj.com/news/articles/SB10001424052702303448204579338222235371890?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303448204579338222235371890.html
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."


http://ca.reuters.com/article/topNews/idCABREA110M520140202
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."

https://books.google.com/books?id=Y-wU1aVyM9IC&pg=PA40&lpg=PA40&dq=pakistan+sugar+mafia+politician&source=bl&ots=W7LPxh8OQW&sig=9zTBvtFcwCSIXjs6Hxz-HdylcXg&hl=en&sa=X&ved=0ahUKEwiLvtLu-4vRAhVpqVQKHXBDCSQQ6AEISjAN#v=onepage&q=loan%20defaulters&f=false
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.

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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

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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


https://en.wikipedia.org/wiki/Political_machine

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