Wednesday, 28 October 2009

Gaining “Independence”: An Alternative Reality


“Come in! Gentlemen, come in!” said Mr. Dawit as he looked distractedly from his rather engrossed conversation with a very official looking gentlemen. “Please have a seat. Make yourself comfortable. Just give me a minute and I will be with you. Unfortunately this message from the president is very important and has to be dealt with immediately.”

With that, he went back to his conversation with the very official looking gentleman seated next to him. The tone of the conversation was much too low for the three rather timid looking gentlemen who had been invited into the very spacious and well-appointed suite of the finest hotel of the time in Philadelphia. The atmosphere was very imposing for our three colonial gentlemen who rarely entered such opulent surroundings.

The two gentlemen huddled in that very official conversation were also of a superior air and manner, obviously used to greater wealth and privilege than their three visitors. The latter huddled together on one small sofa leaving the armchair vacant for the very important Mr. Dawit of the Global Financing Agency (GFA). The GFA was the most important financial agency in the world. For a country to not be in its good books virtually meant committing suicide, if one could think of such a thing for a country. The world looked toward the GFA to grade the economic performance of countries especially the newly emerging ones such as the United States which had just gained independence.

Soon the serious and official conversation was over and Mr. Dawit accompanied the official looking gentlemen out of the room presumably in deference to his importance accompanied him down to the lobby. The words that the trailed the two officials out of the room, “tomorrow in the meeting with the president.....” remained with the three silent furtive gentlemen.

***

Dawit returned a few minutes later and with the aplomb of an aristocrat said “gentlemen I do apologize for keeping you waiting but this was indeed very urgent state business that could not be put off.” Then pointing to another gentlemen who had returned with him, “let me also introduce you to, Mr. Jack Taminer, the newly appointed GFA resident representative, to the US. He will be responsible for looking after all areas fo program implementation here. He is somebody that you should get to know. Each of the three shook hands with the beaming Mr. Thaminer who exuded the cosmopolitan air and the boyish arrogance of power.

“Shall we begin?” said Dawit. To which the three colonial gentlemen merely nodded not knowing what to expect.

“As you know, your country in its initial years must put in place much of the infrastructure that a modern state needs to conduct its business,” Dawit began the meeting. “Like in many other countries the GFA will one of the key advisory and financial agencies in this process. Our extensive experience and research in this area will obviously facilitate this process enormously. We have seen that in order for us to lead this process we need domestic help. In this regard we have found that participation by all stakeholders is necessary for us to succeed. It is for this reason that I am inviting people like yourselves, prominent citizens and leading intellectuals to see how we can collaborate to bring about this required change. So I thought that perhaps we could begin by my telling you of the reform program that we have designed for your country. You can then give me your comments and determine how you think you could be useful.”

The tall, intense, striking looking colonial gentleman, Thomas Jefferson, interrupted, “but Mr. Dawit, you tell us that you have already developed a reform program for the country. I do not know how it was prepared and where we fit in? Who was it from the US who participated in the process of formulating the program?”

“You need not be concerned about the design of the program, we engaged the best brains in the world. I might add that some US people were also hired as consultants. And of course we drew upon the very large amount of cross country information that we have within GFA,” Dawit said somewhat piqued. “Moreover, the new government has been fully in step in this process. After all it is their program. We are merely providing the technical expertise. I know that some criticize us for being intrusive and overbearing when it comes to designing country policies. Believe me that that is not correct. We only provide the expertise and draw upon people like yourself to provide us with key inputs.”

“But we were not a part of the thinking that went into such a program” said the short and pale Mr. Hamilton spontaneously. And then as if to make amends “well let us hear your plan and see how we can help you if at all.”

“Gentlemen, Gentlemen, please” Dawit came back again in an imperial patronizing tone. “I said that we had consulted many of your countrymen. Not all of them. You will understand if we could not reach you at an early enough stage. But we are doing so now. So please bear with me and let us me tell you what we think should be done.”

“In our view, the first order of business is developing the instruments of economic control.” Dawit began to explain. “We are therefore going to help you create a treasury and a central bank. For this purpose, we are sending several advisors as well as several missions who will help develop these things. Of course fiscal discipline is going to be very important so we will have to keep a tight lid on wages and salaries and other items of expenditure.” He stopped, though somewhat impatiently, to acknowledge Jefferson’s furtive gesture requesting the floor.

Mr. Dawit, I do not know if you are aware that we are currently working on a possible constitution including a bill of rights,” Jefferson said. “To us the adoption of a bill of rights as well as a stable constitution is an absolute prerequisite for any kind of political or even economic stability. I would personally request that any program that you are putting forward must include these items as a priority. Should you wish we are all prepared to discuss these matters with you.”

Tom, may I call you Tom,” Dawit asked and did not wait for a reply. “In our experience, which is supported by cross country econometric investigation, democracy or the enforcement of rights is not a prerequisite for economic development. In fact our advice is that these matters are best left until after some development has taken place,” and then added with an expansive gesture, “after all freedom and rights are luxury goods.” With that he laughed aloud and looked around the table for applause. It was obvious from their stony expressions that the three colonial gentlemen obviously did not concur with him.

“Don’t get me wrong my friends as an international agency we are committed to liberty, equality and fraternity, but given our limited resources we must be prudent and prioritize our expenditures,” said Dawit. “We are also helping your government to work in areas of you interest. After all, our experts have put together constitutions is several countries. However, to us the first task is the generation of investment for longer-term growth. The government can play a leading role in this both through its own public investment program for the development of physical and social infrastructure and through creating an environment for the growth of private sector investment. Consequently, we are urging the government to use funds that are available to it internationally wisely so that money will flow into these activities.”

“Regarding social development, I have been working on a education reform idea as well as ont eh design of a major university in my home state,” noted Jefferson, wishing to promote another one of his pet topics.

Tom, I am sorry to disagree again,” said Dawit, “but once again your thinking runs somewhat contrary to evidence. In our experience, education should be developed sequentially. Given the level of illiteracy in the country, the first order of business is primary education. University education is a luxury good that you can ill afford.” He tried his favorite joke again with the same success.

“Given the low level of human development in this country, we are recommending a social action program that will attempt to sequentially develop education from the lowest level up,” he went on to explain. “Consequently, we do expect that grandiose projects like Harvard and Princeton will never be competitive and should be left for a later stage. Moreover the notion of a publicly subsidized university such as a land grant college or a state university such as your University of Virginia, is certainly not likely to work. But please not worry. Our experts will take care of it all. Talk to them at the next sensitizing session that they hold here.”

“In any case, the first order of business is to put the fiscal house in order. The new republic has accumulated a large stock of debt and is displaying the ususal symptoms of macroeconomic instability,” he wanted to quickly return to the comfort of fiscal accounting which did not require much location specific knowledge.

Hamilton very confidently interjected, “ Ah, Mr. Dawit, I have done a lot of thinking in that area. I worked out an entire schedule of tariffs on incoming goods as well as a set of taxes on domestic items of luxury-good consumption such as carriages. I would appreciate it if you could support these ideas since it is your agency that will eventually determine policy.”

Mr. Hamilton, once again, I appreciate your enthusiasm to run your own country but clearly you people have no idea of what is happening in the international arena,” noted Dawit with growing impatience. “ Nowadays, we do not use tariffs or tax luxury goods. Instead our experts will put in a system of tax collection at source from all producers and consumers. Once again I urge you people to not worry about it but to cooperate with our work. Our teams will be working in all the areas that you are interested in and proposing solutions and reform ideas. We will have technical assistance experts and advisors here for many years to midwife this process.”

At this point, Thaminer, who obviously was silent in deference to his superior, whispered something to Dawit. “Ah yes,” Dawit in his most charming voice. “I am impressed by your creativity and desire to help develop your country. Mr. Thaminer has just reminded me that there are several junior positions in the resident mission here and perhaps you would like to work for him. That would be very good for you as well as us. It would place you right in the middle of where it is happening. You will be able to interact with our missions and advisors and pick up on a lot of our experience. And we could certainly use your help. I might also add that the pay is very good. Certainly the best in your country although of course I cannot give you international grades!”

Fired by patriotism, the three colonial gentlemen refused. They indicated how insulted they were by the offer and how they felt that they would fight for their independence and their right to run their own affairs. They even noted how they knew more about their own country than the GFA. Knowing full well that they held all the cards, Dawit and Thaminer were very charming and defended the GFA very well. The meeting ended with the three colonial gentlemen shuffling away very frustrated. They walked in the cold while Dawit and Thaminer went in a limousine, escorted by officialdom to a state banquet in their honor.

***

Two years later, Jefferson joined the resident mission as a case officer and reports to Thaminer’s deputy and often arranges the carriage for Dawit’s visit. Hamilton is a consultant reporting to Jefferson and wishes to work at the headquarters of GFA because the salary and job prospects are better there.

Wednesday, 21 October 2009

The Process of Rentseeking--A club in Lahore

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Masood Hasan's article in the news reproduced below is one of the first attempts to show how the nature of elite rentseeking. No only do they continue to get subsidies for elite country clubs but they also run those institutions in teh most corrupt manner possible.

We must do much more to expose this dark side of Pakistan's elitism and rentseeking. A number of deep rooted political economy issues need to be exposed through this effort to generate an understanding and a momentum for reform.


On Wednesday, October 21, 2009
Masood Hasan wrote

"Those who lament the better days of the past that are no more could perhaps be forgiven for being nostalgic. One refers to the garish and cheap Club that is now the successor of what was once an elegant establishment at the Montgomery Hall in Lahore's Lawrence Gardens. That Club where people of good breeding and class were to be found is long gone, replaced as so often in Pakistan with a motley crowd of power-hungry boors, crooks, yobs and the uneducated. We have destroyed yet another fine institution.

But even if you grant it the benefit of the doubt --- that a club after all is only a reflection of the social values that are prevalent, you cannot accept the rampant decline in standards and etiquette and large-scale looting, plunder and criminal inefficiency. It is simply shocking. This is white and blue collar crime working in tandem. The Club is a favorite hunting ground for bureaucrats. They continue to rule the Club under one dispensation or another and win elections one way or another to retain power.

Club resources are stretched. The losses are in the millions. A grant of Rs50 million shamelessly accepted from the government of Punjab (amidst thunderous applause from the worthies when announced by the then chairman) was quietly channeled into the main accounts. The 2007-08 losses of Rs32m transformed into profit! Allah be praised indeed.

What plagues the Club would fill out this entire newspaper, but suffice to say that there is literally no area where inefficiency, corruption, violation of laws and total fiscal mismanagement does not hold sway. With over 6,000 members on the rolls and many more waiting to get in, you would think that at least financially the club was doing well, but it is not. Of the 15 areas of its operations, it on average reports losses in 12 and measly minor gains in the remaining three. It has an army of employees – over 800 and administrative losses of Rs27m. Rs8m losses in golf, Rs6.2m catering and bar services, Rs4m tennis, Rs3m swimming, Rs2m each cricket and billiards, Rs1.9m cards, Rs1.4m squash, Rs0.7m library, Rs0.3m tambola and Rs0.2m children/women's functions. No way to run a railroad is it? Why are elitist games like golf subsidized? Fees have been raised recently but the raises are meaningless. Losses upwards of Rs.22m are being incurred on sports. This is criminal. Where is the management and what is it thinking? Raise the fees and lose the votes?

Where it is slowly recovering is The Shoppe and guest rooms. There are many stories about senior members holding rooms from one end of the year to the other without payment. Rooms can be hired in advance if you have the right connections while genuine members are always denied the same even when applying weeks in advance. The gym and wellness centre (outsourced), music and film shows and the sports shop are making minor profits. Overall, as of June 30, 2009, the club's losses stand at Rs14 million down from losses of Rs32 million but how kosher are these figures? Everything about the club is tainted and that's a crying shame. The present committee has done precious little to steer the boat ahead safely. As is the custom in the Land of the Pure, some lowly flunky is strung up as a scapegoat and punished.

When it's election time in December the same faces – Lahore's pillars of society, will be popping up to carry on their agenda of mismanagement. When you experience the canvassing onslaught from members, you wonder if they are fighting for the US Presidency or just a Club. It is now common knowledge that the 2008 elections were blatantly rigged. In January this year, 116 permanent members filed a written complaint highlighting serious instances of rigging, misappropriation of funds, violation of laws, etc For all their trouble, they received stony silence from those who were too busy eating into the Club's resources and having a ball. At the last annual general meeting, the chairman astounded everyone – other than his gang, that the number of permanent members was now 'higher' than those listed in the electoral rolls. This was blatant abuse of authority and ensured that the vote would tilt the election in favor of the junta. The matter was brought to the attention of the CEC, Justice (r) Tanvir Khan, who did just the right thing. Nothing.

On another written enquiry moved by members, the club secretary - another compliant cog in the greasy wheel - admitted that 140 regular members had became permanent, 167 regular members were 'inducted' and 53 'A' members were made regular. This was done without the knowledge or approval of the management committee. That this was a violation of club rules and proof of a massive pre-poll rigging did not impress anybody. When the CEC was again approached, he professed helplessness. He also chose not to resign for that would have been an honorable thing. Letters written to the chairman and club secretary have evoked no response. The various 'conveners' who in reality are the viceroys together with whoever is the chairman, simply carry on regardless.

The Shoppe spawned more jokes than all the Sikh jokes that do the rounds and made the Club the laughing stock of the city. A probe committee discovered that goods in excess of Rs11.6m were 'short supplied' to the Club in a period of just six months. The Club's response was to register an FIR against four of the lowlies. No one questioned the big, fat cats. Social circles regaled one another with stories about 10,000 litres of milk and 110,000 eggs having vanished in just six months. The Club said the rats had taken these. For once they were telling the truth. Rats indeed. The Club's already tattered reputation thus sank further and has continued to sink. And this is one area.

In October this year, senior members wrote to the chairman on a subject – misappropriation of funds – and received no answer, the established SOP now. The management committee's 12-page report in the Annual Report 2008 is silent about the various misappropriations. After 18 months of dilly-dallying CCTV cameras were finally installed to check large-scale pilferage in the kitchens but were sabotaged instantly by vested interests. A forensic audit for the last five years is required but it won't happen because the office-bearers are, or think, they are beyond reproach or the law.

'In this hammam,' as Manto Sahib said, 'everyone is naked.' "

Friday, 2 October 2009

Parvez Hoodbhoy remembers a friend

Faheem Husain was someone that many of us from the seventies generation admired. In the article below, Parvez Hodhbhoy captures him better than I have words for. Why do we in Pakistan not use, honor and cherish people like Fahim?

Faheem Hussain -- as I knew him

It was mid-October 1973 when, after a gruelling 26-hour train ride from Karachi, I reached the physics department of Islamabad University (or Quaid-e-Azam University, as it is now known). As I dumped my luggage and "hold-all" in front of the chairman's office, a tall, handsome man with twinkling eyes looked at me curiously. He was wearing a bright orange Che Guevara t-shirt and shocking green pants. His long beard, though shorter than mine, was just as unruly and unkempt. We struck up a conversation. At 23, I had just graduated from MIT and was to be a lecturer in the department; he had already been teaching as associate professor for five years. The conversation turned out to be the beginning of a lifelong friendship. Together with Abdul Hameed Nayyar - also bearded at the time - we became known as the Sufis of Physics. Thirty six years later, when Faheem Hussain lost his battle against prostate cancer, our sadness was beyond measure.

Revolutionary, humanist, and scientist, Faheem Hussain embodied the political and social ferment of the late 1960s. With a Ph.D that he received in 1966 from Imperial College London, he had been well-placed for a solid career anywhere in the world. In a profession where names matter, he had worked under the famous P T Mathews in the group headed by the even better known Abdus Salam. After his degree, Faheem spent two years at the University of Chicago. This gave him a chance to work with some of the world's best physicists, but also brought him into contact with the American anti-Vietnam war movement and a powerful wave of revolutionary Marxist thinking. Even decades later, Faheem would describe himself as an "unreconstructed Marxist". Participating in the mass anti-war demonstrations at UC had stirred his moral soul; he felt the urge to do more than just physics. Now married to Jane Steinfels, a like-minded soul who he met in Chicago, Faheem decided to return to Pakistan.

Faheem and Jane made an amazing couple. Fully immersed in the outstanding causes of the times, they seemed to have a limitless amount of revolutionary energy. Long before I knew them, they had been protesting against the Pakistan Army's actions in East Pakistan. As Faheem would recount, this was a lonely fight. Many Marxists in those times, inspired by Mao's China, chose to understand the issue in geopolitical terms rather than as a popular struggle for independence. Some leftists ended up supporting the army's mass murder of Bengalis.

With Bangladesh now a reality, things moved on. Bhutto's rhetoric of socialism and justice for the poor had inspired nascent trade union movements to sprout across Pakistan's cities. Many, however, quickly turned into organizations for labour control rather than emancipation. There were genuinely independent ones too, such as the Peoples Labour Federation (PLF), an independent Rawalpindi based trade union that saw through Bhutto's shallow rhetoric. In the early 1970s, Faheem and Jane were highly influential in this organization, sometimes providing security and cover to its hunted leadership. Iqbal Bali, who passed away in the middle of this year, would vividly recount those days.

Very soon, I joined the small group of leftwing activists that looked up to this couple for instruction and guidance. We formed study groups operating under the PLF, both for self-education and for spreading the message through small study groups of industrial workers. Some, including myself, branched out further, working in distant villages. Gathering material support for the Baloch nationalists, who were fighting an army rejuvenated by Bhutto, was yet another goal for the group. The dream was to bring about a socialist revolution in Pakistan. All this crashed to an end with Bhutto's death by hanging in 1979 and the subsequent consolidation of General Ziaul Haq's coup. Pakistan's Dark Age had just begun. Although Bhutto's regime had turned repressive and violent

in its last desperate days, it was gentle in comparison with what was to follow. With dissent savagely muzzled, the only option was to operate underground. On Nov 3, 1981, three of our QAU colleagues and friends were caught, imprisoned, and savaged by the military regime. Jamil Omar, a lecturer in computer science and the "ring leader" - was tortured. Two others – Tariq Ahsan and Mohammed Salim – were also imprisoned and their careers destroyed. Their crime was involvement in the secret publication of "Jamhoori Pakistan", a four-page newsletter that demanded return to democracy and the end of army rule.

Although Faheem was not directly involved in "Jamhoori Pakistan", we knew he was being closely watched by the intelligence agencies and could have chosen to hide. Instead, with characteristic fearlessness, he did all that was possible to help locate the abducted teachers, and then to secure their release. But the struggle took its toll. By the mid 1980s, Faheem was in the doldrums. Situated in an academically barren environment, he was able to publish little research of worth. Politically, there was no chance of doing anything significant in the climate of repression. Things had gone downhill in personal terms as well – his marriage with Jane was coming apart. To the great sorrow of their friends, the couple parted ways and Jane returned to America. Encouraged by Faheem, she had written school books on Pakistani history that are still sold and used today. In 1989, Faheem left QAU formally but his involvement in academic and political matters had already dropped off in the year or two before that.

From this low point in his life, Faheem struggled upwards. Initially in Germany, and then elsewhere later, he now concentrated solely upon his profession and was able to learn an impressive amount of new physics. Professor Abdus Salam, who by now had received a Nobel Prize for his work, invited Faheem to become a permanent member of the theoretical physics group at the International Centre for Theoretical Physics in Italy. Faheem remained there until his retirement in 2004. Getting this position was no mean achievement: theoretical physics is a fiercely competitive and notoriously difficult subject. Faheem was the first Pakistani to publish a research paper in one of its most challenging areas – superstring theory.

With a cheerful and positive disposition, and an abiding concern for the welfare of others, Faheem quickly became popular at the ICTP. His laughter would resonate in the institute's corridors. With time, he took on administrative responsibilities as well and was instrumental in setting up a "diploma programme" that admits students from third world countries for advanced studies in various areas. Now married to Sara, a beautiful and even-tempered Italian woman, he was equally comfortable with Italians and Pakistanis or, for that matter, Indians. To Faheem, a cultural amphibian, differences between nations carried no meaning. And then came retirement time. What to do? I wrote to Faheem: come back! He agreed. Finding money was not a problem – Pakistan's higher education was experiencing a budgetary boom. But his old university, plagued by base rivalries and a contemptuous disdain for learning, refused. Specious arguments were given to prevent one of its own founding members, now one of Pakistan's most distinguished and active physicists, from being taken on the faculty. Initially at the National Centre for Physics in Islamabad, Faheem was eventually offered a position at the newly-established science faculty of LUMS in Lahore.

Faheem's unpretentious mannerisms and gentleness of spirit ensured that LUMS too was enamoured of him. Asad Naqvi, one of Pakistan's leading physicists and a faculty member at LUMS, wrote to me upon hearing of Faheem's death: "I am lost after hearing this. I only knew him for about five years, and in that short time, I had grown really fond of him. We are all poorer today, having lost such a lovely person who touched us so deeply."

Surely, there shall be many other such tributes from Faheem's many friends. But, to be true to him as well as my own self, I must admit that in later years we did disagree on some important things - "unreconstructed Marxism" to me is an anachronism, a relic of the 1960s and still earlier, meaningless in a world that has become far more complex than Marx could have possibly imagined. Nor can I reflexively support today's so-called

"anti-imperialism" of the left that ends up supporting the forces of regressive fundamentalism. But let these issues stand wherever they do. Why is it necessary for friends to agree upon everything?

From atoms to atoms – death is inevitable, the final victory of entropy over order. Meaningless? No! To have lived a full life, to have experienced its richness, to have struggled not just for oneself but for others as well, and to have earned the respect and love of those around you. That is a life worth living. Faheem, my friend, you are gone. May you now rest in peace, with a job well done.

Thursday, 1 October 2009

Who's Corrupt?

I am from a corrupt country. On the Transparency International (TI) index, Pakistan ranks 134 out of 180. Indeed, stories of our leaders’ corruption are rife and we are continually looked upon with suspicion. We also believe that we are bad, very bad!

We are called corrupt because of perception surveys. Question include “do you expect to pay a bribe when you get a certain public service”. So if a minor underpaid functionary in tattered clothes collects a small tip of a few dollars, of course that is bribery. And then dark, poor countries are considered corrupt!

But recently, this has become laughable. The pure countries at the top of the TI scale — the white countries — do not seem so lily white. Of course there is no little guy collecting small bribes and there are no meaningful bribes collected for providing public services.

But then as we have seen in the last two decades, corporate balance sheets have been doctored, shareholders ripped off by venal corporate bosses while boards gleefully looked on, collecting hefty commissions. Executives that ran their companies into the ground walked away rich! No law chased them! No board member took a fall.

But of course this was not corruption. Bonuses, retention fees and golden parachutes are not corruption. The retirement plans and nest eggs of poor people went up in smoke, but that is not corruption according to TI. Only petty bribes are!

Do watchdogs like TI notice what Enron, Tyco, Oxford Health, Citibank, Bernie Madoff, AIG, Merrill Lynch and so many others were doing? Do they see how lobbyists managed to sneak into a law a clause to protect outrageous bonuses? Did that change the rating of the United States?

I searched the TI ratings for some impact of these developments. There was none. Alas, no perception survey captures that!

We have seen lobbyists influencing policy again and again to the detriment of the little person. And the line between lobbyists and policymakers has been quite unclear given the convenient revolving door between the offices of the two groups. But lobbyists are performing a useful function making sure that the public keeps paying for bad food, unnecessary expensive healthcare, gas guzzlers, and guns. I guess this is not harmful. Only petty bribes are.

We are told again and again that the dark, poor countries need to set up a state of the art procurement process. The kind where friends of the powerful get ‘no-bid’ contracts; the kind where the government gives out single sourced contracts to friendly firms; where non-competitive awards are quietly made in the dark to firms; where project overruns are large and legion.

“Consultants” can be paid handsomely for stating the obvious. Who are these consultants? Most of them come out of the Rolodex of some enterprising fellow who is linked well with an aid establishment or a procurement officer. Many of them are just retired minor officials in some white bureaucracy. Of course, poor dark people are too corrupt to be hired to these jobs, except at the very lowest rung of the totem pole.

Rich countries are so generous they give poor countries aid to help them out of poverty. Of course, only pure white people are to get these funds. TI and others are funded in the name of the poor by such aid. No one asks the poor, who are the intended recipients, whether this money should be doled out in their name to agencies like TI. Much of the aid that is intended for slumdogs is spent by consultants, lobbyists, international agencies and international NGOs. The poor see little of it.

If it gets to a poor area or a school, it is after the lion’s share has been absorbed by consultants, lobbyists and INGOs like TI. These incestuous relationships between donors and their friends to produce reports, perception indices, technical assistance and trainings in exotic capitals of the world must be for the benefit of the slumdogs.

Aid donors also hire consultants to run many poor dark governments with abandon. They make policy, they run departments. No one holds them accountable to any results. Their money cannot be withheld. Thousands of dollars later, we remember that there might have been some friendly connection somewhere and we rush to hush it up. Project after project leaves the poor world poorer.

But then the consultants and donors tried, and of course no one dares accuse them of any wrongdoing. But then in the clean white world, consulting, lobbying, non-competitive contracting and procurement are all nice words — not like bribery in the poor dark world.

Many denizens of the poor, dark, corrupt world acquire quality human capital and even perform well in the superior clean white world. But they are not to be trusted with aid projects or anything to do with serious economic development in their countries. Of course, high-priced consultants from a Rolodex are better since TI says they come from clean countries.

When payoffs have fancy names like ‘bonuses’, ‘incentive fees’, ‘no-bid contracts’, or ‘single sourced’, they are respectable. Slumdogs are penalised because they are not capable of these fancy titles. That makes sense: please give more money intended for the poor to TI to tell the poor how slumdogs taking petty bribes are bad, very bad. But truly their crime is lack of nomenclature, corporate governance and bureaucracy that makes even makes trillion-dollar malfeasance respectable!

Friday, 18 September 2009

On Zubair's Reply--Rethinking Pakistan's economy

Thank you Zubair for a nice comment!

On the Tyranny of Macroeconomics

I have often lamented that we Pakistanis do not engage in civilized debate and too quickly get into the mode of “argument and personal attacks.” Zubair’s comment is heartening and welcome as an offer to expand a debate so that all of us can learn.

Zubair argues that “There is little doubt in the argument that unless macroeconomic conditions are right and sustainable, economic development cannot be maintained.” Frankly on the surface this statement looks like “motherhood and apple pie” but dig a little deeper and you begin to worry.

Think about it! Zubair’s statement can be rephrased in medical terms as There is little doubt in the argument that unless vital signs (body temperature and blood pressure) are right and sustainable, “life” cannot be maintained.” Does that mean that treatment should focus only on maintaining those vital signs without treating the underlying cause! Most of us know that if a patient has cancer or some serious underlying disease, the symptoms may show up in body temperature and other macro indicators but for a complete cure, the fundamental problem has to be addressed.

My point is that the fundamental problem is political economy and governance and without reform in those areas gains to macroeconomics may be temporary. So let me assure Zubair it is not that I wish for macro-profligacy, but that we should learn from the failed Fund strategy of the last 30 years where macro policy was the only objective. In fact the preoccupation with getting the macro numbers right, has hurt domestic governance and institutions. Case in point is the over-centralization of the economy and the excessive power to the ministry of finance. Macro-policy cannot be fixed without fixing policymaking, political economy and governance. This is the reason that I think that our continuous discussion on macro without looking at the micro determinants may be a mistake.

On increased taxation

Zubair goes on to say that “In this context, I fail to understand the merit of your criticism of improving revenue generation. Simply because the Shaukat Aziz administration squandered the increase in revenues does not make the proposed policy "wrong".” Again no one disagrees that the state should collect more revenues and our revenue GDP ratio must be in line with comparator countries. But with the current state of the civil service, the nature of the state and the elite, I find it difficult to hope for any success to this policy!

Moreover as I have argued frequently, modern fiscal theory regards taxation to be based on some form of a social contract. Governments tax in return for some service that they provide. And there is an expectation that government expenditures will be for the good of the people. My view is very simple that given the extensive misuse of expenditures for VIP pleasures (houses, cars, foreign trips), elite subsidies (gifts to the rich, elite Clubs, prime land, Polo, golf etc), false titles (meaningless cabinet positions, dead agencies), it is hard to justify revenue increases without a proper expenditure review and reform. I point out several areas such as government perks (repeat housing, cars foreign trips etc), elite subsidies (elite Clubs, prime land, Polo, golf etc), false titles (meaningless cabinet positions, dead agencies) where savings can be made and efficiencies achieved.

I also challenge the notion that Pakistanis are under-taxed! There are too many hidden forms of taxation that this ‘9 percent of GDP’ figure does not include. This is also an area we should debate. But I will not take that up here.

On attacks on economics

On whether the criticism was “flippant”, like any other subject economics learns from fresh data and the recent crisis has brought a lot of fresh data. Similarly the continual failure of fund program and donor programs should also teach us something.

It is not surprising that a lot of earlier wisdom has been called into question. Not only Krugman but Volker, De Long, and many other luminaries are questioning our state of knowledge. Yet economists carry the additional burden that the body public seems to feel adequately qualified to talk most authoritatively on economics. Indeed with the aid of a few well known World Bank/IMF statistics amateur economists love to tell economists off and offer big policy announcements.

Physicists have been quarreling over quantum mechanics and are now talking of strings with no real evidence to back them. Dawkins and Gould have argued on evolutionary biology in the harshest of terms. No one accuses them of ideological bias and no one suspects their motives. Yet if economics argue about monetarism or the role of government; it is time for all and sundry to pick on economists (nayyar ali).

Like any other subject economics is evolving science learning from observation and experimentation responding to evidence and anomalies with paradigm shifts and fresh theory. This “evolution’ and “paradigm shift” should not be seen as “ideology” and provoke accusations of “narrow focus”, ‘neo-liberal” and other such epithets. Debates occur in every subject and the best of them occur among the giants of the subject. Einstien and Neils Bohr had their differences, Wittgenstein and Popper did not talk to each other. I can quote many more.

Debates are never flippant and certainly Nobel prize winners like Krugman are not “flippant.” He has a serious point to make and we should be humble enough to be mindful of it even if it challenges our comfortable precepts based on many years of received wisdom!

On Conditionality

Zubair says that “"Conditionality" has been given a bad name by countries like Pakistan which have been able to break it and still continue to obtain financing.” This interpretation assumes that the donors are benign and also know what good conditionality is. There is much literature to suggest that conditionality itself if flawed. Even ex Fund members like Musa and Morris Goldstein have criticized conditionality. People like Conway, Killick, Easterly and Collier have conducted ample research on conditionality to even make the Fund change its mind.

Despite silly assumptions on economics, economic research has shown that for a country to change course deeper changes in behavior and institutions are required. Neither the design nor the method of implementation of those changes is immediately obvious. Should we assume that the donor has all the information and the capacity to make such deep changes in complex societies? Is it something that visiting teams can do in a short span of time? Are donor agencies totally altruistic and competent to make such reform? Will their own agendas and biases as well as career concerns not come in the way? Will such imposed reform be “locally owned?” Does change not have to made locally? If so why does it need to me envisaged globally?

Can you imagine doing the US health care reform through conditionality? Would the World Bank or the IMF be able to do it? There are a number of design issues involved which without local debate and research cannot be solved. There are political economy issues without which the reform will not be “locally owned”. So if it will not work for the US, why should it for Pakistan?

As I said conditionality is a complex subject and a lot has been written on it and many serious thinkers are now very shy of pushing it too hard!

On Solutions

Zubair then issues a challenge to me “I would encourage you to propose an alternative approach to addressing the economic problems that we are currently facing.” And of course we Pakistanis cannot miss an opportunity for making sarcastic personal remarks “ I am sure, after having spent almost thirty years advocating the IMF-supported adjustment programs, you have acquired the wisdom and experience to propound an alternative.”

I am sorry I have to disappoint you by admitting that I have no silver bullet no neat prescription that will make Pakistan rich country. My view is that any serious policy analyst or thinker will have to take this viewpoint. Countries are complex and changing the direction of their societies and economies should not be considered a cavalier proposition. Donor reports do not have complete solutions as well. If they did we would be a high income country by now.

I will be immodest enough to say that I have developed certain lines of thinking which if we begin to seriously develop may lead to better outcomes but that after a lot more work at both research and implementation. These are:

1. Governance related issues.

a. One important issue is civil service reform which I argue is central governance. Within civil ervice reform we have to get the strategy right and focus on perks. See PIDE Website has more material on this. (and this is certainly more than increasing salaries

b. You might also wish to look at issues of judicial reform that I have written about. Can send you a copy if you like.

c. One important forgotten area is the need for organizing religion. http://www.opendemocracy.net/article/how-to-solve-pakistan-s-problem

2. I have argued extensively that our growth strategy is deeply flawed as it remains steeped in yesterday’s thinking.. Growth strategy and Pakistan’s Economic Planning is being conducted on the ideas from thinking of the sixties and may be responsible for many of our problems. http://www.opendemocracy.net/article/how-to-solve-pakistan-s-problem

3. The stifling of our “domestic commerce” sector may be at the heart of many of our problems including slow growth and fundamentalism. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=986881

http://www.pide.org.pk/pdf/PolicyViewPoint/PolicyViewpointNo.1.pdf

4. Lack of knowledge of economic geography in our economic policy debate may be another reason why our cities lack the dynamism that could launch growth. http://www.pide.org.pk/pideweb/pdf/policyviewpoint/PIDE%20Policy%20Viewpoint%20(Urdu%20Version).pdf

5. I have also argued that is a fallacy to focus on sectors and “private sector development” without worrying about entrepreneurship. And what Pakistan lacks is entrepreneurship. http://ideas.repec.org/p/pid/wpaper/200729.html

Let me stop here. While I will not ever claim that I have anywhere near a solution, I have developed some thinking in a number of areas where further work may help develop policy ideas. That is all a researcher can do. A complete solution is not possible and we should not even look for it. We should look for directions of movement and along the path develop further solutions and hope development will emerge eventually (Easterly also argues for this approach).

However, I do think that we must also share a vision for Pakistan for debate and understanding or possible goals for us. For that reason I have written a vision for Pakistan. http://www.pide.org.pk/pdf/Highlights/vision2030.pdf

On engagement

So I hope Zubair that you will now not accuse me of not working on any solution or be sarcastic about my 30 years experience. It would be nice to engage on these issues meaningfully. In societies that developed, there was full and diverse intellectual engagement. Why is it that our society lacks engagement? Why is it that we wish to huddle in small select groups not on the basis of ideas but on personalities? Why is it that we do not cite each other or review each other’s work? On this issue, please see http://www.pide.org.pk/pdf/Sad_Plight.pdf

Wednesday, 16 September 2009

Zubair Iqbal's reply

ConYour comments, though oft-repeated, are valuable and should be considered for continued progress toward an alternative solution--if possible--for Pakistan's economic malaise.

There is little doubt in the argument that unless macroeconomic conditions are right and sustainable, economic development cannot be maintained. Hence, there is little merit is being flippant about macroeconomics, even by a Nobel laureate. I agree that one should not disregard the building blocks--which in cases such as subsidies to maintain a "wrong" exchange rate and promote protectionism are a cause of macroeconomic imbalances--but a tighter macroeconomic stance strictly adhered to, would force corrections to prices and, thus, help restore sustainable growth.

"Conditionality" has been given a bad name by countries like Pakistan which have been able to break it and still continue to obtain financing. I agree conditionality works only if strictly enforced--it is in the long term interest of the country as well as creditor countries. But so-called political realities get in the way--they are not a favor to Pakistan, they are a palliative which string the poor country along. I would rather have strict conditionality, in particular, by donor ,who should be ready to "walk away" if Pakistan is not willing to set its house in order. One conditionality that I would strongly support is linking disbursements by donors under the Tokyo Agreement to a permanent and durable improvement in tax revenue generation so that Pakistan will have the in-house capacity to finance its fiscal needs. This will not only strengthen its ability to face shocks, but also improve equity with sound economic development.

In this context, I fail to understand the merit of your criticism of improving revenue generation. Simply because the Shaukat Aziz adminstration squandered the incease in revenues does not make the proposed policy "wrong".

It is good to know that you consider the issue of poor governance as central to the malaise that we are facing. The question is how do you fix it--a slow process will get us nowhere as we are already lagging behind our competitors. I would like to see a dramatic--convulsive?--action to get the masses force a change in the attitudes of the ruling-- as you call it, rent-seeking-- elites. A confrontation with tax evaders could break the vicious circle, reduce the power of rent-seekers, and get a virtuous cycle moving.

I would encourage you to propose an alternative approach to addressing the economic problems that we are currently facing. I am sure, after having spent almost thirty years advocating the IMF-supported adjustment programs, you have acquired the wisdom and experience to propound an alternative.

Saturday, 12 September 2009

Comments on Zubair Iqbal’s “PAKISTAN’S CURRENT ECONOMIC CRISIS—AN IMPERFECT STORM"

Nice piece by Zubair! It is typical of most economic writing (other examples are Ashfaq and Meekal) in Pakistan which has now been conditioned to think “macro-first” ignoring the underlying micro and institutional problems.

Written in typical IMF fashion giving primacy to macroeconomics assuming that it is independent o political economy, institutions and governance. For example

“It has become fashionable to trace the current economic malady to “wrong” growth strategy of the past 60 years. This is neither meaningful nor helpful in understanding the current policy imperatives. Yes, there has been a secular weakening of institutions but that is not an excuse for inappropriate policies. ???”

This is what Krugman calls the dark age of macroeconomics.

Failure of underlying institutions and lack of policymaking capacity can only manifest itself through poor policy choices. Add to that the deliberate attempt by the powers that be to destroy policymaking capacity (case in point Tariq Hasan at HEC in the earlier regime and K Mirza at CCP now), policy has to be inappropriate. So statements like “weakening of institutions ….(are) not an excuse for inappropriate policies” are difficult to understand. Later Zubair accepts this in a throwaway sentence (which we always use in bureaucracies to cover our back side).

“Finally, the deteriorating official capacity to formulate and implement effective policies has become a major impediment.”

I would argue that this is central to the issue and not a final footnote.

There is also a presumption that course correction in macroeconomics policy can be made in real time.

“Problems were compounded by a total disregard of economic crisis by the new government in the initial period; valuable time, during which the crisis could have been staved off, was lost.”

As if in a few months the mistakes of the last 5 years could have been corrected. With the tax base eroded, an ongoing civil war, a judicial crisis and power shortages and global crisis, I think it is unfair to blame the new democratic government.

He is too kind to the earlier government when he says that the crisis began to show itself in 2006. Indeed the inappropriate policies were evident by 2004 when interest rate and exchange rate policies of the central bank were totally misguided and windfall of a rescheduling was wasted. These misguided policies were directly the result of the lack of capacity in the government. They genuinely did not understand! Some senior officials used to argue that we need expansionary monetary policy for growing the economy. They were also given the comfort by the “usual advisors” that short term macroeconomic stability backed by capital inflows will lead to long term gains. There was no need for fundamental reform because capital inflows will lead to growth. Recall our Banker PM used to shun learning and analysis publicly saying that he knew it all through his practical banking. He was also fond of telling stories on how full hotels were and was always publicly counting the megaprojects were coming in.

Most of the solutions proposed have been tried for many years without success. Surely that should tell us that something is wrong in our solution. Yes the donors and the “usual economists” want an increase in the tax/GDP ratio. And they have wanted that for the last 30 years. But this has not happened?

We are told that

“Without fundamental reforms of the fiscal sector aimed at raising domestic revenues and increasing room for outlays to improve the abysmally poor infrastructure—energy, education, water resources, R&D in agriculture, and transportation-- any sustained improvement in growth outlook is unrealistic.”

This assumes that when the government has additional resources, like it did in the 2000s when aid was increased, that it did use the expenditures wisely. People like Furrukh Salim and Shahid Kardar have documented the waste in government. Our leaders –both current and past—jet around the world as if they were on a frequent flier program costing the exchequer 4 billion rupees if he media is to be believed. VIP cavalcades expensive housing and many other government pleasures is what our expenditures are used for. Public sector perks account for 14% of expenditures larger than our outlays on education and health. Should we not look at these? Perhaps political economy requires that these should be addressed at the same time as a tax increase.

Finally Zubair acknowledges governance. Now he comes close to accepting the primacy of governance in determining economic outcomes.

“None of the proposed reforms will make any headway without a dramatic and sustained improvement in governance—not simply in terms of formulation of policies and strengthening of institutions to implement them.”

So where are the efforts to improve governance and policy capacity in governance? And what does he suggest other than an improvement in the tax/GDP ratio.

What should we do? He has a simple solution! More conditionality!

“It is critical that donor financing must be conditional in order to ensure that Pakistan takes painful, but necessary, steps that are needed for it to durably ensure growth and thus eliminate the need for global handouts every so many years. One way would be for such assistance to be tied to reform programs agreed with multilateral lending agencies.

Is that not what we have been doing for the last 60 years! We have had a fund program based on conditionality for 20 of the last 30 years. World Bank ADB even DFID conditionality has been riding us forever. Remember IPPs social action. If conditionality were the answer, we should have arrived!

We need a separate discussion on conditionality which many of my economist friends who are advising the government from overseas now seem to be asking for. But certainly the onus should be on them to explain why we need more conditionality, why it did not work in the past (in both military and political governments) and why it will work now.