Distortions in trade

A profound change is occurring in the structure of international trade as a result of a series of agreements that have been concluded recently by the European Union and the United States with their trading partners. One consequence of these agreements is the dilution of the most favoured nation provision on which all the previous multilateral arrangements were based.

Up until the adoption of this approach, which favours bilateral agreements, the multilateral system had benefited from applying the most favoured nation approach to all trading partners.

If tariff and other trade related concessions were given to one nation, these had to be advanced to others as well. This provision is now being bypassed as a result of the many bilateral arrangements concluded by these two major trading blocs. I will get to this point more fully later in this article.

It was in order to fully understand what is happening to the global trading system that the director-general of the World Trade Organization, Dr Supachi Panitchpakdi, assembled a group of experts to prepare a report.

He wanted to be advised on how to handle the various trends in international trade so that its basic foundations are not shaken. The experts' report was released on January 17.

Its basic thrust was that the international system that had emerged over the last several decades as a result of the successful conclusions of several rounds of discussions - the Kennedy, Tokyo and Uruguay rounds - was now faced with a number of problems.

Some of these had resulted as a by product of intense lobbying by a number of non-government organizations who had only limited expertise in trade issues. Some others were the consequence of powerful economic and social interest groups pushing their own agendas. This was particularly the case in the developed world.

The report identified a number of misconceptions which, according to its authors, are currently changing the way the international trading system is being approached. The first misconception, according to the report, was popularized by NGOs such as Oxfam and Action Aid.

These organizations have been very active, sometimes behind the scenes and at other times by being present on the stage itself, to influence trade policy in both developed and developing countries.

One of their basic thrusts is that poor countries suffer from what they call hypocrisy on the part of rich countries. This has led to double standards in trade policy, with the rich countries erecting high trade barriers against developing countries while working on the developing world to grant them better access to its markets.

The report argues that it is incorrect to argue that it is the poor countries that are discriminated against compared to those that are rich. Poor countries have long been allowed Special and Differential Treatment in trade negotiations.

Under certain circumstances, they are allowed to protect their industries against imports and for considerable periods of time. This is the well known "infant industry" argument initially advanced by Paul Prebisch, an Argentine economist, according to which poor countries would need some breathing space to develop their industries.

The authors of the report argue that few infant industries grow into adulthood and maturity behind high walls of protection. Development of an efficient industrial economy needs foreign competition.

This was shown by South Korea and Taiwan in the last quarter of the 20th century. It is now being proven once again by China that has significantly lowered barriers to trade in order to promote its industrial development.

It is lack of protection of domestic industry that has turned China into a global economic powerhouse. In fact, using the infant industry argument to develop domestic industry provided rich nations the excuse to maintain their tariffs against the developing countries at high levels.

Consequently, rich countries' tariffs are lower for rich country exports as compared to exports from poor countries. This, the report concludes, is not a display of hypocrisy by the industrial world since rich countries are avoiding making concessions on products of interest to the poor countries as they do not receive reciprocal treatment from the latter.

The second belief on which much of the work done by the NGOs in the trade area is based, relates to the effect of trade liberalization on developed and developing countries.

There is empirical evidence to show that the impact of liberalization may not be as consequential for developing countries as it has been for the developed world. One reason for this is that even with liberalization, developing countries continue to be protective of their industries.

This has had the perverse consequence of creating a bias against exports in developing nations. Therefore, even when the rich countries open their markets, the developing world has not been able to benefit as much because of supply constraints. They have just been too preoccupied protecting their domestic markets against penetration to produce for exports to developed countries.

The third set of argument centres around agricultural subsidies in the rich countries. This has generated so much excitement that it contributed to the collapse of the discussions in Seattle in 1999, and in Cancun four years later. However, some economists have convincingly demonstrated that it is only a handful of developing countries that would benefit from the removal of subsidies by developed countries.

One study done by Alberto Vales and Alex McCalla shows that as many as 45 developing countries, out of the 49 they studied, are net food importers. As many as 33 are net importers of all agricultural products.

Consequently, since removal or reduction of subsidies by developed countries on their agricultural sector would result in raising the prices of agricultural commodities, the net benefit for the developing world may be negative rather than positive.

While it is not in the interest of the global economy at large to have developed countries continue to subsidize their agriculture, it is by no means certain that a significant reversal of this policy would result in an improvement in export earnings from developing countries.

The main argument in the report concerns what we have already mentioned above, which is the erosion of non-discrimination against all trading partners. Non discrimination has been the bedrock on which the global trading system was built.

The few exceptions to this general principle were incorporated in Article 24 of the WTO's charter. This exempted countries entering into preferential trade agreements such as a free trade agreement or a customs union from the requirement that the tariff cuts negotiated within their context would automatically extend to non-member countries. The authors believed that this exception has destroyed the old system.

There are now 300 preferential trade agreements in place and more are being added at a considerable speed. The result is what the economist Jagdish Bhagwati has called the "spaghetti bowl" problem.

Bhagwati was on the experts' panel that produced the report for the WTO director-general. The spaghetti bowl is characterized by "chaotic criss cross of preferences, with a plethora of different trade barriers applying to products, depending on which countries they originated from." This trend, according to the authors of the WTO report, has seriously damaged the world trading system.

This is not the only way an open and non-discriminatory trading system has been compromised. Developed countries have created their own areas of trade influence under schemes such as the Generalized Scheme of Preferences which allow them to lower tariffs on imports from groups of countries without extending the benefits to all developing countries. This has created divisions in the international trading system and has resulted in the introduction of complications in the way countries trade.

There is also a problem associated with preferential trade agreements since their negotiators have allowed developed countries to include agendas that are not directly related to trade. These include issues such as environment concerns, worries about labour standards, and even interest in promoting human rights.

Incorporation of these provisions have corrupted the international trading system. That notwithstanding, there is considerable support for them among powerful groups in the developed countries.

How to deal with these issues? Some economists have suggested what is called the "variable geography" approach to trade negotiations. This would allow countries that are anxious to promote non-trade policies such as those mentioned above to adopt them for their own trading sectors rather than force them on their trading partners.

Such an approach will put the onus on developed countries and save the developing world from having to comply with a lot of requirements which is not easy for them to observe.

The main conclusion of this report is that as the negotiations under the Doha round proceed, there is a real danger that the international trading system would get highly compromised by letting regional trading arrangements grow in number and scope, by allowing the developed world to continue to negotiate new Generalized Systems of Preferences for blocs of countries for political reasons, by reducing the push for greater market opening across the globe on dubious analytical and empirical grounds. The authors call for strong leadership by the WTO as well as the large trading countries.

What does this mean for Pakistan as it also advances its quest for Free Trade Arrangements, continues to negotiate with the US for the possibility of eventually entering into some understanding with it which would take the form of a binding treaty - perhaps an FTA - and works with other South Asian countries to launch Safta no later than January 1, 2006?

The guiding principle for policymakers in Islamabad should be to move on two parallel tracks simultaneously. No matter what the experts say, we have to follow where the rest of the world is going and we should continue to put considerable energy in concluding bilateral and regional trading arrangements.

At the same time, we should take an active interest in representing our interests and those of the developing world in the successful conclusion of the Doha round.

The future of local governments

The local government and police laws relate to the affairs of the provinces but the provincial legislatures cannot alter, repeal or amend them without the previous sanction of the president for six years beginning 2003. The Local Government Ordinance, 2001 was drafted by the federal government but was promulgated verbatim by each of the four governors.

The Police Order, 2002 was promulgated by the chief executive (as General Pervez Musharraf then chose to designate himself) and published for general information for application to all provinces.

The bar on the provinces against tinkering with the two laws is constitutional though the subjects lie entirely under their jurisdiction. The provincial governments have retaliated against this unprecedented intrusion by effectively denying to the district nazims and police commissions and officials the powers that the ordinance and the order vest in them.

The conflict that Musharraf's devolution plan has created between the provincial and district governments is admitted on all sides. As the three-year term of the local councils draws to a close the chief of the National Reconstruction Bureau believes that the conflict has been all but resolved.

Mr Abdul Sattar Afghani, who is one of the better remembered mayors of Karachi, on the other hand, asserts that it is intensifying. Most people would tend to agree with Mr Afghani.

The conflict is inherent in the origin and very concept of the plan and is likely to persist even if some changes in laws and adjustments on the ground were to be made here and there. The hostility of the provinces to the plan, more particularly to the district government, arises from the federation's encroachment on a domain which belongs to them.

While the growing demand is for more autonomy to the provinces, the federal government has made further inroads into their domain by extending its control over the local government institutions and the police. Thus, whatever little provincial autonomy there was, too, has been eroded.

In the wake of the trouble at Sui, and incidents of sabotage elsewhere in Balochistan and the Baloch belt of Punjab, the ruling coalition and the president now seem inclined to concede greater autonomy to the provinces by abolishing the list of concurrent subjects in the Constitution. This appears inevitable, the only question is how soon and how much.

In the constitutional amendments that follow this change in the thinking of the people that matter, the control over the district governments and the police and the laws governing them is bound to revert to the provinces.

The fear then would be that acting in a spirit of vengeance (the ministers and legislators are indeed brimming with it), the provincial governments might emasculate the local councils or abolish them altogether. This fear is not unfounded.

Historically, the urge of both the federal and provincial parliamentarians to exercise power and patronage at the grassroots has not been contained. Resolutions and legislation passed in the assemblies are of little interest or concern to most among them.

Local councils form an integral part of the democratic system. In true democracies, they are protected as a matter of tradition and sustained by the service they render to the people.

Here in Pakistan, in the absence of this tradition and public indifference they deserve to be protected by the Constitution. But before that is done the entire local government system must be reshaped in a manner which enables it to coexist in harmony with provincial authority.

Such coexistence would be possible only if the sphere of responsibility of the district governments and the lower councils is narrowed and their relationship with the bureaucracy and police force is more precisely defined.

Under the present set of laws, almost every provincial subject stands transferred to the local council, leaving only the laws and policy formulation with the province.

That makes a district nazim in his own jurisdiction more powerful both in public affairs and personal patronage than the chief minister and governor put together.

A practical proposition, which should also be acceptable to the provincial government, would be to transfer only the civic services, local development and regulations to the districts.

Subjects like irrigation, information technology, land revenue, health and education (other than primary) can be planned and supervised only at the provincial level. All these activities cannot be split with the districts as they do not possess the skills or resources to handle them.

In any case, the nazims should not be responsible for law and order. That brings in party affiliations. Then also the nazim is a lone figure with no apparatus to discharge that awesome responsibility and to make the police force amenable to his direction.

It is for this reason that despite the provisions of the L.G. Ordinance and Police Order, the police all along have remained under the provincial government, or more plainly put, under the joint control of the governor and the chief minister with the MNAs and MPAs also exerting their influence.

The intention of the new law was to keep the police away from political influence. In fact, the reverse has happened. With the abolition of the deputy commissioners and commissioners and transfer of the magisterial courts to the judiciary, the police has fallen entirely under the control of the politicians.

Naming the set-up in the district as "government" has proved a double-edged weapon. The provincial government views it as a rival and the district nazim has acquired an exaggerated notion of his powers and role.

Further, it was absurd to have given constitutional protection to district governments when a district can be abolished or divided through a simple notification by the revenue department of the provincial government, leaving a nazim without a district. This device has recently been used by the Sindh government to unseat some "undesirable" nazims - who were PPP sympathizers.

This position can be further illustrated by an example from Karachi. The nazim of Karachi has been negotiating and pursuing projects like mass transit, magnetic rail, tramways and sea-water desalination, which are beyond the technical and financial resources of even the federal government.

All the MoUs he signed therefore can make no headway over three years nor are they likely to make any even if he were to return for another term. The city district, not being a constitutional entity nor master of its own income, the investors and lenders cannot rely on his MoU or commitments.

Further, the nazim has been investing scarce public funds in a medical college and a cardiac centre and in a women's university. He has taken over the job of the federal and provincial governments but has neglected his own duty which is water supply, sanitation, clearing slums and preventing encroachments, developing new housing colonies, and improving primary education and health. All these services have stagnated or worsened. It made no sense to invest in a women's university when schools do not have desks.

Private operators have added 300 or so buses to the city's rickety old fleet of 10,000 not because of the efforts of the provincial and city governments but despite the hindrances they created. But for their mutual wrangling and the city government's impracticable plans, Karachi's bus services would have been by now substantially modernized.

Punjab has been more pragmatic. There the city bus services have enormously improved in the past few years because of the fillip imparted to the project by a hard-driving Shahbaz Sharif before he was sent out.

Here is yet another instance where Sindh denied to itself the benefit of federal subsidy to a scheme that Karachi desperately needed. Punjab made full use of it. Then Sindh complains of deprivation. Here it was self-inflicted.

Successive political governments did not allow local representative institutions to dig roots because of their indifference or outright hostility. The result of extraordinary zeal exhibited by General Musharraf and his NRB headed by another general has been no different.

Now, Shaukat Aziz's government which is a mix of military and politics should steer a middle course if the local government is to find an enduring place in the country's democratic structure.

Parliament and salaries

I read, with a certain fatalism, a news report that the government had raised salaries of members of parliament by 15 per cent. Que sera sera. Whatever will be, will be. At least, at some level there is acceptance that the cost of living has gone up.

It could be the harbinger of great things and there could be acceptance that the cost of living has gone up across the board and not just for our elected representatives.

Who knows that salaries in both the private and public sector will go up. This could even be cited as an example of how the members of parliament are providing leadership.

There could be other reasons than just the cost of living for this pay increase. It could be contractual, built into the rewards for being members of parliament, which is a heavy responsibility, and not everybody's cup of tea. Considering that the cost of tea has also gone up, there is something elitist about everybody's cup of tea more so since milk and sugar have become more expensive.

There is one other consideration. There seems to be a good deal of discussion about democracy these days and those who have it (democracy) want to give it to those who don't and those who don't want it run the danger of having their countries invaded.

A pay increase in the salaries of members of parliament will no doubt serve as an incentive for more and more people to take up this career and thus will democracy spread its wings.

I have not worked out how the figure of 15 per cent has been worked out. Is it an arbitrary figure? Or has it been calculated? The cost of living obeys no rules. I needed my reading glasses to be corrected and based on what it had cost the last time I had done so, give and take increasing prices, I was reconciled to some increase but not to be fleeced. When I berated the optician, he listed his own sorrows including the considerable jump in the rent for his shop. Things feed off one another.

The impression being created so far is that I am somewhat light-hearted about this salary increase. I am somewhat interested as I am about all those Mercedes cars that have been imported.

I prefer not to meddle in affairs about which I know nothing and though I can tell the difference between good governance and that governance which is not so good, I have no idea how one goes about getting either one of them.

I do know something about salaries having received them when I worked for a living. I must confess that I always considered mine too low but since I worked for an organization, my personal complaints did not affect the salary structure which was based on the nature of the job, qualifications that one had and most important of all the financial ability of the organization to meet the pay packets.

Salaries did not go up and down on someone's whim but were structured and there was an annual increment, which was given to all, the just and the unjust, the cart-horse, the work horse and the thoroughbred.

In this respect those with lower salaries were the lucky ones for they came in the category of workers and thus were entitled to overtime. Those of us not entitled to overtime had to work along with those who were. I found this unfair but otherwise the system seemed to work reasonably well.

I have no idea how it works with salaries of members of parliament nor am I convinced that they should be given salaries though it seems to be a universal practice. People don't become members of parliament because it is a career though many have made careers of being one. People become members of parliament because of some lofty idealism, the special urge to serve the people. I am putting the best face on it.

Many are people of independent means, indeed much beyond them and as I understand politics, it is an expensive business and the meek may inherit the earth but most likely not have the resources to contest elections. What percentage of our members of parliament would resign their seats if it was decided that there would be no salaries?

I don't really want to write so much about this subject and merely wanted to make the point that financial rewards or perks should be performance related and over the years, parliaments have not exactly endeared themselves to the people and when parliaments are sent packing home and it is decided that the brave, new world will be constructed through some other means, not many tears are shed.

There is no such involvement, no inter-action between the people and members of parliament. The relationship is a distant one, like ships that cross one another. Finally, there is the question of what constitutes a fair wage or salary? It is not something that is pulled out of a hat, though it might give that impression.

There has to be some basis and must compare with the average salary of the people that these members of parliament represent. One-way could be to double that average salary. It would demonstrate that the elected representatives are twice as good.

The history of parliaments in this country is not a straight line but one that twists and turns and there have been periods of time when we have had no parliament. I don't think paying salaries will break the bank but most will agree that it comes in the category of unearned income. Still, I have no strong views on it.

Need for an employment guarantee scheme

One of the pillars of Pakistan's Poverty Reduction Strategy Paper (PRSP) to eradicate extreme poverty and hunger is targeting and expanded coverage of the anti-poverty and social protection programmes for the poor and vulnerable. To fulfil this commitment, the Government of Pakistan has designed several instruments to help the poorest segments of the population.

These include transfers in cash and kind for consumption through Zakat and Baitul Maal, access to concessional credit for entrepreneurial ventures and better employment opportunities through public works programmes (for example, the Khushaal Pakistan Programme).

However, partly because of inadequate government funding, the small size of individual assistance to those eventually helped through these schemes and doubts about the efficacy of this support reaching the most in need of assistance, Pakistan is a long way off from its commitment to a 50 per cent reduction in the proportion of the population with incomes of less than a dollar a day as a millennium development goal to be achieved by 2015.

The poverty reduction goal is unlikely to be achieved even with a growth rate of seven per cent per annum over the next decade unless there is employment-intensive growth.

Unemployment, particularly in rural areas, has been a perennial problem which has become accentuated in recent years. The rate of growth of employment has been below the rate of increase in the labour force, particularly in view of the acute lack of skills among those looking for work in the rural areas.

Moreover, since employment generation from the more capital-intensive production processes now being developed in the manufacturing sector is, and will continue to be, slow, and the rate of job creation per unit of rupee invested in industry is falling, industry is not likely to play the role of the lead sector in providing adequate employment opportunities.

Given the state of science and technology in Pakistan we can only import technology whose labour-intensity is low, and declining over time, since these technologies are being developed in economies in which labour availability and cost is a key constraint. This suggests that the share of regular wage employment in total employment will continue to remain small, at least in the foreseeable future, in comparison with the share of self-employment.

The latter is an obvious outcome in a poor country like ours where the poverty-stricken households cannot afford to remain unemployed, and most of the working poor are engaged in self-employment or work as casual daily wage labourers.

The other sectors, services and agriculture, which could theoretically provide productive employment to the rapidly growing workforce, can at best play limited roles under present conditions.

Agriculture crop production growth, despite the huge untapped potential for enhancing yields, has slowed down while growth of employment in the service sector is constrained by lack of education and technical skills.

Moreover, agriculture which already accommodates 55 per cent of the labour force (which is also heavily under-employed) needs to shed or transfer labour to other sectors to enhance its own productivity and improve its international competitiveness.

The discussion above having highlighted the limitations of the conventional areas of augmenting employment opportunities points to the need for direct government action to reduce distress and poverty, especially in rural areas.

It is, therefore, proposed that the government should consider the possibility of designing programmes that give a statutory right to employment, for example, in public works schemes like construction and maintenance of local roads, irrigation or water supply schemes, etc. for a minimum number of days, say, for 125 days a year to at least one person from every household during the lean parts of the agricultural seasons and then accord them priority while allocating budgetary funds.

Such an employment guarantee scheme is being successfully managed in Indian state of Maharashtra for over 20 years and funds have been announced by the Indian government in its budget for this year.

The determination of the wage rate that would be paid to those found eligible for support under an employment guarantee scheme will also be important for its success.

A rate higher than the market wage rate would encourage shifting of labour from existing activities to such programmes, raising the financing requirements and thereby the burden of these schemes, while a rate significantly lower than the minimum wage would not provide an adequate subsistence income.

In other words, it would have to be a wage rate based on the poverty line to improve self-targeting of beneficiaries, while minimizing the substitution of labour from other employment to employment under such a guarantee scheme.

Considering Pakistan's poverty line estimated at around Rs. 900 per capita per month and a worker to population ratio of approximately 0.3 (which is the ratio of an average of less than two bread earners per household in an average family/household size of under 6.5) the national minimum wage rate works out to around Rs. 3,000 per month (Rs. 120 per day) for 25 working days per month - a rate more than the official minimum wage that employers are obliged to pay.

An average minimum wage of Rs. 120 per day for 125 days work will raise income of poor households by approximately Rs. 15,000 per year, thereby pushing close to half of the poor households above the poverty line, including those assisted under Zakat.

Since the seven million poorest households living below the poverty line already have some sources to meet between one-third to 40 per cent of their expenditures on subsistence living - the additional cost per annum of such a scheme to help around 3.5 million poorest households will not exceed Rs. 75 billion, just over one per cent of GDP (since some support for the poorest households is also being provided as Zakat from official funds or as private charity).

To make this cost estimate more realistic and check duplication of efforts to achieve the same objective - poverty reduction - budgetary funds earmarked for poverty alleviation programmes funded through Pakistan Baitul Mal should be reduced and diverted to such a scheme.

This percentage will fall as the number of households below the poverty line decline, if an economic growth rate of 6.5 per cent can be maintained over the next decade or so and we factor in the automatic generation of additional employment opportunities from the multiplier effects of the spending on public works to be carried out under these employment guarantee schemes.

Issues that will, of course, need to be addressed in the design would be possibilities of leakages, ghost workers and corruption of government functionaries during award of work, which will also have to be combated through effective monitoring by both government and local communities.

The procedures to verify the eligibility of those needing support under such a scheme will have to be rigorous, if inclusion in the programme is essentially based on an administrative decision, in the absence of a database for checking eligibility and ensuring better targeting. The mechanism for removing existing or new households to the list will also need to have clarity.

Leakages on the basis of bogus lists of beneficiaries and widespread political interference, patronage and abuse and exclusion of many in need will be common issues, to tackle if beneficiaries are selected on the basis of administratively determined criteria and identification procedures.

For better targeting, the selection of beneficiaries will have to be on the basis of proxy means tests (by collecting information on wealth, property owned, condition of housing, occupation, locality in which living, number of earners and dependents, etc.).

This would help in assessing the extent to which beneficiaries meet the eligibility criteria, although the physical nature of the work that would be available to those accessing the benefits and the lower wage rate (being below the market rate) under the programme would enable self-selection, since there would be little incentive to enlist for such hard work other than by those in real need.

Moreover, better access to information on the identity of those being covered under the scheme and the participation of local communities in the enlistment of those in search of work would improve both transparency and targeting of the programme.

Initially, there will also be a need to design a distribution formula of the budgetary allocations that is not solely based on provincial and district populations but is driven by levels of poverty, identifying areas with higher concentration of the poor, estimated on the basis of a poverty mapping of the country, until the scheme is adequately funded to cover all potential beneficiaries.

The writer is a former finance minister of Punjab.