Economy’s current state

SINCE I write about the Pakistani economy, I am often asked about its health, performance and prospects. These questions are posed more earnestly in May and June as the calendar advances towards two events. The first is the release of the annual Pakistan Economic Survey; the second is the unveiling of the national budget. The Survey takes a detailed look at the financial year that is about to close; the budget views the year that is about to begin.

The Survey for the year 2006-07 was released to the public by the ministry of finance on June 8. Two days later, on June 10, the budget for the year 2007-08 was presented to the National Assembly. In the article today, I will reflect on the current state of the economy.

The most discussed number in the Survey is the rate of economic growth which is estimated at seven per cent. This is an estimate since the government has data for only the first 10 months of the year, from July 2006 to April 2007. This means that the economy continues to expand at a rate three and a half times the increase in population.

At this rate there should be a sizeable reduction in the incidence of poverty. The expansion that began in 2002-03, when the gross domestic product increased by 4.7 per cent, was maintained in the current year. The GDP increased by 7.5 per cent in 2003-04; by another 8.6 per cent in 2004-05; and by a further 6.6 per cent in 2005-06.

Factoring in the increase for this year, the economy has expanded by almost 40 per cent over the last five years — on average an increase in GDP of seven per cent a year. This makes it one of the most impressive periods of economic expansion in the country’s 60-year history, a fact that Islamabad should celebrate by using the right set of numbers.

I am really puzzled why the country’s senior economic leaders continue to use “nominal” rupees and dollars to underscore the good performance of the economy. A nominal rupee or a nominal dollar is the value of the currency in terms of what it can purchase at a given time. The nominal rupee in June 2007 is what it can buy in June 2007. Its value is eroded by inflation. Consequently, what it can buy today is less than what it was able to purchase a year ago or five years ago.

The rate at which a currency depreciates is what economists call the price deflator. It is the amount by which the value of the currency must be adjusted to discount for inflation. When the Economic Survey says that the GDP increased by seven per cent, the estimate is made in real rupees. It takes out the effect of inflation. It is the real expansion in the economy, not the consequence of inflation.

The claim made repeatedly that the size of the economy has been doubled in five years is correct only when the rate of growth is measured in nominal rather than in real rupees or dollars. That is never done. Growth rates should always be provided in real rather than in nominal terms. The difference between the two is important.

Although this “doubling of GDP stance” was dropped from the various presentations made in connection with the budget, the thinking behind some of these claims, unfortunately, has not changed. “The per capita income in dollar terms has grown at an average rate of 13 per cent a year during the last five years, rising from $586 in 2002-03 to $925 in 2006-07,” write the authors of the recently released Economic Survey. “Per capita income grew at a much lower rate of 1.4 per cent per annum in the 1990s.”

It is particularly worrying that this comparison in the performance of the economy in the 1990s and the early 2000s is being made in these terms. The 13 per cent increase in the recent period was in nominal terms, the 1.4 per cent growth in the earlier period was in real terms.

There was a suggestion that since per capita income is approaching $1,000 a year the country should be on the verge of becoming a middle income economy. But the line that separates the poor from middle-income countries continues to be moved up by institutions such as the World Bank that do this kind of accounting to take account of inflation.

When Pakistan crosses the line, the definition of a middle-income country will certainly have changed. Besides, as indicated in the Economic Survey, the country has continued to keep the exchange rate more or less fixed at Rs60 to a dollar. This has been done despite the fact that the rate of inflation in Pakistan is at least seven percentage points more than in the United States.

As I have suggested earlier, the rupee is now seriously overvalued and when the adjustment is finally made, it will result in reducing the size of the economy as well as income per head of the population when these two are expressed in nominal dollars. That would not mean that devaluation would bring back the country from a middle-income status to being once again poor simply because the exchange rate has been adjusted to a more meaningful level.

This is the kind of problem the use of nominal currencies poses. An economy that has grown at seven per cent average over a five-year period will not only be much larger in size, it will also be structurally different. This will be the case in particular if the rates of growth in different parts of the economy are different from the economy as a whole.

The Economic Survey has data on the sources of growth with the contributions estimated for the main sectors of the economy. Of the three main parts — services, agriculture, and manufacturing — the highest rate of growth was registered by manufacturing. This is to be expected of a rapidly growing developing economy.

The sector’s output increased by eight per cent in 2006-07. However, this was lower than the rate of increase in 2005-06, when the value added in the sector grew by 10 per cent. The rate of output increase in what is described as the large-scale manufacturing sector also declined quite significantly. It was 10.7 per cent in 2005-06 but declined to 8.8.per cent in 2006-07.

The service sector output increased by eight per cent while that of agriculture grew by five per cent. Agriculture’s higher than normal rate of increase was largely the consequence of the recovery from the previous year. In 2006-07, the output of major crops increased by 7.6 per cent, coming after a decline of 4.1 per cent in the previous year.

In other words, the high growth rate of the economy in 2006-07 may be due in part to good weather which normally contributes to wide fluctuations in agricultural output. Also, the fact that the value added by major crops was considerably greater than that by minor crops and the sector of livestock means that the sectors which will ensure high rates of sustainable growth are performing below their potential.

These growth rates suggest that the economy’s three major parts grew close to the average rate of economic increase. The contribution they are making to the economy has not changed by much; the proportions in the national GDP of agriculture, manufacturing and services have remained largely unchanged. This may be the sign of long-term weakness since looking at the country’s endowments growth will come from some of the economy’s components that are currently under-performing. Small-scale engineering and high value added agriculture are some of the activities that would provide long-term momentum to the economy.

What is particularly worrying about the state of the economy is the performance of exports. In the first 10 months of the current year, the value of exports increased by only 3.4 per cent, a sharp decline from the 16 per cent average a year increase in the previous four years. The value of imports has also declined from a sharp acceleration in the period between 2002 and 2006 and the financial year about to be completed.

The Survey identifies in some detail the reason for poor performance of exports among them the most important being the inability of the textile sector to remain competitive in a market that has many aggressive participants. This line of thinking represents a major change in

the government’s view of the performance of the textile

sector.

The Economic Surveys from earlier years had celebrated the large investments that were made by the entrepreneurs in the textile sector. It was repeatedly pointed out that by investing massively in the modernisation of the industry, textile entrepreneurs had prepared the country well for the time when the quota regimes that had directed international trade in the sector, would be replaced by open competition.

The approach taken this time is correct since it puts emphasis on the sector itself rather than on the crutch that the entrepreneurs continue to demand from the government. It is the ready availability of the support the government was always prepared to provide that has retarded the sector’s development.

According to the Survey, “it is generally argued that Pakistan’s exports are uncompetitive in terms of adherence to contracted quality and delivery schedule. Pakistan’s competitors are investing heavily and creating better economies of scale.

These are structural issues and must be addressed by the industry itself with the government playing its role as a facilitator and providing some temporary assistance to address some short-term issues…” This is the right approach to adopt.

The real problem posed by the poor performance of exports is the burden it is imposing on the economy. The trade balance continues to deteriorate with Islamabad prepared to finance it by a combination of foreign borrowing and sale of government-owned assets.

This can’t be a permanent solution to the problem of large trade deficits; the only way out is to increase exports of merchandise as well as services. In both, public policy needs to take account of the country’s comparative advantage.

It is not right to focus so much attention on increasing the export of textile, a sector in which, as the Economic Survey correctly points out, Pakistan faces stiff competition. Not only must Pakistan compete with China in textile exports, it must also face competition from countries such as Bangladesh that enjoy privileged access to such large markets as the United States and the European Union.

In sum, the continuing expansion of the economy is something Islamabad’s policymakers can take credit for. That said, the economy needs careful tending particularly to ensure that the rapid growth spreads its rewards widely. I will discuss this aspect of economic performance next week.

Violence in Gaza

THERE is nothing uglier and more brutal to the human spirit, nothing more lethal to that universal hope for freedom, than to see a people struggling for liberty for such a long time begin to kill each other.

How and why did we get here? Above all: how do we get out of here? These are the questions everyone watching events unfold in Gaza and the West Bank are asking themselves. But before answering them, it is essential to understand just what we are witnessing.

This is not at its heart a civil war, nor is it an example of the upsurge of regional Islamism. It is not reducible to an atavistic clan or fratricidal blood-letting, nor to a power struggle between warring factions.

This violence cannot be characterised as a battle between secular moderates who seek a negotiated settlement and religious terrorist groups. And this is not, above all, a miserable situation that has simply slipped unnoticed into disaster.

The many complex steps that led us here today were largely the outcome of the deliberate policies of a belligerent occupying power backed by the US.

As the UN envoy for the Middle East peace process, Alvaro de Soto, remarked in his confidential report leaked last week in this paper: "The US clearly pushed for a confrontation between Fatah and Hamas, so much so that, a week before Makkah, the US envoy declared twice in an envoys meeting in Washington how much 'I like this violence', referring to the near-civil war that was erupting in Gaza in which civilians were being regularly killed and injured."

How did we get here? The institutions created in occupied Palestine in the 1990s were shaped to bring us to this very point of collapse. The Palestinian Authority, created through negotiations between Israel and the Palestine Liberation Organisation in 1993, was not meant to last more than five years – just until the institutions of an independent state were built.

Instead, its capacities were frozen and it was coopted into performing the role of a security agency for the Israelis, who were still occupying Palestine by military force, and serving as a disbursement agency for the US and EU's funding of that occupation. The PA had not attained a single one of the freedoms it was meant to provide, including the most important one, the political liberty of a self-determining sovereign body.

Why did we get here? Once the exact nature of its purpose emerged, the Palestinians began to resist this form of external control. Israel then invaded the West Bank cities again and put President Yasser Arafat's compound under a two-year siege, which ended with his death. Under those conditions of siege the international "reform" process created a new institution of a prime minister's office and attempted to unify the security apparatus under it, rather than that of the president, whom they could no longer control. Mahmoud Abbas was the first prime minister, and the Israeli- and US-backed Fatah strongman, Mohammed Dahlan, was appointed head of security.

After the death of Arafat, Abbas was nominated to the leadership of the PLO, and directly elected as the president of the PA.

Arafat had followed the strategy of all successful liberation movements: a combination of resistance and negotiation until the conclusion of a comprehensive peace treaty. Abbas's strategy was of an entirely different order: no resistance in any form and a complete reliance on the good faith of the Israelis. After a year of achieving nothing – indeed Ariel Sharon refused to negotiate with him and Israeli colonisation was intensified – the Palestinian people's support for this humiliating policy of submission wore thin. Hamas, polling about 20 per cent in previous years, suddenly won 43 per cent of the vote in 2006.

This popular reaction was a response to the failure of Abbas's strategy as much as the failure of Fatah to present any plausible national programme whatsoever. The Palestinians thus sought representation that would at least reflect their condition of occupation and dispossession.

Although the elections were recognised as free and fair, the US and Britain immediately took the lead in applying sanctions against the Hamas government, denying aid – which was only needed in the first place because the occupation had destroyed the economy – and refusing to deal with it until it accepted what had become, under these new circumstances, impossible "conditions".

The US administration continued to treat Fatah as if it had won the election rather than lost it – funding, arming, and directly encouraging agents within it to reverse the outcome of that democratic election by force. The Palestinian president brought pressure to bear on Hamas to change its position on recognition of Israel. Palestinians refused to participate in this externally driven coup – indeed, the vast majority of Fatah cadres rejected outright an enterprise so clearly directed at destroying the Palestinian body politic.

Both the prisoners' document and the Makkah agreement signed in Saudi Arabia creating a national unity government took place because Palestinian society insisted on a national framework. Yet a small group has brought us to this point.

The outcome is what we have before us today, similar to what the Americans were seeking to create in Iraq: the total exclusion of democratic practices and principles, the attempt to impose an oligarchy on a fragmented political society, a weakened and terrorised people, a foreign rule through warlords and strongmen.

How do we get out of here? For the West, the path is both obvious and simple. It needs to allow the Palestinians their own representation. It can look to the terms of the Makkah agreement to see the shape that would take, and to the 2006 prisoners' document for the political platform the Palestinians hold. It needs to urgently convene a real international peace conference, which no one has attempted since 1991, as recommended in the Baker commission's report on the Iraq war, de Soto's end of mission report, and as championed by President Jimmy Carter. And it needs only to look to the Beirut Arab peace initiative to find everything it has been seeking, if indeed it is seeking peace.

For the Palestinians, the path is also clear: we have come to the end of the challenging experiment of self-rule under military occupation. We now need to dissolve the PA, mobilise to convene direct elections to our only national parliament, the Palestine National Council, in order to enfranchise the entire political spectrum of Palestinians, and thereby recapture the PLO, transforming it into the popular and democratic institution it once had a chance of becoming.

This is already a popular demand of all Palestinians. Palestinians in exile must take their turn again in lifting the siege inside Palestine, as the inside did for the outside after the almost total destruction of the PLO in 1982 in Lebanon and the siege of the refugee camps there in 1986: we are one people.

The Palestinians have a long history of struggle in which each generation has had to break out of the coercive prison imposed by British colonial, Arab, Israeli, and now American rule, and we will do it again. —The Guardian, London

The writer is a fellow in politics and international relations at St Edmund Hall, Oxford University.

The question of press freedom

JUNE 11, 2007, was a hot day in Karachi. The air conditioners did not work and power supply played hide and seek all the time. It was on such a day that I found myself standing in an auditorium filled by more than 100 people and ready to deliver the Hamza Alavi lecture at the invitation of Rahat Saeed, the man who has kept the progressive magazine Irtiqa alive for decades.

Zubeida Mustafa, herself a fearless writer, was the stage secretary and the famous Ardeshir Cowasjee presided. The family and friends of Zamir Niazi had gathered there. And there I was — a man who was not a journalist and who had not known Zamir Niazi except through his books and who could not even pretend to have the kind of courage which Niazi had — daring to speak about him.

But I had my reasons. I could see a connection between journalism and the academia and, further, between our own freedoms as human beings and the freedom of the word. Aware that academic connections might not go down well in a gathering of brave journalists and members of civil society who wanted to hear more about what was happening in Pakistan as they sat dripping in perspiration, I nevertheless took the risk to speak. Here is the gist of what I said.

Zamir Niazi is the man who wrote a number of books in English and Urdu on the freedom of the press in British India and then in Pakistan beginning from Zia’s military rule years onwards. The trilogy (The Press in Chain, The Press Under Siege, The Web of Censorship) is a diary of what the press has been up against since the early 19th century in South Asia.

Niazi was meticulous in keeping records and he was brave. Without this he could not have been the conscience of the press for almost half of the life of the country. But what is more is that he was made of heroic stuff. Although under financial constraints and suffering from ill health, he actually returned the money that had been given with the Pride of Performance award when the government went against the freedom of the press.

The media constructs our realities which is why the powerful want to control the media. In our part of the world it started off as part of a huge spying network of the king and his governors. Emperor Akbar (1556-1605) had ‘waqai nigars’ and ‘waqai navis’ who noted the happenings of the week and sent them to the emperor through runners (‘harkaras’). Then there were secret intelligence agents, ‘khufia navis’, who found out what was happening in the bazaars and reported this to the king. Questioning or subversion of power was not part of the project of these early prototypes of the media.

The media reports on history in the making thus influencing its course. Academia comments on concepts and processes which also shape history. Both are detested by the wielders of power because they challenge the status quo; they deconstruct the ‘truths’ constructed in the favour of the power-wielders and tend to weaken the powerful. Under despotic rule, they are killed, during dictatorships they are jailed; and in governments swearing by democracy they are bribed (carrot) and persecuted (stick).

We hear loud talk about the freedom of the media but Pemra laws swing into action when the government feels threatened. Channels go off air and restrictions are imposed. This is because the reality the press constructs threatens to write history anew. This is the phenomenon that Zamir Niazi spent his life to record and condemn.

But how do our freedoms go with these ‘western luxuries’ (free press and free universities), some people may ask. First, because our physical safety is dependent upon the rule of law and the notion of the rule of law is protected by the press. The press not only informs people about excesses against citizens but tells them what to do about them. It creates public opinion. More importantly, it creates and nourishes the notion that there are rights and that the powerful can be resisted. This leads to far greater personal security than is possible in states where the media is absent or subservient to the power-wielders.

Second, the press exposes people to ideas of pluralism, several value systems and various realities. Our societal norms envisage a certain code of conduct, a uniformity of sorts with deviations being the prerogative of the hypocrite or the powerful. The other contender for restricting choices is the interpretation of Islam. The media is a threat to both these forms of control — tradition and political religion — and thus the onslaught against it.

Third, the freedom of the media is linked with what is called a national character. We are not free to be as we like. There are many forces acting on us which are creating our beings at all times. Thus, contrary to the belief that courage and integrity are personal qualities or choices, the fact is that they are choices only under ideal conditions.

Whether they are personal qualities in any psychological or genetic sense is not for me to say. However, even if they are intrinsic to some natures more than to others, it is obvious that external conditions stifle or nurture them. If a person is sure that no bodily, psychological or economic harm will come to him or her for telling the truth, he or she will be encouraged to be truthful. If, however, the cost of truth is great, few people are ready to risk telling it. Thus, truthful and honest people are not born, they are created. When the press is no longer free, citizens are also no longer free to be honest or truthful, and become dishonest.

Fourth, we think we are free to pursue knowledge but we are not. Free or almost unrestricted pursuit of knowledge is a new phenomenon. It is as old as the rise of the free press and, indeed, both are inter-related.

In our country, we can test the limits of academic freedom when there is no scholarly debate but a lot of mud-slinging against Dr Ayesha Siddiqa for writing a book giving details about the military’s business. If her data is wrong the correct data should be given but to threaten or humiliate her is to curtail academic freedom in a society which does not have a research culture anyway.

Lastly, societies with a free press do a number of things to create conditions for pursuing pleasure. First, they prevent elites from becoming too tyrannical. Second, they criticise rent-seeking economic elites (mostly the same as the political ones). Thirdly, they provide alternative voices against the puritanical clergy or ideologues who condemn all pleasures. Fourthly, they provide entertainment through drama, music, discussion, photography, etc. Fifthly, they give one a sense of participation. Lastly, they make one feel powerful. We may not be powerful in the personal sense, but with the media talking against the powerful, thus expressing our feelings, we feel we have some power.

We should not be complacent about these freedoms. They have come slowly because the British left us with some sterling ideas: freedom, rule of law, constitution, democracy. Even military regimes have not quite done away with this terminology which creates some space for us. But then, we should not forget that people have suffered and paid for these freedoms as the journalists who are facing the state’s power have been doing since March 9.

Surely some of us have succumbed to pressure or bribery but then we are only human. Who has put the pressure? Who has bribed them? The agencies of the state, of course, who must be condemned clearly. We must also not forget that as long as the press is not controlled and owned by media persons it cannot be really free. Owners have their money to protect and they are fewer in number than media men, and are thus more controllable. We must understand that those in the media and in the universities stand for the same ideals of freedom which are currently under great stress. This is the time to respect the legacy of Zamir Niazi and to pass it on to the younger generation.