Anatomy of the crisis

AS if Pakistan didn’t have to contend with enough problems of its own to ensure that it does not stumble badly in the area of economics, it has also to factor into the making of public policy the enormous changes taking place in the structure of the global economy.

The country’s economic and political future will be shaped not only by domestic developments. It will also be profoundly influenced by what happens to the global economy, to the countries that are Pakistan’s neighbours and to the regions on which it depends for both physical and financial resources.

In the past Pakistan had not made a serious effort to understand how it is affected by the developments around its borders and in distant places. It had thus not developed the capacity in any of the ministries and departments that are involved in the design of economic policies to reflect on economic geography. This needs to be remedied. Capacity needs to be created in the ministries of finance, foreign affairs and in the Planning Commission to understand how developments outside Pakistan are likely to affect its economy.

In this context it would be useful to first analyse how the present global economic and financial crisis has begun to affect the emerging world; what is happening in the countries in Pakistan’s neighbourhood; how developments in China and India in particular influence the Pakistani economy; and, finally, what should Pakistan do in order to ensure that these external developments don’t further batter the economy. My concern today will be the first of these four questions.

The view that the developing world has decoupled itself from industrial countries was shared by many economists. This belief was based on the assumption that developing countries had a growth dynamic of their own which was not dependent on the links with rich nations.

The emergence of China as a global economic power supported this point of view. The country has become a major importer of parts and components from the developing world to produce finished products for export to all countries, not just the markets of developed countries. In other words, China and other developing countries that had good economic relations with it could operate without being affected deeply by developments in rich countries.

However, this hypothesis has not withstood the test of time. The severe financial crisis that has already taken such a heavy toll on the United States and Europe has affected the emerging world as well.

Economists, like generals, are always preparing to fight the previous war. The financial crisis of 1996-97 that engulfed the Asian emerging economies, led to the belief that maintenance of large foreign exchange reserves would protect these countries from the effects of a sudden change in the way the international capital markets looked at the developing world.

Accordingly, most large Asian economies accumulated large reserves; China alone has $2,000bn accumulated holdings. Having accumulated such large reserves, the countries had to find ways of investing them. Most of them put their money in US treasuries. However, the flow of this money to the US encouraged that country to spend it on consumption. The United States already had a cheap money policy adopted by the Federal Reserve System, the country’s central bank, to ensure that the economy continued to expand. On top of that Alan Greenspan, then the chairman of the Fed, was of the view that the state should let most financial institutions regulate themselves. The government should not interfere.The availability of cheap money from abroad, low interest rates and encouragement to financial systems to develop new instruments in order to spread the risk around proved to be a heady brew. The US financial system got drunk on it.

Development of securitisation — instruments that allowed the banks to package the mortgages they had written into tradable products — entangled other financial institutions in the web that commercial banks were weaving. Absent securitisation, the risk the banks were taking would have remained on their books. If they were lending to the people who could not service the loans they were receiving to purchase houses that should have become the lending bank’s problem. But securitisation allowed them to spread the risk.

Other financial institutions were prepared to enter the picture since the products the banks had developed centred on the mortgages they had written and were given high ratings by credit-rating agencies. These products were purchased by the investment banks and hedge funds.

Although the rating agencies had rated them safe, investment banks still insured them with insurance companies. In other words, every aspect of the US financial system — commercial banks, investment banks, hedge funds, credit rating agencies, insurance companies — got enmeshed in the business that commercial banks had generated for themselves.

The inherent weakness in the system may not have surfaced had the Fed not begun to raise interest rates in 2007-08. Suddenly, tens of thousands of borrowers found that they did not have the current incomes to service their debt to the banks. The rate of default increased sharply. The products the rating agencies had deemed to be safe suddenly became toxic. Initially there was the belief that the exposure to them was limited to the institutions in the US. It transpired that the European banks were also deeply involved, having purchased the products from US banks. The crisis jumped across the Atlantic. Even though the problem had reached other shores, it was still felt that the developing world would be spared. That did not happen.

The economic crunch in the United States and Europe found a variety of channels through which to reach developing countries. International banks that had subsidiaries or branches in developing countries withdrew cash. Money invested in the capital markets of the developing markets flew out. Rapid global slowdown affected the markets for developing countries for all products ranging from simple textiles to sophisticated electronic products. Even China saw a drop in its export earnings in November compared to the same month last year, the first time in seven years.

What the current crisis has demonstrated is that globalisation has both positive and negative consequences for the developing world. What has also been shown is that the remedies that were effective in addressing the previous difficulties will not work and new ways will have to be found to benefit from the positive attributes of globalisation while protecting the domestic economy from its negative consequences. What is needed, therefore, is for policymakers to remain constantly aware of what is happening to the global economy.

The insanity of war

EUROPE has seen two major wars: the First World War (1914-1918) and the Second World War (1939-1945).

There has never been a nuclear war in any western country but the mind-boggling devastation of Nagasaki and Hiroshima has sunk into the western consciousness. That is probably why westerners do not talk glibly of nuclear war.

We in South Asia have never witnessed such lengthy mass killings in modern history. That is probably why Indian and Pakistani TV anchors and the ‘experts’ they invite talk so blithely of war — even nuclear war. Indeed, ours must be the only country where the birth of weapons of mass destruction was not a quiet, sobering affair. It was actually celebrated with sweetmeat. History was recruited to evoke bitter antagonisms of the past through such names as Ghauri and Prithvi.

Our public has never been educated to consider nuclear arsenals as dangerous for their progeny; in fact, they flaunt this possession. Nobody realises that if these weapons are used there will be devastation of an unimaginable kind. Our streams and rivers will no longer supply water but radioactive poison. Our vegetables and fruits will poison the animals we eat and we ourselves will succumb to cancer and other diseases. Our children will live in pain and die in agony.

They say nuclear weapons prevent war. Well, in the case of the Soviet Union and the United States they did prevent a direct war but the two countries came near it during the Cuban crisis. Besides, if Bertrand Russell is to be trusted, the accidental exchange of nuclear warheads was about to take place but good luck intervened. However, the two rivals did keep fighting proxy wars. Pakistan blundered into one such war in Afghanistan in the 1980s and we are paying for our follies even now. In the case of Pakistan and India the Kargil episode took place when both sides had nuclear weapons. Was Gen Musharraf deterred by the nuclear weapons on the other side?

The Indian adventure in Siachen glacier may have taken place when both sides had the bomb (by some accounts Pakistan had the weapon in the 1980s). Even if Pakistan did not, the nuclear weapons never brought it to an end. Similarly, the disastrous policy of Pakistan, or its security establishment, to fight a proxy war in Kashmir kept going on undeterred despite the nuclear arsenal.

Nuclear weapons neither prevented militant adventurism nor do they guarantee that a conventional war will not turn nuclear. They have not prevented Swat from passing into the hands of the Taliban nor have they prevented violence anywhere in South Asia. That is why when India sent troops to Pakistan’s borders after the attack by jihadi elements in Pakistan in 2001 there was reason to worry. And that is why, now that people in India talk of surgical strikes in Pakistan after a similar incident in Mumbai, and Pakistani troops are moving towards India’s borders, there is every reason to worry.

It is not a case of nuclear weapons preventing war but more a fear of their being used in case a limited war does break out which it can under such circumstances.

I have a question for those who talk of nuclear weapons. Suppose a part of Pakistan were to be cut off by Indian troops, would nuclear weapons be used? The same question can be addressed to India. Suppose a genuine Kashmiri uprising, or even Pakistan, cuts Kashmir off from India will this bomb be used? If so, we in South Asia would rather kill and die than let parts of territory go out of our hands. Let us remember that Paris was occupied during the Second World War by the Germans but there was no nuclear weapon and now Paris is free and happy.

Similarly, Bangladesh is a free country but had there been a nuclear weapon and had it been used our part of the world would have been in ruins.Armies withdraw and areas are returned but if this weapon is used all is lost and life becomes hell. This is not what we tell our people since the voices of the hawks drown out sane voices which are for peace and life, not for war and death.

The fact is that our mode of thinking is obsolete and nobody seems to have understood that modern war is not a rational alternative. Even our elite allows itself to be overpowered by anger, chauvinism and notions of vengeance. All this clouds judgment and does not allow rational decision-making. In India the Rashtriya Swayamsevak Sangh calls for a nuclear war. In Pakistan extremists reciprocate. Neither side knows it is calling for death and the poisoning of earth.

This land has seen waves upon waves of conquerors but now its children are out to destroy it. Whose rational interest can this serve? Nobody’s. But this is just what those who talk glibly of war do not know or do not want to acknowledge in their hatred and prejudice.

Both governments must make immediate efforts to defuse tension. India must officially rule out the option of strikes in Pakistan or across the Line of Control in Kashmir. Pakistan must be proactive in the dismantling of terrorist outfits and ask UN observers to monitor the process. Soldiers need not be moved too near the border so that India does not respond in kind and, equally importantly, the pressure on the militants in Pakistan’s west and north must be increased, not decreased because of troop movements. Above all, the media on both sides must censor itself so that war is only mentioned to rule it out and to educate the public about its horrors. Later, when the crisis is over, both sides must educate their public about nuclear war, build shelters and give training about what to do if there is a nuclear exchange.

Let us learn from Wilfred Owen, a British poet. After describing a soldier’s death from gas poisoning he tells those who talk of the glory of war and nationalism:

‘My friend, you would not talk with such high zest

To children ardent for some desperate glory,

The old Lie: Dulche et decorum est Pro Patria mori.’

The last lines in Latin mean: it is sweet and befitting to die for one’s fatherland. The truth is that it is sweet to live and to let live; not to die and kill. This is what we should be crying from our rooftops on both sides of the border.

Return of the storytellers

BY any reckoning, 2008 was a poor year for fiction and an exceedingly good one for non-fiction. Few really exceptional novels were published (a fact illustrated by the drabness of the Booker shortlist), whereas some outstanding non-fiction titles appeared.

Moreover, it was non-fiction that did the better job of getting people talking. We know all about “outliers” and “nudges”, about Cherie Blair’s hairdresser and Dylan Jones’s boycrush on David Cameron. By contrast, practically the only work of fiction to generate any chatter was Sebastian Faulks’s Devil May Care.

This pattern, it is safe to say, is not going to repeat itself next year. In 2009, it won’t be works of non-fiction, but novels that command the majority of attention. This is because an unusual number of high-profile (and therefore newsworthy) novelists publish new books — and lots of those books are going to be unusually interesting.

A bewilderingly large proportion of literary gossip in Britain seems to attach itself to Martin Amis, and so it seems appropriate to begin with him. Next autumn, he publishes The Pregnant Widow, a loosely autobiographical novel that (so the gossip has it) will include lots of stuff about his old girlfriends and a sensational “revelation” about the identity of his father. Expect frantic speculation about who the girlfriends really are, as well as the perennial “Has Martin Amis lost his mojo?” debate.

If Amis’s new novel looks designed to be provocative, then the same is true of the forthcoming one by Philip Roth, The Humbling (also out in September). The extraordinary sexual attractiveness of Roth’s venerable male characters has long been a discussion point; in this new novel, Roth surpasses himself by having his ageing hero embark on a fantastically kinky relationship with — wait for it — a ravishing young lesbian.

Any new book from Thomas Pynchon is a seismic literary event; his next, Inherent Vice (August), following with unprecedented speed on the heels of Against the Day, is a noirish detective caper set in sixties California with a characteristically wacky line-up of characters.

If Amis, Roth and Pynchon are next year’s headline acts, the supporting cast is impressive too. In January, the English translation of Roberto Bolano’s epic final work, 2666 (barely finished at the time of his death in 2002), makes its appearance; fans of Bolano’s previous novel, The Savage Detectives, won’t be disappointed.

Next month also sees a new short story collection from that inveterate chronicler of toney New York life, Jay McInerney. In March, another acclaimed foreign-language novel will be published in English, Jonathan Littell’s Faustian tale of a concentration camp commandant, The Kindly Ones, which won France’s two biggest literary prizes in 2006.

Next spring also sees eagerly awaited books from Anita Brookner, Toby Litt and TC Boyle. Geoff Dyer returns to novel writing after a long break with a characteristically entertaining piece of autofiction, Jeff in Venice, Death in Varanasi.

If spring is impressive, then autumn looks more exciting still. Along with the Amis, Roth and Pynchon, there’s a new William Boyd, a dystopian fable by Margaret Atwood, a Nick Hornby novel that, for once, isn’t set in north London (it’s about an American rock star) and no less than two books by William Trevor (a novel and an edition of collected stories).

All of which means that non-fiction will have a hard time competing next year. Still, here too there is plenty to look forward to. In January, the talented Australian novelist Chloe Hooper turns her attention to true crime with The Tall Man, a gripping account of the notorious case of an Aboriginal who died in police custody on Easter Island in 2004.

As part of the Darwin anniversary, the same month sees Adrian Desmond and James Moore’s Darwin’s Sacred Cause, a fresh interpretation of the biologist’s theories that locates their motivation in his hatred of slavery.

Books about the 1980s are becoming increasingly popular, and this spring there will be three new ones: Richard Vinen’s Thatcher’s Britain, Jason Cowley’s The Last Game (about how the famous Arsenal-Liverpool match of 1989 symbolised the end of an era) and Kenan Malik’s From Fatwa to Jihad, about the Salman Rushdie affair and its legacy.

Looking further ahead, the autumn will see big new books from William Dalrymple (Religion in India) and Francis Wheen (Seventies paranoia), among others. In the meantime, expect a deluge of titles about banking, the economy and thrift, as publishers seek to make up for the havoc to their balance sheets wrought by recent events.

— The Guardian, London