New role for the state

ONLY history will make clear as to how deep and lasting the current financial meltdown in the United States will turn out to be. That said, it is obvious that it has already resulted in the demise of what we should perhaps call hyper-capitalism.

For a quarter of a century, the United States saw astounding growth in its economy. This was done by deregulating markets, reducing tax rates, promoting growth, letting industries migrate to places that had abundant supplies of cheap but skilled labour, allowing capital to flow freely across international frontiers, and encouraging the development of new lines of financial products that spread the risk taken by entrepreneurs. As one commentator wrote recently, “across wide swath[e]s of the economy — from airlines to banks to energy to telecommunications — Washington stood aside, while fewer regulations… [produced] broad prosperity, even at the cost of greater income inequality”.

Alan Greenspan, the long-serving chairman of the US Federal Reserve — the country’s central bank — became the most articulate exponent of this point of view. “It’s hard to overemphasise how important President Ford’s deregulation was”, he wrote later in his autobiography, The Age of Turbulence. “True most of the benefits took years to unfold — rail freight rates, for example, hardly budged at first. Yet deregulation set the stage for an enormous work of creative destruction in the 1970s: the break-up of AT&T and other dinosaurs, the birth of new industries such as personal computing and overnight shipping, the mergers and acquisitions boom on Wall Street, and the remaking of companies would be the hallmarks of the Reagan era. And, we would ultimately find, deregulation also greatly increased the economy’s flexibility and resilience”.

Greenspan’s book was published last year while his reputation was still high, when the ‘resilience’ of the US economy of which he wrote so proudly had not been challenged by the financial meltdown in the country. The approach he espoused came to be known as ‘Reaganism’ or ‘Thatcherism’ depending upon which side of the Atlantic you happen to be. The same line of thinking was sold to the developing world as the ‘Washington Consensus’. It got that name because of the analytical work that was done at some Washington-based institutions such as the World Bank, the IMF and the Institute of International Economics.

The economists who were employed by these institutions had come to the conclusion that the state had to step out of the way and allow the private sector to play its role freely. Adam Smith, the father of modern economics, became the patron-saint of this ideology. The fact that he had emphasised that the state had a role to play to protect the weak from the profit-seekers in the marketplace was conveniently glossed over. Instead, the private sector was allowed to move forward without hindrance and constraint. For more than two decades, the strategy worked as the American economy grew at unprecedented rates and as disparate economies in several parts of the globe became closely integrated.

Pakistan was among the several developing economies that signed on to this philosophy of unrestrained laissez-faire. It did that for two reasons. The first was the influence of the IMF with which the country signed an agreement to stabilise its errant economy in return for badly needed financial support. In the Fund’s language, Islamabad “entered into a programme” that mandated sharp fiscal and monetary adjustments to restore macroeconomic stability. Pakistan was under the programme for three years at the beginning of the period of President Pervez Musharraf. Stability was achieved but at a great cost. The IMF programme squeezed growth out of the Pakistani economic system.

The other reason for the adoption of Reaganism or Thatcherism or the Washington Consensus was the enormous influence of one man over economic policymaking during the Musharraf period. First as finance minister and later as both prime minister and minister of finance, he allowed the private sector a free hand. Having spent his formative years in Citibank, it is not surprising that he followed that approach. It was a simple-minded belief that what is good for Citibank is also good for a developing country such as Pakistan that led him to adopt this strategy.

However, a decade after his return to Pakistan, it transpired that what was good for Citibank at one time was not good for Citibank all the time. In late 2008, this bank, along with several other large financial institutions, is struggling for its life. The most grievous consequence of the application of this approach to Pakistan was to weaken the state and make it a less effective manager of the economy, particularly during periods of high stress.

It is a fine strategy to give a free hand to the private sector but it should not come at the cost of the state or by weakening the regulatory system under which private entrepreneurs must operate. The United States is now moving away from the system that won so much praise from Alan Greenspan and other people who believed that the state’s economic role is minimal. In several different ways, the state is returning to the fore as the manager of the economy. The Federal Reserve has ventured into areas few thought it would get involved in.

The economic crisis in Pakistan is as deep as the economic crisis that is gripping the West. Pakistan will also need a strong state to guide the economy back towards solvency, development and sustained growth. The capacity the state lost during the Musharraf period will need to be recreated at several different places and at several different levels. Parliament will need to develop the capacity to get involved in the making of economic policies. It has never played that role since it was never encouraged to get involved.

The Planning Commission needs to play the role for which it was set up — to come up with economic strategies that meet the goals set by society at large. Goal-setting should be the job of parliament; the Planning Commission should be tasked to translate these goals into policies. The finance ministry should be responsible for finding the resources needed to implement parliament’s goals and the Planning Commission’s strategy.

Finally, the provinces should be given much greater autonomy to raise resources and formulate detailed plans for their development within the Planning Commission’s framework. In sum, in order to move forward, Pakistan must have the state play a prominent role.

Coastal schemes and the KSDP

IN the last three years, various proposals have been floated for the development of upmarket real estate and elite recreational facilities along the Karachi waterfront.

These include the DHA Waterfront Development Project along 14 kilometres of Clifton beach and waterfront areas in the DHA jurisdiction. The project also involves reclaiming 74.5 acres of land from the sea.

Work on the DHA Waterfront Project has already begun. Sugarland City on 65,000 acres of land and with an investment of $68bn involves real estate development on reclaimed land and along the beaches of Hawkesbay, Sandspit, Manora and Cape Monze. Another project that has been floated is Diamond Bar City on Bundal and Buddo islands at the mouth of Korangi Creek.

All over Sindh, concerns regarding these projects have been voiced by citizens, NGOs, community organisations from lower-middle-income areas, fishermen’s associations and schools. These concerns have to do with ecology and the environment, and issues related to socio-economic degradation, heritage and human rights. However, these various lobbies do not have an agreed view on the future of the coastal areas. There are those who want the beaches to be left as they are and those that want development but in a manner that promotes a better socio-economic and physical environment. Then there are those who have not thought about it and those who oppose any government initiative on principle.

In the opinion of this writer, the beaches will be developed whether one likes it or not. The pressure of the real estate lobby, interests of global capital and the vision of the politicians as to what the city should be will make sure of it. However, the future will be disastrous unless institutional arrangements are put in place to guarantee aesthetically pleasing and environment-friendly development based on principles of equity and justice. This can be achieved if the interests of the stakeholders of the coastal areas are protected and promoted in any future development.

The first and most important stakeholders are the flora and fauna of the region. The livelihood of the fishing communities and the fishing industry as a whole depend on it. It has already been devastated by reclamation from the sea and of mangrove marshes and mudflats. It desperately needs to be protected for no city that destroys the ecology of the region it is situated in is sustainable. The South Asian tsunami gave ample proof of this and so did the flooding of Karachi, much of which is the result of reclamation from mangrove marshes, creeks and natural drainage channels for elite real estate.

The second most important stakeholders are the fishing communities whose history of over 5,000 years is recorded by archaeology and whose earliest written folklore dates back to the 11th century. The livelihood of these communities depends on the flora and fauna of the coastal area and its creeks. DHA development projects along Gizri Creek have already deprived them of their traditional sources of livelihood and related facilities. The Sugarland and Diamond Bar projects as they have been conceived will impoverish and evict them from their villages and fishing areas.

The third interest group comprises people from all over Pakistan who visit the beaches of Karachi and the services sector that serves them (such as hawkers, camel and horse owners, performers, palmists and seashell sellers). The beaches are the only multi-class, multi-ethnic public spaces left in a recreation-and entertainment-starved Karachi. Many hundred thousand men, women and children visit them every week and the number is increasing. The real estate projects as they are structured will deprive the people of Karachi and visitors to the city of most of this public space. The fourth interest group consists of landowning individuals, village communities and agencies, many of whom do not wish to be a part of these projects.

The interests of all the groups can be protected if the provisions of the Karachi Strategic Development Plan (KSDP) 2020, which was approved by the city council in December 2007, are followed. However, one thing is clear: if these provisions are followed then the DHA Waterfront Development, Sugarland City and Diamond Bar City cannot be built as they have been planned.

It is therefore important to look at some of the more relevant provisions of the KSDP 2020. In Section 4.8 of the plan it is stated: “Reclamation along any section of the seafront either on the landward side or the bordering sea would not be advised. The same restriction holds for the mudflats, marshes and backwater creeks, which [can] in no way be allowed to undergo artificial morphological change detrimental to the existing hydrological environment.”

And again: “The coastal sea and its backwater and creeks provide … livelihood to fishing communities who live on the coast. The fisherman must enjoy free access to their traditional grounds in the sea, backwaters and creeks. For any development to be sustainable and acceptable, the historical rights of the communities to the sea and the coastal village land they occupy ought to be respected.”

In the same section the KSDP 2020 talks about environmental and socio-economic provisions. It states: “The coast must be protected as an environmental asset, and environment quality, including reduction of pollution of the coastal zone must be improved. Green turtle sanctuaries and [the] mangrove ecological system along the beach, in the backwaters and creek[s] must be preserved and measures against [their] degradation should be urgently taken to control pollution.”

And again: “The seashore and the beaches should be preserved and promoted as public assets. Public access to the beaches and the coast must remain free and unhindered, and to keep [sic] the enjoyment for … general citizens, no development should be allowed in land area upto 150 metres from the high-water mark.”

The KSDP 2020 also talks about “a programme to promote the seashore and beaches as a public asset”. It also accepts the concept of real estate development along the waterfront but in these terms: “Together with [the] coastal development programme given above, the coastal area has a potential for development such as housing, business offices, commercial establishments and public amenities in suitable sites. However, any development scheme designed in the area must adhere to the above-mentioned [the ones mentioned above in this piece] guiding principles”.

Another important provision states that “Development plans should be finalised with public participation and be presented for soliciting public opinion.” This has certainly not happened; on the contrary, the plans are simply not available to the public.

If the above provisions are applied then all the three coastal projects (one of which is under construction) will need to be scrapped and substantially redesigned. It is the duty of the nazim of Karachi and of the nazims of various towns of the city to protect the provisions of their KSDP 2020. It is the duty of the citizens to support their public representatives in doing so or to pressurise them if they do not do so. If the provisions of the KSDP 2020 are not followed then the plan is not worth the paper it is written on.

However, provisions alone do not guarantee the implementation of a plan. Solid institutional arrangements are required which are not yet in place.

A systemic meltdown

AS we return to work, let the words of the director general of the International Monetary Fund, Dominique Strauss-Kahn, ring in our ears. Mr Strauss-Kahn, having spent all Saturday with finance ministers in Washington, warned that the global financial system has been pushed “to the brink of a systemic meltdown.”

And he added that the measures taken thus far to deal with the financial crisis “have not yet achieved the goal of stabilising markets and bolstering confidence”.

I stretch “systemic” to mean that we are all affected by what has begun to happen — the shrinking of bank credit. Banks won’t even lend to each other, let alone to the rest of us. In a sense, they know too much. Grimly aware of the substantial amounts of dud loans on their own books, following a prolonged period of over-optimistic lending, they assume the worst of each other.

They also turn down highly respectable companies, the mainstays of the economy, when they come to them for credit. For as the banks’ mistakes return to haunt them, they feel compelled to hoard cash.

Systemic, because virtually all businesses have some borrowing. Credit is the oxygen in the system. Take it away and businesses begin to falter.

They become like climbers at high altitudes. An example is the plight of local authorities and charities whose funds have been trapped in insolvent Icelandic banks. Some of these lenders will have difficulty in paying their bills and so they will unwittingly harm others who know nothing of Icelandic banks.

Systemic, seeing that the United States, Germany, Japan and most large economies are feeling the effects. Last week, for instance, shares in General Motors crashed to their lowest level since 1950. Yes, since just before the company launched the first ever “American” sports car, the Chevrolet Corvette, with its white paintwork and red upholstery. Over 50 years later, General Motors’ customers are having increasing difficulty in obtaining car finance.

“Meltdown,” in Mr Strauss-Kahn’s phrase, is not an exaggeration because depriving the economic system of credit would quickly result in prolonged recession, or depression, call it what you will. Stock markets suddenly began to sense this possibility last week. That is why investors rushed for the exit.

Indeed, it is not fanciful to make comparisons with the Great Depression, which started with the stock market crash of October 29, 1929 and ended some time in the late 1930s. President Roosevelt’s chairman of the Federal Reserve, Marriner Eccles, tried to sum up its essence in his memoirs published in 1951.

He had led the Federal Reserve from 1934 to 1948 and seen everything. I quote him extensively because of his sudden relevance: “This is what happened to us in the Twenties,” Mr Eccles wrote, “We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system (which) increased about 50 per cent. This debt, at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer instalment debt, brokers’ loans, and foreign debt.”

Before going further, notice the similarities between then and now — the presence of mortgage debt and of shadow banking — what Mr Eccles called debt outside the banking system. It has long been fashionable to say that this can never happen again because this time we know better than to let banks actually crash — that is, apart from Lehman Brothers a few weeks ago, whose collapse had had such serious consequences. Nor would governments savagely hack into public spending as they did in the early 1930s — though there are plenty of reasons in 2008 to cut back.

“On the brink,” observed Mr Strauss-Kahn, a clear reference to the failure of the Group of Seven industrialised nations to decide anything definite at their meeting on Saturday. But since then, I am glad to say, the pace has quickened. The Bush administration has quickly embarked on an overhaul of its own strategy for rescuing the foundering financial system.

Having two weeks ago persuaded Congress to let it spend $700bn to buy distressed securities tied to mortgages, the White House has decided in addition to follow Britain’s approach. The US government would inject capital directly into the nation’s banks.

As an international civil servant rather than a finance minister with daily politics to consider, Mr Strauss-Kahn may have felt that he should issue the dreadful warnings that others dare not proclaim.

— © The Independent