Seeking long-term social change

WHETHER we like to believe it or not, there is no getting away from the fact that, at least in the West, the mysterious entity we refer to as the ‘system’ has failed.

And that too — slightly exclusive pronouncements such as made by the IMF chief about a virtual ‘systemic meltdown’ of the global financial system notwithstanding — as a whole.

The catastrophic implosion of the US economy is in effect a symptom of something far bigger. The recent reversal of the fortunes of the US suggests as much. And it takes no wizardry to predict that the $700bn bailout package finally passed by both houses will eventually prove a mere placebo rather than a lasting prophylaxis.

Even if this does not send us delving into our copies of Das Kapital, it should nevertheless give us pause. In an overpopulated world where there is simply not enough to go round — whether in terms of food or sources of energy — the American dream which is at best a rather crude dream of ‘plenty’ is a mere absurdity. Like other dreams it does not reckon with the implausibility of its sheer excess. The defaults or deferments on credit extended, for instance, to house buyers in the US have to do with a capital market that, recklessly overextending itself, finds itself, at the end of the day, akin to a sort of beleaguered Tantalus.

Scores of analysts have written about the West’s obligatory recourse to ‘socialism’. So that particular perception would now seem gratuitous. However, there is a slightly more important object lesson to be drawn here. What should have been pointed out — but has not in so many words — is that what the world has just witnessed is an instance of a kind of avoidable force majeure.

For the fact is that, to some extent, the present situation is of the world’s — or the West’s — own making partly as a reaction to the perceived extravagances of historical socialism, in particular the slippage into poverty in the post-Second World War era of Eastern Europe. The result was, in the West and other countries that followed suit, a virtual deification of the ‘free’ market and a consequent takeover by autonomous and ultimately unpredictable market forces.

Thatcher was among the presiding deities of the phenomenon, at least in the UK. ‘New’ Labour, in the shape of Blair, unabashedly promoted that tradition. Dividends presented themselves but were to be selective and short-lived. Regardless of its proponents, the system was bound to pass ‘the many’ by.

The ‘free for all’ bonanza of the Bush regime has proven as flimsy in the context of Main Street in the US. Little wonder then that Obama has felt constrained to speak up in the least politically correct yet most historically convincing ways of the need for a ‘redistribution of wealth’ in the US. If nothing else — and whether his resolve to break the status quo actually comes about in case he is elected next US president — he has at least had the moral courage to challenge it verbally.

Interestingly, the observation was societal more than, properly, economic and to that extent — given the entrenched nature of capitalist interests in the US — fairly improbably radical. Indeed, it would have rung truer of Pakistan which needs, for its enduring survival, to be looking beyond an initially short-term economic programme at long-term social change.

We cannot afford to be blinkered any longer. Much more than an immediate monetary bailout by the IMF or other international donors, followed by the customary illusionist slumber and safe haven of affluence masquerading as ‘continuity’, is called for.

Pakistan has been classified by the Foreign Policy magazine as among the ten ‘failed states’ of the world. If it is to pull back from further decay, it must give up on economic and other forms of spin and, at the brink of default, reconsider its priorities. The collective instinct notwithstanding — and since, for the time being, its sheer subsistence is at stake — its erstwhile goals of power and pelf will, clearly, no longer do.

A more benign and in fact pastoral state will have to take the place of the ravenous bird of prey the country has been suffering since as far back at least as the Ayub era. The energy crisis is just one symptom, among many, of our overall moral and environmental degradation.

Those in power today must realise that democracy has no talismanic attributes per se. Nor do we have any ready icons that can help draw us together so as to allow us to contain our motley mafias and make democracy more wholesome, participatory and credible.

There are numerous issues that await resolution, not least of all the insurgencies in two of our provinces. In the wake of a protracted in-camera briefing, parliament has adopted a curiously convoluted resolution calling for an “urgent review of the national security strategy and revisiting the methodology in order to restore peace and stability through an independent foreign policy”. Where the state is as vulnerable as it is and the country is faced with an impossibly spiralling cost of living, what can such ‘independence’ conceivably mean?

Past masters at doublespeak, we surely know that the malaise of the pre-Zardari era still persists. Why? Some would have it that the rot is too deep-seated to stem. All the same, what, for argument’s sake, are the solutions at our disposal?

There has been talk at the very highest level of the necessity for something like a Green Revolution. At present — given our economic plight and in the absence of a viable work ethic or equitably distributed agrarian resources or indeed Grameen Bank-style micro-credit — that must necessarily remain a pipe dream.

The bid for peace by the government, both externally and domestically, as a possible means to a way forward, seems right now to make greater sense. It will be a start if only by default. However, much, of course, depends on the good faith and foresight underlying it.

Leadership not IMF is the issue

PAKISTAN’S current economic meltdown is a crisis of competence if judged in light of the recent past. In the context of history, it represents a colossal failure of the establishment’s long-term foreign and economic policies.

Pakistan desperately needs $4-5bn to avoid default on its external obligations. The government is working on the multilateral institutions and the Friends of Pakistan to raise this sum within the next few weeks failing which it will go to the IMF.

The government does not want to borrow from the IMF to keep its hands relatively ‘free’ and avoid the likely political fallout from following the IMF’s prescriptions. Does Pakistan have an option? Unfortunately, no.

The World Bank has not disbursed any aid so far for this fiscal year. Its yearly aid to Pakistan is about $500-600m and is unlikely to come through now, that is, before the IMF puts its seal of approval on Pakistan’s economic plan.

The Friends of Pakistan group includes Saudi Arabia, China and the United States. Saudi Arabia has observed a meaningful silence for several months regarding Pakistan’s request to supply oil on credit. China’s commitment to help with specific projects is welcome but its ambivalence about outright cash loans is understandable given its own policy to channel foreign aid through project assistance. It did provide emergency loans to Pakistan in the past (in Dec 1996 and April 2008) but not to the tune of billions of dollars.

The People’s Party government took charge in April 2008 and put the privatisation programme on hold without making alternative funding arrangements. It did not act upon proposals from global banks to raise money from international markets at a time when market conditions were relatively stable. It kept hoping it would get the Saudi oil facility whilst the oil price shot up and the foreign exchange reserves evaporated. Capital flight ensued as the market confidence sank and business sentiment turned negative.

The government’s team of economic managers and advisers lacked the experience in international financial markets to anticipate or manage what was about to hit the economy. This writer warned on these pages of Dawn (May 30, 2008): “If the economy continues its present slide, even the US may not be able to bail Pakistan out. Its own once mighty financial giants are being rescued by Chinese and Arab investors. Pakistan’s last resort would be the IMF with its usual conditionalities and the inevitable pain they would cause. For Pakistan, the most sensible course would be to put its house in order now”. But the government devoted almost its entire attention to the judges issue and power politics as the country headed towards its worst financial crisis in a decade.

The government continued Musharraf’s Washington-centric foreign policy. Yet, in the hour of its greatest need, the US not only ditched Pakistan but a third-ranking state department official publicly humiliated its ‘friend’ by saying that the Friends of Pakistan “wouldn’t throw money on the table”. This wasn’t surprising given Condoleezza Rice’s more subtle remarks earlier on Sept 26: “We are very engaged with Pakistan, through the international financial institutions, to help Pakistan as it takes the difficult decisions that it is and must take on economic reform.” Translated: Pakistan should go to the IMF and reform its economy.While the US pressure on Pakistan to go the IMF has political undertones, it is also true that Pakistani rulers’ historic tendency to indulge in profligate spending and corruption has left them with few sympathisers despite the much trumpeted ‘geostrategic’ importance of Pakistan.

The US has historically directed most of its ‘aid’ to make Pakistan fight its wars. The aid has been primarily used for military purposes (e.g. Pakistan’s arms purchase orders in 2006 alone totalled $5.1bn) but the indirect cost of the conflicts since 1980 has been catastrophic, although some people continue to believe in the ‘benefits’ of such ‘aid’.

The ‘aid syndrome’ stymied any serious effort to reform the economy. Infrastructure investments and tax reforms were neglected because the so-called austerity programmes advocated by the multilaterals hit subsidies but not the pockets of vested interests. Oil and food subsidies played a major role in Asia and the European Union respectively in keeping the prices low because the governments had fiscal space, of which Pakistan never had much. Cutting fat in defence and establishment expenditures and taxing the rich were not high on the multilaterals’ reform agenda as the focus was usually on indirect taxes (e.g. sales tax) that inevitably hit the lower-income groups.

But what is the point in complaining about the US’s ‘real agenda’ or the IMF’s ‘conditionalities’ when the country’s leaders are unwilling to tighten their belts and undertake necessary reforms and are known to own assets worth hundreds of millions of dollars abroad? Confidence and credibility are important issues and cannot be wished away.

Today, there is hardly a major country in Asia or the Middle East that owes any debt to the IMF except Turkey and Pakistan. Turkey is the largest borrower of the IMF and accounts for about 40 per cent of its $18.3bn total lending worldwide. Pakistan owes about $1.3bn.

Turkey went to the IMF in 2001 and the ruling Justice and Development Party (AK Party) came to power in 2002. During the last six years, Turkey’s inflation fell to single digits (though it has risen again due to higher energy and food prices) and foreign direct investment (FDI) rose, helping it to repay almost two-thirds of its loans from the IMF. Turkey still has issues (e.g. a persistent current account deficit) but AK’s economic record is one reason why it easily won the July 2007 elections.

India was nearly bankrupt in 1991 when a balance of payments crisis forced the country to pledge its gold by actually shipping 20 tonnes of it abroad. It was left with no choice but to approach the IMF. Its then finance minister Manmohan Singh recalled later: “There was a silver lining though. India launched the most sweeping economic reforms that year dismantling decades of licence raj, and didn’t ever look back although progress was fitful in the first few years.”

Pakistan can learn from the experiences of India and Turkey. They had serious problems, although their nature differed. However, their leaderships demonstrated sincerity and political acumen to undertake difficult reforms to enable their economies to recover. The reform process was led and executed by people who were highly respected for their integrity and competence. In Pakistan’s case, the real problem is not the IMF; it has been and continues to be the country’s leadership.

Twilight of the oligarchs

SOMETHING strange is happening in Russia — the country that invented the word oligarch back in the 1990s to define a new kind of state-connected entrepreneur. Nobody quite agrees what exactly oligarch means; these days it has become a loose synonym for Russia’s super-rich. But in the new post-credit-crisis world everyone can concur on one thing — that Russia’s oligarchs are in trouble.

Over the past five months, according to the financial news agency Bloomberg, Russia’s wealthiest 25 individuals have collectively lost $230bn. Tycoons like Oleg Deripaska — Russia’s richest man and friend, we now know, of British politicians — have seen their fortunes vaporised. On paper, Roman Abramovich, the Chelsea football club owner, has suffered a $20.3bn wipeout. Alisher Usmanov, the Arsenal shareholder-tycoon has lost $11.7bn, Bloomberg estimates.

Analysts say that private jets could soon be going for bargain basement prices, while some super-rich are scrambling to sell off their villas in Sardinia and Surrey. In Moscow, elite nightclubs have relaxed their strict entry rules — there aren’t enough customers. The capital’s top restaurants, meanwhile, have stopped accepting credit cards.

Not that Russia’s oligarchs are in the mood for entertaining. Since hosting the British Labour cabinet minister Peter Mandelson and the Conservative party’s finance spokesman George Osborne on his yacht in Corfu this August, Deripaska has slithered into a classic British political scandal.

The twilight of the oligarchs is closely linked to the meltdown in Russia’s stock market. Since May, Russia’s RTS index has lost 71 per cent of its value. It is no secret that Deripaska borrowed money from western banks using shares in his companies as collateral. The share price crashed; the banks then asked for their cash back. Deripaska is now in danger of being sucked into a black hole of debt. Others have money stuck in Iceland.

Is, then, the era of the oligarch now over? Not everyone agrees with this thesis. But it does seem that Russia’s rich are experiencing a moment of historical catharsis. After a giddy decade characterised by the acquisition of yachts, football teams, villas in Kensington, west London and the South of France, and even submarines, there is a distinct sense that Russia is moving into a different, more chastened, epoch.

Billionaire Alexander Lebedev, a former KGB agent unkindly nicknamed the spy who came in for the gold, is unperturbed by his loss of fortune. Until recently, he had $3.1bn — and was 39th on Forbes’ list of Russia’s top 100 billionaires.

This spring Forbes magazine estimated that Russia has 110 billionaires — a record. The top 100 had a combined wealth of $522bn — almost four times higher than in 2004, it said. (At the same time 18.9 million Russians live below the poverty line, federal statistics suggest.) According to Lebedev, some members of this exclusive list — known as the golden 100 — are now down to their last $100m.

But in these troubled times analysts suggest that those more likely to feel the pain are Russia’s second-tier rich — the country’s 150,000 to 200,000 or so millionaires, who have acquired their wealth on the back of Russia’s unprecedented economic growth under eight years of Vladimir Putin.

Paradoxically, Russia’s often-surreal ride from communism to capitalism appears to be going full circle. Under Boris Yeltsin a small, favoured group of businessmen was allowed to acquire the country’s newly privatised assets at auctions for a fraction of their real value.

Nobody is in any doubt as to what befalls oligarchs who disobey the Kremlin. In 2003 Putin arrested Russia’s then richest man, Mikhail Khodorkovsky, and broke up his Yukos oil empire. The former tycoon is serving eight years in a Siberian jail and was recently placed in solitary for not sewing properly.—

— The Guardian, London