Pakistan; Challenges In Political Economic Development
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  • 1. Pakistan; Challenges in Political-Economic Development ICEA Feb 13 th 2007 Professor Paul E M Reynolds LONDON Tel + 44 20 874 86788 Mob & SMS + 44 7974 188087 E mails [email_address] [email_address]
  • 2. Pakistan, showing NWFP, FATA & Northern Areas
  • 3. Why is Pakistan important ?
    • Strategic geo-political & transport bridge Mid-East and India & China
    • 165-170m pop – More people in Pakistan than in Russia
    • Potential for Kashmir flare-up – risk of big impact on world growth
    • Border region with Afghanistan
    • - Cross border raids, and question of Tribal Areas and Pashtun nationalism ?
    • - Relationship with NATO/US military activity
    • Role in ‘War on Terror’ and Deobandi ideology (‘Talibs’ = ‘Students’)
    • Many internal factors that create risks of political instability
    • Nuclear armed state – and advanced delivery systems
    • Borders with Iran, Afghanistan, India, China, close Gulf States, C Asia
    • Important Diaspora – especially in the UK (and UK troops on its border !)
    • URGENCY: Presidential & National Assembly Elections Oct 2007
    • – unclear how political events will pan out
  • 4. Pakistan; Challenges in Political-Economic Development Macro, micro & political conclusions. Needing to ‘break out of gridlock’, government is in a difficult position
    • Macroeconomic improvements good - but slow reforms in government , in regulation and within the ‘ real economy’ retard investment & growth rates, hinder exports and undermine fiscal/structural sustainability of growth
    • Flow of FDI inflows now under threat, diaspora remittances up, but insufficient ‘real economy’ investment opportunities as final destination – consumer imports sucked in, savings rates low
    • Full-speed reforms across government needed, but gridlocked due to political uncertainty - helps the ‘reform resistance’ & ‘project silos’. Key decentralisation suffers from ‘unintended consequences’….
    • BUT …. political reform gridlocked by constitutional-political structures and the President’s need to please too many masters
    • Role of Tribal border (Afghan) areas and relationship with ‘The West’ is critical for political and economic reform
  • 5. Economic performance Economy stabilised & growth path established 9.7% 4% 1990s 2.5% 3.1% 2001/2 Inflation (Av.) GDP growth WB/IMF 6.5% est 7% tgt 6.6% 8.6% 7.5% 4.7% 6.5%? 7.9% 9.3% 4.6% 3.1% 2006/7 2005/6 2004/5 2003/4 2002/3
  • 6. Fragility of economic progress
    • Public debt declined from 97% of GDP annual average 1990s - to 75.3% by 2002-3 & 56% 2005-6
    • Annual fiscal deficits fell from an average (excl grants) of 6.4% of GDP, last 5 years of last decade, to 4.4% first 5 years of this decade (3.7% 2006-7 est.)
    • Average trade policy tariffs at ‘normal LDC’ levels after WTO memb. in 2001
    • BUT………………BUT…………..
    • Industry still less than 20% of GDP
    • 2005/06 investment at 16.5% of GDP - too low for sustainable growth (World Bank - 27%+ required)
    • Growing current account deficit - driven by a widening trade gap as import growth outstrips export expansion - from 1.4% of GDP to 4% of GDP in 2005/6 – putting pressure on FX reserves
    • IMF says (2007) need to align demand & output growth (Privatisation-related FDI and internal borrowing one-offs) – But GoP points to import price-hikes as one-off (To be continued…..)
    • IMF ‘imperative’ - Higher savings and poverty reduction
    • IMF REMEDIES. Improve the investment climate, financial market reform, tax reform, improvements in public service delivery, and trade liberalization
  • 7. Economic growth context Trade & fiscal imbalances reduced…but…
    • Yr. to 2006 FDI up to $3.5bn (1/2 from telecoms). Investment from Gulf states.
    • Remittances $4.2bn in 2005/6 - biggest ever
    • Banking & electricity distribution privatisation ‘successful’
    • ‘ Poverty fell 10% 2001 – 2006’ (WB)
    • Cost of borrowing relatively low…..good GCC demand for Pakistani Govt paper
    • BUT………………………………………………
    • But…. trade deficit $10bn and growing
    • FDI effects of privatisation slowing
    • Big increase in MTDB , up 52% 2006/7 despite quality-of-investment problems
    • Low national saving’s rate, 17 percent of GDP, due to fiscal deficits and negative interest rates
    • 4% of GDP spent on the military , possibly much higher, pressure on deficit
    • Only 28% of population is in the ‘workforce’, 32% of pop below poverty line
    • 1m Afghan refugees + ‘Trouble in Tribal Areas’
  • 8. Real-economy problems requiring political will to challenge the interests of the bureaucracy & ‘crony capital’ across federal, provincial, & local government
    • Institutional complexity and bureaucratic turf problems
    • Legislation, regulation, ‘overenthusiastic regulation’ – some resistance to reforms
    • Govt. ‘Project culture’, weak systemic reform focus (‘policy silos’)
    • EXAMPLE 1. Contract enforcement
    • EXAMPLE 2. Admin barriers and ‘cost of doing business’
    • Result – domestic investment opportunities, & ‘bottom up’ domestic growth, both dampened = inflationary pressure, monetary growth, import growth, pressure on FX reserves ?
  • 9. Institutions responsible have overlaps & gaps in reform ‘Diagnosticitis, policy silos & analysis-paralysis ?’ New institutions to solve this problem ?
    • Ministry of Finance & Planning
    • Ministry of Industry, Prod’n & SI
    • Board of Investment
    • Ministry of Commerce
    • Ministry of Econ. Affairs (EAD)
    • Monopoly Control Authority
    • Housing & Works Div.
    • Securities & Exchange Commission
    • Planning Commission, 4 members
    • National Reconstruction Bureau
    • Economic Coordination Committee
    • Public Sector Reform Committee
    • Cabinet Division (3 Depts)
    • Economic Council
    • Office of the Economic Adviser
    • Ministry of Law & Justice
    • National Comm. for Govt. Reforms
    • Civil Service Reform Unit
    • Law & Justice Commission
    • PM’s Secretariat
    • Ministry of IT
    • Ministry of Parliamentary Affairs
    • Competitiveness Support Fund
    • 4 Provinces, FATA, PATA
    • Trade Corridor Committee
    • Office of Private Public Partnerships
    • Federal Ministry of Tribal Areas
    • Ministry of Inter-Provincial Coop.
  • 10. Wrong micro-economic reform tools ? ‘ Government spending versus government efforts’ Huge political will required to overcome deep-rooted systemic problems & interests – does political uncertainty prevent this ?
    • Financial deepening reforms (NSS, Pakistani Investment Bonds) and reforms of intermediation system (Badla) underway - will make better use of remittances & other funds, and tax admin reform has increased receipts……………
    • …… but these are not the core problems…..
    • Credit expansion is a risk, and linked to remittances
    • Political limitations prevent expansion of the tax base
    • Too much reliance on more costly but less effective growth stimulation methods
    • … ..Eg building business parks & giving tax breaks, rather than…
    • - reform of regulations that inhibit capital goods imports
    • - tackling ‘overenthusiastic interpretation of regulations’
  • 11. Pakistan (example): Steps/time and cost of contract enforcement (Source World Bank 2006)
    • Case backlog - half are commercial - in the High Courts of Sindh and the Punjab number over a hundred thousand, and for the lower courts, in the millions - 40% land, 30% challenges to regulations, rest banking/employment
    • When cases do go forward, it takes, on average, more than 46 steps, more than a year and almost a third of the contract value to enforce a contract
    • System is ill-prepared for modernisation - new legal frameworks in complex areas such as foreign investment, insolvency, monopoly regulation, anti-money laundering, insider trading, and corporate governance
  • 12. Real-world problems in economic development dampen investment WB value-chain study of key sectors shows major structural, institutional & regulatory problems: Shrimps, textiles, marble, processed dairy, auto parts
    • High transport costs, high electricity costs (outages) limiting automation, labour market rigidities (temp workers used), access to finance (collateral & informational), imports costs (multiple permissions required etc), cash flow from duty drawback & custom rebate delays, high port charges, state control of input sectors, freight sector over-regulated, opaque land leasing & security of tenure - & resultant low capacity utilisation
    • Fees and taxes collected by the Government represent a quarter of export costs and come from three sources: the petrol tax (1 percent of export invoice), Export Development Fund (0.25 percent of export invoice), and unofficial, speed money payments (approximately Rs 1,250 per consignment). [Poor port governance contributes].
    • Layers of taxes & levies to agents, the PAs, and ‘security payments’ add to costs. High tarrifs in many sectors.
    • Pakistan’s aggregate direct labor cost $0.75 /hour - higher than China’s $0.66 and India’s $0.40 – but productivity lower.
  • 13. Resistance to pro-growth regulatory reforms ?
    • 2004/5 World Bank project on regulatory reform ’Impact has been minimal’
    • 2005 Better business regulations IFC. Admin barriers report not published.
    • 2006 IFC/World Bank business regulations, pending…
  • 14. Future economic reform challenges
    • Regulatory quality and the link to rent-seeking
    • Poor domestic export performance relative to expectations, and the lack of investment to overcome high costs
    • Capital infrastructure problems – access to debt & equity finance for export development, and absence of venture capital & ‘real sector’ investment funds
    • Low ‘growth productivity’ in the use of inward financing from remittances and capital repatriation
    • This challenge combined with industrial and labour rigidities/monopolistic markets = ‘ not enough productive places to put the money’
    • How to apply telecom sector’s success in attracting investment to other ‘regulatory-dependent’ sectors like electricity, water, transport and hydrocarbons.
    • How to address investment and economic growth inhibitors (How to support the Ministry of Law & Justice in tidying up of existing legislation and regulations)
    • Addressing urgent need to tackle problems created by the separate MTBF and MTDF, (eg poor use of assets, lower investment)
    • How to address the negative impact on domestic investment and growth arising from the domestic financing of the budget deficit.
  • 15. Fiscal decentralisation issues Pakistan is highly centralised fiscally Growth & political reform requires change Reforms started in 2001 but within existing structures
    • Sub-national governments in Pakistan - very low sub-national tax collection rates by international comparisons
    • Only 0.9 percent in GDP of revenues in 2005/6. India’s - 6.1 percent, or 7 percent based on more recent figures (World Bank 2005:xxvii)
    • Provinces in Pakistan are highly dependent on federal shared revenues and grants – complex system.
    • All provinces receive identical per capita levels of divisible pool allocations
    • All provinces are characterized by low own revenue mobilization, although some differences are evident across provinces.
  • 16. Fiscal Decentralization in Major Developing Country Federations
    • Source: Figures for Pakistan are FY2005/6 budget. IMF GFS (10/2005), most recent year available, WB Reports for unavailable countries ( italics) . As share of central, state, and local government, net of onward transfers by central and stage governments. Sub-National Revenues do not include financing. *Alternative to GFS expenditure figures for Mexico using World Bank (World Bank 2004; 2004).
    • 2.4
    • 9.1
    • 2.4
    • 11.0
    • Malaysia
    • 13.0
    • 32.4
    • 12.7
    • 38.5
    • Russia
    • ~
    • ~15
    • ~
    • 19.6
    • Venezuela
    • 4.5
    • 25.5
    • 7.4
    • 41
    • Mexico *
    • 10.5
    • 39.0
    • 15.3
    • 41.7
    • Brazil
    • 8.4
    • 44.2
    • 12.4
    • 44.4
    • Argentina
    • 6.1
    • 18.9
    • 18.9
    • 56.5
    • South Africa
    • 3.18
    • 10.7
    • 13.6
    • 38
    • Nigeria
    • 3.0
    • 18.7
    • 9.5
    • 35.9
    • Ethiopia
    • 6.1
    • 33.8
    • 10.8
    • 49.2
    • India
    • 0.9
    • 7.0
    • 6.3
    • 34.2
    • Pakistan *
    • (IV)
    • (III)
    • (II)
    • (I)
    • Sub-National Own Revenues (% GDP)
    • Sub-National Own Revenues (% Total National Revenues)
    • Sub-National Expenditures (% GDP)
    • Sub-National Expenditures (% Total)
    • Federation, Developing Country
  • 17. Unequal regional incomes Table 1: Key Indicators for Pakistan’s Disparate Federation Source: World Bank, UNDP 2003 Human Development Report (p. 11) 106 0.541 1.5 - 128.4 Total/Average 21 0.549 18.3% 61,563 23.7% SINDH 35 0.557 26.8% 47,131 57.4% Punjab 24 0.51 9.7% 35,211 13.8% N WFP 26 0.499 45.2% NA 5.1 % Balochistan Index %/km2 Rs. %/million Number of Local Governments Human Development Index Area GDP Per Capita (2004/5) Population Share
  • 18. Complex system of Provincial financing
  • 19. The status of the Tribal Areas ‘across the Durand Line’
    • Historical Afghan territorial claims over Pashtun NWFP, PATA, FATA, & Pashtun areas in Baluchistan
    • Administered by Punjab British Commissioner, then 1901 direct Delhi rule of NWFP Province - settled & FATA tribal areas separate, both as NWFP Afghan buffer zone
    • Separate status, continued post-independence – constitutional FATA buffer zone and tool against Pashtun nationalism on both sides of the border; not elected (A247). NWFP Governor formally represents President
    • Pre- & post- colonial regimes – ‘no troops deal’ with (paid) Maliks & Lungis
    • Frontier Crimes Regulations (1901 to today), FATA de facto constitutionally separate, Presidential control, Political Agent rule in FATA agencies ‘absolute’
    • President has authority over all governance & military arrangements in FATA (1973 constitution A247/5). Via primary legislation – FCR, permits detention-no-trial
    • PAs – (executive-judiciary-legislature) appoint own para-militaries – can fire Maliks – appoint Maliks to Jirga courts – no full appellate path or normal rights
    • FATA areas a channel for very large-scale US funds to Afghan mujahadeen during Soviet occupation – but govt. wary of Pashtun cross-border nationalism
    • 1980-2000 – roots of ISI culture & skill balancing different Pashtun interests
  • 20. The role of FATA in the Pakistani Political System
    • 12 seats in the National Assembly, 8 in the Senate, elected by appointed (all male) FATA Maliks in the pay of the Presidency/military & each easily dismissed
    • But parliament cannot legislate on FATA, and general Pakistani laws do not fully apply in FATA
    • FATA parliamentarians linked to pro-Deobani groups (JUI-F)
    • No representation over FATA, or in NWFP legislature
    • Alleged tit-for-tat: support in parliament, for peace, arms/drugs trade, & Deobandi ‘freedom to act’ without political competition
    • Political parties & national/regional secular political groups banned in FATA Since Afghan Soviet occupation, (& huge US mujahadeen financing), pro-Deobandis groups & Maliks have grown under such political ‘cover’, and replaced ‘old school Maliks’
    • JUI-F – coalition partners of govt. in Balochistan !
    • Presidency has inherited this system – propped by ‘negotiated balance’
    • President’s international trump card: better to accept a complex negotiated balance than risk a Deobandi government /Pashtun state (may well be true !)
  • 21. Complex governance: a simplification Difficult to reform FATAs (Mostly Pashtun). 3m pop. on Pakistan side. 7 ‘Agencies’. PATAs North West Frontier Province Settled areas ‘Districts’ Presidency Government Prime Minister. Cabinet. Donors. FATA Development Authority 7 Political Agents Naib-tehsildar (Exec, judiciary, legislature) SAFRON Funding. Donor projects . Balochistan Maliks Lungis Prov’l FATA Secretariat Agency Councils Inter-Tribal Jirga PEACE AGREEMENT
  • 22. Reform and/or Resolution Military interventions – part of the solution or part of the problem ?
    • Parliament can normalise rights and court system (FCR was removed from NWFP and Balochistan)
    • Supreme Court can strike down FCR as unconstitutional
    • FATA could become part of PATA under NWFP
    • But instead…
    • 2000/1 NRB Devolution Plan excluded FAA
    • Provisional Agency Councils appointed by tribal Jirgas
    • Military action continues , (but seen as ‘demonstration effects to USA’ – counterproductive ?) (ICG Dec 2006)
  • 23. Can economic growth address political issues in Tribal areas ? Will reform strengthen or weaken the government ?
    • Per capita income $500. 60% below poverty line.
    • 97% female illiteracy (male 71%).
    • But….
    • Need to demonstrate success against foreign fighters etc
    • Buying of permits and ‘rent-seeking’ will decline
    • Decline of 20 year old arms & drug trade - & military %s
    • (army allows vibrant trade & doesn’t require ‘permits’)
    • Pashtun nationalists & Deobandis may turn on govt.
    • Parliamentary support would be lost
    • NWFP JUI-F and Balochistan support may be lost
  • 24. The near impossible task of serving many masters. Is the outcome a kind of political gridlock ? Foreign fighters ? Presidency Head of State Govt. Ministries I.S.I. Donors & foreign NGOs Drug & arms traders Domestic elite, landowners, govt. influencers, & ‘crony capitalism’ Deobanis & Pashtun Nationalists USA Tribal Elders Local NGOs, pro-democracy groups The view from the Presidency ? Military, Governors, & PAs
  • 25. ‘ Show me something’ Reform versus ‘uncovering’ foreign fighters Foreign fighters ? Presidency Head of State Govt. Ministries I.S.I. Donors & foreign NGOs Drug & arms traders Domestic elite, landowners, govt. influencers, & ‘crony capitalism’ Deobanis & Pashtun Nationalists USA ‘ War on Terror’ issues Tribal Elders Local NGOs, pro-democracy groups Military, Governors, & PAs Info flow Info barrier
  • 26. The Inter-Jirga Peace Agreement Why did they fight, why did they agree ? A counterproductive brutal search for foreign militants ?
    • LOW-LEVEL WAR
    • June 2002 - US pressure – troops to capture MO, OBL etc
    • March 2004 – search for foreign militants ‘Tribes refused’
    • (‘failed’ – Former ISI General ICG 2006)
    • Govt. ‘sued for peace’ June 2004
    • Nov 204 agreement – amnesty, cash, BUT hand over foreign militants, & stop cross-border attacks
    • Feb/March 2005, 6-point peace plan with JUI-F over South Waziristan
    • Escalation - heavy casualties in March 2006 battles
    • Effectiveness of ‘official’ institutions declines
    • Military pressure on the President
    • New (military) NWFP Governor May 2006
    • North Waziristan Ceasefire June 2006 signed with JUI-F and Deobandis/Pashtun nationalists
    • North Waziristan Peace agreement with Deobandis Sept 2006
    • Oct 2006 ‘Cross border raids on UK & US troops up’ (Gen Jones NATO)
    • Foreign militants found are few – and mostly 20-year settlers from the anti-Soviet war (Tajiks, Uzbeks)
  • 27. The Sept 2006 Peace Agreement
    • GoP to halt all ground & air attacks
    • GoP to release prisoners
    • Checkpoints removed
    • Financial compensation of combatants for losses
    • Tribal privileges and ‘salaries’ restored
    • GoP to return weapons and allow open carrying of weapons
    • Foreign-born militants to respect local laws
    • Cross-border trade (legal & ‘illegal’) restored
    • Combatants to halt all cross-border attacks
    • Return to official institutions – no parallel bodies
    • GoP troops relocated
    • Joint 10-member Council to oversee Agreement
  • 28. Conclusions
    • Good quality macroeconomic management in Pakistan under difficult conditions – but risks from microeconomic realities
    • Deep-rooted problems in ‘real economy’ reforms and reform within government.
    • Political barriers to real-economy reforms are tenacious – strong political will needed domestically & internationally
    • Chain of causality ? Economic reform enables political reform or vice versa ? Symptoms of gridlock on both.
    • Military demonstration effects for the USA & NATO, may be counterproductive. (How to break the ‘information barrier’ ?)
    • Political reliance on Tribals & ISI (Deobandis indirectly) is an accidental Western creation.
    • International support for political reform, especially in Tribal areas, needed to untangle gridlock and accelerate economic reform.