BALKANISATION AND POLITICAL ECONOMY OF PAKISTAN YOUSUF NAZAR FOREWORD DR MUBASHIR HASAN @ Copyrights reserved with the author First published in 2008 Revised edition 2011 Published by National News Agency 164 A.M Asad Chamber, Ground Floor, Near Passport Office, Saddar, Karachi, Pakistan. Tel: 021-3568828, 35681520 Fax: 021-35682391 web: www.nnagency.com Email: [email protected] Official Correspondence 4-C, 14th Commercial Street, D.H.A., Phase II Ext., Karachi, Pakistan. Tel: 021-35805391-3 Email: [email protected] Produced and design by Mirador Printed by Elliya Printers This book is dedicated to those 60%-70% Pakistanis who live in poverty and survive on less than 2 Dollars a day About the author Yousuf Nazar is an international finance professional with specialisation in emerging economies. As the head of Citigroup’s emerging markets public equity investments unit based in London from 2001 to 2005, he helped Citigroup manage its over US $2 billion proprietary equity portfolio in the emerging markets of Asia, Latin America, Central/Eastern Europe, Middle East and Africa. Before this assignment, he also served as a Director of Citibank’s strategic planning group during the 1990s. Since 2006, he has written many articles on Pakistan’s political and economic issues with a particular focus on the developments in an international context. His interest in politics dates back to his student days as a political activist when he worked against General Zia-ul Haq’s martial law in 1977. His experience in the developing countries spanned across several areas of international finance. He did his Bachelor's degree in administrative studies and an MBA in international finance and economics from York University in Toronto. He currently spends his time on advising his clients on their international investments and strategy. Contents Foreword i Preface to the revised edition iii Introduction to the first edition xxiii The gathering storm and its implications 1 Balkans of the next world war? 5 An illicit affair turns sour 9 Arms and foreign debt 15 Hillary Clinton – wake up! 18 Is global economy headed for recession? 21 A nation in denial 24 Limits of military power 26 The establishment strikes back 28 War of terror: America’s quest for hegemony 32 Obama must remove Pakistan’s fears 38 Pakistan must avoid debt trap 41 Leadership not IMF is the issue 44 Time to cut interest rates 48 Need for a new era of strategic partnership with China 52 Global financial meltdown 55 The price of being a security state 58 Drone attacks and charade of protests 61 Zardari, his own nemesis? 63 State within a State 65 Crisis, political will and competence 70 The government surrenders to the brokers 73 The monetary policy: behind the curve 77 Huge challenges, puny response 80 Faltering economy 83 Economic policy: continuity or change? 88 The fiscal imperative of tax reforms 92 The economy can destabilise democracy 96 Challenges for the new government 100 Balkanisation, not Talibanisation is the real threat facing Pakistan 103 The long term trend of rising oil price 108 How subprime lending in the US led to a global credit crunch? 112 Pakistan is the largest buyer of arms in the developing world 115 Budget largely irrelevant for common person 117 Real incomes’ growth stymied 119 Real income growth lags behind Asia 123 Economy: illusion of progress 127 Political economy model of a security state 130 Political economy model and instability 133 External debt: false sense of achievement 136 Global stock markets turmoil: more to come? 139 The myth of energy routes through Central Asia 142 Untaxed billions while 74 per cent live on less than $2 a day 146 Monetary policy: rising inflation and difficult choices 150 Development strategy and the myth of liberalisation 154 Pakistan economic outlook 157 Rupee depreciation: The wrong debate? 161 The drug threat from Afghanistan 165 The stock market crash 167 Selling Pakistan’s energy assets 170 In the line of fire: setting the record straight 173 US Quest for global energy control 176 Are we ready for $100 a barrel oil price? 180 Conclusion: Pakistan’s Way Forward 182 Foreword Early in 2008 just after the new government had taken over I saw an insightful article in DAWN worth reading again and again to grasp its full economic and political implications. In a very coherent and lucid manner, citing eye-opening facts and figures, Yousuf Nazar was warning all those who cared to ponder about the economic debacle that stared Pakistan in the face. I immediately phoned Zubeida Mustafa of DAWN to ask ‘Who is Yousuf Nazar, how can I speak to him’? Very kindly she found out and gave me his telephone number. At that moment, I was keen to know from Yousuf Sahib what had triggered the sudden and steep down turn of the economy soon after the induction of the new Government. He said that he had been elaborating in his articles in DAWN since 2006 that the economy of Pakistan was extremely vulnerable. The current precipitous fall had been in the making for some time and that the new government and the one preceding it failed to take even rudimentary steps to lessen its ferocity. The government economists believed and elaborated ad nauseam that there is nothing seriously wrong with the economic policies pursued by them. The fundamentals of Pakistan’s economy are sound. The crisis like the present one arise due to international factors such as rise in oil prices, changes in interest rates, paucity of loans etc. Many among of our present day economists subscribe to the Donald Reagan’s mantra of privatisation, deregulation and globalisation. They allege that Pakistan’s economic woes are the result of wrong policies of Islamabad: high budget deficits, faulty taxation system, and deficient infrastructure development, low rates of savings, rampant corruption and failure to develop export-led growth patterns and more… They argue that had Pakistan fully and honestly adhered to the policies of the ‘market economy’ it had promised with International Financial Institutions it would have fared better. Yousuf Nazar, on the other hand, believes that the fundamental reasons for economic plight of Pakistan go far beyond what appears in the current literature on economy. The strategic relationship of the ruling elites with foreign political and economic powers, the absence of the rule of law, frequent unconstitutional interventions by the military, compliant judiciary and political leadership are responsible not only for the severe economic problems but also strike at the stability of the state itself. Inflationary trends, high unemployment rates, rising debt, high poverty levels are the symptoms and not the cause of the present economic scene. Who are our ruling elites? Who amongst the ruling elites exercises the supreme authority? Why they are so inextricably linked with foreign powers and their interests? Finally what needs to be done to break this ‘vicious cycle’ as the author puts it and transfer sovereign authority from the elites to a democratic polity are some of the basic questions facing the country. The ruling elites are found in two categories: those exercise legal power to rule and those who are beneficiaries, extra-ordinaire, of assisting and supporting those elites who directly exercise political power. In this second category fall industrialists, bankers, members of higher judiciary, i landlords, sardars, pirs, big traders, media and real estate barons, top notch lawyers, doctors, managers, accountants, members of parliament when in office, big political leaders in office or opposition and retired senior civil and military officers. The first category comprises the combine of civil and military officers. It is the civil authority at the district level and below which principally governs the country through a huge apparatus of police, magistrate, jails, revenue collector and intelligence network. The civil is the principal repository of the coercive power of the state. The military is the protector of the last resort of the civil authority. The intelligence and assessment of the state of ‘law and order’ plays a crucial role for the military to come into action. The compact between the elites of Pakistan and the United States and its allies is wholly one sided. Despite all the assurances for national security, the US has never helped Pakistan in any war. Indeed, it has stopped the supply of military and economic aid at most crucial times for Pakistan. It is absolutely essential for the elites as well as the people to scrap the compact that has been in operation for more than half a century. The country’s economic woes must be assessed merely not in terms of the knowledge of the science of economy but as the author advises in the light of political economy Mubashir Hasan ---------------------------------------------------------------------------------------------------------------- Publisher’s note: Dr Mubashir Hasan was Pakistan’s Finance Minister during 1971-74. He is a founding member and former Secretary General of the Pakistan Peoples Party. He was a close associate of Zulfikar Ali Bhutto. ii Preface to the revised edition The first edition, published in March 2008, was titled The Gathering Storm. This related to an article I wrote in 2006. It is with a heavy heart that I have changed the title for this revised edition as my worst fears have become more than just that. Pakistanis are suffering from an experience that has been the most traumatic since the breakup of Pakistan in 1971. While the so- called “War on Terror” has taken its toll, the response of the ruling classes bears more responsibility for the nation’s despondent mood and low morale. Pakistanis have never been so unsure about their identity and the future. The Pakistani army has 147,000 troops fighting militants in the tribal areas.