Pakistan; Challenges in Political-Economic Development

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					                    Pakistan; Challenges in Political-
Global Economic
                        Economic Development
 Policy Institute
                          ICEA Feb 13th 2007
     Professor Paul E M Reynolds

     Tel + 44 20 874 86788

     Mob & SMS + 44 7974 188087
     E mails
                    Pakistan, showing
                    NWFP, FATA &
Global Economic
 Policy Institute
                    Northern Areas
                    Why is Pakistan important ?
Global Economic
 Policy Institute

•   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
                    Pakistan; Challenges in Political-Economic Development
                       Macro, micro & political conclusions.
                    Needing to ‘break out of gridlock’, government is in a difficult position
Global Economic
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1.       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
2.       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
3.       Full-speed reforms across government needed, but gridlocked
         due to political uncertainty - helps the ‘reform resistance’ &
         ‘project silos’. Key decentralisation suffers from ‘unintended
4.       BUT….political reform gridlocked by constitutional-political
         structures and the President’s need to please too many masters
5.       Role of Tribal border (Afghan) areas and relationship with ‘The
         West’ is critical for political and economic reform
                               Economic performance
                          Economy stabilised & growth path established
Global Economic
 Policy Institute   WB/IMF     1990s   2001/2   2002/3   2003/4   2004/5   2005/6   2006/7

                    GDP        4%      3.1%     4.7%     7.5%     8.6%     6.6%     6.5%est
                    growth                                                          7% tgt

                    Inflatio   9.7%    2.5%     3.1%     4.6%     9.3%     7.9%     6.5%?
                    Fragility of economic progress
Global Economic
 Policy Institute

• 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
                      Economic growth context
                    Trade & fiscal imbalances reduced…but…
Global Economic
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• 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’
                       Real-economy problems requiring
                    political will to challenge the interests of
Global Economic     the bureaucracy & ‘crony capital’ across
                     federal, provincial, & local government
 Policy Institute

• 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 ?
                Institutions responsible have overlaps & gaps in reform
                        ‘Diagnosticitis, policy silos & analysis-paralysis ?’
                      New institutions to solve this problem ?
Global Economic
 Policy Institute                             •     Cabinet Division (3 Depts)
     •    Ministry of Finance & Planning      •     Economic Council
     •    Ministry of Industry, Prod’n & SI   •     Office of the Economic Adviser
     •    Board of Investment                 •     Ministry of Law & Justice
     •    Ministry of Commerce                •     National Comm. for Govt. Reforms
     •    Ministry of Econ. Affairs (EAD)     •     Civil Service Reform Unit
     •    Monopoly Control Authority          •     Law & Justice Commission
     •    Housing & Works Div.                •     PM’s Secretariat
                                              •     Ministry of IT
     •    Securities & Exchange
          Commission                          •     Ministry of Parliamentary Affairs
     •    Planning Commission, 4              •     Competitiveness Support Fund
          members                             •     4 Provinces, FATA, PATA
     •    National Reconstruction Bureau      •     Trade Corridor Committee
     •    Economic Coordination               •     Office of Private Public Partnerships
          Committee                           •     Federal Ministry of Tribal Areas
     •    Public Sector Reform Committee      •     Ministry of Inter-Provincial Coop.
                    Wrong micro-economic reform tools ?
                      ‘Government spending versus government efforts’
Global Economic
 Policy Institute
                     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’
                                       Pakistan (example): Steps/time and cost
                                        of contract enforcement (Source World Bank 2006)
Global Economic
 Policy Institute

                           Figure 3.4a                                                                                                                                     Figure 3.4b
               Steps and Tim e to Enforce a Contract                                                                                                               Cost to Enforce a Contract
                                                                                                                                                                                     (%of contract value)
     50                                                                                                                                   500   60
                               No Steps                                  Time
     40                                                                                                                                   400   50
     30                                                                                                                                   300
     20                                                                                                                                   200
     10                                                                                                                                   100   10
      0                                                                                                                                   0     0





          Sri Lanka


                                                                                                                                                                                                 Sri Lanka




                                                                                     South Asia

                                                                                                                                                                                                                                                  South Asia
• 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
• 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
                     Real-world problems in economic
                     development dampen investment
Global Economic
 Policy Institute
                     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.
                    Resistance to pro-growth
Global Economic
                      regulatory reforms ?
 Policy Institute

• 2004/5 World Bank project on regulatory reform ’Impact
    has been minimal’

• 2005 Better business regulations IFC. Admin barriers report not

• 2006 IFC/World Bank business regulations, pending…
                     Future economic reform
Global Economic
 Policy Institute

•   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
•   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.
                    Fiscal decentralisation issues
                      Pakistan is highly centralised fiscally
Global Economic     Growth & political reform requires change
 Policy Institute
                      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.
                               Fiscal Decentralization in Major Developing Country
Global Economic
 Policy Institute

            •Federation, Developing Country               •Sub-National Expenditures      •Sub-National            •Sub-National Own           •Sub-National
                                                          (% Total)                       Expenditures (%          Revenues (% Total           Own Revenues
                                                                                          GDP)                     National Revenues)          (% GDP)
                                                                      •(I)                         •(II)                     •(III)                  •(IV)

            •Pakistan*                                               •34.2                         •6.3                       •7.0                    •0.9
            •India                                                   •49.2                        •10.8                      •33.8                    •6.1
            •Ethiopia                                                •35.9                         •9.5                      •18.7                    •3.0
            •Nigeria                                                  •38                         •13.6                      •10.7                   •3.18
            •South Africa                                            •56.5                        •18.9                      •18.9                    •6.1
            •Argentina                                               •44.4                        •12.4                      •44.2                    •8.4
            •Brazil                                                  •41.7                        •15.3                      •39.0                   •10.5
            •Mexico*                                                  •41                          •7.4                      •25.5                    •4.5
            •Venezuela                                               •19.6                          •~                       •~15                     •~
            •Russia                                                  •38.5                        •12.7                      •32.4                   •13.0
            •Malaysia                                                •11.0                         •2.4                       •9.1                    •2.4
            •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).
                               Unequal regional incomes
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                                        Table 1: Key Indicators for Pakistan’s Disparate Federation

                                      Population Share     GDP Per Capita
                                                                                        Development   Number of Local
                                                                                Area       Index       Governments
                                          %/million              Rs.

                                                                                %/km2      Index

                Balochistan                5.1 %                 NA             45.2%      0.499            26

                NWFP                       13.8%               35,211           9.7%       0.51             24

                Punjab                     57.4%               47,131           26.8%      0.557            35

                SINDH                      23.7%               61,563           18.3%      0.549            21
                                           128.4                  -
               Total/Average                                                     1.5       0.541           106

               Source: World Bank, UNDP 2003 Human Development Report (p. 11)
                     Complex system of Provincial financing

Global Economic
 Policy Institute

Per Capita Rs., 2005/6 projected
 3,000                                                               Subven/Other
 2,500                                                               Legacy
 1,000                                                               Shared
   500                                                               OSR







Source: World Bank compilation of provincial budgets
                    The status of the Tribal Areas
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                      ‘across the Durand Line’
 Policy Institute

• 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
                     The role of FATA in the
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                    Pakistani Political System
 Policy Institute

• 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
• 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 !)
                    Complex governance: a simplification
                                                                Difficult to reform
Global Economic
 Policy Institute                          Presidency

                                                                                                            Prime Minister.


                             7 Political                                                                             SAFRON
                              Agents                    North West Frontier Province
                                                           Settled areas ‘Districts’          Balochistan
                        (Exec, judiciary,
                                                    Agency       Prov’l FATA
                                                    Councils     Secretariat                PATAs                      Funding.
                                                                                                                     Donor projects.
                    Maliks                         FATAs
     FATA                                     (Mostly Pashtun).        Inter-Tribal Jirga
     Development                           3m pop. on Pakistan side.
     Authority                                  7 ‘Agencies’.
                    Reform and/or Resolution
                    Military interventions – part of the
Global Economic
 Policy Institute   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)
                     Can economic growth address
                     political issues in Tribal areas ?
Global Economic
 Policy Institute   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
                    The near impossible task of serving many masters.
                        Is the outcome a kind of political gridlock ?
Global Economic
 Policy Institute                     The view from the Presidency ?

           Donors & foreign NGOs
                                                                                         Domestic elite, landowners, govt.
                                                                                         influencers, & ‘crony capitalism’

                      Local NGOs,
                      pro-democracy                          Govt.
                      groups                                 Ministries
                                                                                           Military, Governors,
                                                                                           & PAs
                                          Head of State

                                                                                             Tribal Elders

                                                                   Drug & arms traders

                                   Deobanis & Pashtun

                                      Foreign fighters ?
                                      ‘Show me something’
                        Reform versus ‘uncovering’ foreign fighters
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                                                                 Info flow

            Donors & foreign NGOs
                                                            USA                             Domestic elite, landowners, govt.
                                                    ‘War on Terror’ issues                  influencers, & ‘crony capitalism’

                         Local NGOs,
                        pro-democracy                             Govt.
                            groups                               Ministries
                                                                                              Military, Governors,
                                                                                                     & PAs
                                            Head of State
          barrier                                                                             Tribal Elders

                                                                      Drug & arms traders

                                    Deobanis & Pashtun

                                        Foreign fighters ?
                            The Inter-Jirga Peace Agreement
                        Why did they fight, why did they agree ?
                    A counterproductive brutal search for foreign militants ?
Global Economic
 Policy Institute                     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
•   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)
                    The Sept 2006 Peace
Global Economic
 Policy Institute

•   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
Global Economic
 Policy Institute

• 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