Economy

‘Don’t use price controls to curb inflation’

By Rana Fawad
Posted: June 5, 2008

WASHINGTON: Don’t subsidize energy sector, don’t use the government as a last resort employer, don’t provide open-ended protections to specific sectors, don’t use price controls to curb inflation, don’t neglect urban infrastructure, don’t underpay public servants, and don’t allow exchange rate to appreciate.

These are the ingredients mentioned in an economic recipe offered by renowned Pakistani economist and Senior Scholar at Wilson Center Shahid Javed Burki while speaking on Burki_WC“Pakistan’s Economic Difficulties and Their Consequences,” at a discussion organized by the Woodrow Wilson International Center for Scholars on June 4.

Asia Program director Robert M. Hathaway introduced Shahid Javed Burki to audience and f that Burki has accepted to join WWC as Senior Scholar. During his 25-year career at the World Bank, he served as vice president of Latin American and Caribbean and director of China operations. Moreover, he served as Pakistan’s Finance Minster briefly in 1996-97.

He has  contributed several books on economy. Referring to the current state of economy, he regretted that the political elite were preoccupied with the restoration of judiciary, distribution of power, etc., whereas the common Pakistanis were worried about power outages, food prices, galloping inflation, real reduction in real incomes brought about by significance amount of price changes.

“If this situation is allowed to continue, I think the country could be headed to social and political turmoil,” he warned.

To make the audience understand the current economic conditions, Burki walked them through various stages of economic ups and downs of the country since its inception in 1947.

Pakistan’s economic history: a roller coaster of 61 years
Labeling Pakistan’s economic journey as a roller coaster, Burki declared it an impressive performance. He argued that the average economic growth rate remained over four per cent a year during the past 60 years and the economy today is around 18 times the size of the economy of 1947.

He categorized it as one of the most impressive records of sustained growth anywhere in the world. “Not the most impressive, but amongst the more impressive ones,” he added.

Comparing the present with past, he pointed out that the country’s economic structure has changed. He pointed out that at the time of the Independence Pakistan really had no industry, banking sector, service sector, etc.

“And my guess is that about 60-65 per cent of GDP (Gross Domestic Product) was accounted for by agriculture and it employed about 70-80 per cent of the workforce. It was not only a rural economy it was a rural place as the urban population was accounted for only about 10 per cent of the population.

He told the audience that in 1947 Pakistan’s population was 30 million whereas today it stands at 160 million. “And because of the steady rate of growth GDP per capita increased at a rate of about 2.2-2.3 per cent a year in 60 years, which again is not an insignificant performance,” he commented.

He pointed out that one consequence of this growth is that there is fairly a significant decline in the incidence of poverty. “I’ve estimated in one of my works that the incidence of poverty in the year 1947 was around 65 per cent of the total population. It is now around one-third. Pakistan is much more urbanized now although official statistics endorsed by the World Bank put our urban population less than 40 per cent, my own hunch is that it is much higher than that, probably close to 60 per cent,” he said.

 Burki explained that at present the agriculture sector accounts for only 20 percent of GDP. “The largest sector of economy is service sector which accounts for about 53 per cent.”

However, he lamented that the growth did not occur evenly and pointed out that here were three periods of very rapid economic growth: 1960-1969; second one was around 1977 to 1988 and the third one more recently was from about 2001/2002 to 2007/2008.

“So, if you count them all together you’re talking about 27 years of very rapid good economic growth almost as good as the rates of growth of some East Asian economies, close to seven per cent a year,” he added.

He also noted that for the remaining 34 years, the growth rate was 3 to 3.5 per cent. “Pakistan, therefore, has ridden a roller coaster. It does extremely well for about a decade and then a crisis sets in and it takes time to recover from the crisis and goes back to a high growth of rate.”

The veteran economist told the gathering that the first period of high growth in 1960s was dubbed as a model of growth even by the American economists of that time.

He mentioned that it was interesting to note that the Indian economy in the first 40 years grew at what some Indian economists called the Hindu rate of growth (around 3 to 3.5 percent a year) as compared to Pakistan’s five per cent a year.

“So, there was a gap between the rates of growth. But then the lines crossed after that. In the case of India there was a paradigm shift. From 1947 to 1985-1986 there was a period of slow growth and after that it witnessed high growth,” he illustrated.

Why so? Shahid Javed Burki analyzed that Pakistan depended very heavily on external cash flows, especially when its strategic interests conformed with the United States in 1960s (containment of communism), in 1980s (frontline ally in Afghan-Soviet war) and now in war against extremism and terrorism.

“However, there is a difference. Today, external flows are not coming from official sources as much as they are coming from private sources. The structure of external finance has changed quite dramatically for Pakistan,” he added.

He said another reason was that governments in Pakistan neglected development of human resources and the country was paying a price for that. “Pakistan has one of the very young populations in the world. So it could turn demography into an asset rather than a burden but for that to happen it has to invest very heavily in education, research, health and so forth.”

 On current economic scenario: Commenting on the current economic situation in Pakistan, Shahid Javed Burki said, “At this point the economy has run into some very rough weather. There are a number of deficits that have appeared and these have to be tackled.”

He mentioned that two of them, fiscal deficit as well as balance of payment deficit, are particularly important. He said according to different estimates fiscal deficit stands between 7.5 per cent of GDP and 9.5 per cent of GDP. “Both numbers suggest a very large deficit, fairly significant imbalance which needs to be addressed.”

As a consequence, Pakistan’s trade deficit and balance of payment deficits have also mushroomed and they are about 7 to 8 per cent of GDP.

“We have estimated that a country in Pakistan’s situation can n tolerate fiscal deficit of about 4.5 to 5 per cent and a balance of payment deficit of about four per cent a year on a sustainable basis, which means the current deficits are twice the level of what we consider to be sustainable levels,” he added.

He suggested that adjustments will be needed which should fairly be sharp equal to about two per cent of GDP in terms of fiscal policy which then also translates to an equal amount of adjustment on the balance of payment side. He warned that it should be done in a two-year period to avoid the squeeze over a one-year period. He also cautioned the policy makers that cutting down of public sector expenditure should be done in a way that the growth is not compromised.

Referring to the economic performance of Pervez  Musharraf’s government during 1999 to 2001, he commented that the breaks were applied very hard both on the fiscal as well as monetary side.

“But having done that it suddenly lifted the foot from the brake and put it on the accelerator and the economy took off which is not surprising economies do take off if they have been squeezed very hard and Pakistan was no exception.”

He said in his own view that was not a good way of managing an economy. “It’s like a machine. You don’t give it jolts. Musharraf government gave it two jolts and we are feeling some of the consequences.”

Burki pointed out that the three periods of rapid growth in Pakistan’s history were all military periods. He went on to say that the first two periods (of General Ayub Khan and General Zia ul Haq), when the military came into power, the rate of growth jumped up, but this did not happen in Musharraf’s case.  He explained that this is the only military period which started off very poorly in terms of low level of GDP growth because the IMF (International Monetary Fund) prescription was followed without any question being raised. “And IMF always tries to squeeze very very hard and Pakistan essentially followed that.”Burki_Hathaway_WC

On energy ciris: Referring to the current energy crisis, he pointed out that the government estimates that the power shortage is four thousand megawatt whereas the total capacity of generating power is 30 thousand megawatt. So, the gap is about 15 to 16 per cent between demand and supply. Why did that happen?

Burki revealed that in 2003 the World Bank produced a very elaborate presentation for President Musharraf on Pakistan’s power sector and explained what to expect if certain things were not done. He added that Profel Patel, Vice President and In Charge of South Asia, invited him and Moeen Qureshi to take a look at their presentation and  respond as senior policy makers.

“We went and saw the presentation. I thought it was extremely well done,” he said and added the World Bank had come to two conclusions: one, there had to be some significant adjustment in the pricing regime in order to affect demand; two, new investment in the
power sector was needed otherwise there could be severe power
crisis down the road.

Burki said by chance he met Musharraf right after the WB team had given the presentation. When Musharraf inquired about Profel Patel, he (Burki) replied, “I think very well of him. He’s a serious development person and he is a friend of Pakistan.” Burki said he told Musharraf, “Mr. President that I’ve seen this presentation. Mr. Qureshi has seen it and both of us think that you should act on it. He (Musharraf) said oh is that so but it was a very scary presentation. I said be scared and do something. He said he’d tell the PM.

He regretted that attention was not paid five year ago and the country was already facing a grim situation. He lamented that the situation is affecting both the demand side as well as the industrial production side.

Burki mentioned that the country’s well-to-do are responding to this crisis in an interesting way, as most of them seem to have power generators. “I went around asking the people what is the cost of producing one kilowatt power by these generators. I was told that it was around 1.5 to 2 dollars an hour whereas if the government had invested even the most expensive power could be 13 to 14 cents an hour.”

Talking about shortages of a number of food items like wheat, which is a staple crop in Pakistan, he commented that the government was not all that responsible. However, he pointed out that as a paradigm shift in terms of international food prices was occurring, Pakistan would have to learn to live with that and in fact could take advantage of it. “This is the first time that the terms of trade have turned in favor of agriculture and I think it’ll be very useful if the price increases that have taken place are passed on to the farming community while at the same time providing protection to the poor,” he suggested.

Summarizing Pakistan’s current situation, he said that were enormous difficulties some of them caused by the failure of public policy of the last six to seven years and some of them caused by poor strategic work done by the previous government. However, striking an optimistic note, Shahid Javed Burki was of the view that the country had a lot of potential and with a right set of public policies could get out of present difficulties and go to a growth rate of seven to eight per cent a year.

He also prescribed some steps that could help recover the ailing economy.

His first suggestion was the country should exploit the opportunities afforded by the world economy. Burki said he did not buy the conventional wisdom in Pakistan that it could not get much good out of what was happening at the global level.

Burki termed this kind of thinking as ‘nonsense and said, “Pakistan is not very well integrated into the global economic system but it could. But for that to happen it will have to study the system particularly how international production, trade, finance have changed and then apply them to Pakistan situation and devise public policy to take advantage what’s happening outside.”

The second area, he emphasized, is to maintain macro-economic stability. “There has to be downward adjustments in the two deficits I identified and it should be done quickly and so quickly as to hurt the growth aspects,” he recommended.

Third on his prescription list is high rates of savings and investments. He informed the gathering that recently a group headed by Michael Spence, Nobel Prize winning economist, published a report about economies 13 countries which grew at a rate of seven per cent a year for the last 25 years.

“They identified some things that were common in terms of public policy and one of them was there has to be an investment of 25 per cent of GDP and Pakistan is much below that number. Second is that a significant amount of that investment should come from domestic resources. In the case of Pakistan that is half and half and that is not sustainable. Third, there should be an investment of about five to seven percent of GDP in infrastructure and Pakistan does about half of that. Fourth, there was investment of 7 to 8 percent of GDP on education, health by these countries and Pakistan does half of that. Five, that fiscal deficit should not be more than about five percent.”

Burki gave Musharraf government good grades on letting the market allocate resources. “During Musharraf’s period the private sector became a dominating player in the economy which is a very good thing. But at the same time it was not subjected to the forces of the market. The private sector continues to go back to the government for subsidies and so on whenever it faces a slight problem,” he explained.

He recommended that the private sector needs to be regulated but in a way that its independence is no jeopardized whereas the private sector should not expect the government’s support all the time.

“Finally, I’d say one of the most important conclusions that one could reach by looking at the performance of the countries that have done well is credible and capable governments. We haven’t had these and I think we can find a way getting one that would certainly help Pakistan move on to high rate of growth and sustain it over time.

After presenting his recommendations, Shahid Javed Burki also mentioned some ‘don’ts’ to fix the economic problems.

“First, don’t subsidize energy. This is a difficult one to sell particularly when there is such shortages in the country and petrol prices have gone up and so on. But the subsidy as we know, particularly energy subsidy creates all kinds of distortions and pressure on the government. I think the government has to find a way to transferring the prices without causing too many social problems,” he commented.

He warned the policy makers not to use the government as the last resort employer. “For instance the PIA (Pakistan International Airlines) is in grave trouble because the employees-to-aircraft ratio is the highest in the world. So, the public sector continues to use its agencies for giving employment to the people because the economy hasn’t generated enough jobs.”

Third: don’t provide open-ended protections to specific sectors like the textile industry.

He also warned on using price controls to curb inflation and said, “There is a lot of temptation to do that, particularly as a result of what is happening to food prices.”

He suggested that the urban infrastructure should not be neglected because urban population is increasing rapidly at the rate of about four to five per cent a year.

Talking about the public servants, particularly teachers, Burki was of the view that they should not be underpaid.

And finally, he suggested the exchange rate should not be allowed to appreciate. He pointed out that after a very long time of about eight years Pakistani rupee had begun to depreciate. “I’ve been suggesting that should have begun to happen long time ago especially the US is the major trading partner for the country and the difference between the rates of inflation is about seven to eight per cent. So, by simple arithmetic rupee should have gone through it.”

Burki praised the Punjab province’s performance and said, “I’ve looked at the performance of the Punjab over the last seven, eight years and I’m very impressed with it. The Punjab, which will have a population of about 100 million in three to four years, could become an engine of growth for the country. And I think the Punjab should be allowed to play that role provided that it is at the same time prepared to reduce its burden on the federal government for the resources.”

Shahid Burki concluded his presentation by saying if somehow the country could pass through difficult times Pakistan could grow in a more sustainable way than ever before at about six to seven per cent.

His presentation was followed by a session of questions and answers. Questions and his responses are as follows:

Q: What is your explanation of volatile and highly erratic behavior of the Stock Exchange? Is it manipulated as average Pakistanis suspect?

Burki: My explanation is that it’s based on confidence and there has been loss of confidence on the part of the investor, particularly foreign investors. Karachi stock market did receive fairly significant flow of capital (about six billion dollars). The political turmoil followed by Benazir’s assassination seemed to be endless. Foreign money has just gone out and people have taken money from the stock market and it’s not surprising that there has been such a plunge in the market.

Q: What do you mean by a credible and capable government?

Burki: I think we should give democracy a real chance, but then we should expect political parties also to act in a democratic way. I find it rather disturbing that two of the largest political parties, although talking about restoration of democracy are being run as family enterprises.

The PPP loses its chairman and a will is read out according to which a 19-year kid is appointed as the chairman. I think there was some interview, I didn’t see it myself, where this person, I  think Zardari, is asked, is this a piece of furniture that you’re going to hand over to your son. On the other side Nawaz Sharif’s political party is equally dominated by the family.

A political scientist and I did a report for the government of the UK as to how the political system should be developed. We suggested that there should be a code of conduct for the political parties. Elections to top leadership positions should be mandatory. Accounts should be made public and there should be periodic issues of manifestoes and these should be discussed in open forums. The legislatures should have members given appropriate staff to do serious legislative work rather than just become lobbyists for helping their constituencies by exercising pressure on bureaucracy and so on.

In my more optimistic moments I say to myself perhaps these teething problems the country is facing a transition from a military rule to a democratic rule. And in my more pessimistic times I say to myself isn’t it extraordinary that the two leaders who hold the most power are not members of the parliament. How can they with a straight face say we want to make the parliament the decision making body of the country when they themselves are not are not part of it.

Q: Economic prospects of other parts of the country other than Punjab?

Burki: Pakistan is an interesting federation in which each federating unit has its own international border that’s why it’s important to know the provincial autonomy.

If you give provincial autonomy then the growth models they’ll pursue will be different. I think there is a lot of potential for the Punjab to grow. It has a few difficulties compared to other provinces.

But the Frontier province also has a potential but a very different economic structure. It has a very different kind of agriculture system; much more horticulture than crop culture; smaller pieces of land instead of large land holdings; small industrial enterprises; a lot of workmanship in various areas, etc.  Moreover it has a tremendous amount of talent available for transport and trade. These are the things which need to be encouraged.

Balochistan is an extremely rich province. It has a lot of resources. Something the government is sitting on and not publicizing very much is that Balochistan has discovered copper deposits. If developed they will be second largest copper deposits in the world after Chile. And there are investors coming into the country or wanting to come into the country.

So, Balochistan could become a very important provider of natural resources like copper and gold. Then it has a lot of potential for generating wind power. The Chinese were at one stage interested in investing in one thousand megawatt unit for generating wind power. Port of Gwadar has been developed and it could become a fairly important source of commerce. Sindh has its own problems whereas Karachi is a highly developed city.

If you give provinces a lot of freedom that will begin to show itself in terms of growth rate and poverty alleviation, etc.

Q: What are your views about the last imported PM Mr. Shaukat Aziz?

Burki: Not much purpose is going to be served by trashing or thrashing Shaukat Aziz. I was his critic for a very long time, although at one stage I was a good friend of his. I think a number of his policies were totally misguided. I don’t think he understood the strategic side of management of development. He relied much more on the availability of easy resources and he got them wherever they were available from.

I had very difficult conversations with him when he was the prime minister. And I could see that he was not interested in strategizing and he was very sensitive about any kind of criticism. And some of his things have done a lot of damage. This neglect of the power sector is entirely his failure. I once used a term ‘Casino Economics’ which a newspaper put on the front page. And promptly I got a call from SA saying that’s very unfortunate use of words.

So, I said to him you tell me I’ve never seen anywhere in the world the following: That you buy a piece of land without knowing what you are buying. You buy a file which is your right to purchase a piece of land at some future date and you have no idea where it is. I said isn’t this ‘Casino Economics’. So, there was a lot of speculation during this period. We’re now paying the price.

I wish I could be sure that our banking system is secure. He says that one of his great achievements is the development of the financial sector. I think he’s right over there. But I’d like to feel more comfortable that given the kind of exposures the banks have to consumer lending (motorcycles, cars, refrigerators, etc.) if there is a serious downturn of economy whether these will impact on the health of the banks. It is something to worry about.

Q: Do you think more money going into nonmilitary aid will make any difference in bridging the gap between the rich and poor?

Burki: It could certainly help. But it has to be targeted into the sectors where money has been short. But Pakistani experience is that even when you put a lot of money if you don’t have the structures that then it’s wasted.

A case in point is a program the WB once ran called SAP (Social Action Program). A lot of money went into this. But educational departments and various provinces were so weak that it resulted in a lot of corruption and waste of money.

Q: What do you think of the National Commission for Human Development under Mr. Nasim Ashraf?

A: I think he’s done some useful work. He’s become controversial. The concept is very good that you build capacity at the local level to get money and put into a right kind of use. He’s shown me some stuff done by independent people which seems to suggest that he’s been succeeding.

There is another controversial program although I think positively about it. This is Higher Education Commission which has an enormous amount of money. My own view is that it’s changing the structure. You now have a new paradigm in terms of rewards given to teachers. University professor has become an extremely well paid individual. Good bright people are now thinking of entering public service will give serious consideration to education which I think is very positive development.

Q: You’ve indicated that the elite was focused on reestablishment of the independent judiciary and the common people seemed to care a very little. What your prognosis on the reestablishment. What would be the effect?

Burki: The elite is focused on bringing the judges back who were fired by Musharraf. But I don’t think the elite is very much interested in improving the performance of the judiciary and that’s where the real issue is. If you look at some of the work that Asian Development Bank and the World Bank have done, it shows very clearly that the systems where legal system is good translates into not only rapid economic development but also more evenly based economic progress because people have recourse to the judicial system if things go wrong. Now the changing of a handful of judges is not going to resolve this problem. It calls for much more fundamental reforms like training for judges, code of conduct for judges and salaries of judges. The ADB has a very interesting program and they are prepared to put in hundreds of millions of dollars. I don’t know where it is going.