Leading Pakistani Economist on State of Pakistan Economy & CPEC

One of Pakistan’s continuing challenges for the last seven decades has been economic management. Influx of huge amounts of American aid, waiver of Pakistani debts have been buttressed by Saudi largesse, 12 International Monetary Fund (IMF) low-interest loans and high-interest Chinese loans.  However, Pakistan’s economy has yet to achieve stability.

For the last few years there have been those who view the China Pakistan Economic Corridor (CPEC), under China’s Belt and Road Initiative (BRI) as the panacea and way out for Pakistan.

There are others like the IMF and The Economist that have argued that until and unless Pakistan undertakes structural reforms, CPEC will only burden Pakistan with loans it cannot repay.

On the occasion of Pakistan’s 72nd Independence Day, leading Pakistani-American economist, Atif Mian, Professor at Princeton, laid out – in a series of tweets- what are the challenges Pakistan faces and why CPEC is not a simple cure. 

Dr Mian is John H. Laporte, Jr. Class of 1967 Professor of Economics, Public Policy and Finance at Princeton University, and Director of the Julis-Rabinowitz Center for Public Policy and Finance at the Woodrow Wilson School. He has taught at University of California, Berkeley and the University of Chicago Booth School of business.

Professor Mian’s work focuses on the connections between finance and the macro economy. His latest book, House of Debt, with Amir Sufi builds upon powerful new data to describe how debt precipitated the Great Recession. The book was critically acclaimed by The New York Times, Financial Times, The Wall Street Journal,The Economist, and The Atlantic among others.

We have reproduced those tweets below:

“On Pakistan’s Independence Day 2018, why is the country still far from economic independence? (e.g. seeking its largest bail out ever this year). I will focus on last 5 years as an example. It will get a bit technical but I will try to be clear. Economic growth is almost entirely a function of ‘domestic’ productivity growth. What matters is investment in building your institutions and people. Instead Pakistani governments have increasingly looked ‘outside’ in what I would call an attempt at “import-led” growth. It doesn’t work.”

“The idea is to borrow from outside, and task another country with building your infrastructure or institutions, and hope some magic others. The latest example starts in 2013, when PML-N comes to power and decides to outsource growth to China. I will explain why it doesn’t work. “When government funds large infrastructure projects through China’s Belt and Road Initiative (CPEC in Pakistan), the external debt rises from USD 62 to 90 billion. The borrowing raises domestic demand “artificially”, making Pakistan more expensive and less competitive globally. “This is a variant of the famous “Dutch disease” and Pakistan suffered an extreme version of it. Poof? Real effective exchange rate (Pakistani prices relative to trading partners) increased by 20 plus % and total exports did not increase over past 5 years. To make matters worse, Pakistan’s “in-law” finance minister strips away independence of the central bank and sets the terrible policy of keeping the exchange rate appreciated. Now Pakistan has the Dutch disease, on steroids.”

“Meanwhile there is a blanket ban on any objective assessment of CPEC. Ask a question, and you would be accused of conspiring against national interest. Media feeds the frenzy that it is a “game changer” and a big bubble develops in the port city (currently largely sand) of Gwadar. Real estate bubbles further artificially raise domestic demand, & given the senseless exchange rate policy, it makes the Dutch disease sclerotic. Notice we haven’t even gotten into whether the huge borrowing is “sustainable”, the damage is being done before any repayment is due.”

“So let us talk about debt sustainability now. The first thing to remember is, you are borrowing in dollars, while most revenue from the projects are in rupees (think domestic transportation use and local energy consumption). This is a big problem for two reasons. First, the whole enterprise is exposed to exchange rate (ER) risk. A future depreciation of the currency, which is almost certain to happen given the inane ER policy, will jeopardize profitability. Second, the country must generate sufficient additional exports to pay back, or else it will be forced to become poorer in order to generate an export surplus to pay back. This, again, makes things more difficult given the Dutch disease in the first place. Another big question on sustainability is that the borrowing and spending deals are highly opaque. No one really knows what’s going on. For example, what is the cost of capital in CPEC? A loan contract may report a “concessional” rate of 2%. But is it really 2%? Consider this: There is no open bidding and Chinese companies decide everything. They charge USD 100 for equipment, but put in place lower quality equipment worth only USD 80. Guess what, the “true” cost of capital just went up to (2+20)/80=27.5%! There is a lot China and Pakistan can gain from each other. But deals have to be structured properly, with proper macro-prudential framework. Unfortunately, none of that was done. The government wanted a shiny new road real bad before the next election, which they lost anyways.”

Prof Mian ends his thread of tweets with: “Let’s hope for better economic sense this time.”

Shouldn’t Pakistan Explain Why its Citizens are Dying, Fighting for Afghan Taliban in Ghazni?

Four decades after the start of the Afghan civil war and seventeen years after the American-led international intervention in Afghanistan, the Afghan Taliban appear to have made a comeback in that country.

On Friday August 10, over 1000 Taliban fighters entered the city of Ghazni, a strategic urban center less than 100 miles from Kabul, and have killed “dozens of Afghan soldiers and police officers, cutting communications and severing the main highway from Kabul to the south and beyond.” According to Afghan defense minister Tariq Shah Bahrami the attack on Ghazni city was carried out by Taliban with the support of foreign militants, including Pakistanis, Chechens, and Arab Al Qaeda fighters.

According to reports on the social media dead bodies of Pakistanis killed in Ghazni city clashes are being shifted to Pakistan. Prominent politician from the Awami National Party (ANP) and former senator Afrasiab Khattak in a series of tweets asked Pakistani authorities to explain what was happening and referred to the involvement of Pakistani militants in Ghazni as a repetition of the disastrous Jalalabad fiasco of 1989.

 

Afghan journalist Bashir Ahmad Gwakh stated that the fighters were primarily Punjabi, affiliated with the terror organization Lashkar e Taiba, and referred to videos of the funeral ceremonies of these Pakistani fighters being uploaded on the Facebook pages of the Taliban. 

 

‘Celebrating Independence Day Without People’s Freedom’

Pakistan celebrates its 72nd Independence Day today. The dream of our founding father Quad e Azam Muhammad Ali Jinnah and other leaders who supported him and his vision was that of a progressive, economically prosperous Pakistan at peace with its neighbors and the world. Unfortunately seven decades later we are yet to fulfil the Quaid’s dream!

With a new government taking over power on the eve of Independence Day, we at New Pakistan thought it would be useful to put forth views put forth in leading Editorials and Opinion pieces on why we are in the mess we are today and what we need to do in order to move forward.

The Dawn Editorial states “Democratic rule — true democratic rule — is not a gift that the country must wait to receive when deemed worthy of it; democratic rule is an inalienable right of each and every citizen of Pakistan.” Referring to the “deep political divisions and institutional strife” in Pakistan at the end of the latest elections, the editorial points to the consistent “institutional encroaching on the terrain of other institutions.” Further, “While institutions need vigorous oversight and checks and balances, the mechanisms must come from within the democratic system. A controlled democracy wherein other institutions circumscribe the authority and writ of an elected government and parliament, and impose their own policy prescriptions and priorities, is a recipe for enduring conflict.”

The Nation Editorial states that Pakistanis should stop looking for Messiahs in politics and seek to resolve their problems themselves: “let us get out of the messiah thinking pattern which pushes us to believe that a single entity can solve problems. This is precisely why we disrespect people we elect. Let us all pledge to work together and respect each other.” Referring to the multiple challenges facing Pakistan the editorial asks Pakistanis to “respect those around us and particularly those we elect in our public offices” and understand that “utmost responsibility lies on us to change as people because if the basic structure of the society is the same, no amount of policies can change the outcome.”

The News Editorial focuses on the rise of religious bigotry, the denial of full rights to Pakistan’s minorities and the need to achieve the dream of Pakistan: “to bring a peaceful and prosperous life for the Muslims of South Asia.” As Editorial states, “The rise of religious bigotry has not been confined to terrorist groups. Religiously inspired mob violence continues to serve as a reminder that we have not learnt to deal with the aftereffects of Partition. Dominant religious groups continue to peddle the narrative that they are under threat.” Further, “One of the many glaring challenges we have faced is our inability to accord the same rights and respect to our minority communities. To change this, Pakistan needs to change much within its legal, political and social frameworks.”

Is there hope for Pakistani Democracy?

After one of the dirtiest elections in recent history, the country is attempting to move forward slowly. Pakistan can only function as a true parliamentary democracy when both the government and the opposition fulfil their respective roles.
 
According to an Editorial in Dawn, one of the challenges facing Pakistan is a lack of interest “in parliamentary matters and oversight” demonstrated by most politicians when they are in opposition. Unlike the United Kingdom, from whom we adopted our parliamentary system of government, there are no shadow cabinets so while in opposition there is no one keeping a tab on what is happening and ready to take over when their party comes to power.
 
As Dawn notes: “The PTI’s relative struggle in announcing its cabinets at the centre and in three provinces is rooted in a lack of interest when in opposition. The unwillingness of all major political parties to take the opposition role in the assemblies seriously plays a part in the overall governance crisis in the country. When the switch is made from opposition to governing, incoming governments are woefully unprepared for the immediate challenges they must contend with.” Further, the parliamentary committees lack the firm oversight of the executive that is critical to ensuring governance.

Protest Against Military-Judiciary Rigging of Pakistan Election

On August 8, 2018, Pakistan’s opposition parties gathered in Islamabad to protest the rigging of last month’s elections. These rallies were organized by the 11-party coalition, the Pakistan Alliance for Free and Fair Elections (PAFFE).  
 
According to a news report: “Leaders of various parties demanded senior officials of the Election Commission of Pakistan resign for failing to stay neutral during the polls. Some leaders also blamed the judiciary and the military for interference. “The judiciary and the military have shown that they are no more neutral,” said Fazl-ur-Rehman, a leader of MMA, an alliance of religious leaning political parties.”
 
A news report stated: “It was a good beginning in the sense that the opposition highlighted its demand and agitation over the alleged rigging, and kept their show nonviolent at the same time. It did not cause disruption of normal life, which is generally done so that the protest is duly registered.”
 
While, the demonstration in Islamabad, “failed to get large crowds, as the top leadership of two major parties, the PPP and PML-N stayed away” yet “Hundreds of supporters gathered on August 8 in the capital, Islamabad, after the parties of former Prime Minister Nawaz Sharif and ex-President Asif Ali Zardari and other organizations called for a march on Pakistan’s Election Commission and demanded an investigation into the results.”