Want the economy to improve? Defend democracy.

As political season gets into full swing, one of the top issues is certainly the weak economic growth that the country has been suffering. Obviously there are many reasons why the economy has sputtered instead of taking off, but one important reason in particular is being overlooked. Arif Habib Group Chairman and CEO Arif Habib warned this week that economic growth is suffering due to negative perception of the country by foreign investors.

Speaking at a reception held in his honour by Ruhi Farzana Shafi, he said that “our capital markets are one of the best in the world providing 31 percent average return in the last 10 years, but it has been marred by image issues.”

Over 100 foreign investors left after Islamabad blast.

Image issues? What issues could possibly mar our image with foreign investors? Could it be the image of two government officials – a governor and a cabinet minister – being assassinated for standing up for minority rights? Could it be the image of lawyers throwing flowers at confessed assassin Mumtaz Qadri? Could it be the fact that Osama bin Laden was found living outside Kakul? Perhaps. And perhaps instead of ignoring this growing threat, the judicary should take notice and put militants in jail rather than allowing them to go around shooting up the streets.
Or perhaps it could be the never ending stream of cynical media reports and political slogans terming the government elected by the people as the most corrupt, incompetent rulers. Or the media predictions that the government will fall any day now. Perhaps it is the statements of anonymous military spokesmen who claim that Army is using the judiciary to unseat a democratically elected president.

Could it be that the ‘image issues’ we have come from the fact that in the modern media age, all of our political hyperbole, constant complaining, and drawing room gossip is now available for the whole world to see? And maybe, just maybe, foreign investors don’t want to risk their money in a nation that can’t hold two elections in a row? Actually, there may be something to this.

According to research by economist Ishrat Husain published in the Columbia Journal of International Affairs, political instability – or the expectation of it – is a key obstacle to economic growth in Pakistan.

The tour d’horizon of the past sixty years of Pakistan’s economic history lends credence to the argument that interruptions to the orderly political process whereby elected governments were dismissed, forced to resign or overthrown further accentuated the tendency of risk aversion. Besieged with a feeling of uncertainty over their future, elected representatives have indulged in distribution of patronage to their supporters as well as to self-enrichment. Both the preoccupation with keeping power—applied to both the military rulers and the elected regimes—and fending off attacks from the opposition by co-opting them through state patronage or by coercion has led to laxity in fiscal and monetary policies and to the concentration of economic and political power. The excessive use of discretion in case-by-case policymaking to favor narrow interest groups has derailed institutionalized decision-making based on well-established rules and transparency in transactions.

The solution, Ishrat Husain says, is obvious:

The lesson to be learned from this experience is quite obvious but worth repeating. Democracy, with such flaws and shortcomings as corruption and patronage, may cause economic disruptions and slow down development in the short-term. But it should be allowed to run its course as the inherent process of fresh leadership and governmental accountability through new elections provides a built-in stability to the system that eventually brings the economy back to equilibrium. Interruptions to the democratic process in the name of economic efficiency have created more problems than solutions in Pakistan.

With Senate elections only three months away, and general elections soon to follow, derailing the democratic process would be gratuitous and self-defeating at this point. Whatever might be gained by installing this mythical government of selfless technocrats would be more then undone by the demonstration of impatience and unwillingness to abide by the rule of law.

If the people want to change who’s in office, let them choose so with their ballot. Economies don’t turn around overnight. If we want the economy to improve, we should elect those who we believe have the best policies to improve it and give them a chance to do so without terming them a failure before they can even start.

Economic Consequences

In its editorial of Wednesday, ‘Change of tone‘, Daily Times makes an important point that is not getting enough attention in the latest round of anti-American fist-waving. What is the economic impact of this behaviour?

The cost of the downward spiral in US-Pakistan relations has already sent shock waves through the economy. The stock exchange plunged amidst fears of a breakdown in relations, the rupee floated to around 90 to the dollar, partly because of the ‘dollarisation’ currently underway amidst fears for the future. These negative signals should give pause to all stakeholders to reconsider their fiercest belligerence against the US. We may not like much of what Washington does or even how it does it. But it is not only the US that has constraints so long as it is engaged in Afghanistan. We too have considerations to weigh, first and foremost the struggling economy and the future of a rescue sans US aid and goodwill.

Leaving aside for the moment the unquestionable foolishness of thinking we can defeat an American attack*, we need to consider what impact this anti-American drum beat is already having on our nation.

Yes, Hamid Gul and Ansar Abbasi are crowing about ‘national unity’ behind hating America; and Imran Khan calls for officials to refuse US aid from his sprawling Bani Gala mansion; and self-appointed patriots blog from their AC apartments in Dubai about how cutting ties with the Americans will magically revive the Mughal Empire.

But let’s set aside fantasy fiction and for a moment. Even if Pakistan refuses the billions in aid provided by the US, what about the $5 billion in trade between the US and Pakistan? Are we ready to give that up as well? What about the $1.8 billion in remittances that were received from Pakistanis working in America? Do we expect American companies to look kindly on Pakistani job applicants if we declare war on them? American aid might be ‘peanuts’, but a billion here, a billion there – pretty soon you’re talking about real money!

I know, I know. The cost of war greatly outweighs the meager sum we receive from the Americans. The security situation in Pakistan now is scaring away investors. Who is going to invest in Pakistan once the Americans are gone? Oh, yes, China. But actually, China only accounted for 4.4 per cent of exports last year compared to America’s 15.9 per cent. And even though American aid to Pakistan is ‘peanuts’, Chinese aid amounts to only 3 per cent of those peanuts. Just shells, really.

I know that we are all frustrated. We’re sick of the bloody war and would like an easy solution with a clear villain to blame. But the situation is much more complex than that, and we need to be realistic about the consequences of our actions. The Daily Times is spot on:

Emotion may be cathartic, but it is rarely a good substitute for calm, considered policy, especially in the delicate position Pakistan is placed in, and the fact that the country the gung-ho amongst us want to take on is the sole superpower in today’s world. Not only should the current furore be cooled, diplomatic efforts must find ways to continue to enjoy, if not the goodwill and friendship, at least the tolerance of the US. Any other path will damage Pakistan immeasurably.

If you want to know the alternative, just look at how Afghanistan ended up.

*Spare me the comparisons of an American-Pakistani stand-off to Battle of Badr, please. I know my history, and I also know that the kafirs in 7th century Arabia did not have F-117A Nighthawk stealth aircraft armed with GBU-27 laser guided bunker buster bombs and submarine launched inter-continental ballistic missiles.

How anti-Americanism hurts the economy

Pakistan RupeesOn Saturday, Business Recorder noted that Securities and Exchange Commission of Pakistan (SECP) has registered 21 companies having foreign investment during May.

These companies have investment by foreign nationals from the U.K.,China, Canada, Denmark, South Korea, Romania, Russia, Turkey, Jordan, Norway, the Netherlands, Singapore and Afghanistan.

Notice anything missing from the list? How about the largest economy in the world – the United States of America?

That’s not to say Americans are not investing in Pakistan. BBC recently spoke to Muzaffar Khakwani, who grows mangoes in the southern part of Punjab, about how American investment is helping his business.

“The US assistance in this area has gone primarily into education of mango farmers like me,” Mr Khakwani says. “How to grow better mangoes in terms of quality and yield, how to market our mangoes better, and also into trying to create the conditions to increase exports of our mangoes.”

He says the Americans have contributed to the building of a processing facility on his farm.

“I guess the idea is that because southern Punjab has had problems with militancy, if they invest here it will become prosperous and the money will trickle down to the poor so they won’t become militants,” says Mr Khakwani.

This is not private investment, though – it is US aid. Actually, the US government continues to invest heavily in Pakistan despite anti-American sentiments. Obviously part of this must be because the US wants to show that it is also an ‘all-weather friend’ and will continue to invest in Pakistan even when times are tense between the two countries. But this shows exactly the type of economic self-sufficiency that can grow in Pakistan if it is watered with a little investment. So, why are we seeing so much government aid and so little private investment?

One issue that is keeping private investment away is the security situation. This was stated clearly by Ambassador of Belgium to Pakistan Hans Christian.

He stressed the need that Pakistani High Commission in Brussels should take measures for the promotion of Pakistani products. He pointed out that although the Pakistan is a business-conducive country unfortunately due to the terrorist activities the foreign investors in general and Belgian Investors in particular are reluctant to invest in Pakistan. He further pointed out that not even a single Belgian company is in operation in Pakistan.

Unlike Belgium, American companies are investing in Pakistan, but not as much as they could be. An article from USA Today notes that US companies were holding on to $837 billion in cash. That’s larger than the GDP of Saudi Arabia.

But why would American companies use any more of their capital to invest in a country where news reports regularly show images of crowds burning their flag and blaming them for every single one of the world’s ills?

President Zardari has repeatedly called for ‘trade not aid’ to solve Pakistan’s economic crisis. This is one part of a correct approach to breaking the cycle of dependency on foreign aid. Another part is convincing foreign investors to place their capital in Pakistan’s own companies. Finance Minister Dr Hafeez Shaikh invited the American private sector to invest in Pakistan’s energy sector earlier this year. If this invitation is to prevail, we need to show the Americans that they will be dealt with fairly. This does not mean playing a subservient role or selling the nation for aid or investment. But it does mean being able to act without being pressurised by media or political personalities who sing a tune of anti-Americanism to raise their own profiles. Anti-Americanism doesn’t hurt America. It is only hurting ourselves.

More Good News – Foreign Investment Rises

The other day I listed suggested that, as many problems as the society faces, there is still some good news and reasons not to give up on Pakistan yet. One of these reasons related to the economy, which, while struggling, is actually improving though perhaps more slowly than we would like. I noted at the time that exports registered a phenomenal growth of 42 percent during the month of February. It turns out this was not an accident.

A new report by Reuters shows that net foreign investment has sharply increased this year also.

Net foreign investment in Pakistan rose 27 percent to $1.23 billion in the first eight months of the 2010/11 fiscal year, because of a sharp rise in foreign portfolio investment, the central bank said on Tuesday.

This is a clear sign that, even if we love to beat up on our own country, foreign investors see Pakistan’s promise.

The Truth About Reko Diq

Farooq TirmiziHow valuable is one’s wealth if it is buried underground and one has no way of getting it out? And what would one say to somebody who came along and volunteered to extract this wealth, providing all of the technical expertise and putting up the entire investment costs, and letting you keep half of the profits? Would it be fair to say that this person was indulging in exploitative behaviour? Or would we say that a fair deal was on offer?

The above scenario is not hypothetical. It is exactly what is currently going on in the case of the Reko Diq mining project in Balochistan. The Tethyan Copper Company, a joint venture between Canada’s Barrick Gold and Chile’s Antofagasta, has spent $220 million to explore the Reko Diq area and, having discovered a feasible reserve of minerals, is now willing to spend the further $3.3 billion it would take to extract the minerals. And yet it is being treated like a neo-imperialist villain out to pillage Pakistan’s national treasures.

Here are the facts: The Balochistan government gets a 25 per cent stake in the profits of the company for doing absolutely nothing besides being lucky enough to have jurisdiction over Reko Diq. It also gets a royalty fee on every penny of revenue earned by the Tethyan Copper Company. In addition, the company will pay the full 35 per cent of its income in corporate income taxes to the federal government. When all is said and done, the provincial and federal governments walk away with 52 per cent of the net cash flows of the project, while putting up none of the investment. By what standard is that a bad deal?

Yet if one were to pay attention to all of the populist screeching emanating from every corner of the print and electronic media, and now from 19-odd senators who have filed a petition in the Supreme Court on the matter, and also from people who have absolutely no expertise in resource economics, one could be forgiven for thinking that a great crime is about to occur. The truth, however, is that the crime is being committed right now, with the people of Pakistan being used as accessories to one of the biggest highway robberies in history.

The populist frenzy currently being whipped up on television and in newspapers is no accident. You see, a field is worth almost nothing when it has no proven reserves. Yet it can suddenly become worth billions the minute it is announced that there are significant quantities of minerals buried underneath. And that is when the vultures start to circle, smelling a fortune to be made by crooked means.

Here is how it will happen: The government officials who gave away the licences to the Tethyan Copper Company before it discovered anything at Reko Diq were unable to extort any bribes when the field was worth nothing. Now that it is worth billions, however, they can either extort bribes from Tethyan or from another mining company (and at least two Chinese companies have shown interest). Yet in order to get those bribes from Tethyan, the threat of losing the contract needs to be real enough. Hence the creation of a popular hysteria to give these officials the political cover they need for their banditry.

The other option is to actually kick out Tethyan (for which the popular hysteria is still useful) and then quietly give away the contract to the company willing to offer the highest kickbacks. Either way, the national interest, in the truest sense of the word, will have been cast aside since no company in its right mind will want to do business in a country that kicks an investor out the minute the latter finds something worth mining. The legendary wealth of Balochistan will remain buried beneath the sands of misery that currently haunt the Baloch people.

But, of course, the chest-thumping politicians will have made their cut and the journalists who helped them drum up the smokescreen of patriotic fervour will have unwittingly destroyed the nation’s interests. I do not know about you, but I do not like being used in this manner.

Farooq Tirmizi is a consultant who has worked previously on the business desk of The Express Tribune. He is a graduate of Georgetown University. This column was published in The Express Tribune on 26 January 2011.