pakistan challenges in politicaleconomic development 1224918203452480 8
TRANSCRIPT
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Pakistan; Challenges in Political-Economic Development
ICEAFeb 13th 2007Professor Paul E M Reynolds
LONDON
Tel + 44 20 874 86788
Mob & SMS + 44 7974 188087E mails
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Pakistan, showingNWFP, FATA &Northern Areas
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Why is Pakistan important ?
Strategic geo-political & transport bridge Mid-East and India & China
165-170m popMore people in Pakistan than in Russia
Potential for Kashmir flare-uprisk of big impact on world growth
Border region with Afghanistan
- Cross border raids, and question ofTribal 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 stateand advanced delivery systems Borders with Iran, Afghanistan, India, China, close Gulf States, C Asia
Important Diasporaespecially in the UK (and UK troops on its border !)
URGENCY: Presidential & National Assembly Elections Oct 2007
unclear how political events will pan out
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Pakistan; Challenges in Political-Economic Development
Macro, micro & political conclusions.Needing to break out of gridlock, government is in a difficult position
1. Macroeconomic improvements good - but slow reforms ingovernment, in regulation and within the real economy retardinvestment & growth rates, hinder exports and underminefiscal/structural sustainability of growth
2. Flow of FDI inflows now under threat, diaspora remittances up,but insufficient real economy investment opportunities as finaldestinationconsumer imports sucked in, savings rates low
3. Full-speed reforms across government needed, but gridlockeddue to political uncertainty - helps the reform resistance &project silos. Key decentralisationsuffers from unintendedconsequences.
4. BUT .political reform gridlocked by constitutional-politicalstructuresand the Presidents need to please too many masters
5. Role of Tribal border (Afghan) areas and relationship with TheWest is critical forpolitical and economic reform
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Economic performanceEconomy stabilised & growth path established
WB/IMF 1990s 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7
GDP
growth
4% 3.1% 4.7% 7.5% 8.6% 6.6% 6.5%est
7% tgt
Inflatio
n
(Av.)
9.7% 2.5% 3.1% 4.6% 9.3% 7.9% 6.5%?
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Fragility of economic progress
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 5years 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
BUTBUT.. Industry still less than 20% of GDP
2005/06 investment at 16.5% of GDP - too low for sustainable growth (WorldBank - 27%+ required)
Growing current account deficit - driven by a widening trade gap as importgrowth 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-relatedFDI and internal borrowing one-offs) But GoP points to import price-hikesas 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
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Economic growth contextTrade & fiscal imbalances reducedbut
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 distributionprivatisationsuccessful
Poverty fell 10% 20012006 (WB)
Cost of borrowingrelatively 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 savings 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
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Real-economyproblems requiringpolitical will to challenge the interests ofthe bureaucracy & crony capital across
federal, provincial, & local government
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
Resultdomestic investment opportunities, & bottom updomestic growth, both dampened = inflationary pressure,
monetary growth, import growth, pressure on FX reserves ?
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Institutions responsible have overlaps & gaps in reformDiagnosticitis, policy silos & analysis-paralysis ?
New institutions to solve this problem ?
Cabinet Division (3 Depts)
Economic Council
Office of the Economic Adviser
Ministry of Law & Justice
National Comm. for Govt. Reforms
Civil Service Reform Unit Law & Justice Commission
PMs Secretariat
Ministry of IT
Ministry of Parliamentary Affairs
Competitiveness Support Fund 4 Provinces, FATA, PATA
Trade Corridor Committee
Office of Private Public Partnerships
Federal Ministry of Tribal Areas
Ministry of Inter-Provincial Coop.
Ministry of Finance & Planning
Ministry of Industry, Prodn & SI
Board of Investment
Ministry of Commerce
Ministry of Econ. Affairs (EAD) Monopoly Control Authority
Housing & Works Div.
Securities & ExchangeCommission
Planning Commission, 4members
National Reconstruction Bureau
Economic CoordinationCommittee
Public Sector Reform Committee
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Wrong micro-economic reform tools ?Government spending versus government efforts
Huge political will required to overcome deep-rooted systemicproblems & interestsdoes political uncertainty prevent this ?
Financial deepening reforms (NSS, Pakistani Investment Bonds) and reforms ofintermediation 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
..Egbuilding business parks & giving tax breaks, rather than
- reform of regulations that inhibit capital goods imports
- tackling overenthusiastic interpretation of regulations
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Pakistan (example): Steps/time and costof contract enforcement (Source World Bank 2006)
Figure 3.4a
Steps and Time to Enforce a Contract
0
10
20
30
40
50
SriLanka
Turkey
China
Philippines
Thailand
Nepal
Bangladesh
SouthAsia
Malaysia
Vietnam
India
Pakistan
0
100
200
300
400
500
No Steps Time
Figure 3.4b
Cost to Enforce a Contract(%of contract value)
0
10
20
30
40
50
60
Turkey
Thailand
Malaysia
Bangladesh
SriLanka
China
Nepal
Vietnam
Pakistan
SouthAsia
India
Philippines
Case backlog - half are commercial - in the High Courts of Sindh and the Punjab number over a hundredthousand, and for the lower courts, in the millions - 40% land, 30% challenges to regulations, rest
banking/employment
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
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Real-world problems in economicdevelopment dampen investmentWB 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 flowfrom duty drawback & custom rebate delays, high port charges, state control ofinput sectors, freight sector over-regulated, opaque land leasing & security oftenure - & resultant low capacity utilisation
Fees and taxes collected by the Government represent a quarter of export costsand come from three sources: the petrol tax (1 percent of export invoice), Export
Development Fund (0.25 percent of export invoice), and unofficial, speedmoney payments (approximately Rs 1,250 per consignment). [Poor portgovernance contributes].
Layers of taxes & levies to agents, the PAs, and security payments add to costs.High tarrifs in many sectors.
Pakistans aggregate direct labor cost $0.75 /hour - higher than Chinas $0.66
and Indias $0.40 but productivity lower.
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Resistance to pro-growthregulatory reforms ?
2004/5 World Bank project on regulatory reform Impacthas been minimal
2005 Better business regulations IFC. Admin barriers report notpublished.
2006 IFC/World Bank business regulations, pending
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Future economic reformchallenges
Regulatory quality and the link to rent-seeking
Poor domestic export performance relative to expectations, and the lack of investment toovercome high costs
Capital infrastructure problemsaccess to debt & equity finance for exportdevelopment, and absence of venture capital & real sector investment funds
Low growth productivity in the use of inward financing from remittances and capitalrepatriation
This challenge combined with industrial and labour rigidities/monopolistic markets =not enough productive places to put the money
How to apply telecom sectors 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 theMinistry 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.
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Fiscal decentralisation issuesPakistan is highly centralised fiscally
Growth & political reform requires change
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. Indias- 6.1 percent, or 7 percent based on more recent figures(World Bank 2005:xxvii)
Provinces in Pakistan are highly dependent on federalshared revenues and grantscomplex system.
All provinces receive identical per capita levels ofdivisible pool allocations
All provinces are characterized by low own revenuemobilization, although some differences are evident
across provinces.
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Fiscal Decentralization in Major Developing Country
Federations
Federation, Developing Country Sub-National Expenditures(% Total) Sub-NationalExpenditures (%
GDP)Sub-National Own
Revenues (% Total
National Revenues)Sub-National
Own Revenues
(% GDP)(I) (II) (III) (IV)
Pakistan* 34.2 6.3 7.0 0.9India 49.2 10.8 33.8 6.1Ethiopia 35.9 9.5 18.7 3.0Nigeria 38 13.6 10.7 3.18South Africa 56.5 18.9 18.9 6.1Argentina 44.4 12.4 44.2 8.4
Brazil
41.7
15.3
39.0
10.5
Mexico* 41 7.4 25.5 4.5Venezuela 19.6 ~ ~15 ~Russia 38.5 12.7 32.4 13.0Malaysia 11.0 2.4 9.1 2.4Source: 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).
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Unequal regional incomes
Table 1: Key Indicators for Pakistans Disparate Federation
Population Share GDP Per Capita(2004/5)
AreaHuman
Development
IndexNumber of Local
Governments%/million Rs.
%/km2 IndexBalochistan 5.1 % NA 45.2% 0.499 26NWFP 13.8% 35,211 9.7% 0.51 24Punjab 57.4% 47,131 26.8% 0.557 35SINDH 23.7% 61,563 18.3% 0.549 21
Total/Average128.4 -
1.5 0.541 106Source: World Bank, UNDP 2003 Human Development Report (p. 11)
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Complex system of Provincial financing
Per Capita Rs., 2005/6 projected
0500
1,0001,500
2,0002,500
3,0003,500
4,0004,500
5,000
Balu
chist
an
NWFP
Punjab
Sindh
Natio
nal
Subven/Other
Legacy
DivPool
Shared
OSR
Source: World Bank compilation of provincial budgets
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The status of the Tribal Areasacross the Durand Line
Historical Afghan territorial claims over Pashtun NWFP, PATA, FATA, &Pashtun areas in Baluchistan
Administered by Punjab British Commissioner, then 1901 direct Delhi rule ofNWFP Province - settled & FATA tribal areasseparate, both as NWFP Afghanbuffer zone
Separate status, continued post-independenceconstitutional FATAbufferzone and tool against Pashtun nationalism on both sides of the border; notelected (A247). NWFP Governor formally represents President
Pre- & post- colonial regimesno troops deal with (paid) Maliks & Lungis
Frontier Crimes Regulations (1901 to today), FATA de facto constitutionallyseparate, Presidential control, Political Agent rule in FATA agencies absolute
President has authority over allgovernance & military arrangements in FATA(1973 constitution A247/5).Via primary legislationFCR, permits detention-no-trial
PAs(executive-judiciary-legislature) appoint own para-militariescan fireMaliksappoint Maliks to Jirga courtsno full appellate path or normal rights
FATA areas a channel for very large-scale US funds to Afghan mujahadeenduring Soviet occupationbut govt. wary of Pashtun cross-border nationalism
1980-2000roots ofISI culture & skill balancing different Pashtun interests
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The role of FATA in thePakistani Political System
12 seats in the National Assembly, 8 in the Senate, elected by appointed (allmale) FATA Maliks in the pay of the Presidency/military & each easilydismissed
But parliament cannot legislate on FATA, and general Pakistani laws do notfully 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, andreplaced old school Maliks
JUI-Fcoalition partners of govt. in Balochistan !
Presidency has inherited this systempropped by negotiated balance
Presidents international trump card: better to accept a complex negotiated
balance than risk a Deobandi government /Pashtun state (may well be true !)
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Complex governance: a simplificationDifficult to reform
FATAs
(Mostly Pashtun).3m pop. on Pakistan side.
7 Agencies.
PATAs
North West Frontier Province
Settled areas Districts
PresidencyGovernment
Prime Minister.Cabinet.Donors.
FATADevelopment
Authority
7 PoliticalAgents
Naib-tehsildar
(Exec, judiciary,
legislature)
SAFRON
Funding.
Donor projects.
Balochistan
Maliks
Lungis
Provl FATASecretariatAgencyCouncils
Inter-Tribal Jirga
PEACE
AGREEMENT
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Reform and/or ResolutionMilitary interventionspart of the
solution or part of the problem ? Parliament can normalise rights and court system (FCRwas 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)
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Can economic growth addresspolitical issues in Tribal areas ?
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 & doesnt require permits)
Pashtun nationalists & Deobandis may turn on govt.
Parliamentary support would be lost
NWFP JUI-F and Balochistan support may be lost
Th i ibl k f i
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Foreign fighters ?
PresidencyHead of State
Govt.
MinistriesI.S.I.
Donors & foreign NGOs
Drug & arms traders
Domestic elite, landowners, govt.
influencers, & crony capitalism
Deobanis & Pashtun
Nationalists
USA
Tribal Elders
Local NGOs,pro-democracygroups
The view from the Presidency ?
Military, Governors,& PAs
The near impossible task of serving many masters.
Is the outcome a kind of political gridlock ?
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Show me somethingReform versus uncovering foreign fighters
Foreign fighters ?
PresidencyHead of State
Govt.Ministries
I.S.I.
Donors & foreign NGOs
Drug & arms traders
Domestic elite, landowners, govt.influencers, & crony capitalism
Deobanis & PashtunNationalists
USA
War on Terror issues
Tribal Elders
Local NGOs,pro-democracy
groupsMilitary, Governors,
& PAs
Info flow
Info
barrier
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The Inter-Jirga Peace AgreementWhy did they fight, why did they agree ?
A counterproductive brutal search for foreign militants ?
LOW-LEVEL WAR
June 2002 - US pressuretroops to capture MO, OBL etc
March 2004search for foreign militants Tribes refused
(failed Former ISI General ICG 2006)
Govt. sued for peace June 2004
Nov 204 agreementamnesty, 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
nationalists
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 fewand mostly 20-year settlers from the anti-Soviet war(Tajiks, Uzbeks)
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The Sept 2006 PeaceAgreement
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 institutionsno parallel bodies
GoP troops relocated
Joint 10-member Council to oversee Agreement
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Conclusions
Good quality macroeconomic management in Pakistan underdifficult conditionsbut risks from microeconomic realities
Deep-rooted problems in real economy reforms and reformwithin government.
Political barriers to real-economy reforms are tenaciousstrongpolitical will needed domestically & internationally
Chain of causality ? Economic reform enables political reform orvice versa ? Symptoms of gridlock on both.
Military demonstration effects for the USA & NATO, may becounterproductive. (How to break the information barrier ?)
Political reliance on Tribals & ISI (Deobandis indirectly) is anaccidental Western creation.
International support for political reform, especially in Tribalareas, needed to untangle gridlock and accelerate economicreform