Pakistan Challenges in Politicaleconomic Development 1224918203452480 8

7/29/2019 Pakistan Challenges in Politicaleconomic Development 1224918203452480 8

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Global Economic

Policy Institute

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

[email protected]

[email protected]


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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

Pakistan Challenges in Politicaleconomic Development 1224918203452480 8

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