Voice of America in its coverage on Political Crisis, Inflation, Power Crisis Hurt Pakistan Economy [1] on 9th January 2008 broadcasted an unbiased non-partisan report on the economic crisis in Pakistan. Faisal Bari, a professor of economics at Lahore’s University of Management Sciences, says some of those issues should have been dealt with earlier.

“I think these years that we’ve had, we’ll have to pay for some of the things that we did over the years or didn’t do, as in we didn’t do the reforms that were required in areas like power, in areas like judiciary, and other areas, property rights, etc.,” said Bari.

For the past several years, Pakistan’s economy has shown robust growth of around seven percent annually. Economists say it was fueled by aid from Washington to help fight terrorism, remittances from Pakistanis working overseas and foreign investment in the country.

Economist Qaisar Bengali says the strong performance was not sustainable, partly because on the consumer side of things, it was the result of easier bank credit. That made it possible for more people to borrow to buy big items such as cars. Bengali says when consumer financing is removed, bank profits decline, automobile sector growth declines, and gross domestic product growth declines.

“And this pattern of consumer-financed growth led to very sharp rise in imports,” said Bengali. “Our trade deficit is completely out of control now. It has also created a very high inflation rate. So growth cannot be managed in a way that you have very good numbers for three, four, five years and then those numbers turn into a liability.”

The trade deficit, which economists say runs above $10 billion, contributes to higher interest rates, as the nation borrows to cover the deficit.

Bengali says the government’s fiscal deficit, expected to be above the earlier forecast of four percent, also adds to the problems.

“The government’s current expenditure is running very high, it’s a major contributor to inflation,” said Bengali. “The government constantly borrows more money from the central bank than it has budgeted for. In the first five months of this fiscal year, they borrowed the entire amount that they were supposed to borrow for the whole year, and they’ve continued to borrow since then.”

Energy problems factor into the economic woes. Bari says the government has not reformed the energy sector to increase private investment in new electricity plants. As a result, many parts of the country are without power six hours each day.

“The harder reforms that we were supposed to do when going was good were not done and I think the incoming government is going to pay for that in this year and probably the next one,” said Bari.

Islamabad has steadily raised development spending in recent years, including a 52% real increase in the budget allocation for development in FY07, a necessary step toward reversing the broad underdevelopment of its social sector. The fiscal deficit – the result of chronically low tax collection and increased spending, is fast becoming unmanageable.

Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing to 7.9% in 2006. In 2008, following the surge in global petrol prices inflation in Pakistan has reached as high as 25.0%. The central bank is pursuing tighter monetary policy while trying to preserve growth. Foreign exchange reserves are bolstered by steady worker remittances, but a growing current account deficit – driven by a widening trade gap as import growth outstrips export expansion – could draw down reserves and dampen GDP growth in the medium term.[7]

Since the beginning of 2008, Pakistan’s economic outlook has taken stagnation. Security concerns stemming from the nation’s role in the War on Terror have created great instability and led to a decline in FDI from a height of approximately $8 bn to $3.5bn for the current fiscal year. Concurrently, the insurgency has forced massive capital flight from Pakistan.

Public Policy universally is the indisputable amalgam of Legislative Public Policy, Judicial Public Policy and Administrative Public Policy, while Political Economy is correlates to economics, law, and political science in explaining how political institutions, the political environment, and the economic system each influence the other. When narrowly construed, it refers to applied topics in economics implicating public policy.

The comments of Mr. Qaisar Bengali, a renowned economist and Mr. Faisal Bari Professor of Economics at Lahore’s University of Management Sciences reflect lack of Public Policy and an unrealistic approach to Political Economy which could never be conceived in the governance mechanism of Pakistan. This apart from creating other problems compounded the growing dilemma in the area of Social Justice. Economists and political scientists often associate the term with approaches using rational choice assumptions, in explaining phenomena beyond economics’ standard remit, in which context the term “positive political economy” is common.

If we attempt a serious study of Pakistan’s predicaments which it has faced since generations, one factor which prominently stands out is an ideologically defined educational system which refuses to allow rationale and critical thought to develop in the students, the aspiring future leaders. The failure of disciplines as Philosophy, Sociology, Psychology, Political Science, History and Economics, to name a few which provide evidence for the collapse of a once stable and educated society into a lawless community. A fractured economic and financial system, and rhetoric based political system, cannot provide any help in ameliorating the problems of a common person.

From 2000 to 2007 Higher Education Commission an alternate to University Grants Commission was receiving the highest percentage of chunk of revenues ever reserved for education. The achievements are best forgotten. Not a single step was taken to revive the necessary fundamentals of education. University cities were planned but only for those disciplines which provide immediate utility to specific fields of interest to the establishment. Even such universities are catching dust in their blueprints

In this scenario Pakistan is decades behind in social sciences and physical sciences when compared to other developing countries.

On June 5, 2008, the Carnegie Endowment for International Peace hosted a discussion on Pakistan’s economic and social challenges and prospects.  Featured speakers included Jan Vandemoortele, Senior Advisor on Policy at UNICEF and former UN Resident Representative in Pakistan for humanitarian issues; Ambassador Teresita Schaffer, Director of the South Asia Program at the Center for Strategic and International Studies; and Frederic Grare, visiting scholar in the South Asia Program at the Carnegie Endowment.  Sandra Polaski, Director of the Trade, Equity, and Development Project at the Carnegie Endowment, moderated the event.[2]

Jan Vandemoortele opened the discussion with an overview of Pakistan’s uneven performance in achieving human development goals. The country has made some limited progress on poverty and health indicators, yet its education outcomes remain well below those of other countries at similar levels of development.  Mr. Vandemoortele attributed these poor results to a lack of investment: the country spends only about 2.5% of GDP on health and education, whereas most countries that have grown on a sustained basis have spent at least 7%.  He stated that Pakistan’s recent economic success has produced “growth without development,” as there had been little structural change in the economy and only a narrow distribution of its benefits.  He estimated that those in the bottom half of the income distribution had seen no gains.

Today Pakistani society is extremely polarized – along gender, economic, geographic, religious, and ethnic lines – preventing the social cohesion necessary for broad-based, inclusive growth, he continued.  Mr. Vandemoortele concluded by noting that, while Pakistan is in need of reform, it is imperative that the international community grant it the policy space necessary to develop local solutions for its specific problems; too much foreign involvement would likely be counterproductive, fueling the causes of extremists and undermining moderates.

Teresita Schaffer broadly agreed with Mr. Vandemoortele’s assessment.  She asserted that Pakistan has failed to sufficiently invest in its people; this is a shortcoming not only of the current government, but has been a constant problem under a succession of governments. Such underinvestment is directly responsible for the poor social and economic statistics Vandemoortele presented.  Schaffer also stressed Vandemoortele’s final point on policy space, stating that given the current political climate in Pakistan any new policies which appear to be at the behest of Washington will fail.

Frederic Grare concurred with the problems which Mr. Vandemoortele and Ms. Schaffer had outlined, but maintained that there was reason for greater optimism than the previous speakers had found.  He asserted that though there was significant social polarization in Pakistan, the country did in fact have a history of national cohesiveness, and that effective policies could further unify the people.  Mr. Grare noted that the military/civilian divide which had grown in recent years is now being reversed, another positive development.  He concluded by stating that while the current outlook for Pakistan certainly wasn’t great, the country would continue to muddle through, and noted that as a younger generation came into government outcomes would likely begin to improve.

During the question and answer session following the presentations, Kenneth Dillon of Scientia Press asked how significant Pakistan’s environmental problems were, and whether they were likely to have an impact on economic growth.  Mr. Vandemoortele replied that the government is becoming conscious of Pakistan’s serious and growing environmental problems, but he was unsure whether or not it would succeed in addressing them.  As yet there has been little impact on the economy, but if land erosion and high levels of water salinity continue to spread throughout the country, agricultural production will suffer tremendously.

David Orden of the International Food Policy Research Institute asked the panel what role trade with India could play in Pakistan’s economic development.  Mr. Vandemoortele responded that economic diplomacy between Pakistan and India is growing, as today many Indian information technology companies have begun subcontracting some of their work to lower-wage Pakistani firms.  He stated that the politicians and bureaucrats need to catch up to the business community by further easing trade restrictions between the two countries.  Ms. Schaffer stated that while the potential for trade with India was huge, actual trade has so far remained modest.  She agreed that the politicians have been an obstacle to greater trade, as they are protecting domestic sectors that are afraid of import competition.  Mr. Grare added that with respect to the Indian economy, some Pakistani sectors are defensive, because they fear they can’t match its dynamism.

In response to other questions, the panelists stated that improved security and stability were essential to maintain foreign confidence in Pakistan’s economy and increase foreign investment; that land reform could produce great gains for the economy, but is unlikely to happen anytime soon due to the political clout of large land owners; that, with respect to health and education, the government needs to both spend more money and spend more effectively; and that the military continues to control a significant portion of the economy, which has both positive and negative impacts.

A society shod of education, poverty ridden, how can it be expected to shed its woes easily. A system taught and trained to exist in hate for 62 years, how can it now be reined in to bring tolerance, harmony and piece within, unless it is ready to accept the reality of partition, and willingly longs to co-exist with India. Not much can be expected in any sphere of its life specially its socio-economic issues.

Could social engineering be a possible solution? Is a paisa worth question, provided the policy makers are willing to invest that paisa, which is hard to come by in Pakistan.

Karl Popper referring to social engineering in political science made an a material comment in his book The Open Society and Its Enemies, volume I, The Spell of Plato, Karl Popper examined the application of the critical and rational methods of science to the problems of the open society. In this respect, he made a crucial distinction between the principles of democratic social reconstruction (called ‘piecemeal social engineering’) and ‘Utopian social engineering’

Popper wrote:[3]

“the piecemeal engineer will adopt the method of searching for, and fighting against, the greatest and most urgent evil of society, rather than searching for, and fighting for, its greatest ultimate good.”

According to Popper, the difference between ‘piecemeal social engineering’ and ‘Utopian social engineering’ is

“the difference between a reasonable method of improving the lot of man, and a method which, if really tried, may easily lead to an intolerable increase in human suffering. It is the difference between a method which can be applied at any moment, and a method whose advocacy may easily become a means of continually postponing action until a later date, when conditions are more favorable. And it is also the difference between the only method of improving matters which has so far been really successful, at any time, and in any place, and a method which, wherever it has been tried, has led only to the use of violence in place of reason, and if not to its own abandonment, at any rate to that of its original blueprint.”

While this is true for Political Science, Sociology provides yet another equally potent vehicle for good governance. Sociological practice is intervention using sociological knowledge whether it is in a clinical or applied setting. It is different from pure academic sociology in which sociologists work in an academic setting such as a university with a teaching and pure research orientation. Although there are some common origins, sociological practice is entirely distinct from social work.[4]

More and more universities are trying to make the curriculum more geared towards sociological practice.

While such programs are increasing emphasis on practical skills, they still incorporate pure knowledge. Pure academic researchers are also useful to applied sociologists in that their theories and research may be used by an applied sociologist or clinical sociologist in research or in sociological practice.

Some degrees may only be focused on applied or clinical sociology. Applied sociology is generally meso-level or macro-level intervention. It would include grant writing, program evaluation, human resources, work in public policy, community development, and many other jobs within social service agencies, non-profits, and businesses. There are many other opportunities for someone with applied sociological training.

Clinical sociology courses give students the skills to be able to work effectively with clients, teach basic counseling skills, give knowledge that is useful for careers such as victims assisting and drug rehabilitation, and teach the student how to integrate sociological knowledge with other fields they may go into such as marriage and family therapy, and clinical social work.

Social engineering is something which we don’t hear of, in the din of resounding statistics and claims of achievements. In the present spate of consumerism, disparity between the rich and the poor shows a sharp rise. The middle class continues to fragment financially leading to the vicious cycle of corruption, nepotism, discrimination, etc. Today it is a sad fact that all these are now well entrenched in the society and accepted as social norms.

The recent examples of poverty related incidents, stock market crashes, hoarding of sugar, wheat and other necessary food items, energy crisis leading to hours of daily load shedding in rural and urban center alike well illustrate inept governance.

The necessary prerequisite is to move towards the system of governance which provides democracy essential foundations of political, economic and social justice.

UNDP[5] defines governance as “the exercise of economic, political, and administrative authority to manage a country’s affairs at all levels and the means by which states promote social cohesion and integration, and ensure the well-being of their populations. It embraces all methods used to distribute power and manage public resources, and the organizations that shape government and the execution of policy. It encompasses the mechanisms, processes and institutions, through which citizens and groups articulate their interests, exercise their legal rights, meet their obligations and resolve their differences.”

According to this definition, “good governance therefore depends on public participation to ensure that political, social and economic priorities are based on a broad societal consensus and that the poorest and most vulnerable populations can directly influence political decision making, particularly with respect to the allocation of development resources. Good governance is also effective and equitable, and promotes the rule of law and the transparency of institutions, officials, and transactions” (UNDP, no date).

In brief, good governance refers to a high quality of processes by which decisions affecting public affairs are reached and implemented. Good governance ensures that all, including the poor and other disadvantaged groups, are included and have the means (a) to influence the direction of development in particular as far as it affects their lives, (b) to make contributions to development and have these recognized, and (c) to share in the benefits of development and improve their lives and livelihoods. Good governance helps to ensure that all people have adequate access to basic services.

The quality of governance may be measured according to a set of principles which can be defined as follows:

  • Inclusiveness and equity: the principle that no one can be excluded from the process of development on the basis of gender, race, religion etc.
  • Participation: the opportunity for people affected by the decision to influence the process of decision-making directly or indirectly.
  • Transparency: the degree to which the rules, standards and procedures for decision-making are open, clear, verifiable and predictable.
  • Efficiency: a measure of how economically resources are used to produce the intended results
  • Subsidiarity: the principle that decision-making takes place at the level most appropriate for the issue (usually the lowest level possible).
  • Adherence to the rule of law: the principle that every member of a society, even a ruler, must follow the law.
  • Accountability: the responsibility of a decision-maker to explain and justify the decisions it made and implemented, and the results these produced
  • Sustainability: The likelihood that the positive effects of an intervention will persist for an extended period after the intervention as such ends.

Pakistan’s successive leaderships in this context have not adhered to any one of the standards.

In the face of this intransigence, Pakistan today faces the following problems:

  • Terrorism
  • Religious Extremism
  • Religious Intolerance
  • Breakdown of Law and Order
  • Poor Justice System
  • Maladministration
  • Corruption
  • Poor and Educational System
  • Politico-Religion based Curriculum
  • Illiteracy
  • Child Labour
  • Feudalism
  • High Defence Budget

In the list of Pakistan’s socio-economic woes is the monstrous debt.  Without monetary resources with which to fight the numerous problems of the nation, Pakistan remains overpopulated and poor.  The debt accrued by Pakistan has come from several sources. Primarily this debt has accumulated due to the continuing conflict with India over the Kashmir region. Kashmir is a predominantly Muslim state within India. As such, the possession of this region has been a source of contention between mostly Hindu India and mostly Muslim Pakistan. This border conflict has been raging on and off for the last half of the twentieth century. Due to these hostilities, the Pakistani government spends roughly one fifth of its budget on its military, further limiting potential spending on social improvements and programs.

Another factor in the large debt is Pakistan’s dependence on foreign oil and other imported fossil fuels. As a nation, Pakistan uses 350,000 barrels of oil per day. Of this, 293,000 barrels per day are imported. Also, 1.1 million short tons of coal are imported each year. The combination of these two alone make up a huge part of the over one billion dollar trade deficit. These resources are used primarily for the generation of power.

Due to all of these sources of debt, half of government expenditures are dedicated to fulfilling debt repayment obligations.  In order to finance these payments, additional grants and loans are required each year totaling approximately 25% of revenues.  This prevents Pakistan from devoting significant resources to economic development and/or social improvements.

The primary economic policy issue for Pakistan is reduction of its debt burden, which constrains economic growth, and the Government’s capacity to fund poverty reduction and social sector expenditures. This in turn requires that the fiscal deficit be reduced to a sustainable level. The Government has been able to increase tax revenues in the last two years, but as a proportion of GDP they are well below the average ratio for the 1990s. The burden of adjustment in the 1990s has been largely borne by development expenditure, which as a proportion of the GDP is now at the lowest level ever (i.e., at 3.0 percent of GDP). Given Pakistan’s high and rising levels of poverty and its low level of human development, there is a need to increase development spending. Therefore, the Government needs to focus more on reforms to improve revenue collection by broadening the tax base and strengthening tax administration.

In addition, it must improve public expenditure management, and stop the massive hemorrhaging of public resources to loss-making state-owned enterprises. The Government has announced an ambitious privatization program; if implemented it will help to reduce the fiscal burden of the loss-making enterprises, and generate resources for debt retirement and poverty reduction.

Another important economic policy issue is restructuring the economy to enhance the efficiency and outward orientation of the agriculture and manufacturing sectors. This is necessary for Pakistan to improve its external balance, service its huge external debt, and meet the challenges of globalization.

However without planning a long term strategy involving reform in education, policy planning, setting up think tanks centers, and moving away from individualistic to institutional politics, Pakistan will continue to present bleak picture to the world.

[1] Political Crisis, Inflation, Power Crisis Hurt Pakistan Economy By Nancy-Amelia Collins
Islamabad, 09 January 2008;