Kaiser Bengali’s comments explode some of the myths of how Military rulers are supposedly better for the economy.
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Kaiser Bengali has been extremely critical of the economic performance of the eight years of Musharraf regime, in his writings as well as in his television interviews. Currently working for Collective for Social Science Research, a research company based in Karachi, economist Bengali has also served as the managing director Social Policy Development Centre between 2001-2004. Here he talks with TNS about a range of issues and gives his own economic blueprint which is closely tied up with politics. Excerpts of the interview follow:
The News on Sunday: How do you see this relationship between military regimes and economic progress?
Kaiser Bengali: There is a myth about development and economic performance of military regimes. In Pakistan, Ayub Khan, Ziaul Haq and Musharraf have all received unprecedented support from IMF and World Bank. In the case of Musharraf, it was the rescheduling and, of course, money that was coming as rental from the United States for using our space.
There were four factors which contributed to the high growth during the Zia period, none of which can be located in Zia’s economic policy. The oil price shock hit the world in 1973 but it was 1975-77 when the first emigrants from Pakistan began to leave for Saudi Arabia and it was 1978 when the remittance inflow began and it peaked in 1982 onwards. So the price of the oil price shock was borne by the Bhutto regime but the benefits were accrued by the Zia regime. This high rate of remittance inflow gave the govt sufficient fiscal space.
**Second, there were very large investments made during the Bhutto period that had long gestation periods. The Pakistan Steel Mills construction started in 1974, and it started commercial production in 1982. Similarly there were Heavy Mechanical Complex, Heavy Electrical Complex, Indus Highway, Port Qasim and Ittehad Chemicals (chemical industry’s foundation was laid in the 1970s and chemicals are a major input in a large number of consumer industries). So this investment in the 1970s began to bear fruit in the 1980s leading to large chunks of output increases.
Third, because of Afghan war Pakistan received enormous amount of foreign funding, almost unlimited.**
And fourth, Zia resorted very heavily on borrowing and deficit financing. **When he took over the debt-GDP ratio of the country was 24 per cent and in 1988 when Zia left the scene, it was 48 per cent. **So if you get manna from heaven your performance will be good. However, the poor performance of Zia regime became apparent in the 1990s and till later.
TNS: What happened in the 1990s?
KB: In the 1990s the civilian governments had no fiscal space because all the resources they had were mobilised for repaying the debt which Zia had left them. You will recall in 1984, Mahboobul Haq, Zia’s finance minister floated whitener bonds with a ten year maturity period. They matured in 1994. If you look at the budget of 1994, debt service rate went very high – almost 40 per cent in nominal terms. Zia government had collected money and spent it [on defense], so in 1994 Benazir government had to repay that money.
So, if you say 1990 were not an era of good economic performance, it was because there were no resources. I once asked somebody very senior in the Nawaz Sharif government as to why the ninth five year plan was not being prepared. His reply was that whenever the economic team met, all they discussed was when was the next instalment due and where would the money come from. He said there was no point in discussing anything else.
TNS: In this backdrop how do you look at the economic performance of Musharraf in the last eight years?
KB: GDP growth rate is an average of growth in its component sectors. So in the years that **GDP growth rate was around 8 per cent, in 2003 for instance, banking sector growth rate was 29 per cent and the automobile sector growth rate was 45 per cent. Now if you have some sectors where growth rate is so high, your average will go up, even if the variance is very high.
The banking sector growth rate was high because the government, or the State Bank rather, allowed consumer financing from 2002 onwards. The monetary policy was that you could get a loan for a house, car, fridge, camera, if for nothing else, a vacation or a personal loan. Banks made enormous profits out of consumer credit and profits are a component of GDP. A lot of this credit was going in for buying cars so automobile production went up by 40-45 per cent.**
So basically it was a one legged growth and that one leg is consumer financing. You remove consumer financing, everything else collapses. You are only managing an economy for your numbers to look good, for headlines.
TNS: What is the other leg of the economy?
KB: Largely there are two legs of an economy, agriculture and manufacturing. The services sector is the body. If you look at the national accounts, more than 50 per cent of the growth of GDP is coming from services sector. Agriculture is stagnant, and so is manufacturing barring one or two sectors, like automobiles. Today we have an economy with weak legs and a bloated body. It is not sustainable.
TNS: What is wrong with consumer financing?
KB: What it did was that it increased money supply in the economy. In the first two years, inflation remained low because there was excess manufacturing capacity in the country. So factories which were operating at two shifts began to operate at three shifts and the supply increased. But once that capacity was reached, demand continued to increase because people kept going to restaurants and kept paying out of credit cards. Once supply was constant and demand continued to increase inflation was the result. So today we have runaway inflation, nearly double digit and food inflation which is certainly more than 12 per cent.
Another thing that has happened is that a lot of demand has been created for imported products. We’re importing one billion dollars worth of mobile phones. We’re importing cars, because we only assemble cars here. And with cars come petroleum imports as well.
So we have created two problems: inflation that is out of control and a trade imbalance. Our imports have risen sharply while the exports are stagnant. And this is what the coming government is going to inherit. Just as Zia gave a debt mountain to the incoming government, the Musharraf regime is going to give the next government a massive foreign exchange crisis.
TNS: What about the outgoing government’s privatisation policy?
KB: Our services deficit which has always been very small is rising sharply because of our privatisation and foreign investment policy. All the large entities have been privatised to foreign companies. And the investment (FDI) has been in terms of telecommunications, mobile phones and food. All of these companies earn their profits in rupees but remit their profit in dollars. So there is a dollar outflow in terms of profit remittance against which there is no dollar inflow. We’ve created a liability without creating a countervailing asset.
In 1999 total profit remittance outflow, which in monetary language is called reverse remittance, was 97 million dollars a year. Today it is close to a billion dollars and rising.
TNS: About PTCL, is there a justification for a profit-making enterprise?
KB: There was no real policy or principle involved. This is a neo-liberal govt which believes it is not the business of the government to be in business. What they have done is that they have sold PTCL to a company which is a state enterprise. So de facto their policy was that it is not the business of the Pakistani state to be in business in Pakistan but it can be the business of a foreign state to be in business in Pakistan.
TNS: There is a massive power and energy crisis in the country. Where did we go wrong?
KB: The last investment that was made in the power sector was in the Ghazi Barotha project, which was an achievement of the political governments of the 1990s. In 1988, the Benazir government saw a power crisis coming and they went ahead with establishing thermal power plants which takes about three years to build. If those power plants plants had not been set up, we would have seen the same situation in 1990s that we have today. There would have been power outages for eight to ten hours.
Since 1999, the Musharraf regime has not invested in a single megawatt of power. In 2001, we had surplus power, today we are living with power shortage. When Benazir’s government contracted to buy power at 6 cents per hour, there was excessive criticism. Today, for one project they are contracting at 11.5 cents per hour. Today, the world knows that we have a power crisis, it will increase its power knowing that Pakistan has no choice but to buy.
So it is mismanagement of the highest order of the economy. All the investment that they talk about is either portfolio investment, which is the stock market, equity markets, or soft investments like telecommunications. These are all investments which do not require these companies to build any brick and mortar and steel structures. So if they have to leave at 24 hours’ notice, they don’t lose much. What do banks lose, furniture?
TNS: But they have paid huge licensing fees.
KB: That is peanuts compared to the kind of profits they have made. They have recovered several times their licensing fees.
TNS: So are big dams like Kalabagh the only solution to the energy crisis?
KB: Dams don’t produce water, they only store water and you don’t have water. Even now you cannot store water in Tarbela and Mangla to their full capacity.
TNS: So we need better water management then?
KB: Yes, we don’t need more dams. 40 per cent of the water released by dams don’t reach plant roots, which means it is wasted. So if you build another dam and assuming that it is filled to capacity, 40 per cent of that water is also going to be wasted. So 40 per cent of the capital cost of Kalabagh or Bhasha Dam will be wasted. This is not a prudent or wise way of making investments. I think we need to make investments in improving water management by reducing this loss to single digit.
TNS: What do you think about the social sector spending and will we be able to meet the MDG targets?
KB: I think there is universal acceptance now that we are going to miss the targets. We were spending 0.9 per cent of our GDP on health which has come down to 0.7 per cent.
TNS: What are the different issues pertaining to the estrangement between various provinces like National Finance Commission etc.
KB: There is a pervasive view among the smaller provinces, particularly Sindh, that there is a resource transfer taking place from Sindh to the other provinces, particularly Punjab. An example they give is of the Super Highway, which was a Sindh government entity. But the National Highway took over the Super Highway along with its fairly large toll income. The feeling in Sindh is that the profits of Super Highway are being used to subsidise the losses incurred on the Motorway. This has been cited as an example of resource transfer.
TNS: There were demands about revision of formula regarding distribution of federal receipts among the provinces. Comment.
KB: Three provinces want a change but Punjab has resisted the formula. Punjab benefits from the present scheme – distribution on the basis of population. But I think if there was a genuine political government, with no interference from the military, the politicians would have come to an agreement. For instance, if Punjab and Sindh were to get together to discuss water and finances, politicians would have said you concede on water, we do on finances. It is my personal experience that no delegation comes with an inflexible stand that they are not going to compromise on.
TNS: So what’s the way forward?
KB: There is an urgent economic, let alone political, need to do away with the concurrent list from the constitution along with all the ministries. There is a duplication that eats up twice the amount of money. There is a vested interest. When you do away with the federal ministries, all these bureaucrats will lose their federal jobs.
Then we need to reduce the defense expenditure by at least a hundred billion rupees. It is possible and it is not going to affect our firepower in any way. Because a significant part of that expenditure does not relate to firepower; it relates to providing perks to the officers. There is no needs for military to maintain and run the farms.
TNS: But where is the political will?
KB: We have reached a stage where if the political will is not there, the country will implode with the debris falling inside. We are seeing that happening. We have reached a brink.
TNS: You’re a strong advocate of low GDP growth rates. Comment.
KB: For about ten years we need to run an economy where the finance minister and the prime minister have the courage not to get good headlines. We need to invest in infrastructure which has deteriorated to a point that we don’t have productive capacity.
When you are investing in infrastructure, and by that I also mean cities which are totally chaotic where no foreigner wants to come, and physical and human infrastructure, the results are going to come after a while. So you are not going to get any output and the GDP is going to be low. Ten years later when you have infrastructure in place then you can target double digit growth rates. That growth will be based on real sectors – on agricultural and manufacturing outputs, not on hot air balloon sectors like mobile phones. By doing so, you will have a massive boost in employment, income generation and poverty reduction.
As for inflation it will be controlled by switching expenditures from current heads to development heads – by abolishing concurrent list ministries and reducing defense expenditure.
TNS: In an ideal economic model, what sort of a role do you see for the private and public sectors?
KB: Private sector is good in producing those commodities, which are low technology and require small capital investments. We have seen that our private sector is unable to put together large outlays. We have no one in this country of the calibre of Tata or Ambani in India. These are areas where the state will invest.
TNS: But then the state tends to overstaff?
KB: There is no problem with that. This is where your economic and social values come in. Is the purpose of the state merely to fill the pockets of the profit makers? Or is the state supposed to work for the welfare of the maximum number of people?
It’s a value judgement. When Shaukat Aziz went out for all out privatisation, he made a value judgement. The welfare of the people of Pakistan didn’t matter, what mattered was the corporate profits and he made that decision accordingly. As a state we need to determine what are our values. Are we prepared to have a few people who can enjoy summer holidays in Switzerland and the rest of the people virtually starving? If that is acceptable, then fine. We should follow that policy.
TNS: And now to the most immediate issues. How do look at the current food crisis?
KB: There was a mala fide intention to begin with. The Shaukat Aziz ministry (Finance) predetermined the growth rate they want to achieve. So when you increase the wheat output you increase the agricultural sector growth rate. When you do that GDP growth rate will go up.
There was something else that was suspect here. The estimate for the wheat crop is made after the rains, but this time they made an announcement of a bumper crop before the winter rains and, based on that announcement, allowed a certain party to export wheat to India, apparently half a million tonnes. After that transaction was complete, the rains came and news began to come in that we’re going to have a normal crop. A normal crop means that you import two million tonnes of wheat which is a routine.
Because they had earlier announced a bumper crop, they took time to admit that they were wrong. So the LC (Letter of Credit) for import of wheat was also delayed. Once wheat had been exported and we had a normal crop, the wheat market knew there was going to be a shortage. Now stockists everywhere in the world will behave like that that when they know there is a shortage and prices can go up, they withhold their stocks. They’re not evil people. This is normal behaviour and this is what a market economy will do if there is a shortage.
They made another mistake. Instead of placing an order for 2 million tonnes of wheat, they placed an order for 1.5 million tonnes of wheat first. Then they realised this mistake and placed another order for half a million tonnes of wheat. After their first order, the signal had already gone out in the market that shortage will remain. So they continued to withhold stocks. If they knew that wheat was arriving and prices will fall, they would have released stocks and that would have taken care of the shortage.
TNS: Prices of other commodities have doubled alongside?
KB: There are two components of economic management; fiscal policy and monetary policy. The State Bank is following a restrictive monetary policy while the finance ministry is following a liberal fiscal policy, one is contradicting the other and neither of them is effective. The government is borrowing heavily from the State Bank for its expenditure. That means the money supply increases. On one hand, the State Bank is trying to restrict money supply by increasing interest rates, and on the other the government is raising the money supply. When money supply increases prices will rise.
There is another reason for increasing food prices. Our agricultural yield per acre is constant or declining for most crops because we are not investing in our land, in supporting agriculture. The government’s ad hocism is causing problems. When the government suddenly imports tomatoes from India, the market is flooded with imported tomatoes and prices crash. As a result the farmer will not grow tomato next year, shifting the crisis to the next year.
For eight year Shaukat Aziz has mismanaged the economy like no other finance minister. Because Shaukat Aziz knew he does not have to go back and ask people for votes, he couldn’t care less about what he did to the economy. All he had to show for was the stock market performance which is only hot air.
– Farah Zia, Shahzada Irfan Ahmed and Aoun Sahi
Photos by Rahat Dar
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