Kaiser Bengalis Lecture On Pakistan Economy

Dr.
Kaiser Bengali
Presentation on
'Making sense of Pakistan and its economy'

For
The Green Economics & Globalisation Initiative
SHIRKAT GAH
And
PEOPLE'S RESISTANCE
December 2007 at Shirkat Gah Office, Karachi
Blog Link for Discussion
Let me begin by thanking Shirkat Gah for arranging this opportunity and you all for
being here to exchange views. I am happy to see so many young faces here. This
represents a change. I sensed the first indication of change in October 2005 when the
earthquake hit. Young educated people, many of whom had never washed a spoon in
their own houses, lived in tents and helped the victims. I think that something
happened to bring a generation alive and we are seeing it again. In the current
movement today, we may agree with a lot of things, not agree with a lot of things, but
the point is that you are concerned, and that has been missing for 20 years, and 20
years is a long time. It's a whole generation of people; people especially those in their
30s today, who in their own student days and youth were completely unassociated
with any social issues. So I find this a very refreshing change and I consider myself
fortunate that I am being able to interact with you today.
Now to the subject of economics. I know most of you do not have any economics
background, but I will try to be simple. My ability to speak economics in rather
Dr. Kaiser Bengali's lecture in Dec '07 on Making sense of Pakistan and its Economy
by People's Resistance & The Green Economics & Globalisation Initiative - [ Blog Link ]
simple language developed because when I started my career I started working with
trade unions and I had to explain economics to people who were at best matriculates
or even less, and that's where I developed this ability to talk economics in the lay
person's language. I guess there was some kind of a social consciousness. I had no
need to work with trade unions; I could have done consulting for the World Bank, or
joined the World Bank. In fact I had an offer from an international bank. But like you,
I thought I have to work with people and it is working with people that gave me the
ability to speak the language of the people.
You have heard for the last 5 years at least, stories of economic miracles. Why is it
that this miracle has begun to evaporate overnight? What kind of miracle can it be
that is not sustainable? When General Musharraf made his speech on 2nd or 3rd
November 2007, one of the things he cited as a reason for taking this extreme action
was that the economy was going down. This was the first time anyone from the
government side had admitted that the economy was going down. Otherwise when we
were saying that the economy is not doing well we got very angry responses. So now
we see that there are so many problems with the economy; there is a wheat crisis and
flour is simply not available. It was in the newspaper a few days ago that oil stocks are
down to less than a week. Why? What happened? Why are oil stocks down? There are
other crises. Power of course is not there, we are all living with power shortages and
power breakdowns, exports are stagnant and some categories of textile exports have
actually declined. Our inflation is out of control and even the rich are feeling its
pinch. So why has this happened all of a sudden? Where has the miracle gone? Where
was the miracle?
I want to talk to you further about this, place all of this in a context, because you may
pick the wheat crisis, you may pick the sugar crisis, you may pick the foreign
exchange crisis, or power crisis and look at it individually, but it is good to put all this
in a certain framework, and see whether there is a common denominator to all that is
happening.
Let me start very early; first of all there is a comparison with India all the time. India
has a good democracy, we don't. India has this economy, we don't. I think this
comparison is not valid. It is not valid because India and Pakistan are two different
countries, were two different countries. We were administratively under British rule
together, there was no border, we didn't need passports to come; but we were different
countries. Why I bring in this aspect is because it has an impact in discussing the
development process in Pakistan.
The first British individual to set foot on the Indian subcontinent was in 1643, it was
an Englishman who came to Surat, then a river port in Gujrat state of India. Surat port
has since silted up, but it was a thriving port at that time. Bombay as we know today
didn't exist. In 1643, Aurangzeb was in power and that is when the first Englishman
set foot here. Then of course there was the history of the British coming in and the
East India Company being formed and so on and so forth. The first formal British
presence in India came with the establishment of Fort William in Calcutta in 1758.
They also set up a Fort William College, where they enrolled Indians for education in
English. So, a kind of a development process also started of English western
education, technology and so on and so forth. Of course a lot of things happened
afterwards, municipal corporations were set up, railways were created, government
structures, modern government structures were set up, and so on and so forth.
Now remember 1758. 1643 was when the first British individual set foot on south
Asian soil, but 1758 is important as the beginning of formal presence. The first
British formal presence in what is now Pakistan came 85 years later, 85 years after
1758, when the British conquered Sindh in 1843. In 1643 the first Englishman sets
foot in Surat; in 1843, 200 years later, the British establish themselves in Sindh. The
British occupied Punjab, which at that time included most of NWFP as well; even
Peshawar was part of Punjab, 91 years later 91 years after Fort William was
established in Calcutta. And Balochistan was taken 114 years later.
Why I am giving these differential dates is because British presence in our part, in
what is Pakistan today is less than 100 years, whereas British presence in what is
India today is more than 200 years. In those 200 years, what is India today was the
centre of the British Empire, in those 200 years they introduced railways, they set up
industries, they set up modern governance structures, other modernizing values,
democracy, etc. They even fought off evil social practices, like for example, 'suttee'
the practice of burning the widow alive with her dead husband. Suttee was very
forcefully banned by the British and they fought it. There were Hindu extremist
conservative elements which wanted to defend Suttee and they fought the British
because they said that 'the British are attacking our religion', but the British made
sure that this was eliminated, and of course they had support from Indians and they
eliminated it.
What is now Pakistan was the periphery of the British Indian Empire. First of all it
came, let's say, between 85-118 years after Calcutta and because it was the periphery
they didn't take much interest. Apart from 3 or 4 towns Karachi, Lahore and
Peshawar there were no municipal corporations, and these were the places where
there were cantonments. And in Karachi they had a seaport and railway lines to help
transport cotton. And till today there is only one railway line that runs from Peshawar
to Karachi, there's no other railway line. So this was the backyard.
Why I am saying all this is because Pakistan's development history starts in 1947.
India's development history started much before. Tata Steel Mill already existed when
India became independent in 1947. As today, information technology is the
benchmark of identifying a country as advanced or not advanced; 50 years earlier, the
steel mill was the benchmark. Countries which had a steel mill were considered
advanced countries. India already had a steel mill in 1947, in 1947 Pakistan had only 6
medium-sized manufacturing plants. There were vast tracks of the country with no
electricity; Dhaka city had no electricity in 1947.
So we begin in 1947, the governments that came from 1947 onwards, lets say in the
1950s, were committed to development. Development was a major objective, they
were acutely aware of the lack of industry, the lack of food production, the lack of
schools, hospitals, electricity, roads, and so on and so forth. They were aware of it.
The whole effort of the Government was to provide these economic assets. In
conceptual terms Pakistan was a development state. The objective of the state was to
promote development, that's what it was, so it was a development state. We'll see as
we go into detail how this development state progressed over the 50's, 60's and 70s.
In 1977 Pakistan ceased to be a development state. From 1977 till today, Pakistan
is a national security state, where national security is the main objective of the
state. Development is no longer the main objective of the state and 'national' is
being increasingly defined narrowly from the perspective of the military.
Whatever the military thinks is national security is national security, and to the
military, the military is national!
This is where I want to start the discussion of the development state versus the
national security state. Then we will see where and how the current economic
problems fit in. As I said we started with less than a dozen manufacturing plants in
Pakistan and they were also medium-sized manufacturing plants. One of them was
Dalmia Cement Factory in Karachi. I remember that factory, it wasn't functioning
even when I first saw it but you could see that it was a very small old-fashioned kind
of factory. The cement factories now are very technologically advanced but that was
the kind of industrialization Pakistan had then. After we became independent,
Pakistan was importing everything: toothpaste, toothbrushes, shoes, matchboxes, just
about everything was being imported because we produced nothing. Even most food
items were imported because we grew little. I remember in 1968, West Pakistan was
not producing bananas; we couldn't buy bananas in Karachi. So that was where we
began, but by the end of the 50's, we were producing a large variety of agricultural
and industrial consumer goods.
Now look at the political capital that was invested into development. First the
government had what is known as the Colombo Plan. The process of planned
development started. The British government said that we are going to give assistance
to former colonies, so a meeting was held in Colombo and India, Pakistan and Sri
Lanka, were invited to come with a list of development projects which the British
Government would finance. Pakistan also went and of course that was the first effort
by the Government to identify where there were gaps.
Of course it was a list of projects. There was very little expertise in the country on
how to do planning. Policy planning and development is not just a list of projects. For
example if you double the capacity of Karachi port today but you don't expand the
transport capacity to transport the goods from Karachi up north, then all these extra
ships would berth at Karachi and unload their goods. The goods would just lie there
because you don't have enough railway wagons or you don't have enough road
capacity for the container trucks to drive through. So development is more of an
integrated process, it's not just a list of projects. But it began with a list of projects.
Then the planning capacity was built up and we developed the first 5-year plan, and
of course there was a lot of political investment in this whole activity. The whole
government, the cabinet, the prime minister were involved in preparing the plan and
identifying objectives, mobilizing resources for the projects that were supposed to be
executed as part of the plan and so on and so forth.
By the end of the 1950s, government offices were built up. In 1947 there were no
government offices in Karachi. You probably hear your grandparents talking to you
about how most government offices were operating out on the street. Residential
housing was created; Pir Illahi Bux Colony and PECHS in Karachi were set up in
1950. Industrial and agricultural output had risen, and in fact by the end of the 1950's,
most of the very basic consumer goods were already being produced in the country
like matchboxes, toothpaste and shoes and some textile units had already come up and
e were producing cloth, etc. So there was some level of development that took place
and we were no longer as deficient as we were a decade ago.
Then came the 1960s. The 1960s development effort moved into a higher gear. First of
all the whole experience with the first 5 year plan: making the plan and implementing
it, seeing the deficiencies, the flaws, the mistakes, and learning from them. Some
people were sent abroad for training and they came back. One of them was Mehboob
ul Haq. You know, he had gone abroad for his PhD, he came back. So there were
some trained people who were now involved in the process of preparing plans. The
fundamental thing that happened was that there was a planning board in the 1950s,
which used to do the planning work with a minister for planning who headed it. In the
1960s, General Ayub Khan who was the President, created a planning commission
with the president as its chairman. So you can see the political importance of this
commission going up. From the planning minister now the president was actually
chairing it and Ayub Khan was a very active chairman.
Ayub Khan promoted development, pushed development. We saw the expansion of

the economic infrastructure on a very large scale. In fact, out of the eight 5-year plans
that Pakistan created only the second was successful which was in the 60s under
Ayub Khan. It was successful in the sense that most infrastructure project targets were
crossed. If they said we would produce 500 mw of electricity, they produced 550 mw.
If they said we would create x miles of roads they created x + 1 miles. The
construction of dams started. In 1960, there was an agreement with India that was
called the Indus Water Treaty because of which Tarbela and Mangla dams came into
being. And the whole objective of coming to an agreement with India on water was
driven by economics, not by military considerations. -- Because water is necessary for
agriculture. Otherwise agriculture would have died in Pakistan if India had stopped
the water and they have the capacity to stop the water. New canals were dug out of
these dams.
Pakistan graduated by the end of the 1960's from a mere producer of consumer goods
to a producer of intermediate goods. These intermediate goods are those which are
made for use in agriculture and industry itself, for example fertilizer. We don't
consume fertilizer but it is produced as an input into agriculture. These are called
intermediate goods. So by the end of the 1950s Pakistan was producing a lot of
consumer goods, and by the end of the 1960s we were also producing a lot of inputs
that went into the manufacture of consumer goods. Previously these inputs were
imported, now we began to manufacture ourselves. So, there was a marked upwards
shift on the development level of the country.
Then came the 1970s. The 1970s represents the big push. Although the 1970s are very
maligned but completely wrongfully. In fact, I consider the 1970s to be the golden
period of Pakistan's economic development and I'll tell you why. Economic
development has to be measured by how you are creating economic assets. If you look
at yourselves and your own lives, a lot of you have completed your studies and
working, what do you do? You create an asset from which you can derive an income
in future years. The investment that has been made in yourself in terms of your
education will give you salary or an income for the rest of the years. The house that
you build for your own living, you're actually earning rent, you're not paying rent
which means you're saving that rent, so that's an earning. In economics we call it
imputed rent. -- So economic development has to be measured by the extent of
asset creation that takes place. It is this creation of assets that gives you a flow of
income in the years to come.
Asset creation started in the 1950s and accelerated in the 1960s. Several factories
came into being, power stations were set up, roads were laid, Karachi Port was
expanded with more berths set up. So there was this big push, acceleration of the
creation of economic assets.
But the 1970s saw an even higher push. For the first time in 1970s, capital goods
industries were introduced, very large projects were introduced, and the basis for
future growth was created. The steel mill was set up for example. If any of you are
ever interested, you can read the feasibility reports of the steel mill, you'll actually see
why it was created. The plan for the steel mill was to create an engineering hub in
Dhabeji and Gharo. They are small towns near Karachi, as you go towards Thatta.
That steel would be produced here and this steel would become the basis of the
engineering industry that would be set up there. It didn't happen, but that was the
objective. So, in the 70's we saw the steel mill come up. We saw Port Qasim created
as an alternative port to Karachi. We had the Indus Highway constructed. A heavy
mechanical complex and heavy electrical complex, both in Taxila, were created.
These were complexes that could manufacture machinery.
First, in the 1950s we began to produce consumer goods, let's say toothpaste. In the
1960s we started producing the ingredients for toothpaste and in the 1970s we started
producing the machinery that would produce toothpaste. So we see the graduation
that took place of our economic capacity over this period. And this is very significant
because if you look at data and if you plot industrial production, you will see that
there is a line which is sloping upwards gently from 1974 to 1982 and then shoots up
and continues upwards gently again. What happened in 1982? The steel mill started
production. So when you create an economic asset you have an intercept jump in
production that provides income for years to come.
The 3-decade period of the 1950s, 1960s and 1970s is the period of the
development state. The state's objective was to develop the economy, and there was a
lot of political capital invested into it. The Colombo plan, the first 5 year plan,
creation of the planning commission, the second 5 year plan, the third 5 year plan,
and so on and so forth. Let us see what happened to the economy: per capita income
rose 10 fold; food production tripled; fibre production went up 4 fold; manufacturing
output increased 40 times; electricity output increased 35 times; telephone
connections per 10,000 people rose 10 times. Primary enrolment rose 5 times; but
population per doctor declined 200 fold. I mean one doctor treats how many
people? So what you do is you take the number of doctors divided by population so
you know one doctor is treating how many people, it declined 200 fold. Population
per nurse declined 24 fold and we can go on with these statistics.
Now of course for those of you who deal with numbers, if you have a low base then
obviously the percentage will be very large, and this of course is the reason for this 10
fold and 40 fold increases, there were only 6 industries so if another 6 came into
being there was 100 percent increase, 100% looked very impressive but it's only 6
more factories. Nevertheless having said that you cannot deny that there were
absolute increases in the economy, and this increase did not take place by itself; there
was very conscious effort on the part of the state to push the economy forward.
We can see the commitment of the state to development from one example of the
1970s. We have a budget and there are 2 parts to the budget. There is a recurring
expenditure which is salaries and other things that you pay out and then there is
development expenditure. So there is a non-development budget, called the current
budget, and a development budget which is basically money for building bridges,
roads, ports, schools, hospitals, power stations and so on and so forth.
The rate of growth of development expenditure, between 1972 and 1977 was 21
percent per annum. So every year the budget went up by 21% and the GDP
growth rate at that time was about 5 percent; which means that development
expenditure was 4 times the GDP growth rate; which means that the surpluses
that were being generated by the economy was being ploughed back into the
economy to maintain the infrastructure and to expand it. This reflected the
commitment of the state to development. This is what the development state is.
In 1977 the development state seized to exist. The national security state took
over. Of course in the 1980s there was also very high growth rate. It picked up even
higher than the 1970s. We were in the 6 % range, rather than the 5% range. But this
growth happened for largely external reasons. -- One being the investments that were
made in the 1970's, like the construction of the steel mill started in 1974 but it started
production in 1982, so obviously growth increased in the 80's. So a lot of the growth
that was taking place in the 1980s was because of the investment that was done
in the 70's. The fruits were being plucked off the trees that were planted in the
1970s.
Secondly, there was inflow of remittances from the Middle East. The oil shock took
place in 1973. That doesn't mean that Pakistan's remittance income started in 1973,
because it took Saudi Arabia and the other gulf countries almost 4-5 years to put their
institutional framework for starting development. The development process in Saudi
Arabia and the rest of the Gulf States started towards the end of the 1970s. And the
first remittance flow into Pakistan started coming in 1978 and peaked in 1982. So
1980s also benefited from the flow of remittances, very large remittances coming in.
Thirdly, there was foreign assistance coming in because of the Afghan War. They
were historic because never before in Pakistan's history had there been that level of
foreign assistance coming in.
And fourth, the government in 1980s was borrowing heavily from banks and printing
money. And of course because of the Afghan War and the favourable view
America had of Pakistan, the IMF did not complain. Otherwise, IMF always
shouts when you print money, but they weren't complaining then.
Large debts were created, to the extent that if we calculate debt-to-GDP ratio, namely
what percentage of your national income is indebted. In 1977 the debt GDP ratio
was 24%, or 24% of our GDP or national income was indebted. In 1988 it had
jumped to 48%, this was the extent of indebtedness that the Zia government led
us into.
But the more significant thing about the 1980s, during the Zia regime, is that,
compared to the rate of development expenditure of 21% in the 1970s, in the 1980's it
dropped to 2.7%. Which means that the surpluses that were being generated in the
economy because of the output that came out of investment in the 1970s, because of
the steel mill, because of remittances, because of foreign aid, even by printing money
or loans was not being ploughed back into the economy. We were not reinvesting.
You see you have this beautiful building where we are sitting. It's a very old building,
built more than 50 years ago, or maybe before independence. But look at this
building, it's beautiful. It's beautiful because money is invested in maintaining it.
Capital has to be maintained. If it is not maintained then tomorrow a tube light will
go out, then another; then the glass will break and then the pigeons will come in and
making a nest inside. This is what happens when you leave a house open. But the fact
is that this has not happened, this is what is called replacement investment. You
have to incur replacement investment to maintain your infrastructure and then of
course you have to invest in expanding your infrastructure and create new
infrastructure.
Neither of the two was happening in the 1980s. We had a mere 2.7% growth in
development expenditure. This 2.7% growth rate of expenditure was half the average
GDP growth rate; whereas, in the 1970s, the rate of growth of development
expenditure was 5 times the average GDP growth rate. Here it was half the GDP
growth rate. So where was the money going? Money was being generated, the
economy was booming, but where was the money going? The money was going into
defence. Against average 6% GDP growth rate, defence expenditure during the 1980s
was going up by 9%. So unlike in the first phase -- 1950s, 1960s, and 1970s --
where the economic surplus that was generated was ploughed back into
expanding and strengthening the economy, in the 1980's the economic surplus
that was generated was ploughed into the military's expansion rather than the
economy's expansion.
This is what I mean by the shift from the development state to the national
security state. Because there was a need for the military to strengthen, because there
were wars to be fought in Afghanistan, wars to be fought in Kashmir, and actually
Zia's generals were dreaming about extending the war into Central Asia, that they also
should be liberated from the Russians; this of course was happening before the Soviet
Union collapsed. But they were already talking about it and there were plans of taking
the war from Afghanistan into Central Asia. So the whole focus of the state was not
on development of the economy but on all these military adventures.
I worked in Afghanistan during the Taliban days where I came to know that
Pakistan government was paying the salaries of the Taliban government. We
were putting money in Afghanistan. When you walked into Kabul, only 1% of the
buildings were standing, the rest was all rubble. Can you imagine driving down
Clifton road with rubble on both sides of you? All you see is rubble, no building,
that's what Kabul became. And there was great potential for Pakistan to invest in the
development of Afghanistan. In fact I was proposing at that time, that Pakistan should
give Afghanistan 100 million dollar export credit. That means that Afghanis can
import things from Pakistan and the Pakistani companies will be paid by the
government of Pakistan, and the Afghan government can pay the Government of
Pakistan 25 years later, 35 years later, according to the agreement. If you like you can
write it off latter on. But imagine the demand for Pakistani products that it would
have generated. If Pakistani industries were to build only buildings; cement, tiles, tube
lights, bathroom fittings, doors, hinges, switches, there would be a demand for all
these things and their production would have picked up. And of course our economy
would have done well. This was the 1990s, but they didn't do that.
The military was in charge of Afghanistan and they gave money to the Taliban to
buy arms, they paid the Taliban government salary but they did not do anything
that would help Pakistan's economy. Because their entire focus was not
development at all; their focus was to support the Taliban because they were
anti-India, and because they provided a so-called "strategic depth". And as long
as they provide strategic depth, and as long as they don't provide the Indians any
foothold, that's fine with us. So the entire mindset was military. It was all about
military strategic depths and military objectives; development didn't figure at all.
Even when they were making public statements that this was an opportunity, they did
not take it up. They were not listening because this was the national security state to
them, national security issues, and as I said at the outset, national security is
increasingly narrowly defined. Military's interest is now national interest !
So what happened since the 1990s? When you don't invest, everything begins to
creak; the infrastructure began to crack. And in the 1990s the growth rate began to
decelerate. The governments in the 1990s also could not put money into investment
and the rehabilitation of infrastructure because the debts that were incurred in the
1980s matured in the 1990s. And both Benazir's and Nawaz Sharif's governments
had no fiscal space as they had to repay Zia's debts. Every time the economic
team met, the economic team meeting included the Finance Minister; the Secretary
General Finance; the Secretary Commerce; Secretary Economic Affairs Division and
Deputy Chairman, Planning Commission that's the economic team all they
discussed was when was the next payment due, and where will that money come
from?
The one positive thing that happened in the 1990s was that a very large power
generation program was put into place: thermal power, the IPPs. It became
controversial because it became a political football. But the fact is that till about 2005
the power that was being provided to Pakistan was because of these IPPs. The crisis
that we have today would have arisen I think in the late 1990s if these power plants
had not come in.
Then came 9/11. A lot of our debt is rescheduled; meaning: don't pay now, pay 35
years later. Pakistan saved $1 billion a year in payments. Now if you have taken a
loan and you are having to make payments to the bank, and because of that you're
skipping one meal a day because you don't have the money because you have to repay
your debt payment. And the bank says don't pay me now, pay me 35 years later,
not only will you have your third meal a day but you decide you will also party
because you have a lot of money. This is what happened to Pakistan; suddenly there
was a lot of money.
Now where did this money go? We've actually documented this. Year after year
between 2002 and now, they always overshot current expenditure, meaning
defence and government expenditure, and till 2004 failed to meet development
expenditure targets. Now this is very poor economic governance.
The Musharraf regime was a continuum of the national security state.

Development is still not an objective. But they needed to show that they were doing
well. So what they did was that they engineered a credit-financed consumer driven
growth. See what has happened.
Growth rates were very low till 2003, 3 4% maximum. Then came consumer
financing. You could buy a house, a car, a fridge, a toaster; you could take a personal
loan, even take a loan for a vacation. You can have 6 credit cards and spend, spend
and spend. Obviously demand went up. When demand goes up, GDP growth rates
improved, went up to 8 9%. But it was one-legged development, development that
was standing on one leg and shaky.
What is GDP? GDP is the sum of value added. Value added comes from four sources
-- all the wages that are earned by employees and workers, all the rent that is earned
by property owners, all the interest that is earned by owners of capital and all the
profit that is earned by businessmen. You add these four things and that becomes
national income Other than wages, all the other three -- rent, profit and interest -- they
are usually earned by property owners. So, GDP will go up if only wages go up or if
only profits go up. Wage-centred GDP growth means the increase in national
income is going to wage earners; profit-centred GDP growth means the increase
in national income is going to property owners.
Let us now examine GDP: it grew at 8.4%, but banking sector GDP grew at 30%. If
in this group you are all 20 years old, and I am 50 years old, the average age will be
well above 20. You remove me and your average age drops to 20. So, one sector
growing at 30% pulled up the average GDP growth rate. But that was not the only
sector that pulled up the average GDP growth rate. Because of consumer banking you
could also buy cars, suddenly everybody was buying cars; we can see the traffic on
the road because of that. The automobile industry output also went up. The
automobile industry for 3 years running was growing at 40-45% per annum; that shot
up the large scale-manufacturing sector from 7% to 17%.
Now of course GDP is looking very good, but it's looking good because consumer
financing allows banks to make exorbitant profits. Banks are giving money for cars,
so automobile firms are making exorbitant profits. But what will happen if you
remove consumer financing? Nobody will buy cars, so the automobile growth rate
drops. Banks are not making the same profit, so the banking sector growth rate drops;
in turn the GDP growth rate drops. So they created a bubble, which was standing
on bank credit. You remove bank credit and everything else collapses. Then the
other aspect of this is that by bank credit you only increase the consumption
expenditure. Bank credit was not going into investment, bank credit was not going
into setting up factories, and bank credit was not going into promoting exports.
That is why if you look at another few ratios that we have, one is a tax GDP ratio that
out of your total national income what is the proportion of tax collected? The total tax
collection in Pakistan is equal to about 10% of our GDP. That has remained constant.
So if the economy is growing so fast why aren't taxes increasing? Our export
GDP ratio is constant. In fact it has slightly declined. If the economy is doing so
well why aren't we exporting more? -- Because the whole stress of the growth
was consumption, rather than investment or expansion of the economic
infrastructure, and the failure to think of infrastructure. Imagine, Shaukat Aziz
every week would say so many refrigerators have been sold! so many air conditioners
have been sold and so on. He completely forgot that fridges, air conditioners and deep
freezers work on electricity. Since 1999 till mid-2007, the government did not put in
investment to produce even one mw of power. When this huge crisis blew up they
started searching all over the world for thermal power plants. And when the
government in the 1990s, the People's Party government, made agreements with
foreign power producers to provide power at 6 cents per unit there was a hue
and cry. But now they have made agreements for 11 cents a unit. But we have no
choice right now, we have a power shortage and just we have to pay whatever
price they're asking for otherwise there will be no power.
These are all examples of a mindset of a state that is not thinking development. If they
were thinking development they wouldn't make these blunders. They would have seen
that if production is going up, then credit should go into supporting that production.
What consumer financing has done is that it has increased our import bill. Cars
are imported, they are assembled here. ACs are imported but only their housing is
built over here. We are technologically a very deficient country. We don't know
how to make rickshaw or taxi meters; we don't know how to produce simple office
equipment. The office material that we have, the staplers, the pins, we don't make it
here, we import everything. We have made no investment in improving the
technological capacity of our people.
And this whole business of privatising education. I teach in a private university. You
have studied in private universities, some of you continue to study in private
universities but look at the implication of this. The private sector will only respond to
profit and legitimately so. We are not condemning the private sector for it: that is
what the private sector is for. But there are certain social objectives that also need to
be met. Look at all the private universities. Even the National University of Modern
Languages (NUML) is offering an MBA! There is the Sindh National College of
Textile Technology, it's offering an MBA. We have no centre of excellence for
mathematics for example in the private sector. Why? Because after you do an MBA
you will get a job in Citibank or ABN AMRO or ICI. They are paying a lakh rupees,
one and a half lakhs, maybe start at Rs. 50,000 or 75,000. So you as a student are
prepared to invest one lakh rupees per year or semester to the university because your
returns will be very quick. But if there is a private institute which charges Rs 100,000
per semester to teach you mathematics and you graduate with a math degree, you will
go to Karachi University to teach and you'll get, say, Rs 25,000 a month at the most.
Who else will hire you?
So privatised education will not produce mathematicians. But if you don't have
mathematicians you won't have scientists, and if you don't have scientists you
won't have technologists, and that is the reason Pakistan is not producing any
technology. We all use mobile phones but did we produce the technology for mobile
phone? We don't even have the capacity to repair anything that goes wrong.
When there is a serious error, all the technology companies call people from abroad
to fix it. To the extent that in some Pakistani factories, people are called from India to
come and fix the problems. And this is the level that we have fallen to.
What we've done is that by producing a lot of MBA's we are producing salesmen
and salesgirls for foreign producers of technology, but we are not producing
technology ourselves. We can continue like this, but if we do, we will become a
satellite economy of regional powers. We will become a satellite economy of India,
China and Iran. But if we want to change that then we have to dismantle the national
security state and recreate the development state.
We have to recreate the era of the 1960s and the 1970s in particular. Because only by
a state and functionaries of the state who are always thinking about what they have to
do for the development of the country, only then can we become a viable economy.
Otherwise, we are sinking. All these statistics that you see are hollow, they don't
mean anything. That is why the economic miracle of the last five years is beginning
to evaporate before us. Everybody now talks about the economic crisis, even those
industrialists and businessmen who were ardent supporters of General Musharraf and
Shaukat Aziz. When you create something that has no basis, it cannot last; we did not
create economic assets and assets created in the 1960s and 1970s are deteriorating.
Look at what is happening. About two years ago, a railway bridge collapsed near
Hyderabad, called the Runn Pathani Bridge and for 20 days Karachi was cut off by
rail from the rest of the country. Imagine the scale of the strategic disaster that your
port city is disconnected from the rest of the country for 20 days. And only a few
months ago, 2 berths at Karachi port collapsed into the sea. Now imagine the rust that
must be accumulating in these bridges and berths for years. That they were not being
repaired, that they are not being painted.
A bridge is built in Karachi, General Musharraf inaugurates it, and two weeks later it
collapses. I mean look at the degeneration of the institutional infrastructure. That we
cannot build a bridge which the president of the country inaugurates and it collapses
in 2 weeks. And this will continue to happen, this is just the beginning. Because our
economy is not the objective of the state.
Now no industrialist can set up an industry without setting up his own power plant.
The unit cost of electricity is very high if you're producing it yourself. If the unit cost
of production is high then you can't compete it in the international market, because if
your cost of production is high the cost of your product will be high. Other countries
are producing the same product, same quality, at cheaper costs. Now we have a 15%
sales tax. That's extremely high. You can't have industry running at 15% sales tax.
Energy cost is very high, indirect taxes are very high. And then there is a very high
cost of bribery, for almost everything. An industrialist I know got so fed up paying
bribes that he actually shut down the factory and went away to Canada and set up a
factory there. He had hired a person exclusively for dealing with these bribe-seeking
individuals. He said that he could not deal with them on a daily basis. He had a
salaried person whose job was to negotiate bribes, make a deal and then he would
come to him and say that they had agreed on a certain amount. And every other week
somebody from somewhere would turn up and say that they also wanted a share. Now
that of course has to go. But how will it go? It will only go if the highest authorities in
the country take strong measures to make sure that their officials are not fleecing the
industrialists or other business houses.
Even education is riddled with bribery. The positions of who tops, who comes
second and who comes third in the matric exams, these positions are sold. A boy or a
girl who has done excellently and deserves to come first will not be declared first
class first because her or his parents cannot meet the demand for a bribe. Note that
the first, second and positions are usually from the same school. How is that possible?
-- Because the school gave money. And I know this is happening because there is
somebody who runs a school in Nazimabad who actually came to me and said that
this is what these people have said to me. She said, they came to my office this
morning and said give us so much money and I will declare your child first class first.
They wanted me to do something about it.
Now, when you reduce the state to doing this then what development can you expect?
Because this is not a development state, it is not the objective of the state to develop.
State functionaries are only interested in their own pockets. Higher state functionaries
are playing all kinds of games, whether in the country, in Afghanistan, in Kashmir or
in other places. We have an army which is largely a mercenary army now. It's a
corporate empire. So you have to change that. And unless you change that there will
be a crisis daily.
You know this wheat crisis that we have today is completely manufactured. How did
it happen? Wheat is harvested in March. The assessment of how much wheat there
will be is done after the winter rains. And usually their assessment is correct. They've
been doing it for half a century, so it's correct within a certain margin. This time the
Islamabad Ministry of Food announced a wheat crop before the rains. I spoke to the
Director of Food in Sindh, and he said we have not sent the estimates. We don't
know from where they took it and announced it. Now based on that announcement
of a bumper crop, they allowed wheat export. After the rains it began to filter out, in
bits and pieces, that there will not be a bumper crop. Once it became clear that it was
not a bumper crop, hoarding started. Hoarders are not evil people. That's how the
market operates. When you have a shortage there will be hoarding. The shortage got
compounded. And between January and March, in any case, Pakistan survives on
imported wheat. The Letter of Credit for import of wheat had to be opened in
November for the wheat ships to arrive at Karachi port in January. But the ministers
were too busy trying to bail out General Musharraf from the judicial crisis he had
started.
If you have a development mindset, if you have a welfare mindset, then you will
certainly not do this. There are other avenues of making money. Everyone makes
money, but you don't make money by starving people of wheat and their bread.
But this is what will happen in a national security state because public welfare is
not an objective.
(Consolidated) Question from the Audience:
Practically, what can we do?
KB: Khrushchev and Zhou Enlai were having a meeting and Zhou Enlai said that we
have both betrayed our classes. Because Khrushchev came from a very poor family
and Zhou Enlai was saying that you have betrayed the poor. Zhou Enlai actually
came from an upper class family and he was saying that I also betrayed my class. Che
Guerra betrayed his class. He came from a wealthy family and qualified as a surgeon.
He could have been a millionaire by practising as a doctor, but he decided not to. You
have to step outside your class to first understand what is happening.
The elite has been very clever. We have created a kind of educational apartheid here.
There is one group of people who are English medium educated; we are. That is why
I am speaking to you in English, although there is no need to, as all of us understand
Urdu. I could have spoken to you in Urdu. And there is another group of people who
either send their children to Urdu medium schools or to madrassahs or not at all. We,
those who have learnt English, those who are proficient in English, hold all the levers
of power, in and out of government. You can't be a general if you don't speak English,
or a Civil Servant, or a judge or an ambassador, university professor, you can't do
business because everything is in English. We have effectively pushed the non-
English speaking people which could be 80% of the population into a kind of a
ghetto.
And we have created two Pakistans that way. Those of us who are the English
speaking type we also live in a different part of Pakistan physically. We live in
Defence Societies and Clifton, in Model Colony and Cantonments, E7, F6 and
Hayatabad. The rest of the people live elsewhere. We have of course our own
educational institutions. I don't think anyone of us came here by bus. We all came by
car and most of us came individually driven. Most of us don't know what it is to sit
inside a bus.
The elite have also been extremely selfish. If there is no power they will not go to
KESC and say let's reform KESC. Why is there no power? Let's have generators. If
you don't have water, you have water tankers coming in. If you don't have law and
order you have security guards coming in. Instead of finding collective solutions, the
elite have found individual solutions for themselves. But to what extent will you do
that. To what extent can the elite protect itself? Now, they can opt out. They first went
to live in Defence, but when there was a robbery, they moved to Army Housing
Estate, as it has guards. But how long will you protect yourself? You know, you are
not safe anymore. You cannot create cocoons to hide in.
I was once robbed at gun point of my phone and my money. All the time, I kept
thinking: this middle-aged man, wearing a pant and a tucked-in shirt, had a belt and
was wearing glasses. He must have had a white collar job. And I was thinking:
through which route of life has he come that he is now looting people on the road?
And I still think about it. This man must have been a respectable person supporting
his family and now he is reduced to robbing people on the streets. I think you need to
step out of your class and try and reach out to them. And meet them, talk to them live
with them, travel in buses.
I think bus travel is a great thing, you will learn so much from it. If you travel in a bus
you suddenly become sensitive to what is happening. A man is quarrelling with the
conductor for 50 paisas. What is 50 paisas? We throw away 5 rupees, even 100
rupees. He is fighting for 5 paisas? Why? Because 50 paisas matters so much to that
person. But do we understand that? We have created a world of our own. We simply
do not know the rest of Pakistan.
When I teach I always take my class for a field trip. In my last class, I took my class
to Ibrahim Hydari. Most of the students were shocked out of their wits. They simply
couldn't imagine that such poverty could exist. We need to break down this barrier,
this Pakistan of the elite that we live in. I call it Pakistan of the "Ashrafia" and
Pakistan of the "Awam". We have to break down this barrier. And you will need to
break this down by actually going there, meeting students from there, go across the
Lyari, sit with them, talk with them, do things with them; learning their life,
experiencing their lives, spending time with them.
You don't have to be poor to help the poor. By becoming poor you are not helping the
poor. There were people like that: we will live like the poor, expressing our solidarity.
But how would it benefit the poor? But the thing is that you have to be concerned
about the rest of the society. If you are not then it will come and get you. You can of
course emigrate, it is the easy way out and for some people they couldn't help it.
Those whose children got kidnapped, then they couldn't live here. There was a time
when company executives abandoned their Mercedes and travelled in Suzuki FX,
because there was a danger of kidnapping if you were in a chauffer-driven car. There
was a time when the guests and the bride did not come wearing any jewellery. I think
by now we all know, either if you have not yourself experienced it, you know
someone very close in the family or friends, who have experienced a very horrifying
thing that has happened to them. We have all gone through it.
I think this is a great country and let me make this final statement. I am saying this
with full authority and responsibility. Pakistan is a resource-rich country. We can
become a developed country like Portugal, the least developed European country. We
can become a country like Portugal in 20 years. We can have zero poverty, zero
unemployment and zero illiteracy. Illiteracy we can wipe out in 5 years, it is possible
because we are not an overpopulated country. We talk about a high population growth
rate but we are not an overpopulated country like India or China or Bangladesh. India,
given its present socio-economic structure, cannot abolish its poverty even in 50
years. India will become a big economic power but will not be able to abolish poverty.
We can eradicate poverty in 20 years, we can achieve effective literacy in 5 years. All
these are doable things. We can become a strong economic power in this area. We can
become a respectable country. We can actually give aid to street children of Bombay.
All this is possible. But we have to first become a developed state ourselves. Today,
we are like a factory most of whose revenue is spent on chowkidars and there is no
money left to buy raw materials or spare parts. That factory will close down. Pakistan
is like that factory. We have to change it. You have to change it.

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Dr.

'Making sense of Pakistan and its economy'

December 2007 at Shirkat Gah Office, Karachi

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Ayub Khan promoted development, pushed development. We saw the expansion of

The Musharraf regime was a continuum of the national security state.

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