Before we get into the specifics, it may be prudent to discuss the global re-emerged emphasis on leading recoveries through micromanagement successes. Experts caution that if ignored, micro instabilities can very quickly ruin any illusions to reaching macroeconomic stability and the modern-day economists when discussing the evolution of economic policies argue that macro stems from micro and not the other way round; Meaning if there were to be no micro successes then there exists no need for macromanagement (No wonder the US Fed under Mr. Bernanke works so hard to sustain the myths of US micro delivery success of the financial world, the likes of Bear Sterns, AIG, and others) . Such is a notion, which also quickly needs to be registered with the two current teams (one group consisting of academics and purely banking economists and the other a mix pot of technocrats) formed by the Pakistan government to advise it on economic affairs and hopefully rescue the country from the present economic impasse.
Given Pakistan's high debt burden, a negative cash flow, a large and rapidly increasing population, perhaps the only way forward is the one based on export-led recovery. Countries, which not long ago were in a similar situation like ours have successfully adopted this stairway to the top, e.g. India, China, Brazil, Thailand, South Korea, to only name a few. More recently, we see Bangladesh consciously adopting the Export Focus model by ensuring that its industry remains cost competitive and in turn churns out both the much-needed foreign exchange and employment opportunities. For a country that grows no cotton, Bangladeshi textile exports have overtaken those of Pakistan, their export in knitwear and garments alone is bordering around the $10 billion per year mark and in terms of new spindles installed it has consistently been the fastest growing spinning capacity in the world over the last five years. On a closer look we see that there is no rocket science involved in how the Bangladeshis have managed this, as their achievement hinges on the basic formula of providing regular and cheap energy to its industry (pricing industrial power at about Rs.1.50/unit, courtesy their new found gas reserves), maintaining an industrial environment that is suitable to productivity and production and minimising state interference in businesses to avoid unnecessary distraction cum burden on the entrepreneurs.
India also has been no different. Realising the sub-continent's DNA tilt towards creative individual brilliance rather than collective disciplined team-work, the successive governments during the last two decades promoted a culture of corporate growth, recognition of corporate heroes and facilitating the national manufacturing base like never before (perhaps even compensating for the lost years under the socialist bent). Like China, even in India the financial institutions were deliberately kept under tight control by the state to make sure that not only does the industry get access to competitive credit but also that the banks do not make abnormal profits by siphoning crucial funds into unproductive but high yielding sectors of consumer finance. I remember that in the days of Shaukat Aziz the government functionaries and the local bankers used to boast about how developed the Pakistani financial institutions were, the profitability of the Pakistani banking sector, and how our financial sector was outperforming its counterpart in India. My response even then, which never went down well, was that so what? By having an unrealistic spread one might attract foreign players into our banking market for search of quick returns, but in the process it would kill the industry and in turn dramatically retard the crucial trickle down process of growth to the masses. Banks should serve the national industrial base and not the opposite. Look where India and China are today in terms of Industrial growth, foreign exchange surpluses and global presence, while we in comparison stand dumped.
Important prerequisites to developing exports are to ensure an uninterrupted power supply at regionally competitive rates to the export industry, removal of all unnecessary and non-productive levies on them and also on the ones that feed them their main raw materials for onward exportable value additions, and the creation of an environment that encourages growth through innovation (entrepreneurship). Such facilitation should not be confused with subsidies. No one is asking for the government to dole out cash grants, but simply to invest in the exporting industry what it otherwise would be spending on non-recoverable expenses. For example, trade deficits invariably lead to
(a) the need for additional government borrowing,
(b) weakening of national currency.
A rough calculation for the fiscal year 2007-08 would tell us that the increase repayments in rupee terms due to our currency weakening, enhanced rate of international borrowing owing to our marked-down credit ratings and an excess requirement on domestic plus foreign borrowing, cost us approximately 25 percent extra in rupee terms on servicing our repayments. Even if half of this can be channelled towards supporting our exports, not only can we arrest the declining trend, but also such investment will actually yield sustainable dollar based returns. In wake of the present financial constraints, a conservative approach in the beginning can be to initially only facilitate the resultant additional export (growth) and not the existent. Meaning, only the increase on existing export turnover should be supported to target the incentives mainly towards export growth.
To promote industrialisation per se and, at the same time, control the cost of production, schemes can be worked out, which entertain incentives such as a preferential rate of industrial power tariff, fixed tax ceilings and frozen government levies by meaningfully linking these incentives exclusively to new investments or in core sectors directly to growth in either an organisation's capital or its output or its revenues or a combination of such benchmarks. This way, not only will the government maintain its current revenue collections without paying out anything in sectoral subsidies, but will also reap the fruits of industrial development and the creation of badly needed employment generation opportunities.
When we talk about an export-led growth, then it is only natural to talk about endeavours to buy exports. There are numerous examples where we have seen countries undertake expenses to create industrial incubators to nurture and grow specific industries till such time that they can compete on their own strength i.e. without the state's support. The successful selections then go on to capture significant market share in the global arena. A few glaring examples of such success stories are Malaysia and Thailand in the electronics industry, UAE in the tourism industry and Brazil in the food processing industry. Even if the government of Pakistan cannot at this stage afford to take on such initiatives at least the groundwork should be done to help identify sectors that can be targeted as soon as our finances allow us to do so.
Further, for a country to grow meaningfully in exports a stable currency rather than a devaluing currency tends to play a more vital role. A devaluing currency in fact can be counterproductive in formative years as it tends to increase the cost of production more than it helps to make prices more attractive to the outside world. The key is to grow the exports without growing the value of the currency so that overtime the home currency automatically becomes under valued and helps in keeping the attained export growth rate sustainable. Virtually all examples of export led growth have followed this principle, e.g. the Asian tigers, China, India and the emerging Eastern European economies (Czech Republic, Poland, Austria, etc.).
While stability and framing of friendly legislations are important cornerstones in attracting foreign investment the real direct foreign investment (DFI) inflows stem from linkages made between domestic and global players. The more the home country facilitates its entrepreneurs to have a global outlook and venture into international mergers and acquisitions the more investment it receives from the outside world. Confidence and perception are fundamental to any type of investment flows and considered to be so crucial that quite often we see governments, even in extremely adverse market conditions, breaking their back in maintaining stability in their stock markets in order to send positive signals to the outside world and keep the DFI tap running. Call it a coincidence, but to date in any part of the world, DFI levels have somehow maintained a perfect direct correlation with index bullishness.
The chairman and founder of Bright Horizons Solutions recently heeded the wisdom of visionary Human Resource (HR) guru Charles Wrench: "When short on HR quality use thy neighbour." Poles and Austrians followed this advice like a gospel and in their early days of resorting to capitalist structures supplemented their human resource by sucking in wherever and whatever was available in the neighbourhood. In the process not only did they manage to strengthen their own corporate capabilities, but also unleashed a chain that helped them clean up the neighbouring markets in terms of market access. With the available level of HR in Pakistan being a lot to be desired, Pakistan should seriously work on freely outsourcing quality HR from its neighbourhood. A move that will help the country, both in building up its institutions and at the same time also reaching out to its natural neighbourhood markets.
The combination of the gigantic US trade deficit and the price of oil at more than $125 per barrel (in the recent past) has created an attendant pool of financial liquidity among oil producers in the Gulf. And this era of petrodollar surpluses is markedly different from the last one. In the 1970s, the member states of the Gulf Cooperation Council (GCC) - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates - outsourced the management of their petrodollars to American and UK bankers. This time around they have adopted active investment and development strategies. They are investing heavily in large Western organizations as well as in emerging markets in Africa and India. Although Pakistan as a Muslim country represents a natural and logical partner for at least some part of their portfolio, so far the only significant investment we have attracted is in PTCL by Etisalat ($2.59 billion). We need to ensure that the signals going back to the GCC from this venture are positive so that this could trigger a wave of many more such investments in the near future.
Lastly, amongst all this we need to keep a firm eye on the basic principle: that any growth, development or strategy should be responsible, all inclusive, should create employment opportunities at home and at the end of the day should lead towards improving the living standards of the common man instead of being purely growth-centric. Sometimes, it is important to remember that in the history of nations, it is not the economic instability that drives the political instability but vice versa? Aurangzeb may have created the largest Indian Empire ever, but in the process drained his coffers, demoralised his soldiers, corrupted his court and lost the loyalty of the common Indian. He may have accumulated all the powers that can be visibly placed in a single office (ironically what we have in Pakistan today) but in the bargain lost the moral authority to govern. When William Norris, trade representative of Kind William III, visited Aurangzeb during his last years, he reported back that, "The Emperor's soldiers had not been paid in two years, his courtiers could be bribed for a bottle of wine and the public is ready for a change. All administration has disappeared, the realm is desolated, nobody gets justice and the average Indian stands utterly ruined. This presents as good an opportunity as any for change." ~ John Zubrzycki.
The question that every Pakistani has on his mind today is has change truly come on February 18th or are we drifting towards yet another 'opportunity for change'? The final answer to this will emanate from the performance of present rulers over the coming few months