Kaiser Bengalis Lecture on Pakistan Economy

8/7/2019 Kaiser Bengalis Lecture on Pakistan Economy

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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 20years 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 ]

http://www.teeth.com.pk/blog/2008/02/10/transcript-of-dr-kaiser-bengalis-lecture-making-sense-of-pakistan-and-its-economy/




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 wasan 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 westerneducation, 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 itcame, 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 inPakistan 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 wasnot 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 ande 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 weresome 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 inputsthat 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 seewhy 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 intobeing 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 isdevelopment 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 thisgrowth 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 thefirst 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 printingmoney. 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 moneyor 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 nationalsecurity 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 canwrite 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 didnot 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 the1980s 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 2005the 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 repayyour 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 -- theyare 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 bewell 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 theother 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 hueand 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 yourreturns 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 todo 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 fewmonths 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 oureconomy 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 thismorning 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 acorporate 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 onimported 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







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 andorder 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 keptthinking: 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.



Kaiser Bengalis Lecture on Pakistan Economy

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