Mosharraf Zaidi

http://www.thenews.com.pk/daily_detail.asp?id=143483

Why Pakistan Must Default

Tuesday, October 28, 2008
by Mosharraf Zaidi

Pakistan is not going to default, because nobody will let it. That’s too bad. Don’t let the “economists” scare you. Default sounds like a dark, scary, doomsday scenario. Sovereign default sounds worse, like God’s curse itself. It is not. “Sovereign” is the fancy term for country, used by the same loan sharks that milk pensioners to fatten their year-end bonuses (and who brought you Wall Street Meltdown 2008). Sovereign default is simply a country not making its loan repayments on time. It has happened to plenty of countries. They are all still around.

Ex-bankers and former IMF employees will never advise Pakistan to default because to do so would be counter-intuitive. It would be like expecting the PPP to undertake land reforms, or the Jamaat-e-Islami to be consistent about anything. Advising Pakistan to default would represent an existential crisis worse than sovereign default. People would be forced to revisit the premise of their entire careers. We can’t have that. So instead, we have experts from all around the world wringing their hands, loosening their ties and extolling the virtues of the “bitter pill” of yet another IMF programme. The purpose? To avoid the “dreaded” default, at all costs.

Why is default such a “scary” thing, and why do countries go to extraordinary lengths to avoid default? Countries try to avoid default for four reasons. First, countries try to avoid default to save the country’s reputation as a borrower in good standing–which means that they want to continue to borrow at rates that are favourable to them. Second, countries try to avoid default to save their ability to participate in international trade freely–which means they fear having sanctions imposed on them for being poor managers of their affairs. Third, countries try to avoid default to protect domestic banking and financial system–which means in essence that they want to protect the rich, because there aren’t many poor folks with bank accounts. And finally, the fourth reason countries try to avoid default is to save the government of the day from the disgrace of having defaulted.

Eduardo Borensztein and Ugo Panizza published an IMF working paper earlier this month that exposes one of the worst kept secrets in international development. They conclude that among all four of these reasons to avoid default, the most compelling, based on the evidence, is politics. They conclude that “The political consequences of a debt crisis seem to be particularly dire for incumbent governments and finance ministers”.

In short, governments choose not to default because it is the politically expedient thing to do. The actual economic costs of defaulting, Borenzstein and Panizza conclude, are simply not that high. Moreover, another paper earlier this year (by yet another IMF economist, Ali Alichi), suggests that the only real reason that countries repay the sovereign debt that they owe is to continue to be able to borrow money.

In short, Pakistan is trying to avoid defaulting so that the PPP government can stay in power, and so that while it stays in power, it can continue to borrow money. The real question here is: where is all the money going and why does Pakistan need to keep borrowing it?

Most of the money is going to debt-servicing and to defence. The traditional response to unsustainable expenditure in Pakistan is to call for a cut in defence spending, while continuing to find a way to pay off Pakistan’s loans. No one ever actually explains what they mean by cutting defence spending, which is why the conversation begins with a request to cut the defence budget, meanders into the patriotism of those demanding the cut, and ends with a straight-faced refusal. No one expects Pakistan to compromise its national security, but it is not unreasonable to explore more efficient ways of securing the nation and the national interest. Far from a national conversation about spending priorities however, no one has gone so far as to even suggest a more traditional and hawkish view, for example, that the war on terror being waged by Pakistan’s soldiers needs all the financing it can get, and that Pakistan’s debtors will have to wait. An even more refreshing case to make would be to suggest that both debt servicing and national security are major drags on current and future generations, and that they represent much lower priorities than building infrastructure, fixing the police and delivering real education. What would a Pakistani government that was committed to those priorities look like?

For starters it would stop hiring poorly qualified political workers to stack the deck for future election campaigns. Forget hiring another ten thousand jiyalas as teachers, to ruin another generation of children. Let’s face it, Pakistan cannot grow teachers on trees, it doesn’t have any teachers. It has to go out and hire the best Indonesian, Turkish, and Korean teachers. It has to bring them to Pakistan and put them to work. Pay them real salaries. Hire the Emiratis that have designed Sheikh Mohammad’s infrastructure revolution to do the same thing to Karachi. Then go out and hire every willing CBM, FAST, GIKI, and IBA graduate out there, and make cops and municipal administrators out of them. Take ten of those supercops, give them Blackberrys, night-vision goggles, Humvees and some ammo and put them outside every school. Forget the entourages. Protect the schools. Take the municipal administrators and tell them to get running water to those schools. If there’s no well, and no groundwater, teach them how to negotiate deals, so they can buy truckloads of mineral water for the students, and their mothers. Get those kids and their families some clean water. Make sure there are nurses and doctors at each school. Pay every Aga Khan University Medical School graduate twice what they would make as residents at Mount Sinai or Beth Israel. Teach the kids their native languages, drop the grammatically dreadful and aesthetically murderous fake American accents and bring back the Pakistani accent to film, television, radio and to dinner parties.

That’s the kind of expenditure that would explain indebting future generations of Pakistanis. It would explain deepening the pool of debt that Pakistan is drowning in. It would explain the helplessness currently being feigned by economic and political policy makers. In short, if Pakistan was borrowing money to pay for this kind of a social program, it would be hard to argue against it.

Instead, Pakistan is borrowing money to throw it into the same black hole that the money has been going into for at least a generation now. What has Pakistan got to show for almost forty years of sustained debt growth? Illiterate fanatics who can’t pronounce the name of God are taking over Swat because the courts don’t work. Drug lords and criminals posing as religious vigilantes are taking over NWFP because the cops don’t work, can’t work, and aren’t allowed to work. The water in the taps all over the country is toxic. The teachers at the school can barely read. The ones that can spend more time in Lahore, Peshawar, Quetta and Karachi, at the civil secretariat looking for a transfer, than teaching their students whatever little they know. The students are at home watching Sanju Baba kill bad guys, and Jon Abraham seduce bad girls. The mullahs are making speeches they don’t understand, to crowds that aren’t listening, until they bring on the hate. Then everybody listens. The uncles and aunties think cheap Broadway rip-offs with racy costumes constitute a culture renaissance. Little girls in rural Pakistan meanwhile are being traded by remorseless jirgas, in the name of honour. The culture vultures hate Arabic, love Punjabi, and are addicted to broken English. The hawks want beef, the doves want bhindi. And bankers want to loan Pakistan more money to finance the whole rot all over again.

It’s time for Pakistan to start spending its money on people servicing, instead of debt servicing. Bigger and more successful countries have done this before including Indonesia, Russia, and Argentina. Pakistan loves to ape other countries. Now is its chance. Time to default.

http://www.thenews.com.pk/daily_detail.asp?id=142167

Wanted: Fearless & Creative Economists

Tuesday, October 21, 2008
by Mosharraf Zaidi

To be penniless is one thing, to be penniless and unoriginal, entirely another. Having been bled for every last dollar, the Pakistani state is embarrassing itself as it is wont to do. If Pakistan was an American politician, it would be Sarah Palin: shrill, sharp-witted, lacking substance, never ready for a real fight, but always pretending to be. Its hard to decide what’s worse, the fact that Pakistan is in begging mode, or the fact that it can’t decide whom it should beg, and for what.

No matter the indecision, ultimately the qibla for Pakistani leadership–legitimate, or illegitimate–always seems to be outside the country; Riyadh, Washington DC, Abu Dhabi, London, or Beijing. Pakistan is running out of capitals in which it can showcase its ineffectiveness. Perhaps the next big treat for the international press corps will be high level trips to Dhaka and Kabul, the veritable pieces of bread in the South Asian beef-veggie sandwich that is always cause for just a teeny bit of indigestion.

Whatever would a high level Pakistani trip do in Dhaka or Kabul? The same thing they do in any other capital. Try to bully a stronger country, one with a clear and discernible raison d’etre, into giving Pakistan, a country without any of the above, the one thing it always seems to need more of: money. Given the deluded alternate universe inhabited by most Pakistanis, the idea that Bangladesh or Afghanistan is stronger than Pakistan may be outright blasphemous. Perhaps, its time Pakistanis learnt to be a little more tolerant of reality. Who can remember the last time a Bangladeshi leader went on an unending quest to beg or bully countries into handing over cash? And in Afghanistan, the idea of speaking Dari or Pashto isn’t dealt with in the same scandalously spiteful manner in which speaking Urdu, or Punjabi, or Sindhi, or Balochi, or Seraiki is here in the Islamic Republic.

On the topic of learning, Pakistani Citibankers (all of whom it seems, will eventually become de facto finance ministers) should quickly learn that not all nation states are awash in self-conscious pity or self-loathing rage (practitioners of both faux sentiments know exactly who they are). It is in fact ok for countries to sometimes have original ideas that are fundamentally about serving the people of that country. This is important because eventually, someday, a Pakistani minister of finance will have to actually stand up and say, “Enough! We don’t need the IMF to tell us we need to control spending; we need to control spending because we’re spending too much!” She will say, “We need to stop taxing the middle class, and start taxing the rich”. She will say, “The easiest way to fix the balance of payment situation is to punish the consumption of high-end luxury goods and services that Pakistan sells rupees to buy”. She will say, “The state needs to discern between taxing income, and taxing wealth, and we need to tax wealth”. Most important, perhaps of all, she will say, “I don’t care whether you fire me or not, Mr. President, Mr. Prime Minister, and Mr. Ambassador. I don’t care. I will speak truth, because I took an oath as a public servant to serve the public interest. Besides, I could never win an election anyway, and all the money I’ve made from banking will keep me and my children well fed for the rest of time”.

Pakistan is being beaten mercilessly in foreign policy boardrooms on Pennsylvania Avenue, K Street, Madison Avenue, Downing Street and Palace Street. It is being beaten unrepentantly in the voting booth by the absence and apathy of the English-speaking, urban and expatriate minority. It is being beaten with its own music, and someone else’s cinematography and screenplays in and around Connaught Circle, be it Veer Zara on the silver screen, or the Adventures of Hanuman on the idiot box. It is being beaten in the caves of Tora Bora, and the mountains of Swat by cavemen from all over the world, but with ideas born in its own seminaries.

Given the obvious limitations to outdoing its own inadequacies, it is staggering that Pakistan is once again, preparing to go back to the IMF. This is not the same IMF that Pakistan left in 2004. Back then, if you disagreed with the IMF, you had to be a pinko-liberal, tree-hugging, bleeding-heart, wannabe-Guevara. Today, not even die-hard supply-side mullahs would argue in favor of the IMF as a route to eventual economic prosperity. Pakistan’s impending reentry into the IMF program is astounding, given how widely discredited the IMF is across the globe today. To understand how Pakistan keeps finding its way into the IMF’s lap, one needs to understand who “Pakistan” is, when we speak of economics, and public finance.

First, Pakistan has very few real economists, but it has dozens of senior bankers and retired international bureaucrats. Second, Pakistani bankers are not thinkers, they are doers, and Pakistani international bureaucrats fear authority, not voters. Finally, the country has no history of credible academic institutions at which economics is taught.

Three of Pakistan’s biggest public finance economics problems are: a fiscal burden on the middle rather than the upper class; a balance of payments burden on the state, rather than the consumer, and; borrowing to finance spending, rather than cutting down spending. All of this is compounded by a lack of confidence, which causes capital flight. Foreign investments leaves for other countries’ environments and domestic savings leave for other countries’ dollar accounts.

Bankers are not trained to over-think issues. They are trained to deliver in the short term. Shaukat Tareen is an exceptional banker, and he will probably stave off default, and mobilize some kind of a deal from either the Arabs, or the IMF. He will not, and cannot however deliver an altered playing field for the Pakistani citizen.

Retired international bureaucrats from the IMF or World Bank are not trained to challenge authority, in fact, they are trained to obey it. This means that even with the exceptional intellect that most retired international bureaucrats possess, thinking outside the box is a near impossibility.

The only place where one could expect to find technically competent economists, who are not scared of speaking the truth, who are happy to challenge other people’s ideas, and who are capable of thinking outside the box is at universities. Unfortunately, the story here is even more depressing. My own alma mater, LUMS, began a Bachelor’s program in economics in 1997. Widely hailed as a world class economics program, the first economists’ batch of LUMS students were taught microeconomics by an IMF employee, development economics by a World Bank employee, and agricultural and environmental economics by a Bible-thumping evangelical American, who was, bless his heart, from a state near where Sarah Palin comes from. In short, young Pakistani economists are the products of a very specific kind of economics. At the Applied Economic Research Center in Karachi, or the Economics Department at Quaid-e-Azam University things are not nearly as didactic, but even there, by no means is Pakistan producing a steady stream of future Sens and Bhagwatis.

Pakistan is now completely mired in an economic and national security mess. This means that incumbency is poison. The only possible good that can come of the current mess is a sense of history and lessons for future governments. Pakistan can ill-afford the habitual sullying of good people, with a combination of bad economics and even worse institutional incentives. Economists must be free from fear, from pension considerations, and from ideas they’ve derived from books written by other people for other circumstances. Young non-partisan Pakistani economists like Mushtaq Khan, Ali Cheema and Asad Sayeed are assets that need to be protected from the vagaries of the state, and the impulses of patronage politics. They need to be given the freedom to speak loudly, and be encouraged to be creative. In the long run, as one creative and quite competent economist once said, we are all dead, anyway. So we may as well live with fearless creativity.