Why Pakistan Must Default
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.
[...] question here is: where is all the money going and why does Pakistan need to keep borrowing it? [Mosharraf Zaidi/The [...]
The Acorn » Hey, sovereign default is not such a bad thing
28 Oct 08 at 8:10 am
Nice take on the predicament that Pakistan finds itself in, but a tad utopian. We expect too much from the stolid puppets at the helm of affairs; people who are in love with the familiar and despise ambiguity; people who fear shadows have no soul.
Abdul Ahad Rana
28 Oct 08 at 3:49 pm
It’s a really compelling argument and very similar to one made by the US economist Murray Rothbard about the US repudiating its debt. Although I think that the case for Pakistan doing so is much stronger.
Rabia
28 Oct 08 at 5:01 pm
Another compelling piece…but should Pakistan default dont you think the US might not continue to man the foreign aid pump in return for which Zardari signed up to the War on Terror…?
Emrys
28 Oct 08 at 5:50 pm
I found this to be a very interesting and thought provoking article. Yes I feel the Pakistan Government has to give a lot of attention to human resource development and health. Investment in education has long term benefits and can transform Pakistan. I remember Imran Khan said a few years ago, Pakistanis are generally good in most walks of life, all they require is some good guidance. Hope the present government in Pakistan takes an initiate in this direction.
S. Sridhar
New Delhi
sridhar
29 Oct 08 at 12:22 pm
You need to clarify certain points regarding your article on Default.
1. What type of default you are looking at? The South American debt crises of and bubble economies of 70s/80s like Peru or the one by Nigeria.
2. If your reference is Asean, then that just related to a few years involving foreign banks. No IFIs or Bonds were effected.
3. Do you agree that if Pakistan defaults, it has to be on repayments on borrowings, loans, IFIs, Bonds. In short it means something between the Peruvian-Nigerian Default. If that be so , all currency in Pakistan will be worth a piece of paper, hyperinflation, seizure of assets abroad and finally an internal turmoil, too dangerous even to hypothise. Is total anarchy in your periscope?
Best Regards
Samson Simon Sharaf
Samson Simon Sharaf
2 Nov 08 at 12:15 pm
I have read this article in a national daily and was surprised to know that in this age, our mainstream media can come up with such stuff. I considered it another ‘khutba’ of an ‘economic mullah’ who wishes to defeat USA.
Iran is an example, they are the giggest producers of crude oil, but because of ’samctions’, unable to refine and are dependent on imports. Although they acquire through many countries. But being a defaulter is far ahead of sanctions.
1. In developing word, there is only one way to achive development and that is, I would quote Dr. Mahatir: “Let the cake grow and everyone have a bite”.
2. What does that means, is, development needs money, which we do not have, there would be many who will take undue advantage, lenders will charge intrests, investors will make profits, coprorate will have a party and obvoisly, there will be corruption …but end result is a developed state….not a bad achievement.
3. In case we dont let investors corporations and lenders make profits they would find some beter returns somewhere else and there is plenty of oppertunities around the world, each state offering better incentives.
Lets us see why we need to borrow:
a). Our total imports are US$ 20 and exports around 10Billion, we get around 5 Billion remittences and around that much through privatisation.
The end result is if we continue privatisation, we are able to pay out import bill, otherwise we have to borrow to meet our imports.
Some ’scholars’ like Kamran Khan on GEO Tv would suggest to ‘ban’ all imports. This is simply not possible as we have signed several FTA’s, WTO, reduction on import duties and so on and no state in world can do this unilaterly.
Furthermore, we get favours from countries from where we import in shape of places for Pakistani expats and our substanderd exports. In case we rise the duties or ban any of their items, we would loose same way.
It is simply impossible except we increase our exports. But for exports we need to modernise our industry and that needs technology which costs $$$$. Even if we are able to reduce our imports by some miricle stick, still, we have at the most 15 Billion foreign exchange comming in, which is hardly enough to meet with our import bill.
Now lets us see, why we need loans:
As our import bill is higher and privatisation has come to stall, we need to meet the deficit by loans. Secondly we are living in a stane age and need to develop infrastructure, upgrade our production base and improve quality of life. Our exports do not support that development. There is only one alternate: THE DEBT
Once we default, which means we are unable to repay our lenders, what we have to let the dreams of development go, forget about building energy plans, building dams, acquiring defense equipments, explioting our natural resources and improving our industrial base and agriculture sector, which is severly short of funds.
As a Chiese Prime Minister once said, ‘foreign debts take away a large part of national income, but are inevitable for fast growth’, we have no choice except to borrow and inject in our infrastructure to become competative producer and exproter.
Default means that no one is going tolend us in future, what development we can do with such a small economy? At this stage we need to borrow as much we can and from where we can. Once our economy is stable, infrastructure is sufficient and our production base is developed, we can start reducing our dependance on debts.
But that stage will come much late, US is the biggest borrower in world with 11 Trillion debt, we have foreign dets of around 50 Billion, just a friction of per capita debt of USA.
Even with such a huge economy which produces almost everything, USA can not think of defult. What to talk about Pakistan which is entirely dependent on imports right from agriculture to defense and oil to industrial equipments.
If we can secure more loans, we can inject more in to inftastructure and industry. Meaning thereby that we multiply our GDP. Which will generate jobs, improveliving standerds, increase exports and circulation of money. Default is economic isolation in 21 century when economies are intervowen to the xtent that no state can survive in isolation.
Bottomline is ‘let the cake grow and everyone have a bite’.
islamabadobserver
2 Nov 08 at 1:29 pm
I am not an idealist, and I am still trying to find out an organisation or a country which has ideal working conditions and planning or even transparancy.
Corruption is as much inevitable as development.
As regards your statement about mismanagement, I wont agree with that although to a certain extent you are right, but again where it do not exist?
The problem is a size, if we have a trillion $ economy and Nawaz, Zardari or Shaukat Aziz escapes with a couple of billions, it wont hurt as bad.
To my understanding the fault remains in frequesnt military interventions and unfruitful military adventures which converted Pakistan in to a security state rather then a welfare state.
Our institutions deteriorated and planning become irrelevent, visionary leadership was replaced and development discouraged.
Still, to be honest, we have made significant progress in these conditions and that is atributed to our prople not to our government.
Presently we need to modernise our agriculture, develop non existant industrial base and add value in our exports, this all needs technology and offcourse we do not have it, imports will mean foreign exchange which at this stage we can only have with foreign debts and privatisation.
I am not disappointed about future, our people are demanding and we might have some visionary leadership soon then later. The only thing which makes me worried is writer of this article Musharraf Zaidi and people like Brasstacks Zaid Hamid and Ahmad Qureshi who have links with agencies and come up with such ideas which are appealing to a man in street but recipe for suicide. I wish I am wrong and once again our agenies are not in process of imposing something like an Iranian model on us.
islamabadobserver
2 Nov 08 at 1:30 pm
http://zeemax-contrariancomment.blogspot.com/2008/11/should-pakistan-default.html
No amount of Debt is bad as long as one has the ability to service it through a more than proportionate increase in production of goods and services. It’s no good if it’s only used to meet deficits. So, broadly speaking, I agree with you.
Foreign Debt, FDI, Portfolio investment, all are a transfer from countries with excess Capital to those with a shortfall in the same, and flow naturally from one to the other.
Prudent economic management by the recipient country is the key, which unfortunately has not been the case in Pakistan.
islamabadobserver
2 Nov 08 at 1:32 pm
terrific piece. yet i think it lacked some more technical details perhaps because in it was poured more emotions.
Nauman
3 Nov 08 at 5:23 am
Finally we have an economist with a conscience. I wish you were a communist, our countrymen had not been given an overdose of religion and our chattering classes weren’t fond of a regressive party like the PPP. It is time people like you come to the fore and let people know that another economic order is possible. A very good piece.
Kazim Aizaz Alam
3 Nov 08 at 5:11 pm
We can send our donors a note saying ” we will call u when we have money.. tata”
Faisal.K
7 Nov 08 at 1:54 am
Dear Mush,
Thank you for your piece in the News this morning. I hope it provokes a debate.
Naturally, after reading it, I wanted to know something about you. Unfortunately, I see the “About” on your web page is blank.
You have my e-mail above. Maybe you would be so kind as to tell me something about yourself?
Regards,
Meekal Ahmed
meekal aziz ahmed
12 Nov 08 at 12:39 am