Mosharraf Zaidi

http://thenews.com.pk/daily_detail.asp?id=147364

The Death of Common Sense

Tuesday, November 18, 2008
by Mosharraf Zaidi

Common sense must have died and gone to heaven. If it has indeed died, we can be sure it rests peacefully in heaven because anything that is violated as frequently as common sense has been deserves nothing but five-star treatment from the Lord. Unbridled corporate greed and public policy for lunatics may partially explain the global financial markets mess, and its national subtexts in countries far, wide and diverse, from Hungary to the United States, from Iceland to Pakistan. The real story, however, is the globalisation of an unmitigated culture of direct and obvious violations of the rule of common sense. 

The common sense rule has always been pretty simple. If something doesn’t make sense, it is not worth doing. It is the ruthless insistence on doing things that don’t make sense that has got global and local markets where they are today. When economic and cultural gurus continue to peddle this bankrupt ideology of senselessness, it is incumbent on all the simple people to ask for a timeout, and insist on common sense for a change. 

Let us leave aside the comedy. To watch bankers and television anchors try to sell the idea that the IMF has endorsed government “policy” as an achievement of the government is hilarious. To watch them try to imply that an IMF endorsement is a stamp of some sort of highly sought-after approval, even more so. But let us leave aside the comedy. 

Countries go to the IMF because if they don’t they would default. Not wanting to default is understandable, but the real question is how countries end up in a situation where the choice is between the IMF and default. This is not complicated. When countries spend more than they have, they need to borrow money. When they don’t look like they can pay off that money, the usual lenders stop lending money. That’s when countries are faced with the choice of going to the IMF–which is a lender of last resort–or defaulting. 

Solving a problem requires knowing what the problem is. The problem is not that no one but the IMF will lend Pakistan any money. The problem is that Pakistan spends more money than it has. 

In the last month, Pakistan is not the only bankrupt country that has needed the assistance of the IMF. Much smaller countries have in fact managed to get much more money out of the IMF–including Hungary and Ukraine. Forget measuring size by population, where Pakistan (at 172 million) is a monstrously larger country than most. Even by the IMF’s Special Drawing Rights (SDR) measure, Pakistan’s brilliant IMF cheerleaders have managed a paltry $7.6 billion loan against a quota of 1,033.7 SDRs. How does this compare with Hungary (population 10 million) or Ukraine (population 46 million)? Well, with a marginally higher quota of 1,372 SDRs Ukraine has managed to score a dramatically bigger loan of $16.4 billion–more than double Pakistan’s. And Hungary, with almost the exact same quota of 1,038.4 SDRs, has scored a $15.7 billion loan; again, nearly double what Pakistan’s IMF cheerleaders managed. 

Before Pakistan’s fringe rightwing gets all excited, it’s important to note the real reasons why Ukraine and Hungary (and even Iceland, in terms of its quota) did dramatically better in securing a serious loan than Pakistan. It has got nothing to do with race, religion, or the clash of civilisations that rightwingers would love to blame. 

The real reason Pakistan got a second-rate deal from the IMF is that Pakistan has second-rate perception management and third-rate economic management. If I were desperate for a loan, I wouldn’t go around the neighbourhood with a begging bowl and a loudspeaker. I would hire a lawyer, an accountant and an image consultant. What did Pakistan do? It cheated the lawyers by not restoring the judiciary, it let the accountant (Ishaq Dar) walk away, and it put its best image consultant (Hussain Haqqani) in the most unwinnable job in Pakistani politics (ambassador to the US). 

The only thing that Pakistan, Hungary and Ukraine have in common, other than a culinary obsession with red meat, is a lack of common sense. Common sense is universal, whether you were raised as an Orthodox Christian in Kiev, a Jew in Budapest, or a Muslim in Karachi. If you were fortunate enough to have a mother and father when you were growing up, then one value you were taught, irrespective of faith, geography or race, was to live within your means. Countries that are running to the IMF are countries that live beyond their means. But even in this list of budgetary infamy, Pakistan is animatedly larger-than-life. While Ukraine has a budget deficit of 1.7 percent, Pakistan’s budget deficit is over 7 percent. Next year, the IMF expects Ukraine to balance its budget, but it only expects Pakistan to reduce its deficit to around 4 percent. 

Pakistanis should not be celebrating the IMF loan. They should be asking their representatives in Parliament why Pakistan needs all this money. This too is no mystery. It needs the money to pay off previous loans, and to pay for its security. Again, common sense suggests that once you are in a hole, you need to stop digging. Instead, by getting the IMF loan, Shaukat Tareen has just provided Pakistanis more shovels to dig with. So, more loans to pay off earlier loans. Common sense this is not. 

For all the ridiculous and comedic scenes Pakistan-watchers get to indulge in, the truth is that the grandest violation of common sense is being engineered in a post-modern America that, as David Brooks rightly noted a couple of weeks ago, is unable to deal with scarcity. Almost a quarter century after Lee Iacocca managed to massage massive loan guarantees out of the Reagan Administration, Congress is now examining the umpteenth bailout for the hopeless Big Three pygmies of the US automobile industry. President-elect Obama could hardly have inherited a worse economic situation. Moscow, Mirpur or Michigan, more of the same just won’t do. Of course, we know common sense has died and gone to heaven when Thomas Friedman, the otherwise hugely reasonable globalisation guru, decides to dedicate a Sunday column and an appearance on “Meet the Press,” to the passionate advocacy of more spending as a solution to too much spending. 

The solution to spending too much is to spend less. That’s what Shaukat Tareen, Thomas Friedman, and every IMF cheerleader alive was taught as a child. Pakistani and global financial markets don’t need more hot money to fill the gaping hole that a generation of greed and excess has left behind. Common sense dictates that the markets need a righteous spanking. But common sense has died, and gone to heaven. Inna lillahay…

http://www.thenews.com.pk/daily_detail.asp?id=140926

More Short Cut Economics

Tuesday, October 14, 2008
Mosharraf Zaidi

While Wall Street burns and an entire generation of lefties celebrates a latter-day redemption, developing countries like Pakistan shamelessly continue down the spurious Siraat-e-Mustaqeem of the private sector, and free markets.

Shaukat Tarin, bless his heart, is a phenomenal banking talent. But he’s no Amartya Sen, or Joe Stiglitz. While the rest of the world is quarantining bankers and their irrational pursuit of executive perks and board member privileges, having been bitten by one Shaukat, when push came to shove, Pakistan has handed the keys to another. How very Pakistani indeed. Mr Tarin’s significant abilities are not in question. The paradigm of depending on a now fully exposed (and bankrupt) approach to economics is.

The jazziest additions to the cacophony of the formerly unproven and now debunked free market and private sector supremacy legends are the ubiquitous “public-private partnerships”. Among the several dimensions of Mr Tarin’s appointment is that he now takes over as the chairman of the board of the enigmatic and mysterious Infrastructure Project Development Facility (IPDF).

While Pakistani aunties and uncles spent the last week fretting about the fate of their lockers and foreign currency accounts, and Pakistan’s non-deodorized masses spent the last month worrying about how to score roti and how to wash whatever kapra they have left, the Pakistani state was busy playing ostrich, as its best and brightest fell over each other to get to the airport and head to Washington DC, to pay ode to Bretton Woods. Analysts and pundits are uniformly predicting some kind of a default within the next quarter. So what response do Pakistan’s economic planners and czars have to the impending default?

Well aside from the ever present option of performing Umrah, there is always the Central Development Working Party (CDWP). On Saturday, October 11, the CDWP approved Rs50 billion worth of investments across 47 different projects. Of those, 18 are said to be in the roads and highways sector. Desperate to pull rabbits out of pagris and burqas, the CDWP formally inducted the Board of Investment and the IPDF into the CDWP structure. Ostensibly, the IPDF and the Board of Investment have been tasked with bringing in “private investors” into the business of building infrastructure that will power Pakistan into the “next” century (almost 9 years late).

The induction of the IPDF into the CDWP is a cataclysmic event in the sad and miserable story of the declawing of Pakistan’s bureaucracy and the erosion of the Pakistani state. The IPDF is a company, not a government entity. It is ostensibly owned by the government of Pakistan, and gets all its money from public funds, yet it is neither accountable to parliament, nor accountable to the auditor general of Pakistan, nor subject to review by the Public Accounts Committee of Pakistan. Among its six-member board of directors are three members of the “private” sector, the secretary for finance, the secretary for planning and development, and the chairman — the adviser to the prime minister on Finance.

There are few, if any, explicit mechanisms to control conflict of interest in Pakistan’s very interesting public sector, but the cancerous proliferation of these companies has introduced a whole new dimension to the potency of “two-for-the-price-of-one” rent seeking behaviour. Let’s leave aside questions about how Shaukat Tarin will ring-fence himself from decisions that may affect his significant business interests in the very area that he is now czar of: banking and finance. There are no Michael Bloombergs in Pakistan. Besides, no one asked Salman Shah, or Shaukat Aziz, so it is fair to leave Mr. Tarin alone.

A much more realistic pursuit of public sector integrity would require some effort to deal with the question of how the “non-government” members of the IPDF board are selected. How can a Pakistani citizen be confident that the three “private” sector members won’t get themselves and their families’ sweetheart deals? He or she simply can’t. Not the way the IPDF is currently structured.

The IPDF of course is not alone. The myth of private companies doing the job of government better is a popular one, not because of some newfound ideological movement among Pakistan’s bureaucrats and politicians about the efficiencies of the private sector. It is popular because it is a free pass, a green channel that enables contract awards without the cumbersome tendering procedures that are supposed to define relationships between the public and private sector. Those processes are not meant to be cumbersome to slow down the path of progress. They are cumbersome so that the taxpayers’ money is protected from the abuse that would be a natural corollary of individual discretion. Of course smartly-dressed young economists will attempt to razzle dazzle with ridiculous smoke and mirrors about private enterprise having to share the risk with government, and the long record of government inefficiency. They couldn’t be further from the truth. Even the World Bank-hired firm that advised the IPDF on how to do its business couldn’t brush over Pakistan’s abysmal record of public private partnerships. Its reports detail the debacle of the Independent Power Producers (IPPs), and describe the severe paucity of parties interested in Pakistan, as a result of that debacle.

More importantly, if governments were so inefficient, how did they manage to produce the entire edifice of western civilization as they have? Every country that has produced an economy worth writing home about has got there on the back of governments that were not afraid to invest in their people. Whether it is the US or Europe, or China, Brazil and India, these countries are products of heavy public sector investments in infrastructure, in education, in health and in social services.

If governments have no business involving themselves in the affairs of entrepreneurs, why is former Wall Street shark Henry Paulson nationalizing US banks faster than you can say Caesar’s Palace and the MGM Mirage? Why is New Labour (Maggie Thatcher’s greatest achievement) printing manuals on how it nationalized Northern Rock in stealth, and replicating the model on a half dozen new banks?

The truth is that while the government truly has no business at all, running businesses, it does have a fiduciary and moral responsibility to create an enabling environment for its citizens to achieve their potential. This means the government must deliver value for taxpayer money and produce outputs that are fit for purpose.

All the evidence in the world is pointing Pakistan in the direction of building a capable, responsive and accountable state. Yet instead of rolling up its sleeves and getting to work, Pakistan is handing off its responsibilities on the one hand to the IMF, whom it will yet again crawl toward, in full begging pose, and on the other hand to the “private sector” that has always failed the country.

If parliamentarians want to be really scandalized, they should stop pretending to be interested in the war on terror. It seems no horror will jolt Pakistan into getting into the terrorist-hunting spirit that Sarah Palin seems to inspire in fewer and fewer Americans every week. Just like in the US and the rest of the world, Pakistanis gotta eat before they can fight the good fight. The war should be Pakistan’s, but it isn’t. Everybody will have to get used to it. The top shelf belongs, as it always has, to the economy.

Handing the keys to another banker, asking private businesses to build the country’s infrastructure and starting up a public relations stunt called the Benazir Income Support Fund do not inspire confidence. It is unfair to expect economists from the 1980s and bankers from the 1990s to come up with solutions for the 2010s. When they run out of ideas, they clearly think that handing off the entire burden of public policy formulation, implementation and accountability to “companies” is the way to go.

The real questions serious parliamentarians need to ask are how many “companies” the government has set up in the last decade? How much public money has gone into those “companies” over that time frame? Who audits the funds that the government gives to these “companies”? And most importantly, what have the Pakistani people got out of those investments in these “companies”? Rome has been burning for a while now. We’re giving the hoses and buckets to the arsonists. Brilliant.