The Washington Consensus Lives On In Pakistan

There is a photo essay on American shopping malls that I found quite amusing on Yahoo! featuring pictures taken by an obviously obsessive chap who took lots of them during that era of high consumerism, the Eighties, entitled "Big Hair, Smoking, and Record Stores." While the IMF now styles itself as not your grandpa's IMF in being a kinder, gentler lender of last resort, I had a distinct 45 RPM retro flashback while reading its latest press release concerning its recent staff mission to Pakistan (where they are not quite fond of Yanquis).

Much as the IMF would like to say otherwise, it seems we have not yet gotten away from the greatest hits of one-size-fits-all quite yet. Liberalization, privatization, deregulation...structural adjustment austerity....is there anything new?

Structural adjustment:

The mission was also pleased with the strong fiscal performance in the first quarter of 2013/14 and the steady implementation of the government’s structural reform agenda...

Belt-tightening:

Fiscal consolidation remains a key component of the government’s economic reform program. The mission was encouraged by the government’s efforts to enhance tax revenues, which slightly exceeded the program target level.

Privatization:

The government is moving forward with the privatization or restructuring of 31 public sector enterprises to improve public sector resource allocation and limit poor performance.

Liberalization:

The authorities are also working towards significant structural reforms in the areas of trade and the business climate to encourage higher investment.

Everything old is new again, and I am afraid that we have not quite gotten into the New Wave, let alone the Alternative era at the IMF since the song remains the same. Is that doom metal? Would you like to, ah, break dance?

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IMF Returns; Will Pakistanis Hate US Even More?

I entitled an earlier post about Pakistan, the US and the IMF "When Cash & Hate Collide." To underline that assertion, here's Exhibit A: In a recent Pew Global Attitudes poll, the country which assigned the lowest favorable opinion rating to the United States was--wait for it--Pakistan at a ridiculously low 11% [click for a larger image]. It even outdoes places where Amerihatred is keenest based on current events alike Egypt and the Palestinian territories. As for the cash part, in case you haven't read about it, Pakistan recently inked another IMF bailout for $6.6 billion. That's its eighth--that it not a typo--since 1988. Talk about a state of perma-crisis.

Recently I assigned US-Pakistani ties as a term paper topic to my students. They are well aware of what binds these two reluctant "allies": the danger of a failed nuclear state, the constant Taliban menace, and the strategically advantageous location of this country. The truth is that no matter how badly Pakistan mismanages its economy, the US through the IMF will always come to its "rescue":

In 2008, Pakistan agreed to an $11.3bn loan from the IMF to avert a balance of payments crisis. It received $7.6bn but failed to get the remaining $3.7bn because of its slippages in meeting the performance criteria. That led to the suspension of the programme in May 2010. The programme was extended in December 2010 for nine months, but disbursements were not resumed because of the country’s failure to take fiscal measures as demanded by the IMF. Ironically, Pakistan has availed itself of the new $6.6bn loan to repay the old loan to the IMF of which about half – some $4bn – is outstanding [my emphasis].

From where I come from, borrowing to repay previous borrowing is called a "Ponzi scheme." Whether the IMF does more harm than good is an open question as the IMF readies fairly harsh conditionalities once more. That said, there is hardly reason to believe that Pakistan can work its way out of trouble on its own despite the constant IMF debt overhang. Misplaced subsidies, huge budget deficits, moribund investment, next to non-existent FDI, lack of basic law and order in most places...Pakistan has almost all the negatives humanly possible.

But, going back to the title of the post, can Pakistan be made to hate the US even more after unauthorized incursions via drone strikes, bin Laden strikes, perceptions of IMF neo-imperialism and so on? You can argue that America's 11% favorable rating has nowhere to go but up. I actually expect that it will in the near future as a "dead cat bounce" phenomenon.

As for IMF lending, I expect the same cycle to repeat itself as it has eight times over the last few decades: Pakistan will try to comply for a while with IMF conditionalities but eventually decide the political price of obsequiously bowing to this American hegemonic institution are too high. After all, if there's a better scapegoat for Pakistani perma-crisis than the IMF with its 11% approval rating by proxy, I don't know what is. Who's more masochistic here, Pakistan or the IMF? Beats me, pal.

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Literally Dying for 2022 World Cup: Migrants in Qatar

Just when you thought Qatar's 2022 World Cup could not get any more controversial after continuing debates about the procedure used to select the tiny state and the difficulties associated with hosting the event during the peak of summer in the desert, there's more: It is common knowledge that the bulk of Qatar's workforce is composed of migrants who do the 3-D (dirty, dangerous, difficult) while its few citizens enjoy air-conditioned insulation from the harsh desert environment. However, recent reports have brought to light just exactly what the human cost is on migrant workers.

The Guardian got--pardon the expression--the ball rolling by reporting on the death toll of Nepalese workers due to poor living and working conditions out in the blast furnace of the Arabian desert to put up mega-stadiums in time for the 2022 event:

This summer, Nepalese workers died at a rate of almost one a day in Qatar, many of them young men who had sudden heart attacks. The investigation found evidence to suggest that thousands of Nepalese, who make up the single largest group of labourers in Qatar, face exploitation and abuses that amount to modern-day slavery, as defined by the International Labour Organisation, during a building binge paving the way for 2022.

According to documents obtained from the Nepalese embassy in Doha, at least 44 workers died between 4 June and 8 August. More than half died of heart attacks, heart failure or workplace accidents. The investigation also reveals:

• Evidence of forced labour on a huge World Cup infrastructure project.
• Some Nepalese men have alleged that they have not been paid for months and have had their salaries retained to stop them running away.
• Some workers on other sites say employers routinely confiscate passports and refuse to issue ID cards, in effect reducing them to the status of illegal aliens.
• Some labourers say they have been denied access to free drinking water in the desert heat.
• About 30 Nepalese sought refuge at their embassy in Doha to escape the brutal conditions of their employment.

Der Spiegel then added fuel to the fire by suggesting that Indian workers are also dying of exploitation out in the desert so that the 2022 show may go on:

There are many indications that the 44 dead Nepalese are no exception. Following the revelations in the Guardian, the Indian ambassador reported that 82 Indian workers had died in the first five months of this year, and noted that 1,460 Indians had complained of poor working conditions. The International Trade Union Confederation [ITUC] fears that up to 4,000 workers could die in Qatar before the starting whistle is blown for the first match -- that is, if working conditions don't change.

The 4,000 worker deaths are an extrapolation of the current rate of fatalities being incurred by South Asian workers in Qatar over ten years. Moreover, ITUC argues that Qatar's efforts are in vain since the structure of migrant construction labor is fundamentally abusive:

"The labour inspection system in Qatar has failed, and the government's announcement would simply add some inspectors into a system that doesn't work and will not make a difference," said Sharan Burrow, the ITUC general secretary. "Workers are not able to speak freely as, under the strict visa sponsorship system, employers retain their passports and they are not allowed to change jobs or leave the country without the employer's permission."

Alike nearly all other migrant-receiving states, Qatar has not signed up to the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families. Hence, Qatar's critics are applying pressure on Qatar being a signatory in another ILO convention concerning forced labor:

Qatar is failing to fully implement an international convention banning the use of forced labour ahead of the 2022 football World Cup, the United Nations' International Labour Organisation (ILO) has warned. Azfar Khan, the ILO's senior labour migration adviser in the Arab states, told the Guardian that despite pledges to do otherwise Qatar did not properly inspect workplace conditions and there was "no coherence" in the state's policies over the use of migrant labour.

"The onus is on the Qataris if they have ratified the convention to better implement it," he said. "Many of the abuses that take place which can lead to forced labour are still happening."

It is turning out to be a fiasco not only for football organizers but also for Qatar. The latter's image is receiving a battering that it's hard to imagine it will recover from in nine years' time. Isn't improving national reputation the goal of the whole enterprise? Qatar seems to be losing sight of it very badly.

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Michael Pettis Should Read More, Blog Less

Skip the maths, will ya?

I have in the past tied Michael Pettis to the whipping post for uncritically accepting Bernanke's self-serving notion of a "global savings glut" amidst falling levels of savings worldwide and a fantasyland assertion that the US household savings rate would hit double digits. It didn't, and I still don't quite understand why someone who keeps making factually inaccurate statements and predictions remains popular. If you read blogs to keep ahead of the curve of mainstream media or to understand the antecedents of various economic events, well, I would not be so sure about that if you are a regular China Financial Markets reader.

I do not like to keep doing this, but he has done it again (and again and again). In a recent blog, he takes Arvind Subramanian and Martin Kessler to task for their argument that there is a "yuan bloc" emerging in East Asia. The PIIE authors base this argument on movements of several regional currencies covarying more with the Chinese yuan and less with the US dollar. However, Pettis argues that this argument is artifactual:

Well actually you can argue with the math, or at least you can argue with the interpretation of the math. There are alternative – and much simpler, I think – explanations for the increased “co-movement”, and these do a much better job, I think, of explaining what is happening than reserve currency displacement.

Assume for a moment a global scenario in which the largest exporter of manufactured goods in the world has a significantly undervalued currency. Assume further that many of its competitors also have undervalued currencies, and would like to revalue in order better to manage their domestic monetary policies. Assume finally that the world is in crisis, and exporting nations are having trouble maintaining the necessary growth rate of their exports, so they cannot allow their currencies to rise faster than that of their main export competitors.

In this scenario which currency would the currencies of the smaller exporting countries track, the US dollar, or the undervalued currency of the largest and most competitive exporter of manufactured goods in the world? Almost certainly the latter, right? The smaller exporters would want their currencies to rise, but the rise in their currencies would be limited by the rise in the currency of their largest competitor. This would happen not because they are tracking a new reserve currency but only because they are in export competition with that currency.

That is all well and good if Subramanian and Kessler didn't bother to consider this scenario as Pettis clearly suggests, but they did. On page 11, the PIIE boys write:

i. Is the RMB bloc related to trade integration with or competition against China?
A currency could co-move with the RMB because it is integrated with China in terms of common supply chains. A related but distinctly different reason for co-movement could be if policy targets the RMB because countries do not want to lose competitive advantage vis-à-vis Chinese exporters and domestic manufacturers. In other words, the reason for the co-movement could be competition against rather than integration with China.

How can we distinguish the two? One way of measuring competition is to see if a country exports products similar to China’s. Mattoo, Mishra and Subramanian (2012) develop such an index of competition relative to China. Unfortunately, they compute this index for fewer emerging market countries than contained in our sample.

When we introduce this index of competition (which is country-specific), it has consistently the right sign (the more a country competes with China, the more likely its currency to track the RMB). But is not consistently significant in a statistical sense (in Table 6, the index is statistically significant in column 2 but not in column 1). And when we run a horse race between this competition variable and a pure integration variable, the latter consistently trumps the former. So, the evidence, albeit limited, favors an explanation for co-movement that is more related to trade integration than competition, although a role for the latter cannot be ruled out. One reason for that last caveat relates to the findings reported in Table A6. It seems that outside East Asia, more countries track the RMB when it depreciates than when it appreciates. Moreover, the average magnitude of the CMCs outside East Asia more than doubles in such instances. So, we cannot rule out entirely a competitive pressure motivation for currencies to track the RMB.

PIIE boys did their homework, period. Some points:

1. I don't know why Big Name Authors think they can get away with such sloppy writing;
2. My policy of not having a comments section is vindicated by the echo chamber over at Pettis' blog. 59 comments...and not one who points this out either. I guess the Pettis Fan Club takes his word for gospel truth for better or worse--rather worse here;
3. I'm afraid that this is another example of inept blogging. Pettis writes--and he sure does write with posts extending to thousands and thousands of words--but he clearly doesn't do so from a position of knowledge of the material he himself links to;
4. This demonstrates why some quantitative analysis skills are worth learning for those interested in the subject matter. How do you measure covariance? How can alternative variables be included in models to account for alternative hypotheses? Pettis is a poet with limited numbers chops, so this probably explains his lack of awareness about such things. Do the math.

Note to Mike: If you link to something, at least try to understand what you're criticizing. I am not convinced that the yuan is going to take over as the world's dominant currency soon either, but I think it's at least worth trying to understand the arguments of Subramanian and Kessler before criticizing them for faults they didn't commit.

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Geography Flunkies? Pakistan Wants to Join ASEAN

Of the few opinions I share with George W. Bush, I have long argued that Turkey should be allowed to join the European Union. You know all of the counter-arguments: Turkey is a security risk because it shares borders with Iraq and Syria. Turkey is a dominantly Islamic country, whereas most European nations share a Judeo-Christian tradition. Turkey is a populous nation whose EU membership might see a tsunami of migrants heading for European states. And so on and so forth.

While many of these concerns can be legitimately discounted, I never thought that I would face a similar conundrum in our part of the world, Southeast Asia. Of all the darndest things I could possibly read, how about Pakistan wishing to join ASEAN? On the occasion of predominantly Islamic nations Indonesia and Pakistan signing a (rather limited) FTA, the head of Pakistan's largest chamber of commerce suggests his country is very much interested in this possibility:

Pakistan wants to join the Association of South East Asian Nations (Asean) and Indonesia should support it in its endeavour, Karachi Chamber of Commerce and Industry (KCCI) President Mian Abrar Ahmad said in a statement on Monday.

There are many difficulties here. Being a Citizen of the World, I of course have no objections to Muslim nations in ASEAN, for population-wise it is already predominantly composed of citizens of Islamic states. Aside from populous Indonesia, you also have Malaysia and Brunei in ASEAN. That said, consider the following impediments:

1. Geographically speaking, Pakistan is in South Asia, not Southeast Asia. More specifically, it is on the Indian subcontinent. It certainly doesn't share borders with any Southeast Asian nation since it lies west of India;
2. Pakistan is (logically) already involved in regional groupings in its part of the world, notably the South Asian Association for Regional Cooperation (SAARC) and the Economic Cooperation Organization (ECO) with lots of its neighbouring 'Stans and a smattering of Middle Eastern states. Both SAARC and ECO already have their own regional integration efforts, so I don't exactly see why joining ASEAN makes sense. While the latter's integration project may be further along in a number of respects, Pakistan's advantage with SAARC and ECO is that it's no Johnny-come-lately to them and thus has more leeway in determining the form of integration as they proceed.
3. Counting on the support of your co-religionists is hardly a sure-fire thing in ASEAN. Recall that Timor Leste has long relied on the Philippines to get the predominantly Roman Catholic nation into ASEAN, but to no avail as of yet.

So, while I certainly don't have any grudges against our Pakistani friends, I would strongly suggest that they make the most out of the regional groupings they already belong to instead of reinventing geography as we know it.

UPDATE: Before I forget, there is precedent for Pakistan being (mis)classified in a Southeast Asian grouping. Witness the "Southeast Asia Treaty Organization," composed of, erm, the United States, France, Great Britain, New Zealand, Australia, the Philippines, Thailand and Pakistan. Originally intended to be a mutual defence arrangement alike NATO, it never really took off and was disbanded by 1977. Here is the US State Department explaining away the presence of extra-regional participants--including Pakistan:

Most of the SEATO member states were countries located elsewhere but with an interest in the region or the organization. Australia and New Zealand were interested in Asian affairs because of their geographic position in the Pacific. Great Britain and France had long maintained colonies in the region and were interested in developments in the greater Indochina region. For Pakistan, the appeal of the pact was the potential for receiving support in its struggles against India, in spite of the fact that neither country was located in the area under the organization's jurisdiction. Finally, U.S. officials believed Southeast Asia to be a crucial frontier in the fight against communist expansion, so it viewed SEATO as essential to its global Cold War policy of containment.

That was back when the US suspected India of having the potential to fall under the Soviet ambit given its then-closer ties to the USSR than the US. Note though how this was a security arrangement, not an economic one. Then again, it demonstrates the US is not exactly a stranger to convoluting geography for its pet projects even today.

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When Cash & Hate Collide: Frayed US-Pakistan Ties

OK, so I had to think of a hackneyed title to describe an even stranger relationship. In general public consciousness--especially that of America--Pakistan emerged on the world stage in the wake of the 9/11 attacks. If not wholly supportive of the Taliban regime in Afghanistan back then, it was at least tolerant of its existence. By throwing wads of cash ("foreign aid") to curry Pakistan's favour, then-leader Pervez Musharraf famously switched allegiances to become a global warrior on terror--though his country's ultimate loyalty has remained in question. Since then, Pakistan has encountered several upheavals--the return of former leader Nawaz Sharif from exile, the killing of Benazir Bhutto and the subsequent election of her controversial husband "Mr Ten Percent" Asif Zardari.

All the while, Pakistan's economy has not exactly been a paradigmatic example of South Asian growth. In the wake of the global financial crisis, it did once more what it's done before in taking out an IMF standby agreement. With the consequences of a full political meltdown in a nuclear power potentially rather severe, the West ponied up quite quickly.

Fast forward to today and we have had interesting developments in this exercise in political economy. On the political side, we've had Pakistan complaining mightily about US excursions into its territory--especially that which eliminated Usama bin Laden. (Nevermind owing the US an explanation as to why he was sheltered in Pakistan's capital for the longest time, but territorial sovereignty does matter.) On the economic side, let's just say that Pakistan has, alike during previous bouts of IMF borrowing, failed to meet IMF conditionalities. This time around, failures to improve revenue collection are the culprit. The Pakistan News Service has the lowdown on this repeat borrower's history of, er, repeatedly borrowing without successfully escaping the need to do so. IMF lending to Pakistan is almost a mini-history of lending fashions at the institution:

Pakistan and the International Monetary Fund (IMF) will end [their] 12th loan programme, tag[ged] unsuccessful after 11 out of total signed loans of 18 in [the] last 53 years history of relations between two sides as Islamabad got [its] first loan programme from the Fund in 1958. The existing Standby Arrangement (SBA) programme will again repeat the old history as it is going to expire on September 30, 2011, on [an] unsuccessful note under which Islamabad failed to draw [the] last two tranches of $3.4 billion.

Pakistan’s history of using IMF resources can be divided into three distinct phases. In the first period—1970 to 1988—Pakistan had four one-year SBAs followed by one three year Extended Fund Facility (EFF). The special characteristics of this phase were (a) with the exception of two, [the] rest of the SBAs were fully disbursed, (b) there was little emphasis on structural reforms (except in EFF), and (c) repeated approach to Fund resources, in between periods of break.

In the second period, 1988 to 1999, Pakistan had both the short term and multiyear arrangements with the IMF. Unlike the first phase, these arrangements emphasized on variety of structural reforms along with demand[s on economic] management policies. Almost all the arrangements went off-track sooner or later on account of policy slippages. As a result, throughout this period Pakistan was continuously under one or [an]other IMF programme.

In the third period, 2000-2004, Pakistan availed one facility of SBA and PRGF [Poverty Reduction and Growth Fund] each. These arrangements were completed successfully as Pakistan met most of the structural performance criteria. With the recovery from macroeconomic crises, Pakistan exited from IMF programme in 2004.

The article then goes on to describe various IMF loan programmes since independence; more recent activity can of course be found on the [extensive] Pakistan pages on the IMF site.

In any event, disagreements over security have worsened with the US in the process of cutting off aid to Pakistan over sundry disagreements about how these monies have been used. Matters have come to a head over American incursions into its territory at the same time Pakistan has been unable to meet aforementioned conditionalities to avail of further disbursements of IMF cash. And don't forget that the less-than-transparent Pakistani intelligence service ISI has been accused by Admiral Mullen, outgoing chairman of the US Joint Chiefs of Staff, of coddling the allegedly terroristic Haqqani network. (Various political parties are now in the process of addressing this serious accusation.)

So the US and Pakistan don't quite get along. But what are the economic costs if Pakistan indeed goes it alone? The Express Tribune has some ideas:

The signals are indeed dire. The powers that be, above and beyond Prime Minister Gilani, had already spoken to break the heart of the business community: Pakistan was ready to take the consequences of its embrace of the Haqqani network and that it was the US that would suffer after losing Pakistan as an ally. As for the break with the IMF — after Finance Minister Abdul Hafeez Sheikh could convince neither the MQM [coalition partners] within the government nor the PML-N in the opposition to implement the RGST (Reformed General Sales Tax) — it threatens the economy with ‘dollarisation’ and rampant inflation already standing at a level higher than any other South Asian economy. What the businessmen wanted was probably not within the grasp of Mr Gilani. They were of the opinion that if the US was to be defied and if the umbrella of the IMF was to be removed, then they could hold up their end of the bargain provided that law and order was restored...

The pacification of Karachi is a long way off and may be overtaken by other crises triggered by the tiff Pakistan has picked with the US, to provide temporary emotional relief to the country’s intensely anti-American population. What the Gilani government is doing will not serve to bolster the confidence of the business community in Karachi. The army chief has not denied that the Haqqani Network is alive and well in Pakistan but has claimed that a lot of other countries in addition to Pakistan were maintaining contact with a militia of Taliban that controls 13 of Afghanistan’s 34 provinces. And Mr Gilani has delivered the most telling blow by saying: “America can’t do without us; it should stop sending out wrong messages.”

The end result may just be capital flight as the already-thinned business community in Pakistan flees:

No prizes, therefore, for predicting that the businessmen of Karachi will soon start saving their money and assets from being devalued by fleeing to other markets in the neighbourhood. It would be fair to say that the next few months or more will be uncertain to say the least, and that the consequences of a permanent break with the Americans could be severe on Pakistan’s economy.

To be honest, Pakistan's security services are at least as duplicitous as Westerners who've deservedly earned Pakistan's ire through the years. The ISI is as much of an obstacle to Pakistani development as foreign intervention. Unspeakable as it may be to many Pakistanis, could the alternative to coddling Americans actually be worse? There is much talk that a chastened Pakistan will soon be currying US favour once more given few alternatives and a moribund economy. Most of its "record" $18B reserve holdings f'rinstance are attributed to foreign donors the country is currently keen on ridding itself of.

Pakistan has been the mother country of many great minds; it does sadden me how it has been unable to sort things out at home so it can move forward alike its neighbours in India. Despite also having highly contentious and often violent politics, the latter has somehow managed to improve its situation in a way Pakistan has yet to find.

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As an aside, those all-purpose saviours the Chinese are being mooted for picking up the slack in lending to Pakistan.

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