Friday June 14, 2024

Against the tide

By I Hussain
May 23, 2024
A labourer bends over as he carries packs of textile fabric on his back to deliver to a nearby shop in a market in Karachi on June 24, 2022. — Reuters
A labourer bends over as he carries packs of textile fabric on his back to deliver to a nearby shop in a market in Karachi on June 24, 2022. — Reuters

In Pakistan, change occurs at a snail’s pace, a stark contrast to Facebook’s (now Meta) ethos of ‘move fast and break things’. Instead, the prevailing approach could be described as ‘remain static and do not upset the status quo’

Since the new government under Prime Minister Shehbaz Sharif took office over a month ago, the major activity has been internal jockeying within the cabinet rather than any significant measures to overhaul the economy, which awaits direction from an incoming IMF delegation.

Corruption seems woven into the nation’s political fabric, evidenced by rumors of a costly and unnecessary wheat deal that sapped $1 billion from Pakistan’s already scanty foreign currency reserves. This mismanagement has impacted Punjab’s farmers, who face reluctance from local procurement centers to buy their wheat due to lack of funds and storage facilities, pushing some to consider burning their unsold harvest.

The alleged financial bungling leads to questions about the utility of caretaker governments. They add on layers of cost to the exchequer without delivering significant policy changes, and often exacerbate issues, as seen in the wheat import fiasco. A constitutional review of the necessity of caretaker governments may be warranted.

The federal government has high hopes for Foreign Direct Investment (FDI) from the Middle Eastern Gulf countries, notably Saudi Arabia. However, clarity is essential.

First, if the FDI involves selling profitable state-owned enterprises, it merely changes asset ownership without technological advancement, increasing foreign currency reserves temporarily but leading to ongoing capital outflows.

Second, the sale/lease of agricultural land appears to be on the cards. This requires an abundance of caution because Pakistan is a borderline food-insecure nation. Land transfers to foreign buyers could compromise national interests by not only displacing tenant farmers (whose interests are, unfortunately, normally swept aside because of their lack of power) but also jeopardizing food availability.

Third, any FDI should pass what one may call the ‘Atif Mian’ test. The renowned Princeton economist of Pakistani origin made a very telling point about the type of FDI Pakistan has welcomed.

Professor Mian highlights the pitfalls of accepting investments that generate revenues in Pak rupees but require foreign currency for repatriation straining the country’s reserves of foreign exchange.

Thus, projects that conserve or generate foreign currency should be emphasized either because they are import-substituting or export-oriented. These are usually manufacturing sector projects.

Further, if the government starts giving guarantees about the rate of return on FDI then we are in essence taking on a loan that is risk-free for the lender—not exactly a smart financial strategy as we learned from the disastrously expensive experience of the private sector power generation projects.

Finally, all investments involving privatization should be debated in parliamentary committees instead of being decided upon behind closed doors. This avoids charges of favouritism or malpractices as well skirts around the problem of ‘groupthink’.

Pakistan’s neglect of Karachi’s problems, the country’s major port, particularly during the 1990s and 2000s significantly set back national development. The city’s deteriorating security, highlighted by the brutal murder of the journalist, Daniel Pearl, in 2002 not only sealed its international reputation as a cesspool of crime but also diverted business proposals and export orders to other countries.

By allowing Karachi to become a hub for criminal elements intent on fomenting anarchy, we witnessed a decline in investment not only within the city but also within the country. The frequent strikes in the city resulted in long delays in the delivery of export orders, causing foreign businesses to look for alternative supply sources. This destroyed the chances of Pakistan becoming a major part of the supply chain linking international buyers to developing country manufacturers.

Consequently, we ceded the export market, particularly in garments, to other countries such as Bangladesh, Mauritius, and Vietnam.

The lessons of history suggest that port cities are a fulcrum for a nation’s development. Whether it is London, Ho Chi Minh City, New York, Taipei, or Shanghai -- it is the port cities that are in the vanguard of a country’s economic development.

Why is this so? Because historically port cities have played pivotal roles in national development, benefiting from larger markets and an influx of ideas as outlined by Adam Smith in his ‘The Wealth of Nations’ dating back to 1776.

By undermining Karachi’s development through its perverse status as a lawless city, we stymied the entire country’s development. Also, the perception of a city or country as unsafe can have long-lasting reputational damage, affecting its ability to attract future business and tourism. The perception problem can lead to a vicious cycle where initial disruptions lead to long-term economic isolation.

The prime minister has recently announced that he wants a certain proportion of governmental imports to be routed through Gwadar. While the government may be able to afford this, the extra expense of this trade route renders it an unviable option for most private businesses.

Transport costs in hauling goods to and from Gwadar are much greater than that compared to Karachi because of the latter’s long-established connectivity through road, rail, and air to the rest of the country especially to its manufacturing heartland with cities like Lahore, Sialkot, and Faisalabad only a few hours away.

Finally, practical and security issues make Gwadar an unrealistic alternative to Karachi. Without addressing the infrastructural deficiencies and ensuring safety, Gwadar cannot replace Karachi, which had it been properly managed, could have accelerated Pakistan's development as a major growth center over the past two decades.

Sadly, we missed an opportunity to follow what is a natural progression in the climb up the ladder of development.

The writer is a group director at the Jang Group. He can be reached at: