MicroPakistan

Last  week I had the pleasure of attending a small dinner with Shaukat Aziz, the former Prime Minister.  In a wide-ranging  two hour conversation, he gave his thoughts and perspectives on a whole host of issues facing the country and offered some insights into the past eight years that I found fascinating.

Aziz, as most readers are  aware, was a prominent figure in Citibank in New York in 1999 when he was asked by Musharraf to be the Finance Minister in the new regime.  The decision to work with a military government was criticized by some, but on the other hand, Aziz had an opportunity to tackle some fundamental problems that plagued Pakistan, and his expertise made him one of few who could do the job.  He accepted and served as Finance Minister for several years, then became Prime Minister in 2004.  Although ultimately Musharraf was in charge, the main domestic and economic policies were designed and implemented by Aziz, and so he was the architect of the reforms that occurred.  He left office in November 2007, and is now on a global  speaking tour, for which he has declined remuneration.

Aziz noted that the primary Pakistan issues that concern American leaders, both in the public and private sector, remain terrorism, nuclear proliferation, democracy, and the impact of the global financial crisis.

Aziz made several points on terrorism.  He felt that the US press has been adversarial in its approach to Pakistan, and there has been little or no recognition of the high price Pakistan has paid for the Afghan war.  He stated that the Taliban were not given safe haven in Pakistan, but pointedly remarked that the real problem was the Afghan perception of being occupied by US forces.  In my view this is a mixed bag;  the occupation is viewed more favorably among the non-Pashtuns, but certainly the Afghan Pashtun population remains the heart of the Taliban and anti-US movement.  Aziz felt that the only way to really end this struggle would be replacing US forces with UN forces in Afghanistan.

Aziz also put forth the argument that terrorism is linked to political and economic grievances.   This is certainly the case in Kashmir and Palestine, but less so with the transnational Jihadis and Al-Qaeda movement, which is not linked to any particular defined political cause, and is the source of much of the mayhem in the Muslim world and in Pakistan.

Aziz’s major accomplishment must certainly be considered the economic turnaround.  Pakistan has averaged 7% growth for the last five years, and living standards have risen sharply.  Annual motorcycle sales have gone from 100,000 to 900,000, and there are now many families of modest means with motorized transport.  The telecom and cell phone revolution also has been phenomenal.  Cell phones per capita in Pakistan are much higher than India.  Exports have doubled, and Pakistan has finally said goodby to the IMF.  The latest World Bank data shows Pakistani GDP per head (at purchasing power parity) to be 2400 dollars, versus 2100 in India and 1300 in Bangladesh.  Pakistan also has much lower income inequality than India. The net result has been a plunge in extreme poverty from 35% of the population in 2000 to 25% now, meaning that more 15 million Pakistanis have been lifted out of that desperate state.

Aziz did this through a broad program of economic reform.  The most important elements were independence for the state bank, privatizing and reforming the banking sector, reducing tariffs, privatizing large chunks of the industrial economy, and changing the tax base to income and sales taxes primarily. Aziz was somewhat exasperated that the reforms were so poorly understood by the Pakistani press, which has tended to be dismissive of all this.   But financial  literacy in Pakistan is rather poor, and only recently have there been financial television and newspapers starting up.

We did discuss the issue of electricity.  The reason there has been such a crunch is that demand growth over the last few years was projected at only 8%, but turned out to run at 15%.  In the 1990’s Pakistan contracted with private power producers to provide generating capacity, but they were guaranteed payment regardless of demand. When there was little demand growth due to the moribund economy, Pakistan was forced to pay these providers while they were idle, so there was a hesitancy this time to invest in capacity too aggressively.  Aziz did say that 2 gigawattts of new capacity was under construction, and a nuclear reactor will be on line in 1-2 years.  Ultimately, Pakistan needs to harness its hydroelectric potential but that was not possible, as Aziz said they could not get consensus on Kalabagh dam.  In my view, only a PPP-ANP government could build Kalabagh dam, and hopefully this new government will make the rational choice.

We then moved onto the topic of education.  Aziz noted that out of 160 million Pakistanis, 100 million are under the age of 25.  This is both a challenge and opportunity, and although this creates a favorable demographic profile for the next 25 years, it will depend on educating this mass of people.  Aziz spoke about the importance of vocational training and the need for strong private participation in both education and healthcare.  He put forth the idea that the government should provide a basic level of education to those who cannot afford private schooling, or access NGO’s.  He also noted that education, except for curriculum, is in provincial hands.

Although Aziz is correct on one level, I was disappointed that more was not done in the last eight years, especially given the rapid rise in the tax base.  As a percent of GDP, education is still underfunded, and enrollment and literacy rates are much lower in Pakistan than in India or Vietnam, two other poor nations with large populations.  While the Federal government cannot force the provinces to provide education, it could have allocated more funds, especially for primary education.

Aziz was also particularly pleased with the earthquake relief efforts.  He pointed out that no one died from hunger or epidemics, and everyone who needed medical care got it.  The rebuilding efforts in Kashmir have been very successful.

Aziz stated that the wave of inflation that has been affecting Pakistan is driven by rising global commodity prices, particularly oil.  This is certainly true, but I think that the State Bank has been too loose with monetary policy, and even now with inflation at 12%, real interest rates remain negative. High oil import bills have also driven the trade and current account deficit much higher, although Aziz noted that direct investment and remittances have been covering those costs.  He did not think that devaluing the rupee was called for, and would likely stoke inflation.

Finally, Aziz made a genuine plea that we all give the next government a chance to work.  He sees the electoral process and the outcome as healthy, and he felt that the PPP and PML-N forming a coalition would be a positive precedent.  He felt that Pakistan was a much different place now than 10 years ago, and the people and the press are much more politically conscious.  Overall he was politically optimistic.

Aziz himself seems to have no further political ambitions.  He had not taken a day off in the last eight years, and clearly appeared to be a man happy to have that burden lifted. He should be pleased with what he has achieved, and lifting 15 million out of poverty is a huge advance. He has set a high bar for what a Prime Minister should do, and hopefully the next one will meet that standard. For now, Aziz plans to finish his speaking tour, then write a book about his time in office.  I look forward to reading it.