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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (45837)	4/2/2004 6:29:02 PM
From: IQBAL LATIF	Read Replies (3) \| Respond to of 50167

Wana operation and the economy —Ravian Our Islamists should take a lesson from the Turkish Islamists and should welcome the eradication of extremism. This will promote investment for a prosperous Pakistan The trouble with not being rooted in the ground reality of political economy is that one tends to get carried away. The reaction of Imran Khan, the MMA and the PML-N to the army intervention in our tribal belt is in this vein, as is that of many newspaper columnists. In their desire to take on the West, wishes have become horses and they gallop away into a Quixotic world of make-believe. Pakistan’s “ground reality” is that for the last fifteen years the economy has underperformed not only in relation to our own past achievements but also, importantly, relative to neighbours India and China. The result is that we have produced far fewer high productivity and well-paying jobs than are needed to ensure that living standards keep pace with those of our neighbours. But just as we are cleaning up our act, and the economy is beginning to pick up again, the Islamists have decided to signal to the world that it is okay for Al Qaeda to be holed up in our tribal belt and that the army is wrong to clean up the mess created during the Afghan war. Economies under-perform when investment weakens. Investment in Pakistan has hovered at 15 percent of GDP in the last five years. It is just beginning to increase, spurred on by public investment and also, as seen in most recent trends, a pickup in private investment. But we still lag behind our neighbours. The total investment in India is 23 percent of GDP and in China it is a whopping 35 percent. The last thing we want is to signal to the investor that a large segment of public opinion supports the extremist methods and the worldview of the “guests” in Waziristan. A primer on what determines investment might help. Hire a worker to clean your house and he would do the work for the going daily wage of around Rs100. Now imagine that the house owners bicker constantly on how to clean the house and they keep changing the cleaning instructions. The worker would rather not work in this house, but will agree to do so at a higher wage. This is akin to the premium required by investors if there is fear of policy reversibility with a change in government. . Next imagine that the owners have a habit of paying less than the contracted wage when the job is completed i.e., the owners agree to pay Rs100 before the worker begins the job, but then actually pay only Rs90 after the job is done. (This is not so fantastic: many employers treat workers in such a shabby manner). Over time, workers will learn and will ask for Rs110 to do the same job. This is also a kind of risk premium and is not unlike the higher returns asked by investors in economies where macro-economic instability (such as inflation and/or devaluation) leads to a loss of currency value. If the house has potholed floors and lacks a staircase, it will take the worker longer to clean the house and he would want to be paid a higher wage. For the investor, this is akin to the economy having poor infrastructure (bad roads, inefficient railways, slow ports, poor telephony etc) which raises the cost of doing business. Again, the investor will expect much higher returns (in the shape of tax holidays etc) to invest in the country. Imagine now that the worker has spent time and energy cultivating the owner of the house to get the cleaning contract and after much effort has reached an understanding on how the work will be done and how the quality of work will be assessed. And then, half way through the job, he learns that the house has been sold off to a new owner whose temperament and expectations are unknown. This will impose new unanticipated costs and the worker will either avoid such houses or will want a high premium to safeguard against abrupt changes. In the world of investment, this is akin to political instability. It makes investors extremely jittery and they pack up and leave and do not turn up to look at new opportunities. Finally, imagine that the worker is being asked to clean a house that has been colonised by venomous snakes. The worker would be perfectly rational to walk away from the house. The worker is unwilling to work at any wage because the presence of snakes terrorises people into believing that there is absolute certainty of being bitten and dying. This is the response of investors to the terror of being hit by suicide bombers, the scourge of the 21st century. We have progressed well in allaying investor fears on the first three determinants. The fourth determinant will be addressed when President Musharraf reconciles with the mainstream political parties. The fifth is finally being tackled. Our Islamists need to take a lesson from the Turkish Islamists and should welcome the resolution of this investment hurdle to the pave the way for a prosperous Pakistan. Surely this is what we all want! *