Posts Tagged ‘Economics’

Economic Bullshit

March 6, 2017

By Anjum Altaf

A lovely little book came out in 2005 titled On Bullshit. Written by a professor of philosophy at Princeton, it remained a bestseller for months. Its principal message was that “bullshit is a greater enemy of the truth than lies” because “Liars at least acknowledge that it matters what is true.” Bullshitters, on the other hand, convey impressions without being concerned about whether anything at all is true. They quietly change the rules governing their end of the conversation so that claims about truth and falsity are irrelevant.”

I recalled the book after reading two articles within a week talking up the Pakistani economy in the Wall Street Journal and the Washington Post. Both employed the classic bullshitter’s gambit of throwing out random facts to convey a favorable impression without caring in the least whether the inferences were in any way supported by fact or argument. Had a PR person been paid to write these articles, he or she couldn’t have done a better job.

At the heart of both articles is the blinding vision of a middle class ready to rocket the Pakistani economy into the stratosphere. The WSJ article summarizes its thesis in its title: “Pakistan’s Middle Class Soars as Stability Returns: Consumer spending rockets as poverty shrinks, terrorism drops and democracy holds.” The title of the WP article is more bland –  “Beyond the headlines of terrorism, Pakistan’s economy is on the rise” – but its argument is the same.

Observe how the impression is constructed. First the numbers – 38% of the country is middle class, while a further 4% is upper class. That’s a combined 84 million people.” Then a true fact which means nothing by itself: This size is “roughly equivalent to the entire populations of Germany or Turkey.” And then another less than relevant generalization: “A study by the OECD forecasts that the bulk of the growth in the middle class in the years ahead will come from Asia, which will account for two thirds of the global middle class by 2030.”

Comments culled from international agencies provide a favorable jumping-off point: “What’s more, Pakistan is winning plaudits from the International Monetary Fund, and its economy is forecast for a healthy 5.2 percent growth rate in 2017, according to the World Bank.” That’s enough to conclude that “As Pakistan turns a corner… Three key factors are driving Pakistan’s economic awakening: an improved security climate even despite the most recent attack, relative political stability, and a growing middle class. These three interlocking pieces are fueling Pakistan’s growth story.”

From here the autopilot takes over: “Robust middle classes are vital to healthy societies and growing economies, and Pakistan’s middle class may have reached a tipping point.” Throw in a couple of quotes by experts and the future becomes more than incandescent: “Pakistan’s consumer middle-class market could hit $1 trillion by 2030” and “middle classes are driving impressive 25 percent rates of return for large multinational consumer companies… middle-class growth is sparking increased production of cement, steel, automobiles and the like… one of the key reasons for current bullishness on Pakistan.”

Let us now subject this bullshit to a stool test. First, what does the size of the middle class have to do with anything? Does a population as big as Germany’s mean that a tipping point has been reached fueling Pakistan’s economic takeoff?

Consider several examples in comparison with Pakistan (population 200 million, income per capita $5,100). Singapore, with scarcely any natural resources, has a population of 5.8 million (less than that of Faisalabad) and a per capita income of $87,100. Ask how Singapore’s economy skyrocketed with a middle class that could not have exceeded 5.8 million? Or consider the tiny populations of Dubai and Abu Dhabi which have boomed in front of our eyes. South Korea and Pakistan had roughly the same per capita income in the 1950s (when Pakistan was billed as a model of development with a much smaller middle class). Today, the former with a population of 51 million has a per capita income of $37,900. Does this not suggest that the size of the middle class by itself has very little to do with economic growth? Very clearly it is economic policies and governance that matter much more.

The typical response to such examples is to blame overpopulation for the poverty in Pakistan. Now suddenly the large population has become the magic wand that will even make up for the absence of sound policies. The same fact can fuel very different stories depending on the occasion.

Second, even if the Pakistani middle class is 84 million strong how much purchasing power does it really have? Note that Pakistan’s per capita income of $5,100 is below poverty level income in the U.S.A. Add to that the phenomenon of inequality which is the major issue of the moment. The latest Oxfam numbers inform that in India just 57 individuals own more wealth than the bottom 70% of the population. Isn’t it likely that most of the wealth in Pakistan is concentrated in the hands of the 4% that comprise the upper class. If things were indeed so rosy for the middle class why would almost every member of it want to move to a stronger economy? Can’t they see that Pakistan has turned the corner?

Yes, of course, more cement and steel is being purchased but is it consumption per capita that is going up or simply a reflection that the population of Pakistan has skyrocketed – from 61 million in 1971 to 200 million today. Just keeping up with the additional needs (food, clothing, houses, schools, colleges, hospitals, roads, electricity, etc.) means that commodity sales would increase. And yes, many companies providing these commodities are profitable. But does one see foreign investment rushing into new projects? Even the Chinese have to be guaranteed exorbitant returns to be tempted. In fact, Pakistanis themselves are avoiding new investments preferring to put their money in land or buying property in the Middle East or parking cash in tax havens. Some are even shifting existing manufacturing capacity to foreign countries where costs of doing business are lower.

Ask the middle class if the skyrocketing economy is generating enough acceptable jobs to accommodate those entering the labor force every year let alone the poor who are still in a majority? Is that the reason why more and more people wish to leave to send back money for their families to consume and keep the bleeding economy on life support?

Snake-oil will continue to be sold and there will never be a shortage of buyers. Allah be praised.

This opinion appeared in Express Tribune on March 4, 2017 and is reproduced here with permission of the author.

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CPEC: Lessons from History

January 18, 2017

By Anjum Altaf

How does one get a grip on the proposed China-Pakistan Economic Corridor (CPEC) and its associated investments without any hard information except for the hype? In the absence of any mechanism for credible evaluation I suggest we hold it up against a historical parallel and see what emerges by way of tentative conclusions. Some discussion grounded in real experience may be better than taking sides in the dark.

Around the turn of the twentieth century the British invested vast sums of money in the part of the subcontinent that now comprises Pakistan. Amongst these investments were the network of canals and barrages, the post and telegraph, and roads and railways. All included it would have likely added up in real terms to be bigger than the $56 billion associated with the CPEC.

What came of all that investment and what economic transformations did it sustain? At the macro level, Pakistan remains a desperately poor country with around a third of its population struggling to survive below the poverty line. Almost half the population is functionally illiterate without access to safe water and sanitation or adequate health care. Stunting, malnutrition, and infant and maternal mortality are at levels considered unacceptable in the rest of the world.

The sobering conclusion would be that even if the investments had huge economic payoffs, extremely venal governance ensured that while some people became phenomenally rich very few of the benefits trickled down to the majority in any meaningful sense.

Notwithstanding the issues of governance and distribution, which remain as critical now as then, the question remains: Did the investments have huge economic payoffs? Even to speculate intelligently on the question one would need to disaggregate the investments and consider them separately.

Take the canal colonies and the barrages. I believe most people would accept that the outcomes were positive and significant. One can assess the outcomes in terms of crop outputs, crop yields, employment created, or incomes generated for farming households.

Next, consider the railways where the comparisons become more interesting. The link between Karachi and Peshawar via Hyderabad, Sukkur, Multan, Lahore, and Rawalpindi can be considered the central artery of the Pakistani economy capable of transporting people and products efficiently and economically. Once again, I believe there would be agreement that the outcomes were positive and the payoffs significant.

Now consider some other investments in the railways that turned out differently. Among these were the links between Peshawar and Landikotal on the Afghanistan border, the link between Quetta and Chaman that was intended to have been extended to Kandahar in Afghanistan, and the Trans-Balochistan railroad from Quetta to Zahedan, inside Iran.

All these could be considered as economic corridors of their time. Even if they were not intended as such, they could have become so after the independence of Pakistan. The Trans-Balochistan railroad extended 455 miles with 38 stops linking very friendly countries between which much trade was possible. Indeed, under the Regional Cooperation for Development there was the possibility of extending the link to Turkey and thereby into Europe, an opening with immense economic potential. Today, the Peshawar-Landikotal link is inoperative, and the Quetta-Zahedan link operates on a nominal frequency of twice a month. None of these corridors had any transformative impact on the local or national economies.

Take roads as another example. The British upgraded and extended the Grand Trunk Road, an ancient trade route linking populated habitations, to great and sustained benefit. Contrast the limited economic impact of the more recent Lahore-Peshawar motorway. The equally recent Karakoram and Thar-Karachi highways have had virtually no significant transformative impacts on the local economies except to make it easier for local labor to migrate to more prosperous areas for employment.

Some tentative conclusions can be adduced. For investments to yield economic benefits, it seems a necessary, if not a sufficient, condition for them to either generate employment or to connect populated locations at relatively comparable levels of economic development. The historical evidence suggests that routing corridors through sparsely populated territory even with associated investments that create very few jobs is unlikely to be transformative. And linking disproportionately developed areas without prior complementary investments may just accelerate a drain of people and resources from the less developed regions.

It is indeed possible that investments in roads in some sparsely populated areas, e.g., in the Northern Areas or along the Mekran coast, would pay off economically if as a result a significant inflow of people is facilitated as would be the case with a major boost to tourism. But such prospects are scarce given Pakistan’s security conditions and increasing social conservatism.   

It will no doubt be argued that the unsuccessful rail corridors mentioned above were not made by the British for economic but for strategic military purposes and therefore comparisons with the CPEC are invalid. However, as mentioned before, there was nothing to prevent the conversion of the ready-made investments to economic purposes after 1947. There was significant trade potential both with Afghanistan and Iran and the latter was a very friendly country at the time. The shrivelling of the corridors should prompt serious questions inquiring what went wrong after all the investments were made.

At the same time it could be argued in turn that the CPEC is an equally strategic initiative of the Chinese presented as one with transformative economic payoff for Pakistan. The latter remains to be demonstrated independently and objectively. The historical evidence cautions that mere hand-waving is not enough.

One should also consider what might be the fate of the CPEC if relations with China turn sour in the future. This may seem a far-fetched concern at this time but the evolution of the relationship with Iran should provide a reality check. Pakistan’s abysmal relations with all its primary neighbors does not leave much room for complacency and demand a credible fall-back alternative.  

If the national objective is to further the development of the lagging provinces of Balochistan and Khyber-Pakhtunkhwa, it might be better to think in terms of employment-generating investments in the regional economies much as the canal colonies created jobs in the Punjab in the twentieth century. It might make more sense for economic corridors to follow and not precede such investments.

Anjum Altaf is a Fellow at the Centre for Development Policy Research in Lahore. This opinion appeared in Dawn on January 17, 2016 and is reproduced here with permission of the author.

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A Question of Pricing

December 5, 2015

By Anjum Altaf

Here is a question of pricing for you to consider.

Imagine the following scenario:

You are getting ready to travel from Lahore to Islamabad when by chance X stops by at your house. X is also making the same journey driving his own car. X offers to give you a ride and you accept.

Consider X to be one of the following in different versions of this encounter:

1. Your student
2. Your good friend
3. Your brother-in-law with whom you are on speaking terms
4. A distant relative
5. A colleague at work
6. A neighbor whom you know but are not close to
7. A stranger who stopped at your house by mistake

If you had traveled on your own as planned, the trip would have cost you Rs. 2,000.

For every case of X (from 1 to 7) answer the following questions. You can combine the categories of X who, in your opinion would give or receive the same answer.

QUESTION 1: How many Rupees would X expect for giving you the ride?

QUESTION 2: How many Rupees would X ask for giving you the ride?

QUESTION 3: How many Rupees should you offer X for the ride?

QUESTION 4: How many Rupees would you offer X for the ride?

In each case consider two versions:

  1. You and X are Pakistanis in Lahore and the cost to you of the trip to Islamabad is Rs. 2,000.
  2. You and X are Americans in Washington, DC and the trip is from DC to New York City with a cost to you of $200.

For each case and each version, state what you consider would be the appropriate ask and offer prices from the following perspectives:

1. Social norms and conventions
2. Moral norms and conventions
3. Legal norms and conventions
4. Considerations of fairness and equity
5. Considerations of standard economic theory

Organize your answer in the following tabular form:

Consideration Identity of X (Pakistan) Identity of X (USA)
1 2 3 4 5 6 7 1 2 3 4 5 6 7
1. Social
2. Moral
3. Legal
4. Fairness
5. Economic

For each cell enter your best answer as the four-tuple (K1, K2, L1, L2) where:

K1 represents what you think X should expect of you.
K2 represents what you think X would ask of you.
L1 represents what you think you should offer X.
L2 represents what you think you would offer X.

You can indicate Not Applicable wherever you think appropriate.

After considering all five dimensions (Social, Moral, etc.) state what you believe would be the actual or most likely transaction/exchange between you and X, i.e., how many Rupees would you give X for the trip (convert shared expenses into Rupee equivalent). This will be a set of 14 numbers – 7 for each identity of X in Pakistan and 7 for each identity of X in USA.

Write a paragraph explaining the perspective and reasoning that has influenced your answers.

Write a paragraph stating the conclusions you have reached after completing this exercise.

How to Submit Answers in the Comments Section

Submit your answers in the comments section of the blog.

The table is intended to help your thinking. You may choose not to enter it as part of your answer if you feel the other answers are sufficient to describe the logic of your thinking.

If you do wish to enter the table and are unable to post it in the comments section, use the following longer format in which you will be entering each row separately:

Social: Enter the 14 four-tuples in sequence from the first row of the above table.
Moral: Enter the 14 four-tuples in sequence from the second row of the above table.
Legal: Enter the 14 four-tuples in sequence from the third row of the above table.
Fairness: Enter the 14 four-tuples in sequence from the fourth row of the above table.
Economic: Enter the 14 four-tuples in sequence from the fifth row of the above table.

Enter what you believe would be the most likely Rupee or Rupee equivalent amount you would give X for the trip in the following format:

Pakistan: (R1… R7)
USA: (R1… R7)

Where R1 is the amount when X = 1, R2 is the amount when X = 2, etc. There will be seven numbers in each row, one for each identity of X.

Enter the two paragraphs indicating your perspective and reasoning in thinking through this exercise and the conclusions you drew from it.

Feel free to ask any questions of clarification on the blog before finalizing your answers.

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Why Labour Needs Help

February 5, 2015

By Anjum Altaf

It may seem counter-intuitive but if we wish to spur economic growth in Pakistan both government and citizens would have to step in to help labour. This is the surprising conclusion of a study of the local economy carried out by students from the Lahore University of Management Sciences (LUMS) under my supervision.

Initial discussions with representatives of several small cities around Lahore identified violations of labor laws as having a significant impact on both the welfare and productivity of industrial workers. As a result, the interactions between labor laws and economic growth were studied in Sheikhupura, a half-million sized industrial city about 30 miles from Lahore.

Observations of small scale industry, employing the majority of the industrial labor force, revealed desperate, survival level, working conditions at compensations below the minimum wage. Workers had little or no protection from various forms of exploitation and exposure to hazards. There were virtually no mechanisms of redress and no collective bargaining. One outcome of limited incomes was little or no investment in human capital improvement and sustained poverty over generations.

The balance of power among the three key agents – workers, factory owners, and government regulators – was found to be completely one-sided with the latter two holding all the cards and employing a strategy of extensive collusion. This collusion allowed gross violations of all labour laws with various subterfuges and mechanisms, the most egregious being the outsourcing of worker hiring to contractors less subject to the application of laws. This significantly diluted the legal accountability of factory owners.

The situation in the small-scale industry in Sheikhupura could be characterized as a low-level equilibrium trap sustained by a competitive market in which no individual firm by itself could afford to change the terms of engagement with either the workers or the regulators without going out of business. Charitable intentions were not enough to change the plight of workers.

In such a scenario, market forces alone would not prove sufficient to provide a dynamic leading out of the low-level equilibrium trap although escaping the trap would actually be in the long-run interest of both factory owners and workers. The existence of so many people at survival level keeps purchasing power low which negatively impacts the prospects for consumer-driven growth. As a result the development of local industries catering to the demand of the majority of the population is stifled. At the same time there is no incentive or ability to invest in human capital improvements for the future.

The study concluded that only federal action can change market conditions creating a new level playing field forcing all factory owners to equitably comply with higher standards in their own long-term interest. An example of such federal action was witnessed in the American South in the 1960s with the promulgation of the Civil Rights legislation that altered the negative equilibrium resulting from pervasive racial discrimination leading to with win-win outcomes for all stakeholders. Business was forced to act in its long-term interest against its will and contrary to its perceptions of short-term competitive advantage gained by exploiting labour. In retrospect the federal intervention was deemed to be the best thing that happened to American South.

Federal governments in Pakistan have been unable to initiate such legislative action and present trends in South Asia are actually in the opposite direction owing to pressures generated by the forces of globalization to create business-friendly markets.

In such a scenario of weak support, grassroots political mobilization and consumer activism are necessary to advance the cause of labour. In developed countries such initiatives have often succeeded in convincing governments and employers to curb harmful labor practices at home and abroad and they have been lauded for the contribution. Recent public interest litigation in the Punjab on behalf of workers employed in unregistered stone crushing factories and dying of silicosis is a case in point. Such activism illustrates both the need and the possibilities of proactive lobbying on behalf of labour rights in developing countries.

Many innovative policy responses are possible to improve the conditions of labour to spur demand-driven economic growth in Pakistan. In addition to strengthening existing penalties, a new dynamic can be triggered by measures that incentivize companies to voluntarily improve working conditions and standards. A calibrated carrot and stick regime supported by public disclosure and citizen labor boards can yield sustained progress towards greater social justice and workplace democracy.

There are no fundamental reasons that prevent governments from adopting some or all of the measures that could improve the livelihoods of workers. Continued failure to act is contrary to national interest. Governments and citizens committed to economic growth ought not to allow conditions to deteriorate to the point of a demand deficit that can have uncertain outcomes.

Anjum Altaf is the provost at Habib University and was formerly dean of the School of Humanities and Social Sciences at LUMS. This op-ed appeared in Dawn on January 23, 2015 and is reproduced here with the author’s permission. The complete report is available at http://www.theigc.org/wp-content/uploads/2015/01/Altaf-2014-Working-Paper1.pdf

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The Economics of Culture

October 22, 2014

By Anjum Altaf

I doubt anyone would guess right if a quiz master were to ask what Britain’s leading export was in 1997. The surprising answer: The Spice Girls, through sales of their music, attendance at their film, and related merchandising.

This confirms that culture is big business. In the same year, the US economy produced over $400 billion worth of books, films, music, TV programmes and other copyrighted products and this category emerged as the leading export for the US as well. Not only that, the sector is growing rapidly, between two to three times as fast as the overall economies in developed countries.

East Asian countries which grew by leaps and bounds during the last quarter century on the strength of low-cost manufacturing have noticed this phenomenon in their search for diversification. Almost all of them are investing heavily in promoting their own cultural output as well as in providing lower-cost facilities for the making of cultural products. Entire digital multi-media cities are being set up in a number of locations including Kuala Lumpur, Seoul, Hong Kong and Singapore with Shanghai not far behind. The Indian movie industry has started to attract external capital and looks set to follow software as a global player.

All this is a preamble to highlight an undiscovered and under-exploited source of economic growth and to motivate a discussion of what we might be doing in Pakistan. Clearly we ought to re-examine culture not as a luxury but as a source of economic growth and employment creation. The market is extensive. There is a very large South Asian diaspora with adequate purchasing power. In addition, South Asian culture is continually making inroads in Western markets building on the breakthrough provided by Ravi Shankar: just in the last year, Lagaan was nominated for an Oscar, Bombay Dreams opened on West End, Moulin Rouge paid tribute to Bollywood, and Ashwariya Rai made the cover of Time magazine. Then there is a very large Indian market itself waiting to be tapped. Just to look at one dimension: there is a ghazal craze in India and artists of the calibre of Mehdi Hasan, Ghulam Ali, Fareeda Khanum and Iqbal Bano can sweep that market repeatedly with ease.

The possibilities are manifold. However, on the negative side, we have not only failed to tap these markets in the past, we have allowed our cultural heritage to decay to an extent that we may not be able to exploit the markets when they do open up and we realise their potential. Some examples are obvious and cannot be disputed. Thus, there are no comparable replacements for Roshan Ara Begum or for Ustads Amanat Ali Khan-Fateh Ali Khan, Nazakat Ali Khan-Salamat Ali Khan, Shareef Khan Poonchwaley, Shaukat Hussain Khan, and Bundoo Khan.

It is incorrect to argue that this is so because there is no demand for classical music. We have failed to reproduce this asset base out of sheer neglect and callousness. Musical trends among the youth are no different in India yet Ustad Allah Rakha has been followed by Zakir Hussain, Ustad Vilayat Ali Khan by Shahid Parvez, and Ustad Nisar Hussain Khan by Rashid Khan, to give just a few examples. The number of exciting new stars moving up the ranks is very large. The contribution of the Indian Tobacco Company in setting up the Sangeet Research Academy in Calcutta is an eye-opener (for details see http://www.itcsra.org).

But even if we accept that classical music is dead in Pakistan, if only for the sake of argument, we cannot say the same for the ghazal which remains immensely popular. Yet, even here we have not been able to reproduce and replace artists of the calibre of Mehdi Hasan, Fareeda Khanum and Iqbal Bano. Nor is there the semblance of a replacement for Nur Jehan Begum on the horizon.

The reason can be very simple. These artists were truly great because they had a firm grounding in classical music. New singers often have equally good voices but it is easy to tell that their sense of pitch and rhythm is nowhere the same. They can imitate some of the songs of the greats very well but whenever they sing something original their weak foundations are exposed immediately. Inadequately trained artists would survive in the home market but would find it very difficult to make a mark in a much more discriminating global one.

Given the extent of the neglect and decline, it is obvious that Pakistan cannot jump into the forefront of the market for cultural products. But a realisation that such a market exists can provide a motivation for actions that will not only reverse the decline but likely generate other positive externalities as well.

In this context, we need to remind ourselves that the value of culture extends beyond economics, something we were aware of but have seemingly forgotten. Just one Ravi Shankar has created more goodwill for India than hundreds of paid publicists could ever hope to deliver. At a time when a very negative image of the country has to be overcome, the role of culture in presenting an alternative image cannot be overlooked. Globally recognised cultural icons like Abida Parween, Ustad Fateh Ali Khan, Naheed Siddiqui, Ustad Raees Khan, and Zia Moheyuddin (to name, in alphabetical order, a few of the ones who are still with us) have the power to create positive emotional resonance for a country in search of a new image.

This article can be concluded with another little-known fact. The best-selling poet in the US is Rumi in translation. This is another indicator of the surprising nature of global demand. Yet, none of the great Sufi poets from our region have been translated or marketed in a manner which caters to the global market. Is that really an impossible task? I don’t believe it is and in a follow-up article I will present for discussion a modest proposal for the revival of the arts in Pakistan.

Anjum Altaf is provost of Habib University in Karachi. This op-ed appeared in the Daily Times on 9 February 2004 and is reproduced here with the author’s permission because of a renewed interest in the economics of culture.

Urbanization: The Big Picture

September 4, 2013

By Anjum Altaf

Anyone wanting to understand urbanization needs to get past two major misunderstandings.

First, urbanization is not about individual cities – neither solving their problems nor enhancing their potential for growth. The end result of urbanization is indeed an increase in the population of cities but the term itself refers to the movement of people from rural to urban locations.

But which urban locations do (or should) people move to? That is a more important question.  What are the choices that exist and what determines the attractiveness of one location over another? Should public policy attempt to influence the spatial distribution of population by altering the attractiveness of different types of locations?

Second, the pattern of urbanization is not predetermined. People move primarily to seek work and therefore any change in the distribution of employment opportunities should alter the pattern of migration. Different industrial or economic policies should lead to different patterns of urbanization.

For example, an export-oriented industrial policy favors coastal locations; one based on high-end services might best be centered in big cities; labor-intensive manufacturing for the domestic market is suited to medium-sized cities; a big agro-industrial push strengthens the role of small towns.

It should be obvious that urbanization cannot be divorced from a discussion of industrial policy. But what exactly is our industrial policy and what role does it envisage for the various categories of urban locations – the big, medium, and small-sized cities and towns? Never having considered this explicitly, we have unplanned urbanization with suboptimal results – the big cities are overwhelmed with the influx of people and the majority of medium and small-sized cities are stagnant.

Eighty percent of Pakistan’s population lived in rural areas in 1950 when the economy was dominated by agriculture. Industrialization began to draw people into cities primarily because urban wages exceeded rural wages and better access to services added to the attraction.

The structural transformation of an economy – the transition from agriculture to industry – is accompanied by urbanization because most industry is located in cities. South Korea and Pakistan shared the same level of urbanization in 1950 but the structural transformation in the former is complete – in 2010, 80 percent of its population was urban.

The structural transformation in Pakistan and India has remained stunted by contrast – by 2010, only about 40 percent of their populations were urban according to official statistics, the consequences reflected in their much lower living standards compared to South Korea.

The stunted transformation in the subcontinent is both a source of opportunity and a cause of concern: the former, because the majority of the population is yet to migrate and therefore their choice of locations can be influenced by intelligent policy interventions; the latter, because there is little serious thinking on industrial policy that will influence people’s choices over locations.

The concern is compounded by the fact that arrested industrialization does not forestall urbanization. There might be no positive incentive to migrate but if rural poverty deepens desperate people would be pushed into cities. Such a poverty push has swelled a number of megacities in Africa. A similar push drives the export of labor from many regions in South Asia skipping domestic locations and moving directly to employment-generating cities abroad.

Poverty-driven urbanization is a consequence of weak industrialization. Employment shifts directly from agriculture to low-level services in informal sectors. The results are visible in slums in the big cities.

Healthy urbanization is not possible without industrialization whose policy parameters impact the choice of locations. This connection is ignored in the subcontinent. When challenged, policymakers are likely to argue that economics ought to be left to the free market which would best determine the locations of jobs and people would move accordingly.

This is contrary to experience. God did not create markets, human beings did. Almost all major markets in the subcontinent are outcomes of public sector investments (railways, canals, roads, villages) made by the British for objectives that are hardly relevant today. Opening up the Pakistan-India border or linking Kashgar to Gwadar would strengthen some markets and create others where none existed before. Each would affect the choice of destinations for rural migrants.

This raises a policy question: Where should jobs be located to yield an urbanization pattern that makes people better off? The question assumes that policy makers have a free hand in choosing locations and types of jobs. Unfortunately, that is not the case –one cannot, for example, relocate an impoverished farmer and expect him or her to adapt seamlessly to modern industry in a mega-city.

The reason is simple. Pakistan and India have not invested adequately in the health, education and skills of their rural citizens. Weak social and labor policies have severely limited the ambit of industrial and urbanization alternatives. Abstract theory might suggest that mega-cities are the most efficient engines of economic growth but with the existing endowment of human capital one might just end up with a transfer of rural poverty to urban locations.

The more realistic question is to ask what kinds of urbanization patterns are compatible with existing socioeconomic conditions. Should an informed policy favor rural industrialization? Should there be a phase of skill enhancement through agro-industrial development in small towns? Should medium-sized cities serve as intermediaries in a staged urban-industrial strategy?

These longer-term perspectives may appear suboptimal from the viewpoint of abstract growth theory but economists tend to forget that life is real and not abstract – one can only assume away reality at great cost to human beings.

The key takeaway is the following: Cities are not going to drive growth; rather, different types of growth will energize different types of cities – provided there has been adequate investment in human and physical capital.

Anjum Altaf is Dean of the School of Humanities and Social Sciences at the Lahore University of Management Sciences. This op-ed appeared in Dawn on September 3, 2013 and is reproduced here with permission of the author.

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What Governments Do and Why

August 28, 2013

By Anjum Altaf

A seminal book of the 20th century, at least for academics, was An Economic Theory of Democracy, published in 1957. In it, Anthony Downs applied economic theory to the study of politics and, among other things, inferred what a rational government would do given its incentives.

At its simplest, the theory claims that a government aims to stay in power and therefore, if it is democratic, adapts its policies and actions to appeal to a majority of the electorate. For example, in the current run up to the elections in India, the general wisdom is that the ruling party would spend extensively in rural areas to negate a likely swing to the opposition in urban ones. (Contrary to Downs’ prototype, though, it seems it is not the effectiveness of expenditures that matters most to voter sentiment in India – it is the courting that is important.)

Incentives are the key variable in Downs’ proposition and in normal circumstances a government’s incentives are aligned with the objective of retaining power. Having observed Pakistani politics for decades, however, a circle of friends has inferred a variation that might better explain outcomes in the country. It might also illustrate the nature of the gulf that has opened up between the politics of India and Pakistan.

The essence of the variation is that the incentive of a typical Pakistani civil government (as a whole, not of rogue individuals within it which is a more universal phenomenon) has not been re-election but the maximum accumulation of wealth during any period in which it is in office. For one, the duration of its rule in any given period was highly uncertain given that real power was wielded behind the scene by actors other than itself. Therefore a strategy to satisfy the wants of any part of the electorate might yield no returns whatsoever. For another, it knew, given the paucity of political alternatives, that in the merry-go-round of Pakistani politics its turn would eventually come again. Thus it made strategic sense to build up a war chest to sustain it during its period in wilderness and be available when re-entry appeared possible.

This strategy was abetted by globalization when virtually all Pakistani leaders arranged safe havens abroad to recuperate when out of power or to which to escape when things got hot. Some are foreign nationals ruling by proxy from abroad; others shift abodes as and when the situation demands.

One consequence of the safe havens was that the leaders parked all their capital assets abroad and retained just running expenses in local currency. The operating game plan was then entirely tactical and risk-free – to do whatever was needed to extend their resource-extracting rule in the short term till such time when the music stopped. At that moment, they could take flight literally with the clothes on their backs and await some patron or the other to engineer their return.

With such incentives there was little need or time to do anything for the electorate barring the incidental byproducts of the process of making money (large infrastructure or service contracts, for example). This was quite unlike India where electoral strategy demanded the amelioration of some constituency at the very least. Governments could guess wrong (as with the Shining India strategy) but none could afford to ignore all the constituents all the time.

The complete apathy towards citizen needs in Pakistan is plausible in this perspective. A victim is the democratic process itself. Unlike in India, the real opposition is no longer represented by alternate political parties but increasingly by groups that reject the worldview of electoral politics altogether. The rejection also removes compunctions about the destructive economic consequences of their actions. They can survive on the bare minimum and believe everyone should too till the desired alternative is attained from which the nation would rise purer and stronger.

In exploring the fundamental divide in the politics of India and Pakistan, I often think back to the 300 years of the Mughal Empire. Half this period was dominated by the six Great Mughals whom everyone recognizes. The other half was populated by dozens of emperors most of whom few can recall. This was the period dominated by behind-the-scene king-makers who shuffled puppet emperors at will, retaining them only for the legitimacy they conferred.

This could explain how democratic India and Pakistan both remain overwhelmingly dynastic and yet on different political trajectories. I am tempted to conclude that Indian politics is a continuation of the first half of the Mughal Empire while Pakistani politics resembles more the second – the rule of kings versus that of king-makers.

Of course, in the age of democracy kings don’t rule till they die or are deposed – they can take turns in office. From the viewpoint of incentives it makes a huge behavioral difference if a leader knows he has to remain at home when out of power as opposed to one prepared to flee abroad to seek a patron.

These contrasting imperatives, incentives, and strategies have led to divergent political trajectories in Pakistan and India and thereby to the different fate of their citizens – the one ignored, the other appeased.

The first completion of the political term of a civilian government in Pakistan could signal a change. Constraining further the power of king-makers could bend the Pakistani trajectory towards the Indian model, itself a variant of the Downs prototype. When that happens, Pakistani citizens would attain parity with their Indian peers. It would make little difference in their immediate conditions but place them on a better political platform for the long struggle ahead.

Anjum Altaf is Dean of the School of Humanities and Social Sciences at the Lahore University of Management Sciences. He would like to thank Nadeem ul Haque for discussions on this topic. This op-ed appeared in Dawn on August 27, 2013 and is reproduced here with permission of the author.

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Anchoring Khyber-Pakhtunkhwa Province

July 1, 2013

By Anjum Altaf

I learnt there is just one flight per week from Lahore to Peshawar and it returns three days later. This prompted an investigation of how the city is connected to the outside. Here is some quick information on the flights per week to Peshawar and their origins: None from Central Asia; 1 from East Asia; 1 from Afghanistan; 1 from the Punjab; 2 from Balochistan; 4 from within KPK; 4 from Islamabad; 10 from Sindh; and 56 from the Middle East.

While KPK is part of Pakistan, it seems reasonable to infer that its economic engine is in the Middle East.

One might post oneself outside Peshawar airport to determine the nature of the economic engine. I doubt one would see investors armed with briefcases and laptops. Much more likely that the vast majority would comprise migrant workers returning home for a break with the type of consumer goods unskilled and semi-skilled migrant workers come back with.

This would confirm that KPK is a manpower exporting economy. It does not generate enough jobs to employ its labor force; nor does the rest of Pakistan put together. The type of work for which the human capital of KPK has been equipped by its governments is to be found in sufficient numbers in Karachi and, at a living wage, mostly in the Middle East.

This is not an outcome of the recent unrest in the province. It has been so for a long time. I wrote a paper in 1992 – The Spatial Pattern of International Labour Flows from and to Pakistan – which showed that the NWFP (as it was then called) was the province with the highest relative outmigration from Pakistan (about three times the national average) and the lowest return migration to Pakistan (about half the national average). There was little for people to do in the province and little for them to come back to.

Within NWFP, Peshawar district had the highest relative outmigration (over six times the national average) and the lowest return migration (about a fifth of the national average) suggesting that better prepared workers were even more likely to leave the province and even less likely to return. Clearly the prospects for socioeconomic development would be dented if those most likely to contribute were left with no alternative but to exit.

It might be argued that there is nothing really problematic with the above scenario – we are part of a global economy and labor moves to where the jobs are. There are many sociological and political reasons to argue the contrary. Think of the inner cities in the US that were reduced to pockets of poverty after the flight of the affluent to the suburbs. The pathologies that arise from such phenomena are a source of concern to social scientists. One could surmise that the rise of social and religious conservatism in KPK is an outcome of its manpower-exporting economy, anchored in the Middle East, which transforms laborers into small-property owners imbued with the values of its host society (1).

For an economist, the aspect of interest is not that labor moves to where the jobs are but why jobs are not in KPK. Is it a desert capable of growing or producing nothing? Since few would subscribe to that judgment a search is needed for a plausible explanation.

The corollary to the above is that there has been very little investment in KPK from the Punjab, a neighboring province, or from Karachi, despite the fact that the province is rich in energy potential and many kinds of natural resources. At the very least one might have expected over the many preceding decades some relocation of industry attracted by lower  land and labor costs in KPK. An examination of the reasons for the absence might be a good place to start in designing a new development strategy for the province.

A thought experiment might trigger some ideas. Imagine KPK as an independent country no longer eligible for allocations from a federal budget. What might it do to generate its own revenues and how might it go about attracting foreign direct investment from its neighboring countries?

One could add an analogy to the thought experiment. There was a time when Mexico was exporting its labor across the border to the US for agricultural work. The shock of suspension of the arrangement in 1965 was the catalyst for a border industrialization program designed to provide alternative employment. By the end of the century, almost 4000 factories financed by US investment were generating 25 percent of Mexico’s GDP, almost 50 percent of its exports, and about 10 percent of its formal employment.

The analogy might seem far-fetched but is suggestive of a vision to develop the province. Central to the vision is identifying the type of industry compatible with KPKs natural resource endowments, the type of infrastructure and skills required to operate the industries, the type of incentives needed to attract back skilled labor, and the downstream industries that would cater to the consumption needs of workers with rising incomes to keep money circulating in the domestic economy (2).

In thinking of a border industrialization program it might be useful to re-examine the experience of the Hattar Industrial Estate presumably located on the Punjab-NWFP border to attract capital investment. By all accounts it has not been a success – a recent report indicated that abandoned and sick industrial units exceeded in number those that were operational and under construction. The reasons remain to be fully examined.

Khyber-Pakhtunkhwa is a rich province poorly served by its governments. Its citizens deserve better. They are too desperate to leave and too much in debt to find the time or energy to protest but such good fortune may not last forever.

Anjum Altaf is Dean of the School of Humanities, Social Sciences and Law at the Lahore University of Management Sciences. This op-ed appeared in Dawn on June 30, 2013 and is reproduced here with permission of the author.

(1) This is an involved argument that is developed more fully in a note, The Political Implications of Migration from Pakistan, which was published here and reproduced on this blog here.

(2) In connection with attracting migrants back, see Return Migration in a Lifetime Setting: An Exploratory Study of Pakistani Migrants in Saudi Arabia. At the time of the study, wage differentials between Saudi Arabia and Pakistan needed to be of the order of 7:1 to attract migrants. However psychic costs for the migrants were very high. They were willing to return at a wage ratio of 3:1.

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The Politics of Urbanization

May 20, 2013

By Anjum Altaf

The politics of urbanization could be less or more important than its economics.

It depends on the context. In relatively stable societies, economics shapes politics – these are places where one can meaningfully say “it’s the economy, stupid.” Even seemingly bizarre foreign policies can be related to economics as one might infer from the title of Lenin’s classic text Imperialism, the Highest Stage of Capitalism.

In less stable societies, the economy is hostage to politics. Think of Pakistan’s quixotic foreign policy adventures that have no conceivable relationship to national considerations and have driven the economy into the ground. The politics, in turn, is orchestrated by narrow, parochial and privileged economic interests as those who can discern can readily make out.

It is in this framework that the politics of urbanization in Pakistan is more fascinating than its economics. (more…)

The Economics of Urbanization

May 7, 2013

By Anjum Altaf

We ought to care about urbanization because it will shape our lives, for better or for worse, and often in surprising ways.

An obvious starter is that all developed countries are predominantly urban. Of course one can ask whether it was development that led to urbanization or the other way around. The historical evidence is clear: cities produced jobs that pulled less productive labor from rural areas. That, in a nutshell, was the story of the Industrial Revolution.

The most unremarked replication in recent times has been in South Korea, going from 5 percent urban in 1925 to 80 percent by 2000. At the same time the country transitioned from an aid recipient to a member of the industrialized world, a donor in its own right. (more…)