“The IMF first told countries in Asia to open up their markets to hot short-term capital (it is worth noting that European countries avoided full convertibility until the 1970s). The countries did it and money flooded in, but just as suddenly flowed out. The IMF then said interest rates should be raised and there should be a fiscal contraction, and a deep recession was induced. As asset prices plummeted, the IMF urged affected countries to sell their assets even at bargain basement prices. It said the companies needed solid foreign management (conveniently ignoring that these companies had a most enviable record of growth over the preceding decades, hard to reconcile with bad management), and that this would happen only if the companies were sold to foreigners — not just managed by them. The sales were handled by the same foreign financial institutions that had pulled out their capital, precipitating the crisis. These banks then got large commissions from their work selling the troubled companies or splitting them up, just as they had got large commissions when they had originally guided the money into the countries in the first place. As events unfolded, cynicism grew even greater: some of these American and other financial companies didn’t do much restructuring; they just held the assets until the economy recovered, making profits from buying at fire sale prices and selling at more normal prices.”
The above is an extract from Joseph Stiglitz’s 2002 book, Globalisation and its Discontent, summarising the author’s view on the East Asian crisis of 1997, and if this is exactly how things had happened, in a nutshell, Pakistan’s leadership should indeed be worried. Mr Stiglitz, in addition to highlighting the risks that developing countries face by practicing capital liberalisation, provides an equally blunt analysis of how trade liberalisation impacts developing countries, effectively reiterating the dictum that long term trade imbalance will result in a financial crisis.
Even more worryingly, Mr Stiglitz asserts that in most cases IMF assistance was utilised to meet existing obligations of the recipient country towards western lenders, which is apparently why Pakistan needed assistance as well, to pay off previous debt obligations. For the record, Joseph Stiglitz is a recipient of the Nobel Memorial Prize in Economic Sciences (2001).
More than discussing globalisation, the book is a scathing critique of the IMF and, without carrying out a Google search, it can be safely conjectured that the IMF gave an equally scorching rejoinder, perhaps repeatedly. Without getting into a debate of who is right and who is wrong, it would be prudent to at least read what Mr Stiglitz has to say, if only to create an awareness of what can go wrong with IMF-suggested policies. Admittedly, Pakistan hardly has a choice other than to comply with IMF conditionalities, especially in order to provide comfort to its creditors at large, albeit, if in spite of abject compliance the economy continues to falter, the situation may become unmanageable for the government politically. On the other hand, perhaps being frank about the constraints and limitations in brokering a better deal might be a better strategy compared with passionately defending the structural reforms.
The added advantage of taking this particular medicine with a pinch of salt is that it opens the mind to alternatives; accepting conditionalities as a fait accompli will breed complacency. The minuscule risk that the age old policies dreamed up under the Washington consensus might not work in the domestic economic environment needs to be mitigated, particularly considering that once done, cannot be undone.
Notwithstanding the above, of all the policies being pursued, whether by choice or necessity, the contradictions surrounding public sector enterprises are indeed curious, particularly the policy of commissioning large infrastructure projects in the public sector while at the same time considering privatisation of utilities. Admittedly, public transport needs a lot of investment at the metropolitan level and, most likely, the private sector will not be interested in taking up these projects without adequate government guarantees, but this was exactly the case with power. Irrespective of who is to blame, the crux of the matter is that even with all kinds of guarantees given to the private sector, the power crisis continues to worsen every year.
If private investment is based on guaranteed returns, meaning that rewards accrue to the private sector while all the risk continues to vest with the government, can it be categorised as private enterprise? A layman can very well ask: if the government can release funds to meets its debt obligations, why can it not manage a few billion more to invest in priority areas where private sector interest is highly unlikely? And, as a follow up, what is a bigger priority than cheap power?
Definitely a lot of initiatives are being taken for alternate and cheaper sources of generating power, coal and wind being two. However, hydel electricity continues to take a back seat. Ignoring the politically tainted big dams, apparently there are a number of possible locations for small to medium sized hydel power generation projects in Khyber Pakhtunkhwa province. The primary cause of next to zero private sector interest in such hydel projects is a high level of equity stuck up for an inordinately long period. The position is further complicated by the fact that most prospective hydel projects are situated in the northern areas where security concerns are an additional impediment. It would be irrational to expect private equity to undertake projects where returns, even when guaranteed, are highly unlikely to accrue in the foreseeable future and thereafter remain doubtful of recovery.
Even smaller hydel projects can take seven to 10 years to completion, irrespective of optimistic feasibilities, assuming that an Energy, Procurement and Construction (EPC) contractor, willing to undertake the project under existing circumstances in the designated areas, can be found. Unfortunately, minus a larger share of hydel in the overall power generation mix, the dream of cheap electricity will never achieve fruition; imagine the cost of electricity if Tarbela Dam was not generating power.
Considering that foreign investors might not be interested in a payback horizon beyond five to six years and domestic investors are unlikely to manage the required high equity outlays, irrespective of the return offered, these smaller hydel projects might never take off. A particular solution, perhaps, is that the government makes the necessary equity available for such projects and hires the private sector to manage the financial close and project development, against sweat equity. A critical problem with the government taking this groundbreaking initiative is exactly why the private sector is not interested — by the time these projects start generating electricity, there might be another government hurrying to take credit!
The government therefore has to decide what exactly the priority is and what can be comparatively more conducive for economic generation. Does power generation top the list or not? If it does, there needs to be a definite move towards solutions, over and above the idea floated above. On the other hand, we can continue to pay for imported energy through hard earned foreign currency, continue to have trade deficits and continue to look towards the IMF for a bailout package. On the other hand, the government can decide that, as very well said by someone, the best helping hand is attached to your own wrist!
The writer is a chartered accountant based in Islamabad. He can be reached at email@example.com and on twitter @leaccountant