Privatization for a prosperous Pakistan?

ISLAMABAD JULY 2, 2008 – In the coming days I am going to return to political and insurgency questions, but a couple more economic stories are in order.

Today’s "Dawn" had an interesting report on the words of Pakistan’s Prime Minister, Yousuf Raza Gilani, on economic policy. He identified the problem that Pakistan is not living within its means. Public debt and budget deficits could hurt development. So long as growth remains strong (which it does, at 6-7% a year) and outpaces deficits, deficits will shrink over time. But if a slump comes, as it could from any number of directions (and with the US economy in the midst of one now), deficits will grow.

For those who are inclined to "Keynesian" development economics, deficits and public debts are not the big, bad, evil that they are portrayed as by more neoliberally inclined economics. Instead, they are just a tool of public policy like taxes and spending, that can be used under specific circumstances to spur development, investment, or protect the public from exposure to economic shocks.

On the other hand, it seems to me that developing countries that have any sovereignty and any accountability to their population have no choice *but* to use Keynesianism at times, and Pakistan is certainly using public deficit spending to try to manage the problems caused by energy and food price rises.

That type of economics is not endorsed publicly by the government, however. While Gilani argued for growth (as every government argues for everywhere – and in the developing world, including much of south asia, growth is desperately needed and people do need to consume more, whereas in the West constant growth should probably be questioned and replaced with some notion of stability), he also said that "Economic liberalisation, deregulation and privatization in a transparent manner will be the core principles of our economic reform agenda," and that "it was not the government’s business to run business".

Meanwhile the head of the Pakistan People’s Party (PPP, which leads the ruling coalition and to which Gilani belongs), Asif Ali Zardari (Benazir Bhutto’s widower) said: "A prosperous Pakistan will smash the remnants of terrorism from our frontiers better than the bullets, missiles and tanks of the superpowers".

It is impossible to make a blanket statement, especially in an economy like Pakistan’s where so much of the economy is controlled by the military, about the positive or negative value of privatization. But it is probably worth noting at least that there may be a contradiction between the government’s stated desire to "extend its writ" throughout the territory, and its desire to privatize and liberalize the economy – the latter being based implicitly on the notion that less government is better. We know that there really isn’t a question of less or more government – government is always the big spender in an economy that sets the tone – but what kind. Governments can subsidize multinationals, line their own pockets, and purchase weapons, or they can build infrastructure and provide public services. They always do one or the other, some rich countries used to try to to both, they never do neither. It is hard for me to imagine improvement in the political and economic situation of developing countries without increased public support for agriculture, and public services (health, education), and welfare generally. This would involve the expansion of the public sector of the economy, not privatization.

The government was actually taken to task for neglecting health care problems by the Pakistan Medical Association, which noted that with 70% in the rural areas, the majority population had no access to health care. The PMA doctors told a press conference (reported in Dawn today) that "one child dies every minute from measles, mumps, chicken pox, diarrhea, or acute respiratory infection", with 34% of mothers underweight, 65% of women anemic, 90% of the public being served with 15% of the health resources, and public health spending actually decreased in the recent provincial budgets. The PMA also said private medical colleges offered expensive but non-meaningful education and that public medical education was also declining. Without directed public policy, neither growth nor privatization can resolve any of these problems in the health system, which, like education, are very important for the country’s future as well as the present.

In my previous blog post I mentioned how rising energy and food prices are hurting development here as in other places, and said a few words about the other macro problems of Pakistan’s economy, including military ownership of huge parts of it. There is today more news of rising food prices, this time of flour, and the government’s attempts to try to control it. As the government announces a policy of privatization and liberalization, we come to another piece in this puzzle, the role of multinational corporations.

In this case, courtesy of a researcher friend, who found this story on Barrick Gold, a Canadian mining company. Barrick, with a Chilean counterpart, will be looking to explore in Balochistan, one of Pakistan’s poorer provinces (poor people, rich in resources) and one with a history of insurgency. Barrick wants to explore for copper and the talk is of $5 billion in investments with $1 billion in copper exports annually coming out of it. Pakistan is actually considering a free trade agreement with Chile. Barrick Gold is still seeking to build a massive gold mine spanning the Argentine-Chilean border, the Pascua Lama mine, which is very controversial and has been resisted by indigenous and environmental groups. Indigenous people, peasants, and the environment suffer massively from mining and rarely get any of the benefits. Unless mining multinationals work differently here than in other parts of the world, the benefits of this megaproject won’t go to the people who suffer from it.

A final economic story. Years ago I read a book by a former US Ambassador to Pakistan, Dennis Kux, in which he told a very strange story as a side note about a sale of F-16s from the US to Pakistan. I’ll quote from the commentary I published about it six years ago:

In 1980, Pakistan asked the United States for F-16 fighter aircraft. The deal that Pakistan and the United States had had until then was simple: the US supported Pakistan’s military as its South Asian Cold War ally, and Pakistan used the weapons to threaten India. The US, not particularly interested in aggression against India, would try to strike a balance between arming Pakistan for its own purposes and not arming Pakistan so much that it would upset India unduly. The US decided in 1980 that giving Pakistan F-16s was too much of a provocation to India. And then changed its mind and offered the aircraft. But in 1990, Pakistan with its nuclear program was caught in a ban, and the $564 million economic and military aid program planned for 1991 was frozen. The F-16s were caught, too. The planes sat in Arizona.

But "to help the financially troubled General Dynamics Corporation, with whom Pakistan had contracted to purchase the aircraft, the Pentagon urged Islamabad not to stop payments– even though deliveries were frozen by the Pressler amendment… After considering various options, including invoking a penalty clause to avoid further payments, Pakistan followed the Pentagon’s advice. As a result, even though the F-16s remained mothballed on the western desert sands of Arizona, the US supplier received an additional several hundred million dollars before Pakistan finally suspended disbursements in 1993."

The story of the F-16s does not end there. In 1994 the US offered to deliver the F-16s if Pakistan would freeze its nuclear program. Pakistan talked tough in reply: it would not "bargain away Pakistan’s nuclear programme for F-16s or anything else." Later that year Pakistan’s prime minister put her foot down: "We want either the planes or the money back… we think this is all very unfair." President Clinton agreed– to start looking for a third party to sell the planes to, from the sale of which the funds could go to Pakistan. The original plan was to sell the F-16s to Indonesia, but there was too much publicity about the human rights record of that regime for the sale to go through in 1996 when the opportunity arose.

In December of 1998, the Pakistanis began legal action against the US government to recover their money. The lawsuit empowered the administration to "tap a special fund used to pay judgments against the US government. Since the Justice Department had assessed the chances of losing at 70 percent, the administration could tap the special fund for this percentage of the $470 million that was owed to Pakistan for the F-16s. To cover the remaining amount, the president accepted a Pakistani suggestion that the US government make a ‘best effort’ to provide $140 million of wheat and other commodities on a grant basis over the coming two years." (the whole story is from Dennis Kux, "The US and Pakistan 1947-2000: Estranged Allies")

What is the opportunity cost of several hundred million dollars being paid out over years and years and never fully recovered, for one of the poorest countries in the world? Expressed in nutrition, or health care, or water quality, what was the cost of those stupid fighter jets that never came?

Well, it turns out that story is still playing out. Yesterday’s "The News" had an article by Rauf Klasra, "Scam talk about Zardari request for free US wheat", that links the current 500,000 ton PL-480 wheat aid program to this old F-16 story, including more details about how the hundreds of millions were paid down. Pakistan paid first $60 million, then another $24 million for a shipment of wheat, some of which went to Afghanistan – Pakistan actually had thought this was free wheat, but "when a Pakistani team went to demand payment of the F-16s money, the Americans first agreed but later they told Pakistanis that they would have to pay for both the 300,000 tons of wheat and the shipment costs." Pakistan paid freight rates of $80/ton when the market rate was $27 per ton – charged $32 million instead of $11 million, to US companies. The ‘free wheat’ was also exorbitantly expensive per ton. Klasra asks at the end of his article: "As this scam remains buried in the official files, question is today being raised, ‘Will, at some later stage, the fresh free American wheat under PL-480, as requested by Asif Zardari, be charged as it was done in 2000?’"

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