FALLOUT OF POLITICAL INSTABILITY
WHAT MATTERS IS GOOD GOVERNMENT NOT WHICH GOVERNMENT
SHAMSUL GHANI (email@example.com)
Jan 4 - 10, 2010
The major beneficiaries of foreign investment have only been a few sectors such as communication, energy and financial services. In addition to FDI, portfolio investment creates ebbs and flows in Pakistan's stock markets. Such investment by its very nature is free to make a quick exit.
Serious long term foreign investment targets the strategic assets either purchasing them on a bilateral basis or through competitive bidding. As long as we keep taking to the easy course of selling family silver to the shrewd foreign buyers, no new capital formation will take place.
Capital formation is also a function of country's infrastructure and political stability. We have a very poor industrial infrastructure. While efforts have been on to improve the infrastructure, the ongoing war on terrorism - now being fought on Pakistan's territory - continues to undermine the industrial capabilities.
It will take quite some time before we are able to assess our position and the extent of damage. Only at that point in time, we could think of undertaking any rehabilitation and reconstruction programs.
To our dismay, political stability is completely dependent on a cartel of political, media, and feudal forces that bring about abrupt changes without ever bothering to calculate the economic cost of such changes. Until 2007, we had foreign investments flowing in at a high pace. With the destabilization of an economically stable government that had accumulated $17 billion reserves and done away with the IMF structural adjustment programs (SAPs), foreign investment flew away like a scared flock of birds.
What followed was tailspin of stock markets. Local investments departed to foreign markets. Foreign investment which had recorded a growth of 87.9 percent in FY07 registered y-o-y fall of 35.3 percent and 51.1 percent in the next two financial years.
In order to restore breaths of the economy, we had to look back to the ill-famed IMF assistance programs. It has become customary to speak against IMF assistance programs. However, to quote an US economist John Perkins, who himself served US economic interest as an Economic Hit Man, will not be out of place. He writes in his book Hoodwinked:
"SAPs have been severely condemned by political and social scientists around the world because they 1) threaten national sovereignty and undermine the democratic process by transferring control to foreigners; 2) benefit the largest donors (especially the United States, European Union, Canada, and Japan) whose corporations end up owning the privatized sectors and whose financial institutions receive high interest rate payments; 3) privatize resources that had been in the public domain; 4) encourage foreign corporations to exploit workers and corrupt local officials as they lobby for lax environmental and labor regulations and tax loopholes; 5) †† discourage agriculture and land reforms, thereby protecting aristocrats and facilitating the growth of slums and poverty; 6) increase the use of fertilizers and pesticides that damage the environment and make farmers dependent on foreign chemical companies; 7) force cutbacks on health, education and other social services by diverting money to interest payments; 8) disenfranchise women who dominate workforces in the education, health, and other social services; and 9) cause the abandonment of women and children as rural men migrate to cities and other countries."
Moreover, the cost of doing business in Pakistan is very high. High input costs propelled by energy shortages result in a higher cost of end product. World Bank and IMF always discourage subsidies to energy and agriculture sectors although the US agro sector is one of the most subsidized sectors in the world. Ever worsening law and order situation too has immensely contributed to the high cost of doing business. This situation rules out chances of any long term industrial investment from foreign investors.
FOREIGN INVESTMENTS DURING THE LAST FIVE YEARS
(in million US$)
FOREIGN INVESTMENT SECTOR
FY-06 FY-07 FY-08 FY-09 JUL-NOV-09 JUL-NOV-10 Foreign Direct Investment-1 3,521.0 5,139.6 5,410.2 3,719.9 1,620.7 774.0 % of Total Foreign Priv.Invst 90.9% 73.8% 99.6% 115.9% 109.9% 70.8% Private Portfolio Invst-2 351.5 1,820.4 19.3 (510.4) (146.1) 318.1 % of Total Foreign Priv.Invst 9.1% 26.2% 0.4% (15.9)% (9.9)% 29.2% Foreign Private Invst-3=1+2 3,872.5 6,960.0 5,429.4 3,209.5 1,474.6 1,092.1 Public Portfolio Invst-4 613.0 1,468.3 20.8 (544.1) (16.8) (6.8) % of Total Foreign Pub Invst 100% 100% 100% 100% 100% 100% Other Public Invst-5 - - - - - - Foreign Public Invst-6=4+5 613.0 1,468.3 20.8 (544.1) (16.8) (6.8) Total Foreign Invst-7=3+6 4,485.5 8,428.3 5,450.2 2,665.4 1,457.8 1,085.3 Y-o-Y Increase/(Decrease) - 87.9 (35.3) (51.1) - (24.9)
The table presenting an overview of foreign investment inflow/outflow during the last five years is testimony to the fact that foreign investment is heavily dependent on political stability irrespective of the form of government. Total foreign investment during the first five months of current financial, on a period-on-period basis, is on average decline of by 24.9 percent. Without political stability, total terrorism control is not possible. How long it will take to return to economic normalcy is not clear. The steep downslide in foreign investment since 2008 has eaten away all economic benefits of 2002-07 heydays. We have lost a great deal but perhaps not hope, as yet. One should hope that the calendar year 2010 brings with it a better economic future.