Economic Growth in Pakistan

Shaukat Aziz (Elsa Ruiz/Asia Society)

In November 1999, Shaukat Aziz was appointed as Pakistan's Minister of Finance with responsibility for finance, economic affairs, statistics, planning and development, and revenue divisions.

Mr. Aziz started his career in 1969 when he joined Citibank in Karachi. He moved overseas in 1975 and has since served in several countries including the Philippines, Jordan, Greece, the US, the UK, Malaysia, Singapore and Saudi Arabia. Mr Aziz has had 30 years of experience in global finance and international banking.

In 2001, Mr. Aziz was named 'Finance Minister of the Year' by Euromoney and Banker's Magazine.

Prior to being appointed as Finance Minister of Pakistan, you worked with Citibank both at headquarters in New York as well as elsewhere. How have you made the transition from working in the private sector in the North to working in the public sector in the South?

It is a sea-change because in the private sector you work according to a particular culture. You know every year what you have to achieve and you are judged against performance, based on results. When you move into the public sector, the stakeholders expand dramatically. Everybody from the general public to the opposition, the government party, the Prime Minister, the President, the whole nation evaluates you, particularly as Minister of Finance. You touch their lives everyday. If prices are up, you have to explain, if prices are down, you have to explain, if reserves go up, you have to explain, if currency weakens, you have to explain, if currency strengthens, you have to explain - if the interest rate goes up, it touches everybody, borrowers and savers. If interest rates go down, it has an effect also.

So you are constantly managing the various stakeholders. I think the secret is that if you are professional in your approach, if you are transparent, if you have no hidden agendas, people in the end will respect what you are doing and of course nothing pays better or helps better than producing results. In Pakistan's case, we have been able to show that from literally a basket-case virtually default state 4 ½ years ago, we are today at 6 per cent plus growth in GDP heading to 8 per cent, which in Pakistan is remarkable. We have no balance-of-payments problems; in fact, we are running current account surpluses. Our foreign reserves are at a year's imports.

There are still a lot of challenges naturally. Rome was not built in a day; it takes a long time. But what this shows is that if you can have a clear approach, a clear vision, a clear strategy, and you execute it professionally and transparently, results can be achieved, even the worst cynics gradually come to appreciate this.

Also, in public office, you have to be a bit thick-skinned. If people do ask questions and make insinuations, based on certain opinions, I think you need to defend them and you shouldn't waver with the first critical article. That is part of the process. The people who do this are not malicious, they are not trying to derail you, they just have genuine concerns and a different point of view. So you have to live with different points of view. As long as you know what you are doing and you can explain what you are doing, I think the system will not obstruct you.

You were asked to become Finance Minister under a military government. Were you concerned about being a representative of an undemocratic military regime?

No because given the state Pakistan was in, I think we needed some change in leadership. We knew this state of affairs would not be permanent. I went and met the President; I had never met him before. I was convinced that he was a straight-shooter, a very committed nationalist, and a very bright individual who would be good to work with and work for. So that is what drove me.

He gave a timetable, he honored that through the Supreme Court, it was all validated. It is all behind us now. Now we have an elected government, we have a prime minister and a president. The Prime Minister is the Chief Executive and we work closely with both of them.

No particular route to achieve a country's objectives should be subject to criticism so as long as it delivers the results and has the support of the people. The people welcomed what happened. Unfortunately in the past we have had governance whose quality was not very good, so people were very frustrated.

A non-elected government does not mean that you are not responsive to people's needs. At the end of the day, they judge you, as I said, everyday. So if you talk to anybody, the three years which have passed, people have seen corruption levels go down. Pakistan was rated as one of the most corrupt countries before this. Today, no one talks about it. I am talking about high-level corruption, of course. This is very unique, and means that the same people with the right leadership and the right policies can change. The same people with the leadership not being up to the levels required can be derailed very quickly. This is as true in the private sector as it is in the public sector. Leadership is what it is all about.

So I did this to help my country get out of what was a very troubled situation. Irrespective of which government is in power, if one can help do that, I think every Pakistani should feel good about it.

Naturally Pakistan needs no lessons in democracy. We know exactly the merits of having public participation and we believe in it and that is why the government has come to a certain level. Every country's own culture, traditions, requirements, are very different. You cannot impose a particular style of government. It has to be adapted and adopted to the country's needs. So long as people have a voice, people have a clear choice to make if they want a particular government in or out through an electoral process. But the country has to be at a level where it is breathing normally, it is heading in the right direction, and where the quality of life, and the quality of the country, and the whole process is taken seriously by its own citizens and the world rather than living from day to day and making all decisions expediently, rather than with a vision and a direction. Sometimes you have to make tough decisions but they are the right decisions.

When you assumed the position of Finance Minister, what economic problems was Pakistan confronted with and to what extent do you think the present military government has been able to adequately address them?

I think these are well-known so let me just give you a very brief overview. Pakistan was in severe economic crisis. We were known as a "one-tranche country". We used to take one tranche from the IMF. We were constantly in Fund programs. We would violate all the conditions of the program and it would be stalled, and then we would go back. This was the routine more or less. We had severe balance-of-payments problems. We did not know how to meet our foreign exchange expenses beyond a certain day. Our debts were technically in default; some were past due and no new credit was available from the market. Growth was low, inflation was high, investment was virtually non-existent, flight of capital was rampant, currency was depreciating and deteriorating very fast, credit ratings were at selective default. Incidentally, this latter is not our view, it is the view of S&P and Moody's, both independent, professional, rating houses. If you pick up any of these documents, it is clear Pakistan was a very troubled state from an economic standpoint. There are other factors, too.

Today, after four and half years, we have provided a vision of where Pakistan ought to be going. Pakistan has a tremendous opportunity to excel even more. We have excellent human capital, second to none, the people are very, very talented if given an opportunity. We have an excellent location between South Asia, Central Asia and the Middle East. And we have an abundance of resources: water, agriculture, minerals, hydrocarbons, etc. What we need is good management and good leadership.

The human capital of Pakistan, which I believe is the best asset we have, was previously not being leveraged. Now it is moving in the right direction. Naturally we still have a lot of challenges. We have to focus more on improving education levels, health standards, the police process, the justice system. We have to provide basic necessities to the people. Poverty-reduction is all about providing opportunities. It is not just income-poverty; lack of education is poverty in a sense, as is lack of good health. Deprivation in any form leads to poverty. There we have made progress, but there is still a long way to go. Every developed and developing country has a certain segment of its population in poverty. You see this around New York!

We have a very broad agenda of structural reforms which stacks up against the best reform programs anywhere in the world. In parallel, we worked on improving the macroeconomic situation and reforming, so that we could sustain some of this. Our task is far from over but we have certainly got over the hump. There is still a long way to go. You can't change a country's economic direction overnight, it takes awhile. We took the hard road, which means we went into the foundations of what was wrong and tried to fix it, which took longer. We did not go for gimmicks or quick-fixes, which would not have lasted or been able to sustain themselves.

In terms of our reforms, they covered a whole range of subjects: education, health, justice, agriculture, the petroleum sector, the financial sector, capital markets, governance, government structure, political reform. It was a very comprehensive agenda. In some areas we have done better than others but all is proceeding. And if you talk to anybody independent - look at the published material - they will acknowledge that the reform agenda today stacks as one of the better reform agendas of any developing country, especially in areas like capital markets, the financial sector, the petroleum sector, etc. Others need more work and we are at it. Our task is far from over.

You have said elsewhere that globalization should be viewed as "an opportunity and not a threat." How, concretely and precisely, would you define the forces of globalization as they manifest themselves in the context of Pakistan's economy?

Pakistan, like any other country, is part of the world. We can't isolate ourselves or build a big wall and live within. Everybody is now learning to live with each other and depend on each other. Everyone is leveraging their strengths, creating their niches. And then leveraging the whole country's strengths accordingly so it can play its part in the world.

The globalization effort is like a tidal wave. If you don't ride it, you will be swept away. In Pakistan's case, our people are very open, the country is very open, and we do not think this is a threat, so long as the developed and the developing countries provide a level-playing field for each other. By nature, we are an open economy. Even the bastions of socialism are now moving to some sort of market-driven economies. We have always believed in it. We had some bouts with nationalization, etc. but they are all - with the privatization taking place - withering away. We believe the role of government is policymaking. That is the new paradigm Pakistan subscribes to. Governments should make policy. Regulators, independent of the ministries, should keep track of everybody's interests. And of course the private sector should be doing the business. Deregulation and globalization does not mean abdication by governments. You still have to make sure that public interest is protected. You have to make sure that governments do their part and protect national interests, consumer interests, protect the weaker segments of society and provide opportunities to all.

The WTO, which is one aspect of this effort, has not moved as well. We still feel that developed countries are giving too many subsidies to agriculture. There is no freedom in the movement of people. In true globalization, everybody should be able to move across borders to do the best in any particular environment. You cannot have double-standards, which unfortunately do exist in large number today. Similarly on trade there are still quotas and tariffs and non-tariff barriers which come in. There is a lot of progress on globalization but there is also a lot of lip-service. The way this will succeed is that the developed world becomes more magnanimous, more open, confronts its own political issues. In the US, France, Japan, for instance, agricultural lobbies are very strong so they do not allow their politicians to move on this issue. We hope textile quotas will be gone by 2005, but these are things which need to be addressed.

One element of globalization is what I said earlier: a level playing field. If there are such disparities between the haves and the have-nots, this will lead to instability and a feeling of deprivation. That is why the Millennium Development Goals (MDG) came in. Today the contribution of developed countries towards reducing poverty and helping to create a better world is much lower than the target set. Very few countries which are largely in Scandinavia are meeting the minimum goals that people had set for development aid.

Developing countries, for their part, need to depend on themselves more and show good governance. There is no reason for the developed world to give money if it is going into a bottomless pit. We have to show that we can handle ourselves. We just need resources and opportunities, that is where the developed world can help. But if developing countries learn to live on the dole, then it does not help anybody. I think there is enough pride in everybody to say, "Help us to help ourselves."

We do not want to use aid as a crutch but as a means to improve the life of the people so that you remove a feeling of deprivation, you remove the need for illegal immigration. You see that all over the world today. Many people get into boats and cross into other countries. Why? Because they just need opportunities and their needs are very simple: they need enough to feed their families and give them a very basic life, they are not looking to have a luxurious life. Even the basic things are not available. So the developed world needs to do more.

The Monterrey Summit which we all went to was a step in this direction. The MDG goals have now become well known, but I do not see enough action or conviction or ownership in the developed world to make this happen. Here the Bretton Woods institutions [the World Bank and the IMF] could play a much more active role, as well as the UN. But they are also constrained by various pulls and pushes and pressures which do not allow them to address this issue effectively. I believe that if the Millennium Development Goals are addressed, if a more level playing field is created, the world will be more peaceful, the world will be a better place to live in, there will be less tension, less reason for extremism and terrorism. So they are all linked together and we need to take this very, very seriously.

Despite the fact that Pakistan's economy has grown steadily, according to State Bank of Pakistan figures, the level of poverty has risen from 20 to 33 per cent of the population in the last 15 years (according to the Asian Development Bank, more than 12 million people were added to the ranks of the poor in Pakistan between 1993 and 1999, and the number of people below the poverty line is expected to have further increased since then). Similarly the official unemployment rate (a particularly crude measure in Pakistan given the massive undocumented labor force) has risen continuously over the last decade from 3.1 percent in 1989-90 to 7.8 per cent in 2002-3.

All this is anecdotal data. There is nothing official; the surveys are being done as we speak. In fact it is not the fault of anybody. If there is no published data, then people will speculate.

Pakistan is a country of 150 million people. Population growth is down to 1.94 per cent from 2.1. So it is moving in the right direction. Unemployment is about 7-8 per cent but compared to many other countries, developing and developed, it is better. Also we have a very different system of family support. A lot of statistics in Pakistan may not reflect reality because the way in which unemployment is captured in many other countries is people going to social security. And if social security spending goes up, then you know there are more unemployed. We do not have any such system. The fact is that if we have GDP growth, which I said will be 6 per cent this year and heading to 8 in the next two years, somebody is getting this income. Per capita income will be over $600 this year, the highest we have had in a long time. Having said that, these are averages, so it does not mean that there are not segments of society that are not living below the poverty line. As I said, every country has that. We have it too.

What we are doing is focusing on the macro to get the overall growth levels up, and at the micro-level, where there are clear segments of society which are living well below the poverty line, we have micro-finance, we have special programs (including job creation and food support), cash aid and so on.

In addition 60 per cent of Pakistan's population lives in rural areas. So the biggest incidence of poverty in Pakistan is in the rural areas, which most people do not even get into in detail. That is being addressed by increasing agricultural income. As I said, reducing poverty is all about providing opportunity. It is not about putting people on the dole. That is the approach we have taken.

Levels of poverty have stabilized, they are now going to come down. You cannot have such macro-growth and per capita growth and say that poverty is growing. These are old data. The State Bank data also is old and it is has been quoted out of context by many, you are not the only one.

This is a gradual process, as I said. Poverty levels have already stabilized, they are now going to come down. This year we will see a reduction and it will keep going that way. Secondly, as the economy grows, and investment is up to 16 ½ per cent of GDP this year from 15 ½ last year, that is creating jobs. Exports are up 15 per cent. You cannot increase exports by 15 per cent without creating more jobs. Someone is producing those goods. So employment is being created. What Pakistan has is a skills-gap. There are many people with general skills and you need more with specialized skills. Skills-training is what the government is focusing on.

We have a lot to do. We are not defensive about this. We have a lot to do, as I acknowledged. So long as you know where you are going, that is fine. These are questions we face everyday. The people of Pakistan appreciate and realize that we are heading in the right direction.

These figures may not be the most current but do they not suggest that the prevailing wisdom about the so-called "trickle-down effect" is slightly misplaced?

No, it takes time, anywhere in the world. Nowhere in the world in a developing economy - developed is different - do you have trickle-down overnight. If you go to the average retailer today, for example, in a low-income or middle-income area, he will say that his sales are up 20 per cent. This is the best period he has experienced. Real estate prices are up. There is no free hotel room in Pakistan, that means they are hiring more people. Most hotels are running at 100 per cent capacity. In the old days, they were all empty, laying off people.

When you get growth, it brings such effects, and it takes time. So I am not disputing any of the questions, these are legitimate questions, which I think will be addressed as we move along. We are working hard to get the macro to come down to all levels. But they are many trigger mechanisms and absorbers within any economy, which delay this process. If you want to do it right, it takes time.

I think the people of Pakistan are appreciating the improvements, especially the fact that Pakistan is finally realizing economic sovereignty. That is a major achievement of the government. The quality of life of everybody is improving, particularly in the rural areas, gradually. We are doing a lot more for agriculture, providing water, providing better inputs, providing technical assistance to farmers, and so on. Sixty per cent of the population is there and that is where the large incidence of poverty is. Urban areas have poverty but it is not the same. No one is sleeping on the streets in Pakistan compared to many countries in South Asia. If you drive around anywhere, you will not see too many people like you do in other countries. That does not mean we do not have poor people. Sure we do, we have 30 per cent or more poverty but we are making an effort.

And when you open up the economy and you are talking about growth rates of 6+ per cent, heading to 8, you are creating a lot of opportunity for people. People are taking advantage of it. It is not just the men, it is the women too. I was in a village about 6-8 weeks ago, and the women of the village were actively in the fields. It was the time when cotton was being harvested. I talked to them. They said, "This is the best season we are having." The woman said all her clothing expenses and children's expenses will be met by this, and her husband's farm income will feed the family for the next year, so they are all very happy.

That does not mean there is no poverty. Not at all. These are challenges we have to learn to live with.

The Asian Development Bank has also suggested that while poverty has intensified in the last decade, the country's long-term prospects for achieving high growth are also being compromised by the low level of social sector investment. Is this simply one of the hardships imposed by the austerity measures put in place by the IMF and other international donor institutions?

Not at all, on the contrary. Social sector spending is up 20 per cent a year, the highest in Pakistan's history. All these quotes you have are accurate but out of context. In a 500-page report, they have one or two, or five or ten quotes like this, but there are many other things too. But I do not begrudge anybody for asking these questions. The fact is, we still have a huge gap in the social sector. We need to do more. We are trying our best. Twenty per cent a year is a lot but we have to increase the effectiveness of expenditure. That is what we are focusing on. More money is not the solution. It may be part of the solution; better governance is equally if not more important. So we have to measure the outcomes. Are literacy rates rising? Are dropout rates decreasing? Are teacher-absenteeism rates dropping? Is male and female enrollment in schools rising? All these factors are heading in the right direction. But clearly we have a long way to go. So I do not dispute any of these. They are out of context, but they are still valid comments which need to be addressed. Nobody is implying that every problem in Pakistan has been solved.

According to the Economist Intelligence Unit, large landowners own 40 per cent of the arable land in Pakistan and control most of the irrigation system yet assessments by independent agencies, including the World Bank, show them to be less productive than smallholders, poor taxpayers, heavy borrowers and bad debtors. What are the obstacles to land reform in Pakistan?

We have had land reforms in the past. I think we are heading more towards a free-enterprise economy where people can own anything. The real issue is farmer incomes and farmer productivity, that has to rise. The agricultural sector to me represents the biggest potential of Pakistan.

So land reforms are in a sense not the solution to anything. There are those who would argue that large farms are more efficient because these people have more resources. They can invest in capital. A small 12 ½ or 25 acre farmer is sometimes just a subsistence farmer. If you look around the world, economies of scale is the order of the day. So let the market and let the people decide what they want. If somebody wants a large holding, and he can afford it, more power to him. If he cannot, and they have a small holding, then so be it. In any case, the landholdings are coming down as families grow through the hereditary laws, there is a division of land-pools gradually happening.

But I think we should be leaving this to the market.

What accounts for the fact that Pakistan's education indicators are the worst in South Asia, and yet public spending on education and health remains significantly lower than that of other countries in the region? Why is it the case that substantially more funds are allocated to higher education than to primary and secondary education combined?

Actually education investment from the government is lower but one of the interesting things in Pakistan is that private-sector education is really catching up. This is not just elite education. Even in the poorest of the poor villages and towns, you have NGOs and other non-governmental groups talking about education. Government expenditure on education has grown but the way the population is going, government alone cannot educate everybody. So we are doing our best. We are up 20 per cent a year as I said, and the focus is on primary education. We are spending more, we are encouraging the private sector to do more, and NGOs as well. We hope that this will positively impact the literacy rates and the skill-improvement that is needed to provide jobs to people going forward.

After September 11, 2001, as a reward for Pakistan's unequivocal support of America's war on terror, the US lifted all sanctions against Pakistan, rescheduled US$2.3 billion in Pakistani debt, gave up to US$1 billion in soft loans and grants and also suggested the IMF and World Bank extend assistance of over US$2 billion for poverty alleviation and growth over the next three years. In June 2003, President Bush promised Pakistan US$3 billion in economic and military assistance over the next five years. Prior to this package, spending on the military and debt servicing had absorbed as much as two-thirds of government spending. These measures clearly just provided short-term relief. How do you expect to address these twin problems - debt servicing and military expenditure - in the long term?

Debt-servicing used to be over 60 per cent of revenue, it is now down to 30! One of the major drivers of improvement in Pakistan's economy was the re-profiling and the management of the debt and containing the fiscal deficit, which led to lower rates, and domestic debt became much cheaper. That involved reforms on interest rates and overall domestic and foreign debt management. So the debt problem has been largely resolved. The levels are still high, but as the economy grows without a proportionate increase in the same rate of debt, the ratios are looking better and better. We have a five-year debt strategy which you can find on the internet which talks about what needs to be done. On debt, we have also introduced in parliament the Fiscal Responsibility Law, which puts parameters around how much a government can borrow. So nobody can go crazy and borrow beyond a certain limit of financial prudence, which is historic; only a few developing countries, if any, have such a law. This puts parliament as the sovereign on levels of debt if they exceed a certain manageable limit.

In terms of defense expenditure, Pakistan lives in a region which is unique because there are tensions, there are external factors. No country can afford to drop their guard on adequate defense expenditure. At the same time, Pakistan believes in peace. We believe that with the recent initiatives in South Asia, combined with the situation hopefully improving in Afghanistan, the tensions in the region will diminish. But we have always tried to maintain minimum deterrence, which is itself a guarantee for peace. A weak Pakistan will not help pursue the peace process. Pakistan which has minimum deterrence, which can defend itself will ensure peace in the region, which will lead to development and growth. So the very essence of Pakistan's defense expenditure is a guarantee for peace in the future. This has been proven time and again that if anybody who wants to enter into any state of tension when they realize that Pakistan can defend itself they will not do it. Having said that, Pakistan believes in peaceful relations with all our neighbors. The relations with India after the recent SAARC summit have progressed well. There is still a long way to go.

But I think the feeling is that what South Asia and the whole region need to focus on is a war against poverty, deprivation, hunger, disease, and illiteracy, which exist all over the region. To do that, there will have to be a reduction in the trust deficit, a reduction in the levels of tension, more dialogue, more discussion. I think things are heading in the right direction. The core issue of Kashmir needs to be addressed and settled which is the principal cause of tension between India and Pakistan. This was the tone of discussions between President Musharraf, Prime Minister Jamali, and Prime Minister Vajpayee, and we hope that this process will move in the right direction in the months and years to come because the people of South Asia want peace, the people of South Asia want a better future. They are as talented, if not more, than anywhere else in the world. It is up to all of us to create that environment which will bring out our true strengths and position Pakistan as a key player in the region and in the world, and as a major Muslim country, which can be a stabilizing influence for the entire Muslim world and the world at large.

Interview conducted by Nermeen Shaikh of Asia Society