Monday, August 16, 2010

A Radical Approach to Pakistan's Economic Crisis

This article is written by Brother A.Salahuddin

‘Roti, Kapra aur Mukan' (food, clothing and shelter)! This has been the selfless slogan of the PPP rulers since the party was founded in the 1970s. Yet with the delivery of the new budget Pakistan's rulers have come bearing gifts of a totally different but not of an unexpected kind; new tax rises, public spending cuts and electricity price increases to name but a few. The consumption based VAT tax has been shelved but only until October 2010. The poor like the rest of many Pakistanis will now actually have to make do with less just as they always have done with every new budget.


Ordinary Pakistanis have always struggled to make ends meet but now increasing numbers find themselves challenged to procure even basic staples such as daal and flour. The recent suicide by a poor rickshaw driver's family in Lahore illustrates the increasing poverty being faced by many Pakistanis. A new report by the World Food Programme published days before the budget concluded that nearly half the population of Pakistan is food insecure directly as a result of spending on fighting the ‘War on Terror'. Add to this the fact that electricity throughout the past two years has also becoming a disappearing luxury with consistent blackouts due to the circular debt crisis which has ruined industry and caused many to lose their jobs, most Pakistanis can only look on at the current state of affairs with despair.

Finance Minister Dr Hafeez Sheikh claimed that the Pakistani economy was now on the road to recovery. The bitter truth is that with continuous rampant inflation and the failure of the rulers to provide even the most basic provisions such as universal healthcare and education there has never been an economic recovery for the tens of millions who face poverty every single day. The most disturbing aspect of the rulers' economic policy is the lack of a coherent strategy to genuinely develop the economy by investing in it's key sectors. In the budget, under the Public Sector Development Program, Rs 10.8 billion was allocated for Agriculture, Rs 3.2 billion for Industry and Production, Rs 15.7 Billion for Higher Education and Rs 1.6 billion for Science and Technology research - a combined total of Rs 31.3 billion or $368 million. This pathetic figure for a population of 180 million reveals the true regressive mindset of Pakistan's rulers who publically promise advanced industrial and economic development whilst practically investing next to nothing. It may play politically well to increase the allowance and salaries for government employees but these only form a fraction of the labour force; with no prospect of real industrial growth millions of Pakistanis will remain unemployed or mired in low skilled low paid work.

A look at some basic but key figures in Pakistan's budget helps understand the growing disaster facing Pakistan's economy. Even with new taxes and the IMF driven elimination of government subsidies, the total resources expected to be available this financial year is only Rs 2598 billion whilst expenditure will be Rs 3283 billion. Even if we take the government's massaged figures at face value, this will still leave a projected deficit of Rs 685 billion or over $8 billion, mainly to be financed with new borrowing once again. Dr Hafeez Sheikh claimed that this will only be 4% of GDP, an improvement on last year's 5.1%. The truth is that these now routine annual budget deficits have become a cumulative mountain of debt for Pakistan.

With 28% of government spending being used to service Pakistan's debt, Pakistan's economy is bankrupt. Thanks to the IMF package of $11.3 billion initially agreed in the dying days of the Musharraf regime Pakistan's external debt will soon stand at over $57 billion; by the IMF's own projections this figure is likely to reach $75 billion by 2015. Together with a rapidly growing internal debt of $54 billion, Pakistan's total debt has now crossed the $100 billion threshold making every Pakistani man, woman and child a debtor owing $616 each - that is about Rs 53000, just over half of the total annual GDP per person.

The real scandal though lies in the fact that a massive Rs 873 billion ($10.27 billion) will be paid out this year to service old domestic and foreign loans, the vast majority being interest; last year 46% of government's revenues were used to service debt. To put that in perspective Pakistan's entire defence budget this year after the 17% increase will be Rs 442 billion ($5.2 billion). The combined healthcare expenditure this year will be just Rs 24 Billion ($285 million) whilst total education spending will be Rs 39 billion ($465 million) with total federal government expenditure standing at $38.4 billion. The stupidity of the situation is self evident; Pakistan is borrowing billions of dollars at exuberant rates whilst at the same time making huge payments on old debts.

Whilst it would cause governments in other countries to be humiliated, in Pakistan it is a measure of how severe Pakistan's economic problems have actually become that new IMF loans have actually become a cause celebre for Pakistan's rulers. Mightier states such as the Roman and British Empires have folded under the burden of debt. America's economy today is facing a similar crisis as it struggles to control it's debt of over $13 trillion. Pakistan's pigmy rulers do not even rank amongst this illustrious company yet behave as if there is no tomorrow by continuing to borrow without end.

Institutions like the IMF and World Bank understand this yet they persist in giving new loans like a dealer continues to give an addict his next fix. Like drug dealers they do so at an extortionate price. Pakistan's wealth is being drained away every year thanks to the agreements Pakistan's rulers, past and present, have struck with these international loan sharks over the past many years. The fact is that these Western run institutions are colonial tools which countries like America and Britain use to control the economies of poorer countries like Pakistan, siphoning off their wealth. The people are made to work ever harder as the rulers in these countries follow every Western diktat in a faustian pact whilst enriching themselves beyond their wildest dreams. It should be no surprise then that Asif Ali Zardari is rumoured to have has an estimated wealth of $1.5 billion, marking him out as the eighth richest ruler in the world.

The mortgaging of the country in Pakistan's case doesn't just end there; Zardari and Gilliani have made much of the Kerry-Lugar aid bill which will supposedly bring $1.5 billion per year of aid for the next five years. The real level of regard that Zardari's American friends hold Pakistan in becomes clear in reading the fine print; the US Secretary of State must certify that an exhaustive set of intrusive requirements related to the ‘War on Terror' have been met every six months before funds can be released. It remains to be seen whether Pakistan will get all of this aid; much of the $2 billion bill incurred by Pakistan's military in fighting the ‘War on Terror' in the tribal areas is yet to be reimbursed under the Coalition Support Fund (CSF).
The American ‘War on Terror' is driving Pakistan's economy into the ground with the impact being felt right across the country. The hike of 17% in the Defence budget this year comes after years of inflationary only increases. With further military operations planned in the tribal areas the true cost of fighting the ‘War on Terror' is actually much higher. Hillary Clinton's recently announced $500 million worth of energy, health and water projects pale in comparison to what the Finance Ministry's official Saqib Shirani let slip that the real defence related spending this year will be Rs 675 Billion ($7.94 billion), the true cost of fighting America's war as America ironically loses in Afghanistan and hastily calls for negotiations with the Taliban. Zardari's own government has further admitted that Pakistan has lost at least $43 billion as a result of fighting America's terror war since 2001. The destruction caused in Swat and Waziristan, the re-housing of three million internally displaced people will cost billions of dollars to put right. The continuous terror attacks and suicide bombings, something that never occurred before 2001, have become a persistent feature ever since Blackwater (Xe), DynCorp, and the CIA became operational inside Pakistan. Any person can understand that economic growth and prosperity can never ensue as long as violence grips the country. This though is the chosen path of Pakistan's rulers in deciding to serve America.

Simultaneously the IMF loan package agreed in 2008 came with tough conditions, principally the reduction and eventual elimination of all government subsidies together with new tax hikes. This explains why over the last two and half years Pakistanis have seen their gas, electricity, petrol, CNG, diesel, wheat and other basic staples prices go through the roof along with the inevitable knock on effects on the wider economy; inflation by Dr Hafeez Sheikh's own admission has been running at 25% made worse by a weakening rupee as imports become more expensive. For an IMF accountant supposedly trying to eliminate the red ink from Pakistan's balance sheet it may be all in a day's work but the social havoc and poverty it is creating in Pakistan's society is way beyond the comprehension of any text book free market theory.

It should be clear to anyone who is honest with himself that Pakistan's economic problems are extremely serious and remarkably still getting worse. Pakistan's rulers are devoid of any solutions, they simply masquerade in front of the world begging for more aid and loans whilst seeking to imitate Western free market solutions and allowing foreign ownership of key essential services under the guise of public-private partnerships. One such gimmick is the ‘Carbon tax', apparently designed to reduce the consumption of energy in Pakistan to protect the environment. In a country where more progress is being made towards the Stone Age rather then the 21st century as the lights go out it represents another cruel slap in the face of Pakistanis as their rulers come up with yet another novel method of ripping off the ordinary man. This is made all the more bitter knowing that these tax rupees will be collected by rulers that have made Pakistan recognisable as one of the most corrupt countries on the face of the earth according to Transparency International's 2010 survey.

The fact is that Pakistan's economic problems are chronic, endemic and systemic, beyond the capacity of Pakistan's rulers to fix. Whether it has been military rule or democracy, Pakistan's autocrats and democrats have all failed to solve these problems which are becoming insurmountable year by year. This has been the case throughout the last 63 years of Pakistan's chaotic history. The likes of General Ayub Khan, General Zia ul Haq, Zulifiqar Ali Bhutto and his daughter Benazir, Nawaz Sharif, General Pervez Musharraf and now the duo of Asif Ali Zardari and Syed Yousef Raza Gilliani have all failed to arrest the economic anarchy which Pakistan is succumbing to. Debt has become the ugly hallmark of Pakistan's economy together with rising poverty. This debt burden which has simply increased over time has now reached the tipping point where it is overwhelmingly suffocating and crushing Pakistan's economy. As the debt crisis in Europe currently shows a point will come when lenders will stop lending to indebted borrowers; in Pakistan's case the much hyped ‘Friends of Democratic Pakistan' has been an abysmal failure with only $700 million materialising. If the German, French, British, Italian and Spanish governments are being forced to cut their budget deficits, what planet are Pakistan's rulers' living on?

In all of this madness the tragic sad irony remains that Pakistan is a country located strategically, rich in agricultural and mineral resources whilst being blessed with a large and youthful population. Pakistan in it's current state is still one of the world's biggest wheat, milk and meat producers; Nestle opened the world's biggest milk processing plant in Punjab in 2007. Pakistan has huge untapped coal reserves, one of the largest in the world, which if used with the right investment would easily help overcome the current electricity crisis. Pakistan also has one of the world's largest copper and gold reserves, with just one mine in Reko Diq, Balochistan worth at least $96 billion at today's market prices, worth more than it's entire external debt. And of course we know that Pakistan has a large strong military that is equipped with modern fighter jets, tanks and submarines together with a proven nuclear weapons capability. How is it that a country that has so much in abundance has been reduced to being mere chattel for the West where it's soldiers are being sold out as mercenary slaves?

The answer lies in the fact that all economic decisions are in the end decisions made by politicians; hence they are all political decisions in origin. Whether it is the continuing failure of the education system, allowing multinationals virtual monopolies, permitting corporate farming, building new dams or power plants, all of these decisions are political. The fundamental reason why Pakistan's rulers are failing to solve these problems is ultimately because of the failed political system to which Pakistan's rulers' remain beholden to.

Pakistan's political system is corrupt and broken, a system which the West has exploited to its advantage. It has allowed the feudals, industrialists, bureaucrats and the generals to keep power to within themselves. It is an environment which allows the insincere to breed and flourish at the expense of good people. Military dictatorial rule is unfair in itself and has proven unworthy but democracy has also proven to be no better. It is bad enough to have people enter politics that see themselves as career politicians who look to accumulate political power and personal patronage but in Pakistan's case many of these are simply career criminals who look to loot and plunder in all instances.

If Pakistan's ruinous economic problems are to be solved a new radical alternative, a completely new way needs to be adopted that completely changes the fundamentals of the political and economic parameters that Pakistan is constrained by. The problems are immense and demand an urgent new radical approach to the situation. The question that naturally arises is such an alternative possible? What shape and form could such change take place in?

As we stand at the end of the first decade in the first century in a new millennium we are witnessing Western driven Capitalism in severe turmoil. ‘Boom and Bust' has always been an integral feature of Capitalism; but today those systemic fault lines are being brutally and perhaps fatally exposed. The global financial crisis that began in 2008 shows no signs of abating. What started as a ‘credit crunch' for many businesses and consumers alike in the West has now turned into a full blown sovereign debt crisis thanks to governments spending beyond their means and Western governments adopting the hypocritical practice of giving huge bailouts to Western banks by practising state socialism. We are now witnessing the next phase in the global financial crisis as Western governments drastically cut spending and start raising taxes in a cruel transfer of immense wealth from the ordinary masses to the elite bankers and their supporters in political establishments across Western capitals'. As the situation in Greece shows it takes no genius to realise that this economic crisis is fast morphing into a political crisis threatening to shake the very foundations of the Western political system. In the case of Pakistan, arguably Western imitation by applying capitalistic solutions has had a fair run and we observe Pakistan being enveloped in the resulting chaos today. In Pakistan Capitalism has failed and run it's course.

Communism and Socialism lie dead and buried with even the likes of China having walked away and starting to adopt Capitalism as a means, becoming entangled within the Western controlled financial system, with its fate tied to theirs. Today as the global financial crisis deepens and the Chinese export driven economy slows down as Western consumption drops, the huge wealth inequality that already existed in China with vast low paid workers is beginning to get worse and threaten political stability. China has been forced to introduce its own domestic stimulus package of $586 billion as it confronts rising inflation, an inflated housing market and increasing consumer debt. The Chinese have artificially manipulated and held down the value of the Yuan creating serious political tensions with America by dumping cheap Chinese goods. In the good times the Chinese pacified the Americans by lending back the vast dollars they earnt by buying American government bonds in a favourable circle. Now as America's economy struggles with a deep recession this situation cannot indefinitely continue; with a huge debt, the dollar's long term world reserve currency position in doubt and inevitable rise in the interest paid on its debt, the Sino-American relationship will need re-adjustment. In a country not known for it's political openness with the Chinese Communist party more used to using state intimidation rather than any coherent ideology to hold sway over it's people testing times lie ahead.

For those who are not believers the point has now arrived that only leaves Islamic economics as the only alternative that merits serious examination. Whilst this is true for all others, for the majority of Muslims in Pakistan this is an article of faith that is just waiting to be implemented. For indeed the years of economic failure in Pakistan are not the fault of Islam which has been brushed aside but the blame rightly deserves to be laid at the feet of secularism which has held sway, be it under democracy or military rule, for nearly 63 years.

Islamic economics offers fundamental changes in the way a state's economy would be managed, unprecedented in modern times. To begin with it would ban the giving or taking of interest, the scourge of the global financial debt crisis. This would mean that whilst the state may honour any previous legitimate debts it would refuse to give any further interest payments. Neither would it seek new interest based loans. This would be adhered to across the board whether applied to International loans and debts or domestic loans for individuals. In an Islamic system the Bait-ul-Maal would be used to provide interest free loans to the needy and poor who may wish to start new businesses or fund other personal projects.

Moreover it would introduce the Gold / Silver monetary standard. Today under the fiat currency system every time the Pakistani government want's to get itself out of a hole by ‘borrowing' from the State Bank of Pakistan it is not only creating more debt but it is also effectively printing money thus increasing inflation and eroding the value of the rupee in everyone's pocket. In Islam any paper currency issued in lieu of the monetary standard must be backed by gold or silver and be fully convertible on demand.

Another area that would see complete change is taxation. As we painfully know nearly everything and everyone in Pakistan is taxed except the rich and powerful who are either not legislated to be taxed or simply flout the law. In Islam the principle of taxation is based on the amount of wealth a person owns, not on income itself. Thus those who own wealth above a certain limit (a Nisab) would see that wealth taxed, whilst those who may earn a large income but end up with less than a Nisab after essential expenses would not be taxed. Those who surpass the Nisab threshold for taxation would have the annual Zakat tax levied at 2.5%. Non-Muslims would pay the Jizya tax at 2.5% if they can afford to whilst being exempt from the Zakat tax.

Agricultural land reforms would be an important part of the transformation. Today in Pakistan despite having such fertile land, the dietary needs of the people cannot be met because most of the land is locked up in the hands of the Zamindars. In Islam any landowner who does not cultivate the land for more than 3 years would have that land confiscated and given to the poor who would use it. This would provide both an opportunity and warning to those who own land to use it in a productive way or face losing it. Any landowner would pay the annual Kharaaj tax imposed on the owner of land based upon its productivity whilst Usher would be collected on any agriculture produce. The overall tax base would be considerably lower and is designed to encourage spending, investment and entrepreneurship.

Mineral resources and utilities such as oil, gas, gold, copper, electricity and water would be publically owned and managed for the benefit of all rather then being allowed into private ownership as this is not permitted by Islam; neither would foreign multinationals be allowed ownership although they may be paid a fee for their services in extraction and provision. The state would be bound to provide essential utilities such as water, gas, electricity and fuel for transportation at cost price by investing in the infrastructure required. Islam is not against competition neither does it seek to implement price controls in the market; in fact it sees a fair market as essential to motivate the producer. What it does seek though is to protect the vulnerable by preventing key essential resources ending up in the hands of powerful individuals as is the case today under Capitalism under the guise of freedom of ownership who use them as a license to mint money. Private individual ownership would be allowed and encouraged in all other spheres as permitted under the Shariah.

The stock market as we know it would be abolished all together along with all the other capitalist paraphernalia such as derivatives, securitisation, bonds, hedge funds and credit default swaps that go hand in hand and have lead to so much devastation on a global scale. It is mandatory in Islam to own a commodity or service before being allowed to trade with it. This is unlike Western financial markets where trading has become akin to a grand casino by allowing the same commodity to be traded many times over under various financial instruments without even leaving the original owner. Thus profit or losses are created and leveraged over and over again in bets and transferred to others; as we now know in an economic crisis huge losses conveniently hidden away will eventually become apparent. The requirement for ownership will prevent such ridiculous feverish speculation and short trading that has undermined Western economies by inflating and depreciating prices on a huge scale, triggering shocks in the global financial system.

These are simple but powerful changes to the parameters of an economy that would completely change its dynamics and bring stability. To some this may seem unworkable as Pakistan continues to borrow from and trade with the West. How would this be possible?

The answer to this question is that Islam's economic system does not come on it's own, it is embedded as part of the Khilafat state (Caliphate). The re-established Khilafat would be a powerful state on the method of Prophet Muhammad صلى الله عليه وسلم that will have an independent foreign policy essential to bringing the economic change to the people of Pakistan that is so desperately needed. Moreover it would be a state bound by the limits of the Shariah with the rich and powerful being subject to the law. So the ruler may change but the political system would remain the same where new laws could not be created to favour special interest groups. The result would be that it would cut bureaucratic red tape and eliminate the culture of corruption plaguing Pakistan today by implementing the Shariah punishments' on the rich and powerful as well as the poor. This would have the effect of greatly stimulating small and medium scale business enterprises that would form the backbone of a successful economy by bringing employment on a massive scale.

The Khilafat will be a state that will have political strength and ideological vision, unifying it's people on the basis of Islam that will seek to unify the rest of the Muslim world. If the European Union can exist between twenty seven member states seeking closer political and economic integration, some of whom like Britain and Germany who have fought bitter wars with each other and the United States can bring fifty states together into a federal union, then it is certainly legitimate and viable for the Khilafat to seek unity for the Muslim world. This in time would create a huge market of Muslim consumers that will help create prosperity and raise standards of living as supply and demand would be stimulated. The Khilafat will control some of the world's most plentiful resource rich lands and the world's most important strategic waterways backed up with a powerful military.

It is important to realise that Pakistan's economic failure is inherently linked with its political system that allows Western interference facilitated by corrupt rulers. Western policies of free market economics are imitated by it's failed rulers when in reality the current international order, both economic and political, is loaded against countries such as Pakistan such that these policies only bring disaster. The solution requires the re-balancing of Pakistan's international relationship with the West to ensure parity and stopping the cruel exploitation by the IMF and World Bank which are tools of hegemonic Western powers. They allow Pakistan's creditors to have an undue weight and disproportionate influence on Pakistani policy formulation. Independence of economic and foreign policy is a pre-requisite for economic growth and prosperity to develop.

This can only be achieved with a new vision where the ruler is prepared to stand up for vital interests, even if it means crossing swords with the West by implementing new policies that are geared to mass industrialisation, generating internal consumption, developing it's agricultural resources, encouraging new businesses and by seeking new export markets to sustain the viability of these ventures. This can only be achieved with a new political solution that the Khilafat state would provide. The Khilafat in time would re-unify the Muslim lands, assert its sovereignty and apply the Islamic economic system as a whole coupled with an independent foreign policy.

There is a much more detailed discussion to be had on each of these proposed solutions and changes which are beyond the scope of this article. Yet Pakistan's present course cannot be sustained any longer, it is leading to catastrophe and the time has come for an urgent debate on Islam's solution to Pakistan's crisis as well the current global crisis. The choice before Pakistan to transform itself will not be easy; above all it will require willpower, sacrifice and dedication. The reward for this change though is clear; the Muslim world was once the envy for the rest of the world for many centuries because of its leading developments in science, economics, jurisprudence and its military prowess; all of this was achieved under the Khilafat system.

Adam Smith, the father of modern Capitalism revered in the West, observed "the empire of the Caliphs seems to have been the first state under which the world enjoyed that degree of tranquillity which the cultivation of the sciences requires. It was under the protection of those generous and magnificent princes, that the ancient philosophy and astronomy of the Greeks were restored and established in the East; that tranquillity, which their mild, just and religious government diffused over their vast empire, revived the curiosity of mankind, to inquire into the connecting principles of nature."

The Muslims of Pakistan have a chance to start over and rekindle their future under Islam which helped shape one of the most powerful and dynamic states in mankind's history.

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