Pakistan is losing ground
By Shahid Javed Burki
DURING his recent visit to Washington, Prime Minister Shaukat Aziz spoke repeatedly about the openness of the economy he and his economic team manage. “We are perhaps the developing world’s most open economy,” he told his audiences. “You can come and invest whatever you wish and wherever you wish. You can take 100 per cent or 0 per cent share in the company in which you wish to invest. It is your choice, not the government’s.” In that respect, Pakistan is South Asia’s most open economy, certainly more than that of India. But India is on the move.
A day after Aziz’s final public appearance in the United States’ capital, the cabinet in India took the decision to open that country’s large retail sector to foreign participation. “Consent to permit 51 per cent foreign investment in single brand retail operations was the most striking among a package of measures aimed at signalling the Indian government’s determination to kick start a stalled programme of economic reforms,” wrote the Financial Times about the new Indian initiative.
This was a modest level of opening and it came with several restraints. In announcing the decision by his government, Kamal Nath, the Indian commerce minister said that “companies will be allowed to sell goods sold internationally under a single brand. Retailers of multiple brands, even if they are made by the same company, will not be allowed.”
Constraints notwithstanding, foreign retailers including Wal-Mart, the world’s largest, are lining up to move into India. The new Indian policy, considerably more restricted than the one followed across the country’s northern border — in Pakistan — will still lead to large foreign investment in the sector. Foreign companies, while not totally delighted by the small Indian gesture, are likely to move into the country with billions of dollars of investment. Why are foreigners so eager to go to India but reluctant to come to Pakistan?
One answer is the larger size of the Indian market. In 2005 the size of the Indian retail market was estimated at $258 billion and, according to Technopak, a consulting firm, it is set to grow to $411 billion within five years. The sector is currently dominated by nine million “mom and pop corner stores.” India is admittedly large and becoming larger, but Pakistan is small only by comparison to its neighbour. Otherwise it offers a large and rapidly expanding market. It should also attract foreign interest and investment.
One of the points the prime minister repeatedly underscored in his speeches was the size of the Pakistani middle class. He didn’t offer any numbers but those are not hard to estimate. If by the “middle class” is meant the segment of the population that has the disposable income to spend on the products large retailers would like to sell, then a third of Pakistan’s population of 156 million falls into that category. That means 52 million people with combined incomes of $78 billion and a per capita income of $1,500. If these people spend 20 per cent of their income on goods that large retail shops would be interested in putting on their shelves, this means a market of $16 billion. This is probably increasing at the rate of 10 per cent a year and will, by 2010, amount to $23 billion.
Given the size and openness of the Pakistani economy, why are foreigners not attracted to the country? Why has India become such a flavour of the day and why does Pakistan continue to be shunned by foreign investors? Why aren’t foreign investors attracted by the attributes Prime Minister Aziz kept referring to in his many speeches. I have attempted to answer this question in previous articles. I will go over some new ground today.
A commentator in a letter written to this newspaper in response to some of my earlier writings about India said that I was taken in by Indian propaganda and was ignoring the Indian reality. He couldn’t have been more off-base in his reaction. Let me briefly recount as to what is really happening with respect to foreign investors’ interest in our neighbour by offering some concrete examples.
In the space of a few days in December 2005, three of the biggest companies in the United States — JP Morgan Chase, Intel, and Microsoft — announced plans to create a total of more than 7,500 jobs in high value areas such as research and development and processing complex derivative trades. As a newspaper commentator wrote: “But for those worried about sluggish job creation by the US economy there was a snag. The jobs would all be in India. Worse, they would be jobs that in the past would have been in the US.”
What is even more important and impressive from the Indian perspective is the fact that some of these companies have decided to bet their future on India. Under JP Morgan’s plan, 20 per cent of the global workforce of its investment bank will be in India by the end of 2007. HSBC, one of the world’s largest banks operating out of London, has similar plans with regard to its requirement for financial skills. In an entirely different field — computer sciences and IT services — companies such as Microsoft, IBM, Intel, AMD, plan to locate significant parts of their research operations in India. What attracts them most to India is the quality of human resource available in that country. For foreign companies the attractions of India are not just costs — which industry analysts estimate at about 40 per cent below US levels — but also the quality of staff being produced by Indian universities.
According to Veronique Weill, head of operations at JP Morgan’s investment bank, “the quality of people we hire (in India) is extraordinary and their level of loyalty to the company unbeatable.” One of the many areas in which public policy continues to fail in Pakistan — a subject to which I will return momentarily — is the inability of the educational system to produce in significant numbers the same quality of people graduating from India’s science and technology institutions.
What is most troubling for Pakistan is that it is losing ground not only to India, a country that also has a large and young population. It does not even figure in the “back-up” plans drawn up by foreign corporations for addressing growing shortage of skills in their home countries. According to one knowledgeable analyst, “to avoid being too concentrated in one country, JP Morgan is already looking at other potential off-shoring locations mainly in Eastern Europe, but also China and the Philippines.” How can Pakistan get on the corporate maps of America and Europe? Why has public policy failed in that respect?
The most difficult problem Pakistan faces is the perception about it being the epicentre of Islamic extremism on the verge of an explosion in both political and social areas. Not only that, many influential voices in the United States in particular, are not convinced that Islamabad is doing all that is needed to put down Islamic extremists.
In an editorial the day after Prime Minister Aziz left town, The Washington Post not only advocated unilateral US action against extremists if Islamabad failed to act on its own. It resorted to name calling. Calling President Pervez Musharraf, “a meretricious military ruler,” it advised the administration of President George W. Bush that “if targets can be located, they should be attacked — with or without General Musharraf’s cooperation.”
The newspaper had a long list of complaints against the Pakistani leader. “Gen Musharraf has never directed his forces against the Pushtun militants who use Pakistan as a base to wage war against American and Afghan forces across the border. He has never dismantled the Islamic extremist groups that carry out terrorist attacks against India. He has never cleaned up the Islamic madressahs that serve as breeding grounds for suicide bombers. He has pardoned and protected the greatest criminal proliferators of nuclear weapons technology in history, A.Q. Khan, who aided Libya, North Korea and Iran. And he has broken promises to give up his military office or return Pakistan to democracy.”
If the visit by the prime minister was meant to change some influential minds about the way they view his country, it cannot be counted as a great success. The Post’s editorial could not be seen as a ringing endorsement of a country in which American corporations could do business. This segment of opinion-makers in Washington was not prepared to recognize that by following mindlessly the American dictat, President Musharraf’s regime — in fact any regime in Pakistan — could not expect to stay in power by totally alienating its own people. It was also ironical that even after the occupation of Iraq and the use of lethal force against the insurgency in that country, the US was not able to capture or kill Zarqawi, the Jordanian militant. It expected Pakistan to do that with respect to Osama bin Laden and Ayman al Zawahiri with considerably smaller resources and in much more difficult terrain.
While improving Pakistan’s image with respect to its participation in the struggle against Islamic extremism is not fully in Islamabad’s control, what it could do is to measurably improve the quality of its human resource. Here the public policy continues to fail in spite of the large amounts of new money committed to investment in higher education and skill development. Much of the effort under President Musharraf has been directed towards the use of public funds to open new avenues for advance education for Pakistani students.
Only time will tell whether this initiative will bear fruit. What the government could have done but didn’t do was to establish new institutions or significantly improve those that are already operating in a few areas where Pakistan could carve out a place for itself. An approach that was built on public-private partnership would have been very helpful in this area of human resource development.
Some specific initiatives could still be taken. The government could invite the private sector to establish some institutions of excellence — for instance a health sciences institute in Lahore, an advance engineering and technology institute in Karachi, an urban planning institute at Hyderabad, a small scale engineering institute at Muzaffarabad, a transport institute at Peshawar, a banking and finance institute at Islamabad, and an agricultural sciences institute at Faisalabad.
These are some examples of the kinds of initiatives the state should take to avail itself of the advantage of a large and young population that could bring immense economic benefits to the country. In not developing such a strategy Pakistan is rapidly losing ground to other populous countries. It is still not too late to plan for the future and make a real attempt to move forward.
http://www.dawn.com/2006/01/31/op.htm#1
