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The economics of foreign policies

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    The economics of foreign policies

    Extremist religous elements in pakistan were the basis of two foreign policies: kashmir (since late 80s) and afghanistan (since early 80s). No country, including USA, was bitter about madrassas when they were serving their interests in rolling out brainwashed, fanatic young ppl for Afghan 'jehad'. But after Russian pullout, pak army (which has been running the foreign affairs for the last 2 decades) saw the utility of these groups in two fields:

    1. Luring and scaring the west (IMF, USA, europe) in helping pakistani establishment out, for fear of islamists coming to power.

    2. destabilising Kashmir and Afghanistan for the maintaing influence.

    Post 9/11, the economics of these policies have failed. USA did not care about the religous elements in pak, which were never too strong. Even MQM, just limited to karachi, has been more anti-establishment in 1994-96 than all the religous extremeists combined.

    Foreign policies can and do backfire. Some
    are more obvious than others. America has had
    it's share of these as well. Central Asia may
    benefit from the interest now generated.


      Pakistan: Foreign loans and how to get rid of them
      The recently announced IMF three year poverty reduction and growth facility (PRGF) of $1.3bn has too many come as a welcome step and a vindication of the government's economic strategy. This coupled with future expected debt rescheduling and debt re-profiling later this month from the Paris Club argues the government will fill the financing gap that the country will face over the next few years. However it is clear to any aware observer that seeking further debt from the IMF on top of the existing $38 billion that is currently on the books is economically inept. It is also transparent that IMF loans to Pakistan are not simply an economic decision but a political decision designed to keep Pakistan continually dependant on the outside world, notably America. The Pakistani government instead of seeking its own independent political and economic course to seek self-sufficiency has once again sold out its political and economic sovereignty to America. Through such IMF packages and its associated conditions our country is compelled to adhere to US foreign policy as well as being opened up for exploitation by western multinationals.

      To prove this point of view, one needs to focus on two macroeconomic policies in particular that strongly affect Pakistan.

      1. Interest based debt and its implications

      2. Structural adjustment policies such as exchange rate, tariffs, subsidies and taxation

      However let us start with what the basis of the current political economy is, or its current user name global capitalism.

      Global capitalism through its 'free market' policy is defined as diminishing or ending government interference, specifically in trade but also the economy in general. Global capitalism forces all states of the world to lift trade and custom restrictions that are barriers to world trade; regardless of their type. Other policies that global capitalism seeks to end in the name of a free market policy includes all direct trade protectionism, such as import restrictions which protect domestic production such as high custom tariffs or subsidies. Global capitalism forces countries to open up their markets to foreign investment, privatising their public sector and floating freely their exchange rates. Of course the reality is that global capitalism benefits the leading countries in the world at the expense of the developing countries such as Pakistan.

      1. Interest based debt and its implications

      Turning to the points for examination, the first is interest rate debt and its implications. There is a certain model underpinning the lending to Pakistan and it is indeed a flawed model. Very simply put Pakistan spends more than it earns both in terms of the fiscal account and the balance of payments account. Because it has deficits it seeks to borrow from two sources, its domestic sector and externally. In essence the external party will loan money to Pakistan, enabling it to invest it and ultimately make sufficient returns to pay back the principal plus the debt servicing cost. The reality is much different since Pakistan's loans have continued to balloon and with its now $38 billion external debt and Rs 4 trillion total debt, there is no way Pakistan can repay this debt in any shape or form. Furthermore the conditions which are attached to these loans by organisations like the IMF has a dire effect on the population of Pakistan. For example, Pakistan pays some thing like 60 times more on debt servicing than it does on health and education and pays 3.5 times more on debt servicing than it does on its entire public sector development program. The recent cash injection from America of $600m to Pakistan for its reward in helping the formers crusade, is sufficient to pay for only six weeks debt servicing. Pakistan is not alone, the whole developing world is being drowned with debt; Latin America has a debt of $365 bn, Sub-Saharan Africa has a debt of $140 bn. So something has gone terribly wrong with this model, so when it is said that this model is flawed it is because it has certain realities to it. If our economic managers are expecting Pakistan to repay its debts even after the new three-year PRGF or gain a footing to be in a position to compete particularly against protectionism policies within the west, they are sadly mistaken. If you feel that further debt rescheduling (which increases the burden in the medium term) or further borrowings will give Pakistan a breathing space to increase its own development, you are also mistaken. Because we have seen that Pakistan has been forced into several policies under structural adjustment, to which we will return later, which ensures that Pakistan will never be able to develop its own infrastructure and experience prosperity. So the solution is not to pile more debt upon debt, this is a failed policy. Even the World Bank itself in 1992, then President Larry Summers acknowledged the failing of fuelling the flames with yet more debt stating "The lesson is well learnt, the cost of debt is to put development on hold for a decade in the developing countries."

      Consequently all these fruits that the Pakistani government says it is receiving post September 11 will have absolutely no positive effect on our economy, rather it will increase our dependency. Indeed every government since Ayub has been trying to argue that seeking economic aid directly from America or indirectly through its proxy the IMF will one day make Pakistan great, however our debt which was a few hundred million in the 50's is now almost 4 trillion rupees. The clear reason for this is that Pakistan fails to follow an independent path and seeks more and more reliance on America to such an extent that Ayub wrote to the US State Department in 1958 that 'Continuance of US aid is a matter of life and death to Pakistan'. It only becomes a matter of life and death if your political ambition is to be a client state of America. Not without good reason did Dennis Kux a retired US diplomat say that by late 1954 'Pakistan had become a virtual client state (of America).'

      So all these finance experts who have been telling us for the last thirty years to take on more debt, all these PhD's and high ranking officials, all these bankers and economists, will they admit they are wrong. Of course not, will the IMF, WB, ADB, the Paris Club donors accept their failure, will they forgive these debts, of course not. This is because lending vast amounts to Pakistan and debt relief are political decisions, not economic ones. Countries like America through adherence to the capitalist agenda seek to exploit other countries for their own benefit and those of the multinationals who effectively control these western governments. Thomas Friedman, a well-known journalist for the New York Times summed this relationship up very well, in an article for the New York Times magazine on 28 March 1999. He said " The hidden hand of the market will never work without a hidden fist - McDonald's cannot flourish without McDonnell Douglas, the builder of the F-15. And the hidden fist that keeps the world safe for Silicon Valley's technologies is called the United States Army, Air Force, Navy and Marine Corps." It is the same relationship, which explained why America went to war with Iraq to liberate Kuwait, not because of international law or to restore the previous regime but because of oil. As one US official put it so bluntly, 'if Kuwait grew carrots we wouldn't have butted an eyelid'.

      Countries like America can only get richer through either growth at home or growth through overseas expansion. The same is true for multinationals, which once their own domestic markets are saturated are attracted to developing countries like Pakistan if they want to increase their profits. However their entry is dependant on the IMF making the country an uneven playing ground for the domestic producers who would be their competitors (high interest rates, lifting of subsidies, increased taxation) and to cheapen Pakistani assets for them primarily through currency devaluation. Consequently having Pakistan mired in debt means it becomes totally dependant on countries like America who can then dictate as many favourable policies for its companies as it wants. Giving massive debt relief which some in Pakistan thought naively would happen after September 11, would reduce America's leverage on Pakistan and therefore hurt these economic interests. This is why no substantial debt relief will happen now or ever, as gross indebtedness is essential to ensure continued imperialistic dominance by America.

      2. Structural adjustment policies and their impact

      Let us turn to the second point, which is about structural adjustment policies and their impact. Since the time Pakistan began receiving loans from external donors, the implementation of structural adjustment policies (SAP) has been a condition upon undertaking a loan. The recent poverty reduction and growth facility will be no exception. Examples of these structural adjustment policies are floating exchange rates, restrictions on government spending, currency devaluation, trade liberalisation, free entry for multinationals, changing taxation policies, removal of subsidies and general deflationary policies. If we look at the most common of these Sap's which put conditions upon receiving these loans, we find the effects devastating and you don't need to be a finance minister or a four star general to realise the massive impact these policies have.

      Cuts in social spending due to high debt servicing and imposed budget deficit targets (IMF has restricted Pakistan in its original budget to 4.8% of GDP for 2001/2002) reduces health, education and sanitation standards, millions in Pakistan do not have access to these basic rights. The only ones who can are those who can afford to get clean water and who are prepared to pay the high medical and school fees which go up steeply each year more than the mythical single digit inflation rate.

      Shrinking the government, reducing government expenditure and trimming payroll programs are all there to fuel repayment of debt. An example of this is the recent announcement of 12,000 people to be laid off at the behest of the World Bank in the energy sectors, predominantly employed in Wapda, the WB are even providing a $350m loan to do this. The reality is that these harsh policies cause massive layoffs, which create a whole class of unemployed people. Wage rates decrease dramatically thus allowing exploitation of labour by foreign multinationals the likely buyers of a privatised Wapda or KESC. Cutting out labour also ensures that these entities become more attractive for the foreign buyers.

      Increasing interest rates may combat inflation and enhance banks' profitability, but it has a terrible impact on those businesses that are capital intensive. Though the central bank recently reduced interest rates by 12% down to 10% for its lending to banks, banks have not passed these on to borrowers. As businesses find it increasingly harder to finance their loans, they cut back on production and therefore unemployment increases. Having high interest rates on domestic business while multinationals enjoy practically zero rates at home also affects Pakistan's competitive positioning. Pakistan's credit distribution also reflects the fact that concentration of wealth only exists in the elite areas of the rich. At the end of June 2001 accounts in excess of Rs. 10 million equaled only 0.9% of the total number of accounts in the country yet their share in the total advances of the scheduled banks was almost 76%. Due to these high rates of interest and selective lending by banks there was virtually no net credit expansion to even the government's favoured IT and SME industries. The agricultural sector is also facing severe credit starvation. During 2000-2001 recoveries by the Agricultural development bank of Pakistan (ADBP) exceeded gross disbursements by Rs 23 billion. The IMF's policy of also linking the export finance scheme interest rate to rising T-bill rates also ensured that development financing for exporters was halted in its tracks.

      Eliminating regulations on foreign ownership of resources which Pakistan has done enables multinationals, which are large and powerful to come in as they have in the oil and gas sector. One can argue that they are not in a very even keel for competition to come into our countries to buy and invest, since they are allowed to come in at very short notice. They usually have tax breaks and again there is nothing stopping them pulling out their capital quickly once they smell a crisis, as what happened in SE Asia a few years ago and which caused great instability in that region.

      Having a free floating currency like the Rupee exasperates the situation as people use short selling techniques to attack the currencies and drive them down further. The government has also promised the IMF in its interim poverty reduction strategy paper (I-PRSP) to carry on reforms in the capital markets, which will encourage areas such as derivatives and the use of short selling techniques even further. Though there has been some appreciation in the rupee post September 11, this is not due to structural reasons but as a result of the crackdown on the informal system in America, the Gulf and Europe. The rupee has been on a constant depreciating trend since 1947 and the harsh effect on imports/prices has been chronic for the man on the street. Another perverse effect is the depreciating currency's effect on the external debt, each time the rupee falls by one unit against the US dollar; the external debt rises by 40 billion rupees or the equivalent of 8 times what we spend on health and education. As our debt rises due to a weak currency, we need to borrow more debt to finance the increased burden, which the external donors are only so willing to give for the political reasons, referred to before.

      Reducing tariffs on imports into Pakistan, eliminating subsides to farmers and the imposition of GST on agricultural inputs like fertilisers are structural adjustment policies which Pakistan has implement per its agreements with the IMF and WTO. For example the I-PRSP which the Pakistani government formulated to qualify for the PRGF facility seeks to eliminate all remaining differential applications of excise duties on imported and domestically produced goods by 2003-2004. Liberalisation of wheat imports and exports, elimination of subsidies on wheat has also been envisaged by the I-PRSP. Both the IMF and the World Bank had been asking for elimination of all subsidies in the agriculture and petroleum sectors. This is despite the fact that the EU subsidises its own agricultural sector, to the tune of hundreds of billions of dollars a year and also imposes a quota system on Pakistani goods entering European markets. As Noam Chomsky says "Market discipline is just fine for the poor and defenceless, but the rich and powerful take shelter under the wings of the nanny state". This is not an example of double standards, but one, which is consistent with the colonisation, which is being performed by countries like America and the EU on Pakistan. Is it any coincidence that the commodities that are predominantly found in third world countries like Pakistan are always at rock bottom prices, e.g. cotton, coffee, rice, oil whereas high technology goods produced in the West are exported to these same developing countries at premium prices.

      Another product of structural adjustment policies is that they force Pakistan to reign in its defence expenditure. Over recent years Pakistan's defence budget as a proportion of national wealth has been falling while its hostile eastern neighbour has been making significant increases in its own defence budget, our military budget in dollar terms today is less than it was ten years ago. The result of such defence cuts will inevitably erode the effectiveness of our armed forces and therefore make us more militarily dependent on the outside world, a strategy that is consistent with America's foreign policy. Reduced defence spending also ensures that there is no real development of our large scale-manufacturing sector, another area where a state seeking its own independent foreign policy would focus on. The international donor agencies have been assured by the government in the recent I-PRSP that defence expenditures in future years would also be contained, a complete abdication of our national security.

      Consequently though the capitalist world today still presents itself as promoting international trade and currency stability, directly and indirectly through institutions such as the IMF/WB/WTO, it doesn't take a genius to understand what the real agenda is. We in this part of the world only know too well that just a few hundred years ago, the East India Company came to our lands also under the guise of free trade. They left 250 years later having colonized almost a billion people, extracted most of their wealth and made their markets dumping grounds for their own goods. American policies through organizations like the IMF and ADB where it has a dominant shareholding, are therefore nothing more than an extension of good old fashioned colonialism, they are the inheritors of the East India company. Indeed it wasn't without reason that the New York Times referred to the IMF as "proxy for the United States" and that IMF economist Karin Lissakers said that the IMF is "the credit community's enforcer". The IMF and the World Bank are the agents of international capitalists; their primary objective is to maximise profits for international banks and multinational corporations.

      Alternative Strategy

      The first point to make is that a radical overhaul has to be made of the Pakistani system, in its current form it must be abolished and replaced with an Islamic system. In terms of the Islamic State there are some key principles which are found in the divine texts and which must be implemented comprehensively and without delay. Essential principles govern the focus to tackle poverty, hunger, housing, health, education and law and order as a must. Rasoolallah said in a hadith which can be translated as,

      "The Imam is in charge and he is responsible for his citizens"

      In order for the State to perform the duty placed on it the shar'a gave the State the authority to collect certain revenues such as the jizya (head tax) and the kharaj (land tax) with zakat also to be collected from the people by the Bait ul Mal. Funds are then spent on the needs and requirements of the people. Another key issue is that wealth should not be hoarded but must circulate within society. Allah (swt) says,

      "What Allah has bestowed on his messenger (and taken away) from the people of the townships, belongs to Allah and his messenger, to the kindred, the orphans, the needy and the traveller, in order that it may not remain a circuit between the wealthy amongst you."[TMQ Al-Hashr:7]

      With respect to the issues for Pakistan, which we discussed above specifically the issue of dependency on the west, the debt situation and various macroeconomic policies, the following points need to be made:

      1) The Islamic State will eliminate all foreign, imperialistic influence within its borders whether it is in the form of economic loans, military aid or actual military bases. This is a political decision and is a pre-cursor to any State following their own independent foreign policy, which is a must for the Islamic State. Allah (swt) revealed,

      "Allah will does not permit the believers to place kafireen in authority over them."[TMQ An-Nisai: 141]

      Consequently all agreements with the IMF, WTO and WB are considered null and void.

      2) Strategies and actions, which the State will follow, will be consistent with this political aim of self-sufficiency. At present the current strategy being followed by our economic managers is consistent with the aim of continued dependence. Our current economic managers who are imposed on us are products and graduates of the very institutions which are colonising our country, they are themselves part of the problem.

      3) With respect to the debt situation, there are a number of points to make. First of all we need to review all liabilities both external and domestic to ascertain the principal borrowed. We need to understand that despite Pakistan paying billions of dollars over the last decade why our debt continues to rise. In terms of external debt if there is a shortfall in the principal we could enter into negotiations using political, economic and military factors and arrive at some kind of solution. With respect to domestic debt this could be accounted for in terms of either a loan whose principal will be repaid or emergency taxes could be levied on the richest 1% to compensate those on moderate-income levels. On both forms of debt it will be made clear that paying of interest is completely prohibited in line with the constitution of the State. Allah revealed,

      "Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the devil; this is because they say: 'Trade is similar to interest' while, Allah has permitted trade and forbidden interest."[TMQ Al-Baqarah:275]

      If the Japanese government can argue that giving debt relief to any country is against their country's constitution, then the Islamic State can also argue that the paying of interest is against ours.

      4) Interest saved from the annual budget which is approximately $5 billion or Rs. 325 billion could then be reinvested into productive industrial sectors such as heavy engineering and manufacturing, coal, oil and gas as well as investment in health and education facilities.

      5) As domestic bonds, savings accounts and treasury bills will in essence be abolished, private domestic capital will then flow through to productive enterprises in the real economy. Consequently the current situation where many businesses in the IT, agricultural and SME sectors are credit starved will no longer be the case as capital will no longer be the preserve of the minority but will now circulate freely.

      6) The main reason apart from debt servicing which causes the government to borrow in the first place is the huge corruption by the establishment as well as the poor running of state enterprises. There is huge corruption in Wapda, KESC, Pakistan Steel, PIA and the railways. Better management of entities and removal of corruption will result in a saving of about Rs 100bn a year. By cutting down on the corruption of the elite who control these enterprises, you can then increase the salaries in vital and deserving sectors such as teachers, the police and health professionals. Also those sectors which are vital to the economy such as oil, coal and gas should not be privatised as they are classified by the shar'a as public property. The Prophet (saw) said in a hadith which can be translated as,

      "The people share in three things water, pasture lands and fire (fuels)."

      These vital resources need to be kept in public ownership and the benefits accruing to all the people, not to western multinationals.

      7) If we invest the debt servicing and other savings in our natural energy resources so as to extract coal from Sindh and gas reserves in Balochistan, we would avoid the need to import over $3bn of oil, thus reducing our reliance for foreign exchange.

      8) Taxes such as GST will be abolished as they contravene the shar'a, they are also in essence penalise the poor as they disproportionately take more of their wealth on basic goods and services, thus encouraging wealth to be concentrated. Islam obliges taxes such as kharaj, which is levied on produce from land. At present because of the strong influence of feudal landlords in our political system, no such tax is levied yet the poor of our society are made to pay GST on basic commodities.

      9) At present there are millions of acres of land in Pakistan, which are owned by a small number of landlords who largely inherited these holdings from the British colonialists. Under the shar'a land will be confiscated if it remains idle for three years and given to someone who is in need of land. Hazrat Umar bin Khattab (ra) said and this was confirmed by the consensus (ijma) of the Sahaba (ra)that ' Whoever neglected a land for three years without using it and another person came and used it, it becomes his'. This measure again encourages the principle of wealth circulation in the economy.

      10) The currency in the economy which is currently the rupee will no longer be allowed to be used in the economy as a fiat currency, rather it will be based on the gold standard. A one-time conversion will be made to ensure that all currency in circulation will be backed by adequate gold and silver reserves. Initially this may cause some hardship as at present the government covers up its economic weakness by printing money, thus creating inflation. However in the long run our currency will be stable and will not depreciate like the Rupee has done over the last fifty years creating immense misery for all concerned in terms of higher prices. It will also ensure that our currency cannot be manipulated by the colonialists in the form of international speculators, as was seen a few years ago in SE Asia.

      These are just some of the policies the Islamic State will follow in its shar'a aim to assume an independent foreign policy. For those who argue that executing this strategy will cut us out from external assistance and isolate us, the figures speak for themselves. The $5bn saving we receive from eliminating debt servicing is significantly more than double the net capital inflow that Pakistan currently receives from various international sources through DFI's and project aid per annum. Net external resources inflow is only 10% of our gross capital formation. Foreign direct investment is minuscule only around about $400m gross on an annual basis and portfolio investment is in effect negative and is focused on trading of existing securities not on new issues, project aid is declining. At present domestic savings finance over 90% of our total investment, we are not a foreign capital dependent economy. In addition Pakistan like most of the Islamic world is rich and self-sufficient in all resources whether they be labour, energy or agricultural. Also detaching ourselves from the international financial system is not the same as de-linking ourselves from trading with non-imperialist nations. The Islamic State will continue to trade and seek to build relations with such nations, the State will also be interested in financially acquiring technical assistance and technological transfer as long as there are no detrimental conditions attached to these dealings.

      By pursuing this path, we will regain back not just our sovereignty but we will also expose the global capitalist system headed by America, which today causes oppression, humiliation and misery to billions of people. Establishing this Islamic State is compulsory duty for all Muslims to work for and is the most vital and pressing issue that we face today.

      Barrister Ahmer


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