This third part of this series of articles discusses, among other things, the subject of services imports. As usual, I firmly believe that this position is not the result of any error or omission made in recent times. It is the perpetuation of a certain series of events which started in 1947 and continues till 2022. The ‘ad hocism’ which started at that time still continues. A comparison between two states will assist in identifying problems and arrive at likely solutions.
Pakistan started with no disposable cash other than its share of the cash balances of undivided India. On the date of partition, these balances amounted to approximately 400 crores but the Indian government made an allocation of only 20 crores. Quaid-e-Azam Muhammad Ali Jinnah told Begum Shah Nawaz: “only 20 crores rupees in the treasury and nearly rupees forty crores of bills lying on the table”.
In October 1947, Mir Laiq Ali, (Jinnah’s intimate disciple in the Nizam’s inner circle) saw the Quaid in Lahore. He was told that the financial crises in Pakistan had deepened and there was hardly any money to meet the day-to-day expenses. India had withheld the agreed share of Reserve Bank’s cash balances amounting to Rs 55 crores.
The Quaid clearly stated that India believed “this financial blow would finish Pakistan”. An adequate loan to Pakistan from the Hyderabad State or the Nizam was asked by Jinnah. Mir Laiq Ali describes him as being very emotional at that time: “Never in my life had I seen Mr Jinnah emotional except on that day.
Is sovereign default inevitable? – I
He asked me if I had seen the refugees as I drove from the airport. I had of course. Tears rolled down his cheeks several times as he spoke of the mass human misery… Soon after that, the Nizam sanctioned a loan of Rs.20 crores to Pakistan. The leaders of India were very angry and unsettled at this gesture of the Nizam.“
At this time the Quaid looked towards the US through Abul Hasan Ispahani, the then Ambassador of Pakistan to the US, and he arranged Nobert Bagdam’s, a vice president of Schroeder’s Banking Group in New York, meeting with the Quaid in Karachi to discuss ways of ‘bilateral arrangements’ plus possibility of extending loan to Pakistan. Ispahani appealed urgently for the US support both private as well as public. In March 1948 Ispahani reported that:
• General Motors was interested in installing plants in Pakistan.
• The World Bank and Export Bank were less worried about international stability. They wanted to conduct proper surveys and reports before they committed any loans to Pakistan. [Nothing has changed. It sounds similar to staff-level review by IMF mission]
The purpose of this description is to identify the place from where we started. The ground realities were financial collapse from the start and desired or undesired urge for foreign loans and foreign investment. How we got spoiled on doleouts by the US during the Cold War and War of Terror is a different subject. This can be summarised by one sentence of the former President of the US, Harry Truman, about Pakistan. The US Secretary of State, Dean Aitchison has quoted him as saying:
“[the Pakistanis] were always asking us for arms and I was always holding them off”.
As against this, Hindustan the other part of undivided India, started with a very strong foundation for economic development. Generally people attribute the same to the policies of India’s first prime minister Jawaharlal Nehru, however in reality this was the groundwork of a private industrial group of India which prepared a plan for economic development of India in 1944-45. This is generally called the ‘Bombay Plan’. Everything India has today on the economic planning side is attributable to that plan. Let us see what it was.
The Bombay Plan
Policy: With the support of a few economists, India’s major businessmen, including JRD Tata and GD Birla, devised the Bombay Plan in 1944. The industrialists constituted a diverse group with some maintaining strong ties with the Congress (Birla, Thakurdas, and Lalbhai). Despite their friendship with Mohandas Gandhi, they did not support his mass-mobilisation politics. Despite their differences, they were united in their opposition to Nehru’s command economy model, which he called “socialist.”
The Bombay Plan envisioned the government playing a significant role in the economy and the creation of a central planning authority. In the 1940s, the intellectual atmosphere in the West was favourable to a large state role in the economy, therefore a group of industrialists pushed for such a broad role for the state in the economy. Indian industrialists likewise believed that they lacked the financial muscle to undertake large-scale projects, therefore the government was forced to take action.
Is sovereign default inevitable? – II
Objectives: The prime objective was to double the agricultural sector’s (then-existing) output and five-fold the industrial sector’s output over 15 years, both within the framework of a 100 billion rupee investment (of which 44.8% was earmarked for industry). The Bombay Plan’s central principle was that the economy could not grow without government’s active participation and regulation.
The Plan recommended that the future governments defend indigenous companies against foreign competition in local markets, based on the idea that young Indian industries would be unable to compete in a free market economy. The Bombay Plan also envisaged an active role for the government in deficit financing and planning equitable growth, a transition from an agrarian to an industrialised society, and the establishment of critical industries as public sector enterprises while simultaneously ensuring a market for the output through planned purchases, in the event that the private sector could not do so immediately.
On the matter of foreign direct investment the Bombay Plan observed:
(iii) Both denied any role to foreign direct investment. Bombay Plan made it clear in chapter 4 titled ’Sources of Finance“. Discussion of the finances made it obvious that foreign investment had no place in the scheme, though the Plan carefully avoided stating it explicitly anywhere. Government of India documents were however explicit from a fairly early date. The Advisory Planning Board of the interim government of 1946-47 wrote, “Foreign capital should not be allowed to enter or where it already existed, to expand even in non-basic industries such as consumer goods.
The reaction of the then British investors to this policy regarding foreign direct investment was obvious. The anxiety still persists. The Bombay Plan’s insistence on no foreign investment became a sore point with the British.
As an alternative Lord Wavell, the then Viceroy of India, proposed a portfolio of ideas for ‘reconstruction’ which L. S. Amery, an influential British conservative politician, described it as “as bold and…methods more practical than those of the Birla scheme.” The ‘Birla scheme’ here refers to the Bombay Plan. British industry suggested cooperation between British and Indian businesses using the framework of wartime cooperation as a model. The Bombay Plan observed:
In due course of time it will be possible to restrict or discontinue foreign imports; but foreign vested interests once created would be difficult to dislodge.
The official second plan of India had two distinguishing features: (i) it emphasised public investment in the heavy and basic sectors of industry; and (ii) resources for investment were to be raised by forced saving. The latter was justified on the premise that investments would increase productivity in the long run sufficiently to justify the welfare loss of involuntary saving in the short run. While proposing large outlay on core investment, the Bombay Plan was aware that investment of the proposed magnitude could not be supported by voluntary saving. The Plan, and later a pamphlet by G. D. Birla, explained forced saving in this context very succinctly.
Observing that wars were able to mobilise resources by aggressively forcing down consumption, the Plan asked why this could not be done for economic development in peace time. (Bombay Plan, page 5). It later notes, “… a large part of the capital required, about Rs 3,400 crores, would have to be created by borrowing against ad hoc securities from the Reserve Bank… . There is nothing unsound in creating this money because it is meant to increase the productive capacity of the nation and in the long run is of a self-liquidating character.” (Bombay Plan, page 47).
The purpose of this description is to highlight the inherent problems in our primary economic structure that places continuous pressure on our import bill, including for services which is the main reason behind the balance of payment challenge. The main features of the Bombay Plan which formed the basis of Indian economic policy were:
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The future government ‘defends’ indigenous companies against foreign competition in local markets, based on the idea that young Indian industries would be unable to compete in a free-market economy.
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Foreign capital should not be allowed to enter or where it already existed, to expand even in non-basic industries such as consumer goods.
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The active role for the government in deficit financing and planning equitable growth, a transition from an agrarian to an industrialised society, and the establishment of critical industries as public sector enterprises while simultaneously ensuring a market for the output through planned purchases, in the event that the private sector could not do so immediately.
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Resources for investment were to be raised by forced saving. The latter was justified on the premise that investment would increase productivity in the long run sufficiently to justify the welfare loss of involuntary savings in the short run.
The results of the aforesaid four primary principles were (i) establishment of a reasonable industrial base for the country against the foreign competition. The Indians were using ‘Ambassador’ cars when we were using Mercedes Benz, (ii) in all the cases of consumer goods industry foreign direct investment was not allowed which inspired technological development for local industry and no burden on foreign exchange for dividend remittances.
Pakistan has been allowing dividend remittances in USD for entities engaged in selling water, and (iii) reasonable industrial infrastructure was created for expansive industries like airlines, steel, petroleum, etc., which was not possible in the private sector at that time and (iv) forced saving provided capital for industrial development at initial stage. There were no such attempts in Pakistan and our consumption to investment ratio never coincided with the investment requirements. In simple words, ‘We always lived beyond our means’.
Pakistanis were travelling in luxurious Boeing 747 of Emirates and Singapore Airlines when Indians were using their national carrier with pathetic service in the 1980s and 1990s. The question whether or not we as a country can afford the same luxury now needs an answer, otherwise the example of Sri Lanka is before us.
In 2022, we cannot correct the situation that continued to exist from 1947 to 2022; however, in the present situation there is a need to identify the practical solutions which are necessary to at least defer the present chaotic position. At least one generation would be required to embrace ‘austerity’ if the country is to be taken from the present morass to a sustainable future.
Our two generations from 1947 to 2022 adopted a consumption-oriented pattern. However, there is a natural limitation for import-oriented consumption now. This ‘punishment’ is now inevitable as the present import-oriented consumption pattern is not sustainable for the country. There may be industrialists in Sialkot who have the resources to buy Rolls-Royce cars, however, neither the country’s foreign exchange reserves allow such profligacy nor will there ever be roads available to run those cars. This will lead to compulsive austerity which is looming in front of us if we objectively appreciate the present economic situation of Pakistan. This hard reality has to be accepted by the state; otherwise, we will continue to make mistakes.
Some relevant and undescribable facts about services imports are:
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The country spends about USD 1.75 billion on payments to international carriers for travel to and from Pakistan as our national flag carriers are unable to handle the travel demand, e.g., over 1 million people travel from Pakistan to North America alone, besides Europe and the Gulf countries;
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Almost all of the exports of the country are made through foreign ships as Pakistan does not own the required numbers of container ships. The cost is around USD 1 billion;
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Payments for royalties and technical fees even for consumer products including (off the shelf) OTS medicines due to agreements in the past which are continuously being made. Items include shampoos, biscuits, mineral water and cold drinks. The cost is over USD 1.5 billion;
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Almost all the construction activities for big industrial and infrastructure projects are undertaken by foreign contractors. For example all the power plants under the China Pakistan Economic Corridor (CPEC) have been undertaken by Chinese contractors. There is no major company available in Pakistan to undertake such construction activity. There is effectively no listed company in the construction sector. There used to be companies like MLC and Gammons. These are now only part of archives. The cost is over $1.75 billion in a year of average activity;
In summary, the result is that on average there is an import bill for services of USD 10 billion per annum. The most undesirable part is that there is no short- or medium-term solution available to reduce this incidence as we cannot ask our people living outside Pakistan not to travel to or from Pakistan. These people provide us remittances of over USD 30 billion. Similar is the case with payments for shipping, construction etc.
On the same plain, we cannot stop committed payments for technical fees and royalties. This shows that in the years to come Pakistan will not be able to reduce the import bill for services below USD 10 billion even if we are on the brink of collapse. We cannot imagine the social unrest that will arise if there is suspension of foreign flights due to our non-payment of foreign airlines’ dues. Nevertheless, without prejudice to the same, some out of box solution would have to be identified.
The worst part of the picture is foreign direct investment. As per my study net USD inflow on this account is less than the amount of dividend the country is required to remit abroad on the existing investment. This means that there is negative foreign direct investment. The reasons for it have been identified in the earlier paragraphs. Unlike India, we allowed 100% foreign ownership even for projects making consumer goods.
The mantra of privatisation without any caveat for future repatriation of dividend flourished for the last forty (40) years. The best case will be ownership of the telecommunication industry in Pakistan and India. In India all the major big industrial houses like Tatas, Birlas, Ambanis and others are the owners of telecommunication companies. In Pakistan all such enterprises are foreign owned. The simple question is whether we will be able to serve the demand for foreign currency for their dividends?
It is very difficult, if not impossible, to reinvent the wheels of history, however, it is ruthless in leaving its permanent imprints for the way forward. Pakistan cannot afford the luxury of spending USD 10-15 billion per annum on import services, however, at the same time, society is so tuned that it cannot survive without that. There is no apparent solution to get out of this vicious circle. The only answer and solution is ‘planning’ and compulsive ‘austerity’.
Copyright Business Recorder, 2022
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