Aid: learning from Egypt

At the outset this is not an article praising our Egyptian brothers for their tremendous feat of removing a 30-year-old dictatorship. Political analysts are more competent to comment on the causes of and reasons behind the success of the revolution. For my part, while I am not a believer of change for the sake of change, I am curious about the way forward.
Revolutions have an inherent shortcoming that the leadership is generally not geared for governance thereafter and there is always a likelihood of chaos. Things can most likely move towards an impasse if crowds continue to gather every time an unpopular decision is taken by the government. After all, how long can the government be run from Tahrir Square?
Having visited Egypt as a tourist for a few days only, I cannot claim to be cognizant of its social and economic problems. However, witnessing the emotionally charged crowds willing to die for their rights, it would be logical to assume that the masses were really suffering. The ferocious objective to remove the dictator definitely emanated from the perspective that all of Egypt's woes had their origins in dictatorship. This is arguably where we differ from them, in our case we have transited to a democracy and today have an independent and proactive judiciary. Accordingly the media's constant effort to sensationalise the event and entice Pakistan's masses to come out on the road is quite confusing. What exactly will be the demands, that the military take-over again?
Where we are similar to Egypt is our reliance on aid. Since 1975 an estimated $50 billion was disbursed by United States as military and economic aid to Egypt. This is roughly the amount of foreign debt that Pakistan has contracted over the same period. In recent years aid from United States to Egypt has averaged $2 billion approximately every year. Considering that Egypt's population is half of that of Pakistan, this translates to about 3 times the aid that we are getting. Egypt is blessed with a rich history, which begets tourism, supplemented by fertile land across the Nile both of which suggest a robust economy. A top view would therefore conclude that Egypt is devoid of fiscal problems and unemployment. What then were the masses protesting against?
The ground reality is different. With half the population, Egypt's stated unemployment is around 10% compared with 15% for Pakistan, which in our case has increased in recent years. Egypt's external debt is around $36 billion compared to around $50 billion for Pakistan. As per indicators on Unicef website percentage share of household income for lowest 40% during 2000-2009 is exactly the same for both countries. Interestingly, in case of the percentage of population living below the poverty line Pakistan is probably worse by a margin of only 5% at around 28%. These statistics are based on an internet search and there remains a probability of error. However, it is unlikely that the results will be significantly different.
Studying these selected indicators provides an insight into the causes of the revolution and it would also appear logical for the emotionally charged crowds to blame the ruler who was at the helm of the country for 30 years. What is mystifying is why high levels of aid could not alleviate the poor in Egypt?
The implication is that if we blindly follow the same path, we will end up at the same point in future and one can only conjecture against whom the revolutionary poor masses will whet their anger. While learning from history in this case requires a detailed analysis, there are certain pitfalls which can broadly be identified and avoided through commitment of purpose. While there can be many arguments on the responsibilities of a government, there is a consensus that one of the primary functions is poverty alleviation which requires provision of employment opportunities to the segment of society struggling below the poverty line.
Creation of employment is linked to economic growth, which in turn, is dependent upon investment. The dilemma is that a developing country like Pakistan plagued by fiscal constraints as well as natural and manmade disasters cannot generate the required funding. Investment is dependent upon saving. Where will the savings come from when most Pakistanis struggle with inflation to make ends meet? When putting food on the table becomes an issue everything else takes a back seat, even children's education let alone saving!
Without investment the economy will not move, forget growth it will most likely contract simply due to inability to keep up with technological changes and unskilled human capital. This is where aid has to play a role. Aid provides the missing capital for investment spending and in theory should be utilised in a manner to spur growth. Parodying economics classic joke, "That might be fine in theory, but it'll never work in practice". Free money is never spent wisely.
The debt trap is a key impediment. Pursuing growth, developing countries invariably borrow to finance the trade imbalance. Generally commodities are exported to provide the seed money and debt is contracted to import machinery for future value addition. The strategy sounds viable. Unfortunately, fierce discipline is required to identify the right combination of debt and to subsequently monitor progress. Debt is endemic once contracted it thrives on its own. Faced with current obligations and lacking resources, IMF seemingly is the logical option; unfortunately this comes with strings attached. However well meaning IMF's conditionality's may be, in real life "all else" is never constant. The one fit all model is destined to fail since each underdeveloped country comes with its own unique set of issues and problems generally embedded in its culture and traditions.
With limited ability to maneuver, financial managers look towards use or abuse of aid. In essence aid was required to bridge the investment gap; out of necessity it ends up being maneuvered to meet current expenditure. Logically aid should be directed towards education and infrastructure, desperately needed but ignored due to fiscal constraints, which for all intents and purposes appears to be the donor's agenda as well. However, philanthropy with strings is bad optics, hence the donor invariably concedes to unrealistic demands thereby marginalizing the benefits of aid. The onus of the consequences nonetheless lies on the recipient. If you don't invest in the future how will you ever improve the present?
Corruption may be another hurdle. Today the press is working overtime to cover corruption scandals in the country. Having come across John Perkins memoirs in his book "Confessions of an economic hit man" one can only wonder how much of what he says applies to our situation. While the jury may be out on this in Pakistan, there are allegations of amassing ill gotten wealth on the ruling elite in Egypt. True or false, it is undeniable that corruption is linked with the strength of a country's institutions. A positive sign is that we are probably moving in the right direction on this account.
Another cause identified by economists for failure of aid to spark economic growth is known as the "Dutch Disease". Without going into long details, this is also known as "the oil curse". Simply, research has identified that with the discovery of an expensive natural resource, higher export revenues end up appreciating the currency thereby making all other exports uncompetitive. Discovery of natural gas in Netherlands was where the phenomenon was first observed, hence the name tag. In our case aid inflow will give the same results. No wonder that in spite of all analysis and predictions by currency pundits, the rupee remains broadly stable. This, in turn, is counterproductive for our exports and disastrous for our industry.
Irrespective crisis brings opportunity. The high levels of aid today should be viewed thusly. What is needed is a focused approach on optimum utilisation of aid. At the outset it may be practical to establish an aid utilisation and monitoring wing preferably manned by development and private sector professionals. The initial task obviously is a detailed analysis of historic aid utilisation in Pakistan and similar countries followed by identification of the way forward and projects which contribute to economic growth. Taking lesson from current economic growth theories, a subject for a subsequent write up, education and technology are the visible avenues for aid utilisation. We need to play on our strengths; with 60% of the population under the age of 25 and blessed with fertile land and natural resources, human capital and agriculture may be our growth engines. In any case we should learn from history, before it repeats itself. ([email protected])