In the twilight of globalization

AS world leaders gather in Davos to reflect on the increasingly grim future of globalisation, it is worth a moment to reflect on where Pakistan has stood in this process, and how it might fare as the clouds darken over the global economy.

The process that began almost 25 years ago challenged every country in the world with the imperative to generate a response. Some adapted but others, like us, missed the train.

Three large models can be discerned regarding how countries dealt with a rapidly globalising world in the 1990s. One was Russia and its former satellites in eastern Europe, who embraced the ‘shock therapy’ preached by radical free-market thinkers of the time, and floundered for almost a decade.

The other model was China, which opened up gradually, according to a plan, guided by the state, with state-owned enterprises leading the way. Penetrating the Chinese economy remains a daunting challenge for western capital almost to the present day.

The process that began almost 25 years ago challenged every country. Some adapted but others, like Pakistan, missed the train.

And then there was India, which opened up far more to private capital, but retained trade barriers through sophisticated mechanisms such as quality controls, transfer of technology and local content requirements, and a revamped patent law. Due to heavy reliance on these sorts of measures, India became famous for its ‘non-tariff barriers’ as its share of exports per capita skyrocketed.

Pakistan can hardly be compared to any of these three countries for the sheer fact that we are a far smaller economy, with a much narrower and smaller productive base. Nevertheless, as these economies grew, and underwent deep structural transformations with the emergence of new industries, we remain largely where we were at the start of the process. Sugar, textiles and cement remain our main industries. Some expansion has taken place in automobiles, and a spurt of investment has come into power generation where the private sector has emerged as the largest investor. But our financial sector has not deepened nor opened up to form major global linkages, nor has our agriculture sector witnessed any major boom in yields or new crops.

Our main export at the start of the process was manpower and cotton, and that remains the case to the present. Our software exports are paltry by comparison to the growth this industry has seen since the early 1990s. None of the new industries that have grown since then have had any transformative impact on the economy, in the form of enabling backward and forward linkages for the rest of the economy and serving as a driver of growth in other sectors.

Take as an example the chemicals industry, which in other countries has driven other industries such as pharmaceuticals and synthetic fibres, thereby enabling the creation of new avenues for growth.

Some optimists might argue that this has been a blessing in disguise. After all, isn’t globalisation in deep trouble now around the world? And aren’t those countries whose economies are deeply tied up in it feeling apprehensive about the backlash against it that is gathering steam in the advanced industrial economies?

The answer, to my mind, is no. Despite sitting out the gains from globalisation, we have remained vulnerable to its crises. The Asian financial crisis did not hit us directly, but only two years after it sucked out all the reserves from the export-led economies of Southeast Asia we were drained of all foreign exchange, and were gasping for air by 1999. Had it not been for an IMF bailout, a meagre one with stringent conditions attached that included first restructuring the privately held Eurobonds we had abroad, we would certainly have been headed for a disaster. Then State Bank governor, Ishrat Husain, once told me in an on-record interview that we had oil tankers floating at outer anchorage, waiting for us to raise the money to pay for their shipment before entering port to offload their cargoes.

Then there was the great financial crisis of 2008, which we were told all along will have “no impact on Pakistan”. Except that it did. When that crisis landed on our shores, despite the fact that our banks held no subprime mortgages and had little to no interaction with the cross-border interbank market, the form it took was identical to the form it had in every other country: drying up of bank liquidity, shutting down of the interbank lending market, collapsing stock market.

We can argue whether or not the crises of 1999 and 2008 were born of global factors or domestic ones. Yes there was the Kargil war and the nuclear detonations of 1998 with their resultant sanctions. But important weaknesses, like the massive exposures in foreign currency deposits, had been building up for almost a decade.

Also in 2008, some may argue that the tensions born of the transition to civilian rule created the economic crisis. But the fact is that alarms were sounding as early as 2005, when inflation and the current account deficit both began to shoot up while reserve accumulation was taking place largely on borrowed money. When the international crisis arrived, not as a liquidity shock but as a commodity price spiral, it sucked the air out of an economy that was already running on fumes.

The geopolitical tensions only exacerbated the problem, they did not create them. The problems were created by our lack of an adaptive response to a fast-changing world, leading us to sit out the benefits while absorbing the costs. Today, as globalisation enters the most decisive crisis it has ever faced, with the rise of populist protectionism around the world, it is worth bearing mind that no country is an island, and storms in distant lands inevitably land on our shores too. My fear, which I have repeated many times in the past, is that these storms will once again find us sitting on an unstable perch, with no adaptive response other than a cry for help.

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