Cracking the Pakistan Code

A discussion with

Mohsin Khan
Senior Fellow, Rafik Hariri Center for the Middle East
Atlantic Council

Paula Newberg
Marshall B. Coyne Director
Institute for the Study of Diplomacy

Moderated by

Shuja Nawaz
Director, South Asia Center
Atlantic Council

December 4, 2012

Atlantic Council

Shuja Nawaz: – Crack the Pakistan Code. We have on the roster, three eminent experts on the country, and although I’m normally reluctant to use the word expert with Pakistan because it’s very difficult for somebody to say that he or she gets Pakistan. I think the group that we had originally intended to bring together for this event certainly fits that category.

Unfortunately I regret that Ambassador Haqqani could not make it. He had plans, he had even booked his flight, but he is quite ill. I think he caught some kind of a cold and is recovering from it, so he couldn’t make the flight. So we will unfortunately not benefit from his presence. Although he has been kind enough to send some talking points and I will gladly share those with you too, to set the ball rolling.

But we do have two other eminent experts, and in the order in which they’re going to speak let me just introduce them briefly. We have Paula Newberg who’s done a fair amount of travel and work on Pakistan. She has been the Marshall Coyne Director of the Institute for the Study of Diplomacy and a visiting professor in the School of Foreign Service at Georgetown. She’s worked in the policy field; she’s also been a practitioner and she’s a scholar.

One of my own personal favorites of the work that she’s done has been a work on Pakistan’s constitutions. And that remains probably one of the best books on the subject written. Nobody has yet tried to supplant it.

She has had a very eminent career working with the United Nations, with the United Nations Foundation in Africa. She’s had postings in Central Asia and Afghanistan, and also is a Senior Associate at the Carnegie Endowment for International Peace, where she co-founded its Democracy Project and chaired the South Asia Roundtable. She’s also been a guest scholar at Brookings.

I won’t go into all the other details of her illustrious career, but let me move onto Mohsin Khan. Mohsin is a former colleague at the IMF where he was Director of the Middle East and Central Asia Department. He is currently Senior Fellow in the Rafik Hariri Center for the Middle East, focusing on the economic dimensions of transition in the Middle East and North Africa.

Mohsin was a senior fellow at the Princeton – at the Peterson Institute for International Economics since March 2009, and he has published a long list of books and articles dealing with the macroeconomics of Pakistan and the region. So he will be able to give us his take on the economic situation in Pakistan and then what to expect as we go ahead.

The way I plan to organize this event, particularly in the absence of Ambassador Haqqani is I will give you a very quick rendition of his talking points so that they are in everybody’s mind as we go forward. Then I’m going to request Paula and Mohsin Khan to talk about the economic situation and then we’ll have Paula Newberg try and do the political economy of Pakistan as it were, and also look at the U.S. Pakistan relationship.

The reason why we chose this topic – and it was just good timing in many ways – is that the United States and Pakistan are now apparently coming out of a trough of a very poor relationship. At least a dialogue has begun at the working group level, so what used to be known as the strategic dialogue is going to be revived in some way and we hope that it will pick up steam.

And it’s highly critical that these two countries that have often been described as friends or enemies or frenemies, find a way to understand each other going forward, particularly in light of the transition in Afghanistan. And it’ll be interesting to see to what extent they have managed to find a way to converge their ideas and their actions and their intentions. So our session today should give you some food for thought – I hope.

Now, pretend that I’m Husain Haqqani, and so what I say next is not me, it is really Ambassador Haqqani’s thoughts, which I will convey to you. His basic contention is that there’s a fundamental disconnect between Pakistan’s regional aspirations and the United States’ expectations.

Pakistan’s many paradoxes make it difficult for the Obama administration to go beyond the current, quote, unquote, event-driven relationship. Under this heading the Pakistani democracy has yet to find a balance between politics and polity. Domestic politics in Pakistan makes it impossible for the government to keep promises in key areas of interest to the United States. And these include counter-terrorism, Afghan Taliban safe havens, nuclear proliferation and de-radicalization.

Further, anti-Americanism in Pakistan is coupled with dependence on U.S. assistance, and the economic needs of Pakistan force it to seek U.S. aid. But national sentiment remains hostile to the United States.

And every few years a new explanation is offered for this anti-U.S. sentiment, the latest being the frequency of drone attacks. Further, the anti-Americanism in Pakistan goes back several decades. The mood in the U.S. Congress and the media in the United States has hard considerably after the raid on Abbottabad and Ambassador Haqqani feels that this is unlikely to change.

What makes it very difficult for the Obama administration to ignore Pakistani anti-Americanism, unlike Reagan or the Bush Administrations is this mood change in Washington. Within this rubric Pakistan’s military wants a deal with the U.S. on the so-called end game in Afghanistan. But too many variables, the policies of India, Iran, different Afghan factions and the actions or policies of the Pakistan-based jihadi groups make it very difficult to accomplish.

His third point is that both sides, the U.S. and Pakistan will continue to talk of a strategic relationship, but it is unlikely that Pakistan will forego its nuclear and asymmetric warfare options that are at the heart of this disconnect between the two countries.

The relationship according to him is undergoing a very serious re-evaluation. The old paradigm of tweaking it with joint statements and aid packages might not work very well anymore. The mistrust is deeper and civilian leaders with an eye on elections and facing activist media and judiciary at home cannot afford secret deals and arrangements like they did in the past.

His fifth point is that Pakistan faces major decisions on the domestic front, but those decisions are not being made. Society as a whole, including the media and judiciary are far more influenced by Islamist radicalism than is understood in the United States.

And finally he believes that security concerns and overall negativity continues to undermine Pakistan’s economic goals in trade and in attracting foreign direct investment. Political factors make progress difficult in the energy sector and tax collection reforms. This means that the dependence on external flows and the anger and frustration caused by conditionality associated with such flows is unlikely to diminish any time soon.

Now that’s the end of Ambassador Haqqani’s talking points, but there was no planning and no coordination in the way his talking points ended because I think it provides an excellent segue for Mohsin to pick up on particularly his last point. But feel free to talk about any of the others as we go forward. So, Mohsin, the floor is yours.

Mohsin Khan: Thank you. Thank you very much, Shuja. It’s a pleasure being here. Knowing that Ambassador Haqqani was going to speak first I had no idea that I would be speaking so quickly into this session. But be that as it may.

So, first of all Shuja asked me – or somebody from Shuja’s shop asked me to come and talk about Pakistan and said would you come and speak at this event we’re having called Cracking the Code to which I said I’d be happy to speak, but I have no idea what the title means. But then Shuja was kind enough to explain it to me.

So let me just talk about three – I’ll make three points. First of all, just to give you an overview of the Pakistan economic situation. I imagine many of you are familiar with that, but let me give you my take on that. Secondly I’ll talk about economic policies and reforms and what is needed and what is feasible in the country. And finally I will talk about how do you get – if you think of Pakistan possibly being in a crisis situation now, as most people think it is, how do you get from the short run crisis to a long run, which is a long run strategy for economic development.

So let me start with the overall economic situation in Pakistan. I don’t think I’m being sort of too dramatic in saying the overall economic picture in Pakistan has been – is really quite grim, but in fact it has been grim since about 2008, so it’s the last four years. With virtually all the indicators you can think of – virtually all, not quite all, but virtually all – pointing to an economy which is under considerable stress.

For example growth has been – since 2008, being averaging around – has been averaging about 3%. It’s going to be 3% this year too. Now this is in a country where population growth is 2% plus. This is sort of a clear recession in Pakistan terms or in developing country terms this is a recession that the country’s been going through. And the fact of the matter is that the country needs seven to 8% growth if it’s going to absorb the growing labor force. The labor force is growing at 3% per year and so you need seven to 8% just simply to create enough jobs for the labor force.

Furthermore you’ve got the other – problem on [inaudible], which is that the labor force is getting younger and younger, or in fact the potential labor force is getting younger and younger. So young people are without jobs. So that’s one indicator. It’s a dire indicator. Inflation has been in double digits since 2008. It’s come down a little bit last year – or this year, part of this year and late last year, down to 11%. Still in double digits. It has been much higher but it’s still in double digits and around 11% – running 11%.

The fiscal deficit of the country has basically been growing steadily. This year in fact it will hit its historical peak of 8.5% of GDP, which is almost twice what was in the budget. In the budget the deficit was expected to be 4.7, it’s going to turn out to be 8.5%. Interestingly enough, I mean in the next year’s budget too it’s 4.7 – the deficit. That hasn’t changed even though the fact of the matter is that there was sort of severe underperformance on the revenue side related to expectations. But runaway expenditures on the other side during the course of the year.

And more problematic I think – or equally problematic is that this budget deficit has been financed primarily by the government borrowing from banks. And what happens in Pakistan is this sort of circular thing where banks in fact are – buy government treasury bills. The central bank then refinances them so the central bank is pumping in money into the economy to the banks so that the banks can buy treasury bills from the government.

It creates two particular problems. One, an inflationary problem because this is printing money. The other is that it continuously pushes up interest rates in the economy and then that starves the private sector of credit because credit is very expensive then for the private sector.

So – and lastly, my other indicator, which is of course the indicator that the Pakistan economic team and the Pakistan government always look at is external imbalances. These external imbalances have been rising steadily. As a result foreign exchange results have been falling and international reserves now are at less than $10 billion, and next year if nothing else happens I think they will fall very sharply. So there’s a potential – don’t know how long it’s going to be, but there’s a potential for a balance of payments and a currency crisis on the horizon.

So that is the sort of broad picture that we have in front of us and the question really is, you know what’s the government going to do about this. I just digress for a minute and say look, I’ve given you a real gloom and doom story here. There are some bright spots too in that economy in the economic situation in Pakistan. And let me just point out and mention a couple of these – two or three of these.

First of all, there is – for those of you who have been in Pakistan, either recently or in the past couple of years and I go a lot, there’s a disconnect between the indicators if you look at growth, inflation and so on and so forth and what’s going on – the economic activity that’s taking place in the cities for example. Or even in the rural economy in the agricultural sector. There’s a lot of economic activity. There’s a lot of things going on and that of course is the informal economy.

The informal economy in Pakistan out of the – has been growing very steadily. The most recent estimates I’ve seen is that the informal economy represents about roughly half the official economy. So we’re talking about $100 billion plus informal economy working side-by-side with the official economy.

Now informal doesn’t mean illegal in any sense that this is illegal activities. It’s just undocumented and it’s not subject to – and there are no taxes. They don’t pay taxes and that. Now that’s chugging along very nicely and it’s very – and you know I mean the reason – and there’s a lot of activity going on which is completely outside the government’s net. It’s not governed by taxing obviously, but it’s not governed by regulations or anything of that nature.

The most glaring example you’ll see of this in any city where you find suddenly sort of buildings appearing in areas – let’s say even in government parks. These are illegal buildings, but nevertheless they are okay. So there is construction activity. It’s not just sort of services, it’s actual production going on.

The other bright spot I guess – bright indicator is the rise of the middle class – or the growth of the middle class in Pakistan. The Asian Development Bank in 2010 estimated the middle class to number about 70 million in the country, which is high for a country that’s around 175 million. 70 million of the people are defined by Asian Development Bank as middle class. That’s been happening. There are various indicators that say that this is – that there is a growth in the middle – there’s a growth in the informal economy; there’s a growth in the middle class. A lot of indicators like that.

For example the number of cell phones registered in Pakistan. It’s 120 million cell phones registered in Pakistan. There are 1.5 million motorcycles being registered every year. There are half a million cars being registered every year. There’s sort of – now what I’m point out is that there is a tremendous growth going on in consumer spending. Now that fits in with the informal economy idea, but also says that there is economic activity going on that the government has not seen or is not capturing in its official statistics.

How is it being financed? Well, part of the financing is coming from remittances. That’s the third bright spot on the external side. Remittances this year will amount to $14 billion. Now that’s a very large number and they’ve grown from about seven in 2008, about 7.5 billion in 2008 to almost double that in 2012.

Now remittances – worker’s remittances of course ease the balance of payments problem, they finance the informal economy, yes. These are official remittances by the way. And there just is a real puzzle in Pakistan that’s constantly being raised, is you know why are remittances growing at this rate in Pakistan? Now, what’s going on? Why are people sending more money to Pakistan?

Well, a variety of explanations ranging from, you know altruistic motives that people abroad feel that the economy is doing badly at home and therefore they’re supporting their families and they’re sending more money to Pakistan. A variety of explanations. Now these by the way, even in the downturn in the West – in the recession in the West, the money kept flowing.

It’s sort of there are two implications of this. One is that when people talk – and I’ll come to that – when people talk about the desperate need that Pakistan has for external financing, yes, it does. But put this in perspective, you know. Even if the entire Kerry Lugar bill goes through that Kerry Lugar will represent just 10% of the inflows of foreign remittance – of remittances. And remittances don’t carry any conditionality; they don’t carry any treaties, nothing. You know this is money just coming in.

So, you know you may hear a lot of Pakistani officials saying we desperately need 1.5 billion or $1 billion from the United States. Well, they need it, everyone can do with an extra $1.5 billion, but it’s not essential. It’s not absolutely – I mean in my mind it’s not essential. It’s not – I mean relatively speaking that is.

The second thing is that in this puzzle what is going on in [inaudible]? Well, one explanation that has come up is that a significant part of these remittances are in fact payments for services being done. And I’ll give you – the example I’ll give you is IT.

There is what some people call a cottage IT in the software industry in Pakistan going on where people in their homes and their garage and so on are in fact writing software applications and this goes on by Dubai, by the way. And they’re paid through the remittances channel, which is the channel you would pay anyone in Pakistan because it’s not taxable. So you know you provide software for a company, you get paid in formal remittances.

So I think that that is – those are three bright spots, which have really not much to do with the government. These are fortunes, you know economic fortunes and [inaudible]. There is one important policy move that the government has taken – well, actually there are two. One I’m not so thrilled about, which is the devolution and the NFC award. But that’s a different question. I’ll tell you, the game changer in my view is the change in the Pakistan attitude towards trade with India.

India-Pakistan trade is the game changer and I think this could be potentially the most important step that this government, you know on a policy level has taken. Or any government in Pakistan for a long time.

This – the situation is now as follows. At the end of this year or the beginning of 2013, Pakistan will finally grant most favored nation status to India. And whereupon it has already eliminated the positive list – the positive list is a list of goods that you can import into the country. Roughly 2,000 of them existed in the past. It switched it over to a negative list of something like 1,200 items, which are items which are excluded. They cannot be imported. Everything else is subject to tariffs. Can be imported and subject to tariff.

By the end of this year – at the end of this month the government of Pakistan will reduce the negative list from 1,200 items to a very small number of items that have to do with health, religious, et cetera, which every country maintains.

I think that trade going on at roughly two billion – $2.5 billion a year between India and Pakistan could in the next few years get up to six to ten billion. Provided the infrastructure’s in place, et cetera, and in that sense it could be a real potential game changer for the economic development of Pakistan.

So in terms of economic policies and reforms going forward – well, everyone knows what the constraints are, what are being the serious problems in Pakistan – energy sector is a critical problem. That’s the first. I’m sorry, I’ll abstract – I’m an economist I’ll abstract and leave security and political considerations to my fellow experts.

As an economist I see energy as being a fundamental constraint. A lot of people say oh, it’s just bad governance. Yeah. In stored capacity in Pakistan it’s sufficient and it’s just bad governance, they don’t collect, they have line losses, et cetera, et cetera. That’s not true. I mean the facts of the matter are that in stored capacity in Pakistan if you take up everything, whether it’s used or not used, okay – or it’s decrepit or functioning it’s roughly to give you an idea, 15,000 megawatts is the in stored capacity in Pakistan. Peak demand in Pakistan is 20,000 megawatts. Okay.

So you’ve got a 5,000-megawatt shortfall straight off the bat. Whether you talk about line losses or anything like that, even if you’re producing at full capacity and you had no problems in collections, et cetera, you still have this shortfall of [inaudible]. So instead of having, you know 12-hour load shedding, okay? You’d have three-hour load shedding, but you would have load shedding, you couldn’t do anything. So that’s something that has to be tackled – energy sector – or reforms. And that’s not going to be easy to tackle.

Then of course you have the other standard list of reforms the country needs to undertake. Husain mentions tax reforms. Yeah, I mean I think that [inaudible], you know – let me just say that perhaps an extension of the general sales tax to a couple more goods, perhaps services. VAT is dead on arrival. VAT will not fly at all. So if the IMF or whoever puts that as a condition for a loan, it’s not – I mean I’m just telling you now, it’s not going to happen. VAT is dead.

Collections are the main thing. How do you collect income taxes and so on? That’s where they’ll have to put their efforts into.

The third main reform is reform the state-owned enterprises, the Pakistan International Airlines, railways and so on and so forth. Right now that is an enormous drain on the budget of the country. And what happens typically is that the government makes up numbers of how much the subsidies are going to be and it’s always less than what they were last year. And they turn out to be much greater. Subsidies are primarily in the area of state-owned enterprises. So you have to state-owned enterprise reform.

Now you have to move with these reforms into what is called the new-growth framework that the planning commission of Pakistan has developed. And the deputy chairman was here a session a few months back to talk about this, but you have to get – I mean it’s a very good strategy. But you have to get from the short-term crisis to the long term where you can have things – we can handle things like innovations, entrepreneurship, development of youth, creative cities, et cetera, et cetera.

These are all very good things to be aiming for as an economic development strategy, but you’ve got to get from here to there where you can do it. And I think that’s the issue right now that the country faces. So that’s my third point, it’s the bridge from the short run crisis to the long run development strategy and for that you need external financing.

And so where is this financing going to come from? Well in one form or the other it’s going to come from the U.S. Direct? Yes. I mean that’s the discussion that’s still going on – the U.S. Congress attaching conditions and so on and so forth. But I think it’s going to come mainly from the international financial institutions and that’s where the U.S. would have the leverage.

Because you know basically the discussions that are taking place right now here in Washington with the IMF, with the World Bank and so and so forth, are to do with getting financing from the international financial institutions. The most recent discussion at the IMF board on Pakistan, there was a – it was a very negative view expressed by many executive directors in many countries about the Pakistani’s economic performance.

But that’s happened in the past too. And it really depends on where the U.S. is going to come out on this. Is the U.S. going to support Pakistan’s case in the IMF or not? And I think that’s the leverage that – I think when the Pakistani’s say we’re looking for external financing and we’re looking to the U.S., they’re not looking to the U.S. for the money. They’re looking to the U.S. for the support in the international financial institutions.

Thank you very much.

Shuja Nawaz: Thank you.

Paula Newberg: Thank you, Shuja, thank you all for coming. I’m going to blame my presentation on Husain Haqqani also. I was expecting him to be pithy and political and provocative and then I could be high-minded and moralistic.

So let me start off by saying that many of the comments that Shuja offered on Hussein’s behalf, I actually agree with, but I think I may look at them slightly differently. So I’m going to try to do a couple things at once. And one is to talk a bit about the U.S. Pakistan relation and the other is to talk a bit about the factors in each of these countries, particularly in Pakistan that make a difference in how this might work out.

So let me just do this since I was given initially seven minutes – to try to do this with a series of precepts and then we can discuss some of these issues a bit at greater length during the discussion.

So although this may sound like it’s a truism, I think it’s worth saying that with regard to the U.S. Pakistan relationship both countries needs to get their houses in order. It’s not just the last decade of blaming, but many, many decades of blaming each other for poor performance. And foreign policy has gone really almost nowhere and it’s led to too many years of expedient policy, occasional duplicity, very often short-term thinking and many, many excuses for poor policy.

The second is to say that I think it’s extremely important to look beyond just current events. Most of the discussion in this city of late has been about what happens post-2014. 2014 is one small step on a very, very long road that started quite some time ago and with luck will continue for a very long time. It’s a critical moment, but it isn’t the only thing.

The important part about this is that neither Pakistan nor the United States can be tied to each other’s short term agendas and for that matter even each other’s current problems. That’s extremely important particularly as we enter into an election year in Pakistan following an election year in the United States. It’s very difficult to know how to bargain when you don’t know who you’re bargaining with. And when Americans tend to look at Pakistan all they see are the problems in Pakistan’s governance environment. And they are huge. The list is extremely long.

When Pakistanis look at the United States they see quite a lot of problems and a lot of uncertainty as well. And we, on this side of the ocean tend to forget that also.

So as you can imagine where I’m going with this is to say that governance in both countries is critical, not only about learning who your potential partners are but looking at where the points of stasis might lie and what the external constraints on each country are that affects the way in which they deal with one another.

And the confusion in Pakistan in this regard is particularly important for Americans because if you take a look at the front page of any Pakistan paper on any given day, it all looks as though it’s all very confusing. Because no one knows where anyone else is going and that leads to bad policy, poor responses, highly reactive and much more than reflective concerns. And a confusion that seems almost interminable to insiders and outsiders alike.

With that – I mean I would point you for example to the headlines in today’s papers, both American and Pakistani. If you look at the front page of Dawn, what you’ll see is a series of items, all of which are extremely important but none of which seem to look very promising. The Supreme Court now wants to set up a judicial commission the Lao Mustad events of many years ago. It also wants to set up a judicial commission on the law and order events in Karachi.

There’s a tremendous amount of confusion in parliament today, yesterday, last week and for the last several years. And the problem is it is also considering whether to officially create a different kind of relationship between Pakistan and Iran. Now what do all of these things say? They all look as though they are short-term corrective measures within Pakistan. They’re highly instrumental. They’re not terribly visionary and they’re one set of institutions trying to make corrections for someone else and that’s a very, very hard thing for anybody outside to look at.

If you look at the New York Times what you’ll see is much sadder commentary. And what’s happening in Baluchistan where you have problems of sect and class and caste reflected in sectarian assassinations but also insurgencies in a place, which is in many ways among the most important to the Americans when they look at Pakistan.

So this is not a picture that’s easy to comprehend. And we can talk in large terms about asymmetrical relationships and policies and practices. But in the end it very often comes down to what you see every day in the papers and what you think might be the prospect for some kind of improvement. And for Americans, Pakistanis don’t look as though they’re improving much at all. Which is why in many ways Mohsin’s comments are extremely useful because as in economics, as in politics, there’s always a balancing that’s going on and it’s not often accessible to everyone who’s watching.

In this regard, and with regard to these sorts of headlines, the 2013 elections to my mind are extremely important. Now each time Pakistan has elections we all sit back and say wisely well this is going to be the game changer and it rarely is, but it’s nice to think that it might be.

I prefer to think of it slightly differently and the story kind of goes as follows. For everything that we on this side of the ocean think about what is wrong with Pakistan’s politics, I look and say how will it look ten years from now. In ten years from now you might go back and look at 2011 and 2012 and say the parliament tried to act more professionally. There were rules put in effect for choosing judges. There were rules put in effect for how you deal with devolution and decentralization. Whether or not they all work is another activity. But in the end you see institutions in a changing state potentially trying to do better.

Now to make them do better is different than simply outlining what the policy is. But it does suggest that if you take all of the socioeconomic factors that are important in Pakistan now and add them to what looks like some policy change it suggests that maybe with changing democracy and changing economies you could look toward a state that is somewhat more responsible and somewhat more capable toward its own citizens.

And while we in the United States think that Pakistan is in business to be more responsible toward us, it’s actually their own citizens that’s really the first audience.

Fourth, with regard to policy. I would simply point out that misunderstanding is and continues to be the rule of the day and we tend to confuse our vocabularies. For example when we use the word defense and we use the word offense we mean exactly the opposite of what many Pakistani’s do.

We say we use drones as a defensive operation. They think we use drones as an offensive operation. We think that – when they say that it’s necessary to create relationship with Jihadi groups, they’re using the word necessity in quite the wrong way. They think that they’re actually responding to an extremely difficult problem on the ground and are kind of doing bargains. So we see complicity and they see politics.

Now there are right and wrong in all of this and we can talk about what the right and wrong might actually be. But it comes to a head in almost every policy issue including foreign assistance. We think of bi-lateral assistance as being something that’s helping the state. Many Pakistanis see it as being either useless or too small, or creating conditions that cannot be fulfilled. So you have a communications barrier that far – is far larger than any of the actual policy content on each of these issues.

So whether or not the Americans have more or less leverage in bilateral or multilateral assistance doesn’t change the fact that most Pakistanis think the Americans have all the leverage and that they have very, very little. So a lot of this is about uncertainty. It’s also about a feeling of powerlessness.

Fifth. With regard to the relationship again, I think it’s worth pointing out that for all of us who may care very much that Pakistan succeeds, caring about Pakistan and caring about Pakistanis is not the same thing as having Pakistan trump everything you do.

For the United States single country relationships are important but we really care about Pakistan because of the place in which it lives, the people who live there and how often they go elsewhere. It’s been a place of crossroads before and it will be a place of crossroads now. Now that makes a very big difference in the way that you think about the tilt toward Asia from the point of view of the United States, which will be big and important but Pakistan is either in it or it’s out of it. And if Americans see the Pakistanis as being deterrents in it, it will be out. At that point no one is going to work very well together.

The second is to say that in all of this the way that we deal with who our interlocutors are is extremely important. Now we’ve now endured ten years – and not the first ten years, in which visiting Americans get off airplanes and make a beeline for the army chief’s house. They don’t make a beeline for the prime minister’s house; they rarely make a beeline for the president’s house until after they’ve done all the rest of their consultations.

Try to imagine the same thing happening almost anywhere else or in reverse. This is not the first time. It happened in the ‘60s; it happened in the ‘80s, it happened for a while even before this past decade. But it means that the civil military relationship as we see it and as we diagnose it to be wrong, is both a cause and a consequence of the relationship that we have had with Pakistan as well.

All of which is another way of saying everything is much more complicated than it seems, is much harder to dissect, but there are some things that are right and some things that are wrong and you can’t demand that your diplomatic interlocutor be democratic, participatory, and representative and then not treat it as if it’s trying to be so.

I don’t mean this in any to excuse Pakistan for its low crimes and misdemeanors when it comes to the way it governs itself. But it does mean that if you act as if you’re entirely reacting to what you see as something expedient in another country, you are not going to get what you want out of that relationship.

So let me leave with the following few points. Everything I have said is part of a narrative that has existed between the United States and Pakistan for now almost 70 years. That’s a very sad narrative and it’s a very, very long time. The agendas have generally been short-term and reactive. There are however some very important long-term agendas, which are going to demand both the relationship to get better and each country to get better in it.

The first as I said is this changing security architecture of Asia. Now Pakistan is kind of the off to the side here, the big population centers, the big capital centers, the big places of capital flow are next door. It’s India and it’s China. If a tilt is to be successful however, all the small countries surrounding it are going to have to be embraced in it. So that’s one challenge to think about.

The second is population growth. Pakistan’s population growth is out of whack with what its capacities are going to be. And this is directly tied into its problems dealing with and planning for environmental sustainability, energy and frankly climate change. There isn’t enough space, there isn’t enough land, there’s not enough money, there’s not enough water. So this is not a small issue. This is perhaps the one that looms greatest. And there isn’t enough in and among its neighbors either.

So if any of us were looking at what this country is going to be like, look at what it’s going to look like physically as much as anything else. And recognize that 180 million people is probably already too much for its resources. So either the country is going to have to change the way it trades and the way it develops or everyone else is going to be held responsible for how to make it better.

And then I’d say the last is in fact the complex challenge of what counts as good governance. I think the Americans and the Pakistanis differ as to what counts as the bottom line for creating a capable and responsible state and also disturbs what counts as each other’s version of what is right and wrong in policy and in action.

There is no question that from the point of view of the United States the way that the army, and for that matter the civilian government in Pakistan deal with Jihadi groups, deal with extremists, deal with militants is wrong. Americans thinks it’s wrong not only because it’s bad for the United States and its allies, but it’s bad for Pakistan. It’s self-defeating for Pakistan.

But until and unless Pakistan develops the apparatus and the capacity to think about this more constructively it is going to be in the business of doing what it is doing now, and it is essentially in policy terms eating its young. And that is a very, very bad way to try to construct a relationship.

Now all of this is about not just what the United States and Pakistan do with one another, but it’s really about the way that Pakistan acts and continues to develop as a global actor. And that means thinking seriously about the way it treats its own minorities, but what counts as free expression, but how you participate in a world of high technology. None of this is settled yet.

I think the most positive thing I can say is that it isn’t settled. This is not as if a story has been closed and we’re trying to cope with the detratives. It is in fact a country that is developing, it is changing and we have a choice deciding whether we’re going to be part of that development in a constructive way or we are simply going to leave it aside or malign it and leave ourselves open to the consequences of that. So I’ll leave those judgments and hope we have a conversation about all this. Thank you.

Mohsin Khan: Thank you, Paula.

Shuja Nawaz: Thank you both very much. As advertized and as promised this is very interesting and provocative comments by both our speakers. And I should also thank Ambassador Haqqani for having taken the trouble to share with us his views in somewhat abbreviated form of course. I did absolutely no justice to the ability with which he would have presented his views.

We now move to the question and answers where this very excellent audience that we have here today will help us crack the Pakistan code to help us understand exactly what is it about Pakistan that is so confounding and confusing to people not only in the United States but also perhaps people inside the country. And then maybe we can help shed some light on it.

As usual, if I may I will ask a question to each of the two speakers. That’s the prerogative of the moderator, with your permission. And then we’ll move to the audience and when I recognize you – and please bear with me, I will try and recognize you in the order that you’ve raised your hand. Please wait for the microphone to come to you.

When it reaches you please ask a question, refrain from making a statement because we only have 40 minutes and I’d like to get as many questions as possible answered in this session. So I will need your help in that process. So everything is on the record, so we need for you to tell us who you are and then ask your question. Thank you.

Now, question. To Mohsin. One very specific question and then an additional follow up to that. You talked about the IMF program. Now that’s something that you know more about than anyone else in this room. Under what conditions could Pakistan get a new IMF funded program? And is the government capable or willing to make the – or take the prior actions that might be needed to make that a feasible proposition for the U.S. and others to support?

Mohsin Khan: Well, you know I think what’s going to happen is typically you’d look over the past program and say what was promised by the Pakistanis, what would they do and didn’t do anything. And typically what happens is those things that they didn’t do become prior actions for a program. So that just, you know basically would – it’ll be in the area of the areas that I mentioned, tax reforms, that’ll be in the area of energy sector reforms and it’ll be in the area of state-owned enterprises. Those are the sort of three [inaudible]. Because they all then fold into the fiscal deficit.

But the very fact that the way you put it and the way I’m putting it is for a program these are likely to be prior actions abstracting from any pressures that might be put on the IMF, these would be prior actions. So the program cannot happen until they have undertaken these necessary policies. So in a sense, you know if you want to think about it this way, Shuja, I mean if the Pakistanis want a program, which they do, they must be willing to – up front to undertake those actions in order to get a program.

And now how tough will those prior actions be? Because there’s a matter of degree. How much private sector reforms do you want? How much of a cotton subsidies do you want to get. I’m speaking as from the IMF point of view. Well that’s where the views of the major shareholders on the IMF’s [inaudible] board and the United States being the major shareholder, the most important shareholder in the [inaudible]. It depends on how much they press or say back off.

This sort of – there’s a lot of discussions that take place prior to a program and so it’ll – that’s where I think the influence will be. But I’m taking while answering your question, these will be prior actions and the Pakistanis know that. It’s a question of just how strong will those prior actions be.

Mohsin Khan: Thank you. Paula?

Paula Newberg: Sure.

Mohsin Khan: You talked about the civil military divide. And that’s something that has bedeviled not just internal politics in Pakistan, but the U.S. Pakistan relationship in many ways. How do you see this developing? Or is this going to remain a constant problem for the country and for this relationship, especially in light of the fact that you mentioned the growing activism on the part of parliament and even the courts inside Pakistan, which has some would say relatively diminished the ability of the military to influence decisions inside the country?

Paula Newberg: That’s one of those either or questions to which the answer is yes. The last decade has in some ways not helped the cause of civilian dominance in policy and in practice. And in some ways you might hope that with the diminution of military activity in Pakistan you might see the beginning of a kind of normalization of U.S. Pakistan relations that would allow for something of a withdrawal of the military from paramountcy in policy.

That having been said, it’s very hard right now to look at Pakistan and say here’s what the constitution says and this is therefore what you should do. And it says that there’s parliamentary supremacy and that’s it. Everyone is constantly jockeying for influence pretty much behind the scenes. So you could say that everything that parliament has done has been in aid of verbal or rhetorical recognition of something that hasn’t yet happened.

Similarly you can say that for each moment and that the court looks as though it is rapping the military on the knuckles, it is allowing other things to happen. So you talk about cracking a code – my general feeling is that anytime I think I understand what’s happening in Pakistan I just turn myself around a whole lot of times until I’m restored to their appropriate level of disequilibrium.

I don’t think you can say this is going to happen and this is going to happen. I think what you can say is that the country is a lot larger and lot younger than it has been in a very long time. It also has a far more global young population and there are going to be pressures on that population and by that population to act differently because reality is not going to allow it to act as it has now.

Beyond that I have no doubt that the cards, at least for the moment, still lie in the hands of the military side in this civil military relationship. And it’s going to take a huge leap of faith on behalf of parliamentarians to believe that they can act without reference to that. Because thus far that is their primary interlocutor when it comes to looking at foreign policy.

Shuja Nawaz: Thank you. I have a question at the back. Seth?

Seth Kaplan: Hello? Yes. Seth Kaplan, Johns Hopkins University. So we’ve heard a number of times about the so-called necessary reforms that Pakistan must undertake. We’ve heard about three, I’m sure I could name at least three others.

So my question is is the reason why these reforms don’t happen because the government is too weak? There’s vested interest to oppose? How would you interpret the lack of reform? And then what scenario – what change in the political dimensions or the political dynamics of Pakistan could lead to a more pro-development or pro-reform group coming to power? How would you interpret the present and the possible future? Thank you.

Mohsin Khan: Well, you know on – let’s track from energy sector reforms because that has sort of engineering type issues. And then focus on one particular reform, which is an interesting one, which is tax reform. Okay?

Now everyone agrees on the value added tax. By the way, this is independent of – and this covers the point – President Musharraf tried, Prime Minister Shaukat Aziz tried when he was finance minister of tax reforms, tax reforms even. But let’s talk about the VAT, which is an important tax.

So the government is on board with the VAT and it goes to the senate of Pakistan and is passed by the senate. It’s about to go to the national assembly and one of the coalition partners, the MQM says that if you go through with this reform we’ll leave the government. You are at an impasse. So you’ve got a choice, you know you know you can’t push the reform through. So it’s the politics there that created it.

Now VAT’s a good example of the fact that politics has constrained the government from proceeding. On state-owned enterprises, that’s the other form and refers to the other point you make, vested interest.

State-owned enterprises have been historically a place of – you know where you engaged in patronage and you employed – I mean it’s very clear that the railways and Pakistani airlines have possibly five to ten times the number of employees than warranted. And those are all party members that are being put there. So I think, you know politics is going to be the major constraint.

What’s going to emerge? I mean there is the plan of the [Inaudible] Hans group of [inaudible], which is I suppose if he were to become the prime minister, his minister of finance, as [inaudible] has put forward on these. And they all talk – I mean he talks very nicely about tax reforms, he talks very nicely about energy sector reforms, they all talk about these. They know what the problems are and they know what the solutions are but whether they can deliver them or not is still very much up on the air.

So I’m sorry, I mean I really don’t see a major tax reform coming into the country. I do see some sign of state-owned enterprises, rationalizing state-owned enterprises and there are of course a whole set of other reforms, which will be – some will be easier than others.

But I’m telling you that we’re – as you know and I’ve written on this – we’re in a world of coalition politics in Pakistan and if you’ve got coalition politics whereby members of the coalition come from particular sectors or particular areas of the country, and Karachi being the prime example, then you’re going to face this problem. And you’re going to continue to face it.

Shuja Nawaz: Mohsin is referring to a piece that will be appearing soon under our joint names. That will help explain everything in 700 words.

Mohsin Khan: Yes. Exactly.

Shuja Nawaz: We have the next question here and then Harlan after that.

Bill Metzer: Hi, Bill Metzer with Oceana Energy. I read with interest the New York Times story this morning about what’s happening near Quetta and the violence being perpetrated on Shiites, particularly the Hazara. And this raised a question. And let’s assume that I am a younger version of Shuja, I’m a young brigadier, I have a bright career before me, I have commercial opportunities. I’m part of the in-group. And let’s assume I’m in Iaside.

Now let’s assume that I like this idea of strategic space and I like this idea of accommodating Sub rosa, these extreme Islamist groups because that serves some of my short-term interests vis-a-vis India and vis-a-vis other groups within Pakistani society itself.

My question is first that looks a little bit like the Saudi princes and the Wahabis clerics to me. But secondly is it really even in my interest? Because the social price of this kind of accommodation seems to be quite high. I mean nothing I’ve heard here would indicate that Pakistan isn’t on the verge of tearing itself apart with the worst kind of inter-sectoral violence. And is that really in my interest as the young Shuja? Even in the short term? And if it’s not just from an army perspective, what should I be doing about it?

Shuja Nawaz: Paula’s going to answer that.

Paula Newberg: I knew you were going to say that. I have an – he’s going to answer that because I’ve never been a young brigadier.

Shuja Nawaz: Neither have I.

Bill Metzer: We’re not picking the group that you’ve suggested to dominate.

Shuja Nawaz: Yes. Okay. Let me attempt to see if I can clarify this situation for you. First, there’s never really been a proper national debate in Pakistan about the nature of the country. This has been partly because Pakistan has had long periods of military rule or civilian rule, which has been autocratic. And as a result what passes for debate is really a very controlled form of discussion among the elite.

And so having made the statement once at a gathering where a well-known Pakistani diplomat and analyst was present, I was told that there’s a debate every day on television on Pakistan. To which my response was that taking the same ten people and moving them from one studio to the next does not a national debate make. So that’s – there’s been an absence of this introspection which is very necessary in Pakistan, not just for the civilian but for the military.

I think to some extent this may be happening and it’s being forced by economic circumstances among other things. But I think it’s also going to become necessary by the forces that Mohsin and Paula mentioned, the demographic shift, the globalization of economics, dependence on neighbors and the fact that you have to open up to India to grow Pakistan’s economy will force a change.

But don’t expect a change overnight because it’s not going to happen overnight. The forces that have been in control for so long that have profited from this no war, no peace in the neighborhood are going to resist very strongly and I don’t see that happening easily. And I don’t see that happening easily without a civil military discussion going on on a continuous basis.

Paula Newberg: Could I just add a comment?

Shuja Nawaz: Yes.

Paula Newberg: Because that question also refers back to the earlier one to Mohsin. I mean there are ways in which there are debates that take place each day. I’m not talking about three people screaming at one another on television. There was a small NGO about two years ago in Pakistan that actually tried to have a national discussion about what’s known as the objectives resolution, which is the perambulatory page that no one understands at the beginning of the constitution.

And what they found is, they went from place to place around the country convening small civil groups, was that every single group if not every single person had a completely different view of what it meant or what it should mean. And most of those views were kind of entrenched views.

So what’s missing in a way is a form of far more dynamic, far broader political recruitment that not only changes the nature of the civil military debate, but really changes the nature of what politics is and stands for. Because every institution – political institution in the country resembles to a frightening degree now, what it was like 30, 40, 50 years ago down to the interests in the families who represent it.

Now interestingly and somewhat oddly – and every time a military government has come in, it has decided that the problem is at the grassroots level and that what it’s going to do is reform what is known as local bodies politics. The problem is that each one of them does so by trying to create a constituency for itself. Every time the military leaves the next civilian government comes in and it simply cancels whatever the military government has done, right or wrong. Leaving as you have now, an absence of politics at the local level.

So the national parties tend to then dictate what happens at the local level saying at the same time that their interests come from those localities. So it’s a very fraught relationship, which doesn’t allow for a political structure that is open and honest in many ways. And in a way the media reflects that as well because it has the same problems of ownership and control that every other part of the political society has. Fair enough?

Shuja Nawaz: Thank you. Thank you.

Harlan Ullman: I’m Harlan Ullman. Thank you for terrifically elegant presentations. My questions are to –

[Crosstalk]

Shuja Nawaz: [Inaudible] mic.

Harlan Ullman: – all three of you and my question is this. What safeguards or what’s going to prevent an implosion? By every measure that I see in Pakistan things are getting not only worse, but much worse. I think it’s very unlikely, though he disagrees with this that Ausips at RANPPP will win a majority and therefore reconcile some of these things.

Pakistan has been ruled basically by three and a half families for 65 years who practice schoolyard politics but with real bullies. The military is overstretched, tremendous pressures that are going on, the economy is getting worse, there are 90 million kids 20 and under with no places to go. President Obama has a visceral dislike for President Zardari and there’s nobody on our side or their side who really can be kind of a means of connection. The special representative has just been replaced and you got Doug Lute talking to Kayani rather than somebody of a higher level.

So is this just a situation as Adam Smith said there’s a lot ruin in a nation and Pakistan will get by. But if not, if the situation is becoming as perilous as many of us think, and I think that the religious and ideological rivalries and terrorism is really almost getting out of hand. Karachi is much more of a wild west today than it was three, four, five or six years ago in my view.

What will prevent – are there safeguards, are there any things that can be done on the Pakistani side, the American side or a third party that can try to prevent what could be a huge implosion? It’s to all three of you.

Shuja Nawaz: Mohsin, you wanna try your hand first?

Mohsin Khan: Let me try and – I mean I’ll just make the point on the economy. I mean the predictions of the complete collapse of the Pakistan economy have been going on for two decades now. I mean there’s been ups but then there’s been real downs. And what I’ve been trying to look at is what keeps the country afloat. And where in fact – you talk about, you know yeah, there are 100 million Pakistanis under the age of 30 and it’s not as if they’re all looking for jobs.

And if they’re looking for jobs why aren’t they sort of, you know why don’t you just see them in the streets? And there are thousands or hundreds of thousands looking for jobs or something to do? And there I think what I said was – in my talk was basically the growth of the informal economy has in fact supplied jobs to these people and they do work, has supplied economic activity in the streets.

The streets are bustling and the traffic jams are crazy in Lahore and in Karachi. It’s not [inaudible], but certainly are crazy in the cities. I think that you know I don’t see an economy that’s – on certain indicators it’ll look – it should have been collapsing, but it isn’t. Something’s going on there that is keeping it afloat and remittances are keeping it afloat, the informal economy is keeping it afloat.

There are, you know if you think about a hundred – population – the size of 175 million people in Pakistan of which what you have identified as the people who the extremists, the radicals, et cetera, what proportion of the country’s population do these people make up? A very small amount relatively speaking. A very small amount.

I think that, you know I’m always intrigued by the expertise sitting around in this city that sort of points the finger and says you’ve got A, B, C, D and E wrong and these things are happening and you’re gonna collapse. What’s gonna keep you from collapsing? Well, the fact is that, I mean from where I sit I’ve heard this story for two decades now coming out of here. Not just here, meaning Washington, but elsewhere too. It hasn’t happened. What I’m trying to do is look for reasons why it isn’t happening.

And a lot of people have now – in Pakistan are sort of accepting the idea that something is going on in the economy – I’m just talking about the economy at the moment. Something is going on in the economy that’s keeping it going and the danger I see there is the sort of, you know the thinking that goes on in my own professional class of people that says that somehow, you know there’s this informal economy and you’ve got to bring it into the official economy.

My view now is a little bit different. I say see what’s going on in the informal economy and see if you can’t change your official economy to start reflecting those kind of things that are going on.

For example – I’ll give you the example about if you need five building permits in order to put up a house, and on the other side you need nothing. You know you need no permit whatsoever. Maybe there is some happy medium whereby, you know you need only one permit to get – to build a house. Try and learn some lessons from what that economy, that unofficial – that informal unofficial economy is trying to tell you. My friends on the economic team of Pakistan are not ready to buy all that, but I’m trying.

Paula Newberg: You know there’s another way to ask your question, which I think is a very reasonable question to ask. And that is when –

Bill Metzer: [Inaudible] the answer not having you ask it.

Paula Newberg: Well, but I think if you ask it differently it leads you to a slightly different conclusion. I mean I’ve been trying to understand for more than 30 years now why Pakistan doesn’t have a revolution. I mean many of the same factors that you’ve just listed would suggest that somewhere people should be mobilized to try to overturn things.

So – and the answer usually turns out to be one or both of two elements. One is that people harbor the hope that with each day they will do a bit better, or with each year. And therefore they don’t want to rock the boat. Or alternatively that if they try to rock the boat they will end up worse than they were before. Now both of those answers in a way underscore what Mohsin was saying that there is more there than one sees when one looks superficially.

I think to that you need to add that in some respects for all of what we see reported here, and to a large degree what you see if you spend short periods of time often in Pakistan, disguises those elements of the society which are not changing. I mean get out of the cities, which are changing very, very dramatically. Much of the rural area is very similar to what it was before, both in terms of the structure of poverty, the structure of production to the degree they have it, and the alienation from the state as a whole.

That you and I might see as an incentive to try to change things, but could also be seen as an incentive not to bother because nothing they see about the state suggests that wanting to be closer to it is a very good thing.

Add to that a series of fears that are hard to quantify. I think if you step back and look at the relationship between this country and Pakistan one of the saddest elements is that a lot of it is motivated by fear right now. It’s fear about what goes inside Pakistan, it’s a fear about what goes in things that are in Pakistan leave the country, it s a fear about what the Americans might do to Pakistan. So there’s a kind of lock step there as well.

I think that’s very sad because there is a good deal more opportunity and talent in the country than that sort of mentality suggests. It doesn’t actually answer your question, but it does suggest that sometimes even bad ossified politics can keep a place from falling apart more effectively than you might actually guess.

Shuja Nawaz: Thank you. I just want to let everyone know I’ve tried to take down all the names and people that have raised their hands in the order that they raised their hands. And if we’re going to get through this in the short time that we have at our disposal, when I call on you please make it a short question and we’ll try and give you a short answer. So the next question is the gentleman over here. And this way we’ll try to get as many of you as possible unless you’re willing to stay beyond the 3:30 hour.

Wynia Sheikh: Excuse me. Wynia Sheikh. As the world has emerged we see that there is more track to the world peace from failed states and regional conflicts. We also know that Pakistan has been known to have tremendous potential for growth and prosperity. What do you see, or do you see any change in the U.S. policy towards Pakistan to bring out that potential that works not only for Pakistan but for the region and for the global world? And my second question is there – do you see anything happening on the Kashmir policy in Obama’s second term?

Mohsin Khan: Well I’ll take the second one and say no.

Shuja Nawaz: Good. Thank you Mohsin.

Paula Newberg: I could take the first question and also say no. [Inaudible] get a very simple response.

Wynia Sheikh: What kind of change do you see happening in the U.S. policy and strategy towards Pakistan in [inaudible] in 2014 timeframe? The [inaudible] –

[Crosstalk]

Shuja Nawaz: Let me see if I can pose the question. Do you see a change in U.S. policy emerging?

Paula Newberg: Right now I don’t, although I see the possibility that there could be. On the other side you have an equal possibility that post-2014 it will simply be decided that now we don’t have to deal with this problem and these questions, and we will move on. I don’t think it’s a set game yet.

Shuja Nawaz: Thank you. Aparna? You had – okay, the lady next to you. Sorry.

Maryam Arif: Maryam Arif, I’m a lawyer based in Lahore and my question is this. Some political analysts in Pakistan are saying that the Pakistani state has lost its writ in 60% of the country. Do you think then that the inability to deal with terrorism for example is – do you think there’s a lack of political will or maybe at this stage just – that it’s just impossible for the Pakistani state to stand up to militants?

Paula Newberg: 60% seems rather high to me. I mean even if you just look at it geographically, it doesn’t appear that 60% is outside the writ of the state. You could suggest that the state isn’t doing a very good job in 60% of the state and that might actually be true. Now whether the cause of this is entirely based upon the nature and the breadth and depth of terrorism is another story entirely.

Yes, I think there’s a reluctance in Pakistan to deal with the causes of terror and therefore with its consequences. But I think the weaknesses of the state go beyond that and are more varied and in that sense they may also not be quite as bad as your analysts are suggesting.

Shuja Nawaz: And there’s also the possibility that as relationships improve in the region, with India in particular –

Paula Newberg: Yeah.

Shuja Nawaz: – and the economy in the Punjab gets a boost over time, that some of this resort to asymmetrical war could change.

Paula Newberg: True. But you know the other thing, we really having talked about Afghanistan. And one major issue with regard to that piece of land that is in fact absent in the state’s thinking right now, is what happens in Afghanistan post-2014. And the small things that have been attempted between Pakistan and Afghanistan in the last year to try to set the stage for a more normal relationship may prove not to work, but it may at least lead people to think that maybe it’s required.

Shuja Nawaz: Thank you. The gentleman there and then we’ll have the question over here.

Stephen Engelken: Thank you. My name is Stephen Engelken. I just retired from the foreign service a couple of months ago. I was in Pakistan a lot for the last couple of years and I’m thinking of putting my place – myself in the place of people in C Street right now and we’re going to have a new – purely a new team dealing with South Asia here in about a month. The Secretary is going, Ambassador Grossman is departing, who knows we may even have Senator Kerry come to the State Department.

What should we tell the new Secretary of State we should be doing with our economic assistance to Pakistan? In my time in Pakistan, Pakistanis were absolutely dissatisfied with it. Totally I got nothing but complaint about it. Americans aren’t very satisfied with it either. It clearly cries out for a new look. What should – how should we direct assistance – economic assistance to Pakistan? And how should we re-craft it? It cries out to be relooked by the next – by the second administration.

Shuja Nawaz: Thank you. Mohsin, you want to give your advice to the new Secretary of State?

Mohsin Khan: I think the new Secretary of State is going to get a lot of advice. I mean a lot of working groups, some of which I’ve been part of on aid to Pakistan. I think you’re absolutely right in the way you’re characterizing it that, you know both sides are incredibly unhappy with the situation. I mean this is a bad marriage in some sense or has the characteristics of a bad marriage.

I really think that the Pakistanis need to be reassured not so much in terms of – I mean you know people seem to think that there’s just one player, or one or two players in Pakistan on this aid issue.

You know the aid issue is a complicated issue because it involves financing. So that – there you have the central bank and the ministry of finance involved in it. You have the where does the aid go, you have the development ministries involved, you have the provincial ministries involved, et cetera. You have a lot of players on the other side, each with its own demands.

I think that it would be fair to say and I’m not privy to all that goes on – it would be fair to say that there hasn’t been enough significant thinking in Pakistan about the aid issue. I mean there’s no sort of – there’s been no sort of comparable working groups in Pakistan that sit and say, you know how much do we expect, what do we need, what do we need it for, et cetera.

And ideally, you know if I was advising the new Secretary of State, I would say to the Secretary speak to your counterpart, you know and say come with a plan on what do you think, you know what is needed and then where will it be used, et cetera. So you have an idea from the recipient as to what their needs and the other.

Unfortunately in many cases U.S. aid has been determined here in Washington or in the embassy in Islamabad. And you know – whoever their contacts are, et cetera as to who needs the money and who should get this and who should get that.

U.S. AID story is – to me it makes me smile, it’s an extreme case – is you know you get a new administrator and the prediction was – and in fact I was asked for that prediction is what kind of aid – what’s gonna happen with aid to Pakistan. I said it’s going to go primarily into health. And why is that? Because the new U.S. administrator’s a doctor. I mean that’s why it’s going to go into health. I mean [inaudible] people, you put an engineer and you go into the engineering side. It’s that kind of thing.

So you’ve got to have a – you’ve got to have a serious dialogue and that serious dialogue beyond just the ministry of finance, beyond just the ministry of – well the ministry of finance really. Beyond just the ministry of finance in Pakistan.

Shuja Nawaz: Paula?

Paula Newberg: Just a couple of bullet points anyway. One, the amount of assistance that goes to the civilian side is a pittance compared to the amount of money that goes to the military side. So we spend a great deal of time arguing about the smallest amount of money first.

Second, to the degree that the United States or other donor countries believe that their relationship with Pakistan or countries like Pakistan is determined by their aid relationship, you already have introduced yourself to failure. You have a diplomatic relationship, you don’t buy it with assistance.

And thirdly, given the amount of critique that comes about the way that the United States handles its assistance or in some instances it doesn’t provide it, I think there’s an easy lesson from something that Mohsin said in his more formal comments. And that is look far more to the multilateral side as a way of partnering your money and making a far greater investment. And that by its very nature requires the participation of the Pakistan government in determining how it’s to be done.

Shuja Nawaz: Thank you. Diana?

Diana McArthur: Well, I’ll try to make a question out of this. It’s essentially going to be –

Shuja Nawaz: If you could please – identify yourself for our audience.

Diana McArthur: Oh, yes. My name is Diana McArthur and Shuja knows I’m building a school in Pakistan and private, private. No government money, no NGOs, just private individual money from Pakistan industrialists and from me. And we are finally going to float our tender. It took four and a half years.

The question is where are the adults running anything? Now, if we were to read the New York Times we would have questioned who in our Congress is an adult that we’re getting any work done. Last June sitting in Pakistan waiting for the architects and engineers I read Dawn and I would finally end up saying what is going on here, who’s running anything.

We had the – shall we say, the removal of the Prime Minister to the point that an article written, we have had coups, we’ve had executions, we have had incarcerations and I wonder when we will ever just have an election and vote somebody out. And at the same time there were charges and countercharges about some mysterious man said in the dark of the night he was having meetings with the Chief Justice over whatever, whatever and then he was charged with treason. And it was a circus.

So one would have to say from a point of view an American, where are the adults then running the country if this was the kind of sort of histrionics and character assassination and back and forth and legislature. Is it really the army that’s doing this or whatever, you would have to question who is running the country to answer some of the questions that we heard today. But we have had some of that problem here in this country too. So it can happen.

But from that point of view because you’ve answered it again many times, questions like this. If you were to see all of that happen in one month in Pakistan and you’re just visiting from anywhere and you’re reading about it every day in Dawn, what would you think?

Shuja Nawaz: Well maybe I’ll give you a short answer if I may, and that is going back to the point that all of us have made about the demographic shift. With a population of maybe up to 200 million once the census is completed and 100 million below the age of 22 because the median age is 21.9 at last count. At some point the mantel has to shift to the younger generation and elections are the best way of effecting that change. So maybe the election process will throw up more leaders that are in tune with the needs of the people of the country.

Just a little footnote. In a recent visit to India I was asked to write for India Today and I mentioned this median age in the two countries. And in India the median age is close to 25 or 26 and the average age at that time of the Indian cabinet was 65. So there’s a serious disconnect between the rulers and the ruled. Of course Prime Minister Manmohan Singh saying, probably after reading my article I say modestly, changed his cabinet composition and reduced it by a couple of years on average.

But that is really I think where the answer lies. Eventually the more activist youth who are doing things in spite of government will find a way to assert their position and maybe that’s really where the future lies. I think this –

Mohsin Khan: If I could add a footnote to that. I mean the census there is very important in this issue because the rapid growth of the cities and the urban population is going to throw up politicians and candidates who do not have an allegiance to the old futile structures that exist in Pakistan. So you’re gonna get much less of that, of you know just because your father held the seat, you’re gonna hold the seat now.

You’re gonna run for – that’s what Imran Han is counting on in his sphere, he’s counting on the urban centers and the urban youth in voting and that’s a young population. So maybe there is changes.

Shuja Nawaz: And you’re helping by setting up a school in the northern areas of Pakistan.

Diana McArthur: Yes. I hope so.

Shuja Nawaz: Next question. Barack?

Barack Sheffi: Yeah, Barack Sheffi. Mohsin, you had addressed tax reforms in Pakistan. Goodness knows we need tax reforms really badly in this country. But – and you had also addressed some of my earlier question that I had in mind as I’d been waiting for the mic, but I just modified.

You had mentioned the informal economy, call it the underground economy or the black economy and you had also discounted that the government doesn’t wish to impose a VAT, valued added tax. But is the central government, the federal government, local governments, are they collecting taxes from revenues at least generated by this informal economy, which as you said is half off the total economy? It must be a huge, huge amount not to be sort of pursuing. Thank you.

Mohsin Khan: Well, Barack, they’re not actually collecting – they’re collecting a small part, but anything that touches on the documented economy like for example in the sales tax area, et cetera.

But the problem – I mean if you want to talk about tax reform, there’s a constant talk about income tax and VAT and so on and so forth. I think the biggest problem is that the promises that the area of services and agriculture lie by the constitution in the provinces. And the provinces are not ready to do that. That was my – what I pointed out was the mistake of the 18th Amendment, which was to transfer responsibilities and the money.

They should have had a quid pro quo deal with the provinces that look for every rupee that you are transferred from the central government, you will raise, you know 10% of that in taxes or some form of that. They have no interest whatsoever in putting any taxes on the things that belong to them, the provinces.

In some services there are – for example the thing about car registrations and motorcycle sales and so on and so forth, there are taxes in that. But it’s petty; it’s miniscule. I mean if I, you know – you come to me and I have a motorcycle and I sell it to you, Barack, in the street of Lahore and you give me cash transaction, nothing is reported. No – you know nothing will happen. And that’s the way it typically takes place. That’s how the informal economy works.

Shuja Nawaz: Thank you. I know that you all want to ask some more questions. We’re already way over the time that we’d originally set for it, so with your permission if I may, I’ll go to the last two questions. So we have Gary and then we have Polly at the back after that. Go ahead, please.

Garrett Mitchell: Thanks. I’m Garrett Mitchell and I write the Mitchell Report and I want to ask a question that I think sort of pokes around in the same neighborhood as the one posed earlier by Harlan Ullman. But I want to try a slightly different starting point. Through countless sessions on Pakistan and really particularly in this one, I’ve wanted to ask this question, so I’ll pose it pretty quickly.

If you look at the last 65 years and the roster of countries that have been able to make themselves successful beginning with Germany and Japan and then South Korea and Singapore and Turkey and Taiwan, et cetera – and India. Pakistan isn’t on that list. The metaphor I’ll use is it’s an airplane that’s sitting on the runway. And my question is A, if that is a reasonable characterization, why is that? What are the factors that have kept this plane on the runway when a great many other planes from around the world have been able to take off successfully?

Mohsin Khan: Well, that’s a tough question. I think that there’s a lot of factors that have kept Pakistan from [inaudible]. There have been periods of time where there’s been a great deal of optimism about the development in Pakistan. And you talk about 65 years – in the ‘60s for example – ‘50s and the late – ’50s and the early ‘60s, back then was at the takeoff stage. The civil war, the Bangladesh experience, subsequent to that the socialist experiment of Zulfikar Ali Bhutto, the military rule.

Again, recently in the 2000s, this century, a great deal of optimism. Growth is now 7%, consumer spending is going to skyrocket, we’re gonna become an industrial country and so and so forth. And then the whole thing collapsed again. There’s been cycles. I mean there just hasn’t been that sustained progress in the country.

Garrett Mitchell: That’s really the question [inaudible] –

[Crosstalk]

Mohsin Khan: And I don’t have a one-sentence answer for that. I think there are just too many factors that have kept the country held back in some way. Or when it gets up there there’s not –

Garrett Mitchell: But [inaudible], I understand what the chronology looks like. I mean there’s been, you know there’ve been earthquakes and there’ve been this and there’ve been that. But my question is underneath that, there’s something that, you know when [inaudible] stumped where he has looked at what requires, why does democracy take hold in some countries north of Italy, but not in the south of Italy originally. And I’m just wondering if anyone has done a kind of analysis that says these are the sort of underlying structural systemic things that have haunted this country. I don’t mean –

Mohsin Khan: [Inaudible].

Garrett Mitchell: – that in any way as a put down.

Mohsin Khan: No, no, no. I understand what the – where you’re coming from and I think – let me just give you – because I can’t get into it. Let me just give you a glib answer on that. Somebody went to President Zardari and said look, your country is not doing well economically. Your country is not doing well at all. Look how it compares to India. It does – compares very badly to India. It’s comparing badly to Bangladesh, it’s comparing badly to Sri Lanka, just looking at the neighborhood.

What do you say to that Mr. President? And President Zardari said this is comparing apples and oranges. This was not apples and oranges, apples and apples you know the same people across the border. Bangladesh was part of you, it’s apples and apples. And his answer was India’s had 65 years of democracy. Bangladesh has had some form of democracy for 20; Sri Lanka’s had it for 20. I’ve only had it for four. When I’m at 20 years of democracy, you come and ask me that question.

Shuja Nawaz: Thank you, Mohsin. Polly?

Polly Nyeck: I’m Polly Nyeck, I’m an independent consultant and I have a – I was very struck by Mohsin’s description of the role of the informal economy and thoroughly concur with it. But I do have some questions as we think ahead to the demographic changes occurring that stem in part from some of the points made by Paula, which is first do we not have limits as Pakistan is increasingly knit into – and it’s prospects increasingly depend upon the international economy going forward? Limits that are set by skills and education deficits in Pakistan.

Is Pakistan not gonna run up against even in the dynamism of the informal sector, these limits of its institutional output of education and skills? And how else – what other factors do you see as complicating the sufficiency of the informal sector keeping the burgeoning youth population from bumping its chin against a small formal economy?

Mohsin Khan: Polly, my – without – didn’t want to be misunderstood. My point about the informal economy was what has kept this economy from collapsing? It doesn’t say anything from will it keep the economy going into the future? Now you raise a very good question. I think eventually you’re gonna have to – I mean this cannot go on because if you’re going to interact with the global economy you cannot do it by the informal – well, the informal sector does it by the way.

I gave you example of software development and things that’s going on. But I think I would come back to what I said earlier. I think that to me the ties – improved ties with India at the moment and then with the region in more generally is going to be a game changer for the country. And I’m just – I’m very hopeful that that might be the way [inaudible].

Because you know – yeah, because I mean when we talk about trade with India, not just talking about trading goods and consumer goods and engineering goods, I’m talking about, you know education, medical facilities, these things where India is far more advanced which could offer Pakistan an opportunity.

For example – I give the example of if India would reserve some seats for Pakistanis in their IITs, in their engineering schools. This would be a great benefit to Pakistan. I mean these are the kind of things one has to start to think about. So once relations open up between them, maybe these things will happen. But I think the exit to Pakistan from this morass or wherever it is, lies in – and this was something I told – excuse me – I’m sorry, I [inaudible].

When discussing this issue of India Pakistan trade with some members of the military at one point I said look, let me put it to you simply. India is the engine of growth in the region and, you know it’s the locomotive. You either hitch your wagon up to this locomotive or you’re going to get left behind on the station. That’s the way to look at it and I think that that is the way the country – fortunately the government in fact said – and the military by the way, is looking at it.

Shuja Nawaz: Thank you. You’ve all been a great audience. I really appreciate your patience. I know there are at least two or three of you that I have not been able to include in the public questions, but I’m sure Mohsin and Paula will gladly answer your questions if you come up. Please join me in thanking our two speakers and also in thanking Ambassador Haqqani.

[End of Audio]

Duration: 100 Minutes

With a second term assured, President Barack Obama has a shot at making a huge difference in greater South Asia, an opportunity that he failed to take in his first term.

This may now be the time for a new hyphenation across the map of that critical part of the globe: bringing together a string of countries ranging from Iran, through Afghanistan, Pakistan and India to Bangladesh. For this may be the center of gravity of Asian stability and growth in the next couple of decades, if the United States and its partners get their policies right. But first, the President needs to create a center of gravity for decision making on this region in his own Administration, reaching across the aisle and bringing in new blood to rejuvenate his efforts to bring peace. Then he must help create a network among the nations of this region that is based on their own self-interests and from which the United States would profit immeasurably.

The President could use the emerging forces of democracy, gender equality, and civilian supremacy rather than military might as the catalysts for change in the region. No carrots or sticks, but moral suasion, applied quietly and confidently to help these countries build confidence amongst themselves.

India is perhaps the most critical part of this new opportunity. Under a Prime Minister who has dared to think of peace and normalcy even with arch enemy Pakistan, India needs to be encouraged to open its borders to its neighbors for trade and travel, opening far wider the door that has been cracked open in recent months. A paranoid Pakistan that fears hot borders on the east and the west could be helped to get over its concerns. Pakistan must recognize that it is in its own interest to create normalcy with its neighbors, for it cannot afford to continue on the path of military or economic competition, especially with India. Rather, it can catapult its economy to new heights by becoming a regional partner. The United States could also bring together support for strengthening Pakistan’s recent overtures to all Afghans, not just the contiguous Pakhtuns, whom Pakistan wrongly saw in the past as its assets. There are signs that Pakistan is prepared to let Afghanistan be Afghanistan. Much could be done to support that trend by helping open trade and power (gas and hydroelectricity) routes to central Asia. In both these countries, civil society and civilian governments are the key to progress and stability. Pluralism, gender equality, education, and health may be the foundation stones to help them gain their footing as democracies.

This means shifting the focus of expenditures from guns to butter over time. The United States has a great position in that regard, as a strategic partner to Afghanistan, Pakistan, and India for the time in history. It can also open the door to engagement with Iran by bringing Iran back to the table on Afghanistan’s future stability. By helping create regional ownership for Afghanistan’s future it can find a way to exit gracefully from the region. India, again, will be key in creating transparency in its relations with Afghanistan to help Pakistan overcome its suspicions of being hemmed in on both sides.

The region has been ready for some time to create an atmosphere of trust, though much remains to be done on the issues of cross-border terrorism and non-state actors. Civil society groups have started benefiting from the opening of trade relations and visa regimes. The current limited transit trade arrangements need to be extended from Kabul to Dhaka. The cross pollination of ideas — especially among the burgeoning youthful populations of the region – and the greater involvement of women in their societies, will help ensure that there is no slipping back toward obscurantist thinking of the past. Those positive trends are growing and cannot be turned back, come what may.

President Obama can ride these emerging waves to truly earn his Nobel Prize of four years ago by helping bring lasting peace to greater South Asia. Perhaps he could start by visiting two border posts in the first few months of his second term: Wagah, where India meets Pakistan, and Torkham, where Afghanistan and Pakistan meet, and calling for keeping the gates that now close daily to remain open forever. This would be a grand legacy for the 44^th president of the United States.

Shuja Nawaz is director of the South Asia Center at the Atlantic Council. This piece was first published on Foreign Policy’s AfPak Channel.

Hurry up and wait! This seems to be the order of the day as Pakistan and India take tentative steps towards normalcy.

After much trumpeting of the visa accord signed in Islamabad after External Affairs Minister S.M. Krishna’s visit and discussions with Pakistan’s Foreign Minister Hina Rabbani Khar, the maw of the bureaucracy appears to have swallowed the agreement and refuses to release it. The latest out of Islamabad is that the Cabinet still has to approve the agreement. Surely, the paperwork for such an approval must have been readied before the accord was signed.

Conspiracy theorists will have a field day as to the cause of the delay. Even the often-blamed Pakistan military favours ending the “no-war no-peace” situation with India, so it can concentrate on the domestic threat of militancy. Meanwhile, people who wish to travel from both sides of this fractious border remain in suspended animation. Overseas consulates of both countries have yet to receive orders to ease up on restrictions. Not that the new accord represents a radical leap forward. It is marginal at best and it appears rather than simplifying the visa regime, officials decided to make a dog’s breakfast out of it, creating new categories and slicing and dicing the different visas so they will keep the “babus” occupied. Despite these hurdles, bravo to those officials who keep issuing visas, often at short notice, on their own recognisance. And bravo to the home ministries that have not taken them to task for their transgressions.

On a recent visit to Pakistan and India, I was struck by the hundreds of Indian visitors to Lahore under the aegis of Aman-ki-Asha for different events, including a high tempo India-Pakistan Management Summit. The sentimental outpouring on the final day of this summit, where I was also asked to speak, was astounding. “Jinay Lahore nahin waikhiya oh jammiah hi nahin (Whoever has not seen Lahore has yet to be born!)” seemed to be the Punjabi slogan of the day. If India and Pakistan are to expand their economic horizons, then they need only start in their own neighbourhood rather than reach out across the seas. Let the business sector take the lead. This makes economic and political sense, as it will empower their people and create jobs and trade opportunities along the Grand Trunk Road. Much more than any New Silk Road initiative that will become moribund if Pakistan remains a recalcitrant barrier between Central Asia and India. Common prosperity should contribute to creating security over time.

People on both sides of the border appear ready. In Lahore not long ago, a lawyer swept aside the curtains in his office and showed me a new building going up next to his offices near the high court. No, this was not a new set of offices for the legal eagles. Rather the owner had told him that he was building a hotel in anticipation of the flood of Indian visitors across the Wagah border. Trade follows people and vice versa. Studies, among others presented by Mohsin Khan at the South Asia Center of the Atlantic Council, indicate that potential for trade between India and Pakistan, at the same level as in 1947, could touch $100 billion (Rs 500,000 crore) a year, making Pakistan one of the top three trading partners of India. Up from some $5-6 billion (Rs 25,000-30,000 crore), of total trade via official, indirect, and illegal channels today.

The window of opportunity for politicians on both sides of this divide is narrow. The elderly leaders may be losing touch with their increasing youthful populations. Pakistan’s median age is 21 years, India’s 25 years. The average age of a minister in the Indian Cabinet is reportedly 65 years. Pakistan may have the edge in that department, as the gap between their two foreign ministers indicates. But it is time the politicians took action that would give their youth a greater chance to carve out a peaceful economic future. Indian Deputy National Security Adviser Lata Reddy talked at a gathering I attended in New Delhi about the need for India to create an “integrated neighbourhood” if it is to successfully face an uncertain future attended by “complexity”. She warned of the nexus between climate change, rising populations, and increasing inequalities. Amen to that. War has failed both India and Pakistan. As most of my interlocutors in Pakistan and India on this visit told me, it is time now to wage peace.

Shuja Nawaz is director of the South Asia Center at the Atlantic Council and author of Crossed Swords: Pakistan, Its Army, and the Wars Within. This piece was originally published in India Today.

On October 17, the Atlantic Council’s South Asia Center hosted a discussion entitled, “Combating the Global Improvised Explosive Device (IED) Threat,” with Lieutenant General Michael D. Barbero, director of the Joint Improvised Explosive Device Defeat Organization (JIEDDO).

A video of this event is available from CSPAN

The use of IEDs by militants has made IEDs an enduring threat for both military forces and civilian populations worldwide. The Joint IED Defeat Organization has become the US Department of Defense’s lead unit for countering IEDs in critical areas such as Afghanistan and Iraq. Though IED attacks in Afghanistan have become more frequent over the past several years, JIEDDO operations have helped reduce the number of casualties in IED attacks by more than 40 percent since 2011. How will defense budget cuts affect supplemental operations like JIEDDO? What is the likelihood of IED threats to rise after 2014? Lieutenant General Barbero addressed these questions and provided an overview of the current JIEDDO mission in Afghanistan and the region.

A discussion with

Lieutenant General Michael D. Barbero
Director, Joint IED Defeat Organization
US Department of Defense

Moderated by

Shuja Nawaz
Director, South Asia Center
Atlantic Council

Lieutenant General Michael D. Barbero was commissioned in the Infantry upon graduation from the United States Military Academy at West Point in 1976.
 
In addition to Infantry assignments at the tactical level, he has commanded at every grade, from lieutenant colonel to lieutenant general. As a brigadier general, he commanded one of the Army’s Combat Training Centers, the Joint Readiness Training Center and Fort Polk. As a major general he commanded the United States Army Infantry Center and Fort Benning Georgia. Prior to joining JIEDDO, he served over three years in three separate tours to Iraq where among his many duties, he commanded the Multi-National Security Transition Command–Iraq and NATO Training Mission-Iraq.

Lieutenant General Barbero holds a master’s degree in national security and strategic studies from the National Defense University, Washington, DC. He is a graduate of the Army’s Command and General Staff College and the School of Advanced Military Studies Program. His awards include the Defense Distinguished Service Medal, Defense Superior Service Medal, Legion of Merit and two awards of the Bronze Star Medal. He has also earned the Expert Infantryman Badge, Parachutist Badge, Air Assault Badge, Ranger Tab, Australian Jump Wings, and both the Army Staff and Joint Staff Identification Badges. To read more please click here.

MEDIA MENTIONS

• DOD, State discuss ‘framework of cooperation’ with Pakistan on roadside bombs – Carlo Munoz, The Hill
• JIEDDO Commander: Counter-IED Efforts Eye Waterborne Threats – Otto Kreisher, Seapower Magazine Online

The Atlantic Council’s South Asia Center held a discussion on philanthropy in Pakistan with Robin Raphel, senior adviser on Pakistan, Office of Special Representative for Af-Pak, US Department of State; Qaisar Shareef, executive volunteer and USA representative, I-Care Fund America; and Farrokh K. Captain, chairman, i-Care Foundation and director, Shell Pakistan, Limited. South Asia Center Director Shuja Nawaz moderated the discussion.

Philanthropy plays an increasingly important role in the world, through the support of critical issues such as health, education, and human rights. Pakistan is no exception to this phenomenon, but faces a series of challenges to increase the level of philanthropic investments within the country, by domestic and foreign (including diaspora) donors. Lack of transparency and limited information about social impact organizations on the ground has led to low levels of donor trust.  In a country where the need for philanthropic investment is greater than ever, what are the avenues for providing support for important causes within Pakistan? How can challenges such as impact and accountability be addressed to ensure that donor funds are being effectively spent? What is the role of government and public-private partnerships in facilitating philanthropy within Pakistan?  These and other key questions regarding the challenges and opportunities for philanthropy in Pakistan were addressed.

Ambassador Robin Lynn Raphel is a career diplomat who is currently the coordinator for non-military assistance to Pakistan with the rank of ambassador. She has been the ambassador to Tunisia and assistant secretary of State for South Asian affairs during the Clinton Administration. In this capacity she managed US relations with the newly formed Taliban government in Afghanistan. She also served as a member of the Iraq Reconstruction Team during the Bush Administration, and as senior vice president at the National Defense University in Washington.

Ambassador Raphel previously worked in the Office of Investment Affairs in the Economic and Business Bureau; on the Israel Desk; staff aide for the Assistant Secretary for the Near East and South Asian Affairs Bureau; and as special assistant to the Under Secretary for Political Affairs. In 1984 she was assigned to the US Embassy in London where she covered Middle East, South Asia and East Asia, and Africa. She served as counselor for Political Affairs at the US Embassy in Pretoria (1988–91), and at the US Embassy in New Delhi (1991–93). In August 1993, she was named the first assistant secretary of State for South Asian Affairs. She retired from the State Department in 2005 after thirty years of service. The Obama Administration appointed Ambassador Raphel as a member of the team of the late Richard Holbrooke, the special representative to the Af-Pak region.

Ambassador Raphel received a BA in history and economics from the University of Washington and earned a MA in economics from the University of Maryland.

Mr. S. Qaisar Shareef is the executive volunteer for i-Care Fund America, Pakistan’s first donor advised charitable fund. He recently concluded a nearly thirty-year career with Procter & Gamble. Most recently, he headed up the P&G operations in Pakistan; a role in which he served until early 2011, before returning back to the United States.

During his time as country head at Procter & Gamble Pakistan, Mr. Shareef worked closely with several nonprofit organizations engaged in providing education to the underprivileged and in disaster relief.  He is a charter member at US-Pakistan Foundation, serves on the board of HOPE USA, and is the representative of i-Care Fund America in the United States, where he serves as executive volunteer. P&G Pakistan received the Award for Corporate Excellence from the US State Department in Washington, DC, recognizing the company’s contributions in corporate social and environmental responsibility, and it’s excellence in community engagement. 

Mr. Shareef is originally from Pakistan and first moved to Cincinnati in 1977. He has a BSc in management from the Middle East Technical University, in Ankara, Turkey, and an MBA from the University of Cincinnati, Ohio.

Farrokh K. Captain serves as the director of Shell Pakistan Limited, and chairman of the i-Care Foundation, a donor-advised fund in Pakistan. After completing a BA and MA from the Massachusetts Institute of Technology, he worked as a management consultant with Arthur D. Little First in Cambridge, Massachusetts, and then went on to establish their practice in Pakistan. From 1978 to 1994 he lead a US-Pakistan joint venture chemical manufacturing business in Pakistan: Captain-PQ Chemical Industries (Private) Limited. He is also a member of the Board of the American Business Council. Mr. Captain later stepped back from active business, turning this over to professional management, and focusing on the social sector. In addition to serving as chairman of i-Care Fund America, he is a trustee of the Layton Rehmatulla Benevolent Trust, a much-renowned chain of ten hospitals for curable blindness spread throughout Pakistan, which treats 1 million patients per year free of charge, and to-date has treated 10 million patients. Since 2002 he has served the Human Development initiative in Pakistan as chairman of the Pakistan Human Development Fund. Presently he is also a member of the Special Cabinet Committee for Human Development, and chair of its Committee for determining Pakistan’s future literacy programs. He is also a director of the Mobilink Foundation. Mr. Captain has served for thirty years as MIT’s regional chairman for Pakistan and is chair of the recently accredited MIT Enterprise Forum of Pakistan. He is also a member of the Pakistan Board of The Acumen Fund, a novel new entrant to the Pakistani social service sector, operating in the field of social entrepreneurship.

Summary of the town hall “Is Afghanistan Ready For the Transition Beyond 2014?” at the 2012 Annual Members’ Conference.

Dr. Ashraf Ghani, Chairman, Institute for State Effectiveness
Moderated by Mr. Shuja Nawaz, Director, South Asia Center, Atlantic Council

This session focused on Afghanistan’s current landscape and preparation for the major security and development transition that the country will soon face as most international troops are withdrawn from by 2014. Accompanying the withdrawal is an expected decline in civilian aid as international attention shifts elsewhere, which could have implications for Afghanistan’s political and economic landscape.

Most policy thinking is a projection of today to tomorrow but the better approach is to imagine what 2014 will look and then think backwards. To understand whether Afghanistan is ready for the transition, there are three aspects to Afghanistan’s internal dimension: economic, political and security. A significant portion of the government’s operating budget comes from foreign aid, leading credence to either an economic depression or major recession when the troops withdraw. The large aid inflows have benefited Afghanistan but have also brought problems. It has allowed for much of the progress since 2001 but has also been linked to corruption and weakened governance. Politically, elections will need to be held by May 2014. Regarding the security transition, the mission of the U.S. forces in 2013 is to support, not combat and by the end of 2014 there will be no NATO combat troops left in Afghanistan.

The regional and global dimensions must also be considered. Afghanistan’s neighbors assume that nothing will change until 2014 while globally there are two significant issues: the lack of will to continue the military mission and the globally fiscal environment which is making it more difficult to subsidize Afghanistan.

Afghanistan and its allies must make choices. Should the approach be security or stability? Afghanistan is a landlocked country -there is a need for investment in transport; it currently depends greatly on Turkmenistan. There is also a need for a bilateral security arrangement and an imperative for a special relationship with Pakistan.

From an Afghan perspective, the Afghani imperative is that they cannot become refugees again because the region cannot bear it but equally so, 99% of Afghans do not want to become refugees. While there are several risks that Afghanistan faces, including its relationship with Pakistan, Afghanistan has opportunities as it has several assets within the region. These include its location – which is critical for regional trade, water – it is home to the headwaters of several major rivers on the Central Asian plateau and mineral wealth – it is one of the countries with the richest and biggest intact mines in the world.

The agenda of transition is clearly articulated and foreign troops have gone to every location to speak with Afghan soldiers and build consensus. Although it has taken four years, the transition process is organized but an unexpected event could damage the process. Given the engagement of more than 140,000 troops, the process is being handled in a way that will hopefully leave its mark.

The tattered relationship between the United States and Pakistan has been patched up yet again—with the political equivalent of duct tape. A low-level Memorandum of Understanding has been signed by bureaucrats, not political leaders, to provide a diplomatic fig leaf. But basic flaws continue to haunt the relationship that has degenerated, again, to a transactional one. For a while, it appeared that the United States and Pakistan had agreed on some common goals for Afghanistan and the region and disagreed only on how to get there. Now, all bets are off.

One strong reason for the failure to reconnect is the lack of a center of gravity in both countries in terms of ownership of the relationship at the highest levels. At one time, Vice President Joseph Biden and then Secretary of State Hillary Clinton appeared to be invested in the relationship in the United States. Special Envoy Richard Holbrooke took it upon himself to knock down some stovepipes and get things moving. Now, policy is being managed, not made, but in bits and pieces and a major part of the new policy seems to reside in Langley—where the drone, an instrument of war, has become a virtual strategy and a policy. There are no indications that the Central Intelligence Agency or for that matter the U.S. government would allow Pakistan the access to drones or control over them that it seeks. If the new director-general of Pakistan’s Inter Services Intelligence managed to claw back some control from his U.S. counterpart or get a written agreement during his recent visit to Washington, D.C., then he can claim a major victory. But chances are slim that this happened during this meet-and-greet encounter.

In Pakistan, the civil and military divide remains a huge chasm. The military has allowed the government to drift at times instead of nudging it into action. In the absence of a national security council, it may be necessary to bring together an ad hoc group of the civil and the military to discuss and agree on key issues of national importance so nothing is left to chance and domestic decisions are not postponed. Involving business leaders may be a critical element in this process. But domestic legal and political squabbles have become a major distraction, with the rampant judiciary playing a major role in creating a climate of uncertainty.

A major reason for the U.S. distraction is that election season is upon us in the United States and neither President Barack Obama nor his Republican challenger Mitt Romney has deemed Afghanistan or Pakistan worthy of public discussion on the campaign trail. If Obama were to find a magic lamp tomorrow with one guaranteed wish, my guess is he would ask for an exit from Afghanistan yesterday! Afghanistan fatigue has set in with the American people, Congress, and the administration. Pakistan fatigue may not be far behind. It will require a determined effort by the American team in Islamabad to make its case in both capitals in the months ahead and to convince the average Pakistani that the U.S. is not ready to fold its tent and fade into the night once more.

What will change this depressing scenario inside Pakistan? Pakistan needs to show a determination to craft and implement sound economic policies at home, adopt a proactive approach to helping stabilize Afghanistan, and mend relations with its neighbors so it does not need to rely on military or economic aid from afar. Improved domestic governance and restoration of economic growth and stability are paramount. But Pakistan too is gripped by pre-election fever. Denial is not the right approach. Half measures will not work. Government needs to think boldly and play the long game. This means taking charge of security and economic policy, and working with the best and the brightest inside Pakistan to ensure that Pakistan is prepared to deal with its looming demographic challenges. Most of the population is very young and Pakistan needs to educate and create jobs for millions of youth entering the workforce in the next decade or two. Once Pakistan begins to take itself seriously, its friends in the United States and elsewhere will find it easier to come to its aid.

Otherwise, the risk is that economic woes at home will lead to the shutting off of the aid spigot from the United States and Europe. And the economic pie inside Pakistan would then begin to shrink further and at a faster pace. The consequences of that will be instability and unrest. Pakistan’s South Asian neighbors seem to be accelerating away from Pakistan in terms of growth and open societies, despite the many short-term growing pains they face. Pakistan can catch up with them if it starts now. Leaving things for another year or two may be too late. 

Shuja Nawaz is the director of the South Asia Center at the Atlantic Council. This piece originally appeared in Newsweek Pakistan. Photo Credit: Saul Loeb / AFP

As it completes its 65th year as an independent state, Pakistan faces a host of challenges that only it can resolve, if its people and leaders have the will to do so.

It is no longer the split country that came into being in August 1947. Yet it occupies a strategic location that appears to be determining its destiny. It has been drawn into external conflicts on its western border at least twice, first in the 1980s and then in 2001. And it has fought at least three major wars with India. Although that relationship appears to be thawing, it remains vulnerable to the actions of non-state actors residing in Pakistan whom the state is unable or unwilling to control.

Meanwhile a full-scale insurgency led by the Tehrik-i-Taliban Pakistan continues in the western regions of the country. In Balochistan, a nationalist movement fights for attention while sectarian battles rage involving the Lashkar-i-Jhangvi. Critics of the government and the military allege that some of these actors operate under the umbrella of state agencies.

In brief, Pakistan remains a security state struggling to create a civilian identity, with sharp differences between the elected government and the military that acquired its autonomy partially from Gen Pervez Musharraf and partially from the current administration. More than four years after the government was elected, it has yet to withdraw its remit to the military that had designated the chief of army staff a de facto proconsul to handle all decisions related to security matters in Khyber Pakhtunkhwa. Subsequently, the government indemnified the military for all its actions in the region, creating a virtual martial law. No wonder then that Pakistanis and external observers raise a number of questions related to the future of the country.

Is Pakistan truly ready for civilian rule?

One of the more startling features of conversations with the intelligentsia of Pakistan is the frequency with which they ask when the army is going to act. It is surprising that even today there are those who think a coup would yield the right results despite the history of the country showing how military rule has left it bereft of political development and created economic downturns that bedevilled successor civilian governments.

Another downside to involving the military in government is its professional degradation as its finds itself drawn into areas beyond its normal expertise. The military does not have a comparative advantage in running businesses or political systems, and extended military rule takes senior officers away from their professional duties. The dual-hatted COAS and president Gen Pervez Musharraf did not once visit his troops in the border region with Afghanistan. Gen Ashfaq Parvez Kayani made his first visit within days of taking over and has returned frequently.

Today, Pakistan is more than ready for civilian rule. It needs an active and informed elected government focusing on health, education and employment for its population of some 200 million, half of whom are below the age of 21, if it is to keep up with its neighbours.

How should Pakistan relate to India and Afghanistan?

On the security front, the nuclearisation of its weapons systems has helped Pakistan create a sense of parity and a perhaps a poison-pill defence against what it has traditionally viewed as a hegemonic India. But the conventional military gap is widening as India acquires newer technology and weapons systems and produces more itself. Meanwhile, Pakistan is still encumbered by heavy reliance on military aid and purchases from the West and China. Its defence industries depend heavily on import substitution that is costly and does not ensure parity in the long run, as the rest of the economy sinks to growth rates well below the rate of population growth. A shrinking economic pie will restrict the access of the military to state resources. Increased spending on defence does not guarantee a commensurate increase in security.

A view appears to be developing inside Pakistan and even among the military leadership that the true defence of the country lies in its society and economy and that the threats are not necessarily external. For these views to dominate, there will need to be a national debate on Pakistan’s goals for the next two decades. And then government and civil society will need to work to put the nation on the right path.

A very necessary part of this discussion are the youth of Pakistan. In my recent travels inside Pakistan in connection with an emerging youth leaders’ project, I learned how vibrant this important segment of Pakistani society is. Throughout the country they are launching new movements to serve society not because of government but, in the words of one of Pakistan’s top 100 young entrepreneurs, “in spite of government.”

On the economic front, the opening up of trade relations with India and Afghanistan promises to unleash new economic forces. But fears that the Pakistani military remains entrenched in its opposition to opening up to India remain in both India and Pakistan. A clear, public statement of support from the Pakistani military would do much to destroy the barriers that remain and give the civilian authorities no excuse to drag their feet.

Looking west, what kind of an Afghanistan does Pakistan want?

Traditionally, Pakistan has sought an Afghanistan that relies on Pakistan as its sole land route to the world, resists Indian domination and is either friendly or not hostile. Yet it has seen Afghanistan largely through the Pashtun prism, alienating more than half of the Afghan population. Pakistan also fears that India wishes to encircle it by befriending Afghanistan and investing in its northern, non-Pakhtun areas. Yet both India and Pakistan will need to rely on Afghanistan as a gateway to Central Asia’s energy and trade.

The counterfactual to both India and Pakistan’s current and past behaviour is a collaborative approach to develop Afghanistan, making it a partner in what I would call a Grand Trunk Road Initiative. Both countries would benefit from cheaper gas and hydroelectric power from Central Asia and Afghanistan. Pakistan would be able to export its cement and expertise to Afghanistan, helping transform Afghan suspicions about Pakistan’s attempts to ‘meddle in Afghan affairs’.

Changing the mindset

All these ideas are practicable. But they require a clearer definition of the goals of Pakistani society and government. And they require a broad-based discussion so all parts of the Pakistani population, especially the youth, feel involved and empowered. It is time Pakistan matured into the society that its founding fathers envisaged and that values domestic talent rather than relying on imported ideas and foreign aid. 

Shuja Nawaz is the director of the South Asia Center at the Atlantic Council. This piece originally appeared in Dawn. Photo Credit: Getty Images

India’s Economy: Unusual Past and Uncertain Future

Arvind Subramanian, senior fellow jointly at the Peterson Institute for International Economics (PIIE) and the Center for Global Development (CGD)

Shuja Nawaz, director, South Asia Center, Atlantic Council

August 10, 2012

Shuja Nawaz: Good morning, everyone. I’m Shuja Nawaz. I’m the Director of the South Asia Center at The Atlantic Council, and on behalf of President Fred Kempe and my colleagues at the center, I would like to welcome all of you and thank you for coming in despite the weather.

We are delighted to host Arvind Subramanian today to speak on India’s Economy: An Unusual Past and Uncertain Future. Perhaps it’s not as uncertain as the title suggests and maybe Arvind will be able to spend some time helping us understand that, but I can’t think of a better person to do this. I’m delighted, of course, to welcome him also as a former colleague at the IMF.

But Arvind is currently a senior fellow, jointly at the Peterson Institute for International Economics, and the Center for Global Development. He’s the author of a book called Eclipse: Living in the Shadow of China’s Transformation – China’s Economic Domination. He also wrote India’s Turn: Understanding the Economic Transformation in 2008.

I should note that Foreign Policy named him one of the world’s top 100 global thinkers in 2011. While India Today magazine nominated him as one of the top “35 masters of the mind” over the last 35 years. That’s a very heavy burden that I’m sure he’s bearing extremely well.

But he’s been an Assistant Director at the Research Department of the International Monetary Fund and he’s also worked at GAT on the Uruguay round of trade negotiations. He’s taught at the Harvard University Kennedy School of Government and at Johns Hopkins School for Advanced International Studies. And he contributes frequently to the Financial Times and to other groups. And of course, he was educated in India at St. Stephen’s College, and then, at the Indian Institute of Management at Ahmedabad, taking his Master’s and Ph.D. from Oxford.

I think, with that background, we expect nothing but the best from him. So, I’m sure that all of you will have many questions. I’m going to request Arvind to speak for about 20, 25 minutes, and then, we’ll have a conversation with him. I would request – the conversation is on the record and I would request those of you that have cell phones to, please, switch them off.

We are also delighted to welcome the C-SPAN audience because this event is going out live, and so, we don’t want any undue interruptions. So, with your help, we should be able to begin and end on time, and in an orderly manner.

Arvind, welcome, and the floor is yours.

Arvind Subramanian: Shuja, thank you for that very kind and generous introduction. It’s a great pleasure to be here at The Atlantic Council. You know, August is, generally, not the most heavily-trafficked month in terms of talks and events in D.C. I’m delighted to be here.

I suspect some of the interest in India now is because of the blackout that we saw a couple of weeks ago and I will, you know, kinda talk about that in passing as well.

Let me quickly get – since I have only 20, 25 minutes and I have a rather long PowerPoint, let me just get straight to the – see, this is very much a kinda economist’s perspective on India. You know, politics and security are, basically, way above my pay grade and – but, you know, it’s not hopefully going to be just economics, but economics with some political economy background as well.

I’ve called this Unusual Economic Past and Uncertain Future. I realize that the interest is more in what’s happening now and what’s likely to happen in the near and medium term, but I do want to stress that there is a certain continuity, and in some sense, the uncertainty and the challenges come from, I think, India’s unusual economic past.

So, just a bit of self-promotion, that’s my India book. That’s my recent China book. And in some sense, you know, the more I talk about India, there is this implicit kinda – in everyone’s mind the kinda – contrast with China, which I will, of course, allude from time to time and, you know, I have a book on both countries of errata quality, but I do want to emphasize that there’s an interesting contrast with China that I think should inform our –

So, I’m going to spend the first half of the lecture talking about what I call the unusual economic model, which I call the Precocious India Model. And what I mean by precocious is that, you know, India has been doing things that it is not meant to be doing at this stage of its development. It’s doing things that countries normally do, which are much more advanced in terms of development, and there is a plus side to it, but there’s also a kinda drag that comes from this, which is going to inform my assessment of the challenges going forward.

And then, you know, we can talk about the near-term challenge, the macro challenge, the growth challenge, and I do want to spend a couple of minutes on, really, the big picture on India, what I call the Everything Challenge. That’s – you know, there’s a lot going on here.

But before – see, normally, when I present something on India, I begin by emphasizing something that, I think, people overlook. You know, this is a graph which shows India’s GDP per capita. And I think there have been three phases in India’s economic growth and economic development. The first phase we call the Hindu rate of growth, which, you know, India grew at about 3 percent per year for about 30 years after independence, which is about 1.8 percent per capita. We call that the Hindu rate of growth because people thought, you know, “Indians are not – are more obsessed with the hereafter than the here, and therefore, you know, Indian can –” and that’s what, supposedly, Hinduism teaches one. Of course, that turned out to be complete nonsense because, beginning in 1980, the Indian economy turned around.

I think I want to emphasize this because many people think that, you know, growth actually took off in India after 1991. It’s certainly true that the reforms took off in India after 1991, but growth actually took off, in terms of accelerated, around 1979, 1980. So, India has actually had 30 years of fast economic growth. So, the contrast between India and China is not that China began in ’78 and India began in ’91, but that we both began at the same – both countries began at the same time, except that China did everything at twice the pace that India did.

So, for about 22 years, we had about 5.5, 6 percent growth, and then, you know, between 2002 and 2008, ’09, ’10, and even ’11, we had this rapid phase of takeoff, sorta Chinese-style growth rates. And that’s what, I think, created this buzz about “Shining India” the last seven, eight years, and one could argue that now – which I’m going to later on, that now – the question is, “Are we actually in a forth phase where – which makes the third phase look a bit like an aberration, and that India is actually doomed because of all that it’s been doing, to actually slightly slower growth rates over the medium term than other countries?”

So, this is just by way of background and I think the first aspect of the Precocious India that, you know, everyone knows and talks about – but which I just want to highlight – is that if you plot democracy against development, India is just a massive outlier on the right side, and China is just a massive outlier on the wrong side, given India’s level of per capita GDP. This is kinda broadly the Modernization Hypothesis: given India’s level of GDP, India never deserved to be a democracy.

But it has been for many, many, many years, and this is one of India’s achievements, and the interesting thing, of course, is that China is right at the bottom, and all the states to the right of China are actually oil-exporting countries. So, China is an outlier and this – of course, India will rightly claim this as an achievement, but this is something, I think, that needs to be highlighted in terms of how precocious India has been in its political development.

But the point I want to emphasize next is that, in terms of economics, I think what has really been unusual about India – that it’s been a skill-based model of development, rather than unskilled-based model of development. India, like China, has abundant labor supply – unskilled. It has not used its unskilled labor supply; instead, it has intensively used its skilled labor, and that creates a number of complications.

The number of manifestations of this – it’s not just that India has – does more services than manufacturing, which is true, and certainly much more services than manufacturing than China does; but within manufacturing, too, India does much more skill-based manufacturing than most countries at comparable stages of development.

Here’s a chart I want to show. I wish I knew – oops. I don’t know where the pointer is, but I wish I could show you that, you know, the two – the graph on the left is for India; the right for China. It’s broadly on the same scale, and you can see where manufacturing is in India – way below that in China. And you see services is way above China, so this is one example of the Precocious India phenomenon.

And what I find even more unusual, of course, is that I think what people don’t realize – is the most striking aspect of this skill-based development of India – is the fact that India exports skilled FDI internationally. You know, if you think about the international division of labor, it was meant to be that the rich countries produce skills, technology, entrepreneurship, and finance, and the poor countries provide the cheap labor and the resources, and that’s how the international pattern of specialization is determined. But India has been defying that consistently and, if you look at this chart, this is – so, countries like India and China are meant to import FDI. They aren’t meant to export to FDI. But India actually exports much more FDI as a share of its GDP than China does.

Now, not only is that the case, Chinese FDI is mostly – a lot of it is resource-based to Africa. So, I call that pretty normal FDI because it’s downhill. It goes from rich countries to poor countries. Indian FDI is what I call uphill FDI. It goes from a poor country. A lot of it goes to the advanced countries, which is not meant to happen, and it goes in highly-specialized and skill-intensive sectors. So, this was not meant to happen in the way we talk about the world economy, but this is what is happening in India, which is that, you know, this is very, very unusual. It shows that India has actually comparative advantage in some of the things that the advanced nations have like skill, entrepreneurship, and so on.

So, having said that India’s – these are all aspects of what I call Precocious India. There are other dimensions of India, which we can talk about, in which either India is different or not so different from your average developing country. I don’t want to spend a lot of time on that, but I’m sure people will be interested.

You know, unlike China, we have a domestic demand-based model of development, not an export led-based model of development, but that’s not particularly precocious. I mean, some poor countries do that; some richer countries do that. But it is different – India is different from China.

And also as a share of – you know, in terms of integration, India is much less integrated than China, although it’s been growing very rapidly, and India found out in the global financial crisis that it, too, was much more integrated on trade and finance than many countries. But then, many people in India believed it still lags China’s substantially.

On the social indicators, India is actually not very bad on inequality. For its level of development, India is much less unequal than, say, China is. It’s about par on life expectancy, you know, given what India’s development – as it should be – and it’s horrible on child malnutrition. I’m saying all these things because, on these social outcomes, there is no consistent pattern about India. You know, it’s good on some, not so good on others, and good on others. But these are just general characteristics, not characteristics of a Precocious India. This is kinda – I’ll skip this. We can come back to that later.

So, I think there are two major near-term challenges, which is that at the moment, India is, macro-economically, very vulnerable. It’s vulnerable because, amongst emerging market countries, it has the highest and most persistently high inflation. Inflation has been at, above, or close to double digits for two years or more. It’s external position is becoming more vulnerable and it has very high fiscal deficits. I mean, these are the macroeconomic vulnerabilities that all of you have been reading in the press for the last, I would say about, almost six to eight months because the rupee has been under pressure, foreigners have been fleeing. And the second – which leads to the second challenge – which is the slowdown in growth and, you know, I’m going to talk about that in a different context.

Now, inflation is very high. I can give you all these charts. The really interesting thing about India is that its aggregated deficit – aggregate fiscal deficit – I consolidated states and the federalist level – is about 8 percent of GDP, which is very high; almost U.S. levels of fiscal deficits. And the – really, I think the point I would make on the fiscal deficits was it was a tragedy, almost a policy catastrophe, that in the years of high growth, when India is growing at about – shh.

Male Speaker: [Inaudible].

Arvind Subramanian: I’m terribly sorry. The catastrophe really was, I think, in the rapid growth years, growth was very high. Interest rates were very low, and yet, we didn’t consolidate sufficiently. That was the major policy error on the fiscal side.

Now, the way I put – now, I want to go to, you know, the growth challenge I think is the most interesting picture here. That, in some ways, one could argue that, in the last two to three quarters, India’s growth has slipped from the Chinese style 8 to 9 percent, to about 6, 6.5 percent. And so, the big question in India is, “What’s going wrong? What’s going wrong?” You know? “How do we respond to that?”

And one could make the argument that, in fact, as – that in fact, the 8 and 9 percent of the boom years were the aberration, and that in some ways, India did not deserve to grow at that, given all the things that India hasn’t done. Because here’s something really important to remember: that if you look at any measure of reform – policy reform, any measure of – policy reform for India and China, either in absolute terms or in changes across time, India and China are laggards. The countries that did the most policy reform are those in Africa and in Latin America. And yet, China and India grew much more rapidly than all these countries.

So, I wanna be careful here. It’s not that India and China did not reform, but the magnitude of the reform and still how controlled and closed their economies are. No comparison between China and India, and all these other countries, so that’s why – which leads to my, you know, proposition that maybe India didn’t deserve to grow so much in the first place. So, the puzzle is not why India is slowing down, but why India grew so rapidly in the first place. And the fact that we have high inflation in India could actually be signaling that supply capacity in India is actually not keeping pace with demand.

Now, I would argue – and this is why I’ve spent a bit of time on the Precocious India Model. One could make the case that this is because India’s Precocious Model is unsustainable. And what do I mean by that? We have developed based on skilled labor, which is actually very scarce. You know, this myth that India has a lot of skilled labor is just not true. Skilled wages have been growing in dollar terms at about 14, 15 percent for 10 to 15 years, and we have a completely dysfunctional system of higher education, which just does not elicit the supply that the economy needs.

So, the fact that we use intensively is – you know, running into capacity constraints. What we have abundantly we don’t use because of the labor laws and other rigidities, which we never used, and there’s very little change going forward that we’ll be able to use it. And then, we have a situation where, you know, scarce social capital – you know, we call them public institutions, call it governance, call it corruption – whatever. That is actually getting eroded progressively. You know, the big governance problem of India – which is an important input into development – that is being undermined through corruption and criminality.

And, of course, what is happening is that land, which is meant to be a relatively abundant factor of production in India, has now become the locus of corruption in India so that, you know, we have a situation where, if you take these four factors of production from a development perspective, what we are using intensively is – we’re running out of it; what we don’t use intensively, we have abundant amounts of it; and, you know, important governance and land are becoming real sources of corruption and a problem.

So, you know, this is a chart that people have been using a lot because I put it up as a blog post. If you look at power losses in India, which is kinda – which is a kinda a metaphor or a proxy for not just what is wrong with the power sector in India, but governance more broadly, you know, India is – this is a measure of transmission and distribution losses as a percentage of output and India is way above any emerging market country. This was on Ezra Klein’s blog as well. You know, India is about five to six times as inefficient and corrupt or weakly governed in power than China is, or even Brazil and South Africa. So, this is, in a way, a kinda metaphor for the governance problems in India.

The way I like to put it is that, you know, the medium-term challenge is actually – one can summarize it kinda in terms of two teams. We have fiscal populism, i.e. the notion that over the last five, ten years, that we need to give away goodies and freebies in the form of subsidies. You know, we have oil subsidies, food subsidies, power subsides, fertilizer subsidies, and in the last about seven, eight years, the government also instituted a rural employment guarantee scheme. So, the notion that fiscal populism is an electoral vote-winner in India is very – has – it kinda has a lot of hold, attraction in India, and that’s a big problem. That’s contributing to, certainly, the macroeconomic challenges of India.

But then, I think what is also happening, from a growth point of view, is – I call this – we’ve moved from one of India’s great statesman who you may not have heard of, a man called – from my part of the country called Chakravarti Rajagopalachari. He said India was a permit-license quarter Raj, you know? He just did not like the Nehruvian Model.

But I think, now, some of those things have come down. We have become, I think, what’s called a rents Raj and, you know, in a piece that I wrote, I said kinda facetiously, “There are three kinds of rents: ethereal rents, spectrum allocation –” absolute disaster and a big source of corruption. The biggest scandal India has ever had was ethereal rents. We have terrestrial rents; land has become a source of corruption. The allocation of land is a big source of corruption now – the biggest source of corruption – and that comes in the way, for example, of extracting coal, which in turn, affects power, and infrastructure, and growth indirectly. And then, of course, we have subterranean rents, which is the whole coal phenomenon in India where we cannot get access to coal because the mining rights, again, are really a disaster.

So, in the medium-term, in some ways, fiscal populism and this rents Raj is a serious impediment to growth in the medium term. But then, you know, you wake up and say, “Well, there is the other side to India as well.” And I can make a case – “How can you keep India down?” You know, i.e. that India will actually grow at about 8 to 9 percent over the next 20, 30 years.

And what are the counterarguments? I mean, I think a simple counterargument – one of them – is that India is still, actually, very, very poor. It is at about 8 percent of U.S. per capita GDP, and so, the scope for catching up the economic frontier is just enormous, you know? You have to do very little to actually be able to grow rapidly, and maybe India has crossed that threshold of having done the minimum, and you have a big market, and so on. So, you know, maybe we will have rapid growth going forward.

Everyone talks about the demographic dividend, which is, you know, a source of dynamism in terms of labor force. And then, I think, what is happening in India is that, although there have been no reforms in India or no serious reforms, the way the Indian economy is doing – has been doing well – is because of what I call a Growth Begetting Growth Dynamic. You know, because India has somewhat managed to grow for – what – 15, 20 years, suddenly becomes a very attractive place.

And, you know, my favorite example is that if you look at elementary schools in India, teacher absenteeism is, on average, about 50 percent; 50 percent of the time, teachers don’t show up in public elementary schools in India. But what has happened in the last ten years is that because of growth, the demand for education has risen so rapidly that even in these rural areas, private schools have come up. Not the best solution necessarily, but in fact, exactly in those districts and states where the public education system is the most dysfunctional is where you see the most rapid rise of private schools in India. So – and that’s a response to growth itself; it’s not that, you know, there have been independent reforms, but growth begets reforms.

And I think, finally, what I really think is where the promise for India lies is two-fold – is this combination of the dynamic of competition between states. You know, take power, for example. Very bad on average, but some states are doing very well – Gujarat is the most famous example – and that creates both a demonstration effect, and capital and labor move in a way that puts pressure on other states within India.

And – but it’s not just that there is this dynamic of competition, but that is increasingly being combined with, I would call, the most heartening phenomenon – is that politics at the state level is responding to economic governance and economic delivery. And so, in the long run, if politics – democratic politics – could actually reward good economic governance, that is India’s hope.

Now, my – you know, Indians are very wistful about, “Oh, we wish we could have Chinese centralized decision-making authority.” I say that’s nonsense because I believe in the Donald Rumsfeld rule that, you know, you go to bat with the political system you have; not with the political system you wish to have. India will never have the Chinese political system, but if, through democracy itself, we can overcome some of these economic governance problems, that is India. So – and in the last two to three election cycles, you see more and more broadly, good governance being rewarded by – through reelection at the state level, and there are many examples which we can go into.

So, you know – and all that translates into the fact that India is a nation of hustlers, so the private sector is doing well. Skilled labor is in scarce supply, but, of course, you get this endogenous response of skills. You know, maybe unskilled labor – there’s a demographic dividend we’ll come by. Maybe – you know, even in terms of governance, if you find this responsive politics, maybe some of this can be partially overcome. We have a vibrant civil society in India, and so, that’s kinda the positive spin on the medium-term challenge.
I am completely agnostic about, you know, whether I believe in the pessimistic view in India or this thing. We can talk about that in the discussion.

I want to end – you know, I think I’m still within my time limit – speak about the long-term challenges. I think – I mean, I’ve alluded to this so far. I think what – I think there is a race between rot and regeneration, and I don’t know which one is going to win. I can tell you all the reasons why economic governance, economic institutions, political institutions are deteriorating in substantial and very disturbing ways, but I can also give you examples of regeneration happening and the whole democratic responsive politics.

So, again, as I said, I’m a little bit agnostic, but I think, in some ways, this is the big long-term challenge. If politics can respond, then there is some chance of overcoming what is a serious deterioration in economic institutions.

The other way to think about India, you know, in a very kinda broad picture-sense, I think India – you know, the historian Ram Guha says that, you know, “What is unique about India is that we have many, many more axes of difference and discord than your average developing country.” You have the class axis, but that’s common to many, many countries around the world. And I know, it’s true that, you know, this is getting – inequality is accentuating this source of discord. But that’s not very interesting because, you know, I think many countries have that; we can talk about the inequality problem.

But I think if you look at the other axes, language was an axis of discord, especially in the early years. I think India has, by and large, overcome this problem. This is not a serious issue any more, so that’s a plus check for India.

Caste – horrendous axis of discord, you know, historically, etc. But I would make the case that, amongst these axes, at least India is finding a way of overcoming this because – simple. Electoral politics and numbers means that the backward caste have acquired caste have acquired political power – lots of cost to this, but they also found economic opportunity. They’ve found just a lot of subsidies and so on, but they have found a way of overcoming – partially – all the baggage that was put upon them by the historical, the hideous historical hierarchy in India of caste. You know, most famously, they’ve acquired political power in Uttar Pradesh for many years, also in Bihar. So, just the numbers have worked in their favor. And while I don’t mean at all to suggest that the caste problem in India is over, all I’m saying is that I can see that, you know, the water level in this cup is rising.

I think the two axes of discord we haven’t solved is religion and what I would call, you know, the geography and the tribal problem. If you look at indicators, I think the Hindu/Muslim problem, I think the economic – economically, I think, you know, the backward caste, the [inaudible], are seeing improvements in their standards of living, opportunity, and so on. We don’t see that to the same extent for the Muslims in India and I think that is an axis that I think is a potential source of problem always in India.

And, finally, I think, you know, the big one we haven’t cracked is the tribal problem. I call it the kinda geography axis because most of these people live in a heavily-forested band in Bihar, Jharkhand, Chhattisgarh, Orissa, Andhra Pradesh. It’s kinda a band in Eastern India where they’re basically tribal. They’ve actually not participated in the market economy and, of course, it is the hotbed of Maoist insurrection in India, you know? And that is a serious source of security risk for India because people don’t realize that the writ of the Indian state does not run in this part of India. So, what – 75 to – 20 to 25 percent of India, the writ of the Indian state does not run. And, you know, these people are marginalized, out of the system, and therefore, always a source of problem for India.

Now – and I think there’s really – there is – you know, I had this big – the security angle, the whole South Asia regional angle, and I’m not an expert. We can come back to that, but I do think a big long-term challenge is resources, especially land and especially water, which is becoming scarcer and scarcer, and so, there’s a whole geopolitical angle with China on this. There’s the climate change angle. I think water is going to be a real source.

So, let me end by saying that, you know, you can wake up on any one day, and put on the optimistic hat about India or the pessimistic hat about India. And I usually end talks on India with my favorite quote from this great book by Wendy Doniger called The Hindus and she says, “Every –” so, I think India is like a Sanskrit word. And apparently, every Sanskrit word means itself and its opposite. So, John Robinson famously said of India that, “Everything and its opposite is true about India.” So, it’s like a Sanskrit word. Everything and its opposite is also true about India. But every Sanskrit word also represents a god and a position in sexual intercourse. So, that, I think, in some ways is what I think about India that, you know, it is both itself and not itself. Thank you very much.

Shuja Nawaz: Thank you very much, Arvind. As advertised and as promised, I knew you would deliver. It’s a very provocative, wide-ranging talk and I’m sure there are going to be tons of questions that I’m sure you will have answers to.

I’m just reminded, after your last few comments, about whether the glass is half full or half empty, of the way a very dear friend of ours, Sir Hilary Synnott, who used to be Ambassador in Pakistan for United Kingdom and High Commissioner, once described when he was talking about Pakistan. When we were discussing the future of the country and he said, “It’s not a question of whether the glass is half full or half empty; the question –” and he used his engineering background. He said, “The question is whether the glass is too big.”

Arvind Subramanian: Right.

Shuja Nawaz: And so, I’m wondering the glass in India is growing too fast to keep up with.

One of the points that you mentioned at the beginning was the fact that India has relied on a domestic growth model rather than an export-led growth model, which is what the international organizations had been purveying to the world, particularly the developing world, for decades. And I’m wondering. What do you see as the one or two key elements in that? Will there need to be a greater infrastructure investment? Will there need to be an opening up to foreign direct investment in the Indian economy? And then, what are the prospects of these?

Arvind Subramanian: Should –?

Shuja Nawaz: Yes.

Arvind Subramanian: So, you know, India as shown that – you know, India, a country, can grow rapidly without being a manufacturing, export-led model. I think the big difference between India and these other countries has been, as I said, that we’ve used skilled labor; we’ve not manufacturing exports as much as services exports, but by and large, it’s not been based on foreign direct investment and not been based on a heavy reliance on foreign markets.

Now, I think that this model is sustainable. I mean, I think going forward, it’s not the case that we necessarily need lots of foreign direct investment and so on, but I think – let’s take infrastructure, which is actually a good example, and take power in particular.

Now, it bothers me that routinely people say, “Oh, India’s needs are – India needs 500 billion in foreign resources for the infrastructure – in resources for the infrastructure sector and that most of it has to come from abroad.” I don’t agree with that because, for one thing, China has shown that, you know, all its infrastructure has been in the public sector and it’s not been based on getting foreign savings. China has got foreign direct investment in manufacturing, but in the infrastructure sector, it’s basically been domestic. Now, the reason I get a little irritated with that is because one plays into this conventional Washington consensus view that, you know, “Oh, we need more globalization and more foreign direct investment.” When, in fact, the problem of infrastructure and especially the problem of India, is simply a governance problem.

I mean, let me make it very, very simple. That, you know, people don’t pay for power in India; that’s the bottom line. And if people could be persuaded to pay more, private investment, domestic and foreign, would come rushing in. And, at the moment, you know, when foreign direct investment comes in, they need guarantees because people don’t pay, and then, our state laxity boards are very badly run. We had the whole Enron problem where the guaranteed returns were given and the whole thing blew up because of, you know, all the problems with Enron.

So, I think it’s basically a domestic governance and a political problem where the whole – the notion that every politician of any stripe, routinely, the first thing he will promise when he gets elected is free or subsidized power. And the conundrum is this – that why is it that people buy this promise? Because the history of this promise of free and subsidized power is a history of no power and interrupted power. So, why do – you know, why does politics not change?

And, as I said, the opening that I see now is that as more and more states like Gujarat, and Himachal, and Tamil Nadu to some extent, as they start delivering power with payment and – people then say, “Well, it’s a much better model.” And, in fact, one of the really interesting experiments in Gujarat now is there are two – farmers have the choice of two sources of power: cheap power, no guarantees on reliability; more expensive power, guaranteed. And we shall see and I think it looks like more and more farmers will opt for the latter option.

So, coming back to your question, I don’t think it’s globalization and inadequate globalization that’s holding back growth infrastructure. I think it’s fundamentally a political and a governance issue, the solutions to which are entirely domestic.

Shuja Nawaz: Arising out of this is – a lot of people say that India has an insatiable appetite for energy and it’ll need every ounce of energy that it can get. Particularly in the near to medium term, if India is unable to make this shift in governance that you are suggesting, is there a possibility of taking a regional approach? Having a very different set of relationships regarding water, power, with its neighbors all around, not just to the west, not just to the north, but to the east as well?

Arvind Subramanian: I think that’s an excellent point, Shuja, because I do think that on energy and power, I think apart from whatever India needs to do domestically – just to give you an example, the fact that we have power subsidies in India has meant that the water table has basically – is dropping tremendously. And I do think that a regional solution, which both to China’s – India’s north and to India’s west, i.e. Pakistan, China, you know, Sikkim, and all the countries there, I think one has to have a regional solution, I mean, for two reasons.

One, of course, is that China controls the water table and, increasingly, it will control the water table when water is becoming scarce. So, I think that element has to be – and then, the other element, of course, is that many of these states, including Pakistan, have a big potential in hydro-based power, which I think India should use and substitute for its own coal-based. So, both for the climate change problem, for the regional security problem, and for the water problem, I think we need a much more regionally-cooperative solution to this problem.

Shuja Nawaz: Thank you, Arvind. I’m going to open it up to the audience and I request you to be patient. I will recognize you as I see you, and if I miss you, please, be patient with me. Please, wait for the microphone. Identity yourself, and then, ask your question. Can we start here, please?

Teresita Schafer: Thank you. Teresita Schafer from Brookings. I wanted, actually, to extend the first question that Shuja asked about the appropriate model for India’s future economic growth.

You suggest that the Precocious India Model may not be sustainable. I think, reading between the lines of your presentation, you also suggest that the conventional model, where you start with agriculture, and then, graduate to flip-flops and textiles, may not be adequate for a country of India’s size. Although, textile certainly has been an important sector.

Are we looking at a time when India is gonna need to experiment with different approaches? Or, perhaps, more fundamentally, follow the logic of what works in an economy where the private sector has already begun doing more, and use that to drive India’s future development, while concentrating on things like governance and education?

Arvind Subramanian: So, Teresita, I think I would separate your question into two parts. One is this whole private-sector-versus-government-led model of growth, and the other is more the kinda skill-based-versus-unskilled-based model of growth. I think these are two analytically distinct questions and they both are extremely – very important and very good questions.

Let me take the latter one first. My view is that India has adopted this unusual Precocious Model for a number of historical policy choices, you know, that Nehru made and so on, right? Would it be desirable to go back and use our unskilled labor more intensively? I think, undoubtedly, it would be because I think that’s where the needs are, employment, and so on.

Is it going to happen? I don’t think it’s going to happen because the pattern of specialization is like a Titanic; it’s not easy to change that. And just to give you an example, routinely, now, if you go to manufacturers in India, you will find the situation where they’re thinking of substituting robots for unskilled labor. And you read Ed Luce’s book, there are several examples of that.
So, much as I think it would be desirable to accommodate unskilled labor, I just don’t think – as a matter of history, and hysteresis, and persistence – that’s going to happen.

The sad, unfortunate, and unsaid tragedy of that is we’re going to persist with the skills-based model of development and, hopefully, India’s skill level will catch up. But the consequence is that a number of one or two cohorts of unskilled labor will not benefit from the opportunities of growth; that’s just a sad and inevitable corollary of this pattern of development.

So, my urge or plea would, therefore, be that of course we should improve our labor laws to encourage hiring of unskilled labor, but given a choice, I would focus much more on getting skills upgradation in the economy, improving our higher system of education, because that’s where the demand is going to be going forward.

So, that’s on the economic analytics of this; on the other private-sector-versus-market-based model, the government-based model of development, here’s my slightly controversial take on this. I think people forget that growth requires a healthy public sector, which performs all these basic function, and a dynamic private sector. India has achieved, or is in the process of achieving, the latter. The private sector is very dynamic.

The problem is that the public sector is a drag on India. The reason I feel pessimistic is because I feel that, in the long run, history and experience – the history of economic development teaches us that it’s much easier to create a private sector than it is to create and maintain an efficient public sector that delivers basics – the basics of maintaining law and order, the basics of maintaining property rights, the basics of stabilizing the economy, and the basics of legitimizing the economy via transfers, etc., etc.

These are all very demanding attributes, but very important attributes. Western Europe and the United States took a long time, but they achieved that, and that is, in some ways, the basis of prosperity. I often say that, you know, there’s as much entrepreneurship in Soweto or Mumbai as there is California. That’s not the problem. If you read Kate Boo’s book on the Mumbai slums, there is no dearth of markets. There’s markets for flesh, for, you know, waste, you name it, but we don’t want to live in the Mumbai slum because the basic infrastructure that governments provide, law and order, etc., is missing in Mumbai. So, that – and I think that is eroding in India and it’s much more difficult to reverse. So, that’s where we stand. The private sector will do very well in India, no problem. I have no problems about the private sector at all, as it will do well in any part of the problem, but it’s that basic provisioning essentials that the public sector has to provide that, I think, is a much more source of worry in India going forward.

Shuja Nawaz: It’s interesting. In my visits to both India and Pakistan, when I’ve talked to entrepreneurs, the one thing that they say in both countries is that whatever they’ve achieved, they’ve achieved in spite of government, not because of government.

Arvind Subramanian: Right.

Shuja Nawaz: And they want the government to step out of the way.

Arvind Subramanian: But sure, you know, I think that that – you see, I – to be totally candid, I find that a little bit, you know, self-serving what they say because they rely a lot on what the government does and does not provide. And if the government does not provide social stability, for example, or law and order, you know, these guys are not going to last.

So, I think that’s exactly the kind of discourse and conversation that, I think, bothers me about what’s happening in much of the region. That you say, “Oh, government is the problem.” Yeah, sure, government is the problem. Of course it’s been a problem, and in the past, government has been overbearing and over-intrusive, but the response to that is not that government should get out of the way, but, you know, government, as Teresita was implying, should do a few things, but do them really, really well. And in India, that’s not happening.

If you look at the judicial system, for example, the backlog of cases in the state courts are 30 years, you know?

Shuja Nawaz: Thank you. We have a question here.

Surjit Mansingh: Thank you. On this issue of governance, which I agree is the key issue in India today and tomorrow –

Shuja Nawaz: – Could you identify yourself for the audience?
– Oh! I beg your pardon.

Shuja Nawaz: Please.

Surjit Mansingh: Surjit Mansingh, American University. Wouldn’t you say that the discourse within in India today is, in fact, focusing on these things? That there a lot of people – I can name them; they’re friends of mine – who are recalling the provisions of the Constitution, who are recalling what was achieved by government in the 1950s, in the face of enormous tragedies and challenges.

And so, as you pointed out in your talk, the demand for good governance is growing. And I agree with you that the whole discourse on private versus public – I mean, one only has to go back to Polanyi.

Arvind Subramanian: So, see, that’s why I think, you know, I say there is a race between rot and regeneration. I think the rot, one can see. I think the regeneration is partly because of what you said – that, you know, the demand for governance is a superior good. The demand for governance increases as people become richer and demand more.

I think the other reason for being hopeful about regeneration is that, you know, the fact that India is so open and transparent, and you have really vibrant [inaudible] society and press, that at least the more egregious – the problem is that all these things come to light, but nothing is ever done about them, you know? Enforcement never happens in India.

So, I think there is a lot going on, and as I said, as more and more good governance gets rewarded – so that’s, I think, the regeneration part. But, as I said, both are happening in India.

Shuja Nawaz: I’m sorry. I missed the lady in the back. So, we’re gonna get to her and I’ll get to all the others that I recognize, not to worry.

Polly Nayak: Polly Nayak, independent consultant. I wanted to ask two questions. One is, “To what extent do you think the export of investments by the high-end Indian companies is a function of push rather than pull?” Obviously, they calculate their relative opportunities in economic terms, but to what extent is there a governance issue here? It makes more sense for them. It’s more secure and predictable in other venues – because that’s been going on since the ’70s with some of India’s best corporations.
Arvind Subramanian: – Right.

Polly Nayak: The second part of my question, which relates to governance is, “What role do you see for popular anti-corruption movements in the transformation or – we hope – future transformation of governance in India?”

Arvind Subramanian: See, again, both excellent questions. On the export of FDI, it’s true that – you know, and this is something that’s actually happening to a similar extent now in China where, you know, because of uncertainty about the domestic regime, the notion that capital is fleeing as kinda insurance and push. I think it’s only partly true for India because the period over which this actually surged – this phenomenon – was the period in which India was growing rapidly and foreign capital came flooding into India.

So, I think what this export of FDI – until recently – I think now, things are changing to some extent because of all the uncertainty in India, but until very recently, for over a ten-year period, most of it was because Indian entrepreneurs and Indian management showed that they were capable of running world-class companies, not just domestically, but internationally.

So, I would say that the push factor has been relatively muted until recently, and therefore – on the popular anti-corruption movements, see, I am not an expert on this and this is certainly above my pay grade, but I think the pattern is that – I think what – I mean, the fact that there’s so much mobilization and consciousness-raising, I think, is unambiguously good. The point is, “How does it get channeled subsequently?” and that’s always been a problem, even with the latest – the Anna Hazara movement – the whole thing, you know? The fact that we don’t actually see the concrete manifestations of that is a bit discouraging and, you know, the fact that now he’s started a political party, people are not very sure that that’s the way forward.

So, I often say that, in India, you get episodic accountability. You don’t get ongoing accountability in India, and these movements give you those episodic bouts of accountability, but I wish it would get translated more into basic structures and institutions changing in a way that we get more ongoing accountability.

Shuja Nawaz: Thank you. Question here?

Walter Jurešić: Good morning. My name is Walter Jurešić. I am member of The Atlantic Council. It’s quite interesting debate. I wish I could have more time with you to discuss.

Arvind Subramanian: Sure.

Walter Jurešić: The question for you is – question and comment. Global village and corporate control, and then, you mentioned many times segregation between skills and unskilled workforce. Why we have to concentrate on that? Because I do not believe it. Every individual have some kinda skills, so we should go to the transition from unskilled workforce to skilled workforce. Not everybody is going to go to college, obviously, but maybe on their own they will have an interest to go to college.

And the other comment and question for you: why we cannot create stronger private-public partnerships in those country, including India, which is very critical? Thank you.

Arvind Subramanian: You know, I mean, I don’t wish – mean to, in some ways, say that, you know – make a kind of judgment about skilled is good and unskilled is bad. I just think that the way the modern economy functions and the way that India’s shape of an economic state has traveled that, you know, we – the demand in the economy is for skills, not that much for unskilled people. So, the question is, “How do you address that?” I mean, it’s just a practical question. How do you address that?

One way is to do what the East Asians did and what China did, which is to actually – you know, the pattern demands more unskilled labor, which is actually what the country has in abundance. In India’s case, that’s not been the case. So, as I was trying to say earlier – that the choice is, “Do you make the ship of state move – turn around and move towards unskilled specialization? Or do you upgrade skills?” And, I think in India’s case, I think one will have to upgrade skills.

But it can’t be done easily. It can’t be done easily, and the same governance problems we have in the infrastructure sector, we have in the higher education sector. So, skills upgradation and higher education is not easy to do, either. So, that’s, I think, a dilemma and there’s no kinda value judgment about skilled and unskilled this at all.

You know, all public-private partnerships – it’s become one of these terms that – you know, or things that – it’s become almost a fad, you know? I don’t really know what it means. What does public-private partnership mean? Every thing – every damn thing is – every economic activity – is a public-private partnership.

You know, and in the Indian case, essentially, what it’s become, especially in the infrastructure sector, is basically the government saying, “Look. We’ll give you land, and we’ll look after the land problems that we have, and the rest is yours.” Now, if that’s a way of going forward, I’m all for it. But frankly, in the Indian case, that’s not been that successful because the whole allocation of land has become such a source of corruption that, sometimes, you wonder whether, you know, this is desirable in the first place or not. So, I’m all for PPP or whatever that means; I just don’t know what it means.

Shuja Nawaz: In many ways, this is the government wanting to continue the rent-seeking. So –

Arvind Subramanian: – Exactly, yeah.

Shuja Nawaz: – keeping its hand on the tiller and in the till.

Arvind Subramanian: Exactly.

Shuja Nawaz: So, maybe that’s the way to describe it. The gentleman in the striped shirt? I’ll come to all the others also. Please, don’t worry.

Muneer Sheikh: – Good morning. I’d like to draw your attention –

Shuja Nawaz: – If you could identify yourself, please.

Muneer Sheikh: Yes, my name is Muneer Sheikh. I’m a ex-Executive Director of Electricity Regulatory in Pakistan. I’d like to draw your attention to the electricity sector. A blackout is on everybody’s mind. Was it an accident? Was it expected to happen? Worked in the region and knowing about the electricity problems in India, I knew for a long time the integrity of the electricity grid was an issue. There were large frequency oscillations from getting the power from east to the west and it was alarming.

And so, where do you – if you were to – there was a need for infrastructure development to support the high-voltage network and it didn’t happen. Where do you assign the blame or where you think the problem occurred? Looking back at the California power crisis and New York power crisis, we find out that it could have been easily fixed and there were some problems; we just never paid attention to it. So, could you, please, comment on the blackout in India?

Arvind Subramanian: Firstly, you know, I’m not an expert on the technical aspects of the power grid in India, so what I’m going – I mean, what I – I don’t have much to say by way of – I only know as much as you know in terms of the proximate causes for this problem, which seem to be that some states overdrew because of the drought and because of the fact that the water table had come down. The monsoon has kinda partially failed this year, so the demand for power had gone up, and the supply of power had come down.

And, clearly, what had happened was the governance problem comes back here in the sense that, you know, technically there are limits on how much each state can draw on the grid, but clearly, those were flouted and those were flouted probably in connivance with public officiants. And then, that must have set off the trigger. So, I don’t – apart from – that’s all I know and, you know, I don’t know very much more about the power sector in India.

To me, the much bigger problem – you know, as, actually, Shuja was saying while we were talking, I mean, the amazing thing was it got fixed so quickly, you know, compared to the Pepco problem that we saw – I didn’t have power for five to six days. But that, I don’t think, is the real issue in India. The real issue on power is the chronic under-supply and governance. And I think that is the bigger problem of power in India.

Shuja Nawaz: Thank you. The gentleman in the white shirt over there?

Male Speaker: Yes, I am Dr. [Inaudible] with the [Inaudible] American League. The answer was very simple to the power shut down. Just say it was a conspiracy and that will be much easier for you.

Anyway, the – you mentioned so many things. It was very enlightening for me. How far, successfully, India is managing its population? Because the pressure – population pressure on the infrastructure can become very burdensome and it gives tremendous difficulty to a nation to take off.

And the other thing is, “What is the number of people [inaudible] in India who are below poverty line?” And the nation’s security is nothing but the reflection of your economic strength. And the defense budget of India, if the policy of reconciliation and resolution of issues with neighbors is adopted, and India reflects a softer image, won’t it be very helpful, then, diverting money resources to improve the quality of life, living conditions, and future of their future generations? Thank you.

Arvind Subramanian: Let me take this in order. Population pressures – you see, you know, the world over, there’s been a big shift in the conversation on population, right? That, in the ’60s and ’70s, we spoke about population being a problem, and then, you had Family Planning, birth control, all these things. And then, suddenly, with the East Asian miracle and thereafter, the whole question became, “Can a certain structure of population actually be a source of dynamism?”

So, the focus was shifted from the level of population to the structure of population, and that’s the sense in which, now, people are saying that India has a demographic dividend ahead of it because it has a young and growing labor force, which will save more, which will keep India competitive, and that’s what happened in East Asia. That’s what happened in China, and now, next to happen to India. And conversely, aging is a burden, you know, even though you may have a smaller population; but if it’s an old population, it’s actually a problem, and that’s what looms ahead for China.

And I think – in India, so we have this same situation where I think that, going forward, I do believe now that there’s a huge source of buoyancy coming from India’s – the fact that it’s going to have a younger population. But that is as much a statement about potential; it’s not a statement about what’s actually gonna happen because the fact that you have the capacity for dynamism doesn’t mean that they’ll have the opportunities to actually fulfill that. So, I think the government still has a big challenge ahead to convert opportunity into – capacity into action, you know, jobs, and employment, and so on. But, nevertheless, I do think that it’s a source of pressure – it’s a source of dynamism.

The other thing that’s not recognized about India is that India is, actually, very, very different demographically within India. Kerala and many southern states are now, in fact, heading towards aging. You know, much of the demographic they’re growing is going to be in the hinterland, you know, Bihar, Madhya Pradesh, Uttar Pradesh – which is the most populous part of India – is what is going to generate the biggest increase in this young population, and the other states are actually going to start aging soon. So, India is a very interesting mix, even in terms of demography.

Poverty – I mean, the two things I would say is that, you know, India’s poverty has come down a lot. It’s a very controversial subject – the numbers. I would say something like the current estimate is something like about 20 to 25 percent of India is under the poverty line, which used to be about 50 percent in 1983. It’s a substantial reduction, but it is not as big a reduction, given how much India has grown and given comparable experience in China. So, India has, in that sense, lagged behind. And the experience of the ’90s and the 2000s has been not as good as the experience of the ’80s when, actually, poverty came down much more because it was much more agriculture-based.

On this whole, I think, defense and development question, I mean, I think in an ideal world, yes, you know, if all countries could do – could convert swords into plow shares, everyone is better off. But we don’t live in the real world and, you know, there’s the whole question of, “Well, what is the external environment? What are the biggest security issues in the region?” And, also, “Can you do this unilaterally or can you do this –?” whether you have to do this in concert with other countries.

I mean, I would certainly be – you know, because, for example, he problem in India – just to be a little bit controversial – is that, in India, the big strategic thinking is now – on the defense side is – about the threat posed by China and the need to kinda keep up with that. So, I don’t suspect – I don’t expect Indian defense spending to decline over the next few years; quite apart from the India-Pakistan issue, you know, which is – has its own history and baggage. The big question is whether China is increasing its defense budget to rival that of the United States, and therefore, you know, there is going to be collateral effects on India. And so, India is going to be, I think, trying to match China. So, I’m not optimistic about – much as I would think, I would hope, that that’s the way all countries would go, I don’t think India will go in that direction.

Shuja Nawaz: Thank you.

Robert Dohner: Hi, I’m Robert Dohner from the Treasury. I agree that governance is really important, but I think it’s a decades-long process, and as much an output of growth and development as an input. We’re all in the policy business and I wonder if you’d talk a little bit about what importance you think episodes of policy change have in spurring growth and also retarding growth in India. And if policy episodes are important, what is the scope for policies that could lead to sustained growth over a reasonable period of time?

Arvind Subramanian: You know, since you’re from the Treasury, you know, let me be provocative – is that Montek Ahluwalia often says that, you know, “When U.S. –” often, even, for example, the IMF, the World Bank, and the United States, they go to developing countries and say, “Change the policy. Policy reform – very important.” It’s kinda what I call the Nike Approach: just do it. And then – but then, when you talk about equivalent reforms in the U.S.A., “Well, you gotta understand. We’re a very complicated political economy here. Congress is this and this is that.” You know, all those issues are raised.

And my response is that, in a country like India, those are absolutely and equally true in a country like India. So, while I do – I am a complete believer in the need for policy reform, I think, just as you said, governance is endogenous; policy is also endogenous. Policy reform is also endogenous.

And the way I think it happens is, you know, democratic politics has to make policy reform electorally popular and positive. And I think, you know, to some extent, it’s happening in some parts of India. But to some extent, it’s not happening.

So, I take the view that – just as you said – governance is endogenous. I think politics – or to put it differently, the degree of maneuver or the degree of maneuver for leaders in India to kinda unilaterally and kinda just from top-down institute policy reform, is not as great as outsiders might think. And that’s, I think, the understanding that people will have to have about a country like India, or even now like China, you know? Much as it’s much more top-down, centralized decision-making, even China is now subject, increasingly, to publici opinion and so on. So, I think it really is a complicated business, policy reform, or at least it’s as complicated in India as it is in the United States.

Robert Donher: Okay, well, I’ll be provocative in return.

Arvind Subramanian: – Okay, yeah.

Robert Donher: I mean, there are countries where growth accelerates and there are countries in which growth slows substantially. I’ll go out on a limb and say that it seems to be associated with episodes of policy change and the real question for all of us in this business is, “How do you get there?” I mean how do you get to a period where you raise the growth rate, development rate, and sustain it over time? And what are levers? It may be that policy is endogenous, but if it is, then I really despair of your ability – one’s ability to change things.

Arvind Subramanian: I mean, again, I said – I – there is no doubt in mind that, you know, policy reforms are associated with a faster growth. I think that’s unobjectionable. You know, the question is, “How many independent levers do leaders have to pull?” And you can either despair because of what is happening, which is – you know, and I think there is reason for despair, or you could say that – you know, you could take – as I was trying to say that, you know, as more and more states in India, more and more state-level leaders, start getting reelected because they’re doing better governance and delivering, that’s positive and I think that’s the source for change.

And the demonstration effect from that – so, there’s not only the demonstration effect from that, but India, being a common market, labor and capital can move. So, that’s, I think, the endogenous source of optimism in India, not this, you know, Washington consensus, Nike, you know, “Just reform, do it,” and you know, “Change this and change that,” you know, which I am less and less sympathetic to.

Shuja Nawaz: I think you’re pointing to the nexus between political science and economics now.

Arvind Subramanian: – Exactly, yeah.

Shuja Nawaz: – Much more. The gentleman behind the – behind Mr. Sheikh.

Male Speaker: [Inaudible] from India America Today. I came to listen to you and – because I – you know, you do point out some very thought-provoking things and, actually, my questions are based on what you said. You said notion of hustlers; I found it quite degrading because juggad is what – is in India is surviving on today, and that same thing would have been called here, innovation, and then, somebody would have patented it; and it’s just a way of looking it. So, is juggad not a form or regeneration instead of a rot?

And then, the second thing that got my attention was you, in a way, downplayed and ridiculed the role of Anna Hazare as when he flouted a political party. Is India not a democracy unlike some of its neighbors? And India cannot accept a man in the street making or proposing laws, so the man has to get into the political system. Thank you.

Arvind Subramanian: So, on the point about, you know, you don’t the like use of the term “hustler”, I mean, again, I was trying to use it in a completely descriptive sense because, after all, many, many people who use the same term to characterize, you know, the history of the United States from after the Civil War, to – you know, to about 1914. The U.S. was a nation of hustlers and that has both a positive side and the negative side.

And I think the thing to remember about juggad is that, you know, it is a response in a second-best world. So, that’s what – I think that’s the way you have to look at juggad – that, you know, ideally, they should not have reason to overcome all the obstacles placed by government or the environment, but given that those obstacles exist, people are creative enough to overcome them, you know? So, I don’t mean it in a pejorative sense at all; I mean, I think hustling is, you know, is a good thing. I mean, whatever – even though it may have some, you know, pejorative dimensions or aspects to it.

And I didn’t mean to downplay at all the Anna Hazare thing. I think it’s, you know – the nice thing about India is that, you know, if people want to form political parties, all power to them. My only answer was, you know, in trying to respond to whether I think it’s going to be effective, that’s my comment, you know? As I said, you know, “Great. We have this, but will episodic shedding of the spotlight on these problems be useful?” Yes, but it becomes sustainably useful only when it gets translated into changes in structures and institutions.

And, by the way, in all that I’ve said, I place all my hopes in democratic politics in India because that’s the only game in town, whether it’s policy reform or corruption.

Shuja Nawaz: Yes, thank you. The gentleman who has his hands raised, thank you.

Alessandro Pio: Thanks. Thank you for a very entertaining and illuminating presentation. On the topic of political reform –

Shuja Nawaz: If you could identify yourself –

Alessandro Pio: Yes, sure. Alessandro Pio from Asian Development Bank Office in Washington. On the point of political reform that Bob Dohner – policy reform that Bob Dohner was raising, I would say my experience in Asia has been that you see it happening more under two circumstances: so, in light leadership at a time when opportunities arise because you have growth and, therefore, you can make changes because everybody is benefiting; or at times of crisis when you need to have a response because the circumstances are such that you need to do something. So, I think those are, perhaps, circumstance – and I don’t know to what extent either of those circumstances would apply to India.

Two questions for you – one on the low labor skill. You seem to be somewhat pessimistic about the extent to which India can reap the demographic dividend. But, at the same time, the country is largely based on domestic demand and domestic demand would include expansion of manufacturing and services. So, there would seem to be scope for the lower level of skills to be employed in satisfying domestic demand. And the question there – to what extent do you see that possible? And to what extent – given the difference in demographics among states – can internal migration help redistribute the excess labor supply? Or is it such that structuring people – where you don’t move that much and, therefore, that doesn’t really happen?

The second question is more on the international dimension. You mentioned regional integration and how regional leaders can benefit, for example, integration of the electricity grid and other. At ADB, we have been strongly supporting regional integration and, in some areas – say, the Mekong region, Central Asia – we have seen success begin to develop. But I have to admit: South Asia is one of the regions where we see slower progress and more difficulty in regional integration. I would appreciate your views on whether that is also your assessment. And if so, what makes the South Asia region more impermeable or more difficult as in the area for regional integration?
Shuja Nawaz: – Okay, thanks.

Arvind Subramanian: Just before I answer your two questions, I just wanna say that, you know, I would add a third set of set of circumstances when policy reforms happen. One is crisis; two is enlightened leadership; and third is, you know, the endogenous growth. You know, as I said, for example, growth takes off – the demand for education increases. Private schools come up. So, there is that dynamic as well.

Now, on – you know, on this low-skill, domestic demand migration, one of the things I have been struck by in the comparison between India and China is I’ve always thought of India as a place because – you know, because – in some of my – I was presenting something in London last year where Ram Guha and Suha Kilani were in the audience. I was saying, you know – telling them that I think the fact that one of the under-appreciated legacies of the old Nehruvian economics was the fact that once you establish the idea of India – right, i.e. that India is a political entity; there’s a national identity – what the one economic benefit of that is that migration becomes a much more politically-sustainable proposition.

People don’t realize that there’s this politician in Maharashtra, who’s [Inaudible], who’s kinda vehemently anti-Muslim. He began his life as vehemently anti-Tamil. He morphed into anti-Muslim much later because – I know because, when the Tamils used to migrate to Maharashtra, it was a problem.

But I think because the idea of India has been established, I think that’s less of a problem now and, therefore, migration as a basis for sustaining the growth model in India, I think, is part of my thing because, as I said, one of the ways in which good experiments travel or get replicated is when people move. And, you know, we saw that in agriculture – Biharis moving to Punjab – but now, it’s happening more and more.

But what surprises me is how little migration we’ve had in India compared to China. I mean, China has just been a churning factory in terms of migration, and that’s, I think, one of the under-recognized aspects about China. But I think part of that – my explanation – is that, in China, because growth rates were so rapid, that the prospects of such increases in standards of living overcame what are big costs to moving. In India, that’s only happened recently. When you grow at 4 or 5 percent, the attraction of moving is not that great, but when you grow at 9 percent, then the increase in standards of living that you expect to gain, offsets the cost of moving. And that’s why I think it’s slow to happen in India, but it’s happening.

On the – you know, South Asia is less – and I’ve seen study after study saying it’s less regionally-integrated than the rest of many other parts of the world. I think there are two reasons, you know? East Asia is integrated because they’ve all grown rapidly. So, when you grow rapidly, and most of your trade is with each other, there’s going to be endogenous economic integration. [Inaudible] that much policy integration in East Asia as well. So, it’s just the fact of rapid growth, trade-based growth, and a lot of it within the region, that you get this endogenous regional integration – supported by some policy measures, Asean and so on, happening now slowly.

I mean, so, in South Asia, you’ve not had that rapid growth and external, demand-based growth. And the second thing is the India-Pakistan thing, you know? Unless that gets resolved, South Asian integration is not going to proceed; it’s as simple as that. Unless we find ways to crack the India-Pakistan situation, in some way or the other, that’s going to be a problem.

Shuja Nawaz: Thank you. We have two questions here.

Ken Dillon: Ken Dillon, [Inaudible] Press. What challenges does climate change pose to the Indian economy and how do you see India responding?

Arvind Subramanian: So, I mean, I thought I alluded to the fact that climate change is a serious, long-term challenge for India because, I think, the whole water situation in India is a – water is going to be a – it’s a vital resource. It’s going to become a scarce resource, especially, as said, with China controlling the Himalayan glacier.

Now, how is India responding? I think India is not responding very well. A number of things, you know – subsidies means wasteful water use; all the fuel subsidies means that we use more diesel to generate power as opposed to hydro and other things, which means much more environmental pollution. The kerosene subsidy, you know, in India we have this black carbon phenomenon, which is – it’s not just CO2, but an additional layer of complication that’s causing warming.

So, India is not responding very well and the standard explanation or excuse would be that, you know, “We’re still a poor country; we need energy; we can’t do all these things at this stage of development,” which is only partly true because there are also lots of things being done which don’t need to be done.

But my next book is on climate change. My colleague, [Inaudible] and I are writing a book on climate change, a kinda new model of cooperation between developing and industrial countries. I think what is a glimmer of hope in India is exactly this recognition that there’s a China issue with water and, three years ago, a river in Bihar just kinda changed course in such a dramatic fashion that it brought home, to at least two policymakers, the fact that climate change can have these absolutely catastrophic consequences – domestic consequences.

And so, the awareness that India needs to do more on climate change, for climate change and warming, I think that’s gaining more traction in India. It’s far from being translated into action and I think that’s going to be the next step.

Shuja Nawaz: Thank you. Lady – if you could keep it short, please, because we’re about to run out of time. I want to make sure I get everyone in. Thank you.

Stacy Manning: – Sure, of course. Stacy Manning with The American Legislative Exchange Council. We’re a public-private partnership. So –

Arvind Subramanian: All power to you.

Stacy Manning: I’m speaking along the lines of skilled labor. We’ve seen a lack of laborization or, some would say, stagnant laborization in certain markets. I’m thinking specifically of the legal market. And I wonder – can you give us your thoughts on the potential it has for future growth in India? Is that a drag? Will that be a long-term drag? Do we see any progress on that front?

Arvind Subramanian: So, is the question that, you know – yes, it is a drag, but is the first part of your question more related to the fact that India has a – India is closed to foreign professionals coming into India? Is that the –?

Stacy Manning: – Yes.

Arvind Subramanian: – Yeah, that’s the question, right? And there, I think, India is very protectionist on that and there’s, recently, a big Supreme Court case on this, right?

Stacy Manning: Yes.

Arvind Subramanian: You know about that better than I do. And I think that it is a problem. India is closed, but I feel that there is a – I’d be a little bit more optimistic on that because, you see, in all of these things, when a country recognizes that it has an interest in exporting its own labor, the whole symmetry of that changes the dynamic, you know?

So, the more India realizes that it will also have to ship people abroad, therefore, regimes internationally managed – matter for India’s export of skilled labor and even FDI, the more the pressure on India will be to kinda open up.

And I think, also that, you know, a lot of this protectionism comes from the fact that we have a bar council. We have an accountancy thing – you know, all these standard vested interests. But I think the demand for skills is going to outstrip India’s supply. So, at some stage, they have to, you know? So, that’s going to be another impetus for change.

Shuja Nawaz: Thank you.

Thank you. First, let me congratulate you on a very thoughtful and nuanced presentation of India’s prospects.

Shuja Nawaz: – If you could identify yourself.

Male Speaker: – Oh, sorry.

[Crosstalk]

Male Speaker: – I’m [Inaudible]. I’m an Indian journalist.

Shuja Nawaz: Yes.

Male Speaker: All the questions, and also, what you have said – in fact, much of the debate in India – is coming back to this whole governance issue. To get the prices right, to use an old term, you need to get the politics right. The question is, “How?”

I was wondering whether you might like to speculate on whether India’s fiscal administrative structure is outdated. That there is still – there’s – it’s still too centralized. I mean, do we need something like a finance commission, for instance, or should we let states – like in this country – raise their own income taxes and make the central pool much smaller, so that the central governance role becomes much more manageable? I wonder whether you would like to comment on that.

Arvind Subramanian: So, [Inaudible], that’s a great question. That – see, it’s a great question and it’s a great talk because – let me, you know – I think it’s a wonderful question because this is what I say about India: that the advantage of having established the idea of India is that, then, you can let states go, right, because the basic framework is not threatened.

So, in my model of states-based growth, the whole states doing reform, experimentation being rewarded, a corollary of that is exactly what you said – that you need a much more federal economic and tax structure. But so, I see India, eventually, as a model for cooperative federalism, you know, where the basis for dynamism is actually decentralization.

See, and it’s a very interesting contrast with Europe. In Europe, all the tendencies are centralizing as a way of overcoming this crisis, and in India, it’s exactly the opposite. And, in some ways, India is now, today, a bit like where the United States was, you know, maybe 70 to 100 years ago; that, basically, you have the energies being unleashed in a decentralized fashion. But never the threat – and, of course, in the U.S., you needed the Civil War to establish the idea of the United States as a viable political entity that would not be threatened. In India, we have that. That’s the great Nehruvian legacy.

The idea of India, now, is taken for granted. Unleash decentralizing forces, which also means that fiscal federalism has to be much more decentralized, and that’s a necessary corollary of my conception of where India has to go in terms of even its economics and politics.

Shuja Nawaz: So, the bottom line – let’s hear from you. Is the option going to be to muddle through, to kinda let go the growth rate to about 5, 6 percent a year? How does that affect the battle against the population? Or is the option going to be to make those bold changes in policy, the investments in infrastructure, education, etc., so that you can then go back up and challenge China for economic dominance?

Arvind Subramanian: – Sure, sure. I think nothing bold is going to happen in India. So, no big bang reform, no bold reform.

As in most countries, it’s going to be trial and error, muddle through, but, you know – but a trial and muddle through where if, you know, we get towards this decentralized form of decision-making, and experimentation, and success, I think on balance, one can hope for. You know, there will always be problems, always be crises, always be difficulty, but I think India is still – the advantage is that people forget that if you’re so far away from the frontier, there’s a lot more scope for dynamism. I think that basic dynamism, India will exploit, for the next 20, 30, years.

So, always, you know, end up with Wendy Donegal, you know? It’s – with apologies to my audience, you know? Everything and it’s opposite is true in India.

Shuja Nawaz: Good way to end this. Thank you again, Arvind, for a wonderful talk. I want to thank my colleagues that helped put this thing together.

[Crosstalk]

Shuja Nawaz: – And make it run so smoothly. And thank you – thank the audience for being an important part of this conversation. Thank you.

[End of Audio]

Duration: 88 minutes

With the word “sorry,” Secretary of State Hillary Clinton recently opened the door for the United States to continue to supply its forces in Afghanistan through Pakistan.  Getting to this word took months of effort on both sides but “sorry” may not be enough to keep the relationship on an even keel for too long. It will need a sustained effort on both sides. The auguries are not good.

Many factors militate against a stable relationship. A lack of clearly defined aims on both sides works against a lasting solution to the mistrust that pervades the US-Pakistan relationship. Moreover, there does not appear to be a center of gravity to decision making in either side to lead the building of a lasting relationship. The United States seeks a compliant ally that will help an orderly exit from Afghanistan in the waning days of a difficult conflict, and help guarantee peace and stability after the US and coalition forces leave. Its aims inside Pakistan are unclear, as is the  role it wishes Pakistan to play on Afghanistan. Attack the Afghan Taliban or bring them to the table? The US military is focused on getting the Pakistanis to attack the Haqqani Network, for example, while the Department of State is trying to get them to the negotiating table.

Pakistan does not appear to have a clear end goal either.  It has a persistent paranoia built on an anti-American historical narrative that influences its leadership and civil society. In their view, the United States is a fickle friend and mercurial master. It comes and goes from the region. And now even its longer term presence in Afghanistan is suspect, since those troops are believed by some to have been designated to take out Pakistan’s nuclear weapons. Moreover, the United States is seen cozying up to India, Pakistan’s traditional rival to the east, and giving it a greater role in Afghanistan.

Now, that the supply routes to Afghanistan are opening up, and a separate agreement is likely to emerge on compensating Pakistan for its infrastructure damage over the past decade or so, a number of fault lines remain. What will it take to restore balance to this relationship?

First, Pakistan needs to clarify its positive role in the Afghan reconciliation rather than rely on hedging its support while continuing to allow Afghan Taliban to use its territory to attack Afghanistan and coalition forces there. Is its military still betting on a Pakhtun alliance that includes the Haqqani Network to run Afghanistan in the future?  North Waziristan, the Haqqani base in Pakistan, has become a magnet for not only Afghan Taliban but also local Pakistani Taliban as well as Punjabi militants who pose a real threat to Pakistan’s own stability.

Pakistan could either persuade the Haqqanis to exit North Waziristan and take their war into Afghanistan proper. Or, it can risk a long-promised military offensive that may end up consolidating all the insurgents in that territory, and opening a new front that may extend into the Punjab in the Pakistani hinterland.  Pakistan also needs to reach out to non-Pakhtun elements in Afghanistan and help all Afghans create a stable polity and economy after the coalition ceases its major operations in 2014. Otherwise, it risks fomenting fissures inside Afghanistan and creating a reverse sanctuary for its own insurgents on the Afghan side of the border. Without a friendly government in Kabul, it faces the prospect of continued insurgent attacks from across the Durand Line.

For its part, the United States needs to recognize that its unfettered use of drones to attack targets inside Pakistan has knock-on effects inside Pakistan that lead to widespread fear and hatred. Persistent use of drone techno logy has elevated an instrument of war to virtual policy status in the United States. This may be the time to reopen discussions on practicable ways of involving senior Pakistani military officers based in border coordination centers in targeting decisions and rebuilding the intelligence cooperation that netted many al-Qaeda leaders in the past.

The United States must also find better and faster ways of getting its promised Kerry-Lugar-Berman development assistance into the hands of project planners at the provincial level inside Pakistan. In order to do this it will need to invest in helping build Pakistan’s intellectual and physical infrastructure, and restore access to energy while enhancing Pakistani textile exports to the United States. There is no silver bullet remedy for Pakistan’s problems. The United States must work with Pakistan on a broad front but in a more coordinated manner than before.

Internally, apart from a divided and dysfunctional polity, with the civil, military, and judiciary authorities sniping at each other, Pakistan faces a serious economic challenge. Rampant domestic borrowing, a shattered energy sector, inflation, and a low tax-to-GDP ratio have put it in an economic hole. It will need help from the United States and other allies to garner financial assistance from international financial institutions. Most important, it will need to muster the political will and courage to change the structure of its rentier state economy. Until Pakistan takes the actions necessary to fix its economy, international aid will be hard to get. Pakistan’s age-old game is based on the assumption that it is too important to be allowed to fail, so the United States and others will come to its assistance, despite its lack of action on its own behalf. This approach has been nurtured by the US giving in to Pakistani demands in the past and therefore is likely to persist.

Pakistan, like the United States, is in election mode, as the government and other political parties position themselves for a fresh mandate perhaps in early 2013. So, expect no bold decisions. It will take hard work and persistence to mend the misalliance between the United States and Pakistan. How both countries address the issues that constantly threaten their relationship will determine the success or failure of the current rapprochement. Another crisis may well be lurking around the corner.

Shuja Nawaz is the director of the South Asia Center at the Atlantic Council. 

This piece was originally published on Foreign Policy.