*When written in Chinese the word crisis is composed of two characters. One represents danger and the other represents opportunity.* John F. Kennedy , speech (1959)

These days the entire *who¢s who* of economics in Pakistan is predicting a crisis. Among these are Pakistan¢s first crop of economists. These economists are now retiring from their international jobs and have openly started to talk of a crisis. It is surprising that these people who in their jobs held senior positions in international donor agencies, and were held in very high esteem by all economic policymakers, appeared to be always in agreement with the incumbent. They took no open positions then. Is it because policymaking before this was good and things have suddenly deteriorated? Or is the alarmist approach only to obtain some visibility? These are some of the questions that we will be examining in this paper.

Another prominent group that seems to have rapidly reversed its analysis are the donor and international agency employees and consultants who until very recently were saying positive things about the country. Perhaps they have run out of subjects to discuss and research, having gone the route of women¢s issues, environment and social sector development. Do they now need a new flavor of the day to increase their importance? Does it not matter that the previous agendas of women¢s issues, environment and social sector development remain unfinished? Must they always look for fresh fields to conquer? We will attempt to answer these questions. Before we do that, however, let us look at how to define a crisis and examine what the economic situation in Pakistan has been, and how it has evolved. There is a third group that is using the term crisis even more loosely than the economists. These are journalists and left-liberal intellectuals who are looking for crises everywhere. They argue for all kinds of crises: a crisis of state, legitimacy, foreign policy etc. When looked at from this point of view, crisis is synonymous with a dissatisfaction with current status quo. As discussed later this is not only not an appropriate definition of crisis, it makes the term uninformative. As analyzed in this paper, the term crisis is so loosely used in Pakistan that it has lost any meaning. The reader is urged to ask the speaker/writer who uses this term to define it and describe what his/her ¡model¢ of a crisis is.

1. What is a crisis?

Webster¢s dictionary defines a crisis to be *the turning point for better or worse in an acute disease or fever ; a paroxysmal attack of pain, distress, or disordered function; an emotionally significant event or radical change of status in a person's life; an unstable or crucial time or state of affairs in which a decisive change is impending; especially one with the distinct possibility of a highly undesirable outcome.* Looked at from this viewpoint, a *crisis* is a serious turning point where change should be imminent. A crisis cannot persist for a long time it should be relatively quickly resolved. Where it does persist for some time, say as in the French Revolution, it has an internal dynamic of its own and represents a departure from the past. It is this departure form the past that suggests that the crisis period itself will be characterized by instability and uncertainty. It may resolve itself in the creation of a better environment or a deterioration into further chaos and anarchy. But certainly crisis itself represents change.

Despite the confusion of terms, what these various analysts are doing is lamenting that observable trends in the economy, society and body politic in Pakistan are all deteriorating. And since nature does not support continuous deterioration, something has to give. That something will more than likely be chaos unless some changes in policy and society are made. When the change will occur is hard to say.

What this analysis suggests is that we are in a situation of economic and political *distress* with *distress* being defined as a state of continued deterioration. If neglected, this deterioration will lead to a crisis. Distress can persist for a long time and can turn into a crisis if neglected. Economists and social scientists can analyze distress and indicate that the ingredients of a crisis are present. In some cases we can even gain some insight into the nature of the crisis. An example of such a crisis that we know a lot about is a financial crisis.

What we cannot predict is the timing and the outcome of a crisis. A distress situation represents a continuation of current trends. Crisis is a radical departure from these trends. It has an inner dynamic of its own and cannot be understood or analyzed before the event. For example, certain pre-revolutionary situations appear to be evident, yet where and when revolution strikes, is always a surprise to the frustration of revolutionaries. Furthermore, those imbued with the spirit of catalyzing change cannot generate a crisis even with extreme tactics such as terror. This only serves to show how unpredictable such an event is.

We must learn to differentiate between distress and crisis to sharpen our analysis and to make it more meaningful.

2. Analyzing the Pakistani Situation

Without hesitation, one can characterize the Pakistani economy to have been in a situation of distress since the mid seventies. The country has since then run very high fiscal deficits; inflation has remained at about the 10 percent level but has always threatened to break out; and reserves have been low and declining through this period. Growth though steady at almost 6 percent has not led to much improvement in welfare given the high population growth (more than 3 percent per annum. In addition, this period saw a visible decline in the commitment to development and growth as the difficult fiscal situation was barely brought under control through repeated ad-hoc solutions. The victims of this approach were investment in infrastructure and civil society and the public sector moves in the direction of increased rentseeking and maladministration. The deterioration in infrastructure and administration places a burden on private sector investment and production decisions. Moreover, the cost of maladministration and spendthrift policies has resulted in repeated resort to debt financing, both external and internal. The mounting debt stocks have further exacerbated the fiscal situation.

The analysis clearly suggests that the economy has long been in distress. Yet there has been no crisis during this period. Shahid Kardar, a leading economic analyst in the country wrote in 1987 in a book entitled Political Economy of Pakistan that there was a*developing economic crisis* and that *I believe that the State of Pakistan is more likely to be overwhelmed by a political crisis.* He also noted that *we are short on time.* However, growth and inflation have remained stable. There has been no resort to extraordinary debt arrangements such as default and rescheduling. The exchange rate has been steadily depreciating through the period but there have been no sharp changes in the exchange rate despite the reserves hitting fairly low levels on occasion.

Why has the crisis not occurred? The answer lies in the fact that the financing that was required to allow us to limp along in distress was found as and when the country came close to an actual crisis. Fundamental changes that would pull us out of distress were postponed by this means. During the eighties, we saw migration of Pakistani workers who remitted money for use by their relatives at home. That supplied some financing for the postponement of reform. In the later part of the eighties, the illegal drugs and smuggling businesses took off. This allowed a large inflow of dollars into the country --again providing relatively easy financing to the government: easy in the sense that this money did not impose any policy discipline on the government.

Easy money--that which did not ask for much policy discipline was also available internationally. Geopolitical consideration, such as the Afghan war, made external financing from donors and donor agencies easily available without putting in place the required reform. Donor and international agencies were either not aware of the required reform or forced to make easy conditionality loans. The upshot is that financing was available to postpone a crisis but to continue the distress.

Having reached this situation, the policymaker is so used to easy financing that he cannot take the threat of an impending crisis seriously. He is right. So long as overseas workers, informal market participants and donors are willing to finance the Pakistan government¢s indiscretions, like a spoilt child it can continue to indulge itself. The crisis will come when this rug is pulled. The case of Pakistan clearly shows that the international aversion to crisis can be perversely used by a government that is not economically responsible.

3. The genesis of *economic distress*

There is no dispute on the prevalence of distress and that the probability of the economy drifting into a possible economic and financial crisis is now quite large. But what is it that is now helping to increase the probability of a crisis? Or is it that the *crisis-watchers* feel that there is a fundamental change. In studying the genesis of *economic distress* we will be able to answer this question as well as and possible crisis.

The first important point to note in the history of the country is that there has been no serious attempt to make any long term policy since time government of Zulfiqar Ali Bhutto. Both Ayub and Bhutto had a coherent and internally consistent vision for the country. Ayub¢s vision was a strong state-controlled economic planning effort which sought to manage all elements of growth and comprising strong licensing and an import substitution strategy. Ayub¢s strategy was based on the standard prescriptions of the time that were espoused the international development world and strongly endorsed by international agencies such as the World Bank.

Bhutto too had a coherent and consistent vision based on the radical fashion of the time. He went for an even stronger more socialistic state. He pushed for nationalization and an enlargement of the public sector including involving the public sector in the production of goods. His approach was harmful and wrong but it was consistent and an attempt to put long term vision in place.

Since the martial law regime of Zia Ul Haque, economic policy was firmly in the hands of a civil service clique: the GIK, AGN Kazi, HU Beg etc. of which VA Jafri is a scion. Henceforth, I will refer to the group of civil servants who seem to have a monopoly on economic policymaking as the *GIK group.* Regardless of whether all the civil servants are, or are not, associated with Ghulam Ishaq, any one of them who comes into a policy-making position, and chooses to run things the way the GIK group did, can be viewed to conform to this static bureaucratic viewpoint represented by the GIK group.

The GIK group policy was based on maximizing political power on the basis of patronage. Exemptions and privileges were granted. Public sector was expanded and while its efficiency was retarded. Monitoring of public sector employees was abandoned giving rise to a rapid increase in corruption and rentseeking. A blind eye was turned on the mismanagement of the financial sector as the nationalized banks were used to extend political patronage.

All reform that seeks to increase efficiency but was likely to hurt a powerful group was postponed. When pushed, this clique would put government controls into abeyance but never fully withdrew them. Foot dragging on policy was the norm. Attempts at any serious deregulation or development were badly implemented with only one aim of protecting the rentseeking that derives from control. Privatization and deregulation were announced as policy goals in 1977 but there was no serious attempt at either till the nineties. Even then, implementation was less than satisfactory.

The result of this policy approach was to retard the growth forces in the economy. Given official rentseeking and inefficiency, it spawned the unofficial market. The lack of economic policy, the growth of the informal market, the inability to accelerate growth, and especially the continuation of policies that promoted public sector maladministration and patronage, increasingly led to budgetary and demand management difficulties. Over the eighties and into the nineties, we see continually, the fiscal situation deteriorating, and the current account reaching levels that were leading to sharp losses of reserves. As a result increasingly our policies were completely focussed on the narrow issue of budgetary and reserve management. Since, the GIK group was not willing to make any changes, all that could be done was to increase discretionary, senseless and distortionary taxation.

The GIK group was merely concerned with two goals: the maintenance of the status quo and the hegemony of the civil service. There was no attempt to technocratize the service. In fact, institutions were deskilled by this group in an attempt to further these goals. Thus, during this period, there was no attempt made to develop any skills at key institutions such as the Planning Commission and the State Bank. The few technically skilled economists that remained were tacitly induced to leave by means of the introduction of excessive bureaucratic hurdles on their work and promotions. All semblance of recruitment according to skill requirements was given up. Even university and research appointments were not made according to any considerations of academic achievement but only on the basis of who would not rock the GIK group boat. The policy of retarding thought and debate on economic and social issues was strongly in place. The key element in that was exclusion of all groups who had any ideas that were different from the twin objectives of this group.

It is not surprising that economic, social, political and institutional distress accelerated during this period. Investment was slow. The banking and financial system were hurt badly as the process of accountability was eroded. Education and thinking were perhaps the worst hit as recognition took hold that there was active neglect of this sector by this group. The opportunities that arose in this period, such as the middle east migration boom the positioning of Pakistan as a buffer state against communism, were all lost. As mentioned above, geopolitical advantages provided the country with financing on favorable terms. This was not used to build social and physical capital to accelerate growth but only to gain short term political advantage. The opportunity for reform was lost and availability of financing was misused for the preservation of anachronistic privilege. The situation of neglect of the economy has persisted for about two decades. There has been no long term vision or policy in place as administrators were only concerned with the maintenance of the status quo and extension of official patronage. Meanwhile the problems were mounting as neglect led to deterioration.

4. The earnestness of the ¡crisis-watchers¢

Those who are now predicting a crisis were fully supportive of the earlier policies of the GIK clique. The donor agencies conferred honors on GIK making him the Chairman of the Development Committee for two consecutive terms. The Senior Pakistanis in the international agencies were totally supportive of the GIK group, directly in terms of their relations with members of the group and indirectly through the advice and influence that they exerted for the group in their employing agencies. At that time they were not able to see the ¡distress¢ situation for they never alerted us to it.

Is the prediction of the crisis self-serving? Perhaps it serves to increase the importance of crisis-watchers? Are they the only ones who can who can resolve the crisis? Or are they only trying to distance themselves from their earlier allies in case a crisis does occur?

In order to answer these questions let us look at what these individuals are offering as prescriptions. Are they addressing the central problems or is it only a continuation of the earlier piecemeal reform approach that will leave core of the problem in tact? Unfortunately, the ideas that are being offered are the usual prescriptions of making changes to balance the budget: tax improvements of various sorts such as the imposition of an agricultural income tax. A tariff reform to remove protection and allow the domestic industry to become more competitive. Yes, they are all for the announcement of more open and competitive policies! What is more important is what these people are not saying and who they are addressing. The first most important point to note is that like their earlier friends, the GIK group, these people are only interested in talking to the powers that be. They wish only to address the army, the politicians, and the civil service. They too, wish to exclude any economist or technocratic input into the debate. They too, know all the answers, and need not debate, talk and present their ideas for a public debate. They are not for building any institutions especially those that will seek to educate and develop our human capital.

The ¡watchers¢ have very little to say on domestic civil society and governance institutions. The average Pakistani is facing the problem of a breakdown of the social contract where the basic rights that the state is supposed to guarantee are not made available. The state is not maintaining law and order or providing security to the citizen-- both of which are minimum guarantee of the social contract. The current patronage system is ingrained into the body politic and has destroyed civil society. There is no professionalism in the public sector only political whim. In short, all civil society institutions are in a state of disarray making all social and economic activity extremely difficult to undertake.

The ¡crisis-watchers¢ are not asking for any deep seated reform. They are not really for the sort of reform, that Pakistan needs. They have little to say on the reform needed at every stage of the education system so that Pakistan equips its youth for the twenty-first century; they do not argue for the withdrawal of the government monopoly of the media; they have no arguments for decentralization or for the downsizing of government; there is little mention of financial market development such that the interest of the small investor is looked after along competitive lines; and most importantly, no one says anything of a legal and judicial reform that seeks to provide speedy and efficient justice and is a backdrop to all economic action and decision making. These are very significant absences from the *crisis-watchers¢* agenda.

In addition, they have not really committed themselves to the dismantling of the current patronage system, and professionalizing the government. This would mean reforming the current closed civil service system and moving to the more modern system of governance. They would then have to allow the economic management to be professionalized and the new members of the GIK group to not have monopoly over economic management. Most important of all, the *crisis-watchers* are as elitist and arrogant and anti-institution as the GIK group. They will not allow the local intellectual/ economist/thinker participate in the debate. It is quite clear that they would like to use the existing system and institutions to impose their ideas on the people.

A final thought

Perhaps the ¡crisis-watchers¢ too depict the ¡passionate intensity¢ that Yeats describes in his poetic rendition of times of crisis. Things fall apart; the center cannot hold; Mere anarchy is loosed upon the world, The blood-dimmed tide is loosed, and everywhere The ceremony of innocence is drowned; The best lack all conviction, while the worst are full of passionate intensity. W.B. Yeats , "The Second Coming"

Who knows when the best in Pakistan will be allowed into policymaking and mere ¡passionate intensity¢ will not be enough qualification?

But will a crisis occur? As discussed, the accumulated effects of bad policy decisions are taking Pakistan in the direction of an unmanageable situation as defined by our inability to normally service our debts, develop a high inflation and/or increase

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