Globalization Challenges and the Changing Role of the State

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By
Javed Masud*

The forces unleashed by globalization have changed the world and so rapid has this change been   that yesterday’s experiences may have lost their relevance today, and tomorrow may represent yet another form of transformation. There is a lurking fear that the new world is emerging as a crueler place conspicuous by the domination of the powerful over the weak. To some, globalization merely signifies the cultural and economic invasion of the West, as reflected in the proliferation of fast food chains and designer shops. On a parallel track, there is also an increasing realization that the world of yesterday cannot be resurrected and consequently nostalgia for the bygone era would only prevent countries and individuals from availing the benefits of the opportunities that are now more equitably distributed than ever before. In this new “flattened world,” to use Friedman’s description,1  an individual born and bred in the poorest country can now hope to compete with those born into luxury provided he or she is prepared to accept the challenges. It was never imaginable that a simple commerce graduate in a college, say in Faisalabad, could actually master the technicalities of trading on the Wall Street if he has the enthusiasm, inclination and application to benefit from the age of the internet.

The principal gift of globalization is the access to information and its instantaneous dissemination. As a consequence, geographical boundaries or physical location do not constrain nations and states to work closely together. Not only has this made the world flatter but also smaller and more promising. No longer do individuals have to journey towards foreign shores to seek out greener pastures. They can now become full participants in global operations while enjoying the comfort of living in their own countries, indeed in their own homes. Thus, being a part of the global supply chain for products or services has provided opportunities never dreamt of before. However, this windfall is limited to knowledge workers with other skilled and semi-skilled workers deriving only modest benefits from this revolution. Given the nature of demand generated by globalization, the impact is particularly remarkable in those countries that had in the past several decades invested heavily in human resource development  particularly  in  higher  education. These  countries  now dot the global landscape and include East European countries, Ireland, India, China, Taiwan, Korea, Malaysia and Thailand. For all these countries, globalization has ensured that prospects continue to improve with the increasing pace of globalization. Countries which have lagged behind in this field continue to rely on the earnings of migrant workers or are only beginning to partake of the emerging opportunities. Such countries, like Pakistan, can at best hope to capture that segment of the global marketplace, which will be vacated by the front-runners as they graduate towards the higher end of the supply chain.

The technological revolution which has spurred globalization has also impacted closely not only on interstate relations but also on the manner in which nation states conduct their internal functions. And this is the central theme of this article. The potential benefits for nation states are multiple as well as diverse. The state bureaucracy could become considerably leaner; input for policy-making can be sourced globally and in a time-efficient manner; the speed of decision-making and work processing is now much faster; communication both in terms of speed and form is far more efficient. In brief, it is now much easier than ever before for states to provide good governance to its citizens. Globalization also poses new challenges with intensifying competition owing to a freer trading environment. The electronic media explosion, yet another fallout of globalization, has also led to enhanced expectations of citizens for good governance. They are now far more aware of the essentials of efficient governance and also of their own rights. This places added pressure on governments to deliver. It would be instructive to examine how, if at all, the global revolution has influenced state functions in Pakistan.

Functions which are generally recognized as the exclusive responsibility of the state encompass territorial defence, diplomacy, macroeconomic management, preservation of justice and internal security, protection of the environment, provision of social and physical infrastructure, promotion of agriculture, industry, energy, mining and service sector including banking and finance and mobilization of resources (taxation). Although the scope of many of these functions remains unaltered, the manner in which these have been carried out in the past needs to be re-visited and, in some cases, drastic changes are warranted. Again, the needed changes are likely to vary from country to country.

With reference to territorial defence, what is of paramount importance is to determine whether the state is to be viewed as a national security state or as a welfare state. In Pakistan, historically – and for good reasons

– national security concerns have taken precedence over social welfare concerns. The longstanding confrontation with India and the enduring suspicion  about  the  latter’s  aggressive  designs,  compelled  Pakistan to adopt this course of action. It is now time to evaluate this policy dispassionately and objectively. If one were to recognize India’s emerging stature as a regional economic power, it becomes evident that there has been a paradigm shift in its national priorities. Territorial aggrandizement through military aggression no longer features among New Delhi’s priorities because, among other reasons, this could seriously jeopardize its pivotal position as a part of the global supply chain. Furthermore, the inescapable reality is that capturing a part or the whole of Pakistan would only add to India’s difficulties rather than bring it any benefit. It follows, therefore, that New Delhi cannot possibly, at this point in time, have aggressive designs against Pakistan. Pakistan, at best, represents a mere irritant to India and the latter seems to have come to terms with this, Kargil notwithstanding. At another level, the Kargil adventure has adequately demonstrated that India has the will and the capacity to ward off any irritants of this nature. Under these circumstances, Pakistan’s quest for amassing military hardware or expansion in the size of the armed forces requires to be scaled down as the foremost national priority. In recent years, there is an increasing realization that the main threat to the country’s national security is from within rather than from external forces. The rising intolerance and consequential internal strife suggest a society at war with itself. The obvious and immediate requirement is the strengthening of institutions and mechanisms which could help in reversing this trend thereby restoring the writ of the state. While any lasting solution cannot be divorced from ensuring a democratic, representative government, in the short run, the internal security infrastructure needs to be strengthened. This would require a considerably higher resource allocation for preservation of justice and internal security. Currently, the relative share in budgetary allocations is glaringly inadequate with less than 3 percent allocation for “Public Order Safety Affairs.” 2

In the area of foreign policy, interstate relations are no longer conducted in the manner they were in the past. The era of diplomatic missions being able to effectively pursue state objectives is perhaps over. In the prevalent unipolar international order, the relative importance and clout of states is measured largely by their economic strength. It follows therefore that the core ingredient of contemporary diplomacy must be economic and not political. This, in turn, renders largely irrelevant the creation and maintenance of flag-hoisting diplomatic missions in countries which neither offer significant trade prospects nor any other economic gains in terms of investment and technology. This necessitates the strengthening of Pakistan’s diplomatic presence in certain countries and scaling down its representation in others. Furthermore, this needs to be rationalized objectively. Currently, there is an absence of any cogent attempt to correlate the size and strength of a country’s diplomatic mission in another country with the volume of its trade and economic relationship with that country. It is significant and instructive that the South East Asian countries which have had phenomenal success both in attracting foreign investment and increasing  exports have not achieved this through the presence of strong diplomatic missions or large trade and economic offices.

A claim persistently propounded in Pakistan is that the visits abroad by heads of state and   senior dignitaries promote the national interest.

This script was reiterated threadbare during the tenure of the last as well as the current government in order to justify the record number of foreign trips by the President and the Prime Minister. It would, for instance, be very difficult to determine the likely tangible benefits accruing to Pakistan from visits to countries such as Argentina or Bosnia or Poland and several others. Although the several visits to China demonstrate the significance of this bilateral equation, there is not much to show in terms of any tangible results. Given the huge size of the Chinese economy and its consistently high growth, the opportunities for bilateral trade and Chinese investment in Pakistan remain largely untapped. The annual pilgrimage to Davos is another ‘Pakistan Special.’ No other country considers it worthwhile for its President or Prime Minister to participate in the Davos meetings with such regularity. And to what end? The unconvincing reason advanced is that Davos provides an opportunity to introduce Pakistan to foreign investors and to brief them about the ‘land of opportunity.’ Contrast these joy-rides to the very few, short and purposeful visits of leaders of other countries. On his first visit to India in 2005, Chinese Prime Minister Wen Jiabao insisted on visiting Bangalore before getting to Delhi.3  This gesture reflected the high priority that China attaches to collaboration with India in the field of I.T. Given China’s edge in hardware and India’s strength in software development, the collaboration has promising prospects. Pakistan’s leadership, on the other hand, remains fascinated merely by the heady protocol arrangements and shopping opportunities!

In the area of macroeconomic management, the required changes are of particular significance. In essence, the scope of activity by government needs to be redefined with the objective that the government’s role is restricted to acting as a facilitator of economic activity rather than a direct participant. It is in this context that the privatization programme undertaken by past governments in recent years is the right agenda. At the same time, this exposes the government to the new challenges of effective regulation of private sector activity. This requires a qualitative change in the quality of human resource and in the structure of bureaucracy. While the government has succeeded in creating new regulatory structures like SECP, OGRA and NEPRA, Pakistan still has miles to go in order to change the mindset and attitudes of public functionaries to come to terms with this changing role of the state.

The need for improving the efficiency of government is critical but not attainable through any ready, easily identifiable means. This obviously requires a comprehensive set of measures and reforms in the administrative structure. However, the focus of these measures must be substantially different from the attempts made so far primarily through a large number of commissions and committees established by the government. In all these earlier exercises, the main preoccupation was the removal of inequities in different service groups. This issue is not critical for efficiency improvement. What is of far greater importance is the need to identify weaknesses in the decision-making process and in systems and procedures. It is equally important to concentrate on skill and management improvement – through improved training – and to create an environment in which such improvements are duly recognized and appropriately rewarded. The desired output from these measures could take considerable time to materialize. What are the solutions available to the government in the interim period? A possible alternative is to identify certain core positions in some of the key agencies concerned with macroeconomic policy formulation and implementation and to appoint suitably qualified individuals from outside the mainstream bureaucracy.

In recent years, the government has tried to fill the skill gap by hiring individual consultants in various ministries and departments. The benefits of this experiment in terms of enhanced efficiency remain to be seen. However, according to press reports, the consultants are appointed arbitrarily and in many cases without any specific terms of reference. It would, therefore, be difficult for the government to monitor and evaluate the output generated by such consultants.

With greater focus on the role of the state as facilitator, there is also need to strengthen the capacity for effective policy management. In the area of policy management, the government remains responsible for:

  1. creation of a predictable investment environment; determination of a long-term industrial strategy; creation of a competitive industrial environment; and creation of a mechanism whereby the regulatory framework is subjected to continuous monitoring.

The requirement of creating a predictable environment is a prerequisite for stimulating investment but no serious effort seems to have been made so far in this direction. Frequent changes in policy, tariff structure, tax laws etc., continue as before. As a consequence, potential investors are constrained to take long-term investment decisions in the uncertain environment of merely speculating on the direction and nature of future changes. What is of fundamental importance to both domestic and foreign investors is the political stability of government. This, in turn, can only be guaranteed if the manner in which one government is replaced by another is predictable and based on a transparent electoral process. Although the current government owes its legitimacy to a reasonably fair general election, it has yet to demonstrate its ability to create a stable political environment.

Recognizing the freer movement of capital as a result of globalization, the government is making efforts at attracting foreign direct investment. While frequent claims are being made about the success of this effort, a large part of inflow relates to acquisition of assets of privatized units. This could at best be of limited benefit to the national economy, as it does not add to the stock of productive assets. There has also been a growing interest from overseas investors in real estate projects in Pakistan. While this could provide some benefit in terms of employment opportunities and increased demand for construction material, investment of this nature does not involve any transfer of technology. At the same time, the negative fallout of foreign investment in privatized assets or in real estate projects, is the enhanced liability of the state in terms of servicing obligations against repatriable profit from such investment without enhancing the foreign exchange earning capacity of the country. This dilemma is already evident with outflows of annual profit repatriation since the year 2000 already having gone up from a nominal amount of US$96 million to over US$900 million by 2009 – an increase of almost ten times. Other countries (like China, India, Vietnam and Thailand) that are drawing significant benefits from inflow of global capital are quite sensitive to the nature of foreign investment coming in. A substantial part of FDI relates to manufacturing facilities (e.g., China) or in the utilization of indigenous skill-based and knowledge-based manpower (e.g., India). This strategy has a strong positive impact on the local economy in addition to stimulating the foreign exchange earnings of such countries. This underscores the need for evolving a long-term investment policy.

While a well-staffed high profile Board of Investment (BOI) has been established, the main purpose appears to be to act as a marketing platform for attracting foreign investment. The focus hitherto has been on a series of conferences held within Pakistan and abroad. However, contrary to claims made by BOI from time to time, there is hardly any tangible evidence of BOI’s contribution in increasing FDI. The website of BOI contains a plethora of facts but hardly anything of significance which could induce investor interest. The information is outdated – with a lot of actual data not updated beyond 2005. There is a list of 28 companies/firms that were supposed to be attractive potential joint- venture partners for foreign investors. Several of these names represent retail shops; and some are foreign trading companies. Obviously, hardly anyone of the listed names has joint-venture credentials. In short, the information contained in the website is hardly likely to inspire any interest among potential foreign investors.

While the government has relinquished its right to decide on industrial sanctioning, no alternative mechanism has been developed. Consequently, questions like the location of industry, its capacity and evaluation of sponsors’ capability have come within the exclusive purview of the financing agencies. This implies that investment decisions would be based entirely on financial considerations rather than on both financial and economic evaluation. In other words, in case project viability merely flows from tariff distortions rather than any productive benefit to the economy, it could be justified on financial considerations. Similarly, factors like negative externalities (e.g., environmental degradation) could be disregarded. More fundamentally, given the current and continuing distortions in the market, the dilemma of additional projects leading to duplication of facilities or sanctioning projects with low or negative value addition would remain unresolved. It is obvious, therefore, that these issues should continue to form a part of the public policy framework. It is imperative that the government develops a long- term industrial strategy and establishes systems and procedures for ensuring that the private sector conforms to that strategy. This does not mean a reversion to the regulated culture and policy instruments of the past. It merely underscores the need to direct regulations to critical areas as is being done successfully in several countries today, particularly in Japan and Korea. In this context, particular mention may be made of the formulation of industrial strategy and its implementation by MITI (Ministry of International Trade and Industry in Japan) and MTI (Ministry of Trade and Industry in Korea). In Korea, despite a dominant private sector, the formulation and implementation of the industrial strategy has been the exclusive prerogative of the state. This includes both the macro policy framework as well as guidelines applicable to particular sectors or sub-sectors. To quote one example, it has been the helping hand of the state which has transformed the industrial sector through a phased plan: from the initial labour intensive industries to capital intensive to skill intensive and now to knowledge intensive.

The Planning Commission in Pakistan, the apex body responsible for long-term planning, has been in limbo for the last many years. The government has recently decided to re-activate the organization and recognize its importance in providing policy input. The Commission has been tasked to act as a “think tank” and to help in formulating a long-term vision for the country. Pakistan currently faces daunting challenges both on the economic and social front. It is critical at this stage that a long-term policy as well as strategy is formulated to face these challenges. According to a recent British Council report on Pakistan titled Next Generation, Pakistan’s population in the next twenty years is likely to grow to as high as 265 million. According to the same report, this would require the creation of as many as 36 million new jobs in the next ten years to absorb the rapidly rising work force. There are other many dire consequences of such a scenario – the shortage of housing, the shortage of clean drinking water and the shortage of education and health facilities for this growing population. At this juncture, therefore, the role of the Panning Commission should be to analyze the changing demographic and social structure of Pakistan and to estimate the kind of resources that are required to be mobilized over the years in ensuring the country’s survival. It is equally important to caution the government whether or not such resources are likely to be generated. Without such an exercise, it would be difficult to expect any drastic reduction in Pakistan’s expenditure priorities or indeed the fundamental changes required in its national security outlook as well as in its foreign policy.

The provision of social and physical infrastructure would continue to remain an important function of the government. However, the adequacy of resource allocation as well as efficient delivery of services continues to be a major constraint. While increased resource allocation would be a function of reviewing national expenditure priorities, improvement in service delivery is a more formidable challenge.

There is overwhelming evidence to suggest that in Pakistan – as perhaps in most other developing countries – efficiency levels in activities like health, education and all those providing merit goods are far lower than public enterprises generating marketable output. To quote Arturo Israel:

“Many units in the ‘hard’ sectors and subsectors, such as industry, telecommunication, electric power, have been able to maintain in the public sector a minimum level of operational effectiveness, even under extremely unfavourable general economic conditions. This has been so largely because the hard technologies impose an operational discipline that ‘soft’ activities such as education, the provision of many services in agriculture and health, most of the activities in rural areas, especially at lower levels of development, and most of the activities of the central government do not have. What the ‘hard’ activities have is specificity, the possibility of defining objectives and outcomes, and of tracing those outcomes in the short run.” 4

Given the limited capacity of the government in efficient delivery of social services, it may be worthwhile to consider identifying some of the well-managed NGOs to act as vehicles for delivery of social services. The funding support that government may provide to such NGOs might well represent a more efficient utilization of resources.

The proposed re-structuring of the role of government and changes in some of the specific functional responsibilities would obviously require considerable additional resources. A part of the requirement could be generated from re-ordering of national expenditure priorities. However, resources so released may still not be adequate to meet the higher needs and, consequently, reliance has to be placed on mobilization of additional taxes. Considering that the tax/GDP ratio in Pakistan is among the lowest, there is clearly a need for raising additional revenue through taxation. While there has been much talk in recent years of re-structuring the Federal Board of Revenue (FBR) and creation of a taxpayer friendly environment, there has been a limited success in expanding the tax base. It appears that the main obstacle in the way of this objective is the lack of will on the part of policy-makers. Two recent changes in taxation structure support this hypothesis. In 2005, wealth tax was abolished; and more recently, in 2006, tax on rental property was slashed to 5 percent of gross rental value as against the average incidence of about 25 percent that this head of income attracted previously. Capital gains tax on shares remains exempt and the exemption has been further extended beyond 2009. It is indeed ironic that the two sectors which, during the ‘economic boom’ years of the Musharraf era, generated unprecedented wealth (real estate and the stock market), remain entirely outside the tax net. What is even more serious is that these “concessions” clearly demonstrate that policy-making remains hostage in the hands of the elite and consequently there is limited concern to ensure equity while considering alternative proposals for increasing the tax revenue. Without fundamental structural changes in tax policy, the tax/GDP ratio will continue to stagnate at below 10 percent which is the lowest in the region.

The aforesaid observations suggest that Pakistan has yet to come to terms with the imperatives of globalization. As a result, increased opportunities of attracting investment flows, expanding the export base, participating in businesses and activities progressively being transferred from the ‘west’ to the ‘east’ appear to be largely beyond the country’s grasp. Pakistan today is at the crossroads: if it does not put its house in order, and soon, it is doomed to fall by the wayside while other countries steal the march in the intensifying race for global competitiveness. To quote Friedman5  yet again, the conventional classification of countries as developed, developing or under-developed is no longer relevant. Instead, countries should now be appropriately classified as smart, smarter or the smartest. Pakistan has to try acting smart today in the hope that it can soon progress to the smarter category. There is truth in the old African proverb:6

“Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the fastest gazelle or it will starve to death. It does not matter whether you are a lion or a gazelle. When the sun comes up, you better start running.”

Yes, Pakistan has to start running. It cannot continue to bask in the sun till its limbs get atrophied.

References:

1     Thomas L. Freidman; The World is Flat; Penguin Books; 2006.

2     Ibid.

3     Ibid.

4              Arturo Israel; The Changing Role of the State, (World Bank Working Paper Series, August, 1990).

5     Freidman.

6     Quoted from Freidman.