Thursday, 28 June 2007

A tale of three democracies in South Asia

Ahmadul Ameen
During the current tumultuous and difficult phase of democratic evolution of the country, it is quite natural for the citizens to do some soul searching as to why democracy came to such a pass in the country. To compare is a universal human trait.

Hence, it is natural to compare our democratic development with those of other nascent or established democracies, particularly those undergoing a similar evolutionary cycle. Obviously, the first comparison should be made with our immediate neighbour, i.e. India, with whom we have shared history and political development. Both the countries have good secular constitutions, to start with. Pakistan's democratic evolution, that was in tandem with that of Bangladesh till 1970, however, is murkier, and lags behind those of Bangladesh and India.

In the context of the same discussions, the personalities of the important political players need to be considered, of necessity, to assess how they affected the shaping of political evolution in their respective countries.
Elections have been held in India at regular intervals since independence in 1947, and governments have been changed at critical junctures. In the case of India, holding fair elections is more laudable, simply for the fact that the country is not homogeneous in respect of ethnicity, religion and language. By any standard, it is a difficult country to govern, having a multitude of national, regional and communal political parties. Commendably though, the change in political leadership has been smooth during transitions. By and large, the quality of political leaders in the higher echelons is very good, despite the fact that crooks and goons are in abundance in the rank and file. The judiciary is above the political fray, and defence is never seen to be interfering in political affairs.

The judiciary is respected and feared, despite its slow dispensation of justice. Indira Gandhi's removal from power for a trivial (by our standard) indiscretion was a landmark of judicial probity. Another prime minister, Narasimha Rao, was prosecuted, but avoided jail on health grounds, and Sarin is in jail now. The great Lalu Prasad Jadav of Bihar was running the state from jail, through his surrogate Rabri Devi. His comeback is also equally remarkable. Interestingly, his commendable turning around of the Indian Railway is being studied at the famed Harvard School of Business.

Mahatma Gandhi did not seek power after independence, despite being the undisputed leader of the nation. Rather, he went (or threatened to) on hunger strike on a matter of principle, because of non-payment of money due to Pakistan. Nehru could have become an authoritarian dictator if he had wanted to, but chose the path of democracy. Even after the war with China, he advocated the inclusion of China, a pariah state at that time, into the United Nations just because it was the right thing to do.

Maulana Azad did not hanker for power. The common characteristics of these pre-independence leaders were their patriotism, commitment to democracy, and principled exercise of power. Indira Gandhi had the propensity to be authoritarian, but generally played by the rules. Her political comeback also speaks of the robust political process in India. Atal Bihari Bajpai, giving up power without hesitation when faced with a no-confidence vote, also set a fine tradition. Despite the many political crooks, bigots and radicals, there emerged a good number of clean, pragmatic and committed leaders in post-independent India. Highly educated, committed, and respected politicians like Manmohan Singh, Chidambaram, Jyoti Basu etc., to name a few, can stand tall in any milieu/forum.

Focusing on the bordering state of West Bengal, Comrade Buddhadev Bhattacharya is a living legend because of his spartan lifestyle and popularity with the capitalists, who are making a beeline for investing in West Bengal.
Despite the impressive economical and financial development, socio-political development lags behind badly in Pakistan. The slow social progress is attributed to the feudalistic nature of the society, particularly in Punjab and Sind. The landed elite have their tentacles in every sphere of life in Pakistan. Besides dominating agriculture, defence and bureaucracy, they have also monopolised business and industry. Since independence in 1947, except for brief periods, the military has ruled the country directly or through surrogates. The rules of Suhrawardy and Mohammad Ali were transitory at best. Ayub's democracy came in the garb of "basic democracy." Similarly, Musharraf is trying to colour his democracy in a different shade. Democracy could not flourish in Pakistan because of the dominance of the military.

The relatively brief interlude provided by the elected governments of Benazir Bhutto and Nawaz Sharif was unsuccessful due to their ineptitude and all-pervasive corruption. Sharif who, despite having two-third majority, squandered a golden opportunity to return the country to a viable democracy. The same was true for Benazir, who also could not deliver the fruits of democracy to the common people of Pakistan. Hardly any leader, having the stature of the pre-independence political leaders like Jinnah, Liaqat Ali, Gaffar Khan etc., emerged in Pakistan. Both Bhutto and Benazir had the potential to be good political leaders. Both of them were well educated and charismatic, but their lack of principles and scruples undid them. Sharif also suffered from similar weaknesses, and was disgracefully thrown out of power. Had there been continuous democratic governments, a group of good leaders might have emerged.
Bangladesh achieved its freedom in 1971 through blood and tears. In Sheikh Mujib Bangladesh had an exceptionally courageous and patriotic leader, who was instrumental in the birth of the nation. Unfortunately, his administrative ability fell short of his virtues. The creation of the controversial Baksal did not endear him universally. Many think that the country's history would have been different if Sheikh Mujib had played the role of "Bangladesh Gandhi," and let Tajuddin, who proved to be a fine and dedicated administrator, run the country along with his comrades.

The emergence of Gen. Zia on the political scene had a calming effect but, unfortunately, it did not last long. His personal honesty, austerity and dedication are sorely missed in today's politics.
I remember many of my Pakistani acquaintances mentioning in the eighties: "your Zia is many times better than our Zia." Tragically, both the great leaders of Bangladesh -- Shekh Mujibur Rahman and General Ziaur Rahman -- were assassinated.

Thereafter, the country was run by the dictatorial regime of General Ershad, who was convicted and jailed for corruption, but has made a political comeback since.
In Bangladesh, proper democratic process began in 1991. Since then, the governments have been changed twice through elections. The elections were generally perceived to be free and fair, which itself is an achievement.

In 1991, BNP won the election fairly, but Awami League did not accept the defeat gracefully. They doggedly carried out hartals and strikes at regular intervals throughout the five-year reign of BNP. In 1996, BNP engineered a sham election that did not work. In 1996, Awami League came back to power, but was removed by the BNP in 2001. The first BNP government governed the country reasonably well, compared to the next two governments. The misrule and corruption, particularly in the last ten years, have been monumental and heart-breaking. Other than the two leaders of the liberation period, no single leader of the stature of Fazlul Haq, Suhrawardy or Bhashani emerged. Instead, a pack of unscrupulous and greedy felons hijacked the so-called democracy. The sordid stories of their misdeeds that are unravelling every day beat any soap opera.

Now that a historic (if not divine) intervention is in process, there are indications that a seismic change is brewing in the political landscape. If the politicians realise and internalize that the old rules of the game have changed for ever, and that there ought to be "give and take" politics -- the long suffering people can look forward to better days. The dynastic politics should be a distant memory. The nation should discard the Bhutto/Benazir, Khaleda/Tareque models in favour of better example of Sonia/Rahul.

Ahmadul Ameen is a freelance contributor to the Daily Star.
(Source: The Daily Star, June 28, 2007)

Monday, 4 June 2007

South Asia not ready for a currency union

Akhtar Hossain

THE establishment of a currency union is equivalent to giving up a country’s own currency for a common currency designed for a group of countries with similar economic characteristics. The idea of a common currency has become popular since the successful introduction of euro to most members of the European Union. The theoretical basis of a currency union is Nobel laureate Robert Mundell’s Optimum Currency Area. OCA consists of a group of countries which are integrated in product markets and affected by common economic shocks. Across these countries, labour and capital move freely. As a result, these countries (better if they have wage flexibility) may not lose much by establishing a common currency because relative price changes may not be necessary as factor mobility among them can provide a substitute for exchange rate flexibility in promoting adjustment to, say, external shocks. The member countries benefit from a currency union because it eliminates foreign exchange transactions costs and may expand regional trade, especially intra-industry trade. Because of the elimination of exchange rate uncertainties, consumers and producers make their consumption and production decisions on the basis of quality information, especially price transparency because all goods and services are priced in a common currency. Assuming that the product markets of member countries are integrated, this increases competition and production efficiency. In the absence of exchange rate risk and low or no costs of hedging, investors in particular participate in financial markets and make them more efficient. The establishment of a common currency requires the formation of a central bank for the region which is assigned the job of keeping inflation in check. The independence status of such a regional central bank underwrites regional price stability and encourages both domestic and foreign investment within the region.
Advantages and disadvantages of a national currency
Why should a country have a national currency and under what circumstances should it give up its currency and introduce a currency of another country or a common currency with other countries? To get an answer to this question one should look at first what benefits a country gain from having a currency of its own. To begin with, for most newly independent countries, currency is a symbol of independence. Economists acknowledge a nation’s ‘patriotic sentiment’ but they do not always consider it important; rather, many of them put emphasis on economic policy objectives that a country may achieve through its own currency. Most of the benefits of national currency are interrelated and they can be summarised as follows.
First, by changing the external value of its currency, the (real) exchange rate of the currency, a country may influence its trade flows and stabilise output in response to economic shocks. In general, changes in the real exchange rate alter the pattern of demand and induce reallocation of productive resources across sectors. Therefore, if a country encounters economic shocks, the exchange rate can be used as an instrument to cushion disruptive impacts of shocks and stabilise the economy.
Second, under a floating exchange rate system where the external value of the currency is determined in foreign exchange markets, the country gains the ability to change domestic interest rates (and the shape and level of the yield curve), which may be used to stabilise the economy. In other words, under a floating exchange rate system, a country acquires in its armour an independent policy instrument (monetary policy). In contrast, having a currency but its value fixed to another currency means that the country loses its monetary policy independence and thereby accepts the monetary policy stance of the pegged currency country. Currency union implies that a country gives up its independent monetary policy for a regional monetary policy.
Third, an independent monetary policy means that a country can choose its own inflation rate (low or high). Inflation then becomes a policy variable for the monetary authorities and the rate they choose may be based on both economic and non-economic considerations. Finally, having a national currency means that the monetary authorities have the monopoly power to issue a legal tender (print money). For the government of a developing country, the ability to create money (via the central bank) and spend it (commandeer resources) may be important. In the literature the government’s ability to create money is seen as an inflation tax on the public. There is, however, limit to generating such revenue and the associated risk of causing high inflation could be significant. In extreme situations (economic or political), the ability of the central bank to create money could be handy (for example, during war or other emergencies). The downside of having a currency is that it could be a curse for a country if it is not managed properly; that is, the currency does not perform its traditional functions such as the medium of exchange and the store of value. For example, if there is excessive money creation and that generates high inflation, money becomes a ‘hot potato’, which may lead to hyperinflation. High or hyperinflation adversely affects economic activity and income distribution and often causes economic disaster and/or destroys the fabric of society. It is fear of high inflation in developing countries that leads economists to suggest that for price stability, inflation-prone developing countries should consider using a hard foreign currency or join other countries to establish a currency union. Despite the potential danger of high inflation, not many developing countries have given up their currencies. For most countries, the benefits of having a national currency seem to outweigh the disadvantages of having one. This is especially the case under the present globalised economic system in which developing countries do not have the choice but to maintain disciplined monetary and fiscal policies. Under a floating exchange rate system, changes in the monetary-fiscal policy stance are quickly reflected in the foreign exchange rates and, therefore, policymakers cannot ignore their consequences.
Currency union in South Asia
During the past few years some political leaders in South Asia (India in particular) have expressed interest in introducing a common currency in South Asia. Not many people outside India have, however, taken this idea seriously perhaps because India does not show much enthusiasm for economic integration among South Asian countries, especially under the auspices of the South Asian Association for Regional Cooperation (SAARC), which has remained a moribund organisation. It was only after a relatively successful SAARC summit in Islamabad in 2004 (where the South Asian Free Trade Arrangement agreement was signed) that some politicians (in India in particular) started thinking about the possibility of a common currency. This followed India’s former prime minister Atal Bihari Vajpayee’s ‘vision statement’ where he urged South Asian nations to put aside their mistrust and dispel unwarranted suspicions and work for harmonious integration of South Asian economies to face the challenges of globalisation. Bangladeshi politicians have generally responded cautiously on this issue. This issue can be debated on both economic and political grounds. From an economic viewpoint, a currency union is not a realistic proposition for South Asia. The issue can be examined under the following heads: (1) extent of trade integration among South Asian countries; (2) extent of factor mobility among South Asian countries; (3) nature of economic structure and the pattern of shocks to these economies and (4) extent of flexibility of wages and prices within a country. A number of empirical studies exist on these issues. The most cited one is by Nephil Maskay (2003), who has examined the appropriateness of a currency union in South Asia on the basis of economic characteristics. His analysis suggests that South Asian countries are not suitable candidates for a currency union; they experience asymmetric economic shocks and, therefore, would suffer from large adjustment costs. The degree of economic (trade and factor) integration of the region also remains minimal. Some economists, however, argue that even when economic characteristics do not justify the formation of a currency union, if there is political will the countries involved can change their economic structures so that economic conditions needed for a currency union are met ex post. The critical issue is whether there are concerted national and regional efforts to integrate the product and factor markets of South Asian countries. The answer is no. In a realistic sense, there is only limited scope for economic integration among South Asian countries without causing economic inefficiencies arising from trade diversions and capital controls. The removal of tariff and non-tariff barriers may create some inter-industry trade but this is unlikely to be large. For example, the smaller economies of South Asia do not produce technology-intensive capital goods and they would probably have to shift their sourcing of such imports from India. This would invariably lower the quality of products, destined for domestic consumption or export or both. The greater potential remains in the area of intra-industry trade. However the major obstacles are non-tariff barriers, which are more important for the expansion of regional trade than any transaction costs arising from multiple currencies. Bangladeshi businesses are aware of the difficulties in exporting goods to India, although Bangladesh has effectively become a ‘dumping ground’ for Indian goods. How the Indian economy would be opened up for a country like Bangladesh remains an open question indeed? While the political goodwill among member countries generated in recent SAARC meetings may create some opportunities for institutionalising policy initiatives for greater economic integration, there is no denying the fact that the political and economic aspirations of the member countries remain fundamentally different. As a historical legacy, the smaller countries in particular are jealously guarding their national independence (economic and political). What they want is respect from the bigger countries but remain unwilling to surrender their policy autonomy to the bureaucracy of any institution that could be dominated by staff from countries such as India and Pakistan. Moreover, the former, by virtue of its size and resources, may even expect to be treated as a natural leader. This is unlikely to be acceptable to other countries in the region. Fundamentally, the bigger India has bigger problems. Not all its states and regions have been developing in harmony and its own political integration remains fragile. Therefore, it is a far-fetched illusion that a common monetary policy that suits one of the Western States in India will be appropriate for Sri Lanka or Bangladesh and for that matter, for Nepal or even Pakistan. As the regional central bank bureaucracy (which will conduct monetary policy for the region) is likely to be dominated by the bigger countries, it is unlikely to create policy credibility and confidence among smaller countries. A common monetary policy would also require fiscal transfers (stabilisation funds) among member countries in response to any asymmetric shocks so that they can satisfy fiscal policy norms. Further, labour and capital mobility across countries remains the important channel through which asymmetric shocks among member countries is supposed to be neutralised. The less one talks about the state of labour mobility across countries in South Asia the better. In short, at the policy level, currency union means the surrender of monetary and fiscal policies to the regional central bank bureaucracy, leaving nothing for the policymakers of a member country such as Bangladesh. It is a big question whether Bangladesh would sacrifice monetary and fiscal policies and allow the creation of a super-centralised administration and legal structure within which the Bangladesh Bank bureaucracy will wait for instructions coming from New Delhi or Islamabad in the event of asymmetric shocks to the Bangladesh economy. The Bangladesh economy has been growing steadily since the mid-1980s. If the political mess of the country is somehow cleaned, the country has the potential to become a middle-income country within the next two decades. Even if one does not join any euphoria, it is easy to predict that the size of the Bangladesh economy would be large by then and with a relatively young population size of about 200 million would make it a formidable economic powerhouse. The Bangladesh economy has already been deregulated and opened up for foreign trade and investment. At the macro policy level, the exchange rate has become flexible and the Bangladesh Bank has gained considerable capacity to design and conduct an independent monetary policy. Under the IMF-World Bank surveillance, fiscal policy has also become disciplined. Therefore, it will be too much for Bangladesh to give up its monetary policy (and also fiscal policy) while the economy may encounter domestic and external shocks. While it is true that monetary policy cannot be used for long-term economic growth, there is scope for judicial use of monetary policy for growth and/or stabilisation. At least, the availability of monetary policy gives confidence to policy-makers that they have an instrument to use rather than to have a situation when their hands are tied-up for the reason that they may make mistakes. Let give the monetary policymakers the right to make some mistakes! They will learn from their mistakes. I conclude by saying that it would be a bad decision for Bangladesh to give up its monetary policy for the ‘dubious’ gains from currency union at this critical juncture of the nation’s history.
(Akhtar Hossain teaches economics at the University of Newcastle, Australia)
(Courtesy: The New Age, June 5, 2007)