The article below was originally published in The News recently, and has since appeared in several places on the web and the blogosphere and seems to have gathered some sort of a cult-following. Here, we examine some of the assertions.
Forget IMF, Pakistan Should Default
(Foreword by WWW.AHMEDQURAISHI.COM: This is serious. If you know President Zardari, please take this article to him. Pakistan does not have to go to IMF and we do not have to service debt. This is an opportunity to spend our money rebuilding our economy and nation. Pakistan is trying to avoid defaulting so that the PPP government can stay in power, and so that while it stays in power, it can continue to borrow money. The real question here is: where is all the money going and why does Pakistan need to keep borrowing it? Let’s tighten our belts and spend the money we have to make a pro-Pakistan trade policy and creatively market Pakistan. Please don’t go to IMF. Please default. South Korea, Thailand, and Indonesia have done it. They have survived. So can we.)
By MOSHARRAF ZAIDI, Tuesday, 28 October 2008.
ISLAMABAD, Pakistan—Pakistan is not going to default, because nobody will let it. That's too bad. Don't let the "economists" scare you. Default sounds like a dark, scary, doomsday scenario. Sovereign default sounds worse, like God's curse itself.
It is not.
"Sovereign" is the fancy term for country, used by the same loan sharks that milk pensioners to fatten their year-end bonuses (and who brought you Wall Street Meltdown 2008). Sovereign default is simply a country not making its loan repayments on time. It has happened to plenty of countries. They are all still around.
Ex-bankers and former IMF employees will never advise Pakistan to default because to do so would be counter-intuitive. It would be like expecting the PPP to undertake land reforms, or the Jamaat-e-Islami to be consistent about anything.
Advising Pakistan to default would represent an existential crisis worse than sovereign default. People would be forced to revisit the premise of their entire careers. We can't have that. So instead, we have experts from all around the world wringing their hands, loosening their ties and extolling the virtues of the "bitter pill" of yet another IMF program. The purpose? To avoid the "dreaded" default, at all costs.
Why is default such a "scary" thing, and why do countries go to extraordinary lengths to avoid default?
Countries try to avoid default for four reasons:
1. First, countries try to avoid default to save the country's reputation as a borrower in good standing—which means that they want to continue to borrow at rates that are favorable to them.
2. Second, countries try to avoid default to save their ability to participate in international trade freely—which means they fear having sanctions imposed on them for being poor managers of their affairs.
3. Third, countries try to avoid default to protect domestic banking and financial system—which means in essence that they want to protect the rich, because there aren't many poor folks with bank accounts.
4. And finally, the fourth reason countries try to avoid default is to save the government of the day from the disgrace of having defaulted.
Eduardo Borensztein and Ugo Panizza published an IMF working paper earlier this month that exposes one of the worst kept secrets in international development. They conclude that among all four of these reasons to avoid default, the most compelling, based on the evidence, is politics. They conclude that "The political consequences of a debt crisis seem to be particularly dire for incumbent governments and finance ministers".
In short, governments choose not to default because it is the politically expedient thing to do. The actual economic costs of defaulting, Borenzstein and Panizza conclude, are simply not that high. Moreover, another paper earlier this year (by yet another IMF economist, Ali Alichi), suggests that the only real reason that countries repay the sovereign debt that they owe is to continue to be able to borrow money.
In short, Pakistan is trying to avoid defaulting so that the PPP government can stay in power, and so that while it stays in power, it can continue to borrow money. The real question here is: where is all the money going and why does Pakistan need to keep borrowing it?
Most of the money is going to debt-servicing and to defense. The traditional response to unsustainable expenditure in Pakistan is to call for a cut in defense spending, while continuing to find a way to pay off Pakistan's loans. No one ever actually explains what they mean by cutting defense spending, which is why the conversation begins with a request to cut the defense budget, wanders into the patriotism of those demanding the cut, and ends with a straight-faced refusal.
No one expects Pakistan to compromise its national security, but it is not unreasonable to explore more efficient ways of securing the nation and the national interest. Far from a national conversation about spending priorities however, no one has gone so far as to even suggest a more traditional and hawkish view, for example, that the war on terror being waged by Pakistan's soldiers needs all the financing it can get, and that Pakistan's debtors will have to wait. An even more refreshing case to make would be to suggest that both debt servicing and national security are major drags on current and future generations, and that they represent much lower priorities than building infrastructure, fixing the police and delivering real education. What would a Pakistani government that was committed to those priorities look like?
For starters it would:
1. Stop hiring poorly qualified political workers to stack the deck for future election campaigns. Forget hiring another ten thousand jiyalas as teachers, to ruin another generation of children. Let's face it, Pakistan cannot grow teachers on trees, it doesn't have any teachers. It has to go out and hire the best Indonesian, Turkish, and Korean teachers. It has to bring them to Pakistan and put them to work. Pay them real salaries.
2. Hire the Emiratis that have designed Sheikh Mohammad's infrastructure revolution to do the same thing to Karachi.
3. Then go out and hire every willing CBM, FAST, GIKI, and IBA graduate out there, and make cops and municipal administrators out of them. Take ten of those supercops, give them Blackberrys, night-vision goggles, Humvees and some ammo and put them outside every school. Forget the entourages. Protect the schools.
4. Take the municipal administrators and tell them to get running water to those schools. If there's no well, and no groundwater, teach them how to negotiate deals, so they can buy truckloads of mineral water for the students, and their mothers. Get those kids and their families some clean water.
5. Make sure there are nurses and doctors at each school. Pay every Aga Khan University Medical School graduate twice what they would make as residents at Mount Sinai or Beth Israel.
6. Teach the kids their native languages, drop the grammatically dreadful and aesthetically murderous fake American accents and bring back the Pakistani accent to film, television, radio and to dinner parties.
That's the kind of expenditure that would explain indebting future generations of Pakistanis. It would explain deepening the pool of debt that Pakistan is drowning in. It would explain the helplessness currently being feigned by economic and political policy makers. In short, if Pakistan was borrowing money to pay for this kind of a social program, it would be hard to argue against it.
Instead, Pakistan is borrowing money to throw it into the same black hole that the money has been going into for at least a generation now. What has Pakistan got to show for almost forty years of sustained debt growth? Illiterate fanatics who can't pronounce the name of God are taking over Swat because the courts don't work. Drug lords and criminals posing as religious vigilantes are taking over NWFP because the cops don't work, can't work, and aren't allowed to work. The water in the taps all over the country is toxic. The teachers at the school can barely read. The ones that can spend more time in Lahore, Peshawar, Quetta and Karachi, at the civil secretariat looking for a transfer, than teaching their students whatever little they know. The students are at home watching Sanju Baba kill bad guys, and Jon Abraham seduce bad girls. The mullahs are making speeches they don't understand, to crowds that aren't listening, until they bring on the hate. Then everybody listens. The uncles and aunties think cheap Broadway rip-offs with racy costumes constitute a culture renaissance. Little girls in rural Pakistan meanwhile are being traded by remorseless jirgas, in the name of honor. The culture vultures hate Arabic, love Punjabi, and are addicted to broken English. The hawks want beef, the doves want bhindi. And bankers want to loan Pakistan more money to finance the whole rot all over again.
It's time for Pakistan to start spending its money on people servicing, instead of debt servicing. Bigger and more successful countries have done this before including Indonesia, Russia, and Argentina. Pakistan loves to ape other countries. Now is its chance. Time to default.
The original version of this article first appeared in The News International. The writer is an independent political economist. Email: email@example.com
© 2007-2008. All rights reserved. The News International & AhmedQuraishi.com. Verbatim copying and distribution of this entire article is permitted in any medium without royalty provided this notice is preserved.
For analysis, default on Foreign Debt must be subdivided into that on bonds issued by it, or foreign commercial bank debt, or that of bilateral &/or multilateral International Financial Institutions (IFIs), or any combination of the above.
The consequences of a sovereign default on foreign debt of any kind would depend upon the reason for doing it in the first place - the "Inability to repay", or the "Unwillingness to repay".
The author mentions defaults of South Korea, Thailand, and Indonesia. All of these were foreign bank defaults (not bonds or IFIs) from 1998 to early 2000s due to an inability to repay after the far-eastern currency crisis, and lasted for 1-2 years at most.
Pakistan too has defaulted both on foreign bank debt as well as its foreign bonds between 1998-1999 after the nuclear tests - but soon began repayments. The freeze on foreign currency accounts was also a default of sorts, though of yet another type which was unilateral restructuring of on-demand domestic Govt FX liability into a long-term liability. Borensztein and Panizza quoted by the author were referring to this kind of default in their IMF paper - "Inability to repay".
Default due to "Unwillingness to repay" is however quite a different story. To illustrate this type of default, the examples of South Korea, Thailand, and Indonesia are not relevant.
There have been few defaults of this nature, mostly during the South American debt crisis of the 1970s/80s which were eventually resolved through debt-equity conversions and write offs by foreign lenders. Peru was perhaps the most extreme case in South America which defaulted on IFIs alongwith commercial banks and its bonds.
None of these, though, defaulted on foreign trade obligations. Nigeria was the only one which did on that too alongwith all other types - with disastrous results and had to suffer the most severe consequences i.e. complete collapse - despite its considerable oil wealth.
I suspect the author in this article advocates the latter type of default i.e. due to "Unwillingness to repay", of a kind more like Peru while not going to the extent of Nigeria.
This kind of default, in addition to collapse of the domestic financial sector, renders the local currency worthless due to capital flight and hyperinflation, turns the entire economy into a cash economy with no formal credit of any sort, all imports of essentials need to be via hard currency in cash including oil since letters of credit are not accepted abroad, assets abroad including ships and aircraft at foreign ports are seized - basically total anarchy with an economy of carpetbaggers, smugglers, and bootleggers for needed foreign goods.
If the Government tries to counter this with printing currency for subsidies etc for an impoverished population, the hyperinflation is fueled further and turns into a vicious circle almost impossible to break. The Weimar Republic of 1923 is an example with housewives burning currency notes for firewood (above right), and money carted around in wheelbarrows (below).
In societies already fractious such as Pakistan, as was the case in former Yugoslavia, this often results in civil strife, war, disintegration, or rise of a Hitler as in case of Germany's Weimar Republic of 1923.
I'm sure the author would not like this to happen. We need to be very cautious when talking about Sovereign Default.