Pakistan’s economy: the many consequences of energy costs in developing countries

ISLAMABAD – We had corn flakes this morning. The label says “Fauji Foundation”. Yesterday we drove by the Askari bank. I know enough Arabic to know that Askari means “military”. And indeed, my very knowledgeable host confirmed that it is indeed the military’s bank. As for the Fauji Foundation, that’s also owned by the military. Corn flakes, banks, real estate, cement, and a whole lot of the major parts of Pakistan’s economy are controlled by the military, as Ayesha Siddiqua describes in her book “Military, Inc.” That economic power of the military has not changed at all since President Musharraf lost much of his power in the February elections.

Islamabad is, as my Indian economist friend Girish Mishra pointed out, in one part of the Punjab. The other part is in India. In both parts, the Punjab is a breadbasket – a rich agricultural region. The Punjab is the keystone site of the “Green Revolution”, in which modern chemical agriculture was adopted at the urging of western planners and financiers. “Modern” agriculture uses petrochemicals and machinery instead of the natural productivity of the soil and the skill and labor (often exploited, to be sure) of peasant farmers. The Green Revolution is often presented as a tremendous advance, but some students of south asian agriculture, like Vandana Shiva, Devinder Sharma, and P Sainath, have shown a less bright side to it all – in the form of exhausted soil, people without work and no way to feed themselves, rural-to-urban migration, inreased vulnerability to global commodity prices, and dependence on expensive inputs.

It’s in this context that I found myself reading The Dawn’s Economic and Business Review for this week. It talks about how the country has missed its cotton production target – set to miss the target of 7.9 million acres under cultivation by 15-20%, according to the article by Nasir Jamal. Water shortages until recently and higher power costs for tubewell irrigation were a big part of this – and these factors preclude other crops like rice or sugar cane, that would require even more water, and therefore energy, to grow. (Aside here as someone who does not think biofuels are a good idea – the most “promising” biofuels crop in terms of energy returns is not corn but sugar cane, and it is interesting to note that fuel costs could potentially make it unviable to grow sugar cane… for fuel). This according to the Punjab’s Agricultural Extension Director-General (quoted in Jamal’s piece – an expert from AgriForum Pakistan said otherwise, that farmers had switched to rice). Cotton is a cash crop, an export earner for Pakistan – or rather cotton textiles are. Cotton prices are high, which would be good, but because Pakistan missed its cotton production target, they had to import cotton to run the textile industry – plus energy costs, makes it tougher for Pakistan to earn foreign exchange.

Which foreign exchange, other than the local source of gas, Balochistan, Pakistan also needs in order to buy ever-more-expensive energy. An article by Shahid Javed Burki in the same issue of Dawn talks about how, with an economy growing at 7%, Pakistan’s energy demand grows at 8-10%. Like most countries, Pakistan has in recent years privatized part of its power sector, and Burki argues that this helped increase capacity – until corruption and political instability caused breaches of contracts and lack of continuity, reducing private investment in power generating capacity. In addition to the privatization and the political problems, we return to the increasing costs of energy.

And we also return to agriculture. In addition to having to import cotton, Pakistan is also importing food – milk, meat, vegetables, wheat, dry fruits, tea, spices, edible oil, sugar, and pulses – according to an article by Ahmad Fraz Khan (this includes 500,000 tons of wheat from the US’s food assistance program, discussed in an article by Ashfak Bokhari). In addition to global problems in the food system (again aggravated at the global level probably by fuel costs and the loss of land to production for biofuels), Khan blames Pakistan’s “own economic wizards, who had only one recipe for everything, i.e. import everything and anything” – to the point that Pakistan and India are exchanging commodities like tomatoes and onions, with Pakistan both importing and exporting these foods. Khan hopes for “required facilities for cutting down post-harvest losses for availability of water, high-yielding seeds and the right price for” farmer’s produce.

The energy price shocks of the 1970s really hurt the development of third world countries that didn’t have their own oil resources, setting them back decades. This process seems to be repeating itself here, and developing countries like Pakistan don’t have recourse to the same macroeconomic methods that developed countries have (though, in the neoliberal era, developed countries don’t use these methods anyway).

Another energy recourse is to build dams and increase hydro capacity. Pakistan’s controversial dam project is the three-province spanning Kalabagh dam, or KBD. It will help meet a shortfall of electricity, control flooding and provide water for consumption, its proponents say. It will displace tens of thousands, redistribute water from one group of people to another, and probably deal a finishing blow to the already dammed Indus river, one of the cradles of civilization. Hashim Abro argues in “The News” that “The KBD is like… Dracula. Every time you think you have killed him, he ressurects.” Abro argues that coal is a better option than trying to build additional dams.

On macroeconomic recourses: In “The News” for Monday June 30, an article by Aftab Ahmad Khan argues that the government should use taxation carefully to try to fight inflation and to raise revenues for future investments. The informal economy and the large share of agriculture and services in output, Khan argues, pose challenges to an efficient tax system, and the government does not capture as much as it could in taxes (although, without accountability and given the military control of much of the economy, government’s capture of additional revenue might not necessarily bring additional development benefits).

Which brings us to this morning’s (July 1) news item, that the gas tariff has gone up 31% today, exempting only a few sectors. Many governments are raising or proposing raises to taxes on fuel as prices rise, trying to capture more of the revenue for themselves. If the funds raised are used to reduce energy dependence and ease the suffering of those who are priced out of getting energy as a result, it would be a responsible thing to do. It is hard to know whether this will happen in Pakistan.