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Shubhra Sharma
10/30/'98
India and Pakistan today have caught the world's attention and concern
by exploding nuclear devices within days of each other starting thus a
nuclear arms race in South Asia. Both governments take immense pride in
their "accomplishments" demanding further their "rightful place in the
international community". Note that the event comes at a time of globalization.
It was orchestrated by nationalist-governments. It was their populist response
against globalization, against being forced to be part of the global international
community. The balance of payments crisis that forced India and Pakistan
to liberalize worsened after the nuclear tests. Both countries subsequently
self-imposed financial austerity (i).
Does this paradox of a post-colonial, domestic, political economies of India and Pakistan suggest convergence, voluntary or involuntary, towards the global economy and the subsequent demise of the nation-state or does it suggest divergence from globalism and the rise of a "leaner, meaner, nationalist states"? This paper explores the history of the countries' political economies (1947-1997) to answer the above questions.
According to Vivienne Schmidt different states respond differently to pressures of globalization because of the difference in the political regimes, state orientation towards economic change (protectionism or internationalization), and state capacity to introduce and sustain economic reforms (1). However she fails to identify the specific origins of the kind/s of political regimes of nation states and the way they do business. India and Pakistan's political economy has largely been determined by their colonial history. Both share a turbulent colonial past that resulted in an even more turbulent present. The independence of the Indian subcontinent from British imperialism coincided with the formation of two, independent nation-states- India and Pakistan. Bloodshed marked their first independence anniversary which was partly a function of religious tensions between the pre-dominantly Muslim population of Pakistan (95%) and India's predominantly Hindu population (80%), and partly a function of tensions over distribution of economic resources. Pakistan was formed out of the underdeveloped Western region of the Indian subcontinent which could only boast about good cotton growing conditions. India struck it rich by owning the major steel and manufacturing units in the North (2). However both nation states faced similar problems- an economy in shambles and widespread poverty. Invariably the aim of the political regimes that inherited the "colonial palaces and colonial switchboards" was to restructure the economy, become self-reliant as well as alleviate poverty (3).
According to Haggard and Kaufman, only a centralized executive authority can initiate economic reforms and a system of institutional checks can further prevent economic policy changes at the whim and fancy of powerful social interests (4). In 1947, Pakistan lacked the personnel, democratic institutions, and resources to play a large role in the development of the economy (5). The political leadership incapable of or uninterested in attaining popular support depended on military bureaucracy to retain power and suppress dissent. This heightened the political power of the military and since 1988 it has refused civilian supremacy. So Pakistan's tenuous democracy gradually became distorted. Elections were held but no government survived its full term. Every time the military sensed the civilian government "defaulting" on its agreement to give the military full control over matters of security and economy, the government was sacked through the office of the president (6). For example, in 1993 two governments formed and fell within four months. Again in 1997 the Benazir Bhutto government was sacked by president Leghari over "charges of corruption" which brought Nawaz Sharif of the Pakistan Muslim League (PML) back to power for the third time in the last six years (1990-'96) (7). In such an uncertain political scenario where the executive is subordinated to the military and the military has no institutional checks on it no wonder the economy suffered from lack of direction and planning.
India on the other hand had all the trappings of a democracy- a democratically elected executive, a committed bureaucracy, and institutional checks on the executive power. Also the military has always respected civil supremacy and strengthened democratic order by non-interference (8). However, Indian democracy is characterized as a one-party, one family, authoritarian rule. The Congress party, under the aegis of the Nehru/Gandhi dynasty, has determined India's political economy for the past 50 years (9). While the military weakened the executive power in Pakistan, in India it was Indira Gandhi's authoritarian rule (1966-'77) that made the state her own playground. She bypassed formal democratic institutions to appeal to the people with her populist policy recommendations, surrounded herself with sycophants rather than prudent policy makers, and even amended the constitution to extend her executive powers (10). Her authoritarianism reflected in the way she closed the economy to any foreign private capital, controlled private enterprises and nationalized banking. It was only after the assassination of Rajiv Gandhi, the last scion of the dynasty, that the Congress lost its majority in the parliament and became the center of internal conflicts. From 1991 onwards three general elections have led to hung parliaments inaugurating a new era of coalition politics and a radical change in the way Indian government began to do business (11).
The Economies: The Politics of Stagnation
The political legacies of both nations have affected the nature and performance of different sectors of the economy. The fact that severe balance of payments of crisis in 1990s forced both governments to open up their economies is a critical manifestation of years of economic mismanagement and lack of far-sightedness (12).
Pakistan's economy is biased towards labor-intensive sectors like agriculture. Nearly 24% of total output and 50% of total employment is generated in agriculture (1995-96). Pakistan relies heavily on cotton production and cotton textiles for foreign exchange earnings. Cotton accounts for 30% of the Pakistan's total exports (1995-'96) and has acted as a catalyst to further industrial growth especially of textile industries, knitwear, dyeing, and garment manufacturing (13). Political regimes, with the exception of Zulfiquar Ali Bhutto's regime in 1971, left agriculture alone. It was Bhutto who first seemed to notice the primacy of agriculture to Pakistan's economy. He mechanized agriculture and introduced the French model of administrative intervention and government directed credit allocation. He changed the earlier apathy towards agriculture and increased its output by first nationalizing all the nine commercial banks in Pakistan and then nationalizing agriculture related industries. The government directed the banks to allocate low-interest or interest free loans to farmers as well as provided fertilizer and seed subsidies (14). Bhutto also devalued the rupee by 57% and abolished multiple exchange rates to enhance exports of cotton and cotton-based goods. However, mechanization not only displaced agriculture labor it also played havoc with the banking system and its financial credibility (15). The landowners defaulted regularly on their loan payments forcing the government to often write-off their loans (16). The government actually created a monster in the landowning class who used their economic power to control the parliament and resist government attempts to either end their subsidies or tax their agricultural income (17).
India began with the adoption of the French model of administrative intervention and government directed credit allocation in 1947. Sectoral development was planned. The Nehru years (1947-'64) were highlighted by the policy of intensive industrialization as a key to alleviating poverty. Infra structural industries like power-generation were public-owned (18). Unlike Pakistan, the terms of trade were skewed against agriculture in the 1950s. Agriculture was heavily taxed as its potential for development was deemed to be low. Agriculture production thus remained stagnant (3% of GDP) during this period (19). However, Indira Gandhi (1966-77) followed in the footsteps of Bhutto and reversed the neglect of agriculture by mechanizing agriculture and nationalizing 14 private-owned banks in 1969 (20). Recurring droughts and food riots in all parts of the country was responsible for agricultural modernization. Though India became self-reliant in grain production, the fall-outs of the policy were the same as in Pakistan- a powerful landowning class emerged, regional development was skewed, agriculture labor was displaced, and banking system had negative balances as farmers defaulted on loan and electricity payments (21). Unlike Pakistan which produced cotton for exports, Indian population consumed the wheat and rice surplus leaving nothing for exports (22). No wonder the annual growth rate of agriculture remained the same (3.1%) from 1980 to 1995. Also the agriculture value-added as percent of GDP went down from 38% in 1980 to 29% in 1995 (23).
During the first decade of independence (1950-60) both Indian and Pakistani elites saw rapid industrialization as a vehicle for economic growth and poverty alleviation. Both preferred exclusive ownership of key infrastructure industries like power generation and irrigation systems but for different objective reasons: Pakistan because of lack of personnel and democratic institutions and India because of the presence of a committed bureaucracy (24). The absence of development oriented bureaucracy partly determined Pakistan's ambivalent attitude to private enterprise. During the first decade private investment in agriculture and banking was neither encouraged nor discouraged. With the exception of power generation and irrigation, the rest of the economy was left to private caprice. This led to high concentration of domestic wealth in private hands. Until 1969 a total of 22 families monopolized 22% of the industrial capital, 80% of the banking, and 97% of the insurance sector thus creating what Zysman calls the German-model of credit allocation (25). However, Bhutto's government in 1971 took a page from India's development planning book and nationalized every sector of the economy (26). This was both a populist measure to stay in power as well as a means by which the government determined inter-sectoral development. He also inaugurated an era of public sector monopoly over business. So even when the 1980s brought a military regime to power which shifted economic policy in favor of privatization, government control over key sectors remained intact. This has been a consistent government policy even in the 1990s- foreign and domestic enterprise has grown in both agriculture, industry and banking but only with government approval. Government still retains control over power generation, banking, utilities, insurance, shipping, and irrigation systems and 20% of the GDP comes from the public sector (1995) (27).
India for the past 50 years of its independence has followed a policy of state-controlled and directed industrial development. Foreign and domestic private investments were banned and heavily restricted respectively. State laws made it impossible for foreign enterprises to make their forays into the Indian market. Foreign Exchange Regulation Act of 1973 forbid any foreign company to have more than 51% share-holdings. Those others who restricted their shareholdings to below 51% lived in fear of further dilution of their share holdings (28). While the government pampered small scale domestic private enterprises by setting up banks specifically designed to dole out credit to them, monopolies were restricted through such laws as the Monopolies Restriction and Regulation Act of 1951. The state gave itself the legal right to determine the monopolistic trends in an industrial enterprise and thus take it over under allegation of "mismanagement of resources" (29). So the government not only forced the public to buy uncompetitive goods, it also created a vested business class that now protests attempts at liberalization of the economy (30).
Like Pakistan, 40% of India's GDP is invested in the public sector and it produces a quarter of the GDP (1995) but its deficit is 10% of the GDP. The reason is not elusive. Most public sector enterprises work at less than 50% of their capacity, have inflated payrolls, and are affected by frequent labor-union influenced lock-outs (31). Also the government laws and policies prevent downsizing even when the enterprises are posting no profits adding to the overall economic losses (32). It is not surprising that both countries posted a decline in the average growth rate of the industry. Pakistan's growth rate declined from 7.3% in 1980 to 5.7% 1995 and India's growth rate declined from 7.1% in 1980 to 5.1% in 1995 (33).
One of the many areas that requires reform in India and Pakistan is their policy towards labor and education. Both countries have a low literacy rate (43% in India and 25.6% in Pakistan in 1995) (34). Both have a large informal sector that includes farming and which employs more than 50% of the rural population. In India only 3% of the economically active population are employed in the private firms with more than 10 employees and another 6% are employed in the public sector industries (35). In Pakistan 17% of the economically active population is concentrated in the private sector and an equal percentage is concentrated in the public sector especially mining and power generation industries (36). Of the 7.1% of the population employed in services in each economy, 4.5% are labor exports to Middle East from India and 5.8% are from Pakistan. Labor remittances help both countries balance their payments (36). The labor laws in both countries are too many (45) and are designed to protect industrial labor from being laid off by public and private firms even when the firms aren't making profits. Government's labor protection laws only helped strengthen labor unions and their bargaining power especially against the private sector. 5% of the total labor force (concentrated in the public industrial sector) is both unionized and politicized in both India and Pakistan (37). This makes them not only the largest organized groups but also a state or party instrument to keep a reality check on private enterprises. They were able to use their leverage against the firms to provide bonuses and health care for workers as well as reinstate workers who were laid off through firm downsizing (38). Consequently, agitations and lock-outs aren't too infrequent (39).
While the industrial labor has unionized itself, the agriculture labor continues to remain fragmented and unprotected. Government's public sector orientation in industry, especially in India, gave the labor an automatic protection. But the nature of agricultural development and mechanization increased the assets of big landowners and displaced the agricultural labor. The government couldn't restrict the power of the landholders because they were the mainstay of surplus grain production and had already made forays into the political arenas by floating their own parties and winning elections. So the agriculture labor was left to fend for itself finding little consolation either in the violent politics of the Leftist parties or in the government's doles through an inefficient public distribution system (40).
Both India and Pakistan are capital scarce economies partly because of their colonial history and partly as a function of government policies and disincentives to industrial growth. India specifically restricted trade by imposing high import tariffs (400%) on all consumer and luxury goods like perfumes and electronic goods since 1970 (41). This promoted smuggling and discouraged export-orientation by private and public industries. Pakistan however consistently promoted trade especially exports of cotton and textiles that not only account for 30% of Pakistan's total exports (1995) but are a primary source of foreign exchange reserves (42). Like Thailand, a rice-export based economy, set up rice boards to sustain its exports during 1970s, Pakistan too set up cotton promotion boards that allocated cheap credit and subsidies for cotton production (43). Not surprising that earnings from trade as percentage of GDP are substantially higher for Pakistan (36% in 1995) than for India (27% in 1995). However both countries have a negative current account balance on trade meaning that the volume of imports have continued to exceed their export earnings (44). India's current account balance increased from -2922 Rs. in 1980 to -5830 Rs in 1995 and Pakistan's has increased from -1,137 Rs. in 1980 to -1,965 Rs. in 1995 (45). Unless both countries allow greater privatization of the economy the balance will continue to rise (46).
A stagnant economy and huge unproductive government expenditures have led to consistently high fiscal budget deficits. Pakistan posted a budget deficit of -4.8% of the GDP and India's budget deficit was -5.4% of the GDP in 1995 (47). This however hasn't led to the reduction in the defense allocation or reduction in subsidies, the principle sources of government expenditure, nor has it led to a more transparent and broad based taxation structure to generate revenues that would service government expenditures. If India's total expenditures as percent of GNP in 1992 was 17.8% then 19.3% was the expenditure on defense and 5.1% on subsidies. Similarly Pakistan's defense expenditure in 1992 was 29.3% and expenditure on subsidies was 5.1% of the total GNP of 21.7% (48). Taxation did not generate the kind of revenue it should have to service government expenditures because as Snider says, it was more covert rather than overt (49). To compensate for low or no taxation of corporate or agriculture income, the governments overly taxed imports. 83% of tax revenues in both India and Pakistan come from indirect taxes like trade tariffs, customs and excise duties whereas corporate and income tax revenues account for 12.9% of the total tax revenues in 1995 (it was 11.2% for Pakistan) (50). Interestingly, while private consumption from imports was stringently controlled through tariffs (the government obviously failed to understand that it was lack of uncompetitive goods in domestic economies that spurred people to buy "foreign" goods), government's imports exceeded the exports. In 1995, India's total import value was $54, 303 million and export value was $40,995 million, creating a negative account balance of approximately $5000 million for the same fiscal year (51).
The governments of both India and Pakistan had three different ways of servicing the balance of payments- borrowing from the international financial community like the IMF and the World Bank, borrowing from their Central Banks, and/or using the export earnings to service the debt. Both countries opted to borrow from all three sources (52). And they made the fatal mistake of borrowing more without undertaking a structural adjustment program to make the economy more productive or even reducing their high expenditures. Borrowing only added to their total external debt. India's external debt increased from $20,581 million in 1980 to a whopping $93,766 million in 1995. Pakistan's external debt value too increased significantly from $9,930 million in 1980 to $30,152 million in 1995 (53). Not surprising that debt service as percentage of exports of goods and services thus increased too. For India debt service as percentage of exports increased from 9.3% in 1980 to 27.9% in 1995, and Pakistan's increased from 18.3% in 1980 to 35.3% in 1995 (54). Government also borrowed from the IMF and the World Bank, continues to do so. Both India and Pakistan will receive aid worth $3 billion to embark on a structure adjustment program in their economies as well as to service their debts which only sets of another vicious cycle of borrowing and paying off the loans and their interests. While both the IMF and the World Bank had the power to recall and withhold loans depending on the country's economic policy (which was "right" as long as it abided by the Washington-consensus ideology), the domestic Central Banks did not have the same kind of autonomy and power (55). They towed the domestic political ideology same as the IMF and the World Bank still tow the ideology of the Washington Consensus.
Indian and Pakistani governments nationalized their central banks, the Reserve Bank of India and the State Bank of Pakistan, respectively, in 1948-49 (56). This was one important way of ensuring that the central bank principally address problems of budgetary deficits and excessive monetary growth rather than address issues of profitability of the banking system. Both India and Pakistan have borrowed heavily from their central banks at very nominal interests rates of 4% and 5% respectively and both economies have registered high inflation rates of 9% and 10% respectively in 1991 as more money was printed (it still ranges around 8% in 1995) (57).
The absence of central bank autonomy was also symptomatic of the general banking model that both economies adopted. While India's was exclusively, what Zysman and Schmidt call, a French-Japanese model of credit allocation or what Henry calls "exclusive public sector banking system", Pakistan followed the German model in the 1950s before switching to the French-Japanese banking model in the 1970s (58). India nationalized 14 private, commercial banks in 1969 which have since then remained under government control (59). These banks allocated credit to agriculture, the public sector enterprises as well as small scale private enterprises. No foreign or domestic private commercial banks were allowed to exist from 1950s to 1990. 87.1% of the total deposits are in state owned banks of which the State Bank of India is the largest with deposits worth Rs. 8912,910 million (1991). State bank and its associate banks have deposits whose market share is 26.7%. Nationalized banks' market share is 58.3%. Regional/rural banks, which are also government owned, have a market share of 24%. Foreign banks' market share is close to 7.5% (60). Thus the power of the private structural capital is significantly reduced in India (61). This "exclusive public sector banking system" complemented the socialist ideology of the Indian state.
Pakistan, on the other hand, functioned with a German model of banking from the 1950s to the 1960s. In the absence of government intervention and lack of bureaucratic structures, private industrial conglomerates sprung up. In 1957 there were at least 22 large industrial families who controlled 8 of the 9 commercial banks that existed in Pakistan then (62). Thus unlike India, Pakistan has a history of private commercial banking both domestic and foreign and unlike India, it has a history of what Henry calls the structural power of the private capital, or at least potentially so (63). The military and democratic regimes nipped the burgeoning power of the private capital by nationalizing the banks and monitoring them since 1969 (64). Thus the period after 1969 was characterized by the French-Japanese model of banking system in Pakistan. However, unlike India which never encouraged foreign capital investment in India, Pakistan not only arranged for foreign currency loans to the private sector but also permitted entry to three foreign financing corporations- Pakistan-Libya holdings, Pakistan-Kuwait Investments, and Saudi-Pakistan Industrial and Agricultural Investment (1980s) (65). These investment agencies were an addition to the already existing private and foreign commercial banks. Presently the number of foreign commercial banks (22) exceeds the total number of Pakistani banks (18) (66). But this in no way means that the structural power of private capital is growing, that it can now influence policy decisions of the government. In fact the market share of the 18 Pakistani banks is 81.10% as compared to 18.90% market share of the foreign private banks in 1991-'92 (67).
In 1980s, during President Zia's reign, Islamization of the financial institutions was introduced quite unlike anything offered by Zysman or Schmidt or the banking system in India. Interest rates were banned and accounts operated on a profit-and-loss sharing basis. By 1990, 63% of the funds on deposit were held in profit-loss sharing schemes and is expected to rise to $100 billion by the year 2000 (68). Some policy makers compare the Islamization of finance in Pakistan to the nationalization of banks in India- both were repressive to the development of the economy. However, there are others who support the Islamic banking system as an alternative to the conventional banking system (69).
However, both India and Pakistani banks were alike in the cases of misappropriation of funds which has consistently eroded their credibility amongst the people and foreign investors. Pakistan's private commercial banks (including foreign banks) were known for scandals and misappropriation of funds. In 1970s, the BCCI, a foreign bank with three branches in Pakistan, had to close under heavy allegations of massive losses, racketeering, and laundering of drug money. Many political and commercial elite, including the present Pakistani premier Nawaz Sharif and his Ittefaq Industries, were major borrowers from the bank and were implicated in the scandal. In another instance, four Punjab- based financial co-operatives failed in 1970 amidst allegations of misappropriations of funds to the tune of Rs. 10 billion! In India too most public sector banks have suffered from embezzlement of funds (70).
Stock exchanges too were underdeveloped. In India capital was held captive in the domestic market and foreign capital was banned entry (71). Government's unmarketable and ad hoc treasury bills and below par coupons were held and traded in the captive market. In Pakistan the only difference was that foreign capital was not banned. But then no foreign investment was forthcoming for a long time because of the ethnic conflicts that continue to rage amongst the minorities, the unstable political conditions, and the bank scandals that rocked the economy (72). For the very same reasons private capital continues to fly out of both countries in the form of labor remittances to the Middle-East and the flight of intellectual capital to America and Europe rather than be invested in the domestic economy (73). In Pakistan, political leaders themselves are party to draining the economy of its capital. They have regularly dipped into the treasury and bought mansions and estates in Europe or simply added to their Swiss bank accounts. Benazir Bhutto's assets, allegedly illegal, are presently under investigation by the government of Pakistan (74). In India too ministers of state have amassed huge wealth every time they were in power (75).
A Crisis in Political and Economic Capacities:
Both India and Pakistan then seem to have the kind of political crisis, a reduction in state capacity that Snider and Schmidt talk about and the subsequent consequences and dilemmas that Haggard and Kaufman talk about in their respective texts. According to Snider, the state capacity to allocate resources from one sector to another is greatly diminished with greater state intervention in the form of high tariff rates, import-substitution, covert taxation, increased money supply, and lack of central bank autonomy (76). This clandestine approach to macro-economic policy leads to a political crisis that can be characterized in terms of what Haggard and Kaufman call deterioration in aggregate economic performance indicated by slow growth and high inflation (77). In 1995 India's growth rate stood at 3.5% and inflation at 9% and Pakistan's growth was 5.1% and inflation ranged at 10% (78). Both economies have stagnated for a long time with active intervention from the government and the elites, but Haggard and Kaufman suggest it will require their active intervention again to put the economy back on track because these political crises are not "self-correcting" (79). There will always be certain coalition interests or pressure groups like the landowning classes, the leftist parties, the import-substitution pampered business class, the labor unions, and the military (in the case of Pakistan only) that resist changes in status quo. Or the crisis may be too huge like the volume of the balance of payments/external debt value to self-correct itself. Its correction would require a radical structural adjustment program and financial austerity on part of the government known for its unproductive expenditures like subsidies. In fact it was the impending bankruptcy that forced both governments to undertake a liberalization program in 1990s: woo private foreign investments, lower trade tariffs (India's came down from 400% to 50%, still the highest in South Asia, and Pakistan's tariffs were lowered to 11% from 27%), remove ban on private banking (10 new private/foreign banks have been licensed in India in 1991; Pakistan has 5 new foreign banks), increase autonomy of the central bank (Pakistan passed a legislation in 1997 to grant more financial autonomy to the State Bank of Pakistan; the Reserve Bank of India's autonomy is visible in asking the central government to broaden its tax base rather than borrow from the Bank), cut subsidies to the public sector including power generation and agriculture and open them to private competition, increase investment in education, change labor laws that provide incentives for labor to be competitive in the market, increase exports, and most importantly improve both the judicial structure as well as the socio-political situation in their respective countries (80).
Lewis also says that the states must not only radically change the way they do business but also change their politics. He says that only a process of political adjustment can lead to successful economic adjustment (81). Both India and Pakistan have yet to undertake a radical structural adjustment program, political adjustment is a long way off. Both countries are presently making only such delicate touches to their economies that would satisfy the lender agencies enough to release the loans necessary to service the balance of payments. Both have allowed entry to foreign banks, both have repealed laws like the Monopoly restrictions Act as an incentive to private enterprise and reduced tariffs to foreign capital and transnational organizations, both have also given some measure of autonomy to the central banks to control or limit government spending. However, beyond all the above there's nothing substantial being done about the economy. Government expenditures on defense and subsidies continue to be as high as early 1990s, exports continue to stagnate at 0.6% as rice, one of India's major exports, is still limited to the small scale industries, to give only a few examples (82). Ethnic and regional conflicts continue to plague the polity and so do inefficient and corrupt political leaders. The leaders have been primarily responsible for not only drying up the treasury but also for lack of initiative in starting a democratic dialogue between various sections of the society (83). It is only logical for analysts to ask the question: would India and Pakistan have liberalized if not for the severe balance of payments crisis? While some believe that both would have continued towards stagnation without liberalization, others believe they had no choice because the high point of stagnation in the economy had been reached. The negative balance of payments was its manifestation. However, the more appropriate question in this era of globalization is whether India and Pakistan will continue with their economic adjustment agenda now that it has been put into motion? Would they really become part of the global economy?
To Globalize or Not is the Question? Or The Politics of Resistance
Weiss thinks its improbable that nation states would be integrated completely into the global economy. The only global thing, she says, is money/finance. Trade, production and corporate practice are all territorialized, meaning they have specific characteristics of the nation-states they belong to (84). States or the political regimes in turn have determined the nature and direction of the economy. While some nation-states like Japan, Taiwan, Singapore in East Asia have exhibited "high stateness" in a positive way that is, they have acted as facilitators of internationalization rather than globalization, others like India and Pakistan too have exhibited "high stateness" but in a negative way, preventing their economies from being productive and profitable till crisis came knocking at the door in the form of negative balance of payments (85). In other words, while some East Asian states took care of the central issue of sovereignty by pre-emtively restructuring their economies before the crisis could strike, India and Pakistan for example insisted on maintaining their sovereignty in the present confident that the crisis would not hit them. In a way their sovereignty was more undermined when the balance of payments crisis forced them to undertake a program of liberalization and agree to IMF stipulations for economic change. However, a state's sovereignty cannot be so easily undermined as is obvious from the instances of resistance to the "Washington Consensus" embodied in the structure and policies of the IMF and the World Bank.
Both India and Pakistan have embarked on a program of liberalization but not structural adjustment as yet though it is almost 7 years since the balance of payments crisis forced policy changes for the economy. Both countries have procrastinated over structural adjustment or as Snider would say, privatization of state-owned enterprises, deregulation of tax reforms, altering terms of domestic trade have not even been initiated. Instead both nations have opted for economic stabilization first like embarking on a financial austerity, making the currency, the rupee fully convertible, increasing domestic interest rates, and allowing foreign banks enter the domestic financial system (86). Both countries have preferred not to be proactive that is they haven't created new institutions or radically altered the nature and work ethics of the bureaucracy or even reduced subsidies to public sectors (87). Somehow they are reluctant to change years of doing business even though it has only led to a stagnant economy, hoping that once the balance of payments crisis is brought under control they will be "free" to carry on as before. Delaying structural adjustment is one important manifestation of state resistance to globalization.
The second kind of resistance shows in the way both nations insist on equitable terms of trade with the IMF and the World bank despite not being in position to do so. Pakistani Premier Nawaz Sharif wanted to renegotiate with the IMF regarding the latter's terms for bailing Pakistan out of its balance of payments crisis such that the terms were "fair to the people of Pakistan" (88). India on the other hand never had to deal with IMF stipulations because unlike Pakistan India never defaulted on its loan repayments to the IMF. So its complaint was that the IMF doesn't give India proportionate to what it gets back as interests. Basically India accused IMF for making profits from India's fragile economic situation (89). These public statements against the IMF were followed up in a most dangerous way by nuclear tests (90). Both countries conducted a number of underground nuclear tests within days of each other, that jump started yet another nuclear arms race in South Asia. Lack of economic sovereignty, or at least the perception that it was lost once the balance of payments crisis occurred, resulted in a new and dangerous way of asserting political sovereignty, of "demanding one's rightful place in the community of nations" through a nuclear arms race (91).
While one may criticize the state resistance to globalization as imprudent given the nature of the crisis that grips their economies, criticism must also be directed towards the IMF and the World Bank especially the Washington Consensus ideology that underpins their strategies. One agrees with Evans that the only reason why states would collapse is not because of some structural logic but because of the IMF ideology (92). In the past the IMF gave loans under the specific condition that the economies completely open themselves to trade and international capital. This stipulation led to free markets across the world but intensified the crisis that recently hit most East Asian nations and came knocking at the New York Stock Exchange. According to Kaushik Basu, it is indeed a paradox that the IMF and the World Bank demand increased democratization in member nations in the most undemocratic and biased manner (93). However the paradox can easily be explained in terms of the existing asymmetries of power in the world. For example, while America can and does influence Pakistani military, economic, and cultural life, Pakistanis do not have the same inverse power to influence American life. While the IMF comeback may be that the world is indeed shrinking, it still does not mean that the ones who are heading it are anymore democratic than before. They are the ones who are more "meaner and aggressive" in pushing their economic agenda world wide than the beleaguered third world states are in resisting them! Basu says that most democratic third world nation-states still have some modicum of accountability to their electorate within national boundaries but the IMF et al don't because there is no transnational system of voting (94). If there were then maybe the nature of IMF agenda would have been different at least the style of realizing it would have been. We probably wouldn't have known the crippling effects of nations liberalizing their economies faster at the behest of IMF rather than strengthening necessary structures to sustain such radical change. Lack of regulatory mechanisms for capital in most East Asian countries led to flight of foreign capital seeking better interests rates elsewhere leaving crippled economies in their wake. Ronald McKinnon summarizes it best, " IMF was too pushy in pushing the (East Asian) countries to liberalizing their capital accounts too soon. . . and not the least reason was arm-twisting by America which always wants American banks and Wall Street people to be there competing freely. It was holdouts with capital controls like China and India that have weathered the financial crisis much better than others because they were not vulnerable to a sudden exodus of capital" (95).
Basu cautions that the Asian crisis (and a increasingly global crisis) is simply a reminder that we need better and more democratic international monitors and new rules of the game to account for a changing world economy in an era of heightened nationalism within different states (96). The IMF to have credibility must become a democratic institution rather than an instrument of global (read American) oligarchy. Maybe if IMF takes the leadership in democratizing itself first then it can become an example for nation states to re-evaluate and revamp their political economies. This is critical to the well-being and welfare of all people whose lives are determined by the way states and agencies do business (97).
(i) "Living with the Bomb," Time International, August 3, 1998, v.150, n.4, "Time to Globalize?" Times of India, August 12, '98, and "Financial Crisis and Beyond", Times of India, September 22, 1998.
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