Volume 23 Issue 5, May 2019


By Shahid Javed Burki

There are several international organizations that are important for Pakistan. While Pakistan has been fairly active in the United Nations and several affiliated organizations, its relations with economic entities have real significance for the country. A number of these institutions have provided large amounts of financial support; some of them have been important for improving the global environment in which the country must work. My focus in this article will be on the financial and economic institutions.

Development banks were created after the end of the Second World War. They filled a gap in global finance that made it difficult for the developing world to access finance for development. Soon after the war ended, a number of countries gained independence as European colonizers left the continents of Asia and Africa. The governments that took control of the territories were led mostly by native leaders who, in their campaign for independence, had promised rapid economic growth and social change for their people. But that would have been possible only if inherently low domestic savings could be augmented by external capital. There were two possible sources of finance: the budgets of developed countries or the private sector.

The founders of what came to be called the Bretton Woods system – so called because it was conceived at Bretton Woods, a resort in New Hampshire in the United States – saw a way of combining these two sources. An institution called the International Bank for Reconstruction and Development, the IBRD, was established with capital provided by all member states. Contributions were calculated on the basis of the shares of individual countries in the global gross domestic product. By that measure, the United States had the largest share followed by several European nations. The IBRD later became the World Bank and later still the World Bank Group (WBG).

A couple of decades after the creation of the IBRD, it was realized that that regional banks needed to supplement the WBG. Such institutions would have a better understanding of the geographic areas in which they would be headquartered. The Asian Development Bank, the ADB, was set up in Manila, the Philippines on December 19, 1966. Initially, the bank had a membership of 31 that increased to 68 of which 49 came from Asia and Pacific. It was modeled after the IBRD including the expectation that the president would be from the largest shareholder. As was the case with the IBRD the capital from the shareholders came in two parts: paid-in and callable. The first part was actually contributed to the coffers of the concerned institution; the second could be called in, in case the institution could not service the debt the institution had accumulated. None of the banks have had to call-in the part of the capital in that category. The call-in part of the capital makes it possible for the development banks to float bonds at the rates not available to the borrowing members. The number of regional banks have increased and now include the Inter-American Development Bank, the IDB in Washington; the African Development Bank, AfDB; the Islamic Development Bank, the IsDB; and the European Investment Bank, EIDB.

In addition to providing relatively affordable capital for development, the regional banks also promoted inter-country connectivity in the areas for which they were responsible. Regional Cooperation and Integration (RCI) was introduced as a major objective for the ADB by Harunikho Kuroda who was the Bank's president for eight years - from 2005 to 2013. A Japanese by origin he saw regional integration as an important instrument for raising productivity, acceleration in economic growth reducing poverty and regional as well as personal income inequality. However, while the ADB had a great deal of success in the eastern part of the Asian continent it was not able to make much headway in South Asia. The Association of Southeast Asian Nations (ASEAN) was the most successful regional operation in the area. This was the case in large part because of the accommodating stance of Indonesia, the largest ASEAN country both in terms of population and economic size. South Asia was not able to follow the ASEAN example because of the intense rivalry between India and Pakistan. This had led the two nations to go to war four times after becoming independent in 1947 – in 1948, 1965, 1971 and 1999.

An effort was made in 1975 by President Zia ur Rahman of Bangladesh when he persuaded the regional leaders to create a regional organization for promoting trade and other forms of regional economic relations. Thus was born the South Asian Association of Regional Cooperation, the SAARC. Kathmandu, Nepal was to be the seat of the organization. It was agreed that the SAARC leaders would meet every year in a summit to discuss the progress they were making in achieving regional integration. The venue of the summits were to rotate among the countries. In 1999, at a summit held in Dhaka, the SAARC leaders agreed to launch a trade initiative in the form of the South Asia Free Trade Area, the SAFTA. But nothing of great substance was achieved although the ADB offered to provide both technical assistance and investments for improving regional connectivity. India did not behave the way Indonesia had done in building the ASEAN.

While the ADB has a large program in Pakistan it has not been involved in promoting regional connectivity. That may change with the launch of the China-Pakistan Economic Corridor program aimed at improving the country's physical infrastructure. One of the major initiatives included in the multi-billion dollar investment program is the construction of three highway corridors that would connect the deep-water port in Gwadar on the Balochistan coast in Pakistan with Khunjerab on the China-Pakistan border. This program could be linked with the ADB's Central Asia Regional Economic Cooperation, or CAREC, a partnership of 11 countries including Pakistan, Afghanistan and China. The CAREC is supported by six multilateral organizations with the ADB in the lead. Its focus is on four areas: transport, trade facilitation, energy and trade policy.

Trade within the CAREC region is relatively limited compared with other regions in Asia-Pacific. CAREC's intra-regional trade intensity index is only 0.2, lagging behind the ASEAN's 3.2. The main reason for this is poor communication among the nations in the area. CAREC, working with China' Belt and Road Initiative, would no doubt help in improving the flow of goods and commodities in the region. China's BRI and ADB's CAREC would introduce land-based commerce, reducing the dependence on the sea. Once these two programs begin to achieve their objectives, Pakistan would become a central player in the evolving regional system.

The writer is a professional economist who has served
as a Vice President of the World Bank and as caretaker Finance Minister of Pakistan. He can be reached at sjburki@gmail.com

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