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OBL is dead, the Navy’s been caught napping and the Rangers are shooting unarmed young men in parks: just another hum-drum day in the Islamic Republic. But, beyond these borders – in the real world – things are changing more rapidly than we may realize. There is a Global Economic shift occurring all around us and western economic dominance is giving way, primarily, to the two rising Asian giants; China and India. In twenty years time, right around when this magazine is blowing out 20 candles on a cake, the US, Europe, Russia and Japan will have been economically displaced by, both, China and India. We get to see, from a front row seat and in our lifetimes, the advent of a new world order with all of its attendant excitement and turmoil. Pay attention now because a tectonic shift of such magnitude is a once-a-century event and the last time such a shift occurred was at the turn of the 19th century. That’s when the US replaced Great Britain as the world’s largest economy and the US Dollar became the currency of choice on planet Earth. Hint: Buy Chinese Yuan and the Indian Rupee (is that treasonous?).

The good news is that a shift in the global economy of the kind that is almost certain to occur in the next twenty years, increases global GDP massively, and for so long as it is underway, leads to higher income growth and vast improvements in living standards. That such an event is now expected to occur in China, India and Sub-Saharan Africa is the best news for mankind since we learned to walk upright. It’s incredibly good news because this time around many hundreds of millions will be lifted above the poverty line for the very first time and be able to buy such luxuries as a pair of shoes, three meals a day and that most virtuous of all human endeavors; an education. Mother Teresa herself couldn’t have done better. And, improving the lot of hundreds of millions will be the Godless Chinese and the idol worshipping Indians. The Lord works in strange and mysterious ways indeed.

Thank the stars for a rising China and India because the biggest issue currently perplexing the global economy is: who will replace the US consumer as the driver of global demand? Since the credit crisis of 2008 this has been a persistent worry. However, given the likely economic growth rates that will prevail in these countries over the next twenty years, it’s almost certain the Chinese and Indians will more than compensate for lost US consumer spending. China will grow about 7% a year and India at about 9% a year on average until 2030 and these superb growth numbers may actually be conservative. If the effect of the credit crisis on these economies is less muted we will actually see even better growth in incomes. In the next two decades every single Chinese and Indian will experience, at least, a five-fold increase in their annual incomes and go from being poor to middle income. That is a phenomenal accomplishment since we are talking about roughly 3 billion people earning several trillions of US Dollars more, and not the measly billions they currently do (Note to lawyers: that’s even more money than the fees some of you charge).

If demographics is destiny, more good news follows. In the natural evolution of an economy, a rising middle class ensures a sustainable economic growth trend, creates greater domestic demand, is responsible for most entrepreneurship and innovation and forms the basis for a consensual society. Middle classes run the small businesses that create jobs and wealth whilst, at the same time, consume the higher value- added goods and services that the rural and urban poor never will. By 2030 the global middle class will have grown to 5.0 billion from 1.8 billion people today. And, they will be mostly Chinese and Indian. Other Asian countries, including Pakistan, will also see an increase in the absolute number of their middle class but they will, unfortunately, represent a smaller proportion of the total population than in 2010. Pakistan will, simply put, have more poor people. The scale of middle class creation in India and China is so large that by 2040, the middle classes of these countries will account for half of all global middle class spending in the world. Poor Prada! Good luck designing Saris is all I can say.

We need to take a cue from the very large middle class creation that is certain to occur in our neighborhood and gear up to take advantage of the many opportunities this will create. We will have a larger number of very poor people which means we will have cheap labor that can create the basic products our better off neighbors will soon demand. Developing the products for these new potential export markets is best left to the private sector, and letting the private sector have the freedom and space in which to operate is what the government should ideally do. Where focus is required is in the liberalizing and deepening of trade ties with, both, China and India. This is an area where we have not done enough and we now have no time to waste. As China and India grow the number and strength of their middle classes, their labor costs will increase which, in turn, means they will look to low cost producers for many of the basic goods they now produce. That’s exactly how the Japanese, Taiwanese and the Vietnamese first grew their economies. They became the low cost suppliers to the rich industrialized nations of Europe and the US. As China and India move up the value chain and as their labor becomes better suited to producing more value-added goods, Pakistan can step in to produce the goods they no longer want to make or those that become uneconomical for either country to produce. Essentially, we need to be able to ride their coat-tail and become a well entrenched trade partner and a reliable and economical supplier. If we can get past our egos and the pointless nonsense that seems to always get in the way of our developing closer business and economic links with countries, especially, India, we may actually be able to create far more opportunities for our economy than we have so far.

Not surprisingly, this tremendous improvement in the lives of billions will also create a whole new set of issues which the savvy can quickly turn into profitable opportunities. Growing economies require, at the most basic level, greater supplies of food, energy and water. The rapid rise in the income levels of billions of people will put increasing pressures on the environment to provide greater quantities of these basics. Rising commodity prices are an inevitable consequence of the coming global demand growth with the speed, magnitude and timing of price moves varying across commodities. For Pakistan, the good news is that cotton 2 will encounter significant demand increase and the supply gap of this crop will grow nearly four-fold over the next twenty years, delivering ever higher prices and better returns for the commodity. Given that Pakistan is basically an agrarian economy with some manufacturing scattered about, we must focus on our core strengths and develop on these going forward. The impetus must be on developing corporate farming businesses, a proven way of most efficiently enhancing agricultural yields and developing the economy from an agricultural base. A few far sighted businesses are already working on this but the right incentives need to be provided to the private sector in order to pick up the pace of development in this sector. Several governmental agencies have the ability to provide the knowledge base needed to improve our farming methods, increase agricultural yields, develop new crop varieties and move up the agro-value chain. A major problem with our agricultural sector is the lack of proper storage and preservation which leads to lost product that would otherwise have been sold for cash. Just preventing these losses by providing the right incentives to food storage and distribution companies would lead to a larger surplus of agricultural produce, which can either be exported for valuable foreign exchange or increase supply and reduce prices in local markets. As an agricultural economy, we must understand and quickly adopt new agricultural practices such as hydroponics, hybrid seed development and genetically modified crops which are the only way to ensure our ability to produce cash crops with less water, soil, fertilizer and other costly implements ensuring higher yields, less waste, lower production costs and better produce quality.

Supplying energy in the form of oil and gas to the far larger populations of 2030 will be a tremendous challenge because it requires significantly greater investment in infrastructure, manufacturing and logistics. Asia will dominate the global population in 2030 with four Asian countries ranking in the world’s five most populous (Pakistan 2030 pop: 250 million). From a long term perspective, investments in the oil and gas sector as well as in the food and agriculture sector offer high earnings upside with limited downside risks. However, over the last ten years the oil and gas exploration and production (E&P), mining and extraction sectors have not been fully productive and have, therefore, failed to achieve important milestones. Although these companies have higher revenue earnings than in the past, those higher revenues are principally a result of higher prices and not higher production. Our oil and gas production numbers are quite dismal and getting worse. In 2011 we have seen scary curtailments of gas to a very large part of the fertilizer industry which is certain to create a urea shortage in the country in the month of July. That, in turn means we may not have enough fertilizer to produce enough food to feed the country which could, if the problem is not quickly addressed, create a food security issue.

Moreover, our E&P companies have never been able to develop offshore fields despite an abundance of evidence indicating the strong possibility of sizeable reserves off our shores. That is just bad luck but there are other policy issues that add to their woes. Perhaps the biggest scourge plaguing our E&P companies is the circular debt menace. Over the last five years as electricity subsidies have added up and the government has been unable to pay power producers these subsidy amounts, the burden has fallen on E&P companies who have seen their very large cash piles vanish only to be replaced by IOU’s from the government. E&P companies need large cash reserves to fund the exploration and development of their oil and gas wells. Without cash they will be unable to dig a hole in the ground and recover the oil and gas that is the lifeblood of any economy. For as long as the circular debt remains outstanding and electricity subsidies are not fully withdrawn, our E&P companies will continue to suffer and remain unable to pursue the very vital businesses they are engaged in. Subsidies are never a good idea and the fact that we have been spending way over our means for far too long has finally caught up with us. No new investment is forthcoming in the oil and gas sector for precisely this reason which, if you think about it, is pretty easily solved; just have everyone pay for what they consume. Removing this impediment will allow the much faster E&P activity required in Pakistan and we really cannot afford to wait a second longer.

The same is true of our mining and mineral extraction business. There are large proven reserves of coal, copper and various other rare earth and precious metals in Baluchistan, but the political problems of that poor province prevent extraction and development. Again, a relatively easy to resolve problem has been made into an insurmountable obstacle. Political solutions are probably possible and the payback is huge, yet we continue to falter and happily bear the unaffordable economic costs of lost opportunities. It’s a question of will more than anything else really.

You may argue that the investment associated with developing a robust mining and E&P sector is too large for us to bear and is the real problem with a poor country such as ours, but that argument is invalid today because the economic development model has undergone a paradigm shift. Ever since I can remember and all through my academic training, the popular refrain was; higher savings leads to greater investment in an economy which, in turn, leads to higher employment, income and growth. Apparently, that’s incorrect which means the degree on my wall is now worthless and I am no longer educated. Thanks for nothing, Columbia! The new mantra and one which has important implications from a policy perspective is that causation is from growth to savings and not the other way around. This means good governance and the right policy framework are the cornerstones of economic growth and upon these rests the improvement in the lives of millions. With the right choices, some of which may indeed involve short term pain, a nation’s destiny can be turned around. You don’t need to be a wealthy nation to increase the level of prosperity amongst your people, you just need to frame well thought out, intelligent policy choices. Clearly, this means the emerging economies of the world can attract large amounts of FDI for their infrastructure investments and propel their economies forward, simply by making the right policy choices. Historically, FDI has come from the US, Europe and the developed world but even this is changing as China draws down ever larger amounts from its foreign exchange reserves and invests these in its own backyard and on the African continent.

Although we have seen some Chinese sponsored FDI trickle into Pakistan, it is miniscule in comparison to the investment by the Chinese in other less developed countries. Pakistan could, in my opinion, see much higher investment in its economy with just a slight tweaking of its policy choices and more intelligent policy decisions. The paucity of good economic policy choices also explains why we remain forever vulnerable to a balance of payments crisis and its attendant lack of FDI. In order to pull ourselves out of this quagmire we need to engage in a process of continuous structural reform along with timely devaluations of the Rupee and supportive fiscal and monetary policy decisions. It is precisely this course of action that will make us less vulnerable to a balance of payments crisis and shorten the adjustment period between our not having enough national savings to fund our infrastructure investment needs and receiving large FDI inflows into the national economy. We need to accept the reality that has been staring us in the face for a very long time and start living in the real world. We are a poor nation that doesn’t have sufficient internal resources to invest in roads, dams, telecommunication, utilities, schools or universities because we don’t pay enough in taxes (cheating is a way of life) and fritter away our scarce foreign exchange on such frivolous items as mobile phones (should everyone in a country as poor as ours own imported mobile phones?) and luxury cars. Short term gains are always illusory and end up costing much more in the long term. Tax evasion, ignoring reality and living beyond our means are the primary reasons we are unable to wean ourselves off the IMF and other international lenders.

In 2030, China and India are expected to constitute 33% of the global economy, an increase from less than 12% today. There are ten other countries that are expected to grow 7% a year for the next two decades, which means a tripling of their GDP from 2010 levels. Following these are six nations that could grow relatively fast and it’s in this bottom quartile where we find Pakistan. But, all isn’t lost and although we may be bottom of the barrel, it’s not that hard to extract ourselves from here. Although politics may sometimes stand in the way of our making progress, we have some superbly qualified individuals, situated in key positions where policies are made. I have met them and I am delighted to write that not only are these individuals exceedingly capable but, more importantly, they possess tremendous character and integrity too. Call me foolishly optimistic, if you will, but I remain confident that these few individuals will make a difference: because they want to. They will push through the reforms and difficult choices we need to make as a nation, if we are to achieve the kind of prosperity that almost every one of our neighbors is currently moving towards.

Where we lack and where there is little, or no hope of our catching up is in the area of creativity. As economies mature and get past the rudimentary activities of providing for their citizens, the increased wealth and higher per capita incomes free up resources for research, development and higher education, thereby increasing the pace of innovation. A feedback loop is created, and then enhanced by ease of communication, liberal trade and investment regimes. Prior to its opening up, India focused on developing a world class education system including the IIT’s and IIM’s which now churn out some of the world’s best engineers and business minds. Fortune 500 companies started recruiting directly from these universities, several years ago and by the time India opened up under the policies of Manmohan Singh in the 1990’s, it had a very large number of well educated scientists, engineers and more. That, and the return of the Indian diaspora to its shores in the recent past, continues to propel its economy forward and has resulted in the production of such world beaters as Tata Motors, Satyam Computing, Wipro, Reliance and Dr Reddy to name a few.

Our lack of quality education and strong businesses is the reason the focus must shift from mollycoddling certain businesses and sectors for political gain, to opening up the economy across the board. We need investment and technical know-how in many areas and the only way we can achieve sustained higher economic growth is by allowing the rest of the world to come in to set up business in Pakistan. Creating the right investment climate in the country is the only thing we need focus on. Overseas investment along with its human resource and technical training will not only enhance our economic growth but also quickly compensate for our lack of education and creativity. The big multinationals of the world, regardless of nationality, have the means and the ability to not just set up shop in Pakistan but to also impart the required skill set to our workers. If that were not the case, Toyota would not be able to make cars in Karachi and Mobilink, Telenor and other cell phone operators could not have run their complicated and very large operations here. Good policy is the panacea for our ills. Nothing else matters. It would take too long to fix our broken educated system given our lack of financial resources and willingness. Let in the private sector and let them in fast. They will tackle these issues far more expeditiously because they are driven by the profit motive and have a vested interest in resolving them.

Although we face numerous challenges heading into the second decade of the century, we are also confronted with significant opportunities. Knowing where the world is headed can help us understand what we need to do in order to ensure sufficient economic growth in Pakistan, in order to be able to feed, clothe and educate our people. We will never become as strong, rich or important as either China or India and we will have an even larger number of illiterate and desperately poor people than we do now. That is the reality, whether we like it or not and as far as I can tell we have two options. One is to stick our head in the sand and pray for manna from the heavens; our traditional response. And the other is to proactively tackle these issues. Option one is pointless because God delivers only when man endeavors. That makes the second option far more attractive especially given the fact we have enough well meaning, bright and energetic men and women who have the ability to rise to the challenges ahead and the capacity to pull through. Good policy alone is the single most important factor that has led to the creation of the two most envied economies, i.e. China and India, in less than twenty years. This being the fact, despite the rumor that during the famine of the 1970’s the Chinese ate children who had died of hunger. Similarly, in the early 1990’s India stored and pledged all its gold with the World Bank and the IMF to obtain loans for basic survival. We have never pledged our gold nor have we ever been confronted with a famine and are much better off from where the Indians and Chinese started. Our starting point is farther along than that of the Chinese and the Indians and good policy alone can ensure we move from this starting point and race down the track towards economic growth and national progress. Continuation of what has been the norm will only serve to ensure the world leaves us so far behind, that any starting point advantage becomes entirely irrelevant.