Friday, October 31, 2008




Pakistan is once again on the edge of a precipice. The economy is in tatters. Inflation is hitting the roof. Businesses are closing down and investment has dried up. Power riots are becoming the order of the day. There is no money to import fuel. Large parts of the country are facing food shortages because of production and distribution bottlenecks. There is massive flight of capital. The country's credit rating has plummeted to below junk bond status. To avoid sovereign default and restore the confidence of international financial markets, Pakistan has no option left but to approach the IMF. But accepting IMF prescriptions will by definition mean that things will get worse before they get better, if at all. The immensely painful stabilisation and structural adjustment measures which an IMF program normally entails will increase economic distress, which is already close to breaking point. In short everything that can go wrong with the economy is going wrong.

To make matters worse, the economic meltdown has come at a time when Pakistan is in a virtual civil war like situation with the army desperately trying to regain control over vast swathes of territory that have fallen to Islamist insurgents. The security situation, which is unlikely to improve anytime soon, is further dragging the economy down. This in turn is severely restricting the Pakistani government's ability to provide even a small measure of relief to the distressed people, much less make the structural adjustments needed to put Pakistan on a self-sustaining economic growth path.

The roots of the terrible mess that Pakistan finds itself in routinely lie in the unviable and unsustainable economic model that Pakistan has adopted. Loans are treated as disposable income to be frittered away on consumption, secure in the belief that when the time comes to repay the loans someone will surely come and bail Pakistan out. After all, the prospect of a 'failed' nuclear-weapon state that is likely to end up being Talibanised is the rest of world's worst nightmare come true. Pakistan's success in leveraging the horrendous repercussions of its failure has created an economy that thrives on living beyond its means. What is more, to ensure that somebody keeps footing the bills, Pakistan has mastered the art of fitting into the security and strategic calculus of its patrons. For instance, these days one often hears Pakistani politicians and opinion makers saying that if the world wants Pakistan to fight the War on Terror then it must pay Pakistan for it.

The only time when the Pakistani economy gallops is when foreign aid floods the country. And this usually happens when a military government is in power in Islamabad – the 1960's when Ayub Khan was in power and Pakistan joined SEATO and CENTO, 1980's with Ziaul Haque in the saddle and Pakistan became the staging post for the Jihad against Soviet occupation of Afghanistan and then in the first decade of the third millennium when Pervez Musharraf signed up Pakistan as a frontline state in the War on Terror.

But as soon as there is a transition from a military government to a civilian government, the economy goes into a tailspin. The political governments are of course not responsible for the crisis; they inherit the crisis and end up carrying the can of the economic follies committed by the military regimes. The harsh measures that the civilian governments are forced to take to save the country from bankruptcy impose crushing economic hardships upon the people. Quite naturally, the rising levels of economic distress under the civilian governments are compared unfavourably with the boom under the military dictators. An impression gains ground that the politicians are incompetent and incapable of improving the economic condition of the people. The fledgling democratic process gets badly undermined and people once again start to yearn for another military strongman, something that should be of concern all those countries that profess wanting to see democracy succeed in Pakistan.

In the past Pakistan invariably fell back upon its traditional friends, allies and patrons – China, Saudi Arabia, US and UAE – to bail it out. But this time around, there is no oil facility coming from the Saudis, the Chinese have refused to provide any balance of payment support, the UAE has preferred to join the 'Friends of Pakistan' forum and extend support from this platform, and the US has stringent political and strategic demands tied to aid. Apart from the US, a cold shoulder from the other countries would be understandable if they were facing a deep economic crisis themselves. But this is not the case. The Saudis are sitting on a mountain of petro-dollars, the Chinese are finding it difficult to handle their nearly US$ 2 Trillion of foreign exchange reserves, and the UAE is in no major difficulty. And yet they are keeping Pakistan hanging out on a limb. Why?

A charitable explanation would be that Pakistan's 'friends' are letting it know that the time for free lunches is over and that unless Pakistan is willing to undertake rescuing reform and restructuring of the economy there will be no more blank cheques forthcoming. But since international relations are more often than not guided by political and strategic interests and pressures, there could be something more at play than a mere refusal to continuously pick up the tab for a profligate friend.

Saudis are probably killing two birds with one stone by not opening up their coffers for Pakistan. At one level, by not helping the PPP-led government the Saudis are going to increase the stock of Nawaz Sharif, their political favorite in Pakistan. At the same time, the Saudis are becoming willing partners of the US plan to squeeze Pakistan real hard on the economic front and use this leverage to make Pakistan deliver on the strategic and security front. There is also a possibility that the Saudis want something from Pakistan which Pakistan is chary of giving.

As for the Chinese, they normally use aid as a tool to gain strategic advantage and are not known to give freebies. In the past, China charged Pakistan a price, sometimes exorbitant and at other times concessional, for whatever defence and nuclear technology it transferred. Despite getting paid for everything it supplied Pakistan, China gained Pakistan's deep gratitude. But more importantly, by propping up Pakistan as a counter-weight to India, the Chinese were able to encircle India and embroil it in the neighborhood to an extent that India found it difficult to get into a position to stand up to, much less challenge, China's pre-eminence in Asia.

But today, when Pakistan is arguably facing the most serious economic and security threat to its survival as a modern nation state, there is no succor coming from China. Is it because a stable and strong Pakistan is no longer a strategic necessity for China? Could China be calculating that its interests are better served by a severely destabilized Pakistan? After all the country that will face the brunt of the fallout of an imploding Pakistan is India. What is more, Pakistan's collapse will be a strategic nightmare for China's real strategic adversary – the US. China will of course continue to promise Pakistan the world – nuclear power plants, fighter jet project, investments, a communications satellite – and will even deliver on some of these promises (no doubt, making money in the process) in order to keep its options on Pakistan open and keep alive the impression that China is Pakistan's all-weather friend. But in the end, all this will not add up to anything because it does not address the fundamental problem confronting Pakistan – a belief that the rest of the world owes it a living.

Pakistan undoubtedly needs a massive infusion of funds to avoid bankruptcy. However, all the money given to Pakistan will go down the drain if there is only tinkering with the current economic system. Conditionalities forcing Pakistan to raise some revenue from here and cut some expenditure there are not going to make Pakistan stand on its feet and rid it of the addiction to foreign aid. What is required is a complete overhaul of the economic system. The problem is, to use the words of JK Galbraith, "The rich and privileged, when also corrupt and incompetent, do not accept rescuing reform".


    <1385 Words>                    31st October, 2008



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