Column : Politics kills economics in Pakistan

Written by Kamal A Munir | Updated: Oct 31 2009, 03:36am hrs
The kind of political regimes that much of the third world has been saddled with over the last many decades have ensured an absence of real development, even if there have been periods of growth in GDP. Issues such as independence in policy-setting, whether domestic or foreign, land reforms or their absence, dictatorship vs democracy, political patronage and social embeddedness of economic networks are central to their lagging development. These countries are living proof that politics still trumps economics and none more so than Pakistan.

Whereas Pakistan took giant strides in the initial three decades after its formation, its once lauded economy was pulled down by the weight of its unreconstructed politics thereafter. In the 11 years of Zia-ul-Haqs regime Pakistans entire politico-business landscape changed, with businessmen going into politics and politicians setting up a range of businesses. Then came the major shift under Musharraf. And the supposed economic boom that ensued as a result of this political shift under Musharraf concealed a continuous corrosion of its economic strength.

Nearly a decade after this policy shift, Pakistans economy lies in doldrums, with external debt standing at $50 billion or over 30% of GDP, GDP growth at 2%, inflation close to 20%, and industry gasping for breath due to chronic energy shortages and exorbitant costs. This is particularly ironic since Pakistan received record inflows of capital right after 9/11. Whereas prior to 9/11, Pakistan received around $1 billion in remittances, after 9/11 this jumped to approximately $5 billion/year. Apart from this, there was a substantial increase in bilateral and multilateral assistance. Combined with investment from the Middle East and other countries, Pakistan received nearly $60-65 billion over six years after 9/11. Unfortunately, the liquidity boom that this transfer produced became fodder for ongoing political cronyism under Musharraf. Army generals, who developed, acquired and sold land, were some of the biggest beneficiaries from the real estate bubble that this liquidity led to. Under Musharraf, the army also became the largest business conglomerate in the country, owning and operating over 50 businesses.

The capital that did not go into real estate was used for speculation in the stock market, which remained largely decoupled from the actual industrial base of the country. Whereas the stock market became one of the fastest growing in the world, there were hardly any IPOs (reflecting the actual business activity in the country).

Thus, while Pakistan suffered the negative consequences of its foreign policy shift post-9/11, it did not benefit from the enormous capital inflow that it brought. Impressive growth rates in the 2000s were largely a result of cheap credit fuelling conspicuous consumption and the real estate bubble. None of this money was invested in large developmental projects. Most frustrating was the governments reluctance to transform the vast coal reserves (one of the largest in the world) into a source of energy, or to build sufficient hydel power generation capacity. As a result of energy shortages most industries have come to a grinding halt.

Musharrafs era was one long party, where everyone made merry, but which left in its wake a hugely polarised society, massive political instability and completely wrecked political and economic institutions.

If things were bad then, they turned worse in 2008. Pakistan was now teetering on the brink of default. The government blamed the financial crisis, but in fact the global financial crisis had little negative impact on the Pakistani economy. The exposure to subprime mortgages and other securities was limited in Pakistan. The seeds for the economys decline had been sown much earlier. Like many countries, Pakistan struck a Faustian bargain with the IMF. This meant an end to price subsidies, tighter monetary policy and reducing social spending. This meant further polarisation of society, and price hikes putting everyday articles beyond the reach of most Pakistanis.

Now, US and Pakistani action in the federally administered tribal areas has unleashed a terrible vicious cycle of violence. The situation is such that ordinary freedoms that people in other countries take for granted, are denied to Pakistanis. Only the hiring of security guards is booming. The country is passing from one crisis to another, first energy, then wheat followed by sugar, but the real crisis remains that of political institutions.

Politics still comes first. Multilateral institutions creating economic policies for Pakistan in isolation from its political reality are wasting everyones time. And the political change will have to come from within.

The author teaches strategy and policy at the University of Cambridge & Lahore University of Management Sciences