The reality behind Musharraf’s apparent economic miracle in Pakistan

Zia Sarhadi

Rabi' al-Thani 03, 1427 2006-05-01

World

by Zia Sarhadi (World, Crescent International Vol. 35, No. 3, Rabi' al-Thani, 1427)

According to official pronouncements from Islamabad, Pakistan has never had it so good economically under the present dispensation. Officials point to the booming real estate and stock markets as well as rising sale of commodities such as cars, particularly the number of Mercedes Benzes on the road, to support their case. Similarly, the Pakistani middle class, considered an endangered species only a few years ago, has returned from the grave. It is living it up as never before, flaunting its wealth by going on wild shopping sprees, holding extravagantly sumptuous parties and going on holidays to the Middle East and Europe. There is also an increase in foreign remittances, from an average of US$1 billion per annum a few years ago to nearly $4 billion today. All these point to a robust economy with foreign investors "flocking" in to cash in on the bonanza, they argue. Pakistan is touted as the latest Asian tiger.

A number of economists, among them Shahid Javed Burki, a former World Bank vice president, and Akhtar Hassan Khan, a former planning secretary in the government of Pakistan, have challenged this rosy picture and questioned the sustainability of current economic growth. Burki in particular, in a series of articles in the Karachi daily Dawn (March 28, April 4, 18 and 25), has pointed to several structural weaknesses in the economy that make sustained economic growth doubtful unless steps are taken to alleviate them.

Quite aside from the technical arguments against sustained economic growth, there are numerous political factors that suggest such optimism is misplaced. Governments everywhere (and Pakistani governments in particular) have a tendency to present a rosy picture of their performance in order to "look good" to their public. Before addressing these exaggerated claims, however, it must be admitted in justice that the present economic situation is far better than when the military seized power because civilian rulers were simply interested in lining up their own pockets and those of their hangers-on, instead of worrying about the economy. The military is no better but does so under the cover of "legality"; a number of legal instruments have been put in place to allow the military to siphon off large sums of money directly from the budget. Then there are a number of hidden projects handled only by the military that do not appear in any budgetary figures for anyone to be able to query them. Similarly, there are myriad foundations that the military has set up to benefit its own, including those retired from active service. The top echelons also award themselves vast tracts of land at retirement (one wonders for what meritorious service), adding to their financial fortunes while robbing the state.

The apparent economic upturn must be examined in light of the international environment since September 2001. With America going berserk and freezing foreigners' assets, alleging that they might be used for terrorist-related activities, there has been considerable flight of capital from the US. Much of it is Arab money, the bulk of which has found its way into Europe, some into Southeast Asia; only now have small sums started to trickle into Pakistan. There is also another reason for the rapid increase in foreign exchange reserves: sale of a number of public utilities at throw-away prices that have been lapped up by foreigners. More such corporations are on the block. Their sale too is presented as evidence of the government's sound handling of the economy. Similarly, Pakistanis who had stashed money away in foreign banks are now bringing it back or transferring it to Pakistani banks abroad for fear that it might be held up or stolen outright by the Americans.

The political environment needs closer attention, however. Waziristan and Baluchistan continue to be in turmoil; the former is much more critical, while the latter could cause serious economic problems if gas pipelines are frequently attacked and supplies disrupted. Far from addressing such problems by looking at the root causes of people's grievances, the military has a standard answer to every problem: use maximum force and browbeat people into submission. The people of Waziristan are refusing to take such treatment lying down. Renowned for their fighting skills, they have hit back; large parts of North and South Waziristan have become "no-go areas" for the military and its civilian operators. General Pervez Musharraf has indirectly admitted as such by declaring that the government's writ will be imposed. This clearly means that parts of the country are out of control.

The tribesmen of Waziristan have been aroused because the military regime was pushed into this disastrous policy by the Americans. Unable to stand up to US bullying, it put its hand in a hornet's nest by attacking the people of Waziristan—North and South—under the pretext of fighting terrorism. Not only has the military been humiliated; even ordinary people have been sufficiently alienated to force them to take to arms. In large parts of Waziristan there is no government machinery; there was little government involvement to begin with. Government buildings have been taken over, the radio station has changed hands several times, and tribesmen have set up their own checkpoints to collect taxes, as well as courts to deliver summary justice. People turn to these fighters, not the invisible government officials, to address their grievances. All this is happening in the critical tribal region bordering Afghanistan.

Unable to fight their so-called war on terror and confront the rapidly growing Taliban resistance in Afghanistan, the Americans have been pushing the military regime in Pakistan to crack down harder on its side of the border. The result has been an unmitigated disaster for Pakistan. Why Musharraf should attack his own people and create problems for himself when the Americans have become increasingly belligerent and are beginning to regard Pakistan as an enemy is unclear. Perhaps Musharraf feels he has no choice; his hold on power depends on his remaining in the Americans' good books. This points to Pakistan's political weakness; every ruler—whether civilian or military—believes that he must appease the US to ensure his survival because this will keep his opponents at bay. Uncle Sam, however, is impossible to please; he keeps pushing whoever is willing to be pushed.

The Americans have realised that Musharraf is a pushover; the harder the Americans exert pressure on him, the more brutal he gets with his own people, and the more intractable the political situation gets as a result. While Musharraf may think it is easier to fight his own people than to stand up to the US's bullying, it will have disastrous consequences for the country, especially in the economic field. Economic progress is dependent on a stable political environment; investors, foreign or domestic, are fickle: at the first sign of trouble they flee with their capital. There is no reason to believe they will behave any differently in Pakistan than any other place. In fact, even Pakistani expatriates who have brought their wealth into the country will flee; their patriotism is only skin-deep. They are happy to bring their capital and bask under a halo of patriotism while raking in huge profits, but at the first sign of trouble they will head for safer pastures. Musharraf and his economic managers mistakenly believe that all they have to do is provide an investor-friendly environment, without worrying about the political storm clouds, and the investors will flock in.

The government's economic performance also needs a closer look. The situation is not as rosy as officials claim. First, inflation is rampant; officially at more than 10 percent, its impact is felt most acutely by the poor and those on fixed incomes, which is the vast majority of Pakistanis. Despite high GDP growth rates—it was 8.4 percent in 2005, but experts believe it will be between 6 and 7 percent this year when official figures are released in June—the poverty rate has not declined. Nor are the experts convinced that the growth rate is entirely due to the government's sound economic policies; luck has also played a role, and that is not a sound basis for economic policy. Last year's rains led to a fantastic boost in agricultural production of 7.5 percent, contributing at least 1.5 percent to the GDP growth rate, but that is not likely to be repeated. Officials also rely on the trickle-down theory that has been rubbished by a well-known economist, John Kenneth Galbraith, who was quoted by Akhtar Hassan Khan in a column in the Dawn (April 22): "trickle down is like giving lots of grains to horses so that birds may have extra food on the streets".

According to Burki, "foreign flows have amounted to some eight per cent of GDP a year. These have added two percentage points to the rate of growth." Together with good weather, monetary expansion and a sizeable increase in external savings, Burki concludes "that some five percentage points in the increase in national output in 2004-05 can be accounted for by these essentially exogenous factors. Or, putting it differently, the economy's internal structures produced a rate of growth of only 3.5 per cent." Looked at this way, the economic performance does not appear as wonderful as the government wants the people to believe.

There is another drawback: the country's imports have consistently outstripped exports. While the latter have more than doubled in recent years (from $8 billion to nearly $18 billion per annum), there is still a large gap in income because imports continue to outstrip exports. With increasing inequality in incomes, lack of real growth in the agriculture sector (on which 60 percent of the population depends), and a high population growth rate, there are uncertain times ahead. It is too early to declare Pakistan an Asian tiger; prudence would be a better policy at this stage.