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Is Pakistan Shining?

Despite a period touted as one of "high growth", growing inequality in terms of both income and regional, rising prices and growth that is not broad based, threatens to have the same serious political consequences as they did at the end of the Ayub Khan and Zia ul-Haq eras.

Letter from South Asia

Is Pakistan Shining?

Despite a period touted as one of “high growth”, growinginequality in terms of both income and regional, rising pricesand growth that is not broad based, threatens to have the sameserious political consequences as they did at the end of the

Ayub Khan and Zia ul-Haq eras.


o government official in Pakistan would dare raise the slogan “Pakistan Shining”, though secretly they would love to blurt it out loud. Because of its repercussions and the way things unfolded following India’s use of the slogan a few years ago, Pakistani officials are much wiser. And this, at a time when Pakistan’s economic indicators have not looked so good in over two decades. Following the GDP growth rate of 6.4 per cent two years ago, which was then the highest in a decade, the fiscal year 2004-05, ended up with the growth rate at a phenomenal 8.4 per cent, the highest since 1985. This year again, general Musharraf’s government has been claiming that the economy will grow in 200506 by over 6.5 per cent, a very likely probability. Consumer credit has expanded, exports may cross $ 18 billion, and the stock market creates new records every week. With such impressive economic indicators, no wonder the general and his team are beaming with confidence, especially when headline news in the western media related to Pakistan – such as Newsweek’s recent story – is not just related to terrorism. The Economist too, has finally included Pakistan in its list of “emerging economies”, something that general Musharraf has been particularly pleased with and has remarked on numerous occasions in the recent past. Clearly, Pakistan’s economy is being talked about.

While accepting that the numbers are looking good, one must ask a set of questions to be able to assess whether we should start celebrating and claiming that the economy is indeed on a sustainable high growth rate path, or whether this is a mere flash in the pan, a moment for merrymaking by a select few, while the real problems are brushed under the carpet.

One needs to ask whether there are structural factors underlying this high growth, or whether fortuitous circumstances have created a festive season. This will also help answer the question whether rapid growth will continue. There is also a need to examine more fully, whether it is just a set of numbers that have shown much improvement, or whether there have been structural changes in the economy whereby growth has been allowed to reach a larger number of people, or has it largely been top-heavy. Finally, one needs to identify some serious problems in the economy, which cannot be wished away.

There is little disagreement over the fact that the economy has benefited immensely – as have Musharraf’s political fortunes – as a consequence of the September 11, 2001 terror attacks in the US. The single most important attribute of Pakistan’s economy right through the 1990s was its severe debt burden. Having to repay large amounts of interest every year left little for domestic development. Soon after September 2001, a huge part of the country’s debt was written off and rescheduled, creating immense fiscal space – a windfall which the government could not have anticipated in its wildest dreams. Remittances and hidden wealth from Pakistanis overseas came back to the country immediately after September 2001, when fearing greater scrutiny of their accounts, many Pakistanis (particularly those in the US and Dubai) diverted their funds back home. (This is evident from the fact that Pakistan’s traditional source for remittances – between $ 2 and 4 billion – was west Asia. However, in 2002-03, the US, uncharacteristically, became Pakistan’s single largest source of remittances, replacing Saudi Arabia.) Apart from this, aid flew back to Pakistan, a pattern that we have seen when the two previous military dictators ruled Pakistan in the 1960s and 1980s. As much research has shown, external support to Pakistan, particularly from the US and from multilateral financial institutions such as the IMF and World Bank, grows when the military is in power. It has been this windfall gain after September 11, 2001 that has driven this boom, much of it on account of excess liquidity in the banking system, but once the external support dries up, the economy is likely to slow down once again.

Absence of ‘Real’ Growth

Moreover, while growth figures and those of the stock market look good for publicity reasons, they need not have an impact on the real economy, as events in India showed a couple of years ago. The National Democratic Alliance government felt that with unprecedented growth rates India had begun to shine, but the voters on whom no light had fallen felt otherwise. Growth is necessary, but certainly not sufficient to make an impact on the real economy. This is when distributive issues become even more important.

While the Pakistan government claims that poverty and unemployment have fallen

– although it has still to reveal how it came up with these numbers – it acknowledges that inequality has grown in the country. This is evident even visually and anecdotally across the urban landscape. There certainly has been a consumer boom, as there has been one in India, but again, just like in India, there has been growing inequality which has added to the frustration of those who have not been able to shine along with the few who have. Perhaps for the first time, again as in India, the divide between those who have benefited from liberalisation and the boom proceeding from it, and those who have not, has become far more visible than at any time in the past. Unfulfilled aspirations at a time when only a small section of the population is making merry is a dangerous political and social cocktail. In democracies such as India, people vote out governments; elsewhere, as in Indonesia, eastern Europe, Iran and South Africa, they have used different tactics. However, this is mere wishful thinking in the case of Pakistan, where sadly, the people do not have a political vanguard or a movement to manifest their protest. Though hundreds of thousands from all over Pakistan came on to the streets and shut down the country

Economic and Political Weekly April 29, 2006 over the Danish cartoon issue recently, no political group can mobilise people over the rising costs of living.

Along with high growth there has also been high inflation: 9.3 per cent (if the government is to be believed) last year, the highest since 1997. Few consumers would accept that inflation is as low as this; in fact, most people believe that the quality of their life has deteriorated despite the “boom”. Inflation affects every single person in the country and while the stock and real estate markets may rise as much as they like, most people are finding it difficult to come to terms with rising prices of petrol, gas and sugar.

An area that is being completely ignored by policy-makers in the vain hope that it will go away, a factor that is also a consequence of the high growth, is the large trade deficit. Although exports have broken new records this year, so has the import bill which is likely to outpace the export receipts by between $ 5 and 7 billion. No one is asking the question: who will (and how will they) pay for this deficit? The government will have to either borrow from international financial institutions or the market, or will have to impose curbs on imports, or it might have to devalue the rupee. On all three counts, government action is highly constrained and will make matters worse.

The government has sworn time and again that it will never go back to the multilateral financial institutions; so if it does there will be a political backlash. Secondly, under WTO rules, it cannot impose import restrictions either. If the government has a strategy of dealing with this growing deficit – other than selling Pakistani public assets to foreigners, a strategy known in this country as “privatisation” – this has not been made public. Moreover, the stage where there will be no profitable public sector concerns left to sell is fast approaching. What the government will do then is anyone’s guess. A factor, which has also been overlooked, is that despite the rise in remittances, foreign receipts for privatisation and aid, the foreign exchange reserves have actually fallen over the past two years. This is clearly a sign that something is amiss.

Like the high-growth high-inequality scenario, another characteristic of military rule in Pakistan has been the phenomenon of a government (in this case the military) at war – literally – with its own people. Under general Ayub Khan in the 1960s, the state and its machinery was at war with East Pakistan, under Zia it was Sindh, and now general Musharraf’s military is fighting its own people in Balochistan; many of those in the Waziristan area. All this, at a time when Punjab is thriving and oozing with prosperity, once again a parallel with the times of generals Ayub and Zia.

All is not well in the kingdom of “High Growth Pakistan”. Growing inequality (both income and regional), rising prices and growth which is not broad based, will have serious political consequences just as they did at the end of the Ayub and Zia eras. The sad part of this story is that the unprecedented fiscal space created by circumstances has been squandered away. Public expenditure on health and education put together is still, as it always has been, merely half of military expenditure. Pakistan’s ruling clique, in this case the military, has let yet another momentous opportunity pass by. The tragedy here is that once the economy begins to lose steam and the military’s festive season draws to a close, it will be the politicians and civilians who will be left to do the cleaning up job and to foot the bill that comes with it.



Economic and Political Weekly April 29, 2006

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