Pakistan’s Economy Seen As Resilient, Despite Challenges Governance, Security Issues Closely Tied To Economic Growth

By Howard Cincotta
Special Correspondent

Washington - Pakistan confronts daunting challenges - from a shortfall in energy supplies to Taliban insurgents and government corruption - in its efforts to sustain a healthy level of economic growth and provide greater opportunity for its citizens, according to a panel that met in Washington June 3.

Despite such difficult circumstances, the panel agreed, Pakistan's economy has shown surprising strength in recent years.

The panel topic was "Could Pakistan's Private Sector Promote Stability and Peace?" - and the answer was a cautious but unanimous "yes" from all three participants. "Pakistan's energy sector continues to attract investment despite the high risks," said Moin Fudda of the Center for International Private Enterprise, which sponsored the panel along with the U.S. Institute for Peace.

Fudda, former managing director of the Karachi Stock Exchange, said more than 70 percent of foreign investors in Pakistan plan to continue their investments over the next two years, according to a recent survey of the 185-member Overseas Investors Chamber of Commerce and Industry, Pakistan's oldest and largest investment association.

Political analyst Shuja Nawaz, who directs the U.S.-based Atlantic Council's South Asia Center, highlighted two positive steps taken by the Pakistani government. One was agreement on a formula for revenue sharing among local and federal governments after almost two decades of debate; the second was passage of a value-added tax that should strengthen government revenues.

Nawaz, author of Crossed Swords, a study of Pakistan's military, warned that government policies are critical to economic progress. "There is a nexus between security and governance that is critical to the economic climate," he said. "You need long-term stability to encourage economic growth. ... Companies need a five-year time frame to make investment plans, not six months or so."

Trade and Investment

Esperanza Gomez Jelalian, executive director of the U.S.-Pakistan Business Council, observed that U.S. companies see untapped opportunities in Pakistan, even at a time of intensified attacks by the Pakistan Taliban. The American Business Council of Pakistan, for example, was founded in 1984, and today has more than 60 members, including many Fortune 500 companies.

The United States remains Pakistan's largest trading partner, Jelalian said, with bilateral trade of more than $4.7 billion in 2009. Pakistan's exports to the United States of $3.1 billion far exceeded American exports to Pakistan of $1.6 billion.

Historically, the United States has been Pakistan's largest investor as well, according to Jelalian. In 2008-09, U.S. direct investment in Pakistan amounted to $870 million, representing 23 percent of the country's total investments by other countries.

At the U.S.-Pakistan Strategic Dialogue in March, the United States and Pakistan pledged in a joint statement "to work toward enhanced market access for Pakistani products as well as toward the early finalization of Reconstruction Opportunity Zone legislation."

The amount of foreign investment needs to be put in perspective, according to Nawaz, who pointed out that it is dwarfed by the $8 billion in remittances sent home by Pakistani workers living abroad.

Economic Challenges

Fudda said that while the insurgency has captured the world's attention, the headlines in Pakistan often focus on the nation's severe energy deficit, which causes power outages that have reduced growth and increased unemployment. Nawaz cited the example of the textile industry, which is operating at half capacity due to power shortages and employing only 1 million workers instead of its normal 2 million.

Another constraint on economic growth, in Fudda's view, is a looming water shortage in Pakistan and in South Asia generally. He called for a long-term planning effort between the public and private sectors. Secretary of State Hillary Rodham Clinton stressed agriculture and water issues during the U.S.-Pakistan Strategic Dialogue; both sides agreed to add a separate track in the Strategic Dialogue on water conservation, watershed management and U.S. assistance for water projects.

In a March interview on Pakistani television, Clinton said, "What we want to do is to help Pakistan make better use of the water that you do have. ... Let's see what we do to protect our aquifers. Let's see what we do to be more efficient in the use of our water."

On the issue of corruption, all of the panelists expressed deep concern over an intractable problem, citing the 2009 surveys of Transparency International and the World Bank that ranked Pakistan poorly. Fudda said pressure from the Pakistani media and civil organizations had helped improve accountability among Pakistan's state-owned enterprises, and new electronic procedures for collecting income and sales taxes had moved tax and customs agencies to the bottom of the corruption index.

He named three critical areas that contributed to systemic corruption: lack of accountability in both public and private sectors, lack of merit-based appointments in public agencies, and low salaries, especially for police.

The costs of corruption remain heavy, with expenditures for bribery almost four times as high as in previous surveys, according to the World Bank. Pakistanis rated the police, energy and health sectors among the most corrupt institutions, although the report identified marked improvements by the motorway police and the traffic police in Punjab.

"Nothing is possible without good governance," Nawaz stated. In his view, Pakistan needs to achieve annual growth rates of 6 percent to stay ahead of the growing population and offer expanded economic opportunities to the country's youth, who otherwise will become disaffected and vulnerable to messages of violent extremists.

Competition and Opportunity

Pakistan is still a preferred business destination in South Asia because of its large consumer base and relative ease of doing business, according to the Overseas Investors Chamber of Commerce. At the same time, the country faces growing competition among emerging markets in the region and around the world, already reflected in a declining rate of foreign investment.

Looking ahead, Nawaz identified "great opportunities" in the auto parts industry as the "center of gravity" for global automobile manufacturing shifts to Asia. Jelalian of the U.S.-Pakistan Business Council pointed to continuing opportunities in the energy sector.

The panelists all agreed that Pakistan's economic agenda for the future must include good governance and eradication of corruption, long-term investments in education, and recognition that an improved India-Pakistan relationship could open vast new opportunities for trade and economic growth.