Post 9/11: Dollars and sense

Where would the Pakistani economy be if 9/11 hadn't happened?

It is always a pity when a nation wastes a dictatorship. For the Pakistani economy, that is exactly what happened with the Musharraf administration during the 2000s: the opportunity for structural reform was squandered because of the spigot of cash that Washington opened up after 9/11 in a bid to bribe Islamabad into cooperating in the ‘war on terror’.

When Pervez Musharraf took power in a military coup in October 1999, the country’s finances could hardly have been in worse shape. To his credit, the general decided to confront the problems head on and sought the help of the International Monetary Fund in confronting the government’s financial challenges.

Between October 1999 and September 2001, the government seemed to be making slow, but steady progress on stabilising Pakistan’s economy. The rupee had stopped plunging (a drop that had started with the imposition of US sanctions after the 1998 nuclear tests) and the budget deficit was on its way to being controlled.

This is not to suggest that all was hunky dory. The government’s drive to document the economy, quite literally at the barrel of a gun, failed miserably. The Federal Board of Revenue was also not really able to collect much more in terms of taxes, at least as a percentage of the total size of the economy. But at least there was a sense of urgency about the reforms and a seriousness of purpose that seemed to define the stewardship of the economy in those early years.

After 9/11, however, there seemed to be almost no end to the amount of money the government could ask Washington for and we once again fell into the old habit of not taxing our own people, spending as much as we liked and sending the bill to good old Uncle Sam.

So would the Pakistani economy have been better off had those planes never smashed into the World Trade Centre? The short answer: barring two sectors, yes.

What really drove the Musharraf-era boom

The number speak for themselves: the Musharraf administration averaged 7% annual economic growth for most of the time it was in office. At one point (fiscal year 2005), Pakistan was the third-fastest growing economy in the world. Per capita income rose and the debt-to-GDP ratio — a key measure of the nation’s indebtedness — fell to levels not seen since the early 1980s.

So how did Musharraf do it? It was a combination of IMF-enforced discipline on the government, and the rise of middle classes in some of the world’s leading emerging markets, both of which are phenomena that had nothing to do with 9/11.

Lowering inflation

A good portion of the Musharraf boom was due to the fact that the government put itself on sounder financial footing and aimed at controlling inflation as one of its top priorities. Inflation — and therefore interest rates — dropped to the low single digits in Pakistan, almost unprecedented since the late 1970s.

The low cost of borrowing made it possible for many businesses to grow a lot faster than they would have. That, combined with Shaukat Aziz’s eminently sensible decision to continue Nawaz Sharif’s policies of deregulation and privatisation meant that there was more room for the private sector to grow than ever before.

Both of these policies were put in place before 9/11 and there is little reason to believe they would have been discontinued had the event not happened. Indeed, the government may have continued to introduce even more structural reforms had Islamabad not been able to turn to Washington for money, leading to the economy acquiring an even stronger foundation for growth.

Riding the commodity boom

The second phenomenon that helped Musharraf’s economic record was investment from the Middle East, driven by high oil prices.

While it is true that investors from the Arab world began looking to other avenues for investment after 9/11 — a phenomenon which benefited Pakistan tremendously — what really caused them to look for different avenues was the record spike in oil prices. That spike was caused primarily by the rise of middle classes in countries such as India, Brazil and China.

As these countries consumed even more, their appetite for oil kept growing, causing prices to rise and the coffers of Arab investment houses to continue to swell. The rise of the global middle class happened because of a wave of neo-liberal policies that were adopted worldwide — to varying degrees — after the collapse of the Soviet Union (again, unrelated to 9/11).

Checking the counterfactual

Would the Arabs have invested in Pakistan had 9/11 never happened? The reality is that the biggest Arab investors in Pakistan — the Abu Dhabi Group and investment houses from Dubai — had been investing in Pakistan since the late 1990s. There is no reason to believe they would not have been attracted by the improving macroeconomic stability in the country had 9/11 never happened.

There may have been a slight lag: investments may have flowed in slightly later, and maybe of a smaller size. But had the economy continued to improve its own capacity, it seems reasonable to assume that the net effect would have been better for Pakistan in the no-9/11 scenario than what actually ended up happening.

The two exceptions

There are, however, two very clear exceptions that stand out. No matter how rosy a picture one paints of a no-9/11 world, there is no denying that Pakistan’s real estate sector and capital markets benefited tremendously from the event.

Both sectors were the primary beneficiaries of the fear that drove many expatriate Pakistanis to move their money back to Pakistan. The benchmark KSE 100 index of the stock market doubled in value in the year immediately following 9/11. Real estate prices across urban Pakistan skyrocketed by roughly the same percentage. It was this boom that drove the government to even create policies for the capital markets in the first place.

So how much of a detrimental impact would it have had if these two sectors never went through the post-9/11 boom? The reality is: very little. Real estate drove some of the growth in the cement sector, but not to the point where it had a measurable impact on employment. And despite the Musharraf-era boom in the stock market, Pakistan’s financial sector remains dominated by traditional banks.

We would have fended for ourselves

In short, not having America’s money would have forced us to confront our problems. Having a dictator at the helm would have made it a little easier to make the right choices. We may not have enjoyed the honeymoon period with America, but we would have done just fine, and certainly better in the long run.

Published in The Express Tribune, Sunday Magazine, September 11^th,  2011.