How to revive the Pakistani economy?

I have studied the Pakistani economy for decades and written several books on the subject. Of the several themes explored in this body of work, one is of particular importance. I have suggested that policymakers in Pakistan since the founding of the state 75 years ago have shown remarkable ability to deal with the crises that repeatedly hit the country. However, those in charge of looking after the economy had outside help. In dealing with the crises, the country was aided repeatedly by external developments. These saved Pakistan from economic distress, some of them so severe that the country could have gone under. The country is again faced with a major economic crisis but this time foreign help would not be readily available. In fact, the global economy is also under stress and it is not clear whether we are moving towards another recession.

The first crisis was brought about by the way the British divided their Indian colony. They pulled out their troops even though it was clear that without their involvement the age-old tensions between the area’s two religious communities — Hindus and Muslims — could lead to bloodshed. That happened. There were bloody riots in the months leading up to the partition of the British colony and after India and Pakistan became independent states. There are no firm estimates available as to the number of people killed in the confrontation between the two religious communities — perhaps a million people died including those who were attacked as they were leaving on foot and headed to Pakistan or to India.

While I was a graduate student at Harvard University in the late sixties, Alexander Gerschenkron who was then recognised as the world’s foremost economic historian, encouraged me to come up with an estimate of the number of people who moved across the newly defined border between India and Pakistan. I did that. When the British left and went home, India had a population of 400 million people of which one-fourth, or 100 million, were Muslims. Of the Muslims, some 75 million came to Pakistan’s share; 34 million lived in what is today’s Pakistan and 41 million who were residents of what was to become the state of Bangladesh. Communal riots on both sides of the new border made people leave their homes and seek security on other side of the border. Eight million Muslims came to Pakistan and six million Hindus and Sikhs went from Pakistan to India. When Pakistan took its first census in 1951, one-fourth of the population of West Pakistan were refugees. The proportion for India was much lower — less than 2%. The presence of such a large number of people who were born outside the country was to have profound consequences for the development of the Pakistani economy and its political system.

Resettling such a large number of people was not the only crisis Pakistan’s new government faced. The other was the extreme hostility towards its sister state shown by the Indian leadership, led by then Prime Minister Jawaharlal Nehru. New Delhi took several steps to bring Pakistan down on its knees. These included the trade embargo by India in 1949, when Pakistan refused to follow the British Commonwealth and devalue its currency against the American dollar. “I will not pay 140 Indian rupees for one hundred of Pakistani rupees,” said Sardar Vallabhbhai Patel, India’s Deputy Prime Minister. With these words, he stopped all trade with Pakistan. This move seriously impacted Pakistan since most of what the Pakistanis consumed was made in India. However, an external development — the war in the Korean Peninsula — increased the world demand for two of Pakistan’s major exports, cotton and jute. Dollars flooded into the country with which Pakistan could import consumer goods from Europe. The cessation of trade with India also encouraged entrepreneurs in Pakistan to set up industries to produce for the local market. The result was the rapid industrial development of the country.

There were several other instances of outside help Pakistan received in developing its economy. Pakistan has had three periods of rapid economic growth — in the sixties, in the eighties and in the early 2000s. All of them were financed by money that came in in from the US. Washington assisted Pakistan to compensate the country for the help it was providing the Americans. In the sixties, Pakistan joined two American-led defence pacts to prevent Russia from advancing into South Asia. In the 1980s, Pakistan helped groups of mujahedeen to throw the Soviet troops out of Afghanistan who had invaded their country in 1979. It took a decade of intense fighting for the local fighters to expel the invaders from their county. In the early 2000s, Pakistan joined America’s war against terrorism.

The relatively easy availability of American assistance had one important negative consequence. It made the country excessively dependent on foreign help, not developing its own economic system to raise domestic savings for promoting economic development. Pakistan today has one of the lowest tax-to-GDP ratios among the world’s major economies. There is no doubt that unless it has its citizens pay taxes to the government on their incomes and assets, Pakistan will not be able to finance reasonable rates of economic growth. That domestic resources must be available not only to grow the economy but also to deal with the kind of destruction brought about in the summer of 2022 by rain and floods.

The weather-related damage done to the economy in the summer has been estimated at $30 billion which is 8% of the GDP of $375 billion. These events in other words wiped out almost a year and a half of the growth in the country. With the country saving so little of its income, it has to rely on external flows. These in recent months are mostly coming in as workers’ remittances sent by people in the three large Pakistani diasporas — in the oil producing and exporting countries in the Middle East; in Britain; and in North America. The flow of remittances is likely to be affected by the expected downturn in the global economy. This will be the case in particular with the remittances sent by the members of the Pakistani diasporas in Britain and North America.

One of the more important negative developments in Pakistan’s external situation is how the US now views the country it once considered as one of its closest allies. President Biden’s Washington has gone to some length to put down Pakistan. The American president spoke about Pakistan at a fundraising dinner at a private residence in Los Angeles on October 13. He touched upon his country’s relations with China and Russia and then went on to single out Pakistan as one of the problems Washington was facing. “And what I think may be one of the most dangerous nations in the world: Pakistan. Nuclear weapons without any cohesion.” Pakistan reacted sharply to the US President’s remarks. The US ambassador to Pakistan was called into the office by the Secretary of Foreign Affairs and told about “Pakistan’s disappointment and concern to the unwarranted remarks which were not based on ground reality”. By distancing itself from Islamabad, the US was pushing Pakistan into the orbit of Beijing. At this time China is the only source of badly needed external finance.

Published in The Express Tribune, October 24^th, 2022.

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