Pakistan's Economy: Edging Toward an Abyss or Pulling Back?
Over the last few years, Pakistan's economy has been in a tailspin. These economic struggles will undoubtedly deepen in the aftermath of this summer's catastrophic floods. Pakistan's government puts the economic losses from the deluge at about $43 billion, or more than a quarter of the country's total economy. Islamabad's estimates for gross domestic product growth in fiscal year 2010-11 have fallen from 4.5 to 2.5 percent. On September 13, the Asia Program, with assistance from the Program on America and the Global Economy, hosted an event to highlight the findings of a new report on Pakistan's economy. The study was produced by the Institute of Public Policy (IPP), based at Beaconhouse National University in Lahore. Each event speaker contributed to the report.
Shahid Javed Burki, Senior Scholar at the Wilson Center and chairman of IPP's executive council, gave a general overview. He presented a grim picture of the economic climate in Pakistan, which he described as "South Asia's economic sick man," and projected that due to the floods, Pakistan will have zero economic growth over the next fiscal year. At the same time, Burki spoke of the strengths that can help Pakistan emerge from its economic doldrums. These include an "extraordinarily well-endowed" agricultural system, as well as a population blessed with youth (who, if they acquire the right skills, can be a major asset) and "well-trained, entrepreneurial" women. He acknowledged that Pakistan will require international assistance, yet insisted that the country can "turn the corner."
Parvez Hasan, an IPP executive council member, described Pakistan's gloomy macroeconomic situation. Per capita income and public savings rates are abysmal, while consumption rates have increased only among the elite. He added that Pakistan's tendency to seek external assistance for its economic distress "is now ingrained." Hasan also decried Pakistan's lack of tax revenue. Pakistani governments, he explained, have rarely asked the general population to pay taxes, either because doing so would have constituted bad politics or because leaders feared the impact on their own affluent lives. He concluded that while Pakistan urgently needs a plan for tackling its fiscal deficit, reducing its revenue deficit is of even greater importance.
Jehangir Karamat, an IPP executive council member and a former Pakistani Chief of Army Staff, spoke of the security dimensions of Pakistan's economic problems, and particularly of the potential for these problems to spark civil unrest. He quoted a passage from the IPP study—"People's patience is running out and [Pakistanis] have begun to seriously question the resolve of the elite for improving the well-being of the people"—and pointed out that this judgment was rendered several months before the floods and a subsequent government response that many Pakistanis found wanting. Karamat warned that today, human security in Pakistan has "almost disappeared."
Ziad Alahdad, an IPP executive council member, addressed Pakistan's energy woes. Even before the floods, he said, Pakistanis were suffering through daily power shortages of up to 18 hours. He underscored policymakers' "historic neglect" of non-commercial (household) energy use in Pakistan, which often draws on traditional power sources like dung and firewood. According to Alahdad, this inattention to non-commercial energy—which constitutes 50 percent of Pakistan's total energy consumption—also contributed significantly to the flood damage. He noted how many Pakistanis, faced with no energy alternatives, have had to chop down trees for firewood. As a result, forests across Pakistan have been "denuded," hastening the deluge's spread across the nation.
Despite the downcast analyses, panelists insisted that all hope is not lost. They declared that Pakistan is not a failed—or even failing—state, and that the country has the institutions and capacity to right its sinking economic ship. So what is required to pull Pakistan back from the abyss? The speakers identified several criteria, including a more stable security situation; further fiscal decentralization, which would enable provincial governments to receive a greater share of budgetary resources; and better governance. However, one of the most critical ingredients is political will. As Alahdad argued, speaking in the energy context, the challenge revolves not around "what is to be done," but around "how it is to be done." Indeed, the panel concurred that the right policies—from tax reform to skills development to export diversification—have already been formulated. What remains is the much more difficult phase of implementation.
By Michael Kugelman
Robert M. Hathaway, Director, Asia Program