By Disha Rawal
In a series of tweets, US president Donald Trump took a shot at Pakistan for having “fooled them for years‒, hinting that all aid given to the Asian country may be stopped soon. Given that the world perceives Pakistan as a poor, mismanaged, military-captured and unstable country, it is compelling to believe that US aid is vital for sustaining Pakistan’s economy.
However, South Asia is a hot geopolitical theatre. It has three nuclear powers and two of the world’s largest economies. There is bound to be a countervailing force. China has raked up its presence in Pakistan in a number of ways, in recent years. What does this mean for Pakistan’s economy?
The gloomy state of the economy
Pakistan is a typically unstable, small developing economy. The country achieved a modest GDP growth rate of 4.71 percent in 2016. The economy has grown from the same traditions of central control and secrecy that the Indian economy followed in the first 50 years of its existence. Currently, Pakistan is facing the challenges of insufficient infrastructure, weak exports, high current account deficit and depleting forex reserves.
The reasons behind poor exports are reasonably clear. Insufficient transport networks, unavailability of electricity, lack of compliance with standards create conditions unfavourable to a strong manufacturing base. In fact, the dilapidated transport network costs the government around 3.5 percent of the GDP in losses. These issues, along with poor governance, detract investors from pumping their money in the growing economy.
The government did try to aid this situation by devaluing the currency. However, conditions did not support that move. The economy is consumption driven, a lot of which is sourced from abroad. The import-dominance widened the deficit on devaluation, and created inflation.
Unstable governments
The Pakistani government spends a lot on its military- which could have been sustainable had the revenue matched the spending. As it turns out, that isn’t the case. What adds to the fiscal deficit is the country’s dismal tax collection rate. Pakistan is a country with one of the narrowest tax bases in the world. These facts point to a common problem: Poor governance.
Democracy in the nation has had a poor track record. It is well known that the military has the upper hand in the political affairs of the country. External powers have only augmented this. Democracy has often been looked down upon as ‘incapable’ and ‘too unstable’ to rule the country. Military leadership usually leads to power getting personalised. In this kind of a situation, strong institutions can scarcely develop. The frequent regime change also serves to nip this process in the bud. Lack of transparency and accountability, in the name of ‘secrecy’ follow suit. To give an example, inflation numbers were treated as a national secret till the 1980s.
Where does the US stand in this picture?
Trump’s tirade is Pakistan’s trial, in some ways. In 2016, US channeled around $1 billion in aid to Pakistan. Pakistan’s total GDP size was approximately 283 billion dollars in the same year. The $1 billion wasn’t a huge help to the economy. However, the size of military aid in this $1 billion stayed at twice or thrice the size of economic aid. This amount may be significant for the army.
Moreover, the US dominates institutions like the IMF and the World Bank. US aid roll-back may prompt other institutions to impose more stringent conditions on loans and grants. This may also affect the China-Pakistan Economic Corridor (CPEC), which is generating a huge amount of economic activity in the country.
One implication of this is that the US may have led to the political destabilisation of the country, by supporting the military with aid. Perhaps, the country would have done better without the aid than with it.
If the US stops its aid, will it hit terrorism? Maybe not. Unless a real political change is forced in the country, the long-standing social forces may not change. One way of doing this is tax reform. When more citizens start paying tax, they will question the usage of their money. This may bring politics closer to the needs of the people, and make it more responsive.
The US holds other levers also. Firstly, US-based Pakistanis send some 13 percent of total remittances coming into the country. Secondly, the US is one of the largest markets for Pakistan’s exports. A change in these can critically impact the nation.
Enter China
China’s geopolitical and economic ambition has come to the fore in recent years, and it has taken decisive, swift and active steps to further this ambition. China’s ‘One Belt One Road’ project, which has created the CPEC, is being hailed as a crucial driver of the Pakistan economy. It is a major source of foreign investment for Pakistan and is the biggest investment ever by China in any other country.
The CPEC is contributing to infrastructural development too. Under CPEC, power generation projects with a power generation capacity of 10,640 MW were created, and all of them are expected to become operational during 2017-18. The port and road connectivity would uplift the status of infrastructure too. However, the project is demanding vast amounts of imports from China, which is hurting the current account status further. The currency swap agreement, which allows the use of Yuan for trade and investment in Pakistan, gives China extensive control of financial institutions inside the country. Many claim that this can endanger Pakistan’s economic sovereignty.
Path to real development
But will this heal Pakistan’s governance issues? Will it yield political stability? Most probably not. The bigger beneficiary here is China, with Pakistan enjoying the spillover benefits of greater economic activity and security.
What about Pakistan’s current account deficit? In the past 30 years, Pakistan has been bailed out by the IMF 12 times. As seen above, the CPEC is probably not helping the deficit either. If the US gets postured negatively, IMF may intervene to change the China-Pakistan dynamic to maintain status quo.
Pakistan’s best bet is political reform and an overhaul of its governing institutions. However, that would require either a dominant domestic force or international compulsions. In the absence of either, its economy and its huge population continue to swing with powerful vested interests.
Featured Image Source: Visual Hunt
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