The Giant in the East – IV

By Adnan Syed

This four part series examines the rise of India as an economic giant, the threats that India faces in this remarkable rise, and implications for Pakistan.

Originally planned as a three part series, I decided to split the series into four parts due to sheer volume of information that I came across while writing this series. (AZW).


The Two Fundamental Assumptions

Regarding future India, Pakistan must start with two fundamental assumptions:

A.    India’s progress is for real and will likely continue. Indian economy is beginning to compound and will consequently elevate India as one of world’s top four powers to reckon with on the world’s political stage in coming decades (along with China, US, and Europe).

B. India’s military rise is inevitable along with its economic rise. However, Indian’s military rise is being made possible only because of expanding Indian economy, not the other way around.

Pakistan’s economy today is the 25th largest in the world, yet the economic growth rate remains uneven due to unpredictable political and security situation. Uneven democratic phases are replaced periodically by military rule. Capital flees insecurity and uncertainty, and Pakistan has done little to alleviate these concerns. The economy that is almost 1/7th the size of Indian economy will become almost 1/12th its size in coming four decades, even under fairly optimistic assumptions[i]. Considering the internal threats that Pakistan face today, even these assumptions seem heroic as the country continues to occupy the mantle of one of the top two or three most dangerous places on earth. Karachi, the metropolitan city, that accounts for almost 30% of the whole country’s GDP remains mired in an intense ethnic and sectarian turmoil.

The economic performance of the country showed signs of life at times during its tumultuous history. The economy enjoyed one of the stronger growth phases in early 2000s as another military dictator introduced reforms and liberalized trade. Foreign capital flowed in quickly, rising from $305 Million to almost $1.40 Billion by 2003. However, the security fundamentals in Pakistan were deteriorating sharply during the same years. Pakistan’s strong performance in the early part of the decade must be put in the context of the economic performance worldwide. The world was in the midst of an unprecedented economic boom during the years 2000-2006. This particular period is remarkable in four aspects: A) The United States suffered a brief recession in 2001, but grew strongly afterwards. B)  Europe was growing steadily C) Emerging markets like Turkey, Indonesia and Brazil had started stabilizing their political institutions, and their economies had begun posting strong performances, and D) China had truly established itself as an economic giant and India was beginning to come on board the economic train as well.

As such Pakistan of the early 2000s suffered from the same problem it has throughout its history; the episodes of military rules generally result in higher rate of growth as optically attractive policies are put in place, the chaotic democracy-led mismanagement is shown to be reigned in and the military rulers try to stabilize a mismanaged nation. Invariably, each time, the nation’s political institutions are damaged in the process as autocrats seek to rule by bending the rules. And invariably, after each autocrat left the throne, the country was facing a security crisis. The last three times that three different strongmen ruled the nation, the nation was left politically weaker, causing major security nightmares and thereby jeopardizing its economic performance in the subsequent decades.

The Lesson from Political Continuity

There is an uncomfortable truth embedded in the 63 year history of India, as well as in the more recent stellar economic performances of nations like Indonesia, Turkey and Brazil; something that the policy makers in Pakistan ought to take note of. That political continuity in all these nations resulted in a clearer and cohesive economic policies. The increasing stability of their political institutions turned out to be the key to the subsequent economic momentum. Pakistan has however followed more the script of 1980s and 1990s South American nations like Chile and Argentina where uneven economic and political landscape resulted in periodic growth spurts, only for these spurts to be followed by political and (resulting) economic turmoil.

The risk is that Pakistan chooses a radically different model (or due to out of control circumstances, a never too distant possibility for Pakistan, the new autocrat firmly chooses this model for Pakistan); the model of an autocratic China guiding the economy forward with an iron hand. However, a rather homogenous China under a continuous communist rule for 60 years is a fundamentally different country from ethnically and politically diverse nations like Pakistan or India. China also remains a giant exception when it comes to the economic progress, and its culture of secrecy, crackdowns and censorship is radically different from anywhere in the world. While the economic growth in China is welcome news for all, the curious experiment still has to face a day of reckoning when demands for democracy meet the iron hand guiding the nation.

Keeping up with India in an arms race and repeating the security mantra for all of its policies going forward will be a gigantic folly for Pakistan. India is on its way to become a major world power and it will become a military superpower because of it. India will become a military power because of its economic performance. Pakistan with the world’s sixth largest population cannot claim its proper mantle as a nation to reckon with until it gets its economy right. It cannot get its economy right over a long run unless its social and security problems are not resolved.

On an extremely positive note, Pakistan today enjoys excellent demographics, with 37% of its population is less than 15 years old. A full 59% of the population is between 15-59 years of age. This is one of the highest percentages of present and future working population residing within a single country. At 57% basic literacy rate[ii], Pakistan has the necessary foundation to give its economy the initial thrust. This vibrant demographic is in danger of getting completely wasted if the country fails to establish political and institutional continuity.

As such, a few implications for Pakistan arise as the Giant in the East rises.

1)      India offers the clearest of examples that a democratic country may remain mired in grinding poverty for decades, but inside a democratic framework, its social tensions do not break the whole fabric of the nation. Unfortunately, this process works out over a period of various decades. It requires perseverance, lots of it. Pakistan does not have to start from Ground Zero, and thanks to the example next door, has a blue print for getting the economic affairs right sooner.

2)      The geo-political reality of Pakistan means that the country would need strong defence institutions. However, the focus must change from defence first to country first. Unless Pakistan is politically stable, Pakistan cannot be economically stable. The political stability evolves, and cannot be imposed. Unless Pakistan is not economically stable, it cannot spend on its defence adequately without cutting into basic expenditures on education, healthcare, and the rule of law.

3)      The demographics today can spell blessing or disaster for Pakistan in a few decades. Pakistan is a very young nation, an ideal condition for a vibrant and productive economy. However if this potential is left untapped, the young demographic turns vicious and a massive negative feedback loop begins. Aimless and angry youth feed on chaos, thereby feeding instability.

4)      With two giant economies operating right next door, this is a life time opportunity for Pakistan to become a cost effective manufacturer to supply the new middle classes in these two nations. The trade does not need to be hostage to all the historical baggage that Pakistan carries. China claims the island of Taiwan, yet trades worth tens of billions of dollars every year with it. India and China are extremely uneasy neighbours but continue to trade with each other. Trade with India should be net beneficial for Pakistan, period. Pakistan still has a lower cost base that can supply for a prospering nation like India. Free (or freer) trade brings down inflation, improves country’s competitiveness and increases its tax revenues.

5)      If Pakistan misses this historic opportunity, it faces the risk of becoming more like Mexico. In this scenario, unable to tap the potential of youth, the country allows its youth to migrate away. The remittances of the migrant community become the bedrock of the economy. As the country finds itself right next to an economic giant, a massive underground economy emerges that supplants the proper economy and starts exporting contrabands to the prosperous nation. The country remains in a mild case of chaotic warfare as the country battles and tries to assert itself over the underground economy. In 1984, Alan Riding of the New York Times reported ruefully “Probably nowhere in the world do two countries as different as Mexico and the United States live side by side”. Unfortunately, 26 years and a generation later, the words still ring true.

I would earnestly hope that the future does not bring any similar comparisons for Pakistan. However, as a wise man once said “Hope has never proven to be a good strategy”. The economic paradigm of the 21st century is changing before us. The baton of the world economy has shifted to our neighborhood. We know what is making this paradigm work. We know what is precluding us from joining the paradigm. The stakes for us for not getting it right and joining the paradigm in the coming decades are simply too high.

Concluded


[i] Assuming a 5% annual growth rate for the Pakistani economy for the next 40 years

[ii] http://finance.gov.pk/survey/chapter_10/10_Education.pdf




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