by Bilal Hussain
For a while, it seemed like Pakistan was fulfilling its undoubted economic potential. Real economic growth in 2006-7 was close to 7% per annum, bested only by a few emerging market economies; most of the growth taking place was in the manufacturing and services sectors; and foreign direct investment (FDI) was pouring into the largely unregulated economy at an unprecedented rate. More importantly, the prosperity was trickling down to the people. The source of these positive indicators was also the source of a booming labor market that reported growth upwards of 10% and a rising GDP per capita. This could all be a result of sound economic policies that placed the well-being of the nation at large over that of a well-connected few, an almost unheard of attitude in Pakistan. It could also (and is more likely to) be due to the longest period of political stability Pakistan has enjoyed in its recent history.
The fact that political stability had been achieved via illegal means was irrelevant to most Pakistanis. Such is the premium of a stable political regime in Pakistan that people were willing to overlook the minor transgression of a serving army officer assuming the vacant presidency. So too was the West, as were its businessmen. The dictatorship spearheaded by General Pervez Musharraf did not impede upon existing investor confidence in Pakistan initially, and FDI crawled from less than a percent of GDP to over 3% of GDP today. This growth was boosted by Musharraf’s masterstroke of appointing Shaukat Aziz, a sophisticated ex-Citigroup executive to lead the Finance Ministry of Pakistan, with the expectation that Aziz would allay any fears that the international business community held regarding Pakistan’s political situation. Such was the plan’s success, that Aziz was upgraded to Prime Minister, and presided over a period of burgeoning expansion in Pakistan’s economy that was symbolized by exponential growth in the Karachi Stock Exchange following the new millennium.
Economic prosperity was grudgingly accepted by Pakistani citizens for Musharraf’s civil and legal domestic infringements, but their patience ran thin with his judicial wrangles earlier this year. Pakistana’s position as an unconditional ally in the war on terror allowed it to use its get-out-of-jail-free card numerous times with the international community for misdemeanors at home.
The difference this time is that he doesn’t have a savvy banker to run the nation’s economy. FDI flows have plunged on the back of the state of emergency declared by Musharraf. I think that’s certainly the case here ... Investment decisions get put on hold and generally people are waiting to see how this plays out, Sakib Sherani, chief economist at ABN Amro, said of political uncertainty and slowed economic activity. I know people in the pharmaceutical sector who have frozen their investment decisions. Others in the hotel sector have started going slow. That sort of thing is happening, he said.
Indeed, it is obvious that Musharraf is hurting his chances of retaining power by endorsing actions that alienate those at home. But in doing so, he is pushing away foreign investors whose inflows were equivalent to more than a tenth of GDP. Without domestic backing or the support of the international business community, the US is unlikely to be as unwavering in their assistance. The irony is that the Pakistani economy needs continuity of government more than it needs his brand of moderate pragmatism, and will be the most to suffer from his departure.