Is Pakistan A Failing State?

On May 11 Pakistanis are expected to go to the polls and celebrate transition in what’s been a rare five-year civilian rule. The election may or may not usher in another period of civilian rule. Fundamental reform is required of the political system that functions under the shadow of military power and religious extremism. Otherwise, Pakistan is destined to drift as a failing state.

I first entered Pakistan in September 1958, two weeks before the civilian government of Iskander Mirza gave way to Muhammad Ayub Khan who turned out to be a benevolent dictator—until he went astray by encouraging war with India in 1965.Indeed, Pakistan has had 40 years of military rule out of 65 years since independence

The coming election will put to test the Pakistan People’s Party leadership of Asif Ali Zardari, who succeeded his murdered wife, Benazir Bhutto. Polls indicate that Nawaz Sharif of Punjab’s Muslim League is likely to take over, though the uncertainty over the return of previous dictator Pervez Musharraf and the efforts of Imran Khan, the cricket legend, cast doubt on the outcome. The reception for Musharraf on his return from self-imposed exile abroad was underwhelming, and he was has been arrested on a court order on a charge of violating the constitution. But his ego remains intact. Khan had a tumultuous rally in Lahore recently, but even though the military may be supporting him, questions about the sustainability of his appeal are being raised.

Regardless of who takes over, Pakistan continues to teeter on non-governability. Its own version of the Taliban with ties to the Afghan Taliban, are complicated by the strong mysterious influence of the ISI, the country’s intelligence service. Any prognosis of the political economy future of the system is hazardous.Karachi, Pakistan’s largest city, seems to be virtually in the hands of the local Taliban, and northern Waziristan, at the border with Afghanistan, is but one target under frequent attacks by militants. The Pakistan military continues to carry a big stick, but seems not particularly anxious to intervene in the election, partly out of concern about losing US aid, which could be automatically cut off in the case of a military coup. The strength of the Supreme Court, which has repeatedly and successfully challenged the executive branch, leading to dismissal of a prime minister, contributes to the signs of a failing state.

It should be noted that in the late 1950s and 1960s Pakistan was generally admired as a development paradigm and attracted the attention of development economists, in contrast to India which then lagged behind. But after 1990 when India’s reforms began to take hold, the situation completely reversed, with India en route to middle-income status and Pakistan, in the absence of reform, exhibiting an economy which continues to be creaky and in the doldrums.

For decades, Pakistan has refused to tax its feudal landlords, leading to a 12 percent tax/GDP ratio and a high dependency on foreign donors, with 99 percent of the population reporting attendant corruption. Only 860,000 of the 183 million population pay tax. Amnesty offered in December 2012 to the richest tax evaders to pay a 40,000-rupee penalty on undervalued income and on assets of as much as 5 million rupees has had little response. The current account has turned to deficit with higher prices for imported oil accompanied by lower prices for exported cotton. Foreign-exchange reserves are consequently currently under $13 billion, below 2 months of import requirements, and the rupee has depreciated by more than 40 percent since 2007.

Pakistan’s education lags behind Bangladesh’s. Only 0.7 percent of the Pakistani GDP is spent on health. The literacy rate is at 53 percent and poverty at 24 percent, with a Gini ratio of .41, a measure of income disparity, with zero indicating no disparity. Population growth, though declining since the late 1980s, is still at the highest level in the subcontinent. Budget deficits are at 7.5 percent of GDP, above the government’s target of 4.7 percent. Infrastructure is lagging, especially power, short by 4000 megawatts if blackouts lasting as long as 18 hours a day are to be avoided. Indeed, energy shortages are estimated to cut growth by 4 percent , bringing it down to an average of 3 percent from 2008 to 2012.

The neglected agricultural sector provides 23 percent of the GDP and 44 percent of the country’s labour force, and non-agricultural activity in the rural areas has been lagging. Textiles and apparel provide 16 percent of the country’s exports, and 40 percent of its employed labour force, with small and medium enterprises comprising 80 percent of the total non-agricultural employment. The official unemployment rate, as reported by the International Labour Organization is 6 percent, but this does not take into account the large percentage of the underemployed in both agriculture and the large urban informal sector.

To add to the problem, several provinces are restive and the overall system lacks what economist Simon Kuznets called organic nationalism, pulling together groups separated by language and culture. Fiscal decentralization with grants from the centre is based on population size, favouring the large provinces and ignoring differential poverty and revenue-generating capacity.

The only favourable features are the size of remittances by Pakistani workers in the Gulf and elsewhere, currently at $13 billion, and the large number of NGOs, up to 12,ooo in all. Remittances end up in the hands of the rural population, allocated to consumption and housing, thus avoiding government controls. And NGOs, which do the bidding of wealthy international donors, pursue different goals, offer varying and at times contradicting advice, and tend to get in one another’s way.

While foreign aid remains plentiful, there is a growing uncertainty of its usefulness in generating growth. Pakistan ranks third among recipients of US foreign aid, with more than $2 billion, and two-thirds of that goes to the military, not very productive.

On the economic front, the relationship with the US, still the major donor, is sufficiently frayed that the ideal arrangement—leaving decisions more in the hands of the recipient under self-conditionality rules—is unattainable. Instead, aid spending is inefficient, moving up and down with foreign-policy objectives of the donor, the importation of inappropriate technology, distorting income distribution and encouraging corruption in official elite circles. In 2012 foreign aid was $2.5 billion out of $240 billion nominal GDP or approximately 1 percent.

Pakistan’s obsession with India has meant military resources deployed along the border and budgets heavily skewed towards a possible confrontation with India over Kashmir. Indeed, Pakistan’s economy is on a presumptive war footing which renders it difficult to pursue liberalization and diversification in the globalization context. Ironically, though, Pakistan has been more welcoming to business than its more successful neighbours. The World Bank’s “Ease of Doing Business” ranks Pakistan in 85^th place, above China’s in 89^th place and India in 133^rd place. But insecurity and misgovernance nullify the impact of that welcoming mat.

China remains a close ally and provides aid without visible strings attached. There is a marked contrast with India, which mainly plays the traditional aid game with traditional Western OECD donors.

In the absence of fundamental change, political as well as economic, unlikely under present circumstances, there is little hope Pakistan can emerge from the category as failing state.

Gustav Ranis is the Frank Altschul Professor Emeritus of International Economics at Yale University. Rights: Copyright © 2013 Yale Center for the Study of Globalization YaleGlobal Online