The Politics of 'Borrowed Growth'

Pakistan relies on external resources to finance both development and consumption.

• This was facilitated by foreign aid.

Cold War assistance accompanied Pakistan’s close alliance with the US.

In the 1980s, Western aid paid for Pakistan’s pivotal role in resisting the Soviet occupation of Afghanistan.

Pakistan’s strategic value to the US was again enhanced after 9/11.

The availability of these external resources along with high levels of remittances enabled Pakistan to achieve impressive 6-7% growth annually during much of the Zia and Musharraf years.

But once ‘softer’ financing began to taper off, it was replaced by expensive foreign and domestic borrowing.

• This ‘borrowed growth’ was unsustainable.

The rising defence needs were not matched by a growing revenue base.

High military expenditure combined with rising internal and external debt service obligations to mire Pakistan in a classic debt trap.

This economic management in the 1990s and much of the 2000s:

• destabilised the economy
• exacerbated poverty
• drained resources from health and education.

Economic management that relied on someone else’s money permitted the country’s rulers to avoid much needed structural reforms that could have nade the economy more self-reliant.

Instead, quick fixes created the illusion of good economic management. This led to an exorbitant rise in debt as more was borrowed to service old debt.

Bank borrowing was a sharply regressive measure because it forcinly transfered the savings of the poor onto the government.

‘Borrowed growth’ would not have been bad if the fiscal space that it provided was used to reform the underlying structural problems:

• broadening the tax net
• documenting the economy
• diversifying the export base
• encouraging savings to finance a level of investment that could sustain a growth rate higher than the rise in population.

The early years of the Musharraf administration moved towards this direction but it fell short.

Its own task force on tax reform put it starkly:

Reform of the tax administration is the single most important economic task for the government.

This urgent counsel was trumped by political expediency. Once Musharraf’s military regime was obliged to find political allies for the 2002 elections, its commitment to reform waned precipitously.

Crisis management also meant that little investment or planning took place in power generation and water resources. As a result shortages reached crisis proportions. The social and physical infrastructure was similarly neglected.

The failure to make investments in human development saddled Pakistan with a rising pool of uneducated youth and prevented the country from deriving a demographic dividend from the youthful structure of its growing population.

Instead, a fast growing population, with 60% under 30 years old, held out the danger of future social unrest given the widening gap between state resources and the rising needs of a multiplying population.

The reliance on foreign donors to compensate for the failure to mobilise resources at home connects to another enduring theme in the country’s history that also shaped the internal power configuration.

Enduring Quest for Security: India and Afghanistan

Pakistan’s quest for security* shaped its:

• internal political evolution
• foreign alignments

The hostility of India increased Pakistan’s insecurity.

Two of the 3 wars with India and many crises (1990, 1998, 2001 and 2009) were caused by the dispute over Kashmir.

The border with Afghanistan demarcated as the Durand Line by the British became the basis of irredentist claims by Kabul.

The problem of insecure borders was compounded by another set of issues spawned by its lack of geographical depth.

Pakistan’s longstanding security nightmare was having to confront two ‘hot’ fronts simultaneously.

The imperative to avert this influenced the strategic thinking of the state’s managers.

Pakistan’s fears were reinforced by Delhi’s conduct in the country’s formative years. Whether it was the

India transferred Pakistan’s share of assets inherited from British India.

• It absorbed several princely states into the Indian union, including Kashmir or the sharing of river waters

These early experiences contributed to a ‘siege mentality’.*

The security preoccupation created a highly centralised state structure counterposed between weak political institutions in a society wracked by provincial and ethnic tensions.

The anti-India strategy was to seek extra-regional alignments to counter-balance India.

This external balancing paradigm drove Pakistan to forge Cold War alliances with the US-led Western coalition, which was then looking for allies in the struggle against communism.

Three times Pakistan assumed a ‘frontline’ role to help the West pursue its objectives on the basis of the strategic premise that this would help to mitigate its chronic sense of insecurity.

But superpower intrusion into the region injected its own dynamics plunging Pakistan into the vortex of regional conflict and rivalries.

The unanticipated consequences of Pakistan’s Cold War engagements and especially its role in the anti-Soviet Afghan war were sweeping and devastating.

These blowback effects became enduring aspects of the domestic landscape to exacerbate governance challenges.

The most toxic fallout was the growth of religious extremism and the advent of militancy in the country.

Some 20,000 to 30,000 foreign nationals from the Muslim world were imported to the region by the US-led international coalition that helped arm and train them for the jihad against the Russians.

Once the Soviets were expelled, some left, but most didn’t. Many were to morph into al Qaeda and other militant groups that came to threaten Pakistan as well as global security.

There was another consequence.

The economic and military assistance received through various phases of these alignments created an official mind-set of dependence. As discussed earlier this set up perverse incentives for internal reform.

It also found reflection in an approach that looked outside to deal with mounting problems and address the sources of internal weakness.

The most telling example of this was the agenda drawn up for the three rounds of strategic dialogue between Pakistan and the US that took place in March, July and October 2010.

13 sectors were identified for engagement:

• energy
• water management
• agriculture
• health
• education

Islamabad sought American financial or policy help for these.