Amid corruption and nepotism, Pakistan’s economy suffers

The Pakistani economy is in a dire state and it appears to be getting worse, writes Tom Hussain

Traders in the Karachi Stock Exchange. Asim Hafeez / Bloomberg

It has been nine years since the Pakistan Taliban launched the deadly insurgency that, in addition to taking at least 70,000 lives, has crippled the country's economy.

The massive flight of capital sparked by the insurgency, and subsequent lack of foreign direct investment, rendered the government dependent on the International Monetary Fund for fiscal stability. Now that the Taliban has been put to flight, Pakistan's government is on the verge of exiting the IMF programme and the economy is entering an expansionary phase of sustainable 5 per cent annual GDP growth.

However, it would be misleading to solely blame extremists for Pakistan's economic problems, most of which are characterised by a marked reluctance to institute reforms. Debt servicing accounts for about two-thirds of current expenditure which, in turn, absorbs nearly three-quarters of the budget. Defence and other security heads take up roughly 60 per cent of what's left, relegating development to a pathetic third place.

Corruption and nepotism are Pakistan's other major problems. The government is reliant on debt, domestic and foreign, because it has the lowest tax-to-GDP ratio in the world and, subsequently, is broke. The root cause is connivance between unscrupulous officials and holders of capital. It is widely acknowledged that Pakistan's undocumented economy is two-to-three times larger than the legitimate economy.

It is widely acknowledged that the cost of corruption accounts for at least 30 per cent of budgeted spending. In fact, it is nearly impossible to do business, with the Pakistani government and without, unless the investor has formed relationships with corrupt officials and their associated clique of businessmen, and satisfied their demands.

Half the Pakistani workforce is employed by an agrarian sector that, for the most part, uses medieval farming practices that make it excessively vulnerable to climate change. The government is the next-largest employer, a factor that fuels the indebtedness, corruption and nepotism of the economy.

Most Pakistanis are now aged 24 or below, and their youthful character is adverse to the status-quo mentality of the state. Because of the lack of spending on human development, the vast majority possess educational qualifications grounded in rote-learning and only 5 per cent of them are vocationally trained. In turn, nepotism denies them domestic opportunities, prompting the flight of most skilled manpower overseas.

These problems persist because the component lobbies of the state are in competition for political power and thereby funding, so there is little motivation for change and no consensus within the Pakistani state on what to do.

Instead, the state's corruption has infected society as a whole, making life insufferable to the honest majority. It's often said in Pakistan that people who refuse to partake of corruption and nepotism are either cowards or insane.

China's “one belt, one road” initiative to create infrastructural linkages between 62 countries will provide the capital investment impetus the government and domestic business interests cannot.

By the end of 2018, nearly $15.5 billion (Dh 57bn) will be invested by Chinese companies to plug the sizeable shortfall in Pakistan's energy production. By 2023, Chinese investment is scheduled to rise to $46 billion.

That has been made possible because of China's extraordinary strategic relationship with the Pakistani state, which supersedes the petty competition between its component institutions. That was similarly the case when Gulf Arab capitalists invested heavily in banking and telecommunications in the mid-2000s, in response to reforms instituted by the military government led by Pervez Musharraf, sparking a four-year period of 6 per cent annual GDP growth.

Unless the state moves away from the status quo model of governance, and shifts to an electronic data-based model that efficiently and indiscriminately collects revenue sufficient to finance most of Pakistan’s needs, the economy will lapse into stagnation because of the internal failings of the government.

For nearly 30 years, successive democratic and military governments – and, subsequently, the judiciary and media – have paid lip-service to accountability by prosecuting their predecessors for corruption and nepotism, only for these campaigns to be exposed as witch-hunts.

That obsession with the past and blame-shifting is a poor excuse for not adopting a futuristic outlook. At some point, somebody has to declare the past as past and establish rules applicable to all from now on.

Tom Hussain is Asia-Pacific Editor of The World Weekly