November 10, 2004 ☼ Foreign Affairs
This is an archived blog post from The Acorn.
The Wall Street Journal writes that there is a renaissance taking place in Pakistan — at least as far as its economy is concerned.
Pakistan is experiencing an economic renaissance, largely obscured by a steady flow of darker news about al Qaeda fugitives, terrorist plots and rogue nuclear proliferators. Driven by fiscal reforms and a big dose of Western aid, the Pakistani economy grew 6.4% during the year ended in June. That’s more than double the rate in the year prior to Islamabad’s 2001 decision to back the Bush administration’s war on al Qaeda.
Pakistan’s exports have nearly doubled over the past six years. Manufacturing output grew nearly 17% last year, and Islamabad is sitting on a record $12 billion in foreign-exchange reserves — four times the amount it held before the 9/11 attacks. Pakistan has tapped international credit markets and cracked down on a notorious black market that U.S. officials believe has helped fund militant Islamic groups. Falling interest rates boosted automobile sales roughly 45% last year.
To U.S. officials, Pakistan is emerging as a laboratory for how Western economic orthodoxy can contribute to stability in countries fighting Islamic extremism. They hope that economic development and structural reforms will sap the appeal of militant groups in the Islamic world’s third-most-populous country….
Gen. Musharraf quickly sided with the U.S., but only after receiving substantial economic concessions. The U.S. quickly wired Islamabad $600 million in cash in November 2001 and led a group of foreign lenders in rescheduling $12 billion of Pakistan’s foreign debt, including all $3 billion of Washington’s bilateral loans. The Bush administration has also pledged to provide $3 billion of financial aid over the next five years and lifted any remaining sanctions against Pakistan linked to its nuclear tests or Gen. Musharraf’s coup.
The war provided other benefits for Pakistan’s economy as well. Washington moved to crack down on the traditional “hawala” network of informal fund transfers which U.S. officials believed al Qaeda was using to finance its activities. Millions of migrant Pakistanis living in the Middle East and Europe used the hawala system to transfer money back home, and many grew fearful that their funds could be frozen as part of a larger U.S. crackdown on al Qaeda.
Pakistan’s financial system proved to be a major beneficiary of that crackdown. During the first 18 months after the 9/11 attacks, overseas remittances into Pakistan’s banking system nearly quadrupled to $4.2 billion as overseas Pakistanis sought havens for their funds. The Karachi Stock Exchange, meantime, jumped more than 100% during 2002. And interest rates fell to historic lows, thanks to a combination of the large inflows of overseas funds and the improving position of the government’s balance sheet. [WSJ]But the article also points out that the economic renaissance is not about to get rid of the jihadis any time soon.
“Support for Jihad has nothing to do with poverty or unemployment,” said mobile-phone salesman Muhammed Zareef, from his stall in the heart of Peshawar’s Sadder market. Although his business is flourishing, he still professes his support for Afghanistan’s ousted Taliban government and its fight against U.S. forces over the border.
Meanwhile, there is growing concern inside Islamabad’s government circles that its war against al Qaeda could be radicalizing the very elements of Pakistan’s middle class that should be benefiting from the economic boom. In recent months, a Karachi-based terrorist cell called Jundullah, or “Army of God,” has launched a series of attacks on Pakistani government and military targets. Pakistani police say the cell is comprised of engineers, statisticians, and doctors who were recently trained by al Qaeda operatives.
“Economic progress will help reduce extremism … but economics isn’t everything,” says Ashfaque Hason Khan, a senior economic adviser to Gen. Musharraf. “There are other injustices taking place [against Muslims throughout the world] that create anger, and they must be addressed as well.”[WSJ]So both the bazaar and the bureaucrats are united on the message — unless those ‘injustices’ elsewhere are addressed, new mobile phones and air-conditioned malls will not quite suffice. Economic renaissance, by any measure, is not quite going to create positive externalities for the war on terror.
The Pakistani economy is currently running on American steroids, and is also catching up on lost growth after being starved by international sanctions imposed after its nuclear tests. The good news is that Pakistan’s macro-economic picture looks healthy, but because its leaders did not have to pay for this renaissance the hard way, they dont quite know how much it is worth. Moreover, Pakistan’s military men now know that the international community will continue to rescue them for fear of the twin bogeys of ‘a failed nuclear state’ or ‘nuclear weapons falling into the hands of Islamic extremists’, leaving them free to pursue their grand, expensive, ambitions.
Whatever may be its economic accomplishments, Pakistan’s military dictatorship will face a crisis of legitimacy — making it all the more difficult for it to sell its economic message to the common people. Pakistan’s economy is more in rescue than in renaissance, and remains far from getting out of its basket.
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