A Deadly Disconnect

A Deadly Disconnect

The United States is focused on fighting extremism, but ordinary Pakistanis are worried about the economy. Why emerging markets are key to the war on terror.

"Today I am feeling very happy that all the promises that I have made to the people, to the country, have been fulfilled," said Pervez Musharraf, Pakistan's beleaguered president, lifting the six-week-old state of emergency and restoring the constitution in mid-December.

A few days later, Benazir Bhutto was assassinated ahead of January 8 elections and all hell broke loose from Rawalpindi to Islamabad. Now Islamic insurgency has poured out of the adjacent tribal regions near frontier cities where the Taliban, repression and bombs reign.

Washington's concern is al-Qaeda and nuclear proliferation in Pakistan. But the Pakistanis are worried about their economy.


Incendiary Inflation

After Bhutto's assassination, the parliamentary elections were delayed to February 18. The outcome will not be determined by generals, politicians, or by fears over nuclear proliferation or al-Qaeda-foodstuffs will be the key.

Last December, Pakistan's inflation accelerated as local wheat prices rose to a record, pushed up by smuggling of the grain to neighboring Afghanistan. As the government's failure to curb illegal exports led to a shortage in the domestic market, wheat prices have risen by more than 20 percent since November. Pakistan is the world's sixth-largest consumer of the grain.

Pakistan needs higher interest rates to meet inflation, says the International Monetary Fund. The inflation rate may accelerate further this year as the riots threaten supplies of wheat and other food staples.

To Washington, Pakistan is the front line in the war against terrorism. To Pakistanis, Washington's generous financing of their military means killing fellow countrymen in the tribal areas.

Coping with economic turmoil, many Pakistanis feel that they are caught between the concerns of the Islamists, whose violence they abhor, and the concerns of Washington, which are not theirs.

Since spring 2007, most Pakistanis feel that their personal economic situation has gotten worse and the country is heading in the wrong direction, according to IRI. The overriding majority consider inflation (53 percent) the most critical national issue determining their vote, as opposed to unemployment (15 percent), poverty (9 percent) or terrorism (6 percent).

A truly effective policy should pay attention to the local economic issues, even as it addresses global concerns about terrorism.

Overcoming Pakistan's economic challenges requires macroeconomic stability, which can unleash the potential of the emerging economy, and social reforms.


Pakistan Ascendant?

During the past few years, Pakistan has attracted piles of foreign money. Last fiscal year, foreign direct investment nearly doubled due to Musharraf's liberal economic policies and the fragile stability of the military regime.

Things look even better in Karachi. At year-end 2007, the stock market was up 50 percent, which made it one of Asia's top-performing indices. Less than 10 percent of this $70 billion­­-plus market is currently held by foreigners. As long as fast growth outweighs rising political risks, flows will continue to surge-especially from the oil-rich Middle East.

With its population of 159 million, Pakistan is within the range of Russia and Brazil, two large emerging economies. During the past half a decade, Russia has enjoyed average GDP growth rate of 6.2 percent and Brazil 2.3 percent. Pakistan's 5.3 percent is relatively strong in comparison.

Yet despite high growth rates, there are great differences in terms of the stages of growth among these countries. In Brazil, the rate of urbanization is already 84 percent and in Russia 73 percent, whereas it is barely 35 percent in Pakistan.

Industrialization and urbanization has barely begun in Pakistan, where GDP per capita is just $778, in comparison to $6,908 in Russia or $5,085 in Brazil.

"Pakistan's competitiveness rankings and impressive growth reflect increased macroeconomic stability," note the authors of The State of Pakistan's Competitiveness 2007. That potential, however, is constrained by less advanced institutions and terrorism, undeveloped infrastructure, macroeconomic instability, and deficiencies in health and primary and higher education.

In the absence of sustained economic and social reforms, the current brain drain will continue. Female participation in the labor force remains low. School girls do not wear the burqa in Peshawar because they believe in the Taliban's ultimate authority, but because they have a healthy instinct for survival.

Pakistan's economy may grow at 6.5-7 percent in the year ending June 2008. The IMF projection is lower than a government estimate of 7.2 percent, but it illustrates the great potential of the economy-given even a semblance of stability.


Dr. Dan Steinbock serves in the India, China and America Institute. Focusing on issues of international business and international relations, he divides his time between the United States, China and Europe.