Pakistan: Is it becoming an ungovernable 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

Regardless of who forms the government, Pakistan continues to teeter on non-governability. It has its own version of the Taleban, with ties to the Afghan Taleban. The security situation is complicated by the strong mysterious influence of the ISI, the country’s intelligence service. Any prognosis of the political future of the system is hazardous. Karachi, Pakistan’s largest city, seems to be virtually in the hands of the local Taleban, and northern Waziristan, at the border with Afghanistan, is but one target under frequent attacks by militants. The Pakistani military continues to wield a big stick, but was 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 the 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 that continues to be creaky and in the doldrums. 

For decades, Pakistan has refused to tax its feudal landlords, leading to a 12 per cent tax/GDP ratio and a high dependency on foreign donors, with 99 per cent of the population reporting attendant corruption. Only 860,000 of the country’s 183 million people pay tax. An 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 currently under US$13 billion, below two months of import requirements, and the rupee has depreciated by more than 40 per cent since 2007. 

Pakistan’s education lags behind Bangladesh’s. Only 0.7 per cent of the Pakistani GDP is spent on health. The literacy rate is at 53 per cent and poverty at 24 per cent, 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 the highest on the subcontinent. Budget deficits are at 7.5 per cent of GDP, above the government’s target of 4.7 per cent. Infrastructure is lagging, especially power, short by 4,000 megawatts if blackouts lasting as long as 18 hours a day are to be avoided. Indeed, energy shortages are estimated to cut economic growth by 4 per cent per annum, bringing it down to an average of 3 per cent from 2008 to 2012. 

The neglected agricultural sector provides 23 per cent of the GDP and 44 per cent of the country’s labour force, while non-agricultural activity in the rural areas has been lagging. Textiles and apparel provide 16 per cent of the country’s exports, and 40 per cent of its employed labour force, with small and medium enterprises comprising 80 per cent of the total non-agricultural employment. The official unemployment rate, as reported by the International Labour Organisation, is 6 per cent, 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 calls “organic nationalism”, pulling together groups separated by language and culture. Fiscal decentralisation 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 12,000 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, offering varying and at times contradicting advice, and tending to get in each other’s way. 

While foreign aid remains plentiful, there is a growing uncertainty about 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.  

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 the foreign-policy objectives of the donor. The importation of inappropriate technology distorts income distribution and encourages corruption in official elite circles. In 2012 foreign aid was $2.5 billion out of $240 billion nominal GDP, or approximately 1 per cent.  

Pakistan’s obsession with India has meant military resources are 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 liberalisation and diversification in the globalisation context. Ironically, though, Pakistan has been more welcoming to business than its more successful neighbours. The World Bank’s “Ease of Doing Business” report ranks Pakistan in 85th place, above China in 89th place and India in 133rd 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 that Pakistan can emerge from the category of a failing state. 

 

Gustav Ranis is the Frank Altschul Professor Emeritus of International Economics at Yale University.

 

Yale Centre for the study of globalisation.