THESE are difficult times for Pakistan. The country faces numerous problems which will require serious thought and action. There is considerable political uncertainty as the country heads towards another set of elections in 2007. The war against terrorism is heating up along the border with Afghanistan which itself is becoming more unsettled with every passing day. Relations with Washington appear to have been strained. Some dark clouds are appearing on the economic horizon. Is the country heading towards another crisis?

The purpose of these articles is to focus on the economic situation since a great deal that happens in the next few weeks and months will be determined by the health of the economy. It is a good time to initiate a debate to identify the soft spots that exist on the economy’s surface as well as to recognize some of the weak foundations on which the economic structure has been built over the last several decades. It is important that those entrusted with framing economic policy see the blemishes and take cognizance of the fault lines that lie under the economy. A good place to start this discourse is to parse the growth numbers in GDP over the last couple of years.

In the next couple of months the government will announce the first estimate for the rate of growth in GDP for the year 2005-06. Current indications are that the rate of increase in the national product will be in the range of six to seven per cent. This means that in the current financial year ending June 30, GDP growth increase will be two percentage points lower than in the previous year. Does this mean that the economy is slowing down after a short sprint or is it just a hiccup before a higher level of growth reappears?

The question whether Pakistan has managed to bring about the needed structural change in its economy to ensure a rate of GDP increase in the range of seven to eight per cent has been debated ever since the government provided estimates of growth for the year 2005. Two points of view have been articulated in this debate. According to one, the brisk performance in 2004-05 was the consequence of the happy confluence of a number of positive events. Those who hold this view — and I belong to this group — think there is little possibility of this happening again. The government, on the other hand, maintains that last year’s economic performance signalled a significant break with the past and set the economy on a new trajectory of growth. Islamabad maintains that growth is now built into the structure of the economy and will be sustained at a high level for years to come.

It is useful to examine both arguments in some detail not to settle the debate one way or the other but to determine whether all the changes that are needed in the structure of the economy have indeed been made. A better understanding of the factors that contributed to the remarkable economic progress in 2004-05 will help to devise public policy for sustaining growth in the next several years.

I don’t believe that this task has been undertaken by the government with the seriousness it deserves. The only piece of analysis I have seen in the area of determinants of growth has been done by the Higher Education Commission. The commission is one of those relatively rare government entities that is working hard to put together a strategy for bringing about change in a vital sector of the economy. I will have more to say about this subject in later articles. Today I will write the “story of growth.”

The “confluence of happy circumstances” argument rests its case on factors such as the extraordinary good weather the country experienced last year after several years of damaging drought that laid waste much of the rural areas. Once it ended and the rains came, agricultural production rebounded. Agricultural output increased by more than seven per cent in 2004-05 over the previous year. Perhaps as much as 1.5 percentage points in the rate of increase of 8.4 per cent recorded in 2004-05 could be attributed to the bounce back in agricultural output. However, this was not the only fortuitous event.

It was not only agriculture that rebounded in 2004-05; some other sectors of the economy also began the process of recovery from a decade and a half of stagnation. We know from the experience of many countries around the globe that continuity in policies and palpable efforts at economic reform can bring the economy back to its long-term growth path. This happened in country after country in Latin America in the 1990s. This is also the reason why the Indian GDP growth increased sharply once reforms were introduced in the early 1990s.

If Pakistan had not been beset by political instability and poor governance in 1993-99, the economy could have grown at the rate of about five to 5.5 per cent a year. That was the structural rate of growth of those times. Instead the rate of increase was less than four per cent during this turbulent time. (Notice that I have excluded the first Nawaz Sharif period from the period of economic turbulence since some serious reforms were then successfully carried out). This gap produced between real and possible growth resulted in “suppressed growth” equivalent to about 20 to 25 per cent of GDP. This began to be released once political stability returned and there was continuity in public policy.

Stability was bought at the price of suspended growth. In a number of articles I wrote for this space in 2000-2001, I suggested that Islamabad need not have accepted the strategy forced on it by the International Monetary Fund at that time. The IMF favoured stabilization first and resumption of growth later. Once the IMF programme was done, the authorities, concerned about low growth, decided to stimulate the economy by priming the monetary pump. I would guess that another 1.5 percentage points of the 8.4 per cent increase can be attributed to this policy stance.

Finally, we should take into account the large amount of foreign capital inflow that augmented domestic savings and increased the rate of investment in the period after September 2001. Over the last few years, foreign flows have amounted to some eight per cent of GDP a year. These have added two percentage points to the rate of growth. Adding the contributions made by these three determinants of growth — by good weather, by monetary expansion, and by a sizable increase in external savings — it leads me to conclude that some five percentage points in the increase in national output in 2004-05 can be accounted for by these essentially exogenous factors. Or, putting it differently, the economy’s internal structures produced a rate of growth of only 3.5 per cent.

Without these happy circumstances, the economy would revert close to the rates of increase experienced in what the present administration has called the “lost decade of development.” The rate will be a little higher — but not a great deal more — because of the few structural changes such as the modernization of the financial sector that were made in the last half a dozen years. This then is what appears to be behind the “confluence of happy circumstances” school of thinking.

The official view, of course, is very different. It attributes the performance of the economy since 2003 to public policy. It attributes the revival of the economy to a number of structural changes it brought about, particularly in the financial sector. Islamabad is confident that there are now policies in place that would continue to produce high rates of growth well into the future. My conversations with some senior policymakers have highlighted two beliefs strongly held by official Islamabad.

One, government’s own statistics are not accurate; they under-report the rate of investment. At the current rate, the economy’s incremental capital output ratio — the amount of GDP that must be invested to produce one per cent increase in national income — is not as low as 2.5 as official statistics suggest. It is around 3.5. Even a figure of 3.5 suggests economic efficiencies that are not apparent in the country. If there is truth in this assertion then a sustainable growth rate of some six to 6.5 per cent becomes more plausible. However, to persuade the doubters the government must clean up its statistical act so that analysts outside official Islamabad can conduct a serious dialogue with the policymakers.

Two, the government believes that the unusually high amounts of foreign capital flows can be sustained well into the future. There is comfort in the belief that foreign investors have regained confidence in the economy and will bring capital into the country to benefit from the relatively high rates of return currently available. This is particularly true for the affluent members of the Pakistani diasporas — particularly those in the United States — that have begun to invest in some sectors of the economy. This is something I have analyzed in some of my earlier articles. While I believe that there is a significant structural change in the stream of remittances sent by Pakistanis living abroad and that these people are indeed investing in the country, their confidence will not survive the reemergence of economic and political uncertainty.

Why should one be sceptical of the government’s point of view? I said earlier that there are a number of soft spots on the economy’s surface and several foundations on which the economy’s structure is built are weak. Among the soft spots I would underscore high inflation, an appreciated rate of exchange, rising trade deficit and possible bubbles in the real estate and capital markets. Among the structural problems I should mention poor use of the sectors in which the country has comparative advantage, dependence on external savings, supply constraints on exports, dependence on one set of products and a few markets for international commerce, poorly developed human resources and corporate sector and outdated physical infrastructure.

Given this analysis what lies in the country’s economic future? For some of the reasons I have already given, I don’t believe that the current structure of the economy and the public policies in place will ensure a high rate of economic growth in the next several years. Islamabad has asserted that the country has finally left the groups of laggards behind and joined the club of high-performing Asian nations. I don’t think that is the case. The government suggests that it has identified the sectors and economic activities that will ensure high rates of sustainable growth. I don’t think that has been done, with a few exceptions to which I will turn later in this series of articles. In the next few weeks I will attempt answers to three important questions: what are the historical reasons for the structural weaknesses in the economy, why have a succession of governments failed to deal with them and what could be done to address them?

PRESIDENT Musharraf has another 19 months to put his house in order, before the nation decides whether or not it should continue to be saddled with a head of state that insists on wearing two hats, and tries to exhibit the same gubernatorial longevity which was displayed by his two military predecessors.

During this time, he will have to successfully tackle a number of thorny issues, the most pressing of which is the revolts in the tribal belt in the Frontier and in Balochistan which are threatening to Balkanize the country. The conflict is currently occupying centre stage, and the stand-off is being seen as a victory for the insurgents. But there is also this other issue which is irking the opposition — the nagging business of promising the nation on television about taking off his uniform, and then going back on his word. It has been brought up on a regular basis by the chief of the Jamaat-i-Islami, which must be producing a festering sore in the government camp.

Four overarching issues nevertheless remain. The first relates to the appropriate economic strategy for an economy which in spite of setbacks has shown a healthy growth. The second is the clash between the requirements of political stability and the growing demand for greater openness. The third relates to bad governance and the rising crime rate in the country. And the fourth is how the government of Pakistan will in future relate to the incessant demands of the United States to fight its battles overseas. It is this issue which continues to give President Musharraf a king-sized headache.

On the diplomatic front Pakistan’s options are limited. In spite of President Musharraf’s brief flirtation with Russia in 2003, and his continuing friendship with China, the war on terror has pushed the country into a position from which it cannot easily extricate itself. When President George Bush arrived in Pakistan amid heavy security and a series of anti-US protests in cities across the country, ostensibly to help shore up what is now seen abroad as a shaky regime, one wonders how many members of the Muslim League government in Islamabad recognized the fact that it is the Bush administration that is directly responsible for much of the political turmoil confronting the Pakistani military strongman.

Having been forced by Washington to back its ‘war on terror’ in 2001 and to help topple the Taliban regime in Afghanistan, President Musharraf has increasingly been viewed by broad layers of the Pakistani population as a US stooge. Throughout the past month, tens of thousands of people took to the streets to demonstrate their opposition to the anti-Muslim cartoons published in European and US newspapers. The protesters then turned their anger on the Musharraf regime for its subservience to the US for ‘enslaving the Pakistani nation’ and for his ‘patriotism to America’.

Far from alleviating the political crisis facing Musharraf, Bush’s visit intensified it by demanding that he take more action to prevent anti-US insurgents infiltrating into neighbouring Afghanistan. At Washington’s insistence, the Pakistani military has already deployed some 70,000 troops in tribal areas along the border with Afghanistan to hunt down Taliban and Al Qaeda fighters. These operations, as well as covert attacks by US forces inside Pakistan, continue to generate widespread resentment and hostility towards the Pakistani president.

For his part, Musharraf is acutely aware of his dependence on Washington’s continuing patronage, and it is likely the Bush administration will continue to give its public backing for the regime and completely hypocritical praise for its so-called steps towards democracy. Bush regards Musharraf as a key ally in assisting US ambitions for dominance in the resource-rich Middle East and Central Asia, particularly in helping the US occupation of Afghanistan.

Coming back to the four overarching issues, not a great deal is happening on the economic front. The repeated failure of the government to address the economic and social crises facing millions of Pakistanis impaled on rampant unemployment and poverty is well known. The prime minister, however, feels that there is no undue cause for alarm, especially when the economy is growing at around six per cent. However, things are very different on the political front.

The clash between the requirements of political stability and the growing demand for greater openness and representation is an issue that threatens the very fabric of society. So far, the country appears to have favoured a strong, unelected leadership. And the old cliche that the political history of Pakistan can be summed up as one long extension of military rule, interrupted by occasional bouts of what passes for democracy in this part of the world, is borne out not only by the considerably long innings that the two former military dictators spent at the crease, but also by what is now seen as an attempt by the present head of state to emulate their example.

Leadership will, nevertheless, remain a critical variable in the current political equation. What is interesting, but by no means unexpected, is that for the majority of the electorate the choice of leader appears to be extremely limited. The question that often pops up in articles and private discussions whenever it is suggested that it was high time the president stepped down and allowed somebody else to take over, is: ‘Do we really want Nawaz Sharif or Benazir Bhutto back in the saddle? Both politicians have had two bites at the national cherry, and we all know what happened. The possibility of the nation throwing up a nationalist leader like Nasser or Allende or Castro just does not exist.

The dispute over his wearing two hats notwithstanding, President Musharraf has displayed considerable maturity in his dealings, both with local politicians and foreign heads of state. He has also tackled the nagging issue of India’s insistence on the prerogatives of a major state in South Asia, which remains a constant irritant to policymakers in this country.

In recent months, however, the rose has shown distinct signs of wilting. Whenever the soldier president has appeared on television, which has now become a regular feature, he has begun to demonstrate increasing signs of weariness and fatigue. Some of the old buoyancy has disappeared and has on occasion been replaced by flashes of irritation and anger, especially when addressing large crowds in the hinterland on the pressing need to step up efforts in stamping out terrorism.

Even in more sophisticated settings the exasperation and vexation has seeped through. Detractors still remember the way he handled a question posed by an American woman of Pakistani descent who had journeyed from another city to attend his press conference in New York. The belligerence he displayed will certainly not win him many friends among members of the Pakistani community in the United States.

The degree of openness that can be expected in Pakistan in the future must take into consideration certain factors which have remained decisive and which are likely to retain their hold on the population for at least another hundred years. The clergy, the army, the civilian bureaucracy and the feudal aristocracy have collectively conspired to ensure that the illiterate masses remained virtually disenfranchised. The two well entrenched institutions of the establishment, the military and civilian bureaucracy, which form part of the hierarchical system established in Pakistan, benefit from their close relations with their benefactor, the United States. Both are closely related and inter-connected in their ideological and political properties.

Pakistan has a strong growth record with current estimates hovering around the eight per cent figure, though there are major regional disparities. But in contrast to India’s secularism, Pakistan has a powerful religious foundation, and a bent towards authoritarianism is, therefore, inevitable. Moreover, embedded in the tribal culture is a pervasive military tradition — one which the British found useful to cultivate. Nevertheless the contest between military rule and openness, authoritarianism and parliamentarianism continues ceaselessly with fluctuating trends.

In Pakistan, as elsewhere, military leaders pledge greater democracy, and on occasion try to ‘civilianize’ themselves, thereby contributing to a course they continue to regard with ambivalence. But while they orchestrate their tirade against unscrupulous politicians, they continue to swallow up top jobs reserved essentially for civilians, and subtly and almost subliminally impose their presence through banking, industry, insurance and landmarks which betray warlike themes. It is this paradox that so graphically epitomizes the quasi-authoritarian state, and does not bode well for the future.