IN a little over two years, US relations with Pakistan have moved from a high point of ‘strategic dialogue’ to a trough of ‘strategic near-divorce’.

Despite the long history of an episodic and turbulent partnership, it is difficult to imagine that these Cold War and ‘war on terror’ allies have traversed such rough and barren terrain in their relationship before.

In this context, Pakistan’s decision to reopen the ground supply lines for Nato forces in Afghanistan has been met with a huge sigh of relief — tinged with a degree of celebratory ‘we have been saved’ hyperbole — in some quarters, and a firebrand reaction from the right. It will be useful to explore the economic significance if any of the reopening of Nato’s supply lines. More importantly, in a wider context, how relevant is US assistance to Pakistan’s economy?

As a result of the agreement on reopening Nato’s ground routes, it has been reported that Pakistan will receive around $1.2bn of unpaid arrears pertaining to the Coalition Support Funds (CSF). This money is reimbursement for costs already incurred by Pakistan in military operations in the northwest in support of Nato/Isaf’s Afghanistan campaign, and not assistance.

Nonetheless, it represents a not insignificant potential reduction of the fiscal deficit (by 0.5 per cent of GDP) and the need to borrow by government. More importantly, it has the potential to calm the financial markets that are nervous about depleting forex reserves in the context of large debt repayments due this fiscal year.

However, beyond this the CSF inflow will have a limited effect. To put this money into context, $1.2bn is roughly the equivalent of 0.5 per cent of GDP, 2.5 per cent of Pakistan’s annual foreign exchange earnings and 2.7 per cent of projected imports this year. More importantly, for the benefit of friends who celebrate the arrival of each $1bn of foreign taxpayer money as if it was ‘manna from heaven’, this inflow (or the elusive Kerry-Lugar money for that matter) is the equivalent of a miniscule 2.9 per cent of potential tax revenue that Pakistan can collect — but chooses not to.

In terms of overall US assistance, Pakistan has been a recipient of substantial inflows from the US in fits and starts over the years, with the bulk being in the realm of military aid. In terms of US economic assistance to Pakistan, the defining features since inception appear to have been:

— It has not been enduring, but spasmodic;

— The US has invariably followed a short-sighted, ‘transactional’ approach in its relationship with Pakistan, and continues to do so despite a strong case having been made at the start of the Pakistan-US strategic dialogue for a ‘transformational’ relationship;

— Assistance has peaked in non-democratic set-ups;

— US aid has generally been pro-cyclical, reinforcing upturns in the economy, rather than supporting Pakistan’s economy in a downturn (as currently). As a result, the impact has not been ‘visible’.

— US programmes are mired in bureaucracy, with large ‘lags’ and high transactional costs (to be fair, the latter is pretty much the case with all aid programmes across the board);

— Spending has, until now, either ignored areas deemed high-impact by the Pakistan side (agriculture, water, market access, for example) or, has been spread too thin over a large number of projects. As a result, the impact has been diffused, denying the US visibility for the taxpayer dollars it has spent in Pakistan.

The most potent form of economic assistance the US can provide to Pakistan, one with the greatest externality, is allowing preferential market access to the country’s textile and clothing (T&C) exports. If focused on the right products, such as garments (labour-intensive and value-added), the US intervention has the potential to create hundreds of thousands of additional direct and indirect jobs, carving a powerful urban, educated (and possibly currently unemployed) constituency comprising the country’s youth.

This will also be the ‘lowest cost’ in terms of US taxpayer dollars, since the additional exports from Pakistan will most likely displace existing imports into the US from some other producer.

Strangely, this is proving to be the second hardest legislation to bring to Congress after domestic gun control. Pursued actively by Pakistan since 2004, this request has routinely met the same response: Congress will not sacrifice the interest of its states with a large textiles constituency. Since then, however, Congress has allowed duty-free access for textiles and clothing to large regional blocs in Central America, the Andean states, and a number of African countries.

In addition, it has signed a number of free trade agreements with countries in close proximity to Pakistan (such as Oman) which is hurting Pakistan’s exports. On top of this, China and other large T&C producers have already made substantial inroads in the US market in the wake of the phasing out of the Multi-Fibre Agreement, making the protectionist argument redundant in any case.

Instead, Pakistan has been offered a bizarre piece of legislation — the Reconstruction Opportunity Zones (ROZs) initiative — which potentially provides for duty-free access for a limited number of small ticket lines that Pakistani exporters generally shun, with the additional proviso that the factories are located in conflict-affected areas such as Fata.

Moving beyond the ineffectiveness of US economic assistance, it is imperative to change the false narrative that Pakistan is a hapless, fragile economy that will collapse without foreign assistance. That job will get done by our failure to mobilise our own substantial domestic resources. This narrative emanates from ruling elites that benefit most from the status quo — a reliance on foreign inflows, without taxing themselves.

While it is true that Pakistan currently has a high degree of dependence on foreign savings, this can be mitigated to a large extent by correct policies. Pakistan is a richly endowed country, but like most of its other resources, the country is not utilising its vast financial resources. This is as good a time as any for Pakistan to wean itself from the aid dependency syndrome that has been cultivated.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

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Comments (22)

July 13, 2012 10:04 pm
Who took the biggest risk of establishing the Mujahideens on the call of the US to fight against the USSR? That risk is still haunting Pakistan! It is Pakistan who is suffering from the consequences of that old risk. And remember, India was an ally of the USSR and Afghanistan both! It did not do a shit in supporting the US goals. Now cunningly, it is reaping the benefits from the US and Pakistan is considered an enemy and terrorist supporting state. Come to think of it, the US, right now, is in the same position that the USSR was. And now those same Mujhahideens are the terrorist because they want the US armies to leave. Shame on US for this duplicity!
July 13, 2012 10:13 pm
And yes, before it really collapses, its neigbour will also go down with it. Just think what the economic and social impacts it will have on its neighbour. So, don't mess with Pakistan. It may not have money, but it has the right manpower to protect it self.
July 13, 2012 8:23 am
US will never open up fair trade with Pakistan. Doing that will reduce Pakistan's dependence on the US and diminish it's client status.
adnan khan
July 13, 2012 3:14 pm
Nice article and truly said.also some nice comments but the truth is that U.S should start taking Pakistan as a country not as a state.Pakistan moreover need to reduce it dependence on U.S in every field.Pakistan can get more from Muslim countries and some other nations like China and Russia.
July 13, 2012 10:14 am
But Pakistan is a Pakistan is a hapless, fragile economy that will collapse without foreign assistance!
July 13, 2012 9:54 am
Today Chinese economy is as big as USA even in Trillion dollar terms. Besides they have substantial foreign currency reserves. Pakistanis claim Chinese as all weather friends. So why is not Chinese aid matching USA in case of Pakistan, especially when Pakistanis are fighting for Chinese interests? Chinese have gained a lot from Pakistan including territory. Pakistan could have asked for opening up Chinese markets for export and it is so easy with overland access. Rather than buying nuclear plants from China, it could have Hydro projects or even coal fired thermal power plants. All this is happening because, Pakistan does not see itself as a state benefiting its citizen. Rather it is a state where Citizen work to benefit a special feudal class based on a policy that is no longer current.
July 13, 2012 12:22 pm
One hundred percent correct.
July 13, 2012 11:27 am
Why should world trust USA? USA announce landing into moon some 40 years ago and show the world USA flag is waving. Well, everybody knows there is no air in moon so how could a flag was waving without air. Now it is widely speculated that landing of moon was developed at Hollywood. Second USA invaded Iraq by telling whole world that there are weapon of mass destruction. Now every one knows there was no weapon of mass destruction. Finally every reasonable person knows twin towers cannot be melt down in less than minute with burning of aeroplane oil. No reasonable gentle could buy that verdict, World would be much safer and peaceful if USA is out of Afghanistan, Korea, Philippines and middle east. Invasions of USA is not legal and just meant for exploitation of under develop world resources.
July 13, 2012 10:38 am
For all the demand for aid/trade and other trans-formative support from USA, what has Pakistan provided to US in return? Pakistan continued to be a host to terror groups and supported Taliban, in spite of their horrible obscurantism. It developed Nukes under US nose. It played a duplicitous game with US for most of the decade after 9/11. Why should USA trust Pakistan and have a trans-formative relationship, when Pakistan follows a duplicitous path that's inimical to US interests?
Kadir Saleem
July 13, 2012 3:53 am
Very informative article. Great to get some insight about our economies potential strength and a true chance for USA to really help us(the people for once!) and change its stereotype image in Pakistan
July 13, 2012 4:02 am
Pakistanis constantly talk of "Muslim Ummah" "Pak-Cheen dosti" but in real terms are completely obsessed with the US. I have never even heard of a discussion in Pakistani circles of opening up Ummah or Chinese markets to Pakistani products. Instead its just America America America.
July 13, 2012 4:25 am
Given a choice Pakistan will again choose American guns against economic gains.
Meekal Ahmed
July 13, 2012 1:02 pm
excellent Sakib. Sent you a few brief comments on e-mail.
July 13, 2012 6:41 am
it is not a friendly relation but reciprocal
July 13, 2012 6:57 am
it is not a friendly relation but a reciprocal
Salman Ali
July 13, 2012 8:35 am
Well written. Not sure if our leaders have every asked US to fund infrastructure for Thar Coal Mines. It is helping India with its energy problems. This can be a long term investment, with returns accruing for USA after 10-15 years.
July 13, 2012 8:53 am
There are hundreds of thousands of Pakistanis who work in the gulf countries who are the major source of foreign exchange inflow into Pakistan. The Muslim Ummah is definitely doing its bit for Pakistan.
July 13, 2012 8:56 am
Nice article. I wish Pakistan prosper economically and India & Pakistan have Peaceful, cooperative relationship that will benefit both countries. Lets agree to disagree on certain aspect, keep talking while taking concrete actions to help both nations develop. Aid should be made redundant in short span of time...
Tariq K Sami
July 14, 2012 1:10 am
Pakistan must first elect a honest goverment.
July 15, 2012 12:35 am
Factually incorrect. Chinese economy is $5 trillion. American economy is $14 trillion. In per capita terms, the difference is much starker since China has 4 times the population of China.
July 15, 2012 12:37 am
US trading rules are pretty fair. Pakistan is asking for preferential access for its own exports without offering nothing in return. Not only is it unfair to US, it would also be unfair mainly to Bangladesh and India - the 2 countries who compete with Pakistan in the textiles area.
July 15, 2012 12:39 am
The author seems to have a sense of entitlement that US owes Pakistan and is disappointed when his expectation are not fulfilled. Do some introspection and question your own sense of entitlement, you will be less disappointed. Secondly you say US aid is procyclical and only comes during good times. Have you considered that perhaps US aid causes good times and when the aid reduces, bad times start? Could it be a lack of gratitude more than pro-cyclical nature of aid that prevents it from being visible?
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