How ready is Pakistan for FDI?
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OVER the past few months, I have canvassed important global companies and investors about their appetite for Pakistan. Unlike the more volatile portfolio investors, these ‘sticky’ investors are courted by many countries because they invest through economic cycles, create value-added jobs and bring innovation to markets — the kind Pakistan needs badly over the next decade.
My inquiries were spurred by friends visiting Singapore who passionately argued that after nearly a decade in the wilderness, Pakistan has turned the corner. Security has improved, the economy is expanding again at a faster clip and investment by China will transform Pakistan.
Disappointingly at this stage, for many reputable investors, Pakistan remains largely a no-go area, a risk they can live without. Pakistan, they counsel, needs to create a virtuous cycle of domestic stability, a sustainable economy and a nation that makes education its main social priority. The essential building blocks for this virtuous cycle are there — sputtering and stumbling — but they need to be consolidated over the next 24 months and expanded over the next decade.
Security measures are necessary. But they also reinforce the view that Pakistan isn’t a safe country.
While the mood is upbeat within Pakistan, global sentiment remains weak. Even as the US economy is expanding, Europe and Japan are still sputtering. China’s growth is also slowing as it undergoes a massive, high-risk economic restructuring. Risk aversion towards emerging markets countries — who should be Pakistan’s global peers such as Brazil, South Africa, Mexico and Turkey — is also high.
In this global environment, it is no surprise that Pakistan doesn’t feature brightly.
Security versus safety
Even before the Charsadda attack, almost every conversation I had with investors began with the ‘law and order situation’. This shouldn’t come as a surprise, given what Pakistanis themselves have faced for decades.
However, there is another way of looking at this critical issue: security versus safety. The difference is more than semantics.
“I’m not going to Pakistan,” the chairman of a global energy company and once investor in Pakistan told me bluntly. Over the years, he observed, the walls in Pakistan have been raised, the barricades made more robust, while guns and religion have become more pervasive than ever.
Measures to provide security are necessary and well-meaning, for sure.
But, they also reinforce the view that Pakistan is not a safe country. No amount of persuasion that terrorism is on the decline or that crime in Sao Paulo, Brazil, is worse than in Karachi would convince investors that Pakistan is fundamentally changing for the better.
It would be naïve to expect overnight change because the rot is set deep. But as Islamabad and Rawalpindi work towards consolidating gains from recent military operations and enjoy the public’s support, they now only have one shot to ensure that these gains are further consolidated in the years to come.
The state of the economy
There is growing evidence that the economy and business confidence are improving. Measures taken so far will lead to improved credit ratings, credit-default swap rates and domestic business activity. Portfolio investment should also increase.
However, because of the 2008 global financial crisis there is fatigue towards countries that can’t stand steady without crutches. “Is Pakistan still taking money from the IMF?” asked the CEO of a major Middle Eastern sovereign wealth fund, which once invested in Pakistan and has more than $500 billion in assets worldwide.
Pakistan has been largely surviving at the benevolence of taxpayers in other countries and by squeezing its own middle class and poor. In today’s environment, reforms and execution of prudent policies are not just good economics, they are good politics. Investors want to see governments that can raise and collect progressive taxes and are prudent in spending, not populist. Political parties that work on these principles win elections over and over again.
While two years is a long time in politics, the current government is better placed than others before it. Barring any misadventures, the PML-N can govern Pakistan for another seven years, unprecedented in Pakistan’s history. Reputable investors — who take a long-term view — will take note that with political continuity, Pakistan is also creating fiscal space; they will make a beeline for Karachi or Lahore when they see the government actually saving for the future in the next decade.
Empowering future generations
Long-term investors pay close attention to education, more than any other social indicator. History shows that countries succeed when they create a virtuous cycle between defence, economy and education.
The first leg of the tripod establishes a safe environment that allows business and society to flourish. The second enables the fiscal space and the ability to invest for the future. The third powers the economy, levels the playing field and reduces social unrest.
In Pakistan, roughly 77 million people — equivalent to the entire population of Turkey — are illiterate, and according to the government’s Vision 2025 blueprint, Pakistan has the second-highest out-of-school population of children in the world. Pakistan’s endowment is also its greatest strategic weakness.
Prioritising education as highly as security and the economy is not uncommon. China, which underwent civil wars, famines and once was a closed economy, obsesses about economic growth rates because 7.5 million graduates enter the labour force every year. Even Iran — in one crisis after another for 37 years — knows its priorities. In the first-ever consolidated global survey of math and science education by the OECD, results released last year showed Iran ranked ahead of Malaysia, Indonesia, Saudi Arabia and Mexico.
Investors’ interest in education is not just social but commercial. They need a quality labour force — from technicians to managers — as well as consumers with strong spending power. Education is where the returns on social investment intersect neatly with financial returns.
The Pakistan Vision 2025 sets an ambitious target of attaining universal literacy over the next decade — an incredibly laudable target which, if achieved, will be truly transformational. When investors see well-equipped government-run schools buzzing with teachers and students, and adult education programmes instead of ‘shout-shows’ dominating TV channels, they will know that the virtuous cycle is complete and Pakistan has arrived.
The writer is founder & MD of a Singapore-based investment and country assessment advisory company.
Published in Dawn, January 29th, 2016
