Alert Sign Dear reader, online ads enable us to deliver the journalism you value. Please support us by taking a moment to turn off Adblock on

Alert Sign Dear reader, please upgrade to the latest version of IE to have a better reading experience


The politics of foreign capital flows

July 08, 2012

A country that faces a difficult economic situation as Pakistan does today, has only a limited room for manoeuvre in international affairs. This is so in particular because it has been so dependent on the flows of external funds for financing needed investment.

At the current rate of investment and with a high capital output ratio suggesting considerable economic inefficiency, Pakistan can sustain a rate of growth of only three to 3.5 per cent a year. This is about one-half of the rate the country needs to provide employment to the two million people it adds every year to the work force.

Remittances now coming at record levels — they amount to about 7.5 per cent of the GDP — add another 1.5 percentage points to the growth of the national product. To reach the rate of growth of 7- 8 per cent of GDP, Pakistan will need an additional $6 to 8 billion a year in foreign flows.

The most important likely sources for this are the United States and the multilateral finance and development institutions. Even though institutions such as the International Monetary Fund and the World Bank profess to work in an apolitical world where political pressures are resisted this is only true up to a point. Pakistan was treated softly in 2008 when it went to the Fund for assistance in part because of Washington’s urging.

While China provides significant amounts of project assistance, it is seldom that Beijing gives non —project assistance, not even to Pakistan.

This is the reason why the politics of aid must receive due recognition by the policymakers in Islamabad. It is in this context that we should view the mending of broken relations with the United States following the issue of a statement by Secretary of State Hillary Clinton on July 3.

Compared to the regimes led by the military, those in which the civilians were in charge, Pakistan had a difficult time in securing bilateral aid, even aid from multilateral institutions. This was mostly because the civilian politicians had to be more responsive to public opinion in the conduct of foreign policy.

The best illustration of how democracy serves as a constraint on the formulation of foreign policy is provided by the deterioration of Islamabad’s relations with Washington in the seven month period between the end of November 2011 and the beginning of July this year.

While the public opinion was not in favour of accommodating the United States, Pakistan’s worsening external sector of the economy appears to have persuaded Islamabad to reach an agreement.

Pakistan gave up its demand that the US should pay $5000 for every container and truck that used its territory to supply the troops in Afghanistan. It was receiving $250 before the embargo was imposed. Given the amount of traffic that would be involved in the forthcoming pull out by the United States, Pakistan could have earned as much as $600 million from the demanded tariff.

Washington on its part agreed to notify Congress to release $1.2 billion in withheld funds for Pakistani counterterrorism operations.

Pakistan has said US owed three times as much as part of the existing agreement to reimburse it for its expenses. There were considerable benefits for America as well in this agreement. The United States, according to the estimate of its Defence Secretary, Leon Panetta, was paying an extra $100 million a month for using the northern route to supply its troops in Afghanistan.

Politics will determine whether America and Pakistan can return to a degree of normalcy in their relations after the agreement on the transit rights. There is suspicion and unhappiness on both sides. A day before the Clinton statement The New York Times wrote an editorial that seemed to reflect how Pakistan was viewed by influential opinion-making quarters in America.

It wrote: “After 2011, Pakistan had a chance to develop into a more stable country. It had strong leverage with the United States which needed help to defeat Al Qaeda and the Taliban in Afghanistan. Pakistan received billions of dollars in aid and the promise of billions more, which Washington has begun to suspend or cancel. But the army continues its double game — accepting money from the Americans while enabling the Afghan Taliban — and the politicians remain paralysed too. Soon, most Americans will be gone from Afghanistan. And Pakistan will find it harder to fend off its enemies, real and perceived.”

Political groups on the right of the Pakistani political spectrum were equally unhappy. They threatened to block the US transit goods as it begins its journey to Afghanistan. This, therefore, is not the end to the story.