Accelerated investment all round is accepted as imperative for the solution of Pakistan’s socio-economic problems, but too many deterrents have been standing in the way for long.
These deterrents are strategic, political, economic and social, and they impede the foreign investors and discourage large scale local investment, which have normally to work together for the rapid development of the country.
The first of these are geo-political deterrents, primarily the near-war conditions or imminence of war between India and Pakistan from time to time. Now when India and Pakistan are withdrawing their armed forces from their common borders, India is coming out with reports saying its fores were poised for attacks on Pakistan in February and May last. And following that the Indian army chief of staff designate Gen. N. C. Vij says India was about to attack Azad Kashmir in January and has given details of the arms to have been used by India and the specific target areas to have been attacked. And it is generally assumed that an Indian war on Azad Kashmir would lead to a full scale war between the two countries.
Foreign investors are concerned about the possibilities of a war between the two countries after they had fought three wars between 1948 and 1971, and Pakistan had lost its Eastern half disastrously in the last encounter.
And now when Pakistan’s nuclear capability is said to be a deterrent to a war between the two countries, the fear is an armed conflict between them would lead to a nuclear war. And that certainly is not conducive to a large scale foreign investment in Pakistan, or for that matter in India. Nor would domestic investors be inclined to come up with large scale investments in such an environment of fear.
Foreign investors with wide options for investment around the world avoid such risks, except in exceptionally rewarding circumstances. It is one thing for them to make small investments in the oil and gas sector in Pakistan now, and be rewarded quick enough and quite another to make large financial commitments.
They cannot brush aside their fears while considering large scale investment.They cannot brush aside their fears while considering large-scale investment, as some of us do.One foreign investor in Pakistan tells me that while considering investment here he wants to be sure of recovering the capital within five years, and not risk it for a longer period in uncertain conditions like ours. This is closer to short term investment than medium or long term investment, which we need for sustained development. But they argue they need peace and stability in the region for large long-term investment.
Political stability too is also an uncertain element in Pakistan. The country has been under military rule four times, with two wars in the period with India in its earlier half and military tension mounting from time to time during the second half. Foreign investors are not sure how long the military rule could last or how would it end, and what kind of political set-up would follow and how much policies of one administration would be followed or honoured by its successor.
They are not satisfied with military assurances that the civilian set-up would follow their policies and honour their commitments. It is one thing for existing foreign investors to accept such assurances and quite another for new investors doing the same to make large scale investment. Now even the donors and international aid agencies are not sure whether the civilian set-up would honour the commitments of the military rulers in full.
The role Islam plays in economic policy-making, including in the area of interest rates or fixed returns on deposits, is also vexing for them. They are also perplexed by the uncertainty about the weekly holiday and the possible need to keep their international financial transactions closed for three to four days a week every week under an Islamic system. They are not disturbed by the lofty principles of Islam as such as the narrow manner they tend to be interpreted by some of the vocal votaries of Islam.
Terrorism infiltrating through Afghanistan or other Muslim countries in varied forms and discourage foreign investors. The performance of extremist organisations with their student rhetoric and attacks on churches are upsetting for many of the investors. And the inability of the police and intelligence agencies to check or neutralise them makes the situation far worse.
Proliferation of big-time crimes, like murders and kidnapping for ransom, adds to the fears of foreign investors. Such a situation demands heavy protection for their senior staff, particularly the expatriate staff. All that adds to the cost of production and exports.
And when foreigners see even the police officers being protected heavily and ministers and other officials also having excessive protection, they feel they should be well protected as well. And that breeds a psychosis of fear, and they are not sure of the integrity and efficiency of the high cost guards who protect them.
A Pakistani lady practicising as lawyer in Britain came here recently to work with her farther who is a lawyer but went back after sometime saying she did not want to work in an environment where she saw guns and more guns wherever she went.
And when Western countries want to post the minimum of staff in their diplomatic missions in Karachi, and some of their best diplomats refuse to come to Karachi, how can they advise their countrymen earnestly to make large investments in Pakistan? And that is all the more so when the diplomats in the city are under orders from their governments to keep their wives abroad for safety reasons? Diplomats posted here are also given long holidays for the same reason.
Wendy Chamberlain resigned as US ambassador in Pakistan and went home to be with her two daughters rather than be separated from them for security reasons in Pakistan.
Foreign investors would have come to Pakistan despite the heavy risks if the country was as rich as Saudi Arabia in oil or other natural resources. Or it should have been a fast growing economy like China’s which has been having a ten per cent growth for 15 years and has even now an eight per cent growth.China’s GNP is expected to triple within the next 20 years. Hence 45 billion dollars were invested there as foreign investment last year and that investment in the current year is expected to be 50 billion dollars or more. China attracts that kind of investment despite its communist polity and a rigid administrative system. But Pakistan has during the first half of this financial year received an investment of half a billion dollars and the amount is expected to rise to one billion dollars because of the investment in the oil and gas sector and the privatization proceeds as from UBL.
The social deterrents are also a factor, unlike in India, Thailand or the Philippines. The ban on liquor may not be a major factor in view of the exemption given to foreigners. They find social mixing difficult if they are bachelors. They find going out of Karachi during the week-end risky unless they go to the distant north of the country. Fear of kidnapping is real unless they are self-escorted.
The minimum that could be expected by us was large scale trade between Pakistan, Iran and Turkey which were a part of CENTO and then RCD earlier, and then joined the Economic Cooperation Organization (ECO) along with ten other Muslim states, primarily Central Asian. But trade and economic cooperation among the ECO states have not been large either. Pakistan’s trade is far more with the West, beginning with the US and Europe than with Muslim states. To what extend trade between Pakistan and Iran increases following the visit of President Khatami to Pakistan now remains to be seen in view of the past bleak record.
The fact is that for a country of 140 million people our exports are too small at $9 billion. Two-thirds of the exports are cotton and textiles, mostly low value added. Much of the exports are raw produce, like rice, leather and fish, apart from coarse cloth, like grey cloth, bed sheets, towels, tenting materials and low count yarn.
We have cheap labour — but cheap in terms of wages, not in terms of productivity. They are largely uneducated and unskilled marked for low productivity, which makes the labour costly in real terms. They are not truly disciplined for the modern assembly line.
Rampant corruption discourages foreign investors. In the 1990s Pakistan was declared as the second, third and fifth most corrupt country in the world, according to the perceptions of the foreign investors by Transparency International of Berlin. If our rank has improved since then that is because fewer foreign investors have been visiting Pakistan and far more corrupt African countries have come in at the top of the list of the most corrupt.
The bureaucratic structure in Pakistan is not helpful for promoting foreign investment. There is an excess of red tape where there is no corruption, which inflates the cost of investment.
The infra-structure for industrial purposes in the country is vastly inadequate. The infra structure is not developed enough and what is developed is not properly maintained.As a result how painfully slow has been the growth of the Export Processing Zone in Karachi over a 20-year period compared the rapid progress and expansion of Jwbel Ali in Dubai which came up much later.
The government could have done much more in such areas if it had the fiscal or financial means. But two-third of its tax revenues are spent on debt servicing even after the external debt is significantly reduced and one-third of the tax revenues goes for defence. Hence the government has too small a fiscal or financial leverage in any area.
All this may seem a long negative list with too little said in favour of the country or the revival of the economy. But the fact is that while the size of the population has leaped from 30 millions to 140 millions the growth in the size of the economy has been too small, and the wealth has been very grotesquely distributed. For these negative reasons we have not made great economic progress, not even outstanding progress in the agricultural sector.
Other developing countries may have the same kind of problems but not all of them together. Nor may each one of them be equally assertive. Hence Commerce Minister Humayun Akhtar calls for new directions for the economic thrusts. The whole approach to stepped-up investment calls for new orientation, and not the usual narrow approach to investment which does not take into accounts several of the critical non-economic factors, including the strategic and political.
When it comes to domestic investment two of the factors holding that down are the high cost of capital and the high price of energy. Mr Akhtar is insistent the rate for power should be reduced, particularly for industries as the rate is not only the highest in the region but also the highest in the world, he argues.
The interest rates are coming down rapidly after hitting ghastly peaks, and the banks are under pressure to lend more to the industries. Not only the government and the State Bank of Pakistan is urging them to do so but also the government is wanting to borrow less from them and at very low rates like 4.4 per cent for one year Pakistan Investment Bonds.
These are very happy trends and are truly helpful for domestic investment. In fact, as Mr Shaukat Aziz, Adviser to the PM on finance, argues if domestic investment begins in a significant manner foreign investment will follow and domestic investors will invite foreign investors to join hands with them. Without large industrial investment and truly job-creating investment the acute socio-economic problems of the country cannot be solved. And if such problems are allowed to fester that will have serious political consequences as well, and the increasing lawlessness and big-time crimes will plague us fear-somely.