Multiple costs of the war on militancy
By Shahid Javed Burki
Monday, 18 May, 2009
In this article, I will discuss the cost to Pakistan of the war on terror, a term used by then President Bush to describe the American effort to beat back the rising threat posed by ‘Islamic extremism.’
The term has been abandoned by the new American administration headed by President Barak Obama. This change goes beyond the use of language. Washington now believes that the antipathy felt by a segment of the Muslim society towards America and the West is the result neither of the envy of the success achieved by these societies nor because of the desire to insulate the Muslim populations from the influence of the western culture.
Instead the conflict has its roots in the loss of hope on the part of some of the Muslim youth in their own future. However, today I will not enlarge upon the motives that have prompted some people to take up arms not only against the West but also against their own governments. I will instead focus on the cost of the conflict for Pakistan.
Until recently, the focus on the ‘War on Terror’ was largely on highlighting the benefits to Pakistan in terms of increased support from the international community, especially the US. But increasingly there is a concern that the costs of participation are rising exponentially and leading to severe dislocation of economic activity and unacceptably high losses of life and property.
The costs can be classified into a number of categories, largely depending on their nature (direct and indirect) and on the time period examined (immediate, medium-term or long-term). Those costs that are short run are more clearly identifiable and potentially less difficult to measure. Estimates covering longer periods of time and focused mainly on indirect costs require numerous assumptions and hence are on less firm ground. The decision to participate in the ‘War on Terror’ did lead to a major outpouring of international support to Pakistan. In 2001 Pakistan was emerging from a tough stabilisation programme with the IMF which, in the process of reducing macroeconomic imbalances had, more or less, ‘suffocated’ the process of growth. Per capita income was stagnant and there was a substantial increase in unemployment and poverty.
Foreign exchange resources were scarce and at the beginning of FY 2001-02, foreign reserves stood at $3,231 million, enough only to finance three months of imports of goods and services. Participation in the war effort led to a substantial increase in the inflow of concessional assistance, especially in the form of grants from the US.
Since 2001-02 Pakistan has cumulatively received $12.2 billion funding from the US. This consisted primarily (almost 70 per cent), of reimbursement for the costs incurred by the military in counter-terrorism operations. Development and economic assistance has aggregated to $3.2 billion. The direct contribution to the growth process in the country was limited. However, the overall assistance, including the funding of military operations (mostly incurred in local currency), contributed to a rapid build-up in foreign exchange reserves.
Direct costs include the value of human lives lost or of injuries, the value of property or infrastructure destroyed or damaged, and costs of enhanced spending on security. Here, the major conceptual issue relates to the valuation of the human cost, either in terms of loss of life or of injuries.
In order to avoid controversy over any assumed value, we simply compute the cost as the (potential or actual) compensation due to affected families as per a prescribed government formula. Indirect costs are diverse in nature and include costs to local economies in the context of areas which are severely impacted by terrorism. In addition, due to the heightened sense of insecurity, loss of livelihood, and damage to shelter, terrorism may lead to internally displaced persons (IDPs) on whom costs will need to be incurred in the form of relief and rehabilitation.
Costs also include greater uncertainty and risk which relates to lost investment, both foreign and domestic, due to heightened risk perceptions, especially arising from ‘mega-attacks’ like the assassination of Benazir Bhutto and the bombing of Marriott Hotel. In addition, travel and tourism is likely to be adversely affected leading to decline in associated services by hotels, restaurants, tourist guides, transport operators, etc. Finally, an important category of costs relates to the higher costs of insurance premium for coverage against acts of terrorism.
Higher transaction costs are those costs which are associated with delays in the movement of goods and consignments. Firms may also incur costs of higher inventories to avoid the possibility of disruption in supplies. In addition, there are enhanced time costs, arising, for example, at airports due to greater security checks, immigration restrictions, etc.
If we look at the direct costs starting with the damage to human lives and property we focus only on the cost of compensation for loss of life or injury. Expenditure on security and defence was higher because of the need to place the armed forces at the western borders and for undertaking counter-terrorism operations, especially in the North. Another aspect of enhanced security is the development of private security arrangements. There was a mushroom growth in this service in recent years.
The total costs of fighting terrorism are high, estimated at Rs380 billion, at the 2007-08 base. The distributional consequences of these costs need to be highlighted. Higher security expenditures run the risk of ‘crowding out’ other expenditures related to the provision of basic social and economic services and thereby having an adverse impact, especially on the lower income groups.
The negative implications for the relatively poor include the loss of property and livelihoods in the affected areas which are among the most backward regions of the country, primarily as a consequence of dislocation of economic activity, including the labour-intensive sector of tourism. The human dimension is manifested most acutely not only in the loss of life but also in the emergence of large numbers of IDPs.
For the relatively well-off, the costs consist of foregone investment opportunities and decline in wealth associated with the fall in share values, due to heightened levels of risk and uncertainty. There are also higher costs to the corporate sector in the form of larger premium for insurance coverage and increased transaction costs.
A number of important conclusions can be drawn from the above analysis. First, as the incidence of terrorist acts and counter-terrorism operations has increased rapidly, the benefits of participation in the ‘War on Terror’ are falling while the costs are rising sharply.
In 2007-08, the inflow of concessional assistance from the US was about $1.9 billion, whereas the cost was three times higher at $6 billion. There was, therefore, substantial under-compensation for Pakistan’s participation in the ‘War on Terror.’
This, at least, partly explains the lack of some ownership of the war effort. The recent commitment by President Barak Obama that the US will pass a bill in Congress to authorise economic aid to Pakistan of $ 1.5 billion per year for the next five years, will raise the quantum of concessional assistance from the US but the level of support will still remain at less than half the cost of the ‘war.’
Second, the past experience with the utilisation of the concessional support is not very positive. From the viewpoint of achieving sustainable higher growth and promoting employment, especially for alleviating poverty, it is perhaps better if Pakistan is also given preferential access to markets, especially for textiles, in the US, EU and Japan.
While the proposal for Reconstruction Opportunity Zones (ROZs) in the affected areas, enjoying preferential access, is worthy of consideration, it is unlikely that in the short run much investment will be diverted to these areas despite the incentive given the prevailing situation. It is important that as an alternative fast-track concessional assistance is provided for public investments in infrastructure and basic services and employment-intensive public works in affected areas which are cleared up through military operations.
Finally, the higher direct costs being incurred on the military and police operations against counter-terrorism of almost Rs130 billion per annum and the concomitant increase in acts of terrorism, highlight the ineffectiveness of the current strategy being followed. There is need for a comprehensive review of the strategy, preceded by the development of a stronger political consensus and broad-based public commitment to participation in this war.
To conclude, the country is paying a heavy price for the delay in the effective resolution of these enormous challenges facing it. Potentially, GDP could have been higher by almost Rs590 billion if the problems of security and power shortage alone were not adversely impacting on the economy. The concomitant repercussions for exports, employment and poverty are also sizable. Any further inaction or inadequate/inappropriate policy action can further frustrate the country’s growth potential, which it can ill afford in these times of increasingly unfavorable global developments.