Price of isolation

[Mehwish Pervez]

Price of isolation

THERE is an agenda for economic renewal that is now so well known, so oft repeated, that it risks being entombed in that temple where all good ideas go to die.

The state must raise the revenues to pay for its expenditures, says the agenda. If this doesn’t happen, the spiral of endless borrowing will bury us. The state must cut wasteful expenditures, consumption must give way to investment, revenues must be raised by a broadening of the tax net to bring in more elites who are enjoying the benefits of exemptions.

The agenda has very few critics. A few squeaks of dissent are heard here and there, but by and large the logic upon which it rests is sound, easily substantiated by the facts, and plain to see.

It has found support amongst a disparate group of voices, although they haven’t learned to speak as one. It can be found in the quarterly reports of the State Bank of Pakistan and in the Article 4 reports of the IMF.

The Pakistan Business Council has supported it, and the overwhelming majority of the community of Pakistan’s economists agree with it, even if they quibble over where the emphasis should lie.

The agenda has struggled to be heard in the cacophony of our politics. The costs of renegotiating the elite coalitions that it calls for are too great, and rulers in this country have been too encumbered by issues of legitimacy or political rivalries.

All this has been written about a lot. But there is one thing the agenda as formulated is missing, and that is the external dimension.

No country can find stable and sustainable growth while it remains isolated and cut off from its neighbours. Pakistan has the world’s richest energy markets to its west, and what were until recently two of the world’s fastest growing economies to the east and the north.

Bringing these together was and probably still is the single-most promising economic proposition before the country, far more perhaps than a comprehensive renegotiation of its internal political economy.

I’m not arguing that tax reform ought to be abandoned and replaced by transit revenues on Iranian gas.

But I am wondering aloud whether any set of domestic reforms will ever be sufficient to sustain growth rates high enough to absorb our new labour force entrants — a rate estimated to be around 6pc — so long as Pakistan remains isolated and cut off from its own neighbours.

Thus far our search for growth has had two dimensions: reforms at home and aid from abroad. This equation needs to change to reforms at home and gains from trade with neighbours.

The agenda on reforms at home is a fairly well developed one and there is no need to delve into it here. Of course, much of the reform effort has come to grief on the rugged reefs of our political economy, but that is a story for another time.

For now I have on my mind the story of our isolation, and the mechanisms that sustain it, that seek in it their livelihood, and the pursuit of demented ambitions.

Pakistan’s dependence on external support will not break if this isolation from our own neighbours is not ended. Domestic reforms may alleviate some of the fiscal burden of the state, but can do little about the balance of payments gap that has become a permanent feature of our economy.

As a consequence of this gap, our economy consumes foreign exchange reserves the same way it consumes oil: the reserves are burnt in the furnaces of our money markets, and used to power the engines of domestic consumption.

How can the external weaknesses of the economy be sustainably bridged? Endless concessionary inflows are not the answer. Nor are endless devaluations of the currency.

Broadening the export base is a trickier job than dumping loss-making public-sector enterprises. Breaking the growing dependence on imported oil is, at best, a medium-term proposition, although one remains sceptical even with longer time horizons.

A game-changing proposition is needed to break this weakness sustainably, and the only such proposition around is regional integration. No domestic reforms will get the job done as reliably and in as sustainable a manner. Energy to the west and markets to the east and transit revenues in between are the best supplement to the agenda for domestic reform.

This point is necessary to emphasise at this juncture for a reason. The recent accord with Iran has prompted another round of the silliness that has informed our thinking about our neighbours for too long. ‘India will encircle us!’ goes this silliness, before it is pointed out that regional integration is an ‘American agenda’ to put us permanently under Indian tutelage.

Such a reading of our regional interests looks like it comes out of a Star Trek episode more than any serious foreign policy analysis. When drawing up our interests in the region, our own economic priorities need to be kept foremost in mind. Balance of payments first, balance of power second.

An overactive imagination that is busy reading the true motives behind everybody else’s moves is not helpful. What is required is a sober understanding that our country has a permanent balance of payments problem, and that problem sends us all over the world asking for assistance, and that search for assistance makes us vassals of the foreign policy of distant powers.

In order to break this vassalage, we need two things: fiscal reforms at home and regional integration in our foreign policy.

All those who continue arguing that our regional outlook should remain wedded to an endless rivalry with India should answer one simple question: how do you propose our permanent balance of payments gap should be bridged?

The writer is a business journalist and 2013-2014 Pakistan Scholar at the Woodrow Wilson Centre, Washington D.C.

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