Pakistan is at a pivotal crossroads in its economy today. The country has a population of 250 million plus, a strategic location, rich natural resources and a youthful, energetic workforce – all of which are needed for economic takeoff.
However, the country’s economic potential has not been realised over the past few decades. This is not because it lacks resources or talent, but because it lacks political stability. A cycle of political confrontation, institutional clashes and winner-takes-all politics has taken hold, making long-term planning impossible. For sustainable economic prosperity, Pakistan needs to embrace political reconciliation more than ever before.
There is a strong economic literature that establishes a connection between economic growth and political stability. Investors, domestic and foreign, look for predictability. They need reassurance that contracts will be kept, policies will remain, and the way the game is played will not change drastically. This sense of predictability has been lacking in Pakistan. A new governmental shift always means a shift in the previous government’s policies. Mega projects are halted, reviewed and repackaged. Development programmes lack institutional status as state policies; instead, they take the names of political leaders. This political volatility has led to what economists call a high country risk premium, increasing the cost of doing business and deterring investment.
A clear reflection of this is Foreign Direct Investment (FDI) in Pakistan, which has not reached its potential and has remained stagnant at less than $2 billion for many years. Foreign investors who arrive in Pakistan face the same fears: policy uncertainty, street disturbances, demonstrations that shut down major cities and the fact that the government they agree to a contract with may not exist next year. The world’s biggest investors do not like to invest in a factory or in an energy project when the capital city is always paralysed by sit-ins.
The same instability affects domestic investors. Whether they are big industrialists in Faisalabad or small traders in Karachi, the Pakistani business community has become adept at taking a short-term view. Capital flows into speculative activities such as real estate, dollar hoarding, or short-term trading, instead of industries of the future, R&D or export manufacturing. This is a rational answer to an irrational political situation. In times of political heat, the rupee devalues, interest rates increase and the stock market crashes. Political reconciliation will reduce this heat and make local investors think in 5- and 10-year terms, instead of 5- and 10-month terms.
In Pakistan’s quest for a united front with the International Monetary Fund (IMF), international credit rating agencies and friendly countries for financial support, the world witnessed a split polity. Without a consensus between the government and the opposition on basic economic reforms, which include widening the tax base, clearing energy circular debt, closing loss-making state-owned enterprises and appraising the economy, no reform can take place. All reforms are turned into political issues and are overturned the moment power changes.
Pakistan needs a Charter of Economy for economic prosperity, as required by the Charter of Democracy signed in 2006. Political reconciliation must be the basis of this charter, and all major political players and stakeholders must agree on some non-negotiable principles.
First, continuity of economic policy must be agreed. Whether it is CPEC, energy policy, the tax reform programme or the privatisation programme, there should be national consensus that these are not set up for political point-scoring. The Planning Commission and other economic institutions should be made autonomous and professional, and kept free of political interference. Economics should be based on facts, not politics.
Second, political reconciliation could facilitate the institutional harmony that is so desired. In Pakistan, economic governance has been impaired by antagonism between institutions. Parties in federal and provincial governments often differ, and conflict between them outweighs the cooperation they show in key areas such as health, education, agriculture and investment.
Political reconciliation would create a functional federalism, and the Council of Common Interests (CCI) and the National Finance Commission (NFC) would become spaces for collaboration, not conflict. This is important for economic development, as many of the subjects in the economy are now delegated to the provinces after the 18th Amendment.
Third, the state must create a process of reconciliation to reunite the people with the state. Economic growth is not the only driver of economic prosperity; inclusion is, too. When the system is polarised, citizens lose confidence and start to disengage. The lack of trust in the proper use of taxes leads to tax non-compliance. Educated youth are drawn to the greater opportunities in other countries, which compounds the brain drain. In the past two years, hundreds of thousands of skilled Pakistanis are estimated to have left the country alone. This is a big loss of skilled, educated workforce. A united and inclusive political climate is the only way to get the younger generation to believe that they have a future in the country.
Fourth, Pakistan’s economy has serious longstanding issues – limited export basket, weak tax-to-GDP ratio, energy insecurity and climate vulnerability. These issues can only be addressed through agonising, long-term reform that will take more than one government. For instance, taxing the retail and wholesale sectors is politically unpopular, but economically necessary. A single government cannot do it when it knows the opposition will use this to mobilise street protests. However, if all parties agree to the change through a reconciliation process, it can be done without political repercussions.
But critics of political reconciliation say it involves compromising on accountability or paying for an NRO (National Reconciliation Ordinance). It is a misconception. Reconciliation does not mean turning a blind eye to corruption or neglecting rule of law. It means accepting the rules of political competition. It means holding institutions accountable. It means that when it comes to changing the guard, elections are the legitimate way to do so, not going to the streets and protesting against the election, but waiting for the next one. Real reconciliation enhances accountability by ensuring it is non-partisan and therefore more credible.
This is supported by the experiences of successful economic change. After periods of intense political reconciliation and national consensus-building, South Korea and Malaysia have become economic miracles. Despite its political problems, Bangladesh has maintained broad continuity in its garment export and remittance policy and thus sustained growth. But Pakistan has experienced boom-bust cycles on several occasions, linked to political stability and instability.
The route is now obvious. Political strife in Pakistan should be de-escalated right now. The dialogue should not be about who will be prime minister the next day, but about what economic model Pakistan will adopt over the next 20 years. This dialogue must include key business leaders, economists and civil society, since it is about creating a true national economic compact. State institutions must also play their part in the reconciliation process, serving as impartial mediators rather than players in political games. If institutions are seen as partisan, reconciliation is impossible.
Our economic crisis is essentially a political crisis. Prosperity cannot be brought by any IMF programme, friendly loans from brotherly countries etc. The world is speeding and regional players are taking markets, technology and investment. The political class needs to understand that they can be rivals in the electoral arena, but they are also co-actors in the life of the nation. If political reconciliation does not take place, economic strategies will remain ad hoc, investors’ confidence in Pakistan will stay low, and the dream of a prosperous and self-reliant Pakistan will remain elusive.
The writer is a former additional secretary and can be reached at: [email protected]
Disclaimer: The viewpoints expressed in this piece are the writer’s own and don’t necessarily reflect Geo.tv’s editorial policy.
Originally published in The News
