Submitted on
27 March 2013
A
PERSPECTIVE ON PAKISTAN-INDIA RELATIONS:
POWER
DYNAMICS, DEMOCRACY AND DEVELOPMENT
By
Akmal Hussain,
Distinguished Professor of
Economics,
Forman Christian College
University
© 2014 by
Akmal Hussain. All rights reserved. Quotations from the text, not to exceed one
paragraph, may be made without explicit permission, provided that full credit,
including © notice, is given to the source.
Published as
Chapter-2 in the Volume: Mallika Joseph and Happymon Jacob (ed.) India’s
Economic Growth: Opportunities and Challenges for the Region,
Regional Centre
for Strategic Studies, Colombo, 2014
Submitted on
27 March 2013
A
PERSPECTIVE ON PAKISTAN-INDIA RELATIONS:
POWER
DYNAMICS, DEMOCRACY AND DEVELOPMENT
By
Akmal Hussain,
Distinguished Professor of
Economics,
Forman Christian College
University
INTRODUCTION: A HISTORIC OPPORTUNITY
A seismic change is taking place in the global economy
as its centre of gravity shifts for the first time in three centuries from the
West to Asia. At the heart of this process is the rise of China and India. If
China is able to sustain an annual GDP growth rate of about 9 percent and India
can overcome its present decline in GDP growth to maintain a trend rate of
growth of even 7 percent over the next three decades, then China will become
the world’s largest economy and India the third largest after the US before the
middle of the 21st century.
If India can integrate its economy with South Asia the resultant economic
synergies could well enable South Asia to become the world’s second largest
economy in the next four decades. In the emerging strategic economic
configuration, Pakistan can be a bridge between two of the greatest economic
power houses in human history. Objectively, the choice before Pakistan is
clear: If this opportunity can be grasped, Pakistan’s economy can be catapulted
on to a new trajectory of high economic growth. South Asian regional economic
integration could also give a new impetus to India’s economic growth through a
much wider base of markets, investment, trained person power, talent and innovations.
The powerful
catalytic effect of a region wide growth process could help to unleash the
creative potential of the people of Pakistan as well as India and transform their
material conditions of life in this century. At the same time the economic
linkup between Pakistan and India could strengthen the endeavour for peace and help
nurture pluralistic societies, thereby deepening their respective democratic
structures. If on the other hand this historic opportunity is lost and ideology
overrides the rational pursuit of the interests of the people, then Pakistan is
likely to remain mired in slow long term per capita income growth rates, economic
deprivation of the people, social polarization and widespread violence by armed
militant groups. This internal conflict could
not only threaten the nascent democratic state but could overspill into neighboring
countries to create regional instability. This could become a festering wound weakening
the capacity of both Pakistan and India to actualize their economic potential.
In this paper we will in section I examine
the dialectic of power within Pakistan’s state structure that shapes Pakistan’s
constrained economic relations with India and the emerging social and economic
factors that could help begin a new era of peace and economic cooperation with
India. In section II, we will discuss the attempts by different governments
over the last decade to craft a new approach to Pakistan India relations. We
will indicate the dynamics of power that underlay both the attempts as well as
the constraints to normalization of economic relations between the two
countries. In section III, the logic of normalization of relations with India
in terms of strengthening democracy, economy and the state will be articulated.
A paradigm shift from “national security” to human security will be proposed. In
section IV, we will briefly examine Pakistan’s economic crisis to suggest that some
of the main constraints to GDP growth can be released by opening up trade and
investment flows with India. Finally in section V, we will present an outline of
the adverse effects of climate change in South Asia with special reference to the
problem of water scarcity in Pakistan. The climate change dimension brings a
new urgency to the imperative of Pakistan-India cooperation.
I. DYNAMICS OF POWER, DEMOCRACY AND ECONOMIC
RELATIONS WITH INDIA
I.1 Power Structure and Policy. Governance
in Pakistan has been shaped not only by the Constitution but the power
structure that underlies it. Although the formal rules of the Constitution stipulate
that the military is subordinate to elected civilian authority, yet within the
functioning power structure the military is a key player. The power structure
consists of the President, the Prime Minister, influential members of Parliament,
key members of the bureaucracy and the military. The elite coalition represented in the power
structure consists of the landlords, dominant groups in the large scale
manufacturing sector, big traders, networks within the bureaucracy and the
security apparatus. The judiciary which had earlier lacked independence being
subject to the interplay within the power structure, has now asserted its
independence and in recent years has played a vital role in maintaining and
strengthening constitutional rule.
For most of
Pakistan’s history since 1958, the military has been the dominant element
within the power structure and has played either a direct role during
authoritarian regimes or an important indirect role in governance during periods
of elected civilian governments. It is not surprising therefore that the
paradigm of national security has been formulated by the military which shapes
policy not only in the sphere of security but also foreign affairs. Within this
paradigm India has been seen as an adversary and relations with India a zero
sum game. The armed conflicts with India
in 1948, 1965, 1971 and 1999 have given sustenance to this conception. Thus for
most of Pakistan’s history the military has had a predominant influence not
only on security policies but also economic and political relations with India.
I.2 Power
Dynamics and the Development of Democracy, 2008-13. Over the last five
years during the tenure of the democratic coalition government led by the
Pakistan People’s Party important changes have occurred in the institutional
structure of Pakistan’s democracy. These changes have occurred in the face of
intense contention for power amongst the main organs of the state: the Executive,
the Parliament, the Military and the Judiciary.
The
government perceived a threat of destabilization of democracy when the so
called Memo gate affair emerged. In November 2011, the press made public a secret
memo which suggested that a conspiracy had been hatched to seek the support of
the US through a go between to prevent what the authors of the memo considered an
imminent coup. Allegations were made that the then Ambassador of Pakistan to
the US, Mr. Hussain Haqqani was implicated in this conspiracy which allegedly involved
treasonable changes within the military establishment. The Supreme Court set up a commission of
enquiry and Ambassador Haqqani was removed from his post. During this crisis
there was a faceoff between then Prime Minister Gillani and the military: he
defiantly declared in Parliament on 22 December 2011, that the military’s
continuing role in politics was unacceptable.
These events signified that the contradictions of Pakistan’s power structure
had reached a point of inflection. The political system weathered the storm and
the democratic government survived.
The “Memo
Gate” affair was followed by tensions between the Judiciary and the Executive when
the Supreme Court (SC) asserted its constitutional authority to convict the
sitting Prime Minister, Mr. Gillani for contempt of court when he failed to
implement the SC order to write a letter to the Swiss Court. The letter required
rescinding the earlier Pakistan government decision to withdraw a graft case
against Mr. Asif Zardari prior to his becoming President. Prime Minister
Gillani was removed from office on the orders of the Supreme Court subsequent
to his conviction in the contempt of court case.
During the
same period another case was taken up by the Supreme Court in response to a
petition made by Mr. Asghar Khan in which key politicians in the opposition two
decades ago were found to have been bribed by military and intelligence
officers to destabilize the government of the Pakistan Peoples Party (PPP). During
the hearings of the case, it transpired that in the period 1990-1994 the then
Chief of Army Staff Mirza Aslam Beg (allegedly at the behest of then President
Ghulam Ishaq Khan), had initiated payments amounting to Rs.140 million through the
ISI chief Asad Durrani and Javed Nasir to various politicians for creating the
anti PPP alliance called Islami Jamhoori-Ittehad and bank rolling campaigns of
opposition politicians.
This case (popularly called Mehran Gate)
manifested the contention within the power structure and the attempt by
democratic forces to bring the practice of governance in congruence with the Constitution.
The dialectic
of power illustrated by the above mentioned cases signifies the attempt by
democratic forces to achieve a new balance within the state structure whereby the
judiciary maintains its independence, Executive excess is constrained by the
limits of law and the military could be subordinated to elected civilian
authority as stipulated in the Constitution.
During the
period 2008 to 2013 apart from the struggle for democracy within the elite
coalition, the elected government was able to achieve a broad consensus in the
Legislature to pass key constitutional amendments and improve the institutional
framework of centre-province financial relations. Through these institutional
changes the formal democratic structure was strengthened and the possibility of
a future coup d’état was significantly reduced. This was done by: (a) restoring the main features of the 1973
Constitution and thereby rectifying the distortions introduced in the democratic
Constitution by successive military governments to facilitate the overthrow of elected
civilian governments. Prime Ministerial authority was re-established and the
power of the President to arbitrarily dismiss an elected government withdrawn.
(b) Devolving greater power to the provincial governments. (c) The federal
structure was further strengthened by the consensus achieved amongst the
provinces in passing the National Finance Commission Award under which the
share of the provinces as a whole in federal government revenues (the Divisible
Pool) was increased, particularly the share of the relatively undeveloped
province of Balochistan.
Like all formal rules, the Constitution is embedded in
the normative structure and the core values of a society. Repeated military interventions
in Pakistan can only be prevented if the principles of the Constitution become
part of the norms and political culture of society so that the people are
willing to defend the democratic constitution. An important step in Pakistan’s
journey to democracy was the Citizens’ Movement led by the lawyers during
2007-08. This popular mass movement which was unprecedented in its intensity,
sacrifices and geographic coverage, served to restore the judiciary. In so doing the citizens’ movement helped
establish a new norm in the political culture of Pakistan: the people of
Pakistan are willing to preserve, protect and defend the Constitution. The independent
judiciary after restoration drew its strength from the courage and consciousness
signified by the Citizens’ Movement. It was this strength that enabled the
Supreme Court in the period 2008-13 to hold to account not only the incumbent
government for corruption and malfeasance, but through suo moto action strove
to protect the rights of citizens who had been abducted by various security
agencies in Balochistan; publicly scrutinized interference in political affairs
by the behavior of the military in the Asghar Khan case; and sternly castigated
elements in the military establishment who had stepped outside the law in
Baluchistan. Such
dispensation of justice without fear or favour has played a significant role in
the development of democracy in Pakistan.
A vital element in the struggle for democracy was the
heroic initiative by former Prime Minister Benazir Bhutto of risking her life to
launch a campaign against the dictatorship of General Musharraf. In sacrificing
her life for democracy she joined the pantheon of martyrs whose memory inspires
the resolve of the people to defend their freedom. Her sacrifice was the main
driving force behind the staunch defence of democracy by the PPP led government
in the power struggles during 2008-13.
As the people
of Pakistan build democracy they face two major threats: (i) An economy that
within its existing rent based structure extracts the fruits of labour of the
people for the profligacy of the elites. The sense of economic deprivation of
the people has been accentuated as GDP growth rates have declined sharply in
the last five years compared to the preceding five years. Mass poverty has
persisted, food insecurity has increased and inter personal as well as inter
regional inequalities have accentuated. While a large proportion of the
population is deprived of the minimum conditions of dignified life, fiscal pressures
constrain the government from seriously addressing the problems of food
insecurity, severe shortages of electricity and gas and lack of access of the
majority of the people to quality education and health. (ii) The religious
extremists pose a serious threat not only to democracy in Pakistan but to the
security of the state itself. Armed militant groups have emerged as rival
powers to that of the state within its territorial domain. They have captured
significant swathes of Pakistan’s territory in FATA (Federally Administered
Tribal Areas), have in recent years launched deadly attacks on key military installations,
civilian population centres and have assassinated important political leaders. Over
the last five years the religious extremists have killed 30,000 civilians and 3,000
military personnel.
The cost of terrorism to the economy has been estimated at USD 43 billion. It is not surprising therefore that both the
civilian and military leadership now consider terrorism to be the principal
security threat for Pakistan.
Yet the response to them appears to be ambivalent: they are reported to have
penetrated the security apparatus, captured sections of the ideological space
through influence over parts of the media and have won allies amongst some of
the right wing political parties. The way democratic forces address these
challenges will shape the future of democracy in Pakistan as much as relations
with India.
II THE POLITICS AND ECONOMICS OF NORMALIZING
INDIA PAKISTAN RELATIONS.
During the last decade the attempt by military as well
as civilian administrations to engage in a peace process with India and seek
economic cooperation has been driven by three considerations:
(i)
Normalizing economic relations with India is necessary
for Pakistan’s economic growth which would provide the material basis of maintaining
the integrity of the nation and strengthening the state.
(ii)
Reducing tensions with India on the Eastern front is
necessary to avoid a three front situation as Pakistan battles the enemy within,
and secures the Western front with Afghanistan to prevent intrusions by hostile
extremist elements into Pakistan.
(iii)
Unlike earlier decades, peace with India has become a
popular aspiration and so pursuing the peace process has become politically
advantageous.
II.1 Normalizing Economic Relations
with India: Musharraf’s Initiative.
These strategic imperatives induced General Musharraf in July 2001 to reach out
to India with a new approach based on a number of key innovations. First the
earlier demand of a plebiscite as a precondition for normalizing economic
relations with India was replaced by the idea of a composite dialogue. In this
context economic relations were to be discussed alongside the resolution of
outstanding political and territorial disputes including that of Kashmir. Second,
given the different temporal scales of the two tracks, it was realized that
trade relations would yield results sooner than talks on the Kashmir dispute due
to its intractable nature. Indeed it was thought that improved economic
relations and the resultant peace dividend would not only create stakeholders in
both countries for sustaining the peace process, but would also build
confidence and trust that would facilitate the political dispute resolution
process. Third, there was a tendency to set aside rigid positions on the
Kashmir issue conceived earlier as essentially a bilateral dispute. Instead a flexible approach was adopted and there
was an attempt to seek a resolution of the dispute that was acceptable to
India, Pakistan as well as the people of Kashmir.
General
Musharraf’s policy initially produced encouraging results with a significant
increase in trade volumes and increased visa permits that enabled a larger
number of travelers from Pakistan and India respectively to visit each other’s
countries. However the institutional features of India Pakistan economic
relations constrained a sustained rapid increase in trade volumes. These
institutional factors included tariff as well as non tariff barriers and the
restriction of trade to a limited number of items in the so called positive
list. These constraints on trade persisted even after the historic Islamabad
Declaration at the SAARC Summit in 2004 when the idea of establishing a South
Asia Free Trade Area (SAFTA) was agreed to in principle. Inspite of the
optimism it generated, SAFTA was effectively stalled near the end of President
Musharraf’s government. Fears began to circulate that the Pakistani economy
would be swamped by cheap Indian goods, that it would constitute a betrayal of
the sacrifices of the Kashmiri people and would undermine the very identity of
the national security state. In the face of this political campaign, Prime
Minister Shaukat Aziz reversed the new approach and returned to the original
position when he publicly declared that improvement in economic relations was
contingent upon progress in the resolution of the Kashmir dispute.
The view that trade restrictions and an adversarial relationship with India was
necessary to maintain a large share of the budget for the military, apparently
prevailed. The alternative view that
improved economic relations with India would be a major stimulus to economic
growth and would thereby make a large budget for the military politically and
economically feasible, was for the moment set aside.
II.2 Normalizing
Economic Relations with India: Initiatives
by the Democratic government. After the elections of February 2008 the
coalition government led by the PPP engaged with India once again on the basis
of the composite dialogue approach that had been given up near the end of the
previous government’s tenure as President Musharraf’s political position within
the Establishment had weakened. As the democratic government sought to win
space from the military within the power structure, Foreign Minister Shah
Mahmood Qureshi, called for a “comprehensive settlement” with India. At the
same time President Zardari declared his government’s intention to accelerate
the peace process and focus on economic cooperation.
It was clear that the elected civilian government saw normalization of
relations with India as integral to the process of sustaining democracy as well
as development. Just when Pakistan’s foreign minister was in India to take the
peace process forward it received a major setback with the monstrous Mumbai
massacre by Pakistan based militants. It was after several months that the
dialogue between the two sides could be restarted in February 2010, when the
foreign secretaries of the two countries met in New Delhi.
Pakistan’s
government even as it faced multiple pressures sought to normalize economic
relations with India. An important manifestation of this attempt was the cabinet
decision to, in principle, grant MFN status to India by the end of 2012. This was to enable a free flow of goods and
capital between the two countries just as in the case of other members of the
WTO. Both countries made major concessions with Pakistan undertaking (after the
formal granting of the MFN status) to replace the existing “positive list” with
a relatively short “negative list” as in the case of normal trade relations
between countries. At the same time, India
undertook to reduce its list of impermissible imports from Pakistan by 30
percent and lower the duty rate of imports from Pakistan to 5 percent by April
2013.
However, a
detailed comparison of the tariff structures of the two countries indicated
that there were certain anomalies and asymmetries in the tariff structures
between the two countries which placed Pakistan at a disadvantage, and which
had to be addressed during detailed negotiations before the MFN status and
associated liberalization of the trade regime could be implemented. Some of the asymmetries that were pointed out
include: (a) The number of items in India’s sensitive list of imports from
Pakistan was 1,753 which was significantly more than the number of items 1,577
in Pakistan’s sensitive list of imports from India. Furthermore, the items in
this list were weighted towards agriculture and textiles even though in some of
the sub sectors of this commodity group Pakistan had a comparative advantage.
(b) Import duties on rice at 70 percent and 100 percent on wheat were
considered prohibitive by Pakistani exporters. Such distortions of the relative
prices of these items constituted indirect obstacles to free trade. They were
reinforced by the huge subsidies on agriculture inputs provided by the Indian
Central as well as state governments. These amounted to 5.2 percent of GDP,
compared to 1 percent in the Pakistani case. (c) It is now well established
that non tariff barriers even in the absence of formal tariffs can be a major
constraint to trade liberalization. Non tariff barriers such as lack of
harmonization of customs procedures, certification procedures for quality
standards of traded goods, institutional constraints to opening letters of
credit and transfer of funds across the border are legion in both countries. While
a mechanism is in operation to address these barriers to trade, the process is
not time bound. Yet at the level of the individual exporter non tariff barriers
are seen to be as important as tariff structures. This was a significant factor
in building up pressure to delay the implementation of the MFN decision.
Bureaucratic
mismanagement of the transition process to a free trade regime was manifested
in the failure to address expeditiously the anomalies and asymmetries in the
respective sensitive lists and tariff structures and non tariff barriers prevailing
in the two countries. This led to delays in the implementation of the decision
by the two governments at the highest levels to move towards free trade between
the two countries. As the implementation of Pakistan’s cabinet decision to
grant MFN status was delayed beyond the December 2012 deadline, there was an
unfortunate incident on the Line of Control in Kashmir in early January 2013,
which enhanced tensions. Once again, political dynamics prevented an important
initiative for normalization of economic relations from coming to fruition: With
the elections round the corner the government of Pakistan on 25th
February 2013, announced that the decision to grant MFN status to India would
be left to the next government.
II.3 The Logic of Normalizing Trade Relations.
Inspite of the vicissitudes of India Pakistan relations there is an undeniable
logic to persist with efforts to normalize economic relations. Free trade with
India would place Pakistan on a new high growth trajectory not only through
gains from trade but also through increased investment by Indian entrepreneurs.
Moreover, imports of relatively cheaper
capital and intermediate goods from India could help reduce capital output
ratios in Pakistan and thereby achieve a higher GDP growth for given levels of
investment. At the same time the distribution of real income in Pakistan could
be improved through the reduction in food inflation that would become possible
through stabilization of food prices associated with import of food products
during seasonal shortages when surpluses are available on the other side of the
border. At the same time, increased tourism, trade in services and retail
sectors would increase employment elasticities and improve income distribution.
Thus normalizing economic relations with India could enable Pakistan to achieve
a higher and more equitable GDP growth that could play a key role in the struggle
against extremism.
If the institutional mechanisms could be created for
rectifying the current anomalies and asymmetries in the tariff structures and
substantially reduce non tariff barriers within a time bound framework, both
countries can achieve immense economic gains. The stimulation of equitable GDP
growth resulting from trade and investment could create large constituencies in
both Pakistan and India to counter their respective extremist groups that seek
confrontation rather than cooperation. In Pakistan a shift from an adversarial to
a mutually beneficial cooperative relationship with India would enable a shift
from a national security state paradigm to the paradigm of a state that is
secured through the economic welfare of its citizens. This would help to
strengthen and deepen democracy.
Building a
sustainable democracy requires building a pluralistic society where diverse
communities can co-exist and prosper together and where multiple identities can
be maintained by each individual within a variety of relations with other
individuals. Essential
to deepening democracies in Pakistan and India is the opening up of new cultural
spaces within which people of the two countries can encounter the ‘other’ as a vital
fertilizing presence in the growth of the self. Such an engagement could help
in discovering within the cultural diversity of each country, the shared
wellsprings of human civilization. Thus national integrity would be
strengthened not by the denial of cultural diversity but by creating forms of
social existence in which such diversity can flourish.
II.4 Towards
a new Paradigm of Security. Within the modes of governance in India and
Pakistan, national security has been conceived in terms of building a military
apparatus designed for mass annihilation of each other’s citizens. This has led
to a policy paradigm within which priority in public resource allocation is
given to building the capacity to destroy an imagined adversary across the
border rather than creating the capacity for improved conditions of life within
the country. India is the world’s largest importer of arms and Pakistan, not
far behind, is the 10th largest.
Thus Pakistan and India have the capability for mass destruction through a
conventional or a nuclear war. Even in a limited nuclear exchange, over a
hundred million people could be killed with many hundreds of millions more
dying from radiation related illnesses. Yet these two countries together contain 40
percent of the population of the world that is living in poverty.
At the same time, 37 percent of the population of Pakistan and India is living
below the poverty line,
over 40 percent of the children are malnourished and only 21 to 31 percent of
their respective populations have 7 to 12 years of schooling.
While the
governments of the two countries have been pursuing national security through
war making capacity, the citizens of these adversarial states share the aspiration
of human security: from extremist violence, hunger, loss of livelihoods, social
injustice and the ravages of floods and droughts associated with climate
change. This incongruence between the preoccupations of the state and those of
civil society needs to be addressed if the social contract that underlies the functioning
of the state is to be maintained.
The time has come for Pakistan and India to change state perceptions of each
other as adversaries and recognize their economic, social and ecological
interdependence. A shift is required in the policy paradigm whereby the
policies and resource allocation priorities of democratic governments could aim
to create the material conditions for actualizing the human potential of their
people. Only then can these two states achieve development, sustainable
democracy and meaningful national security.
The rise of
India on the economic and technological plane may be associated with a tendency
to translate economic strength into military power as Western states have
tended to do over the last two centuries. Yet the new world in the 21st
century is different from the past in that there is far greater inter
dependence in facing global challenges of economic instability, poverty, economic
inequality and crucially, the threat to the life support systems of the planet.
In this new world, the influence of an emerging power will be determined not by
the magnitude of its capability of destruction but by its contribution to
enhancing life of the human community facing critical challenges to its
prosperity and very survival. Therefore it is not the military strength of a
state that will be the emblem of status but its contribution to meeting the global
challenges of peace, poverty and environmental degradation.
Countries of the South Asian region share deep rooted though dormant traditions
of harmony with nature, values of sharing and caring and the sensibility of
connecting with the ‘other’ as a mode of actualizing the self.
Thus India and Pakistan are culturally equipped to tap into these shared well
springs of civilization to help build a better world together.
III. THE
NATURE OF THE CURRENT ECONOMIC CRISIS: 2008-11
III.1 Investment and Growth: Persisting Recession.
Pakistan’s GDP growth rate has declined sharply from 6.8 percent in 2006-07 to
1.2 percent in 2008-09 which indicates a negative per capita GDP growth in that
year. Over the period 2007-08 to 2010-11 the average annual GDP growth has been
about half the historical trend rate of 5.5 percent.
Growth in agriculture during this period fell
substantially on average and was subject to sharp fluctuations on a year to
year basis, reflecting the increased variability in the quantum and location of
rain fall associated with global warming. It fell from 4.1 percent in 2006-07
to 1 percent in 2007-08, rose again to 4 percent in the next year but declined
sharply in the next two years.
Growth of the
large scale manufacturing sector has also declined sharply from 8.3 percent in
2006-07 to a negative growth of -3.7 percent in 2008-09. In the following two
years although growth became positive, this sector was still in the grip of
stagnation. Fluctuations in the growth rate of the
manufacturing sector suggest that changes in the volume of output, was the
result of variations in the utilization of productive capacity rather than
fixed investment. Indeed medium term growth of the manufacturing sector is
constrained by structural factors such as the collapse of profitability of the
highly leveraged and dynamic industrial units which face the double squeeze of
sharply increased interest rates on the one hand and on the other, a sharp
depreciation in the exchange rate leading to high rupee prices of imported
inputs. Consequently, manufacturing investment fell sharply thereby
constraining medium term growth. Fixed investment in the manufacturing sector
as a percentage of total fixed investment declined sharply from 22 percent to
16.2 percent over the period 2005 to 2010. The contribution of this sector to
employment generation in the country has also declined from 13.6 percent in 2005
to 13 percent in 2010. This indicates intensified unemployment stress on a
society where 62 percent of the population is below the age of 25.
A number of
structural factors constrain investment and GDP growth. These include: (a) an
institutional framework that restricts competition, lack of access over factor
and product markets to a large proportion of the population and which lacks
incentives for efficiency, innovation and hard work. (b) Lower water
availability per acre due to falling irrigation efficiencies. This has occurred
at a time when the water requirement per acre has gone up due to soil depletion
and the need to leech saline soils before planting. (c) Inadequate
infrastructure particularly electricity and gas generation, transport and communications
and lack of trained personnel due to poor quality and coverage of education and
vocational training facilities. (d) A severe shortage of electricity and an
underutilization of even the low energy production capacity, due to the problem
of circular debt arising out of nonpayment of government dues to independent
power producers. (e) The ongoing war against militant extremism which is a
major constraint to private investment, both domestic and foreign.
Of these
constraints to investment and growth, the most immediate are the power shortage
and terrorism. The annual increase in electricity and gas consumption in the
industrial sector has declined from about 17 percent in 2004-2005 to minus 7
percent in 2008-2009. The deficit between electricity supply and demand reached
5000 megawatts by 2009-2010. It is estimated that the effect of low energy
supply amounts to the equivalent of 2 to 2.5 percent of GDP.
Pakistan has
been mauled by militant extremism which has intensified during the last decade.
The militants have captured significant swathes of Pakistan’s territory which
in earlier years had extended beyond the FATA region into some of the settled
areas. Pakistan’s armed forces mounted successful military operations against
the insurgents and pushed them back to regain control over the settled areas.
However, substantial areas in Waziristan are still under the control of the
Al-Qaeda Taliban combine. In the last few years they have mounted a series of
gun and suicide bombing attacks against major political leaders and also
against a series of key military and civilian institutions. This intensified
warfare within the country has resulted in large human and material losses, and
created a sense of insecurity amongst the people. This has been a major factor
in the decline in domestic and foreign investment and also in the process of
production and sale. The National Crisis Management Cell estimates that between
2002 and April 2010 there were 8,141 incidents of terrorism in Pakistan
resulting in 8,875 deaths of both civilians and law enforcement personnel and
injuries to another 20,675 people. The estimated total cost of terrorism to the
economy from 2005 to 2010 is US$ 43 billion.
III.2 Inflation,
Poverty and Inequality. The inflation rate continues to remain high (14
percent). This is in spite of the government’s contractionary policy of high
interest rates (over 14 percent) and a sharp reduction in development
expenditure (from 7 percent of GDP in the 1980’s to about 1 percent of GDP last
year). The food inflation rate at 18 percent is higher than the average
inflation rate and this has further intensified the pressure on the poor. With
GDP growth at a historic low and food inflation rate at a historic high, it is
not surprising that the percentage of population living below the poverty line has
increased from 29.9 percent in 2004-05 to 36.6 percent in 2010-11.
This means that the number of people living below the poverty line has
increased from 46 million to 60 million over the period. The percentage of food
insecure population is even higher at 48.6 percent or about 80 million people. High
levels of poverty and food insecurity together with twelve hours of power
outages daily, add to the misery of the people.
The stress on
society and the polity is intensified by the increasing inter-personal and
inter-regional income inequality. The growth in income during the period
2001-08 was highly unequal with respect to the rich and poor. The average
income growth for the top income quintile of the population is 2.36 times
greater than for the lowest quintile. This inequality of interpersonal income
distribution while being rooted in a highly skewed income distribution of
productive assets is accentuated by the differential impact of high food
inflation with respect to the rich and poor (this is because food expenditure
constitutes a larger proportion of the
income of the poor compared to the rich). The distribution of disposable income
is made even more unequal by the fact that over 70 percent of government
revenue comes from indirect taxes, which place a relatively greater burden on
the low income groups compared to the high income groups.
The adverse
social impact of inter-personal income inequality is reinforced by the
political impact of increasing inter-regional economic inequality in Pakistan. Over
the period 2001-02 to 2009-10, in the relatively better off provinces like
Punjab and Sindh the employment growth over the period (2.7 percent and 2.2
percent respectively) is over twice as high as in the more backward provinces
of Balochistan and Khyber-Pakhtunkhwa, (1.1 percent and 1.2 percent
respectively).
The
inter-regional economic inequality reflected in the provincial employment
generation figures is also indicated by the provincial data on food insecurity.
In the more backward regions of Balochistan and Khyber Pakhtunkhwa the food
insecure population (61.2 percent and 56.2 percent respectively) is much higher
than in the more developed provinces of Punjab (38.5 percent and Sindh 44.3
percent respectively).
In the Federally Administered Tribal Regions (FATA) which is the epicentre of
militant extremism in Pakistan, food insecure population is highest at 67.7
percent.
III.3 Debt
Burden and Financial Fragility. Pakistan’s debt stock has risen sharply
over the last five years from 2005 to 2009 and has now reached a level that
suggests fragility in the fiscal structure. The external debt has increased
from USD 35.7 billion in 2005 to USD 50.8 billion in 2009. Domestic debt has
also increased from Rs. 2178 billion to Rs. 3275 billion over the same period.
As a consequence total debt servicing (domestic plus foreign debt) has
increased from 32.5 percent of federal government revenue to 38.6 percent
during the period 2005 to 2009.
Since subsidies and defence expenditure could not be decreased, the fiscal situation has now
reached a point where the entire government revenue goes into three items
alone: debt servicing, defence, and subsidies. Consequently the entire operating
expenses of the government as well as development expenditure have to be based
on borrowing. This of course means a further increase in the stock of debt and
the burden of debt servicing in the years ahead. This is an unsustainable
fiscal situation, unless the stock of debt is substantially retired and the
budget deficit reduced.
The
improvement in the current account of the balance of payments in the last two
years is due to a substantial increase in workers’ remittances and a sharp
reduction in imports. The most important factor in the decrease of import
expenditures is a 30 percent decline in the import of machinery and to a lesser
extent a slowdown in mobile phone and telecommunications imports, which are
consistent with the decline in investment indicated in the previous sections.
Thus, the improvement in the current account of the balance of payments has
occurred at the expense of future GDP growth. Export trends are such that the
export earnings are unlikely to finance the increased import expenditures, when
GDP growth picks up in the future. The WTO figures on manufactured exports show
that Pakistan suffered a significant loss in market share in world exports.
During the period 2005 to 2008 there was 40 percent expansion in world
manufactured exports. During this period, while China’s manufactured exports
grew by 75 percent and those of India and Bangladesh grew by over 50 percent,
Pakistan’s exports in this sector grew by only 14 percent.
Consequently, Pakistan’s market share, already at a low level, fell further. A
major factor in this reduction of market share was the fact that Pakistan’s
textile industry is still heavily dependent on the export of low value added goods
whose demand in the international market is growing much more slowly than
demand for high value added textiles such as garments and clothing. Another
factor is the lack of international competitiveness which has led to loss of
market share in textiles and clothing to China, India, Turkey and Vietnam. The
domestic security situation and power shortages have further exacerbated the
problem.
The Strategic
Trade Policy Framework proposes a number of initiatives aimed at improving the
international competitiveness of Pakistan’s textile industry which if
implemented could significantly accelerate export growth of this sector. The
proposed initiatives include: (i) Reduction of anti export bias by withdrawing
protection of inefficient industries, (ii) Minimization of taxation at the
investment stage, and (iii) Zero rating of customs duties on key inputs to
textiles and clothing exports. Apart from this the Textile Policy 2009-14 proposes
specific initiatives for the development of infrastructure facilities, skills development
and modernization of machinery and technology. The Textile Policy proposes that
these initiatives should be financed through the establishment of a Textile
Investment Support Fund (TISF). Support would also be given to undertake joint
ventures for the expansion and modernization of this sector. Perhaps the most
important policy initiative that could accelerate the growth of the textile
industry would be to achieve free trade agreements with India and China which
could aim at removing both tariff as well as non-tariff barriers between
Pakistan and these new potential trading partners.
Since the
financing of the balance of payments deficit in the last few years has been
done through external flows, this has added considerably to short term debt
obligations and worsened the foreign asset and liabilities position. Pakistan’s
external debt and liabilities have increased from USD 35.7 billion in 2005
-2006 to USD 50.8 billion in 2008-2009 and are estimated to be about USD 57
billion in 2009-2010.
This huge debt and liabilities burden increased sharply in the next year (2011-
2012) as large net payments obligations to the IMF had to be met.
The analysis
in this section shows that even at very low GDP growth rates, fiscal and
balance of payments pressures have mounted rapidly. Higher GDP growth in the
years ahead, if achieved, will be difficult to sustain unless the structural
constraints to increasing government revenues and foreign exchange earnings are
overcome. As discussed in the preceding
section-I, normalizing of economic relations with India within a level playing
field for exporters and investors on both sides would enable Pakistan to accelerate
its export growth as well as improve its capital account through investment
from India. This would significantly improve the balance of payments. The gains
from trade alone could increase the GDP growth and when combined with
investment from India would have a substantial positive impact on the overall
GDP growth. Ongoing research at the Beaconhouse National University suggests
that trade liberalization with India, the implementation of the SAFTA agreement
with respect to tariff reductions and structural reforms in Pakistan could
together increase the GDP growth rate in the medium term from 1.5 percentage
points to as much as 4 percentage points.
IV. CLIMATE CHANGE AND THE IMPERATIVE OF
PAKISTAN-INDIA COOPERATION
Given the highly integrated ecology of South Asia, regional
cooperation is necessary to formulate and implement policy measures for
addressing the socio economic impact of climate change. Let us briefly examine
the nature of the impact of climate change on the economy and society of this
region and its implications for India-Pakistan cooperation.
IV.1 Vulnerability
to Climate Change Impact. The available evidence shows that climate change
is already having a significant impact on the economies and societies of this
region. South Asia with its delicately balanced ecology, its heavy reliance on
monsoons, its critical dependence on agriculture and persistent mass poverty,
make it one of the most vulnerable regions in the world to climate change.
Increased variability in the magnitude and timing of rain fall during the
monsoons could increase the instability of agriculture production and add to
the burden of the poor.
The long and densely populated coastline with low lying islands, such as the
Maldives, make the region vulnerable to sea level rise associated with global
warming. The Himalayas containing the region’s glaciers, source of its rivers,
and the key to the region’s climate and economy, are sensitive to temperature
increases. Srivastava provides evidence to show that some Himalayan glaciers
are melting faster than the global average.
This could have a critical impact on the stability of water supplies and
thereby on the economy and society of the region.
IV.2 Water
Scarcity and the Need for Cooperation. Pakistan has shifted from a water
surplus to a water scarce country, as annual flow of rivers in the Indus Basin has
declined from 119 million acre feet in 1960 to 102 million acre feet by 2011. In
terms of per capita annual water availability in the Indus Basin there is a
decline from 5,121 cubic meters in 1962 to 1,396 cubic meters in 2011. This indicates
that Pakistan already faces water scarcity, since the minimum per capita annual
requirement has been estimated at 1,700 cubic meters per capita. This will have
major implications for Pakistan’s economy, society and state. Effective
management of the crisis requires urgent mitigation and adaptation measures in
close cooperation between Pakistan’s provinces of Pakhtunkhwa, Punjab and Sindh
on the one hand and between Pakistan and India on the other.
The declining
river flows and increased seasonal fluctuations in these flows create the
imperative for Pakistan to improve its water management and increase water use
efficiency. At the same time collaborative efforts by India and Pakistan for
forestation and management of the water sheds could slow down the increased
sedimentation of rivers which reduces the life of dams downriver. Reforestation
in the water shed could also prevent devastating flash floods downstream during
heavy downpours in the catchment areas.
Another
significant impact of climate change is that the monsoons have shifted from the
eastern part to the western part of what is Pakistan today while the timing is
delayed compared to the past. At the same time there is reduced glacial melt in
August a month in which glacial melt historically was high. The increased
variability in the timing and location of monsoons as well as the change in the
temporal pattern of glacial melt will further accentuate the observed shortages
of water in the Indus Basin during planting seasons. It is therefore crucial
for the people and government of Pakistan to realize the gravity of the water scarcity
problem. This has urgent implications for policy and public action to improve
the irrigation efficiency as well as the water use efficiency.
IV.3 Climate
Change, Extreme Climatic Events and Crop Yield Decline. The
Inter-Governmental Panel of Climate Change (IPCC)
had predicted that global warming would increase the frequency and intensity of
extreme climatic events. The study by Cruz et. al.
provides data to show that this is indeed happening in South Asia. For example,
the frequency of intense rainfall events has increased, causing floods and
landslides in Pakistan, Bangladesh, Nepal, Northeast India and Sri Lanka,
during the last decade. Consecutive droughts in 1999 and 2000, in Pakistan and
Northwest India adversely affected agriculture growth and the drought of 2002
in Orissa (India), caused crop failures which affected 11 million people.
According to
the IPCC the increase in temperatures in South Asia in the decades ahead are
likely to be above the global average. The IPCC estimates that given the
sensitivity of food grain seeds to heat, even a 2.5oC increase in
average summer temperatures could cause a reduction of 30% in the yield per
acre of food grain. The study by Giorgi and Bi
suggests that higher temperatures will lead to increased year to year variability
of monsoon rains. This phenomenon which is already occurring when combined with
the adverse effects of temperature on heat sensitive food grains could have a
critical impact on agriculture production and accentuate the problem of food
security in South Asia.
IV.4 Climate
Change and Population Dislocation. As local communities across South Asia
face a threat to their life and livelihoods due to climate change, large scale
dislocation and migration of populations can be expected. Increased flooding
and prolonged droughts could displace communities inhabiting the riverine
plains; sea level rise would change the salinity profile of coastal areas,
degrade large areas of fertile land and consequently displace the local
communities which are dependent for their livelihoods on coastal plains.
Climate change could force 125 million people to leave their habitat and
migrate to other places in South Asia.
IV.5 The
Imperative of Cooperation between Countries facing a Common Challenge. Managing
population dislocation, natural disasters, instability of water supply and food
shortages resulting from climate change, will require a high degree of inter-state
cooperation in South Asia. The integrated ecology of the region, the mountains,
rivers, forests and top soils constitute the basis of sustaining its economy
and social life. The people of this region share this life support system. They
also share the risks posed to it by climate change. Therefore, we the peoples
of South Asia and our respective states must cooperate and bring to bear our
shared humanity and innovativeness to face the challenge of climate change.
Cooperation not conflict is the key to building a better future for the people
of South Asia.
CONCLUSION
In this paper we have examined the dynamics of power
that underlie the ongoing struggle to sustain democracy in Pakistan as well as the
attempts to chart a new course of Pakistan India relations. Normalizing
economic relations between the two countries could play an important role in
stimulating economic growth. At the same time cooperative rather than
adversarial relations between Pakistan and India would strengthen democracy in
each country by providing economic security to citizens, building pluralistic
societies and nurturing a sensibility which is enriched through the diversity
of culture. There is therefore a need for shifting the policy paradigm in
Pakistan and India, from an adversarial to a cooperative one. Within this new
paradigm national security could be pursued not by enlarging the military
apparatus of destruction but the construction of an economy and society for
human security.
The structural
constraints to GDP growth in Pakistan were analyzed, to conclude that free
trade and investment between Pakistan and India would help to release some of
these structural constraints.
Finally, the challenges
posed by climate change which could have major adverse effects on the economies
and societies of the two countries were discussed. In this context, regional
cooperation for managing climate change and the associated water crisis is an
imperative of preserving the very fabric of society, economy and state of both
Pakistan and India.
List of
References
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F. Giorgi, Bi X
(2005) Regional changes in surface
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