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Pakistan Confronts Economic Tremors

Author: Lee Hudson Teslik
January 15, 2008

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Pakistan has become a land of what-ifs. Analysts speculate on a wide range of fallout scenarios for the country: suppose President Pervez Musharraf’s regime falls; or Musharraf’s crackdowns disillusion moderate Pakistanis and embolden Islamist extremists; or the country’s nuclear weapons aren’t as secure as official assurances suggest. On the economic front, there’s no need for guesswork—Pakistan’s turmoil has already pinched the country’s economy, stoking inflation and prompting concerns among regional trading partners.

Voice of America (VOA), the U.S.-funded broadcast network, reports on a worsening of endemic economic problems in the country following the assassination of opposition leader Benazir Bhutto in late December. Pakistan’s central bank lowered its growth forecasts (Reuters) for 2007/2008 in early January, but VOA reports that inflation and power shortages pose a more concrete problem in the near term. Bloomberg reports that Pakistan’s inflation spiked in late 2007, ending the year at roughly 8.8 percent. More pressingly for much of the country’s population, the prices of beverages and food items, including basic foodstuffs like wheat products, rose at an even higher rate.

The country’s political turmoil also threatens foreign direct investment, a critical indicator in developing regions. “This is the worst possible scenario for foreign investment,” one emerging markets analyst told Reuters. “This environment of chaos is perfect for Islamic militants.” Less than 10 percent of Karachi’s stock market, which controls more than $70 billion, is owned by non-Pakistanis—yet the Reuters article notes that this number has increased rapidly in recent years. Analysts had hoped Pakistan’s economy might parrot the growth rates seen in neighboring India. As yet, that hasn’t happened. India handily eclipses Pakistan in gross domestic product and other critical economic measures.

Pakistan’s turmoil comes at a particularly bad time in terms of Indo-Pakistani economic relations. Trade between the countries expanded significantly following a 2004 South Asia Free Trade Agreement. The Economic Times, an Indian newspaper, reports that trade between the countries has more than quadrupled since 2001. Yet the space for additional growth remains vast. A 2006 working paper from the Indian Council for Research on International Economic Relations, an Indian think tank, estimates that two-way trade between India and Pakistan could reasonably multiply tenfold (PDF). In an interview with CFR.org, Sumit Ganguly, a South Asia expert, says trade relations between India and Pakistan remain hostage to diplomatic ties.

In the short term, Pakistan’s economic concerns will almost certainly affect the upcoming parliamentary elections, which were delayed from January 8 to February 18 following Bhutto’s death. Agence France-Presse says that basic needs like food carry more political weight for many Pakistanis than headline issues like nuclear security and al-Qaeda. CFR’s Daniel Markey adds in a recent Policy Options Paper that these concerns, which affect basic Pakistani stability, should not be overlooked as the United States seeks to encourage Pakistan to counter Islamic extremism within its borders. The political priorities of Pakistanis are explained more extensively in recent polling data (PDF) from the International Republican Institute, a research institute founded by Congress and run by prominent Republicans. One question asks Pakistanis what issue they are most likely to vote on in elections. Fifty-three percent say inflation. The second- and third-highest responses are unemployment and poverty, at 15 percent and 9 percent, respectively. Only 6 percent of Pakistanis say they are likely to vote on the issue of terrorism.

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