The suicide car bombing attack in Karachi on 8 May that
killed 15 persons including 11 French Nationals working on a key Pakistan Navy
submarine project represents a new phase of terrorism in Pakistan. It was not
just a random attack on a soft target, but was a strategic operation by Pakistan's
enemies. It aimed to simultaneously achieve three military objectives: (i) To
directly damage Pakistan's defence capability by delaying the completion of an
important submarine project. (ii) Striking at military related personnel of a
coalition partner in the war against terrorism. (iii) To demonstrate that foreigners
are not safe in Pakistan even when they are under the ostensible protection of
the armed forces, and therefore to undermine the environment for investment in
The Karachi terrorist attack therefore
poses a challenge not only to the enterprise of economic revival but to the very
integrity of the state. These two aspects of national endeavour are now inseparable.
Indeed addressing these organically linked objectives is not only the primary
obligation of the present military government but also of any democratic regime
in the foreseeable future.
The decade of the 1990s has been
marked by the deepest and most protracted economic recession in Pakistan's history.
It has also seen the emergence of armed militant groups that have asserted themselves
as rival powers to that of the state within its geographic domain. The decline
in GDP growth in the 1990s and sharply increased poverty and unemployment were
rooted in a number of structural features of the real economy. These include:
(i) A deterioration in the economic infrastructure that facilitates new investment
(for example roads, railways, ports, communications, the irrigation system). (ii)
A narrow export base concentrated in traditional low value added industries resulting
in persistent slow growth in the value of exports and thereby a chronic balance
of payments problem. (iii) A low domestic savings rate and a slow down of domestic
investment when cheap foreign loans were no longer available. (iv) Declining education
and training facilities and inadequate number and poor quality of skilled personnel.
On the basis of an analysis of trends in these strategic variables that sustain
growth, I had in 1986 pointed out in my first book (Strategic Issues in Pakistan's
Economic Policy): "It appears that if present trends continue we may be faced
with the stark possibility that high GDP growth may not be sustainable over the
next 5 years". Unfortunately as predicted the GDP growth rate declined during
the 1990s. Perhaps what made the economic recession so deep and so protracted
was a new adverse feature on Pakistan's investment landscape which perhaps more
than any other, dealt a devastating blow to investor confidence. This was the
threat to life and property posed by wide spread acts of terrorism by armed groups
of religious extremists. Just as the economic factors underlying the slow down
in economic growth were rooted in the structure of the economy, in the same way
the violence by religious extremists was rooted in the institutional structure
of the Zia regime.
Today both the economic recession
and the terrorist threat have become the central concerns of the state. What is
important however to realize is that these two issues are causally inter-related.
The pursuit of economic revival cannot be undertaken without overcoming terrorist
violence in Pakistan and establishing the writ of the state. The measures on the
economic front which the government has so far undertaken are probably necessary
but not a sufficient condition for economic revival. These measures include: (i)
Reduction in government borrowings from banks to allow more credit availability
to the private sector. (ii) Reduction in interest rates. (iii) Improved exchange
rate management (iv) Restructuring of the foreign debt profile and the associated
reduction in the debt servicing burden which is primarily a consequence of the
government's courageous decision to support the international war against terrorism.
However inspite of these commendable policy actions
we find that most of the increased borrowings by the private sector have gone
into better utilization of existing productive capacity. The key indicator of
economic revival however is investment in new productive capacity. This has so
far not occurred to any significant extent. Unless it occurs there will neither
be economic revival nor will any real results be produced on the ground, for the
citizens to perceive, i.e. increased employment and reduced poverty.
is clear that increased investment is the key determinant of economic revival.
Unfortunately the biggest constraint to investment both domestic and foreign is
the violence by religious extremists that was demonstrated so dramatically outside
the Sheraton Hotel in Karachi the other day. The enemies of Pakistan have clearly
thrown the gauntlet to the regime of President Musharraf and indeed to the international
coalition against terrorism. The integrity of the state and economic revival depend
on how effectively President Musharraf takes up the challenge.
the international community may wish to consider that the successful prosecution
of the war against terrorism in the region requires strengthening this front line
state. A stronger and economically more stable Pakistan is not only important
in the immediate sense of the "search for Al Qaeda". Thwarting terrorism
in the long term requires creating an economic bulwark against the spread of religious
extremism. This cannot be done by merely providing a minimal debt servicing relief,
just enough to avoid default, as has been done so far. The international community
needs to come forward and provide Pakistan with at least US $4 billion a year
for the next four years for investment in priority sectors such as infrastructure,
high value added industry, information technology and agriculture. In addition,
financial and technical support is required in the health and education sectors
to enable economic take off and human development in Pakistan. This would be the
most effective long-term response to the challenge of terrorism.