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Economic Revival, Terrorism And The State
Dr.Akmal Hussain
Newspaper: Daily Times
Dated: Thursday, May 16, 2002

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 country.

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.

It 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.

Equally 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.

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