The high tension generated by the blunt remarks of Admiral Mike Mullen before the Senate recently is being defused through appropriately quiet diplomacy by both sides. However, the latest diplomatic statements from the US, while toning down Admiral Mullen’s pointed accusations, have retained the official US position regarding: (i) a perceived linkage between Pakistan’s military and the Haqqani network which continues to be considered a threat to US security interests, and (ii) retaining the option of a punitive strike against such a terrorist group. At the same time the Pakistan government while expressing a desire to continue engagement with the US in the pursuit of common interests, has stuck to its guns in: (i) denying complicity with terrorist groups combating US and ISAF forces in Afghanistan, and (ii) expressing a resolve to retaliate against a possible US military strike in Pakistan’s tribal areas. Thus while the tension may have subsided temporarily, the dangers inherent in the polarized perspectives, remain. Let us examine the dynamics of this situation.

Despite the conciliatory statements from both sides, there is a continuing stand-off which is both dangerous and potentially counter-productive for the interests of both protagonists: Dangerous because the asymmetry of power between the two countries can result in punitive actions, whether military or economic, by the bigger country. Counter-productive, because such actions could destabilize an economically and politically fragile state, leading to a new momentum of violence that could overspill across international borders, with major adverse consequences for the security of the region and possibly for the US.

Two features of Pakistan’s political economy create uncertainty about the outcome of continuing confrontation, from the view point of Pakistan’s interests and indeed those of the US:  First, the problem of institutional instability in governance. During the late 1990s, the government of Prime Minister Nawaz Sharif had considered establishing a Cabinet Committee on defense and national security. It was to have a strong secretariat and a professional advisory panel of experts. The purpose was to provide high quality analysis and enable an integrated decision making process. Such an institutional framework for crisis management did not get established. As it is the nascent democratic structure today, has multiple centers of power. Such a governance structure may lack coordination with inadequate ability to conduct well informed analysis to facilitate rational decisions during a crisis. The initiative of calling an All Parties Conference on 29th September was a good one. However it was both ad-hoc, as well as lacking an institutionalized mechanism for putting its decisions into effect. Consequently, the APC resolution was anodyne but lacking in actionable content.

The second uncertainty factor in the current confrontation is the fragility of Pakistan’s economic structure. The elements of this structure are well known. What we do not know however, is the precise configuration of these elements, and therefore the level of pressure the economic edifice can bear, before it reaches a tipping point. The economy at present is in a protracted recession combined with a high average inflation rate (14 percent), with food inflation being 25 percent; over one third of the population is living below the poverty line and the majority is deprived of basic services. The fiscal and balance of payments structures are fragile: the budget deficit at 7.8 percent is unsustainable and the gross foreign exchange reserves inspite of being at an apparently comfortable level of USD 17.6 billion can deplete rapidly due to panic capital outflows. Aid stoppage, and worse, sanctions could trigger an exchange rate collapse combined with hyper inflation, thereby paralyzing the economy and creating critical shortages of essential commodities. Given this economic fragility, can the economic pressure be used as a calibrated form of coercive diplomacy or will it tip over the country into anarchy?

The uncertainty about this issue is such that it cannot be converted into a measurable risk. Therefore it is better for both protagonists to seek common ground and pursue cooperation rather than conflict.