INTRODUCTION

The recent lifting of nuclear related economic sanctions is part of the diplomatic initiative by the U.S. to help revive Pakistan's economy and thereby defuse the social tensions that breed terrorism. Once again there is a prospect of large capital inflows. Yet these in themselves may not necessarily turn around Pakistan's stagnating economy or defuse rapidly rising social tensions associated with high levels of poverty. In this article we will examine three types of imperatives of the effort to achieve economic revival and stability in Pakistan: (1) The necessary structural changes in the institutional framework within which economic revival can occur. (2) The minimum level of financial support required over the next three years for a realistic attempt to achieve economic revival through higher GDP growth and (3) Changes in the structure and composition of economic growth that would be necessary to sustain growth, reduce reliance on loans through higher exports, and substantially reduce poverty.

I THE LESSONS OF HISTORY

Large foreign capital inflows occurred during two periods of the cold war. First during the Ayub regime in the 1960s when the Dulles doctrine gave a key role to Pakistan as a 'bulwark against communism'. The second was the Zia period of the 1980s, when Pakistan was used as a base area for the guerilla war against Soviet military occupation of Afghanistan. During both these periods large capital inflows stimulated the economy temporarily but failed to generate economic growth on a sustainable basis: they provided the financial under pinning to governmental profligacy and thereby locked the country into a debt trap in the long run. In the private sector, foreign official capital inflows allowed subsidies and cheap loans to rent seeking entrepreneurs which bred inefficiency and at the same time intensified economic inequalities between social groups and regions. These inequalities were important factors in the collapse of the Ayub regime and the subsequent break up of Pakistan with the emergence of independent Bangladesh.

During the Zia regime the West conveniently ignored the long- term consequences of providing fungible and unconditional aid to a government that sought to build a social base of religious orthodoxy. Consequently, the Zia regime was able to direct a significant part of the foreign inflows to fund the fundamentalist 'madrassahs' and a number of armed militant groups. At the same time the free floating foreign aid reinforced the culture of corruption within governmental structures and engendered an economy characterized by growing debt dependence, public sector inefficiency and an erosion of the infrastructure through which economic growth could be sustained. In my first book, (Strategic issues in Pakistan's Economic Policy, 1985), contrary to received wisdom, I had predicted that because of these factors the high growth rate of the preceding three decades was likely to end in the 1990s with recession, debt crisis and poverty. Unfortunately, the analysis and its predictions proved true.

Pakistan's history has shown that in the financial shadows of the cold war an economic crisis as well as terrorism took root. The aspiration to build a modern democratic polity based on enlightenment and freedom, was confronted with a closing of the mind: Armed fundamentalist groups emerged, that began to undermine the writ of the state, as well as the social and cultural environment for investment and growth.

II STRUCTURAL CHANGES NECESSARY FOR ECONOMIC REVIVAL

To-day as Pakistan once again becomes a front line state, we may be on the threshold of another period of large foreign capital inflows. It may therefore be helpful to identify the structural changes in governance and the economy that are necessary if large capital inflows are to enable Pakistan to achieve financial sustainability, economic revival and poverty reduction.

In the sphere of governance three structural changes may be necessary to facilitate a sustainable economic revival:

(1) The emerging political dispensation in Pakistan must construct a modern democratic polity, founded on the concept of enlightenment and freedom as envisaged by the Quaid-e-Azam Muhammad Ali Jinnah. These principles are in consonance with Islam which enjoins upon the believers tolerance, moderation, pursuit of knowledge and the freedom to actualize the God given potential of individuals. Consequently armed militant groups that use the gun as a substitute for argument, must be brought within the writ of the state. This would be necessary if democracy in Pakistan is to function and if Pakistan is to remain part of the international community: The historic U.N. Security Council Resolution of 29th September 2001 obliges all member states to deny financing, support and safe haven to terrorists. Clearly the exorcising of armed militant groups from the body politic, and severing their links with elements within the state structure, is necessary for the establishment of law and order. It is equally a pre requisite for private foreign and domestic investment in Pakistan.

(2) Wide spread corruption which through most of Pakistan's history has been endemic to the relationship between state and society must be combated at its roots. Mr. Shahid Javed Burki in a recent article (Daily Dawn, dated September 25, 2001) has rightly pointed to the need to replace the culture of corruption with a rule based system. However the roots of corruption lie not simply, as Mr. Burki proposes, in the sociology of "Yaaran da Yaar". This in any case is essentially a mobilizing slogan in urban areas for building political factions across traditional lines of biraderi and ethnicity. It can be argued that corruption may have deeper roots that lie in the peculiar form of constituting political power in Pakistan in both rural and urban areas. This consists of establishing patron client relationships by those individuals who have access over state resources or discretionary powers with respect to appointments and transfers to government posts. Such individuals by misappropriating state resources and manipulating discretionary powers are able to create a network of dependencies amongst the clients who are locked into their patronage. The attempt to control corruption therefore, cannot simply be entrusted to the National Accountability Bureau as Mr. Burki suggests. Although an independent NAB with constitutional powers and staffed by men of integrity could certainly play a significant role in combating corruption, yet it would not go to the roots.

Attacking the roots of corruption would require three changes in the structure of government decision making and of society: (a) Minimize the regulatory and discretionary powers of government functionaries. At the same time there should be a greater reliance on the market and facilitation of negotiated contracts between individuals and social groups. (b) A decentralization of governmental structure such that the decision making institutions have proximity to the communities which are affected by those decisions. In this context the existing government's program of devolution is a step in the right direction. However it is important to note that in areas where asymmetric structures of power prevail at the local level, consisting of alliances between landlords big traders and local government officials, devolution could well intensify the oppression and exploitation of the poor. (c) Enable the building of organizations of the socially disadvantaged, dispossessed and poor at the local level. These organizations could act as countervailing pressure groups to local power structures, and ensure transparency and justice in decision making at the local level.

(3) A structural change in the civil services is necessary for a more efficient use of public funds. Some of the spheres in which the public sector in Pakistan is likely to play a significant role in the foreseeable future include: Infrastructure construction (dams, irrigation, ports and roads), health, education, police and municipal services. Yet the public sector historically has been characterized by incompetence and corruption. It is important therefore to bring about a structural change in selected public sector services to achieve high standards of efficiency and accountability. This will require wide ranging civil services reforms through which key public sector services could be staffed by a small number of well paid, highly qualified professionals whose promotions and incentives depend on clear performance indicators. At the same time the efficiency of service delivery should be rigorously monitored within modern management systems.

III THE ROLE OF THE INTERNATIONAL COMMUNITY

We have discussed the structural changes in the sphere of governance that are necessary for effective use of official foreign assistance. Let us now indicate the economic and political action by the international community that may be required to achieve stability in Pakistan:

1. Most of government revenue is currently going into debt servicing (the rest into defence), which has financially paralyzed the government. Fiscal space is required for a serious initiative to stimulate private sector investment and aggregate demand. It is therefore necessary to co-ordinate the international community to provide a debt write off on Pakistan's outstanding public guaranteed medium and long term foreign debt (including the Euro bonds and defence) amounting to US $ 27.7 billion.

2. Coordinate the provision of an annual inflow of US $ 5 billion for the next three years for private investment and multilateral grants. This will enable a quick economic revival with a GDP growth rate of about 7%. The US $ 5 billion annual inflow should be directed to the following sectors to ensure not just a faster GDP growth but also one that generates more employment, reduces poverty and stimulates exports. These include: (i) infrastructure projects (ports, railways, national highways); (ii) water sector projects (small dams, drainage and water course management); (iii) information technology; (iv) livestock, milk, fisheries, fruits and vegetables for export; (v) export based light engineering and electronics.

3. Provide military support to strengthening Pakistan's conventional deterrent capability as well as to introduce advanced level fail safe mechanisms for its nuclear deterrent to reduce the risk of an accidental nuclear war or theft of nuclear bombs.

4. Provide international support to Pakistan in arriving at a peaceful settlement of the Kashmir dispute with India in accordance with the wishes of the Kashmiri people within a specified time frame.

5. With the prospects of a million Afghan refugees flowing into Pakistan subsequent to military action in Afghanistan, Pakistan could be on the verge of a humanitarian disaster. Providing food, water, sanitation, health and housing to such a huge number of people will require urgent and coordinated action by the international community for adequate financial material and management services.

CONCLUSION

Pakistan is at the cross-roads. The U.S. and the world community must see that if Pakistan continues to remain in economic stagnation, poverty and illiteracy it will become a breeding ground for terrorism. On the other hand, if its social and economic conditions improve rapidly it can emerge as an enlightened Muslim country that would strengthen the forces of reason and stability in the world. To be able to achieve this the government has to bring about structural changes in governance and the economy. At the same time the international community has to come forward with adequate finances, carefully directed into strategic sectors to ensure sustainable economic revival.