As the financial year 2000-2001 comes to a close Pakistan stands in the cusp of history between the reality of economic recession and hope of economic revival. Never before in Pakistan has there been such a deep and protracted economic recession, such a sharp increase in poverty and such a critical debt servicing burden. For example: (a) GDP growth declined from 6.1% during the 1980s to 4.4% during the 1990s; (b) Growth of the large scale manufacturing sector declined from 8.2% during the 1980s to 4.4% during the 1990s; (c) The percentage of population below the poverty line increased from 18% in 1987 to 34% today. (d) Debt servicing as a percentage of foreign exchange earnings has increased from about 18% in 1980 to about 40% in the year 2000.

The crisis in the economy is integrally linked with the crisis of the state, the decay of institutions and the emergence of armed militant groups which undermine state authority. Therefore any strategy of economic revival must necessarily be predicated on concrete measures to overcome the crisis of state and civil society. In this brief presentation I will attempt to indicate first that the present growth strategy of the government is too modest to constitute a strategy of economic revival and second that Pakistan's economic revival is linked with two crucial factors in the sphere of politics and foreign policy: (i) Re-establishing the writ of the State as a pre-condition for investment. (ii) Winning the whole hearted support of the international community as a pre-requisite for acquiring the necessary fiscal space to embark upon a credible high growth revival strategy.

The target GDP growth specified by the government in its growth strategy aims to increase GDP growth from 4.5% in the year 2000-01 to an average of only 5% during the period 2001-04. This rather timid target of GDP growth is associated with only a marginal increase in investment rate from 15.5% to-day to an average of 16.5% over the next four years. The problem with such a growth strategy is that it will place Pakistan's economy not on the path of economic revival but on the knife edge of good harvests. Given the sensitivity of Pakistan's over all GDP growth to the crop sector, a single bad harvest, God forbid, during the next four years would change all the numbers and push average GDP growth over the next four years to an even lower level than what it is today.

A more credible GDP growth target that could sustain us on the path of economic revival would be 6.5% to 7% which has been the historical trend rate before the recession hit us in the 1990s. However, this GDP growth target would have to be based on a much higher growth rate of the large scale manufacturing sector (9% compared to the envisaged growth of 5.9% ). Yet in all fairness to our economic planners these extremely low GDP growth targets have been specified because of financial limitations imposed by a high debt servicing burden on the one hand and a low domestic savings rate on the other. Thus the basic constraint to a high growth strategy of economic revival is the fact that under present conditions of state and society prevailing in Pakistan, large foreign capital inflows cannot be expected.

The irony is that at a time when Pakistan is sacrificing the economic well being of its people because of low investment and tight financial constraints, a historically unprecedented volume of international private capital is now available and it can flow into developing countries at a hitherto unimaginable speed as Table 1 shows. While net official capital flows have declined during the period 1981 to 1996, net private capital flows by contrast have grown at phenomenal rate from 76 billion US $ in 1981-85 to 212 billion $ in 1996:

Two significant developments underlie the huge increase in foreign capital flows:

(i) After the Reagan-Thatcher rehabilitation of the ideology of the free market, the State has signaled a gradual withdrawal from the provision of welfare and social security to its citizens.

(ii) As a result of both improved life expectancy and declining fertility rates, an aging of the population is occurring in the advanced industrial countries.

Consequently enormous amounts of savings have been drawn into institutions such as pension funds, mutual funds and other fund management organizations (See Table 2). As much as US $ 1.5 trillion are crossing international borders every day looking for better returns.

Therefore those developing countries which can successfully position themselves to attract such private capital flows can grow rapidly, while those that cannot will descend quickly into poverty. Since they will not have the cushion of foreign grants, the rapid increase in their debt servicing burden can throw their economy and environmental resource base into rapid decline.

The question that now arises is what can Pakistan do in the sphere of politics and foreign policy to position itself to successfully achieve a rapid improvement in the material well being of its people within the new rule based global economy. In order to achieve this objective the following hard decisions would have to be taken in the sphere of governance:

(i) Establish the writ of the State within its geographic domain i.e. achieve law and order and provide security of life and property to its citizens.

(ii) Establish sustainable peace along its borders and build confidence amongst the international community with respect to the issue of nuclear proliferation.

(iii) Allow freedom of thought and diversity of cultures within its borders to become part of the global community.

(iv) Establish an efficient and transparent form of democratic governance which involves the participation of various regions, communities and institutions of civil society. This would be in accordance with internationally agreed norms of behaviour by which all states and their citizens are expected to live in the contemporary world.

Once the political and social environment has been created for attracting both domestic and foreign private investment the following key economic measures may be required to position Pakistan for large private capital inflows and economic revival:

1. Establish the sanctity of contracts.

2. Careful Management of exchange rate stability.

3. Reform the Banking System by strengthening banking regulations.

4. Strengthen transparency requirements of banks and financial institutions. They should be required to provide accurate and timely data on reserve levels, short term borrowing and exposure to exchange rate and interest rate risk.

5. Attracting long term foreign investment requires the following institutional measures in the economy:

(i) A sound legal system including enforceable bankruptcy laws that allow exit of poorly performing companies.

(ii) A sound system of government finance.

(iii) Well developed human capital including institutions that produce people with high quality modern skills.

(iv) Domestic capital and labour markets that function without unnecessary distortions.

I have tried to argue that the economic crisis in Pakistan is integrally linked with the issues of law and order, peace on our borders and with winning the support of the international community. While a growth strategy predicated on a narrow fiscal space is too slow for comfort, yet economic revival and high growth would require perhaps equally uncomfortable decisions in the realm of governance. There are no easy economic solutions left any more. Economic revival now depends on the vision and courageous action of political leadership. To quote from the great Punjabi poet, Najm Hussain Syed:

"Gullan, Gullan vich tere kol aaven de khunj gaye vaille"

"Gone are the times my beloved when I could reach you through mere words."

TABLE 1

NET CAPITAL FLOWS TO EMERGING MARKETS (BILLIONS OF US$)

	1981-85*	1986-90*	1991	1992	1992	1994	1995	1996
Net Official Capital Flows	34	39	36	23	19	9	29	-18
Total Net Pvt K Flows	76	32	124	119	182	153	193	212
-- Net FDI	10	18	31	36	57	83	97	115
-- Net portfolio investment	....	.....	37	51	114	106	41	81
-- Bank loans and other	66	14	56	33	12	-36	55	16

SOURCES: IMF - International Capital Markets 1999
WORLD BANK, 1991, World Debt Tables

NOTE: *ANNUAL AVERAGE

TABLE 2

FUNDS CONTROLLED BY INSTITUTIONAL INVESTORS

1980	1995
US $ 2 Trillion	US $ 20 Trillion