Pakistan and the World Economy (Distinguished Lecture)

This paper aims to explore Pakistan's geo-economic options inthe difficult situation that confronts following the easing ofsanctions, which added acute balance of payments pressures to itsexisting ailments of near-stagnant exports, a lower growth trend than inpreceding decades, an unattractive climate for foreign investment, andweak social indicators. The first question explored is whether Pakistanhas any opportunity of participating in a regional trade grouping. It isargued that the only conceivable way of achieving this would involve thedevelopment of SAARC, which would demand a profound transformation ofIndo-Pakistani relations (though one no more profound than that realisedin Franco-German relations since the founding of what is now known asthe European Union). One benefit of achieving deep integration throughSAARC is that this would create the possibility of Pakistan developing aserious engineering industry far more rapidly than will otherwisehappen. In the absence of deep integration in SAARC, it is argued thatPakistan's best option would be a policy close to unilateral free trade,so as to place it in a position to take advantage of whatever the nextgeneration of labour-intensive activities demanded by the world economyproves to be. Under either of those scenarios, the reestablishment of adynamic industrial sector will require the maintenance of a competitiveexchange rate, something that, it is argued, is not necessarilyguaranteed by floating. The paper also discusses the role of inwarddirect investment in contributing to the export success of East Asia,and considers whether the expatriate Pakistani community might becapable of playing a role comparable to that played by the overseasChinese in nurturing the Chinese export expansion of the last twodecades. It is suggested that such a hope was set back by theextra-legal attempt to renegotiate power tariffs with the independentpower producers in the course of 1998, and that Pakistan needs to becomea country of laws rather than discretion if foreign investors, includingexpatriate Pakistanis, are ever to find the country an attractive exportplatform. While more inward direct investment would almost certainly bebeneficial, the same is not true for inward financial investment, wheretoo large an inflow can easily expose a country to very significantrisks, as the East Asian crisis showed. In the long run, Pakistan needsto be prepared to repel excessive capital inflows if they materialise;but its immediate problem is still balance of payments pressure, andthis seems to demand targeting a major and sustained improvement in thecurrent account over the next several years.