Postscript: The Great Flood of 2010

Over the last two decades Pakistan has had the resilience to survive against all odds. How can it succeed is the main topic of this chapter.

Despite its many challenges, during this period, Pakistan has grown at an average rate of over five per cent. As a country with a population of 175 million people today, it is important to understand that 99 per cent of the fabric of a diverse and rich culture and people can and do make a difference.

Pakistan remains open for business despite the enormous challenges it confronts. Whilst international media and policy think tanks focus on how to tackle militancy and extremism, the vast majority of the people who live and work in Pakistan today say openly that this minority does not represent them as a people and ask why the international media cannot recognise the simple fact that every Pakistani is not a militant or extremist.

During 2010 Aisam ul Haq Qureishi became the first Pakistani to reach the US Open doubles final. After losing the final, he addressed a 15,000 strong gathering at the Arthur Ashe Stadium with millions of people watching across the world. He said, ‘I want to say something on behalf of all Pakistanis. Every time I come here, there’s a wrong perception about the people of Pakistan. They are very friendly, very loving people. We want peace in this world as much as you.’

The crowd cheered and the hearts of Pakistani citizens around the world warmed to his remarks of respect for its people. In many ways, this thirty-year old was able to capture for a moment what the Pakistani diplomatic community has failed to achieve—to project Pakistan in its true light. The point is that 215stimulating economic growth in a country requires investment, which in turn requires market access to capital investment. Pakistan’s market access is severely compromised by its negative perception. Addressing this problem head on has to remain a priority for all stakeholders.

That said, Pakistan’s future outlook and its strong underlying fundamentals mean that it is difficult for investors to ignore the opportunities it has to offer. What is even more important as the process of institutional re-building gains momentum, is the gradual yet distinct realisation by all stakeholders that having a clear Pakistan game plan for success is essential and sticking to the script has to be part of the game plan. If the goal is to realise Pakistan’s full potential, then putting the house in order is a fundamental pre-requisite for the success story to unfold at a time when most critics argue otherwise.

One example of such an adversity is the catastrophic floods in Pakistan in the summer of 2010—the worst natural disaster in the country’s history. These have resulted in a colossal setback to its economy. The extensive damage to infrastructure will mean years of rebuilding, and the mass displacement of people will require the rehabilitation of millions across the country. All of this will need an extraordinary amount of resources, thus compounding Pakistan’s economic woes and exacerbating long-standing challenges. Among these challenges are macroeconomic instability, an inadequate infrastructure to support business activity, poor social indicators, a deep governance deficit and limited integration into the global economy at a time when competition from China, India and other regional countries grows in key export sectors including textiles.

With the world still dealing with global recession and the country struggling with the aftermath of floods, sceptics suggest that Pakistan is today less able to handle such shocks than it was ten or twenty years ago. They argue that Pakistan’s economic future is at best perilous given decades of political instability and economic mismanagement and that it is far down on the list of global capital-seeking-investment. Against this backdrop, addressing structural challenges acquires a sense of urgency and priority at all levels of government, industry and businesses. To achieve a sustainable rebound, policy priorities must be set clearly to meet the needs of reconstruction and deal with critical economic, social and political issues in the face of fierce competition, shrinking global demand 216and increasing geo-political risk. Now more than ever, it is imperative to identify what Pakistan needs to do to become more competitive and be among the winners in the coming decades.

This chapter is an attempt to challenge the view of the sceptics. By focusing on the most critical policy measures needed to achieve competitiveness, Pakistan has the ability to capture the energy and dynamism of its natural advantages, accelerate growth and ‘catch up’ on the global economic stage.

Pakistan’s Potential

In 2005 Goldman Sachs formulated the notion of the Next-11 (N-11) as countries that have the economic potential to become important players after the BRIC, an acronym for Brazil, Russia, India and China.

The N-11 had the ability to match, if not eventually overtake, the G7 countries. The main criterion was demographic — a large population beyond BRIC.

Pakistan was identified as one among these countries owing to its size, its growing population, and its industrial base. All these factors give Pakistan an ability to produce consumer goods and have a substantial domestic market with the capacity to consume them.

The following are some of Pakistan’s main advantages, fundamental to its long-term growth.

1. A resilient economy.

Despite 7 changes in government in the past twenty years, Pakistan has maintained an average growth rate of 5% per annum.

Until recently, Pakistan was being touted as one of the most dramatic turnaround stories of the last decade. Driven by domestic demand and population growth, GDP growth averaged over 6 % a year from 2003–2008. This translated into an investment and infrastructure-led growth cycle fuelling expansion in the housing, health care, education, food, infrastructure, energy, telecommunications, IT and financial services sectors. This has meant that Pakistan’s economy has 217progressively moved from its traditional agricultural base to manufacturing and increasingly to services.

In that sense, Pakistan’s economic structure is much closer to that of India and China, and is unlike many smaller Asian countries, which are more dependent on export growth.

Official IMF estimates of the country’s per capita income are US$1,200, which, on a Purchasing Power Parity basis, is US$2,500.

Around 25-30 million people, or 1/6 of Pakistan’s population, have a per capita income on a PPP basis of between US$8,000 to US$10,000.

Part of the growth is accounted for by a large and vibrant informal economy which is estimated to be at least 30 to 50 per cent of the size of the formal economy and which is growing as much as 13 per cent per annum.

Pakistan’s thriving informal economy is not documented and consists of a vast network of smugglers, traders and agriculturalists. The energy and dynamism of the informal economy has, in part, been responsible for continued growth. With better documentation, this has the prospects of being channelled into formal sectors. This can help to raise tax collection and attract investment capital to roll out much needed capacity in healthcare, education, law and order and energy sectors. This will not only have a direct impact on alleviating poverty but also allow the productive economic bc1se to expand in a sustained manner.

Over the last two decades, Pakistan has undergone meaningful banking sector, tax and corporate governance reforms and has a solid financial system. Its economy is more open to trade and investment compared to countries at a similar stage of development. Pakistan’s English-speaking professional elite, a well-developed legal system based on English common law and a significant pool of overseas Pakistanis have allowed a reasonable degree of integration with the global economy.

Pakistan’s business community has historically been westward looking and has also developed strong links to the Middle East and Asian economies and China. Today, over 300 foreign multinationals have well established business operations in Pakistan. The US, European Union and Japan remain the three largest foreign direct investors with new inflows emanating from the Middle East and China. Other key indicators suggest a positive growth trend—foreign remittances hit around $9 billion in 2010 218up from $984 million in 2000, foreign exchange reserves were around $16 billion in June 2010 up from $1.7 billion in 2000 and exports were $20 billion in 2010 up from $8 billion in 2000.

This resilience has also been demonstrated in key capital market indicators. In 2009, Pakistan’s KSEl00 index surged over 60 per cent in a year. Pakistan was wracked by increased violence and many of its state institutions were overwhelmed by security challenges. From 1998-2010, there has been an enormous increase of over 700 per cent in the KSE100 after accounting for rupee depreciation.6 This makes Pakistan the best performing market in a twelve-year period and significantly better than the BRIC economies. Pakistan’s stock market capitalisation to GDP (PPP basis) ratio is approximately 7 per cent. This is very low compared to the BRIC economies, where market capitalisation to GDP ratio ranges from 25 per cent in Russia to 60 per cent in Brazil. This ratio is a measure of the extent of development of a country’s capital market and of the valuation of its listed assets relative to the overall size of the economy. More developed economies like Hong Kong tend to have ratios in excess of 100 per cent. This highlights the comparatively low valuations for Pakistan relative to the BRIC economies.

These low valuations in turn reflect the extent of investor pessimism as well as potential upside for investors if Pakistan’s growth begins to surge. Withstanding geo-political risk. Second, Pakistan has been the victim of two major international events in the last three decades. The Russian invasion of Afghanistan resulted in a war that saw the influx of 3.5 million refugees and led to the rise of militancy in the region. The US-led invasion of Afghanistan after 9/11 compounded Pakistan’s security challenges which dealt heavy blows to its economy. In the current security situation, it has been difficult to attract foreign and mobilise domestic investment. Pakistan has not been given a preferred status for exports to the United States or the European Union, which are Pakistan’s main export markets. As a consequence of geo- political risks, Pakistan is not seen as a friendly investment destination. Despite this, Pakistan’s investment to GDP ratio has averaged 17 per cent for the last decade and is 17 per cent today after reaching a peak of 23 per cent in 2007. In many ways, Pakistan’s corporate leaders and professionals as amongst the most ‘battle hardened’ pool of managerial talent in the world with the ability to manage risk and still show growth under the most challenging business conditions.

3. Demographic asset.

Pakistan is the sixth most populous country in the world at 175 million people.

This has resulted in rapid growth in urbanisation, which presents opportunities as well as challenges. With a large and expanding workforce and relatively few people in the dependent age bracket of under 15 and over 64, Pakistan is ideally positioned to reap the demographic dividend.

While Pakistan’s young population of around a hundred million is already becoming an engine of growth, its youth can become the back bone of its middle class that can, in turn, drive economic growth. This offers Pakistani businesses an opportunity to grow and produce goods and services the population needs. At a time when the Western world is facing the crisis of ageing populations, Pakistan has the potential for economic expansion created by a young population provided, of course, that it can be educated and empowered with the right skills.

4. Natural Resources

Pakistan’s landmass, equal to that of Brazil’s, is rich in natural resources, including mineral wealth and arable land. It is the world’s fourth largest cotton producer and its coal reserves—the fourth largest in the world—are estimated around 186 billion tons, which in terms of energy output is at least equal to if not more than the oil reserves of Saudi Arabia. Balochistan has one of the largest copper reserves in the world estimated at eighteen million tons of copper and thirty-five million ounces of residual gold. Pakistan is the world’s fifth largest dairy producer and increasing its exports of both milk and beef to the Middle East in addition to meeting domestic needs.

5. Strategic location

Pakistan’s location gives it a unique advantage. Although location is currently responsible for much of its negative image, this can be turned around. As the economic centre of gravity shifts to Asia it is situated at the crossroads of opportunity: large energy resources and one of the largest pools of liquidity in the world. For large parts of western China, Afghanistan and the Central Asian Republics, the shortest and cheapest trade route is through Pakistan. The government has been capitalising on this by creating a strategic trade and energy corridor. A major new port in Gawadar has been completed and the Singapore Port Authority has the mandate to manage it. There is a network of highways linking China and Central Asia to the port city of Gawadar. This is an important long term growth opportunity offered by 220Pakistan and has recently been reinforced by the Pakistan Afghan Transit Trade Agreement (PATTA) signed in 2010 allowing the opening up of trade through Pakistan to Afghanistan and beyond.

To summarise, Pakistan’s resilience in the face of problems and its strong fundamentals give it the potential to turn into an economic success story. But it will have to surmount formidable challenges in order to do so. To capitalise on its advantages Pakistan needs to grow by 7–8 per cent per annum for the next ten years; 1 per cent growth in GDP requires a 2.5 to 3 per cent growth in the investment rate. Therefore GDP growth rate of 7 per cent will require annual investment rates of over 21 per cent as a percentage of GDP. Given Pakistan’s weak social, political and economic infrastructure, can Pakistan achieve the required investment to turn the economic corner, grow and compete globally? So the question is—what needs to be done for Pakistan to attain competitiveness and create national wealth?