The truth is that corruption is more symptom than disease itself. To say that corruption is our problem is a truism; much like saying “jealousy is bad.” On the one hand, no country has absolutely zero corruption, because that would require a whole population untouched by greed and power lust. On the other, its quantum can decline only over time, and via strengthening of institutions. In Pakistan, the symptom is routinely diagnosed as the cause – like a doctor saying a patient is ill because they have a fever! How can the cause of exceptional underperformance be the phenomenon of corruption, which is entirely unexceptional within Pakistan’s peer group of developing states?
The real roots of Pakistan’s growth failure are twin deficits, fiscal and external. Many developing countries carry these deficits while managing steady growth. The problem is not the deficits themselves but their unsustainability. A country can grow when fiscal and external deficits hover at, say, 2% of GDP. What stalls growth is when these deficits become unmanageable, when they start ballooning rapidly, and the country is forced to impose drastic cuts in expenditure and imports, and severe measures to jack up revenues. This is the situation Pakistan faces repeatedly, every three to five years, making the country a chronic patient of the IMF. Pakistan is currently in its 22nd IMF program. Each time the IMF comes to Pakistan, it ensures revenues are raised and expenditures reduced, and the largest axe falls upon development.
Why is Pakistan unable to manage its internal and external deficits? For the first, Pakistan’s state earns too little in tax revenue, in particular direct tax from wealthy Pakistanis, and spends too much on non-productive heads, the greatest being debt servicing and defense. In case of the external, Pakistan does not export enough, nor does it attract sufficient FDI to cover its demand for essential and other imports. The confrontation with India feeds directly into both situations.
All of Pakistan’s export and foreign investment needs can potentially be met from India, since Pakistan’s natural economic linkage is with its eastern neighbour, much more than with any other. The countries share a border over 2,000 miles long and over 50% of Pakistan’s population lives within a hundred kilometers of it. Pakistan still has the most linguistic and cultural overlap with India, which leads to crucial overlap in consumer communication and preference. Pakistani companies can quickly start selling in India in a way they never can in China. Equally, given a normal relationship, Indian companies, which are now multinational and investing globally, would be keen to invest in such a large and proximate market. With the exchange rate in its favour, the opportunity for Pakistani exports to India, the fifth largest world economy, is huge. Indeed, any bilateral relationship has to be managed to ensure maximum benefit for the home economy, but this is as true for the relationship with China as it is for India.
To fix its fiscal problem, Pakistan needs tax reform to bring affluent Pakistanis into the tax net, but any such tax reform runs into major resistance. At this point, the government has to hold firm, and wait for the resistance to break, as it invariably will. Unfortunately, the government always blinks first, and the reason is apparent. The state’s bills are so huge that even a month’s revenue loss brings it to its knees. Conclusion; any successful tax reform must be preceded by significant reduction in expenditure. This did not happen, again, when Shabbar Zaidi, a respected professional from the private sector, was given the task of reforming Pakistan’s revenues. He failed within a year.
What are the expenditures to br cut? Pakistan has a plethora of ministries, departments and state-owned enterprises, which exemplify the term ‘white elephant’. Regarding SOEs, all which are in businesses not supplying basic needs, and not natural monopolies, ought to be privatised. However, one look at the state’s budget delivers an obvious truth; the largest discretionary expenditure is defense. Normalisation with India would allow a rationalization of spending here. Pakistan will always need a strong military but the UK, for example, a global military power, spends 2% of GDP on defense. Pakistan spends 4%. In case of a normalisation with India, a whole 2% of GDP can be freed to spend on development, or simply retained to support a tax reform effort. Yet, even this number does not represent half the true cost of the India confrontation when this is calculated by including opportunity cost, as it should.
The largest expenditure in Pakistan’s budget is debt servicing which is now a whole 7% of GDP. Pakistan is deep in a debt trap, where the country has to borrow to pay past debt, yet a massive opportunity awaits here. Normalization will remove the need for Pakistan’s nuclear weapons, and Pakistan can then afford to lose them, the way South Africa and Ukraine did. This ‘greatest national asset’ makes no contribution to the nation’s growth or its people’s welfare. In exchange for these weapons, Pakistan’s creditors would gladly write off all of Pakistan’s debt, foreign and domestic. In one stroke, 40% of the state’s budget is freed up for development and growth.
Normalisation with India creates the breakthrough to change Pakistan’s destiny and is a possibility within Pakistan’s reach. The key lies in resolution over Kashmir, and the settlement here is evident; conversion of the de facto border, the Line of Control, into a permanent one. Why is this achievable? One, it is the only practicable solution. India will never cede any part of Kashmir that it controls, and Pakistan does not have the military strength, nor the international weight to make it do so. Neither can the Kashmiris throw off India’s yoke. Bangladesh could liberate itself because it was supported by an outside force stronger than those trying to suppress it, and Pakistani forces there were encircled. This will never happen in Kashmir. India has land access, and the only stronger force in the vicinity is China, which has no real incentive to expel India from all of Kashmir. Also, India, Pakistan and China all now have nuclear weapons, which places a hard limit on the extent of conflict. As for the relevant UN resolutions, they are worth less than the paper they are written on, because no one – not the international community, not India and not Pakistan – will do what is needed for their implementation.
For India, conversion of LoC into the frontier gives it what it has always wanted. India’s claim upon Azad Kashmir and Gilgit-Baltistan is a response to Pakistan’s claim on Jammu and Kashmir. India already has the part of Kashmir it wants and is likely to grab at such a Pakistani offer. Yes, Modi rebuffed Khan’s offer of talks, but in fact it wouldn’t have mattered if he had accepted. What Imran Khan offered was no different than the multiple rounds of talks that these two countries have conducted in the past, which have all failed. This tired formula of “doing-Confidence-Building-Measures-while-core-issue-remains-on-back-burner” will always fail, because it provides ample time to powerful lobbies, on either side, to derail the process. What can work is not a ten-mile marathon but a hundred-metre dash towards the core issue. Pakistan could even secure a better future for Kashmiris by placing as conditions repeal of the draconian Armed Forces Special Powers Act, and a date for impartial local elections. Indeed, there would be much noise, and accusations of betrayal from within Pakistan and Azad Kashmir, but it would be nothing that a well-managed implementation cannot preempt. The strongest rejoinder is this; “We have secured for Kashmir the best future possible, in place of an ideal future that was doomed to remain forever unachieved. If the Kashmiris reject this, we respect their wishes and will vacate Azad Kashmir, and they can work out their future with India without our involvement.”