The National Security Policy (NSP) 2022-26 highlights geo-economics along with geo-politics as its twin pillars. Its launch for public consumption coincided with the passage of the supplementary finance bill by the Parliament of Pakistan in January 2022. The International Monetary Fund (IMF) conditions appropriately highlight the dire state of the economy, and the media has been in the forefront in showing the pain and agony faced by the people living in a debt-ridden economy. The comprehensive NSP declaration was a timely message that the security of the country was closely linked to its economic strength. A message that was needed to remind the decision makers and the stakeholders that a strong economy was the base on which other pillars of the state stood. External and internal security, foreign relations, food security, law and order, welfare of the people and internal cohesion all depend on a healthy and a vibrant economy. Unless the economy generates the needed wealth and resources all elements of state power stand eroded.
Over the last many decades, Pakistan’s economy has neither lived up to the expectations of the people nor up to its huge potential. A large youthful population, abundant natural resources, strategic location and a huge pool of hardworking, talented people can provide the foundations on which a strong economy can be built. Yet, successive governments have failed to cash in on the opportunity to pull Pakistan out of the shackles of poverty and backwardness. To fully comprehend the importance of a competitive economy as the basis of an effective national security policy, the decision makers need to relate to contemporary real-world development examples to find a way forward. In this context, a comparison of Pakistan’s economic trajectory with the evolution of South Korean economic prowess is instructive.
Fifty years ago, in the early seventies, Pakistan and South Korea ─ the two midsized third world countries ─ had the same per capita income and because both faced existential threats from belligerent neighbours, both spent almost 6 per cent of their respective GDPs on their defence. Since then, the per capita income of South Korea has increased by over 233 times, while Pakistan has managed to increase its per capita income by only 11 times. Both countries continue to face the same belligerent neighbours, but now spend approximately three percent of their respective GDPs on defence. For Pakistan this amounts to around $10 billion a year versus $60 billion a year for South Korea. Clearly South Korea has been able to transform its backward economy of the seventies into an awesome wealth producing machine that can simultaneously finance its national security needs and promote the welfare of its people, but Pakistan has failed miserably to do so.
How was South Korea able to break the curse of backwardness and achieve an economic transformation, while a similar transformation continues to evade Pakistan? From the very beginning, South Korea despite facing an existential threat from North Korea, endeavoured to boost and magnify its economic size. And it tried to achieve this goal without compromising its independence in the pursuit of security. The South Koreans met their defence needs without overreliance on their cold war allies. Pakistan’s efforts were similar as it sought the same western allies to counter its existential threat from the east and tried to build the economy to sustain its defence needs, but the results were opposite.
Both countries made a transition from military dictatorships to democracy but their transitions from dictatorship to democracy followed very different paths. South Korea’s transition from a military dictatorship to a vibrant democracy did not create the hiccups nor the disruptions that a similar transition did in Pakistan. The South Korean path to economic transformation was smooth and exponential whereas the Pakistani path was discontinuous and suffered many reversals as the vagaries of its politics demolished its economic foundations. The result is that today, according to the World Economic Forum, South Korea is the world’s 13th most competitive country, whereas Pakistan ranks at the lowly 110th position, one of the least competitive in Asia. South Korea as a matter of routine generates around $100 billion in current account surpluses every year, while Pakistan continues to be constrained by its huge current account deficits and relies on excessive foreign debts and the IMF programmes to sustain itself.
The South Korean miracle is a magnificent celebration of its civil and military leadership that nurtured a two trillion-dollar vibrant, entrepreneurial, high-tech and modern economy with the principles of economic freedom well entrenched in its economic frameworks and constitution. It excels in most booming global markets from electronics, engineering, automobiles, chemicals, shipbuilding, telecommunications and robotics. Driven by the business freedoms granted to its private sector, the role of the government is facilitative but demanding.
The Economic Freedom Index of the Heritage Foundation ranks South Korea among the top 20 in the world, with its governance institutions meeting and exceeding international best standards and practices. Its property rights, independent judiciary, tax system, investment freedom and trade freedom rank among the best. Its anti-corruption efforts are also world class. In contrast, Pakistan ranks 152nd out of 161 countries in economic freedom; 34th out of 40 countries in the Asia Pacific region. Pakistan has the worst eco-system for a free economy in the world, which is highly-bureaucratic, over-regulated, over-protected and corrupt. We have evolved over the years as a dysfunctional, extractive economic system that is now the biggest threat to our national security.
In the last 50 years, while the Koreans were building their economic power-house, we were busy strangling the very foundations of a modern competitive economy. During this time, we have had military rule for 20 years and civilian rule for 30 years. Military rule always followed a period of civilian rule purportedly to fix the mess created by the civilians.
The Pakistan People’s Party was at the helm of affairs for 14 of these years under the firm control of the Bhutto dynasty, which is now in its third generation. The Pakistan Muslim League-Nawaz (PML-N) has ruled for 11 years in the iron grip of the Sharif family, which is now preparing its second generation to take over. The military ruler General Zia-ul-Haq ruled for 11 years with the active support of the Sharif family, while Gen Pervez Musharraf for around nine years fully supported by the PML-Q and the PPP-Patriots.
These handful of players are responsible for our current economic mess. They are the rulers, who created the enormous external debt of the country. They are the rulers who have left us with a dysfunctional judicial system, a dysfunctional bureaucracy, archaic economic rules and regulations, the complex processes and systems that create rent seeking and corruption, and a banking system that only serves the elite. They are the ones responsible for our dismal rankings in most economic indicators, including our 152nd and 156th ranks in the Economic Freedom Index and the Human Development Index, respectively. These are the politicians responsible for our shocking economic performance in the global race of nations. Over the last five decades, it is difficult to describe the efficacy or the vision of the policies pursued by these politicians other than to classify them as capricious, unnecessary, wasteful, fraudulent, unworkable, ill-conceived, and badly-implemented, which has led to disastrous consequences.
Four beguiling boondoggles can be identified to have shaped our economic contours over the last 50 years. The first was the slogan of ‘Roti, Kapra and Makaan,’ raised by the PPP to sweep into power in the 1970s. But instead of fulfilling its promises, the PPP went about destroying and decimating the entrepreneurial foundations of the economy as, with a stroke of the pen, it nationalised the productive and financial sectors of the economy. Yes, in one go, the very entrepreneurs, who could have generated great wealth for the nation, found themselves deprived of their economic freedoms and assets. Overnight, the footprint of the government increased manifold and bureaucratic control over the economy was made absolute. The wealth creating capacity was demolished. The economy lost its private sector engine and its direction. In subsequent stints in office, the PPP tried to reverse the damage but to no avail. The damage of nationalisation is still felt in the economic structure of Pakistan.
The second boondoggle was floated by General Zia to counter the PPP. He introduced an Islamisation drive to legitimise his coup and force the people on to a straight and narrow path. In the process he disabused any notions of Pakistan becoming a modern international hub for tourism, commerce, finance or manufacturing. In his 11 years, he turned Pakistan into a very conservative, intolerant and divisive country. The Soviet invasion of Afghanistan was his lucky break and he became the conduit for Jihad-e-Afghanistan that contributed to his longevity but did nothing for the country’s economic wellbeing. Ably assisted by the PML-N, Gen. Zia thrived on maintaining the status-quo and did not endeavour to privatise, deregulate, liberalise or reform in any significant manner, nor create an environment of economic freedom that could have turned Pakistan into an economic powerhouse.
The third major boondoggle was floated by Nawaz Sharif to make Pakistan an Asian Tiger. He started out well by launching an aggressive privatisation programme, but very quickly it got mired in allegations of corruption and crony capitalism. To the great misfortune of Pakistanis, Sharif’s governance model was driven by tight family control, total disregard for conflict-of-interest principles and a management model derived from running a large undocumented business entity. His foreign currency account freedoms were designed to permit money laundering by corrupting the banking channels. His profligate ways led the country to bankruptcy not once but twice in his various terms. His style of governance led him into damaging confrontations with seven army chiefs. Instead of making Pakistan an Asian tiger, he left it pauperised and highly indebted to international creditors.
The fourth boondoggle was undertaken by General Musharraf, who launched the era of ‘enlightened moderation and ruthless accountability.’ He took over in a bloodless coup from Nawaz Sharif, who got convicted in the infamous hijacking case. General Musharraf established the National Accountability Bureau (NAB) headed by a senior military general. The ruthless accountability campaign targeted not only politicians, but also leading businessmen, who were put behind bars for defaulting on taxes and bank loans. The draconian measures tanked the economy, compelling the regime to undertake a U-Turn. The tax authorities were tethered by the removal of their discretionary powers and the introduction of a self-assessment tax scheme, which was easy to comply with. Privatisation, deregulation and liberalisation of the economy were accelerated. The measures led to Pakistan becoming the second fastest growing economy in Asia driven by an investment boom comprising both foreign and domestic investors. The debt-to-GDP ratio tumbled from a high of 100 percent in 1999 down to 54 percent in 2007. The investment-to-GDP ratio exceeded an all-time high of 23 percent. With the economy growing at over 7 percent during 2004 to 2007, an ambitious armed forces modernisation plan was developed and put into execution mode.
The virtuous cycle of economic freedoms, investments, economic growth and poverty reduction came to an end when the ‘Western allies’ of Musharraf cooked up a plan to create a hybrid dream team, comprising the military ruler and Benazir Bhutto, to navigate the quagmire of being the frontline state in the war on terror. The infamous National Reconciliation Ordinance (NRO) was promulgated, which opened the floodgates for the hitherto discredited leadership to make a triumphant comeback, knocking out the General’s pledge to root out corruption and hold the rich and powerful accountable.
The assassination of Benazir Bhutto paved the way for the PPP, headed by the bereaved widower Asif Ali Zardari, to come into power for a stint of five years, followed by five years for the PML-N.
The decade under these experienced political stalwarts showed that they did not learn any lessons from the past. After their 10 year rule ─ from 2008-18 ─ the economy was in tatters. The debt-to-GDP ratio went from 54 percent in 2007 to 85 percent in 2018 and, more dangerously, external debt increased from $38 billion to around $90 billion, while the investment-to-GDP ratio never exceeded 15 percent. Exports stagnated and imports multiplied on the back of a debt financed, overvalued exchange rate and a grossly import dependent and expensively padded energy sector. Rather than meeting the requirements of national security, the economy was caught in an external debt trap and needed the crutches of the IMF to survive. The aftereffects are reverberating throughout Pakistan.
Going forward if we continue doing what we have done for the past 50 years, we are doomed. We live in a tough neighbourhood and to survive, we must become the fastest growing economy of the region. We need to pursue a national security policy that ensures the welfare of the people, provides adequate financing for our defence needs, enables us to pursue geo-economics objectives and counter economic coercion from any quarter whatsoever. In this case, the most important pillar of our NSP has to be the development of a powerful economic machine that churns out the wealth needed to meet national security requirements, somewhat similar to what South Korea has done over the past 50 years.
It is critical that we should focus, without any delay, on laying the foundations of a $5 trillion economy to be achieved by 2047. This would require painstakingly upgrading and building an eco-system that unreservedly promotes entrepreneurial freedoms, well-functioning competitive markets and a capable judiciary and bureaucracy that meet international standards of governance.
The size of our working age population (sixth largest in the world) mandates us to become a major export-production hub of our region. This would require building excellence in multiple value chains in high-value agriculture, hi-tech manufacturing and sophisticated services. Our objective has to be creating unambiguous competitive advantage in each chain through productivity enhancements to international standards.
It would necessitate facilitation of the private sector, both domestic and foreign, to invest in the modernisation of Pakistan, simultaneously, the government focus has to shift from an ‘NOC culture’ towards a culture of promoting supply chain development. This would require dismantling the restrictive governance and institutional regimes, developing dedicated physical infrastructure for each chain, facilitating knowledge based development, promoting technology up-gradation and creating specialist capital and financing systems.
From a national security point-of-view, fixing the economy in all its dimensions is critical. The most urgent objectives are:
- Completing the ambitious macroeconomic reform agenda embedded in the IMF programme in letter and spirit and meeting all its performance criteria.
- Executing a comprehensive and accelerated programme of rapid privatisation.
- Establishing the eco-system for economic freedoms, including unfettered property rights, freedom to invest, freedom to trade, and freedom to do business. Rollback of the heavy hand of the state impeding our economy, through a massive deregulation plan.
- Pursuing a comprehensive strategy to enhance value chain productivity and investments to global standards.
- Developing the financial sector to provide for the financing and capital needs of all sectors and segments of the economy.
- Transforming the energy sector from being an imported and expensive millstone around our necks to a sector providing energy independence to the country, with abundant availability of competitively priced power; a vital economic input.
- Reforming the judicial system to promote economic efficiency, commercial activity, the rule of law and enforcement of contracts.
- Preparing a properly articulated economic transformation plan with implementation responsibility assigned to each relevant entity of state and requiring all its organs to effectively coordinate efforts as an integral part of the proposed NSP, the first leg of which is destined to finish by 2026.
Economic strength is the key to our national security, international relationships, economic security, and a respectful place in the ranks of the developed countries of the world. This would entail reinventing and organising the state to focus on an investment led economic transformation, which will be challenging. It will involve reforming the bureaucratic governance structures, processes and personnel that are firmly entrenched in the status-quo. Furthermore, we will have to consign our brand of power politics based on ethnicity, sectarianism, divisiveness and dynastic control to the dustbin of history and refocus our politics towards a national consensus of relentless nation building. The challenging tasks are doable, but will need the absolute commitment of the highest echelons of the state including the Parliament, the Executive, the Judiciary and the Armed Forces.
