Will A Showdown with the US Slow Pakistan’s Growth Story?
The poorest and the lower middle class will face heavy blows from a slowing economy, but sound fundamentals, an entrepreneurial business class, and Chinese investments will cushion the blow.
The news of Pakistani Prime Minister Shahid Khaqan Abbasi’s “frisking” at an airport in the United States sent shock waves across Pakistan’s political and media classes. During a private trip to visit his ailing sister, the Pakistani premier was pulled aside for a routine security check. Cries of “shameful!” and “humiliating!” echoed through Pakistan’s commentariat. One widely shared video of an angry commentator already has 245,000 views and counting.
The reality is, however, that Pakistan has bigger problems in the US than the frisking of their prime minister — and those problems threaten to hamper, though not derail, the country’s growth story, according to Vali Nasr, a prominent Pakistan analyst, former State Department senior official, and the dean of the Johns Hopkins University School of Advanced International Studies.
Not long ago, Pakistan was an emerging markets darling, with one of the globe’s top-performing stock markets in 2017. Today, Pakistan faces a rocky period as its dollar cash reserves dwindle at a faster pace than any country in Asia, a balance of payments crisis looms, another IMF bailout hangs over the horizon, and Washington is threatening sanctions and aid cut-offs for what it views as Islamabad’s support for militants in Afghanistan. The Karachi stock exchange is also down nearly 7% annually compared to last year, though it has recovered from a sharp end-of-2017 fall, so it remains in positive territory for 2018.
If the US turns up the heat on Pakistan for its alleged support of militants in Afghanistan, Pakistan’s economy could get hit by negative perceptions from outside investors, thus slowing its robust growth story. Targeted sanctions aimed at changing Pakistan’s geopolitical calculus could ultimately hurt the Pakistanis that need the growth most: the poor and lower middle classes.
I recently spoke with Nasr about the state of relations between Islamabad and Washington, and what this might mean for the country’s economy. If the US stand-off hurts Pakistan’s growth, this will trickle down negatively across the economy, and potentially hurt the poor disproportionately.
“Pakistan is being blamed in Washington — rightly or wrongly — for the deterioration in Afghanistan and the attacks on US forces by militants,” Nasr said. “This could lead to targeted sanctions and it has already disrupted military aid,” he added, referring to the $1.3bn in annual aid to Pakistan that has been temporarily suspended.
“Other administrations have been frustrated with Pakistan,” Nasr said, “but none have threatened this level of action.” He also noted that “sanctions against Pakistan could make a lot of Europeans and other foreign companies skittish about investment in Pakistan”, even if the sanctions do nothing to inhibit the business environment. “It creates a negative perception,” he added.
Pakistan’s fiscal woes and the possibility for slowing growth threaten to slow its considerable gains in poverty reduction and exacerbate its growing inequality problem. As the economy’s size has nearly quadrupled from 2002 to today, its poverty rate also fell dramatically from 34% in 2002 to less than 10% in 2014.
Despite these gains, challenges remain, including wide disparities in access to education and healthcare for the poor. Oxfam ranks Pakistan 139th out of 152 countries in its Commitment to Reducing Inequality Index. While Pakistan has — like all of South Asia — made substantial gains toward poverty reduction over the past three decades, economic inclusion at the base of the pyramid remains a substantive challenge.
But geopolitics and geo-economics have changed the calculation, said Nasr. Today, Pakistan has, well, a trump card, so to speak: China. “Pakistan is not isolated. They do not feel so alone. In their mind, they now have a major power (China) that has a concrete investment in them economically and strategically, and could boost their growth even amid this US stand-off.”
China’s eye-popping planned $62bn in investments in Pakistan as part of the China-Pakistan Economic Corridor agreement have already given a strong boost to the economy, and there is no sign of a slowdown in investment. In fact, as Nasr noted, the US-Pakistan stand-off will likely lead Islamabad to lean even more closely toward Beijing.
Nasr cautions against allowing the perception to change the fundamentals. “There is a very robust workforce, a good sized middle class, an entrepreneurial business community, and a relatively open political system,” he said. He also pointed to opportunities for companies in the education and healthcare space that cater to Pakistan’s middle classes.
“Private education and healthcare is booming in Pakistan,” he noted, “because the quality of the public options are so weak, and so the middle class is ready to pay for these services.”
As for the base-of-the-pyramid populations, there remains tremendous potential for entrepreneurs with the ability to solve for issues of affordability, accessibility, and quality at scale to serve customers among Pakistan’s poor. A new poverty line calculation in Pakistan in 2016 raised the bar on national wellbeing, but it also put nearly 30% of the population below that line.
This means that there are some 58m people in Pakistan’s base of the pyramid, a market that has been successfully tapped around the world by some of the largest multinationals. This also presents tremendous opportunities for multilateral development banks looking for impact investing. Opportunities abound in that same education and healthcare space that is currently targeting the middle class. “Pakistan’s poor understand the value of education,” Nasr noted. “They understand it more than just about anyone else.”
