Pakistan Needs A Plan

But a revolution would be very likely to either break up the country or burden it with an ideological, totalitarian regime, which would also spell doom. So Pakistan's leaders have a very large incentive to prove Mian wrong and to make a concerted effort to fix their country's economy.

Escaping the debt trap is obviously job #1. An IMF bailout will replace old debt with new debt, so it's just a delaying tactic. A better idea, as
Samir Tata writes , is a privatization program - selling off government assets to pay down debt:

The key to escape Pakistan's sovereign debt trap is hiding in plain sight – deleveraging...[P]rivate holders (e.g., portfolio investment funds, sovereign wealth funds, and corporate investors) of existing Pakistani sovereign debt denominated in foreign currencies would swap such debt for shares of state-owned enterprises that are to be privatized...

Privatization would have two objectives: raising cash via the sale of state-owned assets and reducing the budgetary burden of supporting poorly performing loss-making state-owned enterprises...An example of an individual transaction to transfer control of an SOE to a foreign company could be the sale of Pakistan International Airlines (PIA) to a foreign airline company.

That trick would really only work once - you pretty quickly run out of SOEs to privatize - but it would give Pakistan a single golden opportunity to escape from the crushing cycle of foreign debt that has characterized the last forty years.

So how can Pakistan take advantage of that one-time opportunity? The answer, in broad strokes, is that it needs to invest more.

Right now, Pakistan builds very, very little new capital. Whereas Bangladesh and India are reinvesting 32 and 29% of their GDP each year, respectively, Pakistan is reinvesting only 14%:

As I put it in a post back in 2021, this means Pakistan is a low-income consumption society:

How can Pakistan increase investment? Obviously, when the government is so strapped for cash, it can't do much.

A privatization program, coupled with bailouts, might get it out from under the debt burden, but it would still have to figure out how to
tax the economy more effectively . That's a worthy goal, but one that will probably take a lot of time and effort.

In lieu of government investment, Pakistan will have to rely on the private sector. Pakistani businesses will invest more if the country is both politically stable and macroeconomically stable. The former is something that Pakistan's elites have to work out for themselves, while the latter mainly requires reducing the foreign debt burden and curbing inflation.

But that leaves one important actor: foreign investors. FDI is a tried-and-true strategy that has lifted countries
like Malaysia
to near-developed status, and which
helped Bangladesh
grow quickly in the 2000s and 2010s.

The most important type of FDI for Pakistan, by far, will be greenfield investment in export manufacturing.

This is when companies come to set up factories in Pakistan to make stuff to sell elsewhere. This kind of export-oriented investment can help narrow a country's trade deficit, even as it also provides employment, raises productivity, and pumps money into the country's financial system.

Pakistan has low wages, but by itself, that's not typically enough to attract a bunch of FDI. Foreign companies need more than just low wages - they need water and electricity and transport infrastructure, they need government assistance in setting up their business, they need cheap financing, and they need low regulatory and tax burdens.

But most of all, they need security. They need to know they aren't going to lose their business. There are basically three kinds of people who can destroy or appropriate your business assets - the government, rebels/terrorists, and criminals.

If Pakistan's government is serious about attracting FDI, it'll avoid expropriating foreign businesses' assets; instead, it'll roll out the red carpet and give them what they need.

Rebels and terrorists are a bigger threat, as Pakistan has both. Baloch separatists
have attacked
Chinese workers and projects. And various Islamist terrorists, including the Taliban, have
attacked Pakistani cities . They might conceivably try to blow up foreign factories.

Crime is also a problem. Karachi, the country's biggest port, is beset by chronic gang warfare, and for a while was considered one of the world's most dangerous cities. There has been
a big effort to clean it up , but high violence rates persist.

Yet Pakistan has shown that it's capable of creating pockets of public safety, if it really wants to. The capital, Islamabad, is generally viewed as
an extremely safe city .

So the best approach for Pakistan is to make heavy use of
special economic zones. SEZs are places where foreign businesses can cluster and find qualified workers easily. But they're much more than that - they're places where governments in poor countries can create pockets of stability and good infrastructure.

Within a designated factory zone on the coast, Pakistan's government can use the army and police to provide security from terrorists and criminal gangs. And even its meager resources are probably enough to provide those small areas with electricity, water, roads, port infrastructure, and so on.

Pakistan already
has a few SEZs , many of them created
as part of
Pakistan's economic partnership with China. These should be upgraded and expanded, if possible. But more importantly, these existing SEZs and some new SEZs should be opened up to countries other than China.

Companies in the US, France, South Korea, and other developed democracies are eager to de-risk their operations by moving them out of China; right now they're moving to India, Vietnam, and Mexico, but Pakistan could make itself another contender. All it has to do is to encourage developed democracies to come set up shop in its special economic zones, right alongside their Chinese rivals.

Pakistan has been playing the developed democracies off against China for a while now, using its possession of nuclear weapons and its strategic importance in fighting terrorism to pressure both sides of Cold War 2 into letting it borrow cheaply and in large volumes. Now it's time to use that same strategic importance to encourage FDI instead of loans.

There are a couple of other ingredients Pakistan will need in order to take advantage of FDI. One is education. No country is an attractive base of operations without a large base of workers who can read, write, and do basic math.

Pakistan scores
notoriously poorly
on international measures of education, with much lower literacy rates than Bangladesh.
Indices of human capital
place Pakistan more on a level with the very poor countries of Sub-Saharan Africa.

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This obviously needs to change, and quickly. Simply spending more on public education is clearly the solution here. The government is strapped for cash, but if foreign debt can be reduced and tax collection improved, then there will be some money to invest in quality public schooling for the mass of Pakistanis.

The final thing Pakistan needs is peace with India. This idea will doubtless ruffle some feathers in the Pakistani military and the more nationalistic elements of Pakistani society, who view resistance to India as their country's national purpose.

But it's time to face facts - Pakistan has gone to war against India four times , in 1947, 1965, 1971, and 1999, and it lost every time. India is just way too big for Pakistan to ever beat.

The old adage goes:“If you can't beat 'em, join 'em.” Pakistan has failed to defeat India in more than 70 years of trying, and it's time to stop. Pakistan should recognize that it controls part of Kashmir, and India controls the other part, and that's how it's going to stay.

A lasting rapprochement between these two countries may sound like an unrealistic pipe dream, but it happened to Germany and France, and it's
now happening to Japan and Korea , so maybe it could happen to Pakistan and India as well.

Instead, the focus should be on opening up trade links and economic cooperation between the two countries. This will improve Pakistan's security because it will free up military resources to provide security for special economic zones and foreign investors.

It could also improve Pakistan's fiscal position since it would allow decreased spending on the military. And most importantly, trade with India would give Pakistan's economy a direct boost.

This is South Asia's moment to shine in the global economy. Pakistan needs to take advantage of that moment before it's too late. If it misses the window, it'll end up being a poor, dysfunctional backwater, while India and Bangladesh advance confidently to middle-income status and beyond.

Success will require determination, pragmatism, compromise, dogged purposefulness, and some smart planning on the part of Pakistan's elites. But the alternatives are just too awful to contemplate.

This article was first published on Noah Smith's Noahpinion Substack and is republished with kind permission. Read the original and become a Noahopinion subscriber here.

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