Is Pakistan Taking Off?

Pakistan may be catching the (beneficial) virus of rapid, transformational economic growth. From 2001-2005 the country has had five consecutive years in which the real GDP growth rate has exceeded the growth rate the year before, with growth in 2005 of approximately 8% on top of 6% growth year before that. Anecdotally, there are reports in the Pakistani press of construction booms in cities like Karachi (a city known thus far mostly for the relentless gang warfare between militant Sunnis and Shiites there); indeed, from 2003 to 2006 production of cement doubled. Before growing a modest 5% last year the Karachi stock market had also been booming for several years. The country is an increasing destination for foreign investment, although inbound flows are still dwarfed by those into India.

Based on recent history, Pakistan would have to be judged to be an unlikely candidate for the kind of growth that China and increasingly India take for granted. It is a society crippled by religious extremism and where significant chunks of the country such as Waziristan and Baluchistan are almost untouched by the central government. The existence of social norms far removed from those demand by globalization is also a problem, as evidenced by my previous post, is also problematic. And for all its recent growth Pakistan is still an extremely poor country, with per capita income of less than $1000.

And yet, taken as a whole recent events seem to me to have that feel of embryonic modernization about them. I cannot point to anything concrete, and a skeptic could certainly be forgiven for pointing to Pakistan’s past history, which was also marked by occasional spurts of growth followed by years of stagnation. But it feels different this time. The country certainly has immense problems of social norms that must be transformed to be modernization-friendly, but then again, so too did China round about 1978 or India shortly before the 1991 reforms. That this growth spurt has followed a series of economic reforms involving taxation, telecommunications liberalization, and other controls is also suggestive. In no sense has Pakistan undergone shock therapy, but for all his many faults the Pakistani president, General Pervez Musharraf, seems to get globalization and what it takes to accommodate a country to it.

In terms of the rigidity of the social structure, the seeming enormity of the task of reform in a country with so many bad economic policies, Pakistan now is indistinguishable, I think, from India in the early stages of its reform. There are of course political differences – India is a solid liberal democracy – and differences in the extent of religious extremism – Pakistan has more. And there are still gigantic policy problems to solve – Pakistan is still in the lowest quartile of most of the World Bank’s measures of governance quality, including corruption control. And of course there is always geopolitical risk (much larger in Pakistan than in most places). But there are also numerous precedents for takeoff growth starting in one country and spreading quickly to nearby countries, as they catch the virus and economically engage with the first country to boom. One could think of the growth boom spreading from Japan in the 1950s to Korea, Taiwan, Hong Kong and Singapore in the 1960s, and from there to Thailand and Malaysia in the 1970s. Pakistan may be benefiting somewhat, either because of direct economic ties or perceptions of similarities among global investors, from the Indian boom. It is still a bit of a crapshoot, but if you are a person with a lot of tolerance for risk you could do worse than to bet that Pakistan has turned some sort of corner.