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Atlantic Council Report Calls for India and Pakistan to Reinvest in Economic Relations

Atlantic CouncilWASHINGTON – A report released today by the Atlantic Council’s South Asia Center argues that heavy military spending in India and Pakistan has in fact been detrimental to the citizens of both countries in terms of security and economic growth, and calls on leaders to reinvest in trade and confidence building.

In India and Pakistan: The Opportunity Cost of Conflict, Atlantic Council South Asia Center Director Shuja Nawaz and Nonresident Senior Fellow Mohan Guruswamy explain how high defense spending and low economic integration into South Asia’s regional economy have come at the expense of those living in poverty. Although many now favor rapprochement, Nawaz and Guruswamy argue that unless both sides begin a dialogue on economic and military relations, these issues will only worsen.

In addition to military spending, a lack of strong bilateral trade relations between India and Pakistan has also exacerbated South Asia’s socioeconomic challenges. From GDP to job losses to investment, the non-fulfillment of trading potential is a cost that “neither of the two countries can afford to ignore.”

Nawaz and Guruswamy provide a set of actions both countries can take to decrease military spending and promote confidence building:

  • Increase the distance between land forces by withdrawing from border areas
  • Engage in direct communications between militaries, including exchange visits
  • Invest jointly in energy, water, and export industries
  • Open borders for trade and eventually tourism

Such measures will have a lasting impact beyond India and Pakistan, as the authors note: “economically intertwined and mutually beneficial economic systems in both countries will create a huge peace constituency that will not only be good for the two nations, but also for the region and the entire world.”

Read the full report here.

Listen to audio from the Report Launch here.

Sec. Clinton, Amb. Rehman focused on improving Pakistan’s economy

State Dept Spokeswoman Victoria Nuland

QUESTION: Ambassador Rehman also said that what Pakistan is looking – not aid from the U.S., but trade, and she said that as far as textile tariffs are concerned – and also, what I’m asking you is: Is Pakistan – is U.S. focusing more to spend money more on the development in Pakistani people in order to have a better image of U.S. in Pakistan?

MS. NULAND: Well, Goyal, as you know, the Secretary has been one of the most vocal advocates of switching as much of our economic relationship with Pakistan from aid to trade. That’s been the focus of the Department’s efforts with the Pakistani Government over the last couple of years, and some of the internal reviews we’ve done are focused on that. So we are investing in the economic health and strength of the country. We are investing in energy. We’re investing in education. We are investing in democracy programs and development, so – and micro-lending and all of these kinds of things. So it’s not about improving our image. It’s about helping to strengthen a stable, peaceful, democratic Pakistan.

Rep. Todd Young: A trade-based strategy with Pakistan

Regarding Pakistani President Asif Ali Zardari’s Oct. 2 op-ed, “Talk to, not at, Pakistan”:

Rep. Todd Young (R–Ind.)A bipartisan group in Congress would readily lend its support to a trade-based, rather than aid-based, Afghanistan-Pakistan economic strategy. Such a plan should explain how Afghanistan and Pakistan can develop the homegrown financial wherewithal to support themselves, and fend off violent extremists, with minimal American financial assistance. This might take the form of a bold effort such as the negotiation of free-trade agreements with Afghanistan and Pakistan, combined with a diplomatic offensive aimed at increasing trade between the two countries and India. Alternatively, the United States might advance a more modest approach, such as establishing the so-called Reconstruction Opportunity Zones mentioned by Mr. Zardari, which have been debated in recent Congresses.

Potential benefits to the United States include a reduced aid burden; a check on corrupt aid distribution; job creation to reduce recruitment of violent extremists and illegal poppy production; and enhanced credibility for civil authorities at the expense of Pakistani military leaders, the latter having demonstrated a penchant for giving aid and comfort to our enemies.

Todd Young, Washington

The writer, a Republican from Indiana, is a member of the U.S. House of Representatives. This letter appeared in yesterday’s Washington Post.

Path to stabilizing US-Pakistan relations: Trade

Dr. Abdul Hafeez Shaikh

As US-Pakistan relations continue to focus on difficult and controversial security negotiations, a path to more productive relations was laid out by Pakistan’s Finance Minister, Abdul Hafeez Shaikh, at the Atlantic Council on Monday. To build a foundation of trust and cooperation relations should be founded in an interest both countries share – improving the economy.

Speaking to a packed room of academics, policy experts and government officials, Dr. Hafeez Shaikh noted that for the first time in decades, Pakistan’s civilian institutions are beginning to operate in an autonomous, independent manner. While there are still reforms and improvements needed, much has improved – courts are functioning independently, coalition and opposition parties are engaged in dialogue and consensus building, and President Zardari has voluntarily ceded powers accumulated under past rulers making parliament supreme in its position to decide policy.

As the discussion turned to the impact of international relations on economic growth, Dr. Hafeez Shaikh said that it is imperative for Pakistan to improve its economic ties with other countries as these can serve as the bedrock of strong and lasting international relations. Governments come and go, he observed, but economic relations are evergreen.

While US lawmakers debate whether aid to Pakistan is an effective tool, they should look at how India is changing the paradigm in Indo-Pak relations by liberalizing trade and normalizing business relations between the two rivals.

Commerce ministers from both countries met in New Delhi on Wednesday and decided to liberalise terms for issuing business visas soon by allowing multiple entry to more than one city. The two also decided to work on allowing investments from each other’s countries and encouraging joint ventures. “We engaged in a frank, open and constructive manner and our discussions will define the future roadmap of our engagement,” commerce minister Anand Sharma told reporters after the bilateral meeting, adding that the visit of a commerce minister from Pakistan after 35 years reaffirmed growing understanding between the two countries.

Since transitioning to democracy in 2008, Pakistan’s civilian leadership has consistently repeated that “trade, not aid” is key to growing Pakistan’s economy. It could be the key to stabilizing US-Pakistan relations as well.

Time For A New Approach to US-Pakistan Relations

Zalmay Khalilzad

A response to Ambassador Zalmay Khalilzad’s op-ed in The Washington Post

US-Pakistan relations may not be broken, but they’re certainly strained. Events in recent months have reinforced fears on both sides, and leaders in both countries are under increasing pressure from their respective publics to abandon each other. It’s clear that a new approach to US-Pakistan relations is needed. Unfortunately, Ambassador Zalmay Khalilzad’s op-ed in The Washington Post reflects a mindset steeped in past thinking, and his recommendations represent an old and dis-proven approach

What drives Pakistan?

Amb. Khalilzad offers two theories for why Pakistan’s military might support militant groups: Either they are trying to prolong the Afghan war in order to extort US aid, or they are trying to conquer Central Asia. This represents not only a false dilemma, but a fundamentally silly one.

The Kerry-Lugar-Burman bill (KLB) provides for $1.5 billion in economic aid annually for five years. While this aid is valuable, it represents about 0.3 percent of the nation’s GDP. Moreover, in the first year of KLB, the Government Accountability Office (GAO) found that only $179.5 million was actually disbursed. Even if it were possible to buy Pakistan’s cooperation, this amount of foreign aid is simply insufficient to do so.

The alternate theory offered – that Islamabad has a secret “ambitious plan to consolidate regional hegemony in Central Asia” – is equally nonsensical. With China and India sitting on its doorstep, Pakistan’s strategic priority is not to expand its influence across Asia, it’s to defend its own sovereignty. If Pakistan seeks influence in Kabul, it is not as a means of expanding its influence to Tashkent, it’s as as means of preserving it’s control of Lahore which sits precariously on the border with India.

So why might some in Pakistan’s military support the Afghan Taliban and militant groups like the Haqqani network? The same reason that they – and the US – supported these groups in the 1980s: they keep other people out. During the Cold War, the US supported the Taliban as a way of fighting Soviet influence in Kabul. Similarly, some security strategists in Pakistan today see the Taliban as a way of fighting Indian influence and preventing the nation from being boxed in by hostile neighbors.

What drives Pakistan is neither banditry nor ambition – it’s a basic desire for self-preservation. While some individuals in Pakistan may have ideological or religious affinity for the Taliban, this does not represent an official position any more than the existence of radicals in the US represent any official positions on the part of the US.

This is why it is disappointing that Amb. Khalilzad continually references “Pakistani support” for militant groups. By suggesting there is some state policy in support of these groups, the Ambassador ignores the incredible sacrifices that Pakistanis have made in the fight against militancy and extremism including the lives of over 35,000 Pakistani citizens.

Carrots and Sticks, re-revisited

Ambassador Khalilzad proposes using aid along with the promise to facilitate trilateral talks between Pakistan, Afghanistan, and India. In other words, what we’re already doing. But if these carrots are not sufficient to change Pakistan’s strategic outlook now, why would they be tomorrow?

The fact is that Pakistan seeks to reduce its reliance on aid, not prolong or deepen its dependency on foreign donors. We know this because it has been stated repeatedly by Pakistan’s President, Asif Zardari, as well as Pakistan’s Ambassador to the US, Husain Haqqani.

And the the Government of Pakistan has been doing more than just talking about improving its domestic economy. Pakistan announced this week that it has beat tax collection targets, bringing its tax-to-GDP ration to 9.2 percent, up from 8.9 percent a year ago. This demonstrates that the Government of Pakistan is making serious efforts to get its books in order, despite significant political obstacles – something Washington may want to eye with more sympathy as American lawmakers struggle to create consensus on their own economic policy.

Rather than continuing attempts to use economic and military aid as leverage, the US would be better advised to listen to Pakistan’s leadership and seriously discuss the possibility of improved trade deals such as Reconstruction Opportunity Zones (ROZ), lower textile tariffs, and investment in energy production and delivery to improve capacity in Pakistan’s domestic industry.

Similarly, the “sticks” proposed by Amb. Khalilzad amount to little more than cutting aid to Pakistan – a strategy that will only further entrench anti-democratic forces in Pakistan and reinforce suspicions that the US is a less reliable ally than Taliban militants. Again, we don’t have to assume this to be the case. We can look to the outcome of America’s policy of disengagement in the 1990s as a response to Pakistan’s nuclear program – a nuclearized Pakistan suspicious of US motives and interests.

Strengthening Civil Society

Despite his other errors, Amb. Khalilzad gets one thing right: “Ultimately, only the Pakistani people and a new generation of civilian leadership can rein in the country’s military leaders.” Whatever US interests in South Asia, the future of Pakistan will be defined by Pakistanis themselves. If the US wants to see a free and prosperous Pakistan, the only way forward is to invest in the success of Pakistan’s civil society.

That means dealing with the civilian political leadership, even when it might seem more efficient to deal directly with the military; it means focusing aid and investment on sustainable ways of improving the lives of ordinary Pakistanis; and it means listening to Pakistanis about their own priorities, rather than trying to convince them to prioritize American interests. Above all, if we are going to see a peaceful and stable Pakistan, the US must move beyond the strategies of the past and engage Pakistan as a partner, not a patron.

The Path to Peace and Prosperity

Stanley Weiss, Founding Chairman of Business Executives for National Security, offers four recommendations for bringing peace and prosperity to Pakistan in a column for Huffington Post.

Stanley WeissBin Laden’s death within 30 miles of Islamabad has put a spotlight on the Pakistani military. The U.S. should take advantage of this moment to continue re-crafting the relationship from a short-term military alliance to a sustained economic and social partnership, in four ways:

First, root the relationship in trade, not aid. Hussain Haqqani, Pakistan’s ambassador to the U.S., recently called for Washington to “move beyond the begging bowl.” A new report from the Center for Global Development provides a good starting point: offer duty-free, quota-free access for all Pakistan exports to the U.S. market for at least five years. As Haqqani says, it would create economic opportunity and foil extremists’ designs to exploit unemployed Pakistani youth;

Second, increase U.S. incentives for investment, including credit programs for Pakistan’s small and medium-sized businesses;

Third, publicize the many economic benefits that would accrue to both nations if India and Pakistan were to normalize relations, an idea a top Indian official told me is “supported at the highest levels of the Indian government.”

Fourth, use leverage from the recent U.S.-India nuclear deal to nudge India, as former Indian Foreign Secretary M. Rasgotra suggested to me, “to create a final settlement on the existing line of control in Kashmir, but then soften it by turning both sides of Kashmir into a Free-Trade Area.”

It's the Economy…

Textiles

Bill Clinton knew it. Hu Jintao certainly knows it. Barack Obama is learning it the hard way. And if we really want to ensure democracy and justice in Pakistan, Congress needs to figure this out, too: It’s the economy, stupid.

Pakistan’s democratic government continues to suffer incredible attacks from militant extremists. Just last week, Lashkar-e-Jhangvi – a terrorist group affiliated with Al Qaeda and the Tehrik-e-Taliban Pakistan – attacked a security compound in Karachi killing at least 18 and wounding over 100. And this was only the latest in a wave of deadly attacks that have plagued the city in recent months.

Karachi is financial heart of Pakistan. That may be one reason terrorist militants are so keen to destroy it. Undermining stability in Karachi has a direct impact on foreign investment in Pakistan; undermining the nation’s economy undermines support for the democratic government. It creates a feeling of hopelessness and frustration that militants use to recruit new foot soldiers.

Discussing the nation’s education system, Pakistani analyst Mosharraf Zaidi told PBS Frontline that a lack of economic opportunity can have dire consequences.

“You look at the consequences of these kids not going to school — and let’s set aside the fearmongering and the scare-mongering of saying, you know, ‘What if all these kids become terrorists?’ Setting that aside, the real problem is that, if you aren’t capable of participating in the global economy, you will be very, very poor. And desperate and extreme poverty has some diabolical consequences for societies and for individuals.”

Michael O’Hanlon, Senior Fellow at the Brookings Institution, writes that one of the keys to creating peace and stability in Afghanistan and Pakistan is economic stimulus for the region through trade liberalization.

Struggling economically, Pakistan needs such a shot in the arm, and a trade deal could arguably do even more than aid at this point.

Over the weekend, the US and Pakistan agreed to cooperate on a new $375 million wind farm near Karachi to provide 150 megawatts of power. This is a good start. Projects of this nature go beyond mere aid and create sustainable infrastructure that can reduce Pakistan’s dependence on foreign energy supplies while also providing a much needed boost to employment.

This is a good start, but the US needs to do more if we’re going to continue to have a strong relationship with the South Asian power. Pakistan’s president Zardari is no American puppet, and he has been making successful overtures to Chinese investors keen to profit from Pakistan’s unrealized potential.

The President said that there existed a great potential between Pakistan and China to further expand their bilateral trade and Pakistan was keen to welcome greater Chinese investment in the country.

He said that Pakistan and China have established a Joint Investment Company (JIC) with the help of China Development Bank to assist joint ventures and signed the Free Trade Agreement on goods and services, which were helping integration of Pakistani and Chinese economies.

The President said that the Government has put in place policies directed towards rapid economic growth, employment generation, poverty alleviation and encouragement of the private sector.

And it’s not only the cash-flush Chinese who are looking – the UK is also beginning to see the potential of investment in Pakistan.

[British Deputy High Commissioner] Robert Gibson pointed out that British entrepreneurs working in Pakistan were having continued interest to work and safeguard their businesses and were looking forward to opportunities to further increase their operations by expanding existing projects and explore new avenues for investment.

The US can begin its program of economic investment by liberalizing trade, specifically through granting preferential market status to Pakistani textiles, a policy encouraged in a new report by the Council on Foreign Relations.

“To reinforce US-Pakistan ties and contribute to Pakistan’s economic stability in the aftermath of an overwhelming natural disaster, the Obama administration should prioritize and the Congress should enact agreement that would grant preferential market access to Pakistani textiles,” former deputy Secretary of State Richard L. Armitage and former national security adviser Samuel R. Berger, stress in the report.

This agreement would help revive the Pakistani industry and all of the associated sectors of the economy, including Pakistan-grown cotton, the report adds.

Additionally, Congress should revisit legislation establishing Reconstruction Opportunity Zones (ROZ), a bill first introduced by President Bush and passed by House Democrats in 2009.

Conventional wisdom says that American policy towards Pakistan should involve ‘carrots’ and ‘sticks.’ This thinking is misguided. Targeted aid packages like Kerry-Lugar and flood assistance are necessary, but not sufficient if the goal is to develop a strong and lasting partnership. Pakistan has demonstrated that it will not be a client state, nor should any such outcome be at the heart of American foreign policy. Only by developing economic partnerships that benefit both countries will lasting trust be established. Investment in Pakistan may involve certain risks at this time, but ignoring this opportunity poses greater risks still.

US Should Follow EU Trade Concessions

EU officials announced that this Thursday they will unveil plans to grant trade concessions to Pakistan to help the country grow its economy following the historic floods. The US should follow suit.

Recently, Pakistani Foreign Minister Makhdoom Shah Mahmood Qureshi spoke at the Council on Foreign Relations where he explained why open markets support democracy, stability, and the fight against terrorism in Pakistan.

Americans for Democracy & Justice in Pakistan agrees, and has encouraged the reduction of textile tariffs as a means of helping Pakistan grow its domestic economy and reduce its reliance on foreign aid.

By following the EU and adopting a package of trade concessions for Pakistan, the US would stand to benefit in two important ways.

US businesses and consumers would have access to equipment and products at a lower cost. This would provide a much needed boost not only to the Pakistani economy, but to our own struggling economy as well.

One of the greatest recruiting messages of extremists is that the democratic government cannot provide stability and economic growth necessary. Strengthening the Pakistani economy is essential to the long-term stability of Pakistan’s democracy.

With the EU moving ahead with more general waivers including not only textile exports but also industrial goods, the US should pass its own trade concessions to further Pakistan’s ability to support itself economically, and to strengthen the security of a key ally.

Reduce Textile Tariffs to Aid Pakistan

Pakistan's textile industry

The devastation caused by flood waters that have submerged twenty percent of Pakistan will leave lasting scars across the embattled nation for years, if not decades to come. Terrorist militants are using the opportunity to launch suicide bomb attacks on soft targets including mosques in an attempt to destabilize the democratic government, and patience is wearing thin among a war-weary public. While the US has given over $150 Million in aid for flood relief, as well as $7.5 Billion in civilian aid via the Kerry-Lugar bill, Pakistan needs more than just a handout. The US should remove tariffs on Pakistani textiles to provide Pakistan sustainable economic growth and political stability.

Sustainable Economic Growth

Waqar Khan, secretary of Pakistan’s Textile Ministry, told the Wall Street Journal earlier this week that,

“Clearly a big crisis is looming on the horizon for the textiles sector, which is the mainstay of the country’s economy. Yarn shortage is inevitable. Market access will greatly mitigate the imminent disaster.”

This isn’t a case of teaching a man to fish. Pakistan knows the textile sector, and provides inexpensive and efficient production that benefits both domestic employment while lowering the price of goods in other countries. This is a case of giving a man access to the pond.

The country’s textile sector directly employs 3.5 million people, accounting for 40% of urban factory jobs. Textile-product exports were $10.3 billion—just over half Pakistan’s total exports—in the last fiscal year. About $3 billion of those goods went to the U.S. and a similar amount to Europe.

But the sector has faced a slump in the past 18 months, due in part to competition from China’s much-larger industry, which uses its size to win big U.S. orders and keep costs down. While China’s textile-goods exports have powered ahead over the past three years, Pakistan’s have stagnated. Some producers, also hurt by the rising cost of raw materials like yarn and by more expensive electricity, have been forced out of business.

Additional global macroeconomic benefits could be reaped by reducing textile tariffs as well. Presently, the primary competitor for Pakistan is China, whose economy is overly dependent on exports, creating an artificial trade imbalance. While many economists call on China to allow the Renminbi to float freely, such a move is politically unlikely in the near future. However, by reducing textile tariffs for Pakistan, the US could create structural changes that level the playing field for Pakistani goods, thereby reducing China’s ability to dominate markets with their ability to operate with massive economies of scale.

Most importantly, though, lowering textile tariffs would allow Pakistan the opportunity to grow its economy naturally, unfettered by artificial constraints imposed from without. Vietnam can serve as an example here. Despite being ruled by a communist party, Vietnam has increased its exports to the US over recent years, growing its economy rapidly. In turn, it has begun to discover consumerism and promises to balance its economy between imports and exports in the long term, providing a reciprocal market for US goods and services.

US Imports from Pakistan and Vietnam, 2000-2009

Political Stability

Whether in main street America or main street Pakistan, politics largely boils down to President Clinton’s famous maxim: “It’s the economy, stupid.” And the devastation of the flooding threatens Pakistan’s already struggling economy.

Coping with the social and economic costs of the catastrophe will strain the government’s finances. The budget deficit was already on track to reach 4.5% of gross domestic product in the fiscal year ending June 30 before the crisis but now could widen to as much as 6% to 7% of GDP, said Mr. Mitra. That’s a grim prospect for a country, which had external debt totaling $55.63 billion as of June 30.

President Asif Ali Zardari’s government has been reaching out to other countries for help. A delegation met with IMF officials Monday in Washington. Donors including the U.K. and the European Union have so far pledged almost $500 million in additional help.

Moody’s is unlikely to upgrade Pakistan’s credit rating in coming months due to the devastation from the floods and other challenges, but the country’s current B3 rating “adequately captures the risk” of the likely economic slowdown and is unlikely to be downgraded further, said Mr. Mitra. A B3 rating is just one notch above the C level, which applies to countries in effective sovereign default, and makes it hard for a country to issue bonds in the international market.

As important as relief aid is, it is structural changes such as tariff reduction that will give Pakistan access to markets where it can compete and provide sustainable growth to the nation’s economy. This will demonstrate that its leaders are effectively promoting Pakistan’s interests in the world community, and quell popular dissatisfaction as people become better able to provide for themselves and their families

Moreover, improving Pakistan’s economy through actual economic growth rather than aid gives Pakistanis an ownership over their own nation that is too often missing in countries that require substantial amounts of foreign aid. Questions surrounding condition-based aid such as those that arose in the debate over the Kerry-Lugar bill and IMF programs would be moot, as Pakistan’s economy would be free to grow naturally. No longer could democratic political leaders be accused of “selling the country for peanuts” by anti-democratic forces.

The unprecedented destruction of Pakistan’s floods combined with continued attacks from extremist militants pose an existential crisis for Pakistan. American aid and generosity, as well as our ability to organize effective international relief is vital. But Pakistan cannot live on aid alone. If we are to truly help our friends in Pakistan, we must use our standing as a global economic power to hold open the door to international markets so that Pakistan can develop its own sovereign economic strength. Then we will truly see democracy and justice in Pakistan.