Pakistani anti-terrorism measures not good enough to attract FDI | Video

World Finance interviews Michael Kugelman, Senior Programme Associate for South and Southeast Asia at the Woodrow Wilson International Centre for Scholars, on the impact of the Pakistani government’s ground offensive against the Taliban

July 22, 2014

Pakistan continues to face a sluggish economy partly due to recent terrorist attacks in the nation’s financial capital, Karachi. These events, in addition to other local threats from militant groups, have resulted in a limited number of foreign direct investment opportunities. World Finance speaks to Michael Kugelman on how the government and the emerging middle class can improve the country’s economic prospects.

World Finance: Pakistan is currently engaged in its most ambitious attempt to control the Taliban and Islamist fighters in the mountains of Waziristan; what are the costs of losing this region?

Michael Kugelman: You hear very often the phrase that Pakistan is essentially the supermarket for global terrorism, just because there are militants of all walks of life. Some Pakistani, some from elsewhere around the world. Al-Qaeda has a large, or had a large presence, in this region. There are a lot of foreign fighters there. And of course Pakistan is a country with nuclear weapons, so that all adds to the picture, and makes it a really unpleasant stew of militancy.

So there’s really a lot at stake here.

World Finance: Now do you think the perception that Pakistan has been harbouring terrorists, the likes of Osama bin Laden, will be obscured by this current military campaign?

Michael Kugelman: Unfortunately no. I think that on the surface level, this military campaign in north Waziristan seems to be a good thing. Because for the very first time in recent memory, the Pakistani government has agreed to launch a military offensive in this locus of terrorist activity in north Waziristan.

The problem though is that the Pakistani military’s going to be very selective in who it goes after. It’s going to go after certain militants, like the Pakistani Taliban, that target the Pakistani state. But there are many militants in north Waziristan that target Afghanistan, that target international troops in Afghanistan, that target India; I’m talking about groups like the Afghan Taliban, the Haqqani network.

There are a lot of groups that are threats, and they really are not going to be dealt with. In fact many of them have actually just left north Waziristan and slipped into Afghanistan or other tribal areas.

World Finance: And all of this being considered, how is it going to affect investor confidence in the region?

Michael Kugelman: There really is not much interest at all in terms of foreign investment in Pakistan, and particularly since a terrorist attack on the Karachi airport not too long ago, which I think really hit home.

If the major airport in the financial capital of Pakistan is attacked… you know, it can’t really get much worse than that.

And it’s a shame! Because there is a lot of potential in Pakistan. A lot of growing industries. In my view there is the architecture for there to be significant foreign investment in Pakistan. But the security situation just does not allow for it.

World Finance: So what is this all going to do for the country’s international economic curb appeal?

Michael Kugelman: If the security situation calms down, then I think we could see it change. Unfortunately I tend to be a pessimist. I really fear that the security situation will get worse before it gets better. I fear that a lot of the militants that are being targeted by the military will essentially launch a new campaign of revenge attacks, which will make the security situation even more troubling. And that of course bodes very ill, bodes very poorly, for foreign investment.

World Finance: Now let’s consider the role of the military. The military complex of course is one of the strongest in the world in Pakistan; who really controls the country? Is it the government, or is it the military?

Michael Kugelman: The military has a say in everything, including the economy. Every year, despite promises to the contrary from the government, defence spending always constitutes a significant component of the national budget. And this hasn’t changed this most recent year. And so I think until the military is willing to relinquish its tight hold on the budget; until more money is made available to cover other key areas – from energy to education – there are going to be a lot of problems.

Others will argue however that the military, when it’s been in power, the military was actually very effective. It actually managed the economy very well. There wasn’t as much corruption and so forth.

But the key issue is that the military still hogs the national budget, and that’s not going to help the economy.

World Finance: But there have been some demographic changes, including the role of the middle class; can you tell me how important are they to the future of Pakistan?

Michael Kugelman: Pakistan is not the type of country that lends itself to large protests. It’s a very divided country, fractured along ethnic lines, provincial lines, sectarian lines. It’s hard to get these large movements, even within the middle class.

I’m glad you mentioned that, it’s a very significant component of the demographic; it’s relatively large and rising.

I just don’t see it as realistic. I don’t see there being these protests, trying to get the military to change the role it plays in the politics of the country.

World Finance: Now let’s look at the government’s overall game-plan. They’ve been involved in fiscal consolidation to deal with high deficits, but do you think that this is even the most effective economic strategy?

Michael Kugelman: No, unfortunately I think there’s much to be concerned about the Pakistan’s economic policy. I’ve said before, I’ve said many times that Pakistan does have the potential to get its house in order. But I just see repeatedly that despite what the government’s saying about belt-tightening moves and austerity measures, that it essentially is settling for hand-outs.

Not too long ago, the Saudi Arabian government, which is very close to the Pakistani government, provided a lot of money to Pakistan to try to deal with some of its economic problems. It’s a good short-term measure, but it certainly is not sustainable in the long-term.

Similarly Pakistan has tried to address its very large amount of debt in its energy sector. Not by creating more efficient industries, or dealing with pricing and subsidies, but simply printing more money to bring the debt down! That’s what it did a few months back. And of course, completely predictably, that debt has come right back.

So I see a lot of encouraging nice talk, and the right things are being said. But in terms of actual action on economic policy, I’m not seeing much to be encouraged about.

World Finance: Michael, how long is it going to take for us to see Pakistan really turn a corner?

Michael Kugelman: So I think it’s going to really take a paradigm shift in how the state and its practitioners, and the people in government, think about the country as a whole.

Maybe one could argue that we have to wait for a new generation of younger, more open-minded Pakistanis to bring about this change. But unfortunately, given what I’m seeing about demographics in young people in Pakistan, they tend to be much more conservative, in many cases much more hard-line, than their parents’ generation. More supportive on the military.

So I fear… it’s hard to put a date on when things could change. And I really worry that Pakistan could really… it…

Probably what will happen is that it will muddle along. It’s not going to collapse, it’s not going to fail – contrary to what a lot of people, including in Washington DC here, say. But I think it’s really going to plod along, muddle along, and it’ll reach a point where you have to wonder – how long can it continue to survive on that level? And I don’t know.

World Finance: Michael Kugelman, thank you so much for joining me.

Michael Kugelman: Thank you.