This paper aims to explore Pakistan's geo-economic options in
the difficult situation that confronts following the easing of
sanctions, which added acute balance of payments pressures to its
existing ailments of near-stagnant exports, a lower growth trend than in
preceding decades, an unattractive climate for foreign investment, and
weak social indicators. The first question explored is whether Pakistan
has any opportunity of participating in a regional trade grouping. It is
argued that the only conceivable way of achieving this would involve the
development of SAARC, which would demand a profound transformation of
Indo-Pakistani relations (though one no more profound than that realised
in Franco-German relations since the founding of what is now known as
the European Union). One benefit of achieving deep integration through
SAARC is that this would create the possibility of Pakistan developing a
serious engineering industry far more rapidly than will otherwise
happen. In the absence of deep integration in SAARC, it is argued that
Pakistan's best option would be a policy close to unilateral free trade,
so as to place it in a position to take advantage of whatever the next
generation of labour-intensive activities demanded by the world economy
proves to be. Under either of those scenarios, the reestablishment of a
dynamic industrial sector will require the maintenance of a competitive
exchange rate, something that, it is argued, is not necessarily
guaranteed by floating. The paper also discusses the role of inward
direct investment in contributing to the export success of East Asia,
and considers whether the expatriate Pakistani community might be
capable of playing a role comparable to that played by the overseas
Chinese in nurturing the Chinese export expansion of the last two
decades. It is suggested that such a hope was set back by the
extra-legal attempt to renegotiate power tariffs with the independent
power producers in the course of 1998, and that Pakistan needs to become
a country of laws rather than discretion if foreign investors, including
expatriate Pakistanis, are ever to find the country an attractive export
platform. While more inward direct investment would almost certainly be
beneficial, the same is not true for inward financial investment, where
too large an inflow can easily expose a country to very significant
risks, as the East Asian crisis showed. In the long run, Pakistan needs
to be prepared to repel excessive capital inflows if they materialise;
but its immediate problem is still balance of payments pressure, and
this seems to demand targeting a major and sustained improvement in the
current account over the next several years.
The Impact of Foreign Direct Investment Inflowson Balance of Payment
