Executive Summary:Dealing with aPerfect Storm
T
he Second Annual Review of the Institute of Public Policy (IPP) is focused on
Emerging from the Crises
; a multi-faceted crises which essentially involves a vicious cycle arising from thenexus of a security breakdown, economic downturn, governance failure and lack of politicalstability. What Pakistan is experiencing today is ‘the Perfect Storm’when all negative factorshave come together and are reinforcing each other. The question before policy makers is how tostop this vicious cycle that is virtually carrying us to a point of no return.
THE VICIOUS CYCLE
On the economic side we face the possibility of a prolonged slow down in activity that willprobably imply a decline in the real incomes of the bottom 60 to 75 per cent of the population.The only segments of the population that may still see some improvement in their economicsituation are the rich and the relatively well-to-do. This will further exacerbate the maldistributionof income, with an addition of 10 million new poor to the 50 million who already suffer from abjectpoverty and deprivation. This will increase the social restiveness in concentrated pockets in citiesadding not only to the general level of crime and violence but also to the problems posed by therise of extremism and militancy. The economic downturn can lead to a loss of 'effectiveness' ofthe incumbent government and radicalization of politics, contributing to the environment ofpolitical confrontation and instability.The aggravating security conditions, in turn, further lead to economic difficulties and governancefailure. When an increasing number of people believe that the present structure of the society isnot serving their interests, they may be willing to resort to extreme means to disturb the existingsocial order. As mentioned earlier, failure of the economy to provide adequately for the people atthe bottom end of the income scale or living in the more backward regions of the countryaccelerates the rise of extremism. The failure of the political system which does not have theinstitutions the disaffected can use to voice their discontent further increases the sense ofalienation and marginalization. The resultant rise in the acts of terrorism lead to loss of life andproperty and negatively impacts upon the investment climate. The cost of doing businessincreases, reflected in the higher transaction costs, adversely affecting the country'scompetitiveness and economic growth. Security breakdown can potentially aggravate thepolitical situation also. Challenges to the 'writ' of the government can destabilize the incumbentgovernment and damage its credibility and reliability, both nationally and internationallyThe third pillar of the nexus is political instability/governance failure as reflected by the inabilityof the political institutions to develop a system that would allow voice to the people, make itpossible for the people to resolve their differences without resorting to the politics of the street,and create a structure that will be able to sustain the shocks inevitable in a politically volatile
Executive Summary:Dealing with a Perfect Storm
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State of the Economy: Emerging from the Crises
situation. Such a situation negatively affects the investment climate, especially for foreigninvestors. Further, public agitation on the streets leads to short-run economic dislocation, bulk ofthe burden of which falls on the lower income segments in society. Needed government attentionto tackle the security challenge is not forthcoming and the extremist elements get an opportunityto strengthen their capabilities and expand their influence.The nexus of economic, politics and security discussed above is further reinforced by two otherdimensions of crises facing Pakistan: foreign involvement in the domestic affairs, which the worldthinks is necessary because of the impact on them if the Pakistani state weakens and severaldevelopments in external environment, especially the on-going global recession, over which ithas no control. These developments introduce a number of downside risks for Pakistan’sexternal accounts and sustainability.Overall dealing with the five crises enumerated above would have been less difficult if they hadoccurred separately. However, by all coming together at the same time, the country has beendrawn into a vicious cycle. The fundamental question is: what strategic interventions are requiredto break into this cycle?
STRATEGIC INTERVENTIONS TO BREAK THE NEXUS
It is our considered view that in order to break into this vicious cycle of economy, security andpolitics, we should first address the problem posed by the continuing deterioration in the state ofsecurity. Astrategy focused on improving security has many dimensions. The state must firstcreate an awareness among the people that battling extremism is in their interest. It is importantfor the people to recognize that the extremist elements are doing harm to the economy, to thedevelopment of the political system and to Pakistan's standing in the world. The message will bebetter received if the state commits significant amount of its resources to improving the socialand economic well being of the people who reside in the areas most affected by the rise ofextremism. Simultaneously, institutions that provide voice to the people and help them to resolvedisputes not only among themselves but also with the state need to be strengthened. It will meanputting in place a judicial system in which the people have confidence.In order to deal with extremism, Pakistan will also need a combination of targeted developmentprograms, including an ambitious program of social protection focusing especially on youth skilldevelopment and employment. It will require ensuring that people, no matter how disaffectedthey are, do not question the authority of a legally constituted state. It is only when the institutionsput in place by the state to help the common citizen are not violated by any one element insociety that Pakistan will be able to convince the world that it is serious about dealing with theproblem of extremism and mobilize more support from the international community for the 'Waron Terror' necessary to cushion against the negative impact of the downturn in the globaleconomy. Adetailed counter-terrorism strategy is presented in Chapter 4.On the economic front, the report presents a set of stabilization policies which are consistent withearly revival of growth. The emphasis is on pursuing a pro-poor and inclusive growth strategy.This requires focus on agriculture, small-scale enterprises, labor-intensive industry and servicesalongwith a move towards decentralizing economic decision making by devolving greaterauthority to the provinces and to the institutions of local government and thereby bringgovernment closer to the people.
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State of the Economy: Emerging from the Crises
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Executive Summary
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