National and International Issues

The Economics of Peace

Because of its strategic location — a gateway to South and Central Asia, East Asia, and the Middle East – Pakistan has the potential to become a regional, and eventually a global, trade and transport hub. In addition to infrastructure development — for which the CPEC can play an important role — a stable security situation is essential for realizing this potential, so that passengers as well as cargo to and from different countries may pass through Pakistan’s territory and waterways seamlessly. The success of Radd-ul-Fasaad will go a long way in making Pakistan a trade and transport hub.


The recent history of Pakistan may well be written in terms of the epic struggle of the Pakistani nation to whup terrorism and violent extremism. Until a few years ago, the dark, diabolical forces of militancy were threatening to rip the society apart. However, the nation’s indefatigable will, embodied in successive military operations culminating in Operation Radd-ul-Fasaad, to go the whole hog against the militancy has put the lid on the menace. 
Operation Radd-ul-Fasaad was launched by the Pakistan Army on February 22, 2017 to consolidate the gains made in other military operations by indiscriminately eliminating the “residual/latent threat of terrorism.” The operation is underpinned by the idea that the war on terror can’t be won without the involvement of the entire nation. This thought makes every Pakistani part of Radd-ul-Fasaad. The strategic intent of the operation is to restore peace and stability to Pakistan and beef up security at the frontiers.



A stable security situation gives a boost to the economy — and so on. Whenever the link between peace and progress or that between security and economy is ruptured, it casts its shadow on the entire society. Chief of the Army Staff General Qamar Javed Bajwa hit the nail on the head when at the National Security Dialogue in Islamabad on March 18 he stated that national security is not only about defending a country against internal and external threats but also entails providing an environment conducive to development and prosperity.  


Peace and progress, stability and development go hand in hand and the relationship between security and the economy is complementary. A peaceful, stable and secure environment is essential for both development and sustaining the growth momentum. A resilient economy, in turn, gives the state the resources necessary for safeguarding peace and security. A stable security situation gives a boost to the economy — and so on. Whenever the link between peace and progress or that between security and economy is ruptured, it casts its shadow on the entire society. Chief of the Army Staff General Qamar Javed Bajwa hit the nail on the head when at the National Security Dialogue in Islamabad on March 18 he stated that national security is not only about defending a country against internal and external threats but also entails providing an environment conducive to development and prosperity.  
The successful fight against terrorism and violent extremism and by implication a vastly improved security environment will bring substantial economic dividends in both short- and long-run. In order to appreciate the economic prospects in the offing in the wake of a successful Radd-ul-Fasaad, the starting point may be to look at the way the twin scourges of terrorism and violent extremism have caused Pakistan’s economy to bleed over the years.    
In the war on terror, Pakistan has gone through fire and water in terms of both men and materials, with thousands martyred and billions lost. Between 2001-02 and 2017-18, the direct and indirect economic cost of terrorism was only a whisker away from reaching US$ 127 billion, which accounts for more than 48% of Pakistan’s present GDP of US$ 264 billion. 
The cost includes loss of lives and injuries, destruction of physical infrastructure; compensation paid to the victims of the acts of terrorism; rise in security related expenditure at the expense of developmental spending; fall in economic output, public revenue, domestic and foreign investment and exports; loss of jobs and tourism opportunities; businesses’ shutdown and increased cost of doing business. 
Starting 2001-02 (FY02), the economic cost of terrorism kept on going at a gallop and peaked at US$ 23.77 billion in FY11. Since FY15, the cost has been on a downward trajectory; it ratcheted down to US$ 2.07 billion during FY18 (July-February). The decrease in cost can easily be set down to full-scale counter-militancy operations, starting with Zarb-e-Azb and culminating in Radd-ul-Fasaad. 
The engine of economic growth is investment. In a market economy, like Pakistan, the bulk of investment comes from the corporate sector. According to the economist John Maynard Keynes, business expectations hold the key to investment. Expectations are both rational and subjective or irrational (animal spirits), depending on social and political atmosphere. Socio-political instability breeds speculations, which make investment volatile. As Keynes puts it, “There is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased on the stock market…. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” 
These observations, coming from one of the greatest economists of all times, are especially relevant to Pakistan. The process of economic growth is circular. In order to grow, an economy must have considerable savings — either government or private — at its disposal. But savings are made only when the income or revenue exceeds consumption or satisfaction of current needs and wants. In the face of lackluster business activity, the government will be hard pressed to collect sufficient revenue and will have to borrow to finance its expenditure, thus accumulating debt. Economic growth, at the other end of the scale, will drive up corporate and personal incomes and perk up the size of public revenue.


Like other central banks, the State Bank of Pakistan (SBP) conducts periodic business confidence surveys (BCS). These bi-monthly surveys approach large firms in different sectors of the economy all over the country to solicit their opinions on multiple indicators, such as production, employment, demand for credit and economic conditions, which constitute the Business Confidence Index (BCI). In recent months, mainly due to an uptick in the security situation, the BCI in Pakistan has been on an upward trajectory. For instance, in April and June 2020, the BCI was 38 and 39 respectively, which shot to 52 in August, 55 in October and further to 56 in December 2020. 


In case of Pakistan, militancy made the business environment frightfully uncertain, as strategic assets and public places came under attack. The uncertain business environment hobbled productive investment and instead encouraged speculative ventures (in real estate and stock market). Speculative investment is not only volatile but has a nominal impact on job creation and wealth generation as well. In the wake of the veritable uptick in security situation, the vicious economic cycle is likely to turn virtuous.
To begin with, the turnaround in security situation will shore up business confidence. Investment is a trust in the future and is undergirded by how businesses expect the economic environment to shape up in the months to come. The security situation will decidedly ramp up business confidence by providing a safe and predictable environment for businesses to operate. When the corporate sector perceives that their physical assets are safe, their supply chains are secure, and their markets are functioning smoothly, it will step up investment. The conducive security environment will crank up consumer confidence and spending as well. Higher consumer spending will lead to an upswing in the demand for goods and services, which will jack up business confidence — and this virtuous cycle will continue.  



Like other central banks, the State Bank of Pakistan (SBP) conducts periodic business confidence surveys (BCS). These bi-monthly surveys approach large firms in different sectors of the economy all over the country to solicit their opinions on multiple indicators, such as production, employment, demand for credit and economic conditions, which constitute the Business Confidence Index (BCI). In recent months, mainly due to an uptick in the security situation, the BCI in Pakistan has been on an upward trajectory. For instance, in April and June 2020, the BCI was 38 and 39 respectively, which shot to 52 in August, 55 in October and further to 56 in December 2020. 
A related indicator is the Purchasing Manager Index (PMI) on which businesses in the industrial sector are asked about their purchase orders over past six months as well as access to raw materials and other inputs. Like the BCI, PMI is an indicator of the corporate sector’s trust in the economy and thus indirectly an index of the economic health of a country. According to the SBP, from 44 in June 2020, the PMI rose to 45 in August, 53 in October and 56 in December 2020. The increase in BCI and PMI has come despite the COVID-19 pandemic and its adverse impact on businesses. 
Related to business confidence is the cost of doing business (CDB). Cost minimization together with profit maximization is the cardinal and universal business principle. All else equal, the lower the CDB, the higher is the incentive for businesses to invest. The CDB is contingent upon a slew of factors of which the foremost is the security situation in a country. Terrorism enhances insurance, freight, tracing and tracking, supply-chain management, wages, marketing, security and overall administrative costs for an enterprise, which together undermine its competitiveness. De-escalation in terrorism by a long way, by contrast, will enable the businesses to cut back on such costs, incentivizing them to invest.



Increase in business confidence and cuts in CDB will bolster Pakistan’s attractiveness for multinational enterprises (MNEs). Developing economies like Pakistan, which are capital deficient, need foreign capital to bridge the gap between domestic savings and the desired level of investment. Foreign direct investment (FDI) is the most optimal way to attract capital from overseas. The alternative to FDI is borrowing, which, as in case of Pakistan, adds to a country’s stock of debt as well as increases the cost of debt servicing. Any economy will find it arduous to allocate resources optimally in the event that debt servicing, as in case of Pakistan, is the largest component of public expenditure.  
Despite having the most liberal investment regime in the region and being a big and growing market, Pakistan has received exceedingly low volume of FDI in recent years (on average US$ 1.8 billion per annum between 2010 and 2019). One of the major reasons has been a precarious security situation, which held back cost minimizing MNEs from moving to Pakistan. In addition to the economic cost, foreign entrepreneurs’ concerns for their own safety as well as that of their staff boxed in Pakistan from realizing its enormous FDI potential, making the country look to debt creating foreign aid.
Arguably, the most credible institutional mechanism available to Pakistan to attract FDI is the China-Pakistan Economic Corridor (CPEC). An important part of the flagship Belt and Road Initiative (BRI) of the Chinese government, the CPEC will not only upgrade Pakistan’s energy and communication infrastructure but will also help the country overcome its supply-side constraints through development of special economic zones (SEZs) and modernization of agriculture. The success of CPEC will also encourage MNEs from other countries to invest in Pakistan. Due to CPEC, China has become the largest source of FDI in Pakistan. A stable security situation is of paramount importance for Pakistan to capitalize on the enormous benefits which the CPEC promises.      
Because of its strategic location — a gateway to South and Central Asia, East Asia, and the Middle East – Pakistan has the potential to become a regional, and eventually a global, trade and transport hub. In addition to infrastructure development — for which the CPEC can play an important role — a stable security situation is essential for realizing this potential, so that passengers as well as cargo to and from different countries may pass through Pakistan’s territory and waterways seamlessly. The success of Radd-ul-Fasaad will go a long way in making Pakistan a trade and transport hub.
Provision of public goods, such as social and physical infrastructure, is essentially the role of the government. However, the government can play this role effectively only if sufficient funds are available in the kitty. The success of Radd-ul-Fasaad and the consequent fall in the security related expenditure in real terms will widen the space available to the government for development related spending. This will usher in not only a higher quality of life for the people but increased competitiveness of the economy and its greater attractiveness for foreign investors as well.



As well as these tangible benefits, a stable security situation will bring in its train many intangible advantages. To top it all, it will recast Pakistan’s image and help change the narrative in vogue abroad about Pakistan. Due to the militancy, over last one-and-a-half decade, Pakistan has largely been seen in a negative light: an unstable and unsafe country, where terrorists run rampage; and where foreign buyers, tourists, and investors can go only at a grave risk to their lives and assets. But thanks to the strides made on the security front, this negative perception about Pakistan is beginning to change and, in a few years, will make way for the country’s image as a business-friendly place, which because of its rich culture and long history dating back to the Indus Valley Civilization — one of the oldest civilizations in the world — an exotic and diverse landscape, and ethnic diversity is also a heaven for foreign tourists.
All these factors will combine to drive up economic growth, job creation, exports, and government revenue. As the economy turns around and the employment and people’s living standards rise, social discontent will spiral down. A strong economy and increased prosperity will also constitute a potent antidote to militancy, terrorism, extremism, radicalization and other such menaces.
For sure, the road to economic development is long, and peace and stability are not the only prerequisite to reaching the destination. That said, the economy is an organic whole and malfunctioning of any component can pull the entire edifice down. Being the foundations of the economic superstructure, peace and stability are a necessary condition for progress. In conjunction with other variables, they can nudge a nation towards glory.
Already, some signs of economic recovery are visible. For instance, during FY2020, FDI inflows shot to US $ 2.56 billion from US$ 1.36 billion in FY2019 by a whopping 88%. Likewise, remittances, which inter alia, are a trust in the economy and national institutions, went up to US$ 23.14 billion in FY2020 from US$ 21.74 billion in FY2019. The gross foreign exchange reserves available with the central bank increased from US$ 9.30 billion in FY2019 to US$ 13.72 billion in FY2020. The challenge for the government is to sustain the upward trajectory in these and other basic economic indicators for which a constant improvement in the security environment is mandatory.


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Twitter: @hussainhzaidi

 

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