Pakistan’s Moral-Hazard Economy

LAHORE – Hillary Clinton’s just-concluded visit to Islamabad – for the second session of the strategic dialogue that she and her Pakistani counterpart, Shah Mehmood Qureshi, launched in Washington earlier this year – brought some comfort to her hosts. The United States promised to provide $500 million of funding for several “highly visible” projects in Pakistan. This was to be part of the $1.5 billion allocated to Pakistan in legislation signed by President Barack Obama last year.

The day before Clinton arrived in Islamabad, the Friends of Democratic Pakistan met there. An earlier meeting of the group was chaired by Obama on the sidelines of the United Nations General Assembly session in New York last year. It was attended by then-Prime Minister Gordon Brown of Britain, the heads of the World Bank and the International Monetary Fund, and government ministers from several countries. At the Islamabad meeting, the FDP agreed to provide finance for Pakistan’s energy-development program, and requested proposals from the Pakistanis for the development of other sectors considered vital for the economy.

A few days before that, President Asif Ali Zardari paid his fifth visit to Beijing since taking office in August 2008 – this one a state visit – and received pledges of support for developing nuclear power and constructing a railway line over the Karakoram mountain range, linking the two countries. This would facilitate western China’s access to the sea, via the Pakistani port of Gwadar.

These promises and pledges underscore Islamabad’s growing dependence on foreign assistance, which is not surprising, given that Pakistan’s tax-to-GDP ratio has declined to less than 9%, the lowest among the 22 largest emerging economies. They also suggest the continuance of a sort of moral-hazard approach to economic management that ensures foreign help whenever the country drives itself to the edge of an abyss.