SHORTLY after his coup in 1999, General Musharraf unveiled a "seven-point agenda" to save the nation. He vowed to do all the right things: revive a sick economy, reduce corruption, rebuild national confidence and so on. But a year later he had made so little progress that The Economist labelled him a "useless dictator".
Six years on General Musharraf is still in charge, and the economy has been transformed.
In retrospect this newspaper's verdict of six years ago looks too harsh, but mainly for a reason that no one could have predicted. The Pakistani most responsible for the economy's brilliant turnaround, it might be argued, was not General Musharraf or his technocratic prime minister, Shaukat Aziz. It was an ethnic Pakistani currently in American custody, Khaled Sheikh Mohammed, the architect of the attacks on September 11th 2001.
Before that day, Mr Aziz, then the finance minister, had been struggling bravely, launching a few liberal reforms, slashing import tariffs and energy subsidies, introducing a sales tax and stepping up privatisations. On the eve of the terrorist attacks on America, Pakistan had just about met the terms of an IMF programme, but investment remained low and debt high. In 2001 the economy grew by 2%, barely more than the population, and one-third of the budget went on debt-servicing. Then Mr Mohammed's plan came off, and Pakistan's world changed.
America wanted Pakistan as an ally and was prepared to pay. It gave $600m straight up, promised to forgive $2 billion of debt and persuaded other creditors to go easy. Some of Pakistan's debt was already due to be rescheduled; America ensured that the terms were generous. In December 2001 the IMF agreed on a $1.3 billion facility. Meanwhile remittances rocketed, especially from Pakistanis in America, reflecting fears that Christian countries might freeze Muslim assets. Remittance flows also became more visible as America cracked down on the informal hawala money-transfer system, which it thought was being used by terrorists.
This fiscal reprieve, combined with sensible reforms in the banking sector and plenty of spare capacity, provided the basis for Pakistan's burst of growth.
This is a hopeful time for Pakistan. But the country has been here before. In both the 1960s and the 1980s, the economy sustained annual growth of over 6%. Those periods, too, saw military rule--which brought relative stability--and lashings of aid dollars. The first general in charge, Ayub Khan, managed the economy well; the second, Zia ul-Haq, did not, but was also blessed with a rush of remittances, from the Middle East. Both periods were followed by a decade of civilian misrule during which donors and investors withdrew, growth dropped to 4%, and millions of people were pitched into poverty. Will General Musharraf leave behind a more solid basis for growth?
This is not a bad record, especially when compared with that of General Musharraf's predecessors. But if he is to fulfil a pledge to cut poverty significantly, he must maintain the current level of growth. The government has set its latest target at 7%, but that looks impossible. Investment, at around 20% of GDP, is still lower than it should be. Although foreign direct investment last year was an encouraging $3.5 billion, or about 2.7% of GDP (see chart 2), this was boosted by privatisations. A lot of foreign money also went into telecoms, where profits come through quickly. Savings account for a modest 15% of GDP. The consumer boom--along with high-cost oil, of which Pakistan has little--has caused imports to double in the past four years. Exports, dominated by low-value textiles, cannot keep up. Last year, the trade deficit widened to $11.5 billion. To finance it, the government will have to eat into its foreign-exchange reserves, and eventually may have to devalue the rupee. But this will exacerbate another ugly effect of consumer-led growth: inflation.
Straightening out Pakistan's police and judiciary were also on General Musharraf's priority list. Both featured in a complex package of local-government reforms introduced in 2000, but neither emerged much the better for it.
On paper, these reforms looked fine, but they soon ran into a sludge of vested interests. General Musharraf's political supporters have rigged local elections to ensure the election of nazims loyal to the government. And local and provincial politicians now have direct control over the police, which is helpful for winning elections but not for building an independent police force.
In the matter of judicial reform, the vested interests are General Musharraf's.
Such political legerdemain is an indictment not only of General Musharraf but of Pakistani politics as a whole. Unlike his civilian predecessors, the general has at least made a serious attempt to improve the country's rotten institutions.
