Budget cuts and sequestration have accelerated the growing interest in promoting international development through the private sector As donor agencies reduce project spending and work within shorter time frames, they have been choosing to partner with private sector firms as a strategy for sparking growth that can be self-sustaining after the end of a project. Increasingly, donors are working to enable businesses to hire, produce, and grow as a way of increasing country-wide growth and reducing poverty. The emphasis on private sector development is particularly appropriate in fragile or violence-affected states, where the private sector is often the only functioning institution in society and security threats limit access for outside officials. The imperative to stabilize Pakistan’s economy despite diminishing U.S. financial commitments to the region makes Pakistan both an important case and an example for promoting private sector development.
U.S. foreign assistance efforts in Pakistan rely on large infusions of money, comprised of military aid, civilian development and relief programs, and direct budgetary support. These funds are intended, in large part, to encourage Pakistani cooperation with U.S. foreign policy objectives. The Kerry-Lugar-Berman bill encourages high spending to continue at steady levels, but it will expire in 2014, leaving the future of U.S. assistance to Pakistan unclear. Shrinking budgets at home and reduced U.S. presence in Afghanistan after 2014 will push down Pakistan’s foreign aid account in the coming years. Despite this, Pakistan will remain a top U.S. foreign policy concern, as a result of its nuclear arsenal, militant-extremists, and geopolitical rivalries. The key components of U.S. strategy toward Pakistan will be to reduce militancy, boost employment, and strengthen Pakistan’s regional economic integration with China, India, and Central Asia. These objectives must be achieved without massive U.S. expenditures. As with fragile states around the world, stabilization and development efforts should focus increasingly on developing the local private sector.
Efforts to stabilize Pakistan through strengthening the country’s private sector and increasing international business involvement will depend on a number of factors.
Addressing international business and media perceptions of Pakistan will be vital. International news coverage and public attention center on the threats emanating from Pakistan and the strained relationship between the U.S. and Pakistani governments. This focus obscures: first Pakistan’s tremendous economic potential, with its 180 million potential consumers, rapidly growing private sector, second, location as a shipping hub, and third, one of the most favorable demographic age distributions in the world. Investment in Pakistan presents a confluence of interest for both U.S. businesses and the people of Pakistan. Despite dire predictions, Pakistan’s economy has a number of structural factors that will translate investment into growth.
The first of these factors is the age distribution of Pakistan’s population. Pakistan’s enormous youth population is often perceived as a threat to its stability, with large numbers of disaffected young people facing poor employment prospects. A private sector led development approach can turn the youth bulge from a liability to an asset, paying out a “demographic dividend” as young workers accumulate wealth without a large retired population to support. Many observers credit China’s demographic dividend with a portion of its incredible growth. With 56% of Pakistan’s population under 21, Pakistan is poised to see millions of youth enter their productive twenties and thirties. Expanding business can employ this population, reaping the rewards of inexpensive, productive, and skilled labor.
A second, and related trend, is the increase in Pakistani consumer spending. As Pakistan’s population moves into cities and into its prosperous late twenties and early thirties, demand for consumer goods is expected to increase rapidly. Pakistani consumer spending has already seen a 7.5% compounded annual growth rate since 2007. Multinational corporations that operate in Pakistan’s consumer goods sector have seen high revenue growth, including Unilever, Colgate-Palmolive, and Nestle. These companies have actually experienced faster growth in Pakistan than their global average. Foreign assistance programs for Pakistan should encourage local Pakistani businesses to expand into the rapidly growing consumer sector.
Pakistan also presents opportunities for financial investment. A very low percentage of Pakistani small and medium enterprises (7%) have bank loans. This figure stands in contrast to 32% of SMEs in Bangladesh and 33% in India, indicating potential for growth in the commercial lending sector. International investors could increase the amount of available credit in Pakistan. Local banks should increase their outreach to local companies that could benefit from loans, perhaps with the assistance of U.S. agencies. Local creditors could benefit from increased lending: local companies have seen high growth recently (35% two-year median compound growth for the top-performing AllWorld Pakistan 100). From a development perspective, small and medium enterprises are more able to rapidly increase employment than large firms and their local ties ensure that they both invest and operate locally, even in the face of security threats.
Foreign investors have another reason to invest in Pakistan. As Western investors seek to hedge against market volatility, they seek to diversify their investments and reduce exposure to any one market. Recent external research has examined the potential for Africa to provide regional diversification through its low market correlations with the United States and Europe. Research by Pakistani economists indicates that the market correlation with Pakistan is even lower (around 0.05). As banks and institutional investors try to limit their exposure to risk, Pakistani investments are likely to yield good returns and could shield investors from market fluctuations elsewhere.
All of these factors provide an impetus for international investment and the potential for local businesses growth in Pakistan. The United States government could, with minimal expenditure, lift many of the barriers to inclusive, private sector-led growth in Pakistan.
First, the U.S. embassy in Pakistan could immediately and without significant expense, increase its consultations with U.S. businesses considering investment or already present in Pakistan. Greater interface between the business community and the embassy could exploit the embassy’s knowledge of local regulations and the local political climate to provide consultation and guidance for both international and local businesses.
In the longer term, existing U.S. government institutions for promoting trade, including the Overseas Private Investment Corporation and the Export-Import Bank, can change their priorities to include small and medium business growth in fragile countries, as the Ex-Im Bank has already begun to do. Such a policy could help U.S. companies invest in growing, but potentially risky countries, and at the same time further U.S. foreign policy priorities of poverty reduction and increased stability in fragile states. This approach would be especially appropriate for encouraging U.S. business growth in the commercial centers of Karachi and Lahore.
Finally, many local companies prioritize infrastructure, better regulation, and lower corruption over increased FDI. These governance improvements, which U.S. policy already pursues, are especially important in areas experiencing ongoing conflict, including Balochistan and Khyber-Pakhtunkhwa. While investment inflows can be captured by local elites and exacerbate the rent seeking economy of conflict, improvements in legal and physical infrastructure benefit non-elites and can spur new business creation.
These three policy shifts are already in line with existing U.S. policy and objectives. Better coordination between the U.S. embassy and local companies can help target U.S. development work toward specific undertakings that will promote local business growth. These three policy changes, along with the suggestions of business leaders detailed in the Program on Crisis, Conflict, and Cooperation’s recent publication can redirect shrinking aid toward the sectors of Pakistan where they will have long-term impact.
Sadika Hameed is a fellow with the Program on Crisis, Conflict, and Cooperation (C3) at the Center for Strategic and International Studies (CSIS) in Washington D.C. Andrew Halterman is an intern with the C3 program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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