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Story Publication logo December 7, 2009

The Golden Mean in Pakistan


Media file: south asia economics of security.jpg

"The Economics of Security" explores the threat of extremist violence in South Asia, especially...

Media file: south asia economics of security.jpg

Political reformers in Pakistan have long argued that economic growth would bring about a decline in the militancy that today threatens to tear the country apart. While economic deprivation is undoubtedly a cause of political instability, recent history suggests that growth alone is not a solution.

That's the lesson from a new book by Tufts University political economist Vali Nasr, Forces of Fortune: The Rise of the New Muslim Middle Class and What It Will Mean For Our World (2009). Capitalism is the best insurer of political stability, Nasr posits, but not all capitalisms are equal. To promote peace, growth must do more than simply reduce absolute poverty by expanding the proverbial economic pie. It must also curb inequality by expanding the middle class, and tie their success explicitly to the stability of the state.

The Muslim world's middle classes are the ultimate stakeholders in the war on terrorism. While demanding liberal pro-growth policies that raise the incomes of those at the bottom, middle-class business leaders remain dependent on the state for core services such as education and healthcare which both facilitate their own entrepreneurship and benefit the poor.

Unlike upper-crust investors, they can't pack up their assets and their families and leave when political turmoil hits. Because they have real wealth to lose if the state falls apart, middle classes remain engaged in the democratic process and protect democratic institutions from violence and corruption. By strengthening the state, and enriching their societies, they undermine the sales pitch of militant leaders who prey on inequalities and power vacuums to recruit followers. Even in economically troubled, war-torn Pakistan, a small middle class is beginning to play this very role.

Nasr is Milton Friedman with a liberal twist. Like Max Weber's Protestant ethic, Nasr's capitalism is a system of control that marries self-interest to social duty. By contrast, capitalism's advocates inside Pakistan recall Ayn Rand in their conception of free markets principally as mechanisms of individual autonomy.

Former prime minister Shaukat Aziz, for example, boldly removed barriers to foreign investment, cut corporate taxes and privatized major industries. At the high point of his tenure, in 2005, Pakistan's economy was expanding at an annual rate of 7%.

But Aziz focused on pure growth—delivering gains to a few elite individuals—rather than on targeted growth among the middle classes. He liberated capital markets for investors but left gaping holes in social services: together, health and education spending still make up less than 10% of Pakistan's economy. Elite industrialists received preferential access to energy and raw produce, fuelling a lucrative export boom, but creating shortages for ordinary consumers.

The government compensated with generous subsidies, driving inflation to 25% by 2008. Linked to food and fuel, this inflation hit hardest at the poor, in rural areas vulnerable to Taliban recruiters. If there is a link between deprivation and violence, it appears when these rural populations feel exclusively cut out of the larger society's economic gains.

As the Taliban rapidly expanded and military spending on counterterrorism ballooned, Aziz's plans to shrink the state collapsed. After all, defence spending is just another form of big government, one that keeps middle-class professionals outside the private sector, where they could contribute to economic growth and social development.

Nasr concludes that capitalist reform which fails to protect middle-class entrepreneurship doesn't stay capitalist for long.

Meanwhile, Pakistan's socialists —most famously Zulfikar Ali Bhutto, whose heirs in the Pakistan Peoples Party (PPP) control the country today—have emptied the state's coffers to offer welfare handouts to the poor, while thwarting private sector growth for the middle class. Worse still, they have failed to bring redistribution to the political sphere itself. The two leading parties are controlled by two elite clans—the Bhuttos and the Sharifs—from the two largest provinces: Sindh and Punjab.

The lower middle classes have no outlet to demand economic policies that might benefit them, such as an end to direct subsidies or more investments in long-term infrastructure and social services. It's old news that socialist central planning impedes growth, but Nasr reminds us that it also impedes equity.

Yet, despite policy failures from both left and right, an embryonic middle class is emerging: small farmers, merchants and professionals who saw limited benefits from the growth of the Aziz years. Though still too small to push for the policies they need through the electoral system, they have been able to make their voices heard through civil protest.

It was the professionals—in media and law, principally—who took to the streets in 2008 to demand the restoration of the judiciary and an end to martial law. It was these same middle classes who protested for a crackdown against the Taliban in the spring, as violence threatened to destroy their homes and livelihoods. Now they demand initiatives for economic liberalization.

Meeting this last demand depends on Pakistan's allies. If the international community wants to win the fight against terrorism, we should engage the Pakistani middle class directly—through investments in their businesses and an expansion of international trade that goes beyond the very largest Pakistani firms.

Instead, we seem bent on using aid to cushion the blow of failed government policies, implicitly underwriting the failures and kicking structural problems and legitimate grievances down the road for future leaders to contend with. This is the modern-day equivalent of handing out cake to appease a bread riot—it didn't work for Marie Antoinette, and it won't work now.







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