In the wake of stock market meltdown and falling value of the rupee, Pakistan’s economic managers are hoping for some external help to bail the economy out of trouble.

Pakistan’s economic situation, especially its external indebtedness, which has reached $46 billion or $10 billion more than it was a decade ago, is in dire straits and without immediate remedial measures, it may again fall into the debt trap which it found itself in at the end of the last decade.

This cyclical merry-go-round has been a feature of Pakistan’s economic history in the last five decades, as military regimes have alternated with civilian ones with distressing decadal regularity. The question is whether this circle will ever be broken or whether we will get deeper and deeper into the vortex of debt and despair after the end of each cycle.

There seems to be two schools of thought on how to tackle the problem. The first argues that we need to take advantage of our geopolitical situation and accept the economic aid being offered by the United States and Saudi Arabia to enable us to stabilise the economy and then bring about fundamental structural reforms in the economy. The second school seems to think that the circle can be broken through pursuing a more pro-active social policy in which foreign assistance need play only a minor and transitory role.

The former view, which has been the lynchpin of the development strategy during the three major episodes of military-led development of Ayub Khan, Ziaul Haque and Pervez Musharraf is being vigorously advocated by seizing the opportunity of a recent landmark bi-partisan legislation introduced in the US Congress, jointly by Senator Joseph Biden and Richard Lugar proposing non-military aid to Pakistan be tripled to $7.5 billion over five years, and linking security aid to performance.

Included in the same category, though with different underlying motivations, is the Saudi government’s reported offer to defer oil payments worth $6 billion, although its details and terms have not yet been revealed.

The bipartisan US legislation authorises $1.5 billion annually for development purposes, such as building schools, roads and clinics, for five years and advocates a similar amount over a subsequent five-year period. The measure is being as peddled as a “democracy dividend” and being held out as a carrot to Pakistan’s democratic government to blindly follow the US lead in the war on terror, rather than devise a way of solving its internal problems through negotiations and solution of the economic and social problems, which have given rise to terrorism. It is clear the United States deems the solution of these problems primarily through military means.

The total economic assistance expenditures in Afghanistan are a tiny fraction of the military expenditure, which amounts to $100 million per day for the United States alone. The offer of economic aid to Pakistan does not represent a change in its strategy to fight terrorism in Afghanistan and Pakistan, but merely a ploy to ensure that Pakistan does not deviate significantly from the script signed by Musharraf making Pakistan an unquestioning ally of the US in the war on terror.

Along with the economic aid offer, the US is also luring Pakistan with offers of upgrading military hardware, such as the F-16s, which it wants Pakistan to use against the Taliban insurgency in Pakistan.

Mr Shahid Javed Burki, understandably eager to see Pakistan elevated to the ranks of middle-income economies, has proposed that the country should pitch for a higher foreign aid target to be mobilised in the next five years, amounting to $20 billion or almost thrice the amount proposed in the Biden-Hagel bill, provided Pakistan promises to meet an equal amount through domestic resource mobilisation.

Mr Burki’s argument seems to favour a return to the supposedly halcyon days of Ayub Khan’s Planning Commission with experts imported from abroad or trained with the assistance of donor agencies. He would like the scope of such assistance to be extended to improving the quality of governance and the training of judges and parliamentarians. He is of the opinion that, “Pakistan, at this critical time in its history, does not have the capacity” to formulate an appropriate development strategy.

While Mr Burki’s prognosis has some degree of substance, his prescription is hardly acceptable, as the economic and political environment facing Pakistan has undergone a sea change, both globally and domestically, in the four decades since Ayub Khan’s exit. What we need now is to seek the solutions to our economic problems in the light of the present challenges, which are located largely in the domestic economy and in our past neglect of social policy issues.

While the global economy does provide opportunities for increasing a country’s development prospects, they depend largely on its ability to take advantage of them. Only a few developing countries – mainly, in East Asia, which have exercised a degree of autonomy in policy-making –have been successful in avoiding the harmful effects of globalisation during their development process.

This is well brought out by Alice Amsden in her latest book, Escape from Empire, which also highlights the changes in the US foreign aid policy to developing countries, showing that it has ceased to play a benign role since 1980s.

Similarly William Easterly has questioned the effectiveness of foreign aid in reducing poverty and promoting economic growth. The complex problems of poverty of low-income societies can be solved by the home-grown rise of political and economic institutions, rather than through influx of foreign aid.

Even if one were to ignore the political motivations of the US offer – and believe that the aid being offered by Saudi Arabia would be manna from heaven, would it solve the economic problems facing Pakistan and would it facilitate Pakistan’s return to the path of vigorous economic and social development?

If Pakistan’s past experience – which is an object lesson in the failure of aid to enhance development objectives – is any guide, this is most unlikely to be so. Our experience with the Ayub era of foreign aid-led and inequality-inducing growth, the military-aid led growth of Ziaul Haq and Musharraf eras and the failure of the structural adjustment packages in the 1990s, do not have to be repeated. One must turn to the second alternative of tackling the problem with the help of a pro-active social policy which would change the structure of our institutions in a way that would preclude the recurrence of political business cycles.

Many economists who subscribe to this view, look at the problem in terms of graduating Pakistan from the low-income to middle-income category of nations, but alleviating the poverty of more than a third — possibly up to a half after the current wave of fuel and food inflation — of the population.

Using a minimum income of Rs7000 per month and assuming a third of the population as officially poor or nearly poor, around 55 million persons would require employment-income support.

With one adult provider for another six household members, eight million men and women would need priority access to employment, requiring the guaranteed income annual provision is nearly Rs600 billion[$10 billion], which, in turn, would require an investment of Rs3000 billion[$50 billion] of assets would have to be vested in the poor, assuming a 20 per cent rate of return. (These calculations are based on an unpublished paper of Dr Aly Ercelan of PILER).

The financing of this large sum – which is in the same ball park as Mr Burki’s foreign aid-driven growth strategy – will be dependent on greater domestic resource mobilisation and transfer of resources from the affluent classes and sectors, including defence.

It would require quite a different configuration of social policy initiatives, including education, human resource development, migration, regional and gender balance, labour, land and water reforms than those implicit in growth-through aid strategy, which is top-down and centred more on bureaucratic and governance reforms.

One of the major social issues that has defied solution and plagued Pakistani political scene is the question of land reforms – although its focus is often restricted to agrarian reforms – which has been put on a policy back-burner for almost three decades.

Without tackling it head on, it is difficult to see how the country can lay the basis for political stability and economic equity. However, as pointed out in a recent paper by Haris Gazdar, the question of land reforms is no longer restricted to the agrarian economy, but has become multi-dimensional and has to be viewed in varying regional contexts and historical evolution.

As he cogently argues, “The arrangements for holding land are deeply embedded in the social, political and institutional fabric of the country” and technocratic solutions, such as the computerisation of land records, cannot in themselves provide the solution to a complex problem, which needs to be researched and debated further.

Neither the foreign aid and nor the social policy approach can however deny the primacy of a democratic political process which needs to debate the economic and social alternatives thoroughly before taking a policy decision.

syed.naseem@aya.yale.edu