THE threat of Talibanisation and the alleged ‘deal’ between General Musharraf and Benazir Bhutto have dominated the news recently. The two subjects are perceived to be interlinked in that some analysts see the need for an understanding between these parties as something that would benefit both at a time of a seemingly growing threat from the extremist forces and tensions between Islamabad and Washington. However, some of the fundamental questions raised must be addressed before one jumps to welcome the possibility of a rapprochement between the government and the Peoples Party as need of the hour or condemn it as a sell-out.

Both viewpoints may turn out to be redundant if the establishment, the politicians and the media do not address basic and crucial questions about the future direction of Pakistan’s political economy. Power sharing adjustments between military leaders and civilian politicians have taken place before but failed to bring either stability or prosperity to the country. This time, the stakes are even higher.

Pakistan cannot afford to live in a state of continuous external or internal confrontation because it is receiving aid to do so. Demands “to do more” to stop the Taliban insurgency in the north is politically destabilising. Asking to provide logistic support in the event of an air strike against Iran may turn to be a nightmare.

Therefore, the most critical question that merits further and deeper discussion is whether the political economy model of a security state that Pakistan has practiced - and one that can rightly be termed as a failure - can survive in the 21st century. Before one explores that question further, it may be useful to discuss some salient features of that model in the context of Pakistan’s recent history.

The focal point of this security state has been the threat - both real and exaggerated - from India and the stated need for a large standing Army and its need for military hardware and money. The Army governed with the help of two principal alliances until the 1980s. Externally, by aligning its foreign policy with the global and regional interests of the United States and internally by forming partnership with the economic interests of the feudal aristocracy and big business. The external alliance provided weapons and money that benefited the military and provided the ‘aid’ that was used to finance fiscal and current account deficits.

The development issues such as land reforms, the need to broaden the tax net and develop export-oriented industries were put on the back burner. A combination of aid, subsidised loans, protectionist trade policies and a lax tax regime benefited the civil and military bureaucracy, inefficient industries and tax evading business magnets. This bought the military their support at the expense of the vital economic reforms that should have been undertaken to prepare Pakistan for the 21st century.

While China, Korea, Taiwan and the rest of East Asian countries adopted policies for exports-led growth, the trade regime in 1988 [at the end of Zia ul-Haq’s rule], according to a World Bank report, “still seems to be biased in favour of import substituting production. Domestic markets are insulated from foreign competition through non-tariff barriers and high tariffs.”

In 1988, Pakistan’s nominal tariff rates (around 66 per cent) for manufacturing industries were among the highest and Pakistan’s tax-to-GDP (13.6 per cent) was among the lowest in the developing countries. These policies were instrumental in promoting the robber baron culture under a patronage-driven protectionist economy that was incapable of standing on its feet in increasingly competitive international markets where skilled and educated workforce and not the size of its army became a measure of a country’s potential.

The average expenditure on education as a percentage of GNP was criminally low at 0.8 per cent in the 1980s as General Zia and his corrupt cronies (who made fortunes) boasted of defeating the Soviets. While Afghan war, nuclear programme, Islamisation, non-party elections, ethnic and sectarian conflicts and other such issues dominated the headlines, the real ‘political economy’ or the game was mostly about protecting the security state apparatus that provided the maximum benefits to key stake holders, that is, the army, big business and landed elites.

In 1985, Mohammed Khan Junejo appointed Mahbub ul-Haq as finance minister. Haq called for the vigorous collection of revenues through taxation to generate economic growth from domestic resources. His reformist agenda drew loud protests from these vested interests. The protests led to his removal as finance minister in January 1986, after less than a year in office.

Junejo wanted a quick end to the Afghan war, which had provided a steady source of billions in income for the military establishment’s supporters through arms and drugs trafficking. Junejo met the fate of his finance minister and was dismissed in May 1988.

In the backdrop of Zia’s death, the end of Afghan war, and the stoppage of aid from the United States, the economy was in a bad shape with the fiscal deficit reaching seven to eight per cent of the GDP. Zia left Pakistan close to $22 billion in external debt (50 per cent of the GDP) that had climbed from $8.7 billion in 1978.

During his tenure, overall debt, including domestic and external debt, increased to around 80 per cent of the GDP, while defence expenditure rose annually by 9.2 per cent, with public spending on social development a mere 3.2 per cent per annum, or negative in real terms. By the time of his death, the army had become quite unpopular and the establishment decided wisely that it was time to share power with the politicians (although real power stayed with the military) because that was “the need of the hour.”

During the 1980s, the military-business-feudal alliance was expanded to officially co-opt the extremist religious forces. The militants were given a virtual license to carry on all kinds of illicit trade to finance themselves, make illegal encroachments to build mosques and madarassas, to receive money from abroad, etc.

The Afghan war involved the biggest covert operation ever undertaken by the American CIA, which provided nearly $700 million in secret funds to the military [during 1982-1987] to finance the jihadis. This gave birth to a Frankenstein that was going to do irreparable damage to the rule of law, criminalise the society and haunt the masters of the political economy of aid and patronage for decades to come.

The Afghan war ended but the political economy of a security state needed another conflict to sustain itself. Abandoned by the United States and eager to flex its muscle like a spoiled brat, the establishment decided to start the jihad in Kashmir forgetting conveniently that it had all but officially abandoned that ‘cause’. The establishment clashed with both Benazir Bhutto and Nawaz Sharif, who wanted to make peace with India and disengage from Pakistan from adventurous and costly pursuits. The jihadis’ cross-border operations reached to a point that Pakistan came quite close to being declared a terrorist state.

The adventures culminated in Pakistan exploding the nuclear device in 1998 although the wisdom of doing so was highly questionable because as long as Pakistan had the nuclear weapons capability, it did not really matter whether it announced this with a bang or not.

This led to the first ever default of its foreign currency deposits’ obligations and sanctions from the United States. The 9/11 provided a godsend opportunity to end Pakistan’s international isolation and repair historically close relations with the United States.

Since then, the economy has done well by traditional measures (so it did in GDP growth terms during Zia’s regime) following an injection of large doze of US aid and $22 billion in remittances. But more crucially, the biggest casualty of “easy money’ has been the reforms agenda that General Musharraf undertook to implement when he took power.

The economy remains largely undocumented, the tax-to-GDP ratio has fallen to a level even below that of 1988, stories of mega corruption abound, and no land reforms have been introduced although the establishment and its supporters have never stopped criticising Bhutto even 28 years after his death for not doing enough.

The underground economy continues to flourish with tax and money laundering havens in real estate and stock trading while Pakistan’s external debt-to-GDP ratio remains worse than even that of Sub-Saharan African countries. Yet, some Pakistanis mistake the presence of BMWs on roads as a sign of progress.

If a nuclear-armed Pakistan, with claims of one of the fastest growing economies in Asia, is as strong as the government leaders would have us believe, why it is that just some articles in the New York Times and press briefings of the US state department can cause tremors in the corridors of powers in Islamabad?

Until and unless Pakistan’s establishment and the political parties are prepared to undertake critical economic reforms to mobilise domestic resources to produce economic growth and reduce dependence on sporadic flows of ‘aid money’, it would be naive to expect any real change.

Pakistan does not need “aid money” any way if the military wants to make peace with India as most of the aid goes to buy military hardware that may never be used. Unless of course, the establishment has found a new nemesis in Afghanistan’s Karzai or a bogeyman in Lal Masjid to continue to justify its insatiable appetite for aid and arms to keep its hold on power at the expense of a stable, democratic and well-governed Pakistan.