Several weeks ago, Pakistan indicated
that it would say "thanks, but no thanks" to more
than $3 billion in loans from the International Monetary Fund (IMF), as
internal political issues proved stronger than the need for Pakistan to bring
in much needed money. But while this incident says much about the conflict
going on within Pakistan's ruling bodies, it also shines light on the flawed
American strategy of trying to use economic aid to ensure better behavior from
Pakistan's military and intelligence services.
For the past three years, Pakistan has had an IMF program backed
by a loan of more than $11 billion. Of this, the IMF has so far released almost
$8 billion in several tranches-each dependent on Pakistan's civilian government
making progress on key tax and energy sector reforms. Over a year ago, as
progress on those reforms stalled, Pakistan asked for -- and received -- more time to
comply with promised changes and collect a final $3.6 billion tranche. But at the end of
September the Minister of Finance announced that Pakistan would not continue the IMF program at all,
and he has since emphasized that Pakistan would work on its own "home-grown"
reform program. Though Pakistan can go back to the IMF anytime (and indeed
there were rumors
recently that it would), the civilian government clearly wants to avoid locking
itself into another IMF program involving promises for reforms that it will not
be able to fulfill.
Why would Pakistan, which has benefited this past year from high
agricultural prices, but nonetheless is battling serious revenue problems and
rising inflation, turn down big IMF money -- and while pressing ahead with its
own reform package, avoid seeming to seek a fresh new round of IMF money?
Pakistan walked away from the IMF because a weak coalition
government simply could not deliver sufficiently on the reforms it had promised,
despite the apparent desire of the country's economic policy team to do so.
Attempts by the civilian government to lower subsidies or raise taxes have been
met over the past year with street protests and threats of further upheaval, and
unsurprisingly, resistance on the part of the legislature.
As a result, measures to increase the size of the tax base ended
up being modest and ad hoc. An effort to implement a value-added tax (VAT)
failed because of domestic resistance from business elites and some provincial
governments. On energy policy, the government raised tariffs, but not
nearly enough to address the fundamental problem that less than 10 percent of
consumers pay for electricity at cost-recovery level. The World Bank estimates that energy
subsidies drive a huge hole in the government budget, to the tune of 1.2
percent of GDP. Rolling blackouts are getting worse, leading factories and
households that can afford it to resort to inefficient diesel generation, and
forcing smaller companies to close altogether.
Meanwhile in Washington, debate in the U.S Congress about aid to
Pakistan -- not just military aid but aid to shore up the civilian government
along the lines that the late Richard Holbrooke advocated -- has grown
increasingly hostile. Many in Congress assume that Washington's announced
annual economic aid package of $1.5 billion provides leverage that can somehow
bring both the civilian and military sides of Pakistan's government into line
-- and are threatening
to withdraw civilian aid in frustration with the inability or unwillingness
of Pakistan's military and intelligence agencies to deal with the Haqqani
Network and other threats to the security of Americans in Afghanistan.
The IMF saga makes clear that that leverage just doesn't exist. Using
economic aid to push weak civilian governments into political steps they cannot
take (unless they are willing to give up power altogether) doesn't work. It is
even more far-fetched to imagine that the much smaller amount of U.S. civilian
aid constitutes leverage with Pakistan's military and intelligence
establishment, or that it's removal is a serious threat to them. If the
government of Pakistan is willing to walk away from more than $3 billion of IMF
money because it cannot implement a VAT, it seems unlikely that the powers that
be will change their strategic calculus in Afghanistan for whatever Congress
appropriates this year.
As we have emphasized before, the purpose of U.S.
civilian aid to Pakistan is not to bribe or reward, nor would withholding aid
be a useful punishment. Aid seldom constitutes leverage over tough domestic
policy decisions, as the development community knows
well. Apparently, so does the U.S. military. On the eve of his retirement,
Chairman of the Joint Chiefs of Staff Adm. Mike Mullen told Congress that the U.S. needs to move
beyond counterterrorism in Pakistan and focus on the development issues that
constitute the foundation of that country's long run success. In his words,
"isolating the people of Pakistan from the world right now would be
counter-productive."
The issue is whether modest amounts of U.S. aid -- to help
educate kids, create jobs, and strengthen democratic institutions -- might help
give Pakistan a shot at becoming a more stable, prosperous and democratic
country in the long term. Congress should be demanding evidence of that
possible effect and targeting aid appropriately, rather than making superficial
cuts that hurt America's image and impact in Pakistan for no apparent gain.
Nancy Birdsall is the founding president of
the Center for Global Development, a Washington, DC based think tank. Milan
Vaishnav is a visiting fellow and Daniel Cutherell is a policy analyst at the
Center for Global Development.
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