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Our private sector

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.

The imperative to stabilise Pakistan’s economy despite diminishing US financial commitments to the region makes Pakistan both an important case and an example for promoting private-sector development.

US foreign assistance efforts in Pakistan rely on large infusions of money, through military aid, civilian development and relief programmes, and direct budgetary support. These funds are intended, in large part, to encourage Pakistani cooperation with US 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 US assistance to Pakistan unclear.

Shrinking budgets at home and reduced US presence in Afghanistan after 2014 will push down Pakistan’s foreign aid account in the coming years. Despite this, Pakistan will remain a top US foreign policy concern, as a result of its nuclear arsenal, militant-extremists, and geopolitical rivalries.

The key components of US 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 US expenditures. Stabilisation and development efforts should focus increasingly on developing the local private sector.

Efforts to stabilise 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 centre on the threats emanating from Pakistan and the strained relationship between the US and Pakistani governments. This focus obscures Pakistan’s tremendous economic potential, with its 180 million potential consumers, rapidly growing private sector. It also obscures its location as a shipping hub, and one of the most favourable demographic age distributions in the world. Investment in Pakistan presents many interests for US 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 percent 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 labour.

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 percent compounded annual growth rate since 2007.

Multinational corporations that operate in Pakistan’s consumer goods sector have seen high revenue growth. These companies have actually experienced faster growth in Pakistan than their global average. Foreign assistance programmes 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 (seven percent) have bank loans. This figure stands in contrast to 32 percent of SMEs in Bangladesh and 33 percent 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 US agencies. Local creditors could benefit from increased lending. From a development perspective, small and medium enterprises are more able to rapidly increase employment than large firms; their local ties ensure that they 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 US government could, with minimal expenditure, lift many of the barriers to inclusive, private sector-led growth in Pakistan.

First, the US embassy in Pakistan could immediately and without significant expense, increase its consultations with US 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 US government institutions for promoting trade can change their priorities to include small and medium business growth in fragile countries. Such a policy could help US companies invest in growing, but potentially risky countries, and at the same time further US foreign policy priorities of poverty reduction and increased stability in fragile states. This approach would be especially appropriate for encouraging US business growth in the commercial centres of Karachi and Lahore.

Finally, many local companies prioritise infrastructure, better regulation, and lower corruption over increased FDI. These governance improvements, which US 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 US policy and objectives. Better coordination between the US embassy and local companies can help target US development work toward specific undertakings that will promote local business growth. These three policy changes, along with the suggestions of business leaders detailed by the Programme on Crisis, Conflict, and Cooperation’s in a recent publication can redirect shrinking aid toward the sectors of Pakistan where they will have long-term impact.

Sadika Hameed is a fellow at the Centre for Strategic and International Studies (CSIS) in Washington DC. AndrewHalterman is an intern at CSIS.

Email: SHameed@csis.org

Andrew Halterman, "Our private sector," The News. 2014-04-18.
Keywords: Economics , Economic relations , International development , International policy , International relations , Foreign investment , Economic growth , Growth rate , Foreign aid , Economy-Pakistan , Poverty , United States , Pakistan , Afghanistan , China , India , SMEs , FDI