Since independence, Pakistan has been suffering from political and macroeconomic instability and has been relying on foreign aid and others capital inflow. But due to unstable macroeconomic policies, millions of people have been thrown into poverty and Pakistan remained fail to dig up its people out of poverty.
According to latest World Bank report entitled World Development Indicators (WDI) 2013, 60 percent of Pakistan’s population is living below poverty line, of which 21 percent households are found to be severely poor who lives below $1.25 per day.
Pakistan is also one of the biggest victim of terrorism after the 9/11 episode, in the US. Pakistan has paid a lot to it. With a loss of 50,000 precious lives and about 100 billion dollars in economic terms, Pakistan has become the number one country in the world which has lost so much without a foreign military attacking it. Furthermore, food insecurity, severe energy crisis, devastating floods and growing extremism and terrorism are adding fuel to fire.
Foreign aid still has a larger proportion in the foreign capital inflows to Pakistan. This external assistance is assumed to facilitate and accelerate the process of growth and development. But in the presence of poor policies, foreign aid has no significant effect on country’s economic growth and development.
Though, there is some positive impact of foreign aid and capital inflow on gross domestic produce (GDP), but GDP increases at the declining rate with the increase in the flow of foreign capital. But on the other hand there is negative impact as well of foreign capital inflow. Studies show that the amount of external debt increases with the rise of foreign capital inflow. This happen largely due to macroeconomic mismanagement, mis-utilization of aid and inappropriate policies.
If we take stock of past many decades, it shows that during the period of 1980 to 2002 (as shown in the above figure), the trend of foreign aid has been increasing, but country caught in debt problems. The rise in external debt burden is mainly due to shift in the composition of foreign aid from grants to hard loans.
Besides that there is also no significant improvement on the social fronts. This is because, major share of foreign economic assistance goes back to the repayment of the loans and the debt servicing, whereas the share of the education, infrastructure & services, health & population and the other social sectors remained very low.
There is also sharp rise in amount of external debt rises over the period of the 2002 to till date in Pakistan. So dependence on foreign capital inflow, on the other hand, has led to the emergence of rising debt burden.
Pakistan now must opt for the new mantra; No more Aid but Trade. But the question arises that Pakistan would capable enough to come out from the severe economic woes and vicious circle of poverty when its trade goes up?
It is now proven fact that fact that trade lowers poverty all over the world. Many studies also investigates that trade openness has positive and significant impact on poverty reduction. So the world is becoming more integrated, goods and trade in services are crossing borders in line with globalization and regionalization processes. Additionally, free trade agreements (FTA) in the regional economies like EU (European Union) have positively increased welfare and reduce poverty in the region. These fact denies the commonly held notion that the developing countries and under develop countries needs foreign aid to combat economic woes and for their growth and development.
But what is wrong with the South Asia region? Why South Asian countries are not getting benefits from SAARC (South Asian Association for Regional Cooperation) and its FTAs such as SAFTA (South Asia Free Trade Agreement)?
South Asian region is vulnerable because of facing civil conflict and guerrilla war, natural disasters and political instability over the last few decades. The current exchange of fire at the borders has increase the conflict between India and Pakistan. This growing conflict between India and Pakistan has kept the entire South Asia region backward. These hostilities between two nuclear rivals have serious negative implications on regional trade. Trade, which is essential to alleviate poverty.
Other countries in South Asia are getting frustrating now with India and Pakistan, because repeatedly these two countries are not letting the SAARC and its agreement to move forward.
Both countries must exercise the level of maturity that can help South Asia to move forward as a vibrant region like EU. Both rivals can reap maximum benefit from free trade agreement like SAFTA. Improving trade relations and policy reforms have the potential for improving growth and development and thus alleviating poverty in both countries and in the region as well.
However, the international institutions and the developed countries should facilitate the developing countries in trade and aid should be given to facilitate the trade process. And the governments of developing economies like Pakistan need to rethink on allocation of funds to social sectors so as to bring the issue of poverty reduction to the central stage of economic policy making.
The Writer is Public Policy Analyst at Sustainable Development Policy Institute Islamabad.