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Focused US-Pakistan Engagement Is Better for Pakistan’s Economic Future

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Focused US-Pakistan Engagement Is Better for Pakistan’s Economic Future

Issue de-linkage is the need of the hour when it comes to Islamabad-Washington relations.

Focused US-Pakistan Engagement Is Better for Pakistan’s Economic Future

A Pakistani agriculture specialist receiving a course-completion certificate from USAID Country Director Jonathan Conly, September 26, 2012.


As the Biden administration begins to form its policy toward South Asia, Pakistani officials are advocating for a broad-based relationship, beyond the focus on Afghanistan and security issues. Recently two veterans of the Obama administration made the case that Pakistan is critically important for the stability of its neighborhood, arguing for a broader relationship with a first step of restarting the U.S.-Pakistan Strategic Dialogue, which spanned from 2010 to 2016. The Strategic Dialogue was led by the U.S. secretary of state and senior Pakistani cabinet officials, and spanned a range of issues including energy, the economy, and security and defense ties.

While the idea of encouraging a comprehensive dialogue through a strategic framework makes intuitive sense, past experience suggests that high-level diplomatic focus on Pakistan often stifles the economic reforms that are required to create an environment where Pakistan can have a sustainable economy — something that is important for Pakistan’s domestic and regional stability. U.S. support for Pakistan will continue to be important both for the country’s welfare and for bilateral ties, but such ties and support should go through the narrower, focused channels where they are more likely to succeed, and be predicated on Islamabad taking the lead on addressing the long-standing challenges it faces, not deferring difficult actions while pointing to its strategic importance.

Consider Pakistan’s engagement with the International Monetary Fund (IMF) as an example.

Pakistan has received 13 IMF loans since 1988, including two during the Strategic Dialogue period. The repeated need for emergency assistance despite high level U.S. support of Pakistan for the majority of the period highlights that attention has only served to maintain the status quo in Pakistan and enabled Islamabad to defer reform.

A 2002 IMF review of its past lending arrangements with Pakistan noted that a large number of staff believed that “political considerations had, at times, prevailed over technical judgments” and said the “fact that IMF-supported programs are widely perceived as heavily influenced by political factors … probably weakened the efficacy of these programs.” A senior Pakistani official interviewed by the review team was blunter when he said that “IMF-supported programs primarily served political purposes. Thus, it should come as no surprise that they did not achieve much in terms of economic results.”

The 2008 IMF program, which was secured with the help of U.S. lobbying efforts, lost momentum and was abandoned in 2011. Another loan program begun in 2013, under the Nawaz Sharif government, was technically successfully completed, but the Pakistani government undertook such limited reforms that the country needed another IMF bailout by 2019.

While Imran Khan came to power promising “tabdeeli” (change) he is backed by many groups that oppose economic reforms, including the military and prominent feudal families. High level U.S. engagement generally ends up supporting these entrenched interests, who oppose the very reforms that are needed for the private sector to flourish and to accelerate economic growth. Pakistan has been described by some as using its strategic location as a way to extract rents from international actors, especially the U.S. High-level U.S. engagement often happens with politicians, industrial elites, bureaucrats, and current and former military officials who form the “rentier‐class dependent on external handouts.”

The IMF review found that the “prevailing perception within IMF staff was that the principal IMF shareholders … were not willing to take the risk of major turmoil in Pakistan that an interruption of IMF support might have caused.” In other words, the United States and partners were unwilling to push Pakistan to make difficult economic decisions and more motivated to ensure Pakistan’s completion of its IMF program commitments than Pakistani governments were.

The Pakistani government claims to have a new “economic security paradigm,” but only implemented painful stabilization policies, including raising interest rates, devaluing the rupee, and shrinking the fiscal deficit, after it was forced to return to an IMF program. Khan has long been a critic of the reforms, including privatization efforts, advocated by the IMF.

A useful comparison point on how economic engagement and development can occur without U.S. high-level policy attention is Bangladesh. When Bangladesh gained independence from Pakistan in 1971 it was much poorer, but even under governments with less than stellar governance performance, it has managed to make impressive economic and development gains and thereby increased commercial ties with the United States. Bangladesh has done so while not being seen as a key geopolitical partner of the U.S.

In comparison to Pakistan’s 13 IMF loans, Bangladesh only has had five IMF loan programs since the late 1980s, including one recently focused solely on efforts to manage the impact of COVID-19, not larger economic concerns. Furthermore, while in 1999, Pakistan’s exports were around 50 percent larger than Bangladesh’s, in the last 20 years the dynamic has flipped with Bangladesh’s exports in 2019 being more than 50 percent larger than Pakistan’s, according to World Bank data. Consistent with the overall trajectory, U.S. trade with Bangladesh has grown at a substantially faster rate than U.S. trade with Pakistan.

Additionally, the rise in Bangladesh’s exports, particularly garment exports, was facilitated in part by government industrial policy and measures to enable women’s participation in the workforce. While Bangladesh’s government needs to focus on improving the rights of textile sector workers and diversify its economy and exports, the country’s faster progress relative to Pakistan’s, despite the later receiving much greater amounts of U.S. assistance and attention, highlights a more sustainable approach to economic growth and engagement.

It is also the case that Pakistan will benefit from more narrower exchanges with the U.S. — and not through broad “strategic” dialogues.

While Pakistan plays an important role in the stability of its neighborhood, its role is largely limited to that of spoiler. With sanctioned Iran to its west, economically impaired Afghanistan to its north, and the country’s nemesis, India, to its east, Pakistan is unlikely to play a vital role facilitating meaningful connectivity in the region. Despite the high profile, and expensive, projects associated with the China-Pakistan Economic Corridor (CPEC), land border trade between the two countries was worth only about $1 billion in 2019, a small percent of overall bilateral trade between the two countries. The bilateral land-based trade is limited by high altitudes and risk of landslides.

Pakistan faces significant economic challenges, and could benefit from international assistance, but the aid should be predicated on the Pakistani government following through on implementing long-needed reform, not Pakistan’s relative geopolitical importance. Allowing international financial institutions, like the IMF and World Bank, where the U.S. has a prominent voice, to lead the conversation, will increase the likelihood that such engagement will strengthen Pakistan’s economic future. Whether it’s pushing for more transparency and cost-benefit analysis on big infrastructure projects, including those that are part of CPEC, or ensuring Pakistan has a broader and more equitable tax base, the discussions will have a greater chance of success if they are insulated from the influence of Pakistan’s presumed geopolitical importance. Broadening the U.S.-Pakistan dialogue will likely only enable power centers in Islamabad who want to maintain the status quo to once again convince Washington that it is “too big to fail.”

Shezad Lakhani is a former economic analyst with the U.S. government whose career focused on South Asia. He is located in Santa Clara, CA. Follow him on Twitter @Shezadl1. The views expressed in this article are the author’s alone and do not reflect those of his employer.