For much of his tenure, Pakistan's president, Gen. Pervez Musharraf, had two claims to fame: that he'd put the country on the path to moderation by marginalizing its Islamic radicals, and that his economic policies had helped spark dramatic economic growth (about 7 percent a year). Now the resurgence of the Taliban and its allies and a spate of suicide bombings have called the first claim into question. And while the recent accidental killing of Pakistani troops on the Afghan border, allegedly by coalition troops, have focused all attention on security matters, Musharraf's second supposed achievement is also unraveling: according to some Pakistani economists, the poverty rate recently hit 34 percent (up from 32 percent in 1999); the World Bank is now predicting a paltry 3.5 percent growth rate for the coming year, and the rupee is plummeting against the dollar.
What happened? The answer has less to do with Musharraf's declining power—he's now fighting for survival—than you might think. The country's economic boom never actually had much to do with the general's policies; like Tennessee Williams's Blanche DuBois, Pakistan has always depended on the kindness of strangers. In the wake of 9/11, renewed ties with Washington brought substantial aid. Even before the $10 billion in U.S. military and economic assistance started to flow in, Pakistan's Western allies wrote off billions of dollars of debt, which helped bring the economy back to life. About the same time, many expatriates who'd parked their wealth in foreign banks began investing in their homeland's stock market. Their new strategy wasn't irrational; after the attacks on the United States, many Muslims in the West, regardless of their political or ideological proclivities, started coming under considerable government scrutiny. Suddenly investing back home became much more attractive.
The new aid, investments and remittances significantly buoyed Pakistan's economy. Yet Musharraf's military regime never used the opportunity to address the country's endemic underlying problems. Tax receipts remained low due to the government's reluctance to crack down on powerful business players, investment in infrastructure lagged, agricultural productivity stagnated and social services were neglected. Adult literacy is still only about 49 percent, and the Human Development Report ranks Pakistan 136 out of 177 countries. Foreign investors, who'd been flooding the country's booming service sector to cater to its growing ranks of nouveau riche, took note of these persistent flaws, and even the emergence of a democratically elected government in the February 2008 elections did little to allay their concerns. The worsening security situation—tragically underscored by the assassination of former prime minister Benazir Bhutto in December 2007—made the country's future seem all the more uncertain.
Foreign dollars thus soon started to dry up, and the underlying weakness of Pakistan's economy left it acutely vulnerable to other external shocks. When oil prices began to climb this spring, the country reeled, and as Pakistan's treasury faced a dramatic outflow of funds (Pakistan buys most of its oil abroad and has to pay in hard currency), confidence in the rupee fell precipitously. This, in turn, made imports more expensive. The rise in global food prices also hit ordinary Pakistanis hard and, as they cut back on consumption, sent the already shaky economy into a tailspin.
All this bodes ill for the country's immediate future. The new coalition government has already deadlocked, mired in an unseemly squabble over the reinstatement of a number of Supreme Court judges arbitrarily dismissed by Musharraf. (Nawaz Sharif, a former prime minister and leader of one half of the coalition, wants to reinstate them; Asif Zardari, Bhutto's widower and the head of the other faction, doesn't.) All these leaders are far too preoccupied with their own survival at the moment to deal with Pakistan's pressing economic ills. Yet this inattention could prove critical, for economic drift will only exacerbate the country's political woes. Widespread economic distress will lead to increased public demonstrations, strikes and turmoil. Under these conditions, Islamist forces could easily win broad support by promising facile remedies, such as the imposition of Sharia and an end to military cooperation with the United States.
An Islamist resurgence would put the country's military, which has recently been accused of starting to appease radicals in the border regions, in an awkward spot, forcing it to decide between trying to co-opt the Islamists and crack down. An Islamist surge could also damage Pakistan's fragile relationship with India, which both countries have tried to repair in recent years. From a U.S. standpoint, all this would be a disaster, since an economically anemic and politically unstable Pakistan wouldn't be able to offer much help against Al Qaeda and the Taliban. Islamabad can still switch course if it ends the factional squabbling in the government, restores the independence of the judiciary, professionalizes the police and paramilitary forces and keeps the military in check. But time is fast running out.