Lahore School of Economics

Business Policy

Pakistan: Is Foreign Aid Helping or

Hindering Development?

Written Analysis of Case

Submitted to

Professor F.A.Fareedy

Submitted by

Moin Illahi

Rabia Rauf

Zaigham Gondal

Zunair Ahmed

MBA II-Section C

Date: 16th May 2014

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TABLE OF CONTENT

1.1 OVERVIEW...................................................................................................................3

1.2 QUANTITATIVE STATEMENTS................................................................................4

1.3 QUALITATIVE STATEMENTS...................................................................................5

1.4 DECISION REQUIRED.................................................................................................8

1.5 PROBLEMS....................................................................................................................8

1.5.1 EXPLANATION.....................................................................................................9

1.6 CORE PROBLEM..........................................................................................................9

1.7 ALTERNATIVES.........................................................................................................10

1.7.1 Pakistan should continue taking foreign aid..........................................................10

1.7.2 Pakistan should stop taking aid..............................................................................12

1.7.3 Pakistan should take aid for short term and stop taking it in long run..................12

1.8 DECISION....................................................................................................................13

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1.1 OVERVIEW

This was the nail most relevant to straining the ties between the two nations. One of the

reasons for this was America’s belief that ISI had to have had knowledge of this and without

that it would not have been possible for Osama to have had a safe Haven there. Tensions

lead to the ISI leaking names of 5 CIA operatives adding further fuel to fire. This resulted in

a bill in Congress to cut the aid that Pakistan was getting. Pakistan would lose 800 million

dollars as a result of this bill. To date Pakistan has received 20 billion dollars in support but

the question here is this aid helping or hindering economic development of Pakistan?

Pakistan has always been important to the foreign powers not because of its economic

conditions but because of its strategic location. For this very reason, it garnered a lot of

foreign support which not only benefitted Pakistan but also US and European Union. Pakistan

has also been an important player because of its alliance with China and healthy relations

with Middle Eastern oil based countries. However, Pakistan could not capitalize on this one

basic fact. One of the biggest mistakes that Pakistan committed was to indulge in “War on

terror” which played a pivotal role in hindering the economic development of Pakistan. USA

always looked upon Pakistan as its ally in war against terrorism and other civil wars by

providing huge amount of aid for its military.

All this dependence on aid has made Pakistan redundant to growth. Countries in much similar

situation as that of Pakistan have long become self-sufficient by developing its infrastructure

and human capital. They realized that reliance on aid could be a short term remedy. But in the

long run, a country needs talented and skilled labor force, adequate technology and developed

infrastructure. Aid is not loan, but is a help for economic development but our Past leaders

haven’t been able to capitalize from it. Instead, they enjoyed it and spent it uselessly resulting

in the downfall of our country and we always like to play blame game.

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1.2 QUANTITATIVE STATEMENTS

U.S had been providing civilian and military aid since 1950’s, providing some $20

billion worth of assistance since September 11, 2001 alone, about two-thirds for the

security forces and the rest for economic purposes.

Although all aid was not cutoffs after bin laden incident, the US administration

warned Pakistan that it would lose $800 million of military assistance unless it

cooperates better.

With growth averaging over 6% from 2003 through 2007, the economy increased

more than a third in size.

In 2005 only 55% of the population was of working age, between 15 and 64 years,

and 42% was age 15 or younger.

Only 54% adults were literate in 2009.

Pupil to teacher ratio was among the worst in the world, at 41 to 1.

Government defense spending exceeded education spending by a factor of ten in

2009.

Recent agreement with Iran to construct a 560-mile, $7.5 billion pipeline.

Tax revenues amounted to only 10% of GDP, one of the lowest in the world. Only 11

out of every 1000 of its citizens paid income tax.

Pakistan traded more actively with China to see its bilateral trade deficit balloon from

$0.3 billion in 1999 to $6.1 billion in 2009.

Remittances reached $7.8 billion in fiscal year 2008-09.

War cost the Pakistani economy $8 billion a year in exports, foreign investment,

industrial output and tax collection.

ADB provided Pakistan with a loan of $20 billion since 1966 with a total loan over

$15 billion at the end of 2009.

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After defaulting in sovereign debt in 1999, Pakistan turned to IMF for $1.5 billion in

loans which it repaid by 2004.

32% of the deaths products of the drone attacks were of civilians.

In 2010, Pakistan received $3 billion from 79 nations and international agencies for

flood relief, including, $571 million from United States and $220 million from

China.

1.3 QUALITATIVE STATEMENTS

“Our government will have issue, will be weak for the moment, but we will learn from

our mistakes, and we will go on and we will improve”. Asif Ali Zardari, President

of Pakistan, August 2008.

The two countries already strained alliance in the “war of terror” was plunged into

crises.

The financial times speculated that Pakistan’s military might tolerate militants to help

justify its own existence and to give the United States a good reason to continue

financing it.

Jim of Goldman Sachs had set his sigh in the next N-11, including Pakistan. Three N-

11 nations, he claimed in 2007, “might have the kind of potential for global impact

that the BRICs have highlighted, essentially an ability to match G-7 size”.

The day after bin laden raid, a bill was introduced to block any assistance to Pakistan

unless the administration certified that Pakistani authorities had had no knowledge of

bin Laden’s presence.

Cutting off assistance to government with a history of coupes, assassinations, and

instability, however, was not simple, especially given its strategic location in the

Middle East.

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The Economist argues, Pakistan might well be where the war on terrorism would be

“won or lost”.

New York Times reported, in their only public appearance (Hillary and Mike Mullen),

during hours of meeting with Pakistani leaders. President Asif Ali Zardari office

issued a terse statement that the countries agreed to work together in any further

actions against high value targets in Pakistan.

After Pakistan’s bloody inception claimed as many as a million lives, the Muslim

League found itself governing a country with weaker institution that the British had

built in India

Pakistan’s strongest institution, the army repeatedly stepped into politics, as the nation

experienced four spells of military rule and several more coups attempts in its 65 year

history.

When Bhutto and the western dominated military prevented the National Assembly

from meeting, East Pakistan, declared independence as the nation of Bangladesh.

“Pakistan’s ultimate political arbiter” and its “most effective institution”. If the

civilian government bungled badly again, it could well again intervene in politics.

Demographic projections weighted heavily in N-11 forecast since without the large

population, even the best growth stories are unlikely ti have meaningful regional and

global impact

O’Neil saw Pakistan’s investor-friendly policies in ease of doing business ratings,

which were higher than many of its peers, as promising foundation for future growth.

Rapid growth of mobile telecom market raised hopes that fast mobile internet would

provide a more favorable environment for entrepreneurship and foreign investments

easing the long standing physical infrastructure deficit.

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Large coal reserves discovered in the south east of Pakistan were also expected to

ease the country energy shortfall

Having entered into an agreement with the IMF in 2008 in exchange for loans to

stabilize the economy in the global downturn, Pakistan had agreed to improve fiscal

performance. As it followed through on commitments to increase income taxes and

import duties and remove fuel subsidies.

The government had recently attempted to broaden its tax base through sales taxes but

met resistance from a range of firms- wholesalers, retailers and exporters- that

habitually evaded taxes

Remittances from Pakistani workers overseas reduced the strain on its current account

deficit

Pakistan’s role in the war on terror severely hindered its economic development

The Asian development bank 20102 assessment noted that Pakistan’s economic

performance revealed how “years of seemingly sustainable growth can in ravel in a

single year” because of underlying structural problems such as the infrastructure

deficit exogenous shocks such as large capital outflows and delayed policy responses.

No matter what changes might take place in the international landscape, China and

Pakistan will remain forever good neighbors, good friends and good partners and

good brothers?

The pattern of trade and investment between Pakistan and China suggest that the US

has little chance of retaining its status as Pakistan’s major ally, said James Brazier of

HIS, a U,S political risk consulting firm

Lawrence Wright argues in The New York Times that eliminating it drastically

reducing military aid to Pakistan would weaken the military’s political power and

willow more possibility for civilian rule.

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Robert Black will, a former U.S ambassador to India, said that military assistance to

Pakistan had failed and should be ended.

This relationship is too important to walk away from…

The stakes are too high for the US to cause a serious rift now. America has no

strategic interest in cold-shouldering a fragile nuclear state battling determined

Islamic insurgents.

1.4 DECISION REQUIRED

Should Pakistan keep on taking foreign aid or suspend it and is this aid helping or hindering

development of Pakistan?

1.5 PROBLEMS

Lack of infrastructure in the country and poor sectorial growth

Political and Economic instability in the country

Lack of Education or Education Deficit

Poor Utilization of Funds and Aids

Increasing external and internal debt of Pakistan

Low GDP growth of Pakistan

Low Investments

Increasing population of the country

Low labor force participation rates in comparison to peers

Increasing unemployment

Low tax generation as compared to other countries

Low literacy rate of the country

1.5.1 EXPLANATION

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AID

Education

Financial

Technology

Skills

The economy of Pakistan struggles because of its low literacy rate of 54% compared to the

neighboring countries like China and Sri Lanka where the literacy rate is over 90%. This implies that

a large part of the population will remain at the low-income level and subsequently the GDP will stay

low as well. There is a dire problem of taxation in Pakistan. The taxes collected are only 10% of GDP.

This is firstly because of the narrow tax base and secondly because of inefficient tax collection

system. Everyone in the country evades paying taxes, strong penalties should be imposed and no

compromise be made on taxes. This nation works by punishment. The current account balance has

most of the time been negative. The export/import ration as of 2010 was 31% which is alarmingly

low. The major reason for persistent trade deficits is because Pakistan is an agro-based economy, it

exports low value goods (agricultural commodities) and imports high value goods (manufactured and

luxury goods).

1.6 CORE PROBLEM

“POOR UTILIZATION OF FOREIGN AID AND LACK OF ACCOUNTABILITY”

TYPE OF AID

Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a

lifetime.

1.7 ALTERNATIVES

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This case can be answered using following stated alternatives:

1. Pakistan should continue taking foreign aid

2. Pakistan should stop taking aid

3. Pakistan should take aid for short term and stop taking it in long run

Each of these Alternatives is explained as follows:

1.7.1 Pakistan should continue taking foreign aid

Nothing is free in this world, if someone helps you with money you need to listen to his

condition and act upon it. According to Pakistan Economic Survey 2010-11 Pakistan this war

on terror has struck Pakistan in a very harm way and it has destroyed our economy way too

much. It is currently estimated that directly or indirectly Pakistan has suffered $67.93bn

because of its role in the war against terror. Pakistan is currently a coalition partner of

America under charter of War and terrorism, so leaving this aid will harm Pakistan current

position as more than half of our armed forces are fighting with these disease and current

economy doesn’t have any room to afford this Cost. Pakistan’s foremost economists, such as

S. Akbar Zaidi and others at the Planning Commission in Islamabad have argued for a

secession of aid as a precondition for restructuring Pakistan’s economy to make it self-

sufficient over time. Already in the first quarter of 2013-14, the current account gap has

widened to $1.2 billion (despite more-than-expected remittances from overseas Pakistanis),

and exceeds the target agreed with the IMF ($900 million). Is trade not aid a solution to the

problem? So far, this is just rhetoric. Rich countries have failed to open their markets to poor

countries. Indeed, they have used aid as a lever to gain access to the markets of the poor

countries.

The fact of the matter is that donors provide aid to meet their strategic and economic

interests. The objective might be to benefit their powerful domestic interest groups or to buy

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political allies abroad or to continue conflicts and civil wars. This is evident from the fact

when U.S reduced its aid significantly following the 1965 war and remained so till the

beginning of the Soviet-Afghan war, when it picked up again and continued till the

conclusion of the war, when it was abruptly stopped.

The above graph has shown the economic assistance and military assistance total by US. So

US helped Pakistan on number of occasion whether it is related to improve infrastructure or it

is on the times of natural disaster. But its poor utilization and corruption eroded the essence

of such aid.

By choosing such option one should keep taking this loan and continue current practices and

hope that one day, Pakistan would never need to take any aid or loan in future.

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1.7.2 Pakistan should stop taking aid

This alternative will enable Pakistan to become self-sufficient. Pakistan will be able to

develop its industrial sector and stand on its own feet, learn from its mistake. Moreover,

opportunities will be provided to the much talented workforce instead of letting them go

abroad. Adding more to this point, government will have more incentive to develop other

modes to increase revenue. But this alternative could also back fire because this option is not

sufficient for the short to medium term to repay current debts and currently, Pakistan does not

possess adequate resources to become self-sufficient i.e. Pakistan will not be able to service

its debt obligations and to pay for its imports.

1.7.3 Pakistan should take aid for short term and stop taking it in long run

“The race of mankind would perish did they cease to aid each other. We cannot exist without

mutual help. All therefore that need aid have a right to ask it from their fellow-men; and no

one who has the power of granting can refuse it without guilt.”

Walter Scott

Take aid to cope up with the current necessary steps to help themselves from getting out of

the race of developing nations. Spend the aids in a manner to create opportunities for

developing and overcoming current problems faced problems. More details are given under

the decision heading.

1.8 DECISION

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Pakistan should take aid for short term and stop taking it in long run

Pakistan has always been dependent on foreign aid since its independence. Our political

leaders have always been concerned with power rather than the national interest at large. Not

taking aid is not an option at least not in the short run because Pakistan relies heavily on the

aid for fulfilling its import requirements and to service its debt. It can be a solution for the

long run when Pakistan decides to become self-sufficient by developing its infrastructure as

well as human capital.

The donors should follow the money and there should be a clear transparency regarding

where the money was used. The process of monitoring and oversight should be strong and

sufficient. This will reduce the corruption. This strategy was successfully implemented in

Rwanda and now the country is on track to meet all of its health-related UN Millennium

Development Goals while non-health related trends are also encouraging. Another way can

be in the form of reimbursement only once the project is complete or when significant

progress has been made. A hotline can be opened where the public can report any fraudulent

activity regarding the use of aid. Both the public and the private sector should be involved.

Public sector must be included because large scale changes in sectors like health and

education cannot be achieved without the effort of the public sector. The donors should not

place restrictions on the use of aid because through this, aid is used in non-productive sector

and sectors that require immediate attention are ignored. Pakistan should have control over

where the aid will be utilized. The aid should be diverted from military aid to economic aid.

Government of Pakistan should direct it towards infrastructure, energy, health, training and

educational programs.

Foreign Aid is not always given in the form of grants. It can also be given in form of loans.

Unlike grants, loans have to be repaid and often carry interest. A large proportion of the tax

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revenue is taken up by the external debt servicing. Debt servicing obligations on external debt

of IMF loans alone was $3.553 billion in the fiscal year 2013. This means that only a tiny

amount is left for the development purpose. The burden on the future generation will also

increase because of the large amount of loans taken today. Taking aid in the form of loans

will hinder future growth and this need to be controlled.

How aid is best utilized can be learned from Europe after the World War II by help of aid

through Marshall Plan to rebuild Europe. The result was that by the time the Marshall Plan

ended in 1951, industrial production in Western Europe had risen 40 percent above the

prewar level. Trade and exports also increased far above what they were before the war.

People had returned to work and their standard of living was rising.1 

So Pakistan, should continue taking foreign aid for almost next 10 years and start utilizing it

for building our nation by spending most of its chunk on Education, Infrastructure, Industry

development, creating employment opportunities and once get stable then should stop taking

further aid and start standing on its own feet. Undoubtedly, U.S. will impose conditions

because nothing is free in this world, but Pakistan should negotiate with them keeping in

view the safety of their own people.

“AID IS NOT TO MAKE US DEPENDENT BUT USE IT TO BUILD NATION AND

BECOME INDEPENDENT”

1 http://www.crf-usa.org/bill-of-rights-in-action/bria-20-3-a-the-marshall-plan-for-rebuilding-western-europe.html The Marshall Plan for Rebuilding Western Europe

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