Build Pakistan, Don't Buy Pakistan

If Secretary Clinton is serious about resetting America's relationship with Pakistan, it is imperative that the administration uses all the tools at its disposal. Simply throwing more money at the problem will not solve the critical issues.
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On her recent trip to Pakistan, Secretary of State Hillary Clinton unveiled over $500 million in civilian projects as part of the $7.5 billion aid package the U.S. has promised Pakistan over the next five years. The purpose, according to Secretary Clinton, is to leave behind an era of mistrust and launch a new period of cooperation. Is there evidence that this will this work?

Let's look at the figures. From 2001 to 2009, Pakistan received over $11 billion in aid. The result? A whopping 68% of Pakistanis have an "unfavorable" view of the United States. This is not to say that aid to Pakistan has no benefits, indeed aid projects should continue to play a part in a comprehensive solution. However, if the past 9 years has taught the U.S. anything, it is that throwing money alone at the problem won't solve it.

What else can the U.S. do? Push for closer trade ties with Pakistan. The U.S. is already Pakistan's single largest trading partner and effective trade legislation will therefore help build Pakistan's domestic industry, create employment opportunities, and provide sustainable development. It will also demonstrate to Pakistanis that the U.S. is serious about its long-term engagement with Pakistan and the region.

Unfortunately, not only has the administration done very little on this front, but its only initiative is simply off the mark. The current legislation pending before Congress seeks to create trade preference zones in Pakistan's conflict ridden and destitute Federally Administrated Tribal Areas (FATA). Ideally, it would create legitimate jobs and long-term prosperity in a region widely regarded as an al-Qa`ida safehaven. It is a noble idea, but is flawed for three critical reasons.

First, this bill aims to spur textile and apparel production in FATA. Strangely, however, it excludes critical products from this duty-free eligibility, namely cotton knit tops and cotton trousers, which make up 25% of the total value of U.S. imports from Pakistan. As the Association of Textile Importers points out, excluding these products is an obvious disincentive for new investment in apparel in Pakistan's border regions.

Second, Pakistan is able to compete against China in the textile-processing arena due to its quick turnaround time on orders and not because of lower costs. Not only is the FATA region geographically isolated from ports and the cotton producing regions of Pakistan, but it also lacks secure rail or road links to the rest of the country. Simply put, apparel produced in the ROZ would cost more and take longer to arrive at the intended destination--eliminating Pakistan's comparative advantage.

And third, prior experience with special economic zones has demonstrated that governments consistently need to provide higher levels of infrastructure and security than the domestic norm in order attract foreign investors. Given that the FATA region remains embroiled in conflict and any further expenditure in the region would strain an already fragile government budget, the prospects for a successful ROZ are limited.

Congress must rethink this legislation to ensure that it has real benefits for the Pakistani population.

First, trade benefits should build on existing capacities and not create new industries. FATA boasts vast, untapped mineral resources including marble and semi-precious stones whose extraction is limited due to a lack of equipment, infrastructure and investment. However, despite these challenges and constant violence, there is a committed group of entrepreneurs who have continued their business operations in this arena. Focusing trade preferences on products indigenous to FATA would bring more sustainable employment opportunities as well as direct economic benefits to the region.

Second, the U.S. government should make a concerted effort to pair aid programs with trade preference programs. For example, the State Department recently announced a $2 million grant to provide modern machinery for marble mining in some parts of FATA. Aid which is targeted at entrepreneurs and developing the private sector would help complement the trade benefits and would enable FATA to develop a business sector that is competitive on national and international levels.

Finally, the U.S. should cut tariffs on top Pakistani textile exports. As of now, the average tariff rate on the top ten Pakistani exports to the US is 11%--an obscenely high figure for a country which continues to spend its money and shed its blood in the war on terror. Cutting tariffs will increase Pakistan's competitiveness, create jobs, reduce instability, and have a positive effect on perceptions of the U.S. in Pakistan.

If Secretary Clinton is serious about resetting America's relationship with Pakistan, it is imperative that the administration uses all the tools at its disposal. Simply throwing more money at the problem will not solve the critical issues facing Pakistan. As a Pakistani trade advisor said recently to an American audience: "We are not interested in aid; we are interested in trade."

Shyam Sundaram is a development consultant with Dalberg Global Development Advisors based in Washington, D.C. and Albar A. Sheikh is a counter-radicalization analyst at Navanti Group.

This post solely expresses the views of its authors and may not represent the views of Navanti Group or the views of any of its clients.

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