PAKISTAN: POLITICAL ECONOMY AND POST-2000 DEVELOPMENTS---7

the overall growth rate, which stagnated at around 4%. A drought also affected agricultural

performance at this time, accompanied by emerging scarcities in irrigation resources and the

failure to develop any major hydro-electrical projects.

Efforts at widening the income tax base proved unsuccessful, in the face of corruption in the

revenue bureaucracy, lack of documentation in the widely diffused informal sector, and

resistance by the rural elite to taxation of agricultural incomes. Under pressure from the

international money lending agencies for meeting interest payments on external debt, the

government started a process of reducing subsidies and moving towards user charges in

utilities. It then resorted to indirect taxation by introducing a high general sales tax, at the rate of

15%, thereby transferring the revenue and fiscal burden on to the poor, since further state

income could not be derived from the better-off through direct taxes. The higher input costs that

both agriculture and industry began to experience made them uncompetitive with economies

like China and India, where producers continued to enjoy substantially subsidized energy rates.

Also, other low income countries, like Bangladesh and Vietnam, threatened to erode Pakistan’s

competitiveness in the staple industry, cotton textiles, especially in the value added segments of

apparel and made-ups. Margins there tended to be higher than in the commoditized yarn and

grey cloth segment, where the bulk of Pakistan’s investment in textiles remained concentrated.

Despite these deep-seated problems, Pakistan’s economy experienced a considerable

turnaround after the September 2001 attacks on the World Trade Centre in New York City. With

the American invasion of Afghanistan and the ensuing campaign against ‘Al Qaeda’, Pakistan

again became a front line state in geopolitical conflict, and an essential ally for meeting western

military objectives. Once again, the economic benefits that it obtained were a pittance of the

strategic contributions that it was called upon to make. It has never been the destination of any

sizeable investment flows from the West, in comparison with the substantial amounts directed

towards first East Asia, then South-east Asia, and more recently India. From 2002, some foreign

assistance was resumed, and the more onerous sanctions were lifted; but the real dynamic

behind the turnaround were the inflows of money from expatriate Pakistanis, in the face of

greater accountability and vigilance over money laundering and the funding of ‘terrorism’

networks. Another source of inflows was the bounty money paid to the Pakistani military for

handing over ‘terrorist’ suspects to be sent to concentration camps and torture facilities, run by

or for the United States. Investment funds have also reached Pakistan from Arab oil economies,