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  1. Home
  2. / Markets
  3. / Regulation

Can Pakistan, Now 70, Make Up for Lost Time?

India and Pakistan shared a similar rate of growth for the first five decades of their development. What changed?
By ALEX FREW MCMILLAN
Aug 14, 2017 | 10:00 AM EDT

Donald Trump's nuclear war of words with North Korea has distracted attention from Asia's original nuclear odd couple, nations previously thought to have the itchiest fingers on the red button.

Pakistan celebrates its 70th birthday today -- in style. It has hoisted the highest and largest flag in Asia over its border crossing with India at Wagah. And the skies over the capital, Islamabad, are hosting the largest air show in the country's history on Monday, as citizens harassed by days of jet practice overhead could attest.

The day marks seven decades since Pakistan's partition from India, which caused the largest migration of people ever seen on the planet. As the British Raj dissolved, some 11 million people were forced to cross the Radcliffe Line that separated Muslim majority Pakistan from Hindu India. The two nations became three when Bangladesh split off in 1971, and countries that began in racial tension retain their mistrust to this day.

Although India and Pakistan became new nations at the same moment, they celebrate their birthdays one day apart.

That's because the last British viceroy of the Raj administered the independence oath first to Muhammad Ali Jinnah, Pakistan's first governor general, on Aug. 14, then sped to Delhi to swear in Jawaharlal Nehru, India's first prime minister, on the stroke midnight as Aug. 15 began.

In Pakistan, the anniversary is already marred with violence. Islamic State claimed responsibility for a suicide bomber on a motorcycle, who killed at least 15 people in Quetta on Saturday by ramming his bike into an Army truck next to a bus stop. The stated aim was to disrupt the Independence Day celebrations.

Trump and Kim Jong-un are the new kids on the block when it comes to promises of Armageddon. Pakistan and India have been at odds over Kashmir since the very formation of their separate states, and still do not to see eye to eye on most issues. More like eye for an eye.

And Pakistan and India have around 120 nuclear warheads each, according to the International Campaign to Abolish Nuclear Weapons. Each country has been building up its arsenal in recent years, the organization says. 

Pakistan has a new leader, Prime Minister Shahid Khaqan Abbasi, who replaces Nawaz Sharif, now charged with corruption. None of the country's prime ministers have, in fact, completed a full, five-year term.

Pakistan is also one of Asia's forgotten investment destinations. Religious intolerance and a habit of harboring extremists has held it back. It doesn't help that Pakistan has made itself a difficult customer. Even its trade with its most obvious partner is hampered by protectionist policy.

Bilateral trade between Pakistan and India was just $2.2 billion last year, meaning Pakistan deals less with a nation of 1.3 billion than it does with Bangladesh, Sri Lanka and Nepal. But that's in part because Pakistan maintains a "negative list" of products, banning the import of 1,200 goods from India -- including cars, tooth brushes, diapers and cricket bats.

Companies often send goods between the two nations by indirect means, using shipment points in the Middle East such as Dubai. Were all of that trade done directly, the combined value of shipments would likely reach around $10 billion.

During the first five decades of their development, India and Pakistan shared a similar rate of growth. But since the start of this century, India has been opening up its markets -- and has benefitted dramatically as a result, while Pakistan remains in many ways walled off, economically, from the world.

Pakistan is, however, a sleeping giant. Its population of 185 million people produce an economy standing at $221 billion now. 

India's economy has the highest growth rate of all major nations, forecast at 7.9% in 2016, and if Pakistan can implement some of India's reforms of opening up its economy, it could soon be on that track, too.

China is looking to fund that change. The first investment in its highly touted One Belt One Road strategy was to provide funds for the construction of a hydroelectric plant in Pakistan. In fact, Pakistan may be the biggest beneficiary from the 65-nation initiative, with Beijing prepared to pump $55 billion into the country.

The Pakistan Business Council anticipates that Belt and Road projects could account for 20% of Pakistan's GDP over the next five years. That would help boost growth by about 3 percentage points, a sizeable leap from its current rate of 5.2%. It is already likely to benefit from growth of 5.1% or higher every year between now and 2030, according to Oxford Economics. 

China could propel Pakistan into a new age of relative prosperity, and help it regain some of the ground lost on India.

"China is the only game in town," Khurram Dastgir Khan, Pakisan's commerce minister, said according to the Financial Times. "Pakistan has not been part of the world for a long time. We were in a dark bubble, and we are only just emerging."

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At the time of publication, McMillan had no positions in the securities mentioned.

TAGS: Investing | Global Equity | Regulation | Markets | Emerging Markets | Economic Data | China | Economy | Politics

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