Pakistan’s political crisis: The limits of U.S. leverage

Pakistan marked the start of 2011 with a series of events that signal another year of turmoil.  In the span of little more than a week, Pakistan’s governing coalition fell apart and then reunited in equally dramatic fashion, a secular-minded provincial governor was assassinated, and progress on critical economic reforms was rolled back, putting more than $3 billion in IMF funds in jeopardy. Within days, U.S. Vice President Joseph Biden arrived unannounced in Islamabad, offering his assurances of sustained U.S. support. The turmoil illustrates two hard realities for U.S. policy in Pakistan.  First, despite commitment from Pakistan’s technocratic economic team, its leaders have yet to find a way around the political roadblocks standing in the way of urgently needed economic reforms. And second, the deep pockets of the United States’ civilian program in Pakistan-in the form of $1.5 billion a year in development assistance-don’t seem to contain the leverage to push those reforms through.

Pakistan’s difficult start to 2011 will continue to exact a heavy toll on the idea of effective civilian government in the months and years ahead. The assassination of Salmaan Taseer will likely have a chilling effect on the willingness of smart, capable men and women to serve in public office and to speak their minds openly. The week’s political brinksmanship calls into question the ability of the ruling Pakistan People’s Party to move critical economic reform legislation through Parliament. Prime Minister Yousaf Raza Gilani succeeded in holding his governing coalition together only by undoing an unpopular increase in fuel prices and by deferring indefinitely consideration of a contentious tax reform package.

Pakistan’s international donors lamented the terms of the deal. U.S. Secretary of State Hillary Clinton said, "It is a mistake to reverse the progress that was being made to provide a stronger economic base for Pakistan."  An International Monetary Fund (IMF) spokeswoman said the fuel price subsidies would mainly benefit large corporations and the wealthy. The IMF’s view matters, because Pakistan has been waiting for the remaining $3.5 billion from an $11.3 billion bailout package that kept Pakistan’s economy from collapse in the wake of the 2008 financial crisis. But that support carries explicit conditions, including progress on both energy pricing and tax reform.

For months, Pakistan’s technocratic economic policy team has signaled its commitment to progress on reforms.  In a major speech delivered to the Pakistan Development Forum in November, Pakistani Finance Minister Dr. Abdul Hafeez Sheikh identified reducing energy subsidies and tax reform as two of his top six priorities. Unfortunately, the real challenge lies not in diagnosing the problem or even in prescribing solutions, but in addressing the treacherous politics of reform.

U.S. policymakers should note well this series of events and remember a simple lesson. Billions of dollars of U.S. assistance-and a sustained diplomatic focus on the reform agenda-have not given the United States the ability to dictate the outcomes of Pakistan’s political process. This is inconvenient for the United States, but not surprising. For the United States and for other major donors in Pakistan, money has never brought leverage.

Pakistan’s energy sector demonstrates the difficulty in achieving the kind of influence donor countries would like to have. For decades, the World Bank and the Asian Development Bank-armed with sums greater than the current Kerry-Lugar-Berman U.S. aid package-have urged the Government of Pakistan to finally reduce the price subsidies on electricity, to no avail. Time and again, project documents cite the same problems, the donors recommend the same solutions, the government of Pakistan promises to implement the same reform, the government breaks (and donors lament) the same promises. Meanwhile, the basic politics maintaining the status quo have not changed-there are too many reaping the benefits of subsidized power, and ordinary consumers feel they aren’t getting service that warrants paying more.

When Vice President Biden visited Islamabad this week, he promised that the United States would "keep the entire commitment" of the pledged $7.5 billion in Kerry-Lugar assistance. This assurance will surely be welcomed by Pakistan, and it’s a fair reflection of Pakistan’s short-term and long-term importance to U.S. interests. Adjusting where and how aid is spent-including by taking the requests of the Pakistani government into account-is necessary to respond to the real needs on the ground. (On that note, we applaud the decision to put $190 million into direct smartcard grants to help Pakistani flood victims rebuild their lives). But U.S. policymakers should not expect the aid money to give the United States greater influence on economic reforms in Islamabad. This is not the point, nor the potential, of U.S. aid.

It’s true that Secretary Clinton and her diplomatic team have the ability to work with Pakistan’s good technocrats in nudging along economic policy conversations — including by getting the right political actors around the table. However, it is unrealistic and impolitic to expect officials in Pakistan to take often politically toxic actions in return for U.S. aid payments.  That is a hard reality increasingly understood by many in the administration and in Congress.  The question is whether aid money in some cases might help grease the wheels so that the Pakistani political process performs better.  Could U.S. aid to Pakistan sometimes support the difficult politics of economic reform — as opposed to mostly providing a short-term band-aid to help the country muddle through its current mess?

The key point is that certain aid projects can carry both direct benefits (better services and infrastructure for the people of Pakistan) and indirect benefits (incentives for the Pakistani political system to achieve greater results with their existing resources). Here are a few examples to consider: U.S. investments in energy generation and transmission capacity can be linked to public commitments to raise electricity tariffs  only when brownouts have been reduced below an announced benchmark. In this grand bargain, as service quality improves, tariffs would go up, and another round of aid investments would be delivered. In another case, U.S.-financed tools can be deployed to help Pakistani citizens hold their government accountable-with regular reports on simple indicators of development, for example, or an easily accessible database of all development projects funded from internal or external resources.  Or a pilot Cash on Delivery aid contract in one or more Pakistani provinces could put levers in the hands of education reformers and help their ideas gain traction.

A very bad start to 2011 in Pakistan has left the country shaken and thrown the politics of reform into even greater doubt. Gilani’s decision to jettison energy and tax reforms jeopardizes Pakistan’s IMF program and raises questions about how the United States aid package should move forward. However, last week, last year, and forever more, the hard realities of Pakistani domestic politics have trumped and will trump any pressure from external donors. Any strategy grounded in realism requires knowing first what money can and cannot buy.

Nancy Birdsall is president of the Center for Global Development and chair of the CGD Study Group on a U.S. Development Strategy in Pakistan. Wren Elhai is a research and communications assistant and Molly Kinder is a senior policy analyst at the Center for Global Development.