Pakistan: Turmoil and spillover

Today, we turn to risk #6 in our series of posts on Eurasia Group’s Top Risks for 2012 and answer the most common questions we’ve gotten about it.

Here’s a summary:

Pakistan: Turmoil and spillover  — Pakistan’s economic and security challenges will become more difficult in 2012, driven by weak governance, the spread of extremism, and deteriorating ties with the U.S.. The state will not collapse, but the risk of severe political instability is growing, not just for Pakistan but also the region, as the U.S. withdraws from Afghanistan.

Q- What are the Pakistani government’s biggest problems?

A- There is the weak economy, the government’s deteriorating finances, a hostile military, judges spoiling for a fight over corruption charges, determined militants who have proven they can strike virtually anywhere inside the country, and worsening ties with a key source of direct and indirect financial aid — the United States. Flooding last year did considerable damage to exports of rice and cotton, undermining the country’s balance of payments position. Higher electricity subsidies and renewed pressure for large financial bailouts for cash-strapped public sector enterprises (especially airlines and railways) will also limit the government’s ability to mind the budgetary gap.

The best thing this government has going for it is that neither the opposition nor the military wants responsibility for this mess and aren’t ready to try to force the ruling party from power — at least not yet.

Q- How does the beginning of withdrawal of U.S. troops from Afghanistan feed these problems and what is the risk of spillover?

A- A smaller U.S. footprint in the region will feed financial insecurity in Pakistan, because Washington will probably reduce development aid to the country and roll back Coalition Support Funds, a reimbursement program for Pakistan’s counter-terrorism cooperation. Pakistan isn’t totally dependent on U.S. aid, but it does plan on external financing from the U.S. and other donors when it prepares a domestic budget.

The U.S. drawdown will also add to Pakistani fears that Washington is passing leadership in Afghanistan to India, allowing Pakistan’s long-time rival to encircle the country. That’s not purely paranoia. India’s development and diplomatic presence in Afghanistan is real, and the two governments signed a strategic partnership agreement last year. India also wants to build on traditional ties with the country’s Northern Alliance groups, the Taliban’s most obvious rival for power. That’s why Pakistan will resist calls from Washington to increase pressure on the exiled Taliban leadership living within its borders this year, because the Pakistani military and security services may calculate that the Taliban will again become their most reliable friend inside Afghanistan.

This dynamic is bad for the entire region, because it undermines progress toward South Asian economic integration at a time when India’s fast-growing energy demand, Pakistan’s energy crisis, and Afghanistan’s obvious development needs are only becoming more urgent. The Afghanistan-Pakistan Transit Trade Agreement, for example, probably won’t be extended to include India anytime soon.

Q- Does all of this raise the terrorist threat to India?

A- Whenever the Pakistani government pushes the Pakistani military to attack militants inside the country, those militants have a compelling incentive to try to launch an attack inside India. That’s because when India goes on high alert, Pakistan’s military will always turn its attention to threats from India’s military. Let’s be clear: heightened risk does not mean an attack will happen. The success of a particular attack comes down to the capabilities of the attackers, the effectiveness of Indian security officials and police, and some degree of luck. But this is certainly a threat that India will take seriously

Next up, China and its nervous neighbors.