Which straw is the last one?

On Saturday, I wrote about the black mood that’s gripping Pakistan, with many here asking whether the country faces a descent into chaos.

So, how serious is the threat?

Very, if you believe the 2007 Failed States Index, which places Pakistan twelfth, only a couple of points behind its neighbour, Afghanistan. The country was 36th in 2005.

Pakistan’s decline is unsurprising. It sits on the modern world’s key geopolitical, religious and ethnic fault lines. Any country that borders Afghanistan, India, China and Iran is in for a hard time. Add in disastrous domestic politics and a dose of counter-productive international meddling and you’re left with a toxic brew.

But three less obvious drivers have caught my eye during a visit here. Each of these ‘hidden drivers’ (I use the term loosely) suggests ongoing trouble for the country, even if its geopolitical problems begin to ease.

First, there’s the country’s rotten demography – or more accurately the interaction between its demographics and rotten policy. Last week, I met Durre Nayab, a demographer at Pakistan’s Institute of Development Economics whose work draws heavily on the research of my sometime co-author, the economist David Bloom.

Bloom’s work (summarised here) demonstrates the demographic dividend countries can collect while they have young populations. This dividend, he has shown, accounts for around a third of the East Asian economic miracle. But it is only on offer if countries can educate their workers, employ them productively, and give them opportunities to save. At present, Pakistan does none of these things.

Durre Nayab:

The demographic dividend is inherently transitory in nature. Due to lack of prior planning, Pakistan has wasted the first 15 years of the opportunity demography has offered it…Time is running out to put appropriate policies in place, the absence of which may result in large-scale unemployment, [and] immense pressure on health and education systems.

In short, a socio-economic crisis may take place making the demographic dividend more of a demographic threat.

Then add the second hidden driver – the growing impact of scarcity on the Pakistani working and middle classes.

Pakistan’s newspapers, at the moment, are full of complaints about rocketing food and energy prices. The price of flour has more than doubled in recent times, a situation the government is trying (and failing) to control. Electricity is also in short supply, due to a failure to build new power stations in line with rising demand. A World Bank report published a few days sums up the situation.

Pakistan is one of the most water stressed countries in the world, and water resources are depleting rapidly. With its water infrastructure in poor condition… Pakistan has to invest around Rs60 billion (US$1 billion) per year in reservoirs and related infrastructure over the next five years. In the energy sector, the country will face severe power shortages of around 6,000 megawatts by 2010. Similarly, inefficiencies in the transport sector cost the economy between 4-5 percent of GDP each year.

The report is extremely pessimistic about Pakistan’s ability to correct these deficits.

Three factors are causing this problem. First, there are global factors in play, as my colleague Alex Evans has extensively documented. Energy prices are high; food and oil prices are now linked; and water scarcity is certain to increase. Climate change adds another layer of threat, both globally and within Pakistan (recent electricity shortages have been partly been down to a lack of water for hydropower).

Second, there is the Pakistan government’s total failure to develop infrastructure. More people, rising living standards, and falling prices for energy-hungry appliances have all increased demand for energy, but rulers have failed to respond to clear warnings of trouble ahead. Instead, the government is engaged in what will surely prove to be a futile attempt to keep prices low through subsidies and controls. The country is already struggling to pay its fuel bills, with the government budgeting for an oil price at less than 70 dollars per barrel, and suffering as it heads ever higher.

And finally, there is the impact of unrest, instability and out-and-out sabotage. John Robb highlights the potential damage that this type of tax can do to a fragile economy in his book, Brave New War (drawing on this analysis by James Harrigan and Philippe Martin). “Singular terrorist events (black swans), such as 9/11, do not affect city viability,” Robb writes. “The costs of a singular event dissipate quickly. In contrast, frequent attacks (even small ones) on a specific city can create a terrorism tax of a level necessary to shift to a [lower] equilibrium.” In other words, the city will be out of kilter – literally not worth living in – until it shrinks.

This effect may be underway in Pakistan’s urban centres, and possibly in the country as a whole, as insurgent attacks combine with political instability and sheer unrest to erode the country’s infrastructure. According to the Daily Times:

Violence has grown in the cities most hit by load-shedding and outages. Karachi and Hyderabad are the two cases in point. After the assassination of Ms Bhutto on December 27, there was anger and fury which vented itself on public property. Not all of the protesters were the workers of the PPP. Some were common criminals looting banks, but a large number were ordinary citizens habituated to violence through Karachi’s most cruel period of power outage in the summer of 2007.

And finally, a third hidden driver: the worrying role being played by the Pakistan army, once a source of national stability and pride. It is no secret that the army has hollowed out many, if not all, of the country’s political institutions, but less well understood is its growing economic dominance, a phenomenon excellently explored in Ayesha Siddiqa ground-breaking recent book, Military Inc – Inside Pakistan’s Military Economy (allegedly banned in Pakistan, but I found a copy on sale in a Lahore hotel).

The army, Siddiqa reports, controls bakeries and banks, fertilizer plants and television channels, shopping malls and motorway toll booths. It is also a massive land owner, co-opting state land and acquiring private land, sometimes by coercion. And of course, it can use its political and military might to protect its investments, while using its wealth to gain permanent autonomy from civilian control.

The growth of the military’s economic empire… was parallel to the increase in the organization’s political power and influence in national decision-making. As the military consolidated itself into a class, it gained greater confidence to exploit national resources and acquire greater opportunities, which benefited it as an institution and also filled the pockets of the senior generals…

The crystallization of these economic interests is a major determinant to the future of democracy in the country.

So you have an army that is engaged in banditry…hordes of alienated young people…an economy that is vulnerable to scarcity and disruption… in a country that is already prey to many other stresses. It’s a sobering outlook. For a couple of years, I suppose, the country can continue to muddle through. But corrective action is now desperately needed.

After all, you never know which straw is the last one until you hear the camel’s back snap.