ishrat husain : economy of pakistan - past, present and future keynote address by mr ishrat husain, governor of the state bank of pakistan, at the conference on islamization and the pakistani economy, washington dc, 27 january 2004. * * * in this shrinking global village internet chats, cable tv, talk shows and transmissions through satellite dishes have made perceptions more powerful than realities in influencing public opinion. there is a widely held perception in pakistan - right or wrong - that the popular american view of the u. s. s. r. as an evil empire and communism as a threat to economic and social stability of the world is beginning to resonate itself with islam replacing communism and pakistan and other muslim countries, standing in for the ussr. those who hold this perception point out, as an example, to the recent council of foreign relations asia society task force report which aptly sums up the popular american view about pakistan in the following sentence : “ pakistan presents one of the most complex and difficult challenges facing us diplomacy. its political instability, entrenched islamist extremism, economic and social weaknesses and dangerous hostility towards india have cast dark shadows over this nuclear - armed nation ”. it is in this context that the woodrow wilson center deserves our commendation for organizing this conference to explore in depth one of the elements of this newly emerging conventional wisdom about islam and pakistan - although each one of the components of the above statement deserves further analysis and discourse to sift out the facts from myths. i hope that the candid discussion today will enlighten many of us, clarify a number of issues and debunk some of the popular myths surrounding islam and pakistan ’ s economic direction. i have chosen to focus my remarks today on the one aspect of pakistan and islam that is, in my view, hardly discussed, least known but creates a lot of jitters in the u. s. this issue has received increased importance since the elections of october 2002 when an alliance of religious parties won power in the province of nwfp. i propose to walk you through the past and current trends of pakistani economy, sketch the future direction and offer my own assessment of how the adoption of an islamic economy, if it indeed happens, will affect pakistan ’ s future. this paper is divided into six sections. the first section deals with the past achievements and failures of pakistan ’ s economy. the second section presents a synopsis of economic performance during 1999 - 2003 - a period of intensive restructuring and

since 2001 is undergoing a phase of consolidation and is facing some teething problems. but this devolution has an in - built capacity to respond to the demands of the common man for obtaining basic services such as security, education, health, water supply, sanitation, etc. this system is facing fierce resistance from all those groups who had vested interests in the old centralized, highly personalized top - down system of administration. the system needs to be carefully nurtured, monitored, its structural and operational deficiencies and weaknesses removed, but any attempt to dislodge it or make it impotent will adversely affect the access of the poor and disenfranchised to public expenditures and public goods. finally, most important among all the factors that will impinge upon the future shape of pakistan ’ s economy is accelerated investment in human development. in fact, this underdevelopment of human capital is the most daunting challenge facing pakistan. high population growth - one of the fastest in the world - has given rise to a young dependent population and increased unemployment among the youth. one half of the population is illiterate making it more difficult to impart new skills to the everburgeoning labour force. the average years of schooling remains quite low. investment in higher education, science and research has been almost insignificant and has hurt the competitiveness of pakistani firms in world market. low level of female education and literacy have made one half of the population less than adequately prepared to participate in the domestic labor markets and deprived the country of many externalities that arise from a literate female population. a comprehensive package of educational sector reforms, a medium term health strategy, fiscal restructuring and devolution of administrative and financial powers to local government, public - private partnership in delivery of social services, community involvement and participation are some of the ways that need to be put in practice with full commitment. the above survey of pakistan ’ s past, present and future should reassure the western community that if and when islamization of the economy takes place it will not pose a threat to pakistan ’ s journey towards stability, growth and poverty reduction. along with good policies, good governance and good luck it will create conditions that are conducive for growth and poverty reduction pakistan is very much and will remain integrated into the world economy and fully utilize the opportunities thrown open by globalization to benefit its population. table ii changes in key macronomic indicators october 1999 september 2003 gdp growth rate inflation fiscal deficit / gdp