Pakistanprivate Investment Initiative
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RECOMMENDATIONS FOR THE Pakistan Private Investment Initiative Dustin Cathcart, Meredith Gloger, & Aaron Roesch John F. Kennedy School of Government Harvard University May 2012 A Policy Analysis Exercise submitted to Office of the Coordinator for Economic & DevelopmentAssistance U.S. Embassy, Islamabad, Pakistan U.S. Department of State PAKISTAN PRIVATE INVESTMENT INITIATIVE HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE ACKNOWLEDGEMENTS Above all, we would like to thank our principal cli- ent, Vinay Chawla, Deputy Coordinator for Eco- nomic and Development Assistance at the U.S. Embassy in Islamabad. As our main point of con- tact for this project, we owe him a huge debt of gratitude—and we have sincerely enjoyed work- ing with him. (He also housed us for two days in Islamabad, so we are extremely grateful for that, as well.) We further thank Ambassador Cameron Munter and the U.S. Embassy in Islamabad for encouraging and supporting this research project. We also want to thank Nadia Naviwala, who first introduced us to Vinay, and to many other essen- tial contacts for this project. Thank you as well to Mark Karns, Vinay’s counterpart at USAID, who has been exceptionally helpful throughout this process. Thanks are due to our advisor, Professor Meghan O’Sullivan, as well as our Policy Area Concentra- tion seminar leaders—Profoessors Monica Toft and Stephen Kosack. Their feedback throughout this process has been invaluable. We wish to thank Ali Siddiqui and Steve Smith, and everyone at JS Private Equity and JS Bank, for their unbelievably generous support during our trip to Pakistan—and, in particular, an immense thank you to Imran Shaikh, whose hospitality truly knows no bounds. We also sincerely appreciate the assistance of Nadeem Hussain, Ali Jameel, Kalsoom Lakhani, Vally Khamisani, and the Truman National Securi- ty Project Fellows, who were instrumental in help- ing us set up so many excellent interviews. And, of course, thank you to everyone, in the States and Pakistan, who met with us during our research, and who shared their insights and perspectives on the Pakistan Private Investment Initiative—we learned so much from, and truly enjoyed, discussing this project with so many in- spiring people over the last few months. Cover Photo: Clifton Beach, Karachi, Pakistan Credit: Benny Lin, January 25, 2010 Inset Photo: K2 , Gilgit-Baltistan, Pakistan Credit: Extreme Design Studio (http://www.extremestudio.ro) 2 3 PAKISTAN PRIVATE INVESTMENT INITIATIVE HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE CONTENTS B ACKGROUND Background ....................................... 5 Promoting Private Sector Development Pakistani border post in November. In October 2009, President Obama signed into law the Enhanced Partnership for Pakistan Act. The legis- The U.S.-Pakistan relationship, however, and Ameri- Executive Summary ........................... 6 lation, better known as the Kerry-Lugar-Berman (KLB) can engagement in the country more broadly, remain bill, introduced a comprehensive policy framework for crucial to ensuring Pakistan surmounts the immediate Overview .......................................... 10 U.S. assistance to Pakistan, tripling development aid challenges it faces—which are substantial. Vital U.S. to $7.5b over five years. As part of this package, the interests and the economic integration of South Asia re- United States prioritized support for private sector de- quire a stable Pakistan—but looming social, economic, Market Analysis ................................12 velopment through trade and investment. and political upheaval could compromise any hope for – Economic Challenges...................... 12 long-term stability. – Development Approaches ................ 16 Launching a U.S.-sponsored investment fund to sup- port Pakistan’s private sector first garnered attention – Targeting Investment ........................ 20 when Secretary Clinton, in partnership with the Over- Investing in Stability –– Market Sectors ............................... 21 seas Private Investment Corporation (OPIC), pledged The U.S. Government has various tools at its disposal— to provide $50mm for private equity investments in aid, trade, technical assistance. But one that has been –– Market Segments ........................... 25 small- and medium-sized enterprises (SMEs) during the given relatively little emphasis in Pakistan has been in- U.S.-Pakistan Strategic Dialogue in March 2010. That vestment. U.S. investment, however, has the potential to Operational Analysis ....................... 31 July, Senators Lugar and Kerry introduced bill S. 3665, both stabilize the economy through effective economic – Model & Strategy ............................... 31 the Pakistani-American Enterprise Fund Act. The bill, development, and to widen and deepen American ties inspired by the 1989 Support for East European De- to powerbrokers in Pakistan—especially those outside – Structure & Implementation ............... 31 mocracy (SEED) Act and the 1992 Freedom Support the traditional political establishment. – Complements & Alternatives ............. 38 Act, which together established 10 ‘enterprise funds’ throughout Eastern and Central Europe after the Soviet Pakistan’s private sector is essential to any strategy for collapse, authorized an independent fund to provide long-term engagement—bolstering it will increase eco- Risk & Impact Analysis ...................... 46 loans and equity to private Pakistani enterprises, in or- nomic stability, hamper terrorist recruitment, and draw der to create jobs and counter militant extremism. in a wider array of political allies. Recommendations .......................... 50 – Key Features .................................... 52 In December 2011, Congress chose not to authorize The country’s economy is beset by stagflation and a the $60mm allocation for establishing the Pakistani- lack of competitiveness. Energy shortages and rising American Enterprise Fund. Despite this setback, how- fuel and food costs are closing factories and pushing Conclusion ....................................... 56 ever, the U.S. Department of State, still committed to more Pakistanis below the poverty line. Private invest- strengthening support for Pakistan’s private sector, ment is the engine that drives economic growth; the Appendices ...................................... 58 began surveying alternative models for promoting job middle class expansion that often accompanies such growth and investment in SMEs. This paper examines growth will play an important role in promoting econom- – Appendix A – Growth Diagnostic .... 58 these alternatives and makes recommendations for ic stability, which undergirds political stability. A robust –Appendix B – Potential Partners ..... 61 which to pursue, and how best to pursue them. middle class provides a constituency for free markets, –Appendix C – Interviews .................. 65 effective governance, democracy, and the rule of law. –Appendix D – Acronyms .................. 67 Looking Beyond 2014 As well, job creation is an important tool for countering The U.S. partnership with Pakistan is one of the most violent extremism. A burgeoning youth population— strategically significant bilateral relationships in the an alarming 68% of all Pakistanis are under the age of world, and it will continue to be so long after the ten- 30—is engulfing Pakistan’s urban areas, where a lack of tative withdrawal of U.S. forces from Afghanistan in jobs, education, clean water, and access to justice cul- 2014. Pakistan, located at a geopolitical crossroads, tivate a breeding ground for radicalization. An invest- is locked in an enduring rivalry with neighboring India ment fund can help grow businesses, which will create and holds close alliances with China, Saudi Arabia, and new jobs. Generating employment is essential for re- the broader Muslim world. Its geographic significance ducing poverty and lessening the tensions that terrorist is compounded by its demographic composition and networks exploit to radicalize marginalized populations. powerful military. Pakistan is a nuclear state, home to the world’s second-largest Muslim population, and is Finally, direct engagement with business leaders will projected to become the fourth-most populous country form new alliances in Pakistani society. The value of in the world by 2050. diplomacy outside the traditional halls of power has become increasingly clear, especially after last year’s Several events in 2011 tested the relationship between ‘Arab Spring’ uprisings. Building broader, stronger re- Pakistan and the United States—in particular, the Ray- lationships throughout Pakistan is in the American inter- mond Davis incident in January, the killing of Osama bin est, helping U.S. policymakers to better prepare for an Laden in May, and the accidental helicopter attack on a unpredictable future. 4 5 PAKISTAN PRIVATE INVESTMENT INITIATIVE HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE EXECUTIVE SUMMARY The U.S. Department of State’s Coordinator for Eco- discourage investment in Pakistan, it can still have vari- MAJOR FINDINGS RECOMMENDATIONS nomic and Development Assistance in Pakistan has ous, multiplicative positive effects. 1. There is an urgent need for financing among Pakistani 1. Establish a vehicle to address Pakistan’s immediate proposed the creation of a Pakistan Private Investment businesses and entrepreneurs. financing needs, but acknowledge its limitations—ul- timately, governance failures constrain private invest- Initiative (PII), to be implemented by