The neglected agricultural sector provides 23 percent of the GDP and 44 percent of the country's labor force, and non-agricultural activity in the rural areas has been lagging. Textiles and apparel provide 16 percent of the country's exports, and 40 percent of its employed labor force, with small and medium enterprises comprising 80 percent of the total non-agricultural employment. The official unemployment rate, as reported by the International Labor Organization is 6 percent, but this does not take into account the large percentage of the underemployed in both agriculture and the large urban informal sector.
To add to the problem, several provinces are restive and the overall system lacks what economist Simon Kuznets called organic nationalism, pulling together groups separated by language and culture. Fiscal decentralization with grants from the center is based on population size, favoring the large provinces and ignoring differential poverty and revenue-generating capacity.
The only favorable features are the size of remittances by Pakistani workers in the Gulf and elsewhere, currently at $13 billion, and the large number of NGOs, up to 12,ooo in all. Remittances end up in the hands of the rural population, allocated to consumption and housing, thus avoiding government controls. And NGOs, which do the bidding of wealthy international donors, pursue different goals, offer varying and at times contradicting advice, and tend to get in one another's way.
While foreign aid remains plentiful, there is a growing uncertainty of its usefulness in generating growth. Pakistan ranks third among recipients of US foreign aid, with more than $2 billion, and two-thirds of that goes to the military, not very productive.
On the economic front, the relationship with the US, still the major donor, is sufficiently frayed that the ideal arrangement - leaving decisions more in the hands of the recipient under self-conditionality rules - is unattainable. Instead, aid spending is inefficient, moving up and down with foreign-policy objectives of the donor, the importation of inappropriate technology, distorting income distribution and encouraging corruption in official elite circles. In 2012 foreign aid was $2.5 billion out of $240 billion nominal GDP or approximately 1 percent.
Pakistan's obsession with India has meant military resources deployed along the border and budgets heavily skewed towards a possible confrontation with Indiaover Kashmir. Indeed, Pakistan's economy is on a presumptive war footing which renders it difficult to pursue liberalization and diversification in the globalization context. Ironically, though, Pakistan has been more welcoming to business than its more successful neighbors. The World Bank's "Ease of Doing Business" ranks Pakistan in 85th place, above China's in 89th place and India in 133rd place. But insecurity and misgovernance nullify the impact of that welcoming mat.
China remains a close ally and provides aid without visible strings attached. There is a marked contrast with India, which mainly plays the traditional aid game with traditional Western OECD donors.
In the absence of fundamental change, political as well as economic, unlikely under present circumstances, there is little hope Pakistan can emerge from the category as failing state.
