The Contrarian Case for Pakistan’s Upside

Pakistan is not often in the Western news, but when it is, it is almost always negative. That is certainly the case with the arrest this week of former prime minister and leading opposition figure Imran Khan, on corruption charges widely seen as a pretext for Pakistan’s military to prevent him from winning elections scheduled for the fall. As expected, his arrest triggered widespread protests, and that in turn will almost certainly worsen an already critical political and economic crisis.

You would be hard pressed to find another country with a more dismal global reputation than Pakistan. Even before Khan’s arrest, In the past few months alone the country has been in the grim spotlight: on the brink of defaulting on its foreign loans, a bailout package from the IMF highly uncertain, devastating floods impacting the 2022-2023 harvest, rampant inflation above 30%, currency depreciation, dwindling foreign reserves, and continued terrorist attacks stemming from the multi-decade dance with the Taliban. With all of this, it is increasingly common to hear some version of the refrain that Pakistan is a failed sate and “moving toward anarchy.”

The result is that few if any foreign investors and governments have much inclination to involve themselves deeply. For a time, China poured billions into the country as part of its Belt & Road initiative, but that has since largely dried up. The Saudi government and the sheikhdoms of the gulf have also provided financial lifelines, but in the past months they too have signaled that the days of such largesse are done. As for the United States, it had been willing to provide limited aid to Pakistan, especially to the military, when it was actively engaged against the Afghan Taliban, but since the U.S. withdrawal in 2021, that too has waned and the U.S. is now focused more on better relations with India, Pakistan long-time and often bitter rival.

Yet, underneath the grim macro and political realities, there is another dynamic at play. Pakistan is the fifth most populous country in the world with 230 million souls, a median age of barely 22 and two-thirds of the population under the age of 30. That means unlike most of the world, it has a favorable demographic future. That is, if it manages to navigate through its macro and political morass. It has multiple urban centers but is not yet truly urbanized, ranging from the chaotic and decaying megalopolis of Karachi to the more sedate boulevards of the capital city Islamabad. And unlike, say, Nigeria, where the ethnic divisions and decades of corruption mean that it well-nigh impossible to treat the country as one unified market for goods and services, Pakistan is one common market even with its various tribal divisions.

Read More: Imran Khan on His Path to Return to Power

Pakistan also has a real private sector, one that has not been fully crowded out by the military as in, say, Egypt, and an informal economy that doesn’t flow through either the government or the state banks. That is a negative for a government that can barely collect taxes and is starved for foreign reserves, but it means that the country is more functionally dysfunctional than at first glance it appears. That informal economy (which by many estimates accounts for 75% of the jobs in the country and would add more than 50% to official GDP) is creating a growing ecosystem of financing that does not involve state banks, and creating a burgeoning e-commerce system that will reach more than $6 billion this year, making it one of the top 50 e-commerce countries in the world. Much of that activity isn’t captured by official statistics.

One area that is especially intriguing is that most of e-commerce is Pakistan is now settled by cash on demand rather than digital payments. Even with that massive headwind, it is a multibillion dollar market. Now, with smartphone usage surging off a low base, there is the opportunity to replace cash on demand with digital payments that are managed not by banks but by nimble fintech applications. Other countries such as Kenya have already shown the power of smartphone digital payment systems that are not centered on banks, and that can unlock material benefits for millions without any of that showing up in official data. That is true as well for digital delivery of education and learning for young people without that showing in official education statistics.

In a world where capital seeks opportunity, it is entirely appropriate to compare and contrast various countries. And at least in terms of opportunities for growth and change, Pakistan has more potential than many, and significantly more than its negative global reputation would suggest. To be clear, I am not writing this as an entirely neutral party. I have a handful of investments in Pakistani start-up companies (mostly in consumer and financial technologies) and have clearly acted on the thesis that there is unmined potential. But I’ve done that because I honestly believe in that opportunity. Either that will prove accurate or not. Until now, to be fair, very few investors have made much money from Pakistan, and many have lost quite a bit.

But the idea that Pakistan is uniquely messed up should be challenged. Yes, it has a multi-decade legacy of the military ruling both behind the scenes and directly. But it also has that real and dynamic private sphere that is not only seeing a start-up and new business ecosystem that has attracted hundreds of millions of dollars a year for the past few years but operates freely in a way that would be inconceivable in many other countries. Again, take Egypt, which receives far less negative attention and more foreign money yet is almost entirely dominated by a military dictatorship. Or Algeria. And then there are countries which barely function at all, dominating a whole swath of Sub-Saharan Africa but also dot central Asia (Tajikistan anyone?)

Yet, Pakistan is usually lumped in the word of global basket cases, sharing reputational space with Somalia and Mali and Venezuela. That is not the case on the ground. Even Lebanon, a country whose non-functional government cannot even supply power and water, has boosters for the liveliness of Beirut. Argentina, which has defaulted on its debts nine times in total and three times since 2000, is seen as a dynamic hub for everything from the nightlife of Buenos Aires to the tourism and natural wonders of Patagonia. South Africa, Bangladesh, Cambodia, Peru, all suffer from extraordinary macro and political problems, yet also attract more constructive foreign interest and investment.

To some degree, this is an argument of “well, it’s not as bad as they say.” But it’s also a way of highlighting that Pakistan today may be a case of darkest before the dawn. With elections schedule for the fall, and with Imran Khan the most likely victor of said elections unless is his arrest leads to his disqualification as a candidate, Pakistan is in a very similar position to where Turkey was in 2001-2003, when a series of elections brought Recep Erdogan to power even as he was repeatedly disqualified by a military that was determined to retain control. Imran Khan has many of the same strengths and weaknesses of Erdogan, who after championing Turkish democracy and economic reform, then turned into the very type of corrupt autocrat that he had once fought against. But he nonetheless unleashed massive economic potential in Turkey and has left its 80 million people materially better off over the past 20 years, even as hyperinflation and Erdogan’s recent economic ineptitude is now eroding that. Should Imran Khan return to the head the government, he may well usher in a similar period in Pakistan, even as he has his own authoritarian and demagogic tendencies.

We are globally in such an intensely negative period that we have, almost everywhere, succumbed to the tendency that to assume that the future will likely be grimmer than not. Pakistan is a prime example of that reputational spiral. It is, of course, entirely possible that the next months will see a government external debt default followed by a military coup and chaos on the streets. In fact, that scenario would surprise no one. But what if things suddenly went not predictably wrong but unexpectedly right? That has happened elsewhere, and not just in Turkey, yet in moments of global grimness, we tend to forget that possibility. Pakistan in on a cusp. We should honor the fact that whichever way the consensus believes it will go, the country is also poised to breakout on the upside. Which path will only be clear in retrospect, but we should pay more attention to the potential of things going right along with the legitimate focus on all that is going wrong.