Pakistan; Challenges In Political Economic Development

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Pakistan; Challenges In Political Economic Development

  1. 1. Pakistan; Challenges in Political-Economic Development ICEA Feb 13 th 2007 Professor Paul E M Reynolds LONDON Tel + 44 20 874 86788 Mob & SMS + 44 7974 188087 E mails [email_address] [email_address]
  2. 2. Pakistan, showing NWFP, FATA & Northern Areas
  3. 3. Why is Pakistan important ? <ul><li>Strategic geo-political & transport bridge Mid-East and India & China </li></ul><ul><li>165-170m pop – More people in Pakistan than in Russia </li></ul><ul><li>Potential for Kashmir flare-up – risk of big impact on world growth </li></ul><ul><li>Border region with Afghanistan </li></ul><ul><li>- Cross border raids, and question of Tribal Areas and Pashtun nationalism ? </li></ul><ul><li>- Relationship with NATO/US military activity </li></ul><ul><li>Role in ‘War on Terror’ and Deobandi ideology (‘Talibs’ = ‘Students’) </li></ul><ul><li>Many internal factors that create risks of political instability </li></ul><ul><li>Nuclear armed state – and advanced delivery systems </li></ul><ul><li>Borders with Iran, Afghanistan, India, China, close Gulf States, C Asia </li></ul><ul><li>Important Diaspora – especially in the UK (and UK troops on its border !) </li></ul><ul><li>URGENCY: Presidential & National Assembly Elections Oct 2007 </li></ul><ul><li>– unclear how political events will pan out </li></ul>
  4. 4. Pakistan; Challenges in Political-Economic Development Macro, micro & political conclusions. Needing to ‘break out of gridlock’, government is in a difficult position <ul><li>Macroeconomic improvements good - but slow reforms in government , in regulation and within the ‘ real economy’ retard investment & growth rates, hinder exports and undermine fiscal/structural sustainability of growth </li></ul><ul><li>Flow of FDI inflows now under threat, diaspora remittances up, but insufficient ‘real economy’ investment opportunities as final destination – consumer imports sucked in, savings rates low </li></ul><ul><li>Full-speed reforms across government needed, but gridlocked due to political uncertainty - helps the ‘reform resistance’ & ‘project silos’. Key decentralisation suffers from ‘unintended consequences’…. </li></ul><ul><li>BUT …. political reform gridlocked by constitutional-political structures and the President’s need to please too many masters </li></ul><ul><li>Role of Tribal border (Afghan) areas and relationship with ‘The West’ is critical for political and economic reform </li></ul>
  5. 5. Economic performance Economy stabilised & growth path established 9.7% 4% 1990s 2.5% 3.1% 2001/2 Inflation (Av.) GDP growth WB/IMF 6.5% est 7% tgt 6.6% 8.6% 7.5% 4.7% 6.5%? 7.9% 9.3% 4.6% 3.1% 2006/7 2005/6 2004/5 2003/4 2002/3
  6. 6. Fragility of economic progress <ul><li>Public debt declined from 97% of GDP annual average 1990s - to 75.3% by 2002-3 & 56% 2005-6 </li></ul><ul><li>Annual fiscal deficits fell from an average (excl grants) of 6.4% of GDP, last 5 years of last decade, to 4.4% first 5 years of this decade (3.7% 2006-7 est.) </li></ul><ul><li>Average trade policy tariffs at ‘normal LDC’ levels after WTO memb. in 2001 </li></ul><ul><li>BUT………………BUT………….. </li></ul><ul><li>Industry still less than 20% of GDP </li></ul><ul><li>2005/06 investment at 16.5% of GDP - too low for sustainable growth (World Bank - 27%+ required) </li></ul><ul><li>Growing current account deficit - driven by a widening trade gap as import growth outstrips export expansion - from 1.4% of GDP to 4% of GDP in 2005/6 – putting pressure on FX reserves </li></ul><ul><li>IMF says (2007) need to align demand & output growth (Privatisation-related FDI and internal borrowing one-offs) – But GoP points to import price-hikes as one-off (To be continued…..) </li></ul><ul><li>IMF ‘imperative’ - Higher savings and poverty reduction </li></ul><ul><li>IMF REMEDIES. Improve the investment climate, financial market reform, tax reform, improvements in public service delivery, and trade liberalization </li></ul>
  7. 7. Economic growth context Trade & fiscal imbalances reduced…but… <ul><li>Yr. to 2006 FDI up to $3.5bn (1/2 from telecoms). Investment from Gulf states. </li></ul><ul><li>Remittances $4.2bn in 2005/6 - biggest ever </li></ul><ul><li>Banking & electricity distribution privatisation ‘successful’ </li></ul><ul><li>‘ Poverty fell 10% 2001 – 2006’ (WB) </li></ul><ul><li>Cost of borrowing relatively low…..good GCC demand for Pakistani Govt paper </li></ul><ul><li>BUT……………………………………………… </li></ul><ul><li>But…. trade deficit $10bn and growing </li></ul><ul><li>FDI effects of privatisation slowing </li></ul><ul><li>Big increase in MTDB , up 52% 2006/7 despite quality-of-investment problems </li></ul><ul><li>Low national saving’s rate, 17 percent of GDP, due to fiscal deficits and negative interest rates </li></ul><ul><li>4% of GDP spent on the military , possibly much higher, pressure on deficit </li></ul><ul><li>Only 28% of population is in the ‘workforce’, 32% of pop below poverty line </li></ul><ul><li>1m Afghan refugees + ‘Trouble in Tribal Areas’ </li></ul>
  8. 8. Real-economy problems requiring political will to challenge the interests of the bureaucracy & ‘crony capital’ across federal, provincial, & local government <ul><li>Institutional complexity and bureaucratic turf problems </li></ul><ul><li>Legislation, regulation, ‘overenthusiastic regulation’ – some resistance to reforms </li></ul><ul><li>Govt. ‘Project culture’, weak systemic reform focus (‘policy silos’) </li></ul><ul><li>EXAMPLE 1. Contract enforcement </li></ul><ul><li>EXAMPLE 2. Admin barriers and ‘cost of doing business’ </li></ul><ul><li>Result – domestic investment opportunities, & ‘bottom up’ domestic growth, both dampened = inflationary pressure, monetary growth, import growth, pressure on FX reserves ? </li></ul>
  9. 9. Institutions responsible have overlaps & gaps in reform ‘Diagnosticitis, policy silos & analysis-paralysis ?’ New institutions to solve this problem ? <ul><li>Ministry of Finance & Planning </li></ul><ul><li>Ministry of Industry, Prod’n & SI </li></ul><ul><li>Board of Investment </li></ul><ul><li>Ministry of Commerce </li></ul><ul><li>Ministry of Econ. Affairs (EAD) </li></ul><ul><li>Monopoly Control Authority </li></ul><ul><li>Housing & Works Div. </li></ul><ul><li>Securities & Exchange Commission </li></ul><ul><li>Planning Commission, 4 members </li></ul><ul><li>National Reconstruction Bureau </li></ul><ul><li>Economic Coordination Committee </li></ul><ul><li>Public Sector Reform Committee </li></ul><ul><li>Cabinet Division (3 Depts) </li></ul><ul><li>Economic Council </li></ul><ul><li>Office of the Economic Adviser </li></ul><ul><li>Ministry of Law & Justice </li></ul><ul><li>National Comm. for Govt. Reforms </li></ul><ul><li>Civil Service Reform Unit </li></ul><ul><li>Law & Justice Commission </li></ul><ul><li>PM’s Secretariat </li></ul><ul><li>Ministry of IT </li></ul><ul><li>Ministry of Parliamentary Affairs </li></ul><ul><li>Competitiveness Support Fund </li></ul><ul><li>4 Provinces, FATA, PATA </li></ul><ul><li>Trade Corridor Committee </li></ul><ul><li>Office of Private Public Partnerships </li></ul><ul><li>Federal Ministry of Tribal Areas </li></ul><ul><li>Ministry of Inter-Provincial Coop. </li></ul>
  10. 10. Wrong micro-economic reform tools ? ‘ Government spending versus government efforts’ Huge political will required to overcome deep-rooted systemic problems & interests – does political uncertainty prevent this ? <ul><li>Financial deepening reforms (NSS, Pakistani Investment Bonds) and reforms of intermediation system (Badla) underway - will make better use of remittances & other funds, and tax admin reform has increased receipts…………… </li></ul><ul><li>…… but these are not the core problems….. </li></ul><ul><li>Credit expansion is a risk, and linked to remittances </li></ul><ul><li>Political limitations prevent expansion of the tax base </li></ul><ul><li>Too much reliance on more costly but less effective growth stimulation methods </li></ul><ul><li>… ..Eg building business parks & giving tax breaks, rather than… </li></ul><ul><li>- reform of regulations that inhibit capital goods imports </li></ul><ul><li>- tackling ‘overenthusiastic interpretation of regulations’ </li></ul>
  11. 11. Pakistan (example): Steps/time and cost of contract enforcement (Source World Bank 2006) <ul><li>Case backlog - half are commercial - in the High Courts of Sindh and the Punjab number over a hundred thousand, and for the lower courts, in the millions - 40% land, 30% challenges to regulations, rest banking/employment </li></ul><ul><li>When cases do go forward, it takes, on average, more than 46 steps, more than a year and almost a third of the contract value to enforce a contract </li></ul><ul><li>System is ill-prepared for modernisation - new legal frameworks in complex areas such as foreign investment, insolvency, monopoly regulation, anti-money laundering, insider trading, and corporate governance </li></ul>
  12. 12. Real-world problems in economic development dampen investment WB value-chain study of key sectors shows major structural, institutional & regulatory problems: Shrimps, textiles, marble, processed dairy, auto parts <ul><li>High transport costs, high electricity costs (outages) limiting automation, labour market rigidities (temp workers used), access to finance (collateral & informational), imports costs (multiple permissions required etc), cash flow from duty drawback & custom rebate delays, high port charges, state control of input sectors, freight sector over-regulated, opaque land leasing & security of tenure - & resultant low capacity utilisation </li></ul><ul><li>Fees and taxes collected by the Government represent a quarter of export costs and come from three sources: the petrol tax (1 percent of export invoice), Export Development Fund (0.25 percent of export invoice), and unofficial, speed money payments (approximately Rs 1,250 per consignment). [Poor port governance contributes]. </li></ul><ul><li>Layers of taxes & levies to agents, the PAs, and ‘security payments’ add to costs. High tarrifs in many sectors. </li></ul><ul><li>Pakistan’s aggregate direct labor cost $0.75 /hour - higher than China’s $0.66 and India’s $0.40 – but productivity lower. </li></ul>
  13. 13. Resistance to pro-growth regulatory reforms ? <ul><li>2004/5 World Bank project on regulatory reform ’Impact has been minimal’ </li></ul><ul><li>2005 Better business regulations IFC. Admin barriers report not published. </li></ul><ul><li>2006 IFC/World Bank business regulations, pending… </li></ul>
  14. 14. Future economic reform challenges <ul><li>Regulatory quality and the link to rent-seeking </li></ul><ul><li>Poor domestic export performance relative to expectations, and the lack of investment to overcome high costs </li></ul><ul><li>Capital infrastructure problems – access to debt & equity finance for export development, and absence of venture capital & ‘real sector’ investment funds </li></ul><ul><li>Low ‘growth productivity’ in the use of inward financing from remittances and capital repatriation </li></ul><ul><li>This challenge combined with industrial and labour rigidities/monopolistic markets = ‘ not enough productive places to put the money’ </li></ul><ul><li>How to apply telecom sector’s success in attracting investment to other ‘regulatory-dependent’ sectors like electricity, water, transport and hydrocarbons. </li></ul><ul><li>How to address investment and economic growth inhibitors (How to support the Ministry of Law & Justice in tidying up of existing legislation and regulations) </li></ul><ul><li>Addressing urgent need to tackle problems created by the separate MTBF and MTDF, (eg poor use of assets, lower investment) </li></ul><ul><li>How to address the negative impact on domestic investment and growth arising from the domestic financing of the budget deficit. </li></ul>
  15. 15. Fiscal decentralisation issues Pakistan is highly centralised fiscally Growth & political reform requires change Reforms started in 2001 but within existing structures <ul><li>Sub-national governments in Pakistan - very low sub-national tax collection rates by international comparisons </li></ul><ul><li>Only 0.9 percent in GDP of revenues in 2005/6. India’s - 6.1 percent, or 7 percent based on more recent figures (World Bank 2005:xxvii) </li></ul><ul><li>Provinces in Pakistan are highly dependent on federal shared revenues and grants – complex system. </li></ul><ul><li>All provinces receive identical per capita levels of divisible pool allocations </li></ul><ul><li>All provinces are characterized by low own revenue mobilization, although some differences are evident across provinces. </li></ul>
  16. 16. Fiscal Decentralization in Major Developing Country Federations <ul><li>Source: Figures for Pakistan are FY2005/6 budget. IMF GFS (10/2005), most recent year available, WB Reports for unavailable countries ( italics) . As share of central, state, and local government, net of onward transfers by central and stage governments. Sub-National Revenues do not include financing. *Alternative to GFS expenditure figures for Mexico using World Bank (World Bank 2004; 2004). </li></ul><ul><li>2.4 </li></ul><ul><li>9.1 </li></ul><ul><li>2.4 </li></ul><ul><li>11.0 </li></ul><ul><li>Malaysia </li></ul><ul><li>13.0 </li></ul><ul><li>32.4 </li></ul><ul><li>12.7 </li></ul><ul><li>38.5 </li></ul><ul><li>Russia </li></ul><ul><li>~ </li></ul><ul><li>~15 </li></ul><ul><li>~ </li></ul><ul><li>19.6 </li></ul><ul><li>Venezuela </li></ul><ul><li>4.5 </li></ul><ul><li>25.5 </li></ul><ul><li>7.4 </li></ul><ul><li>41 </li></ul><ul><li>Mexico * </li></ul><ul><li>10.5 </li></ul><ul><li>39.0 </li></ul><ul><li>15.3 </li></ul><ul><li>41.7 </li></ul><ul><li>Brazil </li></ul><ul><li>8.4 </li></ul><ul><li>44.2 </li></ul><ul><li>12.4 </li></ul><ul><li>44.4 </li></ul><ul><li>Argentina </li></ul><ul><li>6.1 </li></ul><ul><li>18.9 </li></ul><ul><li>18.9 </li></ul><ul><li>56.5 </li></ul><ul><li>South Africa </li></ul><ul><li>3.18 </li></ul><ul><li>10.7 </li></ul><ul><li>13.6 </li></ul><ul><li>38 </li></ul><ul><li>Nigeria </li></ul><ul><li>3.0 </li></ul><ul><li>18.7 </li></ul><ul><li>9.5 </li></ul><ul><li>35.9 </li></ul><ul><li>Ethiopia </li></ul><ul><li>6.1 </li></ul><ul><li>33.8 </li></ul><ul><li>10.8 </li></ul><ul><li>49.2 </li></ul><ul><li>India </li></ul><ul><li>0.9 </li></ul><ul><li>7.0 </li></ul><ul><li>6.3 </li></ul><ul><li>34.2 </li></ul><ul><li>Pakistan * </li></ul><ul><li>(IV) </li></ul><ul><li>(III) </li></ul><ul><li>(II) </li></ul><ul><li>(I) </li></ul><ul><li>Sub-National Own Revenues (% GDP) </li></ul><ul><li>Sub-National Own Revenues (% Total National Revenues) </li></ul><ul><li>Sub-National Expenditures (% GDP) </li></ul><ul><li>Sub-National Expenditures (% Total) </li></ul><ul><li>Federation, Developing Country </li></ul>
  17. 17. Unequal regional incomes Table 1: Key Indicators for Pakistan’s Disparate Federation Source: World Bank, UNDP 2003 Human Development Report (p. 11) 106 0.541 1.5 - 128.4 Total/Average 21 0.549 18.3% 61,563 23.7% SINDH 35 0.557 26.8% 47,131 57.4% Punjab 24 0.51 9.7% 35,211 13.8% N WFP 26 0.499 45.2% NA 5.1 % Balochistan Index %/km2 Rs. %/million Number of Local Governments Human Development Index Area GDP Per Capita (2004/5) Population Share
  18. 18. Complex system of Provincial financing
  19. 19. The status of the Tribal Areas ‘across the Durand Line’ <ul><li>Historical Afghan territorial claims over Pashtun NWFP, PATA, FATA, & Pashtun areas in Baluchistan </li></ul><ul><li>Administered by Punjab British Commissioner, then 1901 direct Delhi rule of NWFP Province - settled & FATA tribal areas separate, both as NWFP Afghan buffer zone </li></ul><ul><li>Separate status, continued post-independence – constitutional FATA buffer zone and tool against Pashtun nationalism on both sides of the border; not elected (A247). NWFP Governor formally represents President </li></ul><ul><li>Pre- & post- colonial regimes – ‘no troops deal’ with (paid) Maliks & Lungis </li></ul><ul><li>Frontier Crimes Regulations (1901 to today), FATA de facto constitutionally separate, Presidential control, Political Agent rule in FATA agencies ‘absolute’ </li></ul><ul><li>President has authority over all governance & military arrangements in FATA (1973 constitution A247/5). Via primary legislation – FCR, permits detention-no-trial </li></ul><ul><li>PAs – (executive-judiciary-legislature) appoint own para-militaries – can fire Maliks – appoint Maliks to Jirga courts – no full appellate path or normal rights </li></ul><ul><li>FATA areas a channel for very large-scale US funds to Afghan mujahadeen during Soviet occupation – but govt. wary of Pashtun cross-border nationalism </li></ul><ul><li>1980-2000 – roots of ISI culture & skill balancing different Pashtun interests </li></ul>
  20. 20. The role of FATA in the Pakistani Political System <ul><li>12 seats in the National Assembly, 8 in the Senate, elected by appointed (all male) FATA Maliks in the pay of the Presidency/military & each easily dismissed </li></ul><ul><li>But parliament cannot legislate on FATA, and general Pakistani laws do not fully apply in FATA </li></ul><ul><li>FATA parliamentarians linked to pro-Deobani groups (JUI-F) </li></ul><ul><li>No representation over FATA, or in NWFP legislature </li></ul><ul><li>Alleged tit-for-tat: support in parliament, for peace, arms/drugs trade, & Deobandi ‘freedom to act’ without political competition </li></ul><ul><li>Political parties & national/regional secular political groups banned in FATA Since Afghan Soviet occupation, (& huge US mujahadeen financing), pro-Deobandis groups & Maliks have grown under such political ‘cover’, and replaced ‘old school Maliks’ </li></ul><ul><li>JUI-F – coalition partners of govt. in Balochistan ! </li></ul><ul><li>Presidency has inherited this system – propped by ‘negotiated balance’ </li></ul><ul><li>President’s international trump card: better to accept a complex negotiated balance than risk a Deobandi government /Pashtun state (may well be true !) </li></ul>
  21. 21. Complex governance: a simplification Difficult to reform FATAs (Mostly Pashtun). 3m pop. on Pakistan side. 7 ‘Agencies’. PATAs North West Frontier Province Settled areas ‘Districts’ Presidency Government Prime Minister. Cabinet. Donors. FATA Development Authority 7 Political Agents Naib-tehsildar (Exec, judiciary, legislature) SAFRON Funding. Donor projects . Balochistan Maliks Lungis Prov’l FATA Secretariat Agency Councils Inter-Tribal Jirga PEACE AGREEMENT
  22. 22. Reform and/or Resolution Military interventions – part of the solution or part of the problem ? <ul><li>Parliament can normalise rights and court system (FCR was removed from NWFP and Balochistan) </li></ul><ul><li>Supreme Court can strike down FCR as unconstitutional </li></ul><ul><li>FATA could become part of PATA under NWFP </li></ul><ul><li>But instead… </li></ul><ul><li>2000/1 NRB Devolution Plan excluded FAA </li></ul><ul><li>Provisional Agency Councils appointed by tribal Jirgas </li></ul><ul><li>Military action continues , (but seen as ‘demonstration effects to USA’ – counterproductive ?) (ICG Dec 2006) </li></ul>
  23. 23. Can economic growth address political issues in Tribal areas ? Will reform strengthen or weaken the government ? <ul><li>Per capita income $500. 60% below poverty line. </li></ul><ul><li>97% female illiteracy (male 71%). </li></ul><ul><li>But…. </li></ul><ul><li>Need to demonstrate success against foreign fighters etc </li></ul><ul><li>Buying of permits and ‘rent-seeking’ will decline </li></ul><ul><li>Decline of 20 year old arms & drug trade - & military %s </li></ul><ul><li>(army allows vibrant trade & doesn’t require ‘permits’) </li></ul><ul><li>Pashtun nationalists & Deobandis may turn on govt. </li></ul><ul><li>Parliamentary support would be lost </li></ul><ul><li>NWFP JUI-F and Balochistan support may be lost </li></ul>
  24. 24. The near impossible task of serving many masters. Is the outcome a kind of political gridlock ? Foreign fighters ? Presidency Head of State Govt. Ministries I.S.I. Donors & foreign NGOs Drug & arms traders Domestic elite, landowners, govt. influencers, & ‘crony capitalism’ Deobanis & Pashtun Nationalists USA Tribal Elders Local NGOs, pro-democracy groups The view from the Presidency ? Military, Governors, & PAs
  25. 25. ‘ Show me something’ Reform versus ‘uncovering’ foreign fighters Foreign fighters ? Presidency Head of State Govt. Ministries I.S.I. Donors & foreign NGOs Drug & arms traders Domestic elite, landowners, govt. influencers, & ‘crony capitalism’ Deobanis & Pashtun Nationalists USA ‘ War on Terror’ issues Tribal Elders Local NGOs, pro-democracy groups Military, Governors, & PAs Info flow Info barrier
  26. 26. The Inter-Jirga Peace Agreement Why did they fight, why did they agree ? A counterproductive brutal search for foreign militants ? <ul><li>LOW-LEVEL WAR </li></ul><ul><li>June 2002 - US pressure – troops to capture MO, OBL etc </li></ul><ul><li>March 2004 – search for foreign militants ‘Tribes refused’ </li></ul><ul><li>(‘failed’ – Former ISI General ICG 2006) </li></ul><ul><li>Govt. ‘sued for peace’ June 2004 </li></ul><ul><li>Nov 204 agreement – amnesty, cash, BUT hand over foreign militants, & stop cross-border attacks </li></ul><ul><li>Feb/March 2005, 6-point peace plan with JUI-F over South Waziristan </li></ul><ul><li>Escalation - heavy casualties in March 2006 battles </li></ul><ul><li>Effectiveness of ‘official’ institutions declines </li></ul><ul><li>Military pressure on the President </li></ul><ul><li>New (military) NWFP Governor May 2006 </li></ul><ul><li>North Waziristan Ceasefire June 2006 signed with JUI-F and Deobandis/Pashtun nationalists </li></ul><ul><li>North Waziristan Peace agreement with Deobandis Sept 2006 </li></ul><ul><li>Oct 2006 ‘Cross border raids on UK & US troops up’ (Gen Jones NATO) </li></ul><ul><li>Foreign militants found are few – and mostly 20-year settlers from the anti-Soviet war (Tajiks, Uzbeks) </li></ul>
  27. 27. The Sept 2006 Peace Agreement <ul><li>GoP to halt all ground & air attacks </li></ul><ul><li>GoP to release prisoners </li></ul><ul><li>Checkpoints removed </li></ul><ul><li>Financial compensation of combatants for losses </li></ul><ul><li>Tribal privileges and ‘salaries’ restored </li></ul><ul><li>GoP to return weapons and allow open carrying of weapons </li></ul><ul><li>Foreign-born militants to respect local laws </li></ul><ul><li>Cross-border trade (legal & ‘illegal’) restored </li></ul><ul><li>Combatants to halt all cross-border attacks </li></ul><ul><li>Return to official institutions – no parallel bodies </li></ul><ul><li>GoP troops relocated </li></ul><ul><li>Joint 10-member Council to oversee Agreement </li></ul>
  28. 28. Conclusions <ul><li>Good quality macroeconomic management in Pakistan under difficult conditions – but risks from microeconomic realities </li></ul><ul><li>Deep-rooted problems in ‘real economy’ reforms and reform within government. </li></ul><ul><li>Political barriers to real-economy reforms are tenacious – strong political will needed domestically & internationally </li></ul><ul><li>Chain of causality ? Economic reform enables political reform or vice versa ? Symptoms of gridlock on both. </li></ul><ul><li>Military demonstration effects for the USA & NATO, may be counterproductive. (How to break the ‘information barrier’ ?) </li></ul><ul><li>Political reliance on Tribals & ISI (Deobandis indirectly) is an accidental Western creation. </li></ul><ul><li>International support for political reform, especially in Tribal areas, needed to untangle gridlock and accelerate economic reform. </li></ul>

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