Demystifying the illegal economy in Pakistan

Pakistan is located on a geographical fault line, and some of the countrys socio-economic ailments have geopolitical underpinnings. A by-product of territorial hostilities is a thriving illegal economy, which both fuels and feeds on the conflicts and militancy along the porous borders. It is from there that illicit trade seeps deeper inside the country through complex, informal and formal organised criminal networks. Last week, the Sustainable Development Policy Institute (Islamabad), in collaboration with the United Nations Office on Drugs and Crime, released what could be termed as culmination of serious research efforts at uncovering the contours of illegal economy. The joint-study aimed to estimate the scale of illegal economy in Pakistan assesses its dynamics and linkages with security and provide a policy of recommendations. The study rightly identifies that an "illegal" economy is essentially a subset of the "informal" economy, and includes all injections into the overall economy, both formal and informal, from illegal activities. Though the authorities are yet to put a number on the scale of illegal economy in Pakistan (globally $2.1 trillion), the SBP estimates suggest that the size of "informal" economy was somewhere around $34 billion in 2011. The nine months long SDPI/UNODC study focused on five major illicit activities in Pakistan, based on their contributions to national and cross-border risks. These include drugs and precursors trafficking, migrant smuggling and human-trafficking, arms trafficking, illegal timber trade, and kidnapping for ransom. The researchers made it sufficiently clear that owing to outdated, conflicting and limited data on these clandestine markets, the quantitative estimates were necessarily imprecise, were largely on the conservative side, and should be viewed as indicative rather than definitive. The findings are very insightful. The study indicates that it is the least-developed areas in Pakistan where organised crime is deep-rooted mostly in Khyber-Pakhtunkhwa, Baluchistan and FATA. The border proximity of these regions to Afghanistan is both a cause and an effect vis-à-vis burgeoning illicit trade in goods, services and people. The study indicates that the value of components of illegal economy, such as drugs and their precursors, multiply exponentially as they reach global markets. For instance, the value of heroin transiting Pakistan is nearly 27 times its Pakistani street value in Western destinations. By far, the drugs trafficking is the most rewarding of the five crime types studied, followed by migrant smuggling and human-trafficking, arms trafficking, illegal timber trade and kidnapping for ransom. The illustration indicates specific dynamics and scale of these illicit activities. The researchers call upon the government to deal with organised crime in a holistic manner, rather than through stand-alone policies. For effective law enforcement, it recommends inter-agency collaboration, specialised trainings and equipment, and plugging the legislative gaps and regulatory loopholes. International cooperation to contain both the supply-side and demand-side of illicit trade is emphasised. "The loss to Pakistans formal economy through illegal trade is very high as it distorts decision-making and allocation of resources, and impacts effective service delivery. It helps increases the cost of doing business in Pakistan and discourages international investors. The illicit money flows create real estate bubbles, result in rent-seeking activities and crowd out the documented economy", the study concludes. This research report is a commendable effort by SDPI and UNODC and serves as a solid foundation over which further research in the subject area can be commissioned. Towards that end, the government must build capacity for information and data management so that in-depth and action research can be carried out in the future and policy prescriptions can be offered to the authorities concerned.

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Illegal Economy in Pakistan: A snapshot
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Activities                               Dynamics                                                                Value (p.a)
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Drugs & precursors                       Trafficked via Pakistan to Iran, ME, Africa, East Asia & the West       $0.9-1.2 bn
                                         44 percent of Afghan Heroin transited through Pakistan
Human trafficking & migrant smuggling    Destination, transit and source country                                     $107 mn
                                         Trafficking women & children for sex trade, child labor & bonded labor
                                         Illegal emigration of Pakistanis (& Afghans) to Europe and ME
Arms trafficking                         70 pc of arms meant to fight Soviets ended up in local black mark            $52 mn
                                         Unregulated private ordinance manufacturing factories in FATA
Illegal timber trade                     Timber prices higher in Pakistani cities than world average                  $23 mn
                                         Timber contractors harvest beyond sustainable and legal limits
                                         Patronage by non-state actors in troubled areas along border
Kidnapping for ransom                    A multi-ethnic phenomenon; on the rise since 2007                            $10 mn
                                         Three-fold, organised setups: Kidnapper, middleman, bargainer
                                         Hostages usually kept in tribal regions due to weak control of LEAs
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Source: "Examining the dimensions, scale and dynamics of the illegal economy: A study of Pakistan in the region": SDPI, UNODC (January 27, 2012)