Bombed economy

After a short-lived cease-fire, the terrorists, the suicide bombings and the drone attacks are back in business. The dilemma is growing stronger with every passing day as the one Pakistan fights for and the one it fights with; both are continuing with their rampage - badly hurting the countrys image, identity, sovereignty and economy.
The Social Policy and Development Centre (SPDC) recently published a report on Social Development in Pakistan citing the security related problem as the single biggest hurdle for Pakistan towards achieving economic prosperity. The report states that the security breakdown creates a vicious circle that triggers economic crisis as well as political instability and governance failure.
The gripping security crisis in Pakistan results in higher transaction costs, diversion of resources from productive uses and loss of life, property and investment to trigger an economic collapse. This in turn reduces the efficacy of economic management, which brings in poor governance. Moreover, the loss of governments credibility and international standing also have a say in weakening the political system, hence, contributing more toward economic woes.
Keeping the economic indicators aside which have been on a steep decline of late, the qualitative governance indicators do not show a bright picture either.
Pakistan lags miserably behind the worldwide governance indicators with all the regional players having a score in the negative zone when it comes to the rule of law, political stability, corruption control, government effectiveness etc - all of which are directly or indirectly related to the persisting security problems in Pakistan.
The recent Pakistan-US riff over the Raymond Davis issue is all set to worsen the scenario for Pakistan - both from the economic and governance perspective. It is not to say that Americas contribution in the war on terror, other than the drone attacks, has been substantial. It has indeed been paltry when compared to the costs, direct and indirect combined, incurred by Pakistan ever since the beginning of the war on terror.
The official numbers state that the war had cost Pakistan nearly $43 billion, majority of which comes under the indirect costs. And worse still, according to SPDCs research, the cost in FY10 alone more-than-doubled to Rs840 billion from Rs380 billion in FY08.
In contrast, the bilateral assistance form the US has been significantly low to cover the total costs, as the ratio of costs/US bilateral assistance stood at 2.8X in FY10, which means that Pakistan has to bear more than two-third of the total cost.
And that naturally has its impact on the way the economy is run. The dire situation can be gauged from the fact that the investment growth nosedived to negative 3.5 percent in FY10, a major decline when compared to the 40 percent investment growth witnessed in FY06. Of course, a lot of factors have contributed to the dismal show, but nothing more than the countrys perceived image and the deteriorating security situation - something which is not even accounted for, in the indirect costs to the war.
There seems to be no immediate solution to this bleeding as the defense expenditures continue to eat nearly one-third of the current expenditure pie - coming at the cost of economic affairs, health and education. Pakistan, in this situation, can best hope for the US to increase the bilateral assistance and refrain from drone attacks - without which, there seems to be no end to the problem.