Pervez Musharraf faces two crises and several serious problems. Investors don’t seem worried about the woes of the Pakistani president, who took power in a 1999 military coup. But they might take notice if nuclear-armed Pakistan came under the control of radical Islamists, which isn’t impossible.
Crisis one is over Musharraf’s sacking of the Chief Justice, which provoked deadly riots in Karachi and has alienated the president’s supporters from the traditional political parties. Crisis two is with the Islamists, which has only been deferred by the release of two policemen held hostage in the Las Masjid mosque in Islamabad. The problems include popular antagonism to the US, Musharraf’s biggest international supporter; rebellion in the Muttahida Quami movement, Musharraf’s biggest domestic support group; and a near rebellion in the Balochistan region.
A power struggle is likely, and a radical Islamist victory is plausible. Mild Islamists win elections in Turkey, where the secular government kept tight control over what was said in the mosques. A more radical strain is well established in Pakistan. It was one of the few countries to recognise the Taliban government in Afghanistan. What’s more, corruption and exile have cost the traditional Pakistani political parties much of their popular support.
Musharraf’s underlying problem is not slow growth. Indeed, political troubles haven’t slowed down the economy. Despite having few resources to export, Pakistani GDP growth has averaged 7% over the last three years. Inflation is high at 7%, but the government and trade deficits are modest. But even the best macroeconomic management cannot address the cultural challenges of modernization. In Pakistan, many people seem to believe that radical Islam can do that.
Investors in Pakistan have ignored the political tension. The Karachi stock exchange is up 25% since the beginning of the year. An apolitical investment strategy has generally paid off in other troubled countries. Even bad governments want to promote growth, and most of them are willing to reward investors fairly.
But Iraq and Afghanistan provide potent examples of the economic damage that can be wrought by bad politics. If nuclear-armed Pakistan descends into chaos or acquires a radical Islamist regime, investors might lose some of their nerve.