Via The Financial Times, a look at Pakistan’s economic under-performance:

Last month, Pakistan celebrated the launch of a new railway service between Karachi, the commercial capital, and Lahore, near the border with India. Crammed with flatscreen televisions and attentive stewards, the Pak Business Express, run under a public-private partnership, completed its inaugural 1,200km voyage 10 minutes ahead of schedule.

National media granted the service a resounding thumbs-up – failing to note that the journey time of 18 hours made the train three to four times slower than counterparts in China, Japan and South Korea.

Like stranded passengers, Pakistanis feel left behind. While the economies of neighbouring India and China have roared ahead, their country’s failure to exploit its huge potential has corroded the legitimacy of its leaders and sapped a generation’s faith in the future.

Elections due within the next year promise to mark a decisive moment in the quest to cobble together a viable democracy after decades of army rule and a more recent surge in Taliban violence, which has spread from the Afghanistan borderlands to pierce the heart of the biggest cities. For the first time since its creation in 1947, the Islamic Republic is headed towards a transition between elected governments without overt meddling by the generals.

Business is desperate for the polls to deliver a more dynamic government, capable of kick-starting faster growth in the country of 180m people, the world’s sixth biggest. But chronic power cuts, a dearth of foreign investment, shaky state finances and the march of talent abroad have fuelled a fear that growth rates are trapped on a plateau. Unless the next administration can do better, the frustration-filled chasm between the expectations of one the world’s youngest populations and their opportunities seems destined to grow.

The prospect sends a chill through the west. A rising tide of religious conservatism, the Taliban insurgency and the army’s history of sponsoring militancy in its conflict with nuclear rival India are the stuff of worst-case global security scenarios.

Add to this a power struggle between the government, the judiciary and the military, and declining relations with the US fuelled by the killing of al-Qaeda founder Osama bin Laden in Pakistan last May, and the picture appears even more volatile.

Yet the more fundamental question of whether the country will prove able to embrace a growth path that can blunt rising public anger is often eclipsed. In October, severe blackouts sparked furious protests in major cities, and the risk of further unrest remains high. “Our circumstances have deteriorated,” admits Abdul Hafeez Shaikh, the finance minister. “We have the capacity to be a tiger – we can do better.”

This kind of lament is a constant among Pakistani businesspeople, who insist the country did not always feel so gloomy. In the years after Islamabad aligned with the US following the terrorist attacks of September 11 2001, a combination of debt relief, banking reforms and foreign investment fuelled a mini boom. Between 2002 and 2008, average gross domestic product growth was 6.5 per cent.

The picture has darkened. Factors from militant violence to natural disasters and energy shortages have cut expansion to an average of 2.6 per cent in the past three years. MSCI, the market index, downgraded Pakistan in December 2008 from “emerging” status, which implies growth, to the more risky “frontier”.

The government of President Asif Ali Zardari argues it has made progress in improving Pakistan’s dismal record on tax collection since coming to power in 2008. It has also established a Rs50bn ($550m) safety net for the 6m poorest families.

But it has caved in to pressure from coalition partners opposed to bolder steps to boost revenue and cut subsidies. The International Monetary Fund, disappointed with Islamabad’s record on reform, suspended its lending programme last year.

The government’s showdown with the judiciary has proved a further distraction. Prime minister Yusuf Raza Gilani was charged with contempt of court by judges last month for his failure to obey an order to reopen a corruption investigation into Mr Zardari. The coalition’s main challenge is now to hang on to power – elections could be called as early as October.

Indeed, looming polls may make the situation worse. The budget deficit is projected to hit 6.5-7 per cent of GDP in fiscal 2012. The temptation to print money to finance pre-election spending may push inflation even higher than the 11.1 per cent year-on-year figure it hit last month.

Fears are growing that the country’s precarious position could deteriorate into a full-blown balance of payments crisis. Although foreign currency reserves of $16.8bn might look respectable, the figure has been inflated considerably by $7.8bn of IMF money and $4.5bn of deposits by private citizens in commercial banks. The rupee has started to lose value. The depreciation may bolster exporters but it is also driving up the cost of imports such as oil.

Pakistan has muddled through, mainly thanks to an influx of $6.3bn in remittances in the past six months of 2011 alone, which are an important prop to the economy but also a sign of the flight of talent overseas.

The relative ease with which domestic banks can make profits investing in government debt, rather than lending to private sector borrowers, starves Pakistan of investment.

At the same time, flagship foreign projects have foundered. For example, Kingho Group, one of China’s largest private coal miners, backed out of a proposed $19bn project in August citing fears for staff security, scuppering what would have been Pakistan’s largest foreign investment.

For Pakistani companies, meanwhile, the high cost of capital – banks charge about 16 per cent interest – along with shortages of power and natural gas, and persistent under-
investment in education all make it harder to compete with global rivals.

The contrast with India, which has succeeded in training the workers needed to run a thriving information technology industry, is stark. An outpouring of national pride greeted the news that filmmaker Sharmeen Obaid-Chinoy had became the first Pakistani to win an Oscar. But there is a lingering feeling that, while individuals often achieve world-class results, the nation as a whole is incapable of mustering the public goods – such as education – to succeed.

“You can hardly invest here,” says Nadeem ul-Haque, deputy chairman of Pakistan’s planning commission. “We’ve developed individual cleverness – but intellectual capital requires more hard work.”

A failure to provide enough jobs for the young raises some of the most troubling questions about Pakistan’s future. Like many developing countries, it has a large youth bulge – more than 60 per cent of its people are under 25, according to the UN, and only half are literate. The mix of unfulfilled dreams and radicalism makes the country’s allies nervous.

Against this backdrop, it would be easy to overlook exceptions that shine as beacons of what Pakistan might achieve. Textile exports – the biggest foreign exchange earner – hit a record $13bn last fiscal year, helped by high cotton prices and by larger manufacturers embracing better technology.

Nishat Group, the biggest textile company – supplying retailers such as Tommy Hilfiger and Gap – recorded an increase in pre-tax profits of 66 per cent in the 2011 fiscal year. Ahmed Jahangir, executive director, says the Taliban violence that so often features in media coverage of Pakistan has never hurt operations. “We still deliver on time,” he says. The company’s success mirrors a broader upward trend in corporate earnings in Pakistan, according to Suleman Maniya, an analyst at IGI Financial Services, an investment bank in Karachi.

Yet even this apparently positive sign reflects an unhealthy lack of competition. Only the biggest companies have the economies of scale to pay for a stable power supply and fund investment. The barriers to entry for smaller companies can lend the corporate sector a stultified feel, casting its captains more as oligarchs than entrepreneurs. Some textile makers have relocated to Bangladesh, exploiting lower costs and preferential access to western markets.

Even agriculture – another big pillar of Pakistan’s economy – is far from fulfilling its potential. The sector was hit hard by catastrophic floods in the past two years, although a recent surge in global commodities prices pumped more cash into rural areas.

Beyond textiles, the country has yet to develop the more sophisticated agricultural businesses that could trigger a broader-based take-off. Yields are sharply higher across the border in India, which has invested far more in irrigation. Even Indian cows give more milk.

There are some positive signs. Fatima Group, a domestic fertiliser manufacturer, says demand is growing as farmers seek to boost productivity. “The opportunities that are still available to us in the sector we are in are so huge,” says Fawad Ahmed Mukhtar, the chief executive.

Yet even upbeat conversations with industrialists have a back-in-time feel, featuring boasts about the quality of fertiliser sacking rather than visions of an India-style high-tech revolution.

Pakistan has traditionally looked to China for support in troubled times, and its cheap capital and expertise could be of further help. The Three Gorges dam company is in talks about building a $12bn barrage to ease the country’s energy crisis, and other infrastructure projects are on the drawing board.

But the quickest route towards unleashing faster growth lies to the east, in bolstering trade with India. Last year, India accounted for only
1.2 per cent of Pakistan’s total exports worth nearly $25bn, and 4 per cent of its total imports worth $32bn. With the powerful security establishment fixated on the perceived threat from New Delhi, the government’s pledges to forge closer trade ties are making painfully slow progress.

As long as the military clings to old enmities, it is hard to see where the next government will find the new markets and industries needed to satisfy a rising generation. “The planners don’t look to the future,” says Salim Ghauri, founder of NetSol, one of Pakistan’s few software developers. “That’s where people like me come in. We do not wait for things to happen, we do things.