In his famous work, The Wealth of Nations, Adam Smith argued that greater economic interdependence and trade would bring prosperity and eliminate conflict between countries. This widely celebrated book was published in the 18th century and the Scottish author attempted to counter the prevalent mercantilist system adopted by the European countries. Under that system, countries tried to maximize wealth by boosting exports and limiting imports as it was believed that wealth was finite and this was the only method to secure their supremacy. This system was quite destabilizing as it not only encouraged countries to build up their armies in order to secure vital supplies and markets but also fostered slavery and harsh taxation regimes.
On the contrary, Adam Smith advocated for free markets whereby interdependence and division of labor would pave way for wealth creation and prosperity. For him, individuals acted in self-interest but their actions also benefited society. Moreover, the division of labor concept called for specialization and as countries specialized in the production of certain goods they would have to rely on other countries to meet the rest of their needs. These mutual dependencies would deter countries from acting aggressively as that would ultimately hurt their own interests.
Understanding Smith’s theory better
Despite globalization and rapid expansion of international trade, the world is far from experiencing the kind of stability Adam Smith had imagined. More alarmingly, mercantilist tendencies are on the rise and are jeopardizing the international order and global peace. Nowadays there are even more economic tools to coerce the opponent. Geoeconomics has become a go-to approach for many countries which allows them to achieve their strategic interests without resorting to direct military confrontation.
A country dealing with widespread poverty, unemployment, and debt is quite vulnerable to foreign destabilizing forces. It faced sanctions because of its nuclear program, and then came the threats from the Bush administration during the war on terror in which Pakistan paid an extremely heavy human and economic cost. Presently, the Financial Action Task Force (FATF) is burdening the country and hampering its economic progress.
Therefore, ensuring economic security has emerged as the main challenge for the political and military leadership of this country. Dr. NaafeySardar estimated that $4.5 billion were lost in exports from 2008-to 2019 due to FATF grey-listing. According to him, a grey-listed country faces complications in accessing international lending instruments because major financial institutions like the IMF and World Bank are affiliated with FATF as observers.
The FATF came into existence in 1989 as G7 countries attempted to counter money laundering through a set of recommendations. Shortly after 9/11, terror financing was also added to its mandate. The decision to keep Pakistan on the grey list is not taken well in Islamabad as it argues that it is backed by vested political interests and not technical realities.
Pakistan being in FATF raises multiple questions
Moreover, there are certain conditions that cannot be taken up by the government alone and have to go through the legal procedures of the country. The Pakistani authorities have addressed most of the demands and it is doing much better than many of the countries that are not being greylisted. Expressing his dismay, former Pakistani Ambassador Abdul Basit tweeted in June 2021 that ‘FATF is now clearly being used as a political tool against Pakistan’.
Indeed, there are plenty of negative economic consequences of being on the grey list. It not only disrupts the inflow of foreign capital but also complicates banking activities within the country which hampers ease of doing business. In the age of globalization, the FATF restrictions are a formidable tool to deter Pakistan from reaching its true economic potential as they further weaken Pakistan’s competitiveness in the international markets. In addition, as long as Pakistan struggles to keep its economy afloat there will be complications in implementing CPEC projects. Unsurprisingly, India is very vocal when it comes to placing harsher conditions on Pakistan. Sluggish economic growth will also not bode well for Pakistan’s defensive capabilities.
Given its poor state of economic affairs, Pakistan has limited options to overcome these challenges. Its overreliance on China for its economic revival thus becomes understandable. To survive in this discriminatory world order, Pakistan has to solidify its economic base and eliminate its dependency on foreign lending.
As resources become more and more scarce, the struggle between countries will intensify and economic tools will continue to be deployed for political rather than peace and development purposes.
Ali Haider Saleem has worked with the Institute of Strategic Studies Islamabad (ISSI) and National Defense University (NDU). His research interests lie in sustainable development, regional integration, and security cooperation. He has studied public policy at Queen Mary University of London and economics at NUST, Islamabad. The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.