In his famous book, The Wealth of Nations, Adam Smith argued that greater economic and commercial interdependence would bring prosperity and eliminate conflict between countries. This widely celebrated book was published in the 18and century and the Scottish author attempted to counter the widespread mercantilist system adopted by European countries. In this system, countries tried to maximize wealth by increasing exports and limiting imports because it was believed that wealth was finite and that was the only method to ensure their supremacy. This system was quite destabilizing because not only did it encourage countries to build up their armies in order to secure vital supplies and markets, but it also promoted slavery and harsh tax regimes.
On the contrary, Adam Smith argued for free markets where interdependence and division of labor would pave the way for wealth creation and prosperity. For him, individuals acted in their own interest, but their actions also benefited society. Moreover, the concept of division of labor called for specialization, and as countries specialized in the production of certain goods, they had to rely on other countries to meet the rest of their needs. These mutual dependencies would deter countries from acting aggressively, as this would ultimately harm their own interests.
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Better understand Smith’s theory
Despite globalization and the rapid expansion of international trade, the world is far from experiencing the kind of stability that Adam Smith envisioned. More alarmingly, mercantilist tendencies are on the rise and jeopardize international order and world peace. Nowadays, there are even more economic tools to coerce the adversary. Geoeconomics has become a go-to approach for many countries, allowing them to pursue their strategic interests without resorting to direct military confrontation.
A country struggling with widespread poverty, unemployment and debt is highly vulnerable to foreign forces of destabilization. It faced sanctions because of its nuclear program, then came the threats of the Bush administration during the war against terrorism for which Pakistan paid an extremely heavy human and economic cost. Currently, the Financial Action Task Force (FATF) weighs on the country and hinders its economic progress.
Therefore, ensuring economic security has become the main challenge for the political and military leaders of this country. Dr. NaafeySardar estimated that $4.5 billion was lost in exports from 2008 to 2019 due to FATF greylisting. According to him, a country on the gray list faces difficulties in accessing international lending instruments because major financial institutions like the IMF and the World Bank are affiliated to the FATF as observers.
The FATF began in 1989 as G7 countries attempted to combat money laundering through a set of recommendations. Shortly after 9/11, terrorist financing was also added to its mandate. The decision to keep Pakistan on the gray list is not well taken in Islamabad as it argues that it is backed by vested political interests and not technical realities.
Read more: Political pressure: FATF keeps Pakistan on gray list
Pakistan being part of the FATF raises multiple questions
In addition, some conditions cannot be supported by the government alone and must go through the legal procedures of the country. Pakistani authorities have responded to most requests and are doing much better than many countries that are not on the gray list. Expressing his dismay, former Pakistani Ambassador Abdul Basit tweeted in June 2021 that “the FATF is now clearly being used as a political tool against Pakistan”.
Indeed, there are many negative economic consequences of being greylisted. This not only disrupts the inflow of foreign capital, but also complicates banking activities in the country, hampering the 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 international markets. Also, 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 imposing tougher conditions on Pakistan. Sluggish economic growth also does not bode well for Pakistan’s defensive capabilities.
Given its poor economic situation, Pakistan has limited options to overcome these challenges. Its excessive dependence on China for its economic recovery then becomes understandable. To survive in this discriminatory world order, Pakistan must consolidate its economic base and eliminate its dependence on foreign loans.
Read more: India is manipulating the FATF through its defense purchases?
As resources become increasingly scarce, the struggle between countries will intensify and economic tools will continue to be deployed for political purposes rather than for peace and development purposes.
Ali Haider Saleem has worked with the Islamabad Institute for Strategic Studies (ISSI) and the National Defense University (NDU). His research interests focus on sustainable development, regional integration and security cooperation. He studied public policy at Queen Mary University of London and economics at NUST, Islamabad. The opinions expressed in this article are those of the author and do not necessarily reflect the editorial policy of Global Village Space.