Can Pakistan's New Ruler Control The Winds He's Unleashing?

Give General Pervez Musharraf credit for trying. On Nov. 17, the new leader of Pakistan started arresting deadbeats who took out billions of dollars in sweetheart loans and never payed them back. After all, he had justified his October coup d'etat by the need to clean up the rot that permeates Pakistan. And the country stands a better shot at attracting desperately needed foreign investment and aid if it is less corrupt and more stable.

Yet Musharraf is in a double bind. International lenders--especially the International Monetary Fund and the U.S.--are refusing him new loans because of the coup. Without them, Pakistan's economy remains on the brink. Meantime, the general's anti-corruption campaign, laudable though it may be, could weaken Pakistan's fragile economy even more.

Musharraf's attack on corrupt defaulters netted $155 million in quick repayments of overdue loans. It's a modest sum for a country with a foreign debt of $32 billion. Yet bankers were thrilled, particularly because legally they can't seize debtors' assets. Says Sakib Sherani, an economist at ABN-Amro Bank in Islamabad: "The government sent a strong signal that financial malpractices will not be tolerated."

The scope of the sweep is surprising. Some of Pakistan's wealthiest industrialists were arrested. In principle, that's a good place to start. But in practice, Musharraf risks provoking instability. Pakistan is a deeply divided society, where a small number of elite Punjabi families hold the lion's share of wealth and power while other ethnic groups vie for the remainder. Upsetting this balance could increase factional tension and cause a backlash. Already, some families are refusing to make new investments. "Because all the institutions are in the hands of this tiny elite, going after them with radical reengineering will not work," says Amitabh Mattoo, professor of international relations at Jawaharlal Nehru University in New Delhi. "It will cause tremendous turmoil."

The risks of chaos and factionalism producing an unstable regime are all the more serious because Pakistan has nuclear weapons--and because violence is ingrained in Pakistani life. Already, it has been on the rise. Terrorists fired rockets at U.S. and U.N. buildings in Islamabad on Nov. 12. And Pakistani troops again have been exchanging artillery fire with Indian soldiers over their disputed border in Kashmir. In June, the two sides nearly went to full-scale war on orders from Musharraf.

VESTED INTERESTS. The general has yet to set a timetable for restoring democracy, saying he needs time to root out corruption first. That's true, but Musharraf also wants to increase the army's clout. If history is any guide, Pakistan's military rulers always find it hard to cede power. Attacks on vested interests cause a backlash, "which causes the military to feel it can't leave the scene," says Marshall M. Bouton, executive vice-president of the Asia Society.

Yet the longer Musharraf waits, the more dire his country's financial straits. Reserves are a slim $1.5 billion. Capital flight by the wealthy has drained the country of an estimated $50 billion over the years. The U.S. and Japan want a timetable for restoring democracy before approving new IMF loans. An economic-reform package due out next month must provide a viable tax-collection plan and a means of boosting foreign-currency reserves. Without more revenues--and more opportunity for those outside the power structure--the crackdown on the rich elite risks being merely cosmetic. And Pakistan doesn't have time for reforms that are only skin deep.

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