Pakistan’s political turmoil also threatens foreign direct investment, a critical indicator in developing regions. “This is the worst possible scenario for foreign investment,” one emerging markets analyst told Reuters. “This environment of chaos is perfect for Islamic militants.” Less than 10 percent of Karachi’s stock market, which controls more than $70 billion, is owned by non-Pakistanis—yet the Reuters article notes that this number has increased rapidly in recent years. Analysts had hoped Pakistan’s economy might parrot the growth rates seen in neighboring India. As yet, that hasn’t happened. India handily eclipses Pakistan in gross domestic product and other critical economic measures.
Pakistan’s turmoil comes at a particularly bad time in terms of Indo-Pakistani economic relations. Trade between the countries expanded significantly following a 2004 South Asia Free Trade Agreement. The Economic Times, an Indian newspaper, reports that trade between the countries has more than quadrupled since 2001. Yet the space for additional growth remains vast. A 2006 working paper from the Indian Council for Research on International Economic Relations, an Indian think tank, estimates that two-way trade between India and Pakistan could reasonably multiply tenfold. In an interview with CFR.org, Sumit Ganguly, a South Asia expert, says trade relations between India and Pakistan remain hostage to diplomatic ties.