Potential Turmoil in Pakistan Impacts Our Economy

Events in Pakistan this past week have the potential to really upset the geo-political turnip wagon. For Canadians ensconced in a new world with the loonie at $1.07 and oil at $94/barrel it may seem a world away. However, with Canadian troops just across the Pakistan border in Afghanistan, trouble in the world’s poorest nuclear state could cause us real trouble.

It has become easy in 2007 to look at our economic outlook simply by our domestic numbers. I do it all the time. We look at interest rates, exchange rates, the loonie’s value, inflation numbers, and unemployment numbers etc., to explain the nuances of our economy. However when a cataclysmic event comes along like 9/11 everybody is caught off guard. The events of the last week in Pakistan have the potential for that.

If you missed it Pakistan’s President Perez Musharraf proclaimed a state of emergency last week and suspended the country’s constitution at the same time. He said he did that to stop extremism and save Pakistan from anarchy. That anarchy may have been a judiciary, which would have ruled that he was in the Presidency illegally, having led a bloodless coup to get there. In any case since Saturday 1500 people have been detained some of whom were opposition politicians and human rights activists.

The problem the west has is that Pervez Musharraf might have been a dictator but he was also the leader of a country, which was strategic in the fight against global terrorism. He’s been the west’s biggest ally ferrying support to the Americans and their allies for the fight in Afghanistan. Being unelected and loathed in some Pakistani circles didn’t matter. He was “our guy” in the fight against global terror. That might annoy India, but in the post 9/11 world the west preferred to look the other way.

However, the events of the last few weeks have changed that. The Americans, British and now our own Canadian government have called for Musharaf to restore democracy and go ahead with planned election. President Bush has even suggested that President Musharraf needs to get rid of his military uniform, a key symbol to the world that the military is the true source of power in Pakistan.

Some of you might be thinking so what? How does this affect the global economy? How will Pervez Musharraf affect the amount of money jingling in my pocket or embedded on my new Tim’s coffee card? OK, let me give you the nightmare scenario. Unrest in Pakistan grows and Pervez Musharraf is pushed out or assassinated by radical forces within the Pakistani military. With over 30 nukes ready to fire they fall into radical hands and one or two disappears raising the possibility of mushroom clouds on the other side of the world. Not pretty.

Under such a scenario you probably could put a digit 1 in front of the current oil prices of $94/barrel. That’s $194/barrel. Core inflation in Canada would suddenly skyrocket, food shipments around the world would be interrupted, and things would never be the same. Yes, this is the nightmare scenario, however, it’s in the back of people’s minds that run the major western countries.

It’s geo-political stuff, all this Pakistan talk. Nonetheless it’s very important with regard to how it affects our economy. At least for the next little while oil prices are going to react to Pakistan. As you all know our loonie goes with oil prices. In manufacturing plants and farms across Ontario and Quebec that loonie is killing us. So what we want in Pakistan is peace, stability, democracy and Musharraf. However, I’m not quite sure what order we want that in.

It is quiet a mess, this Pakistan thing. However, its not like Pakistan has been the most stable place in the world throughout its history. Born through partition with India in 1947 its actually fought three wars against their historical cousin. One of those wars saw Pakistan split with East Pakistan becoming Bangladesh. Since then democracy has been scarce. The latest trouble in Pakistan will probably morph into some type of bizarre stability. However, this time the world’s focus is on it unlike times in the past. Any little blip will send oil markets tittering.

So you want to know what interest rates are going to do? Or do you looking for clues into what the price of gas will be next month. If that’s the case don’t forget those cosmic geo-political events, which seem to come out of our woodwork. This week it’s Pakistan. Next week who knows where?