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The Tale of Imran Khan for global investors dealing with political risk

  • Pakistan matters more to geopolitics (230mn population bordering China, India, Iran) than to investment (45bps of EMBI)

  • But the political life of its most famous citizen, Imran Khan, offers useful insights for investors, particularly in EM

  • Two-party, dynastic, 'deep state' politics, foreign policy independence, key man risk, economic pragmatism vs. populism

The Tale of Imran Khan for global investors dealing with political risk
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
12 November 2022
Published byTellimer Research

Pakistan is far more important for geopolitics, with its 230mn population, bordering China, India, and Iran, and its nuclear weapons capability, than it is for investors.

It accounts for merely 40bps of global GDP, around a 0.5% weight in the JP Morgan Emerging Market Bond index, and around a 3% weight in the MSCI Frontier Market Equity index.

But the observations to make on the political life of its most famous citizen, Imran Khan, are worthwhile for any global emerging markets investor, particularly for those who agree that political risk is assuming every greater importance.

Perhaps, as the institutional safeguards that have historically distinguished them erode, there is something here for the investor in developed markets too.

But for a few inches in the trajectory of bullets fired in his direction on 3 November, these observations may have been written in the form of an obituary.

Who is Imran Khan?

To his supporters, he is:

  • A sporting hero turned into a political hero;

  • A champion of social justice for those born without privilege;

  • Proud of his country and determined to see its independence respected globally without resorting to base nationalism;

  • A lone clean face in the corrupt swamp of the political and military elite; and

  • An inspiring and unflinching leader who leads from the front.

To them, he represents what Pakistan, a country with over a 200mn population, nuclear arms and strategic locations (borders with Afghanistan, China, India and Iran), but woefully poor economic growth, reliant on external financial support, high youth unemployment, low average educational attainment, stark inequality, and weak political and judicial institutions, could be.

To his opponents and detractors, he is:

  • An addict to attention and sychophancy, drugs and sex, religious extremism and conspiracy theories;

  • Technocratically unfit to govern and an expedient flip-flopper on policy;

  • A dictator within his own party with the inflexibility needed to build bridges with others when in government;

  • An arrogant idealist who was born into privilege, an insincere challenger to an elite on whose shoulders he has become a political force; and

  • No less untrustworthy or corrupt than any of his political rivals.

To them, he reinforces why the governance of such a complicated country must be left to the experienced hands of the established military and civilian elite.

In the Pakistan of today, you can be pro-Imran or anti-Imran, but you cannot ignore Imran.

‘The Tale of Imran Khan' is laid out below and suggests why, even outside Pakistan, it is worth paying attention to how he fares.

The Tale of Imran Khan

1) Breaking a two-party system and dynastic politics in democracies takes a very long time

Imran's precedent suggests it takes a very long time to break into an existing political system, particularly one that is a parliamentary, as opposed to presidential, one. There is no shortcut. Two-party systems and political dynasties are not easily challenged.

However charismatic the leader of a new movement, the need to present candidates for so many individual seats requires party funding, infrastructure, organisation and alliances.

Perhaps, too, a political message that is as broad as possible is necessary: one that appeals nationally, as opposed to regionally, across economic divides, and, in youthful populations, as much to first-time voters as the middle-aged.

Imran founded his political party, Pakistan Tehreek-e-Insaf (PTI), in 1996. But it was not until the 2013 election that this arrived as a meaningful parliamentary force, with 10% of seats. In the intervening 13 years, he:

  • Grew his party membership organisation from the ground up, mainly as a result of electoral disappointment in 2002, when merely a single seat was won;

  • Championed an anti-corruption message (an issue of broad appeal); and

  • Started building alliances with both established politicians estranged from the old parties and, perhaps more importantly, sympathetic elements within the military-intelligence deep state (largely by refraining from the sort anti-army rhetoric he had engaged in during the 1999-08 era of martial law and presidency under Pervez Musharraf).

It still took another round of mass mobilisation, during the 2014 protests over alleged election-rigging, the falling out of Prime Minister Nawaz Sharif and the military-intelligence leadership, and another election, in 2018, for Imran's party to win enough seats (44%) to form government.

By this time, Imran was into his mid-sixties and had already spent two decades in formal politics.

Examples of two-party systems, as opposed to opportunistically assembled electoral coalitions, in EM include India (BJP, Congress) and Nigeria (APC, PDP), and in DM include the US (Democrats, Republicans) and the UK (Conservatives, Labour).

Numerous examples of political dynasties at the helm of governments in EM include the families of Gandhi (India), Hasina and Zia (Bangladesh), Aquino, Duterte and Marcos (the Philippines), Kenyatta (Kenya), Kabila (DR Congo), Kirchner (Argentina) and Fujimori (Peru), and in DM include the families of Bush and Kennedy (US) and Trudeau (Canada).

A 2018 study by Historical Social Research (Rincker) found that, between 2000 and 2017, 10% of world leaders had family ties to politics, and, within this group, around one-third had family ties to former leaders.

Imran Khan's PTI now a competitor for all of the old parties

2) Challenging a deep state is the endgame, not the starting one

Imran's rise to power in 2018, his fall in 2022, and his extraordinarily popular resilience since that fall may offer a lesson in how a political challenger deals with the deep state sitting behind a democracy. However ideologically compromising, there may be no alternative but cooperation.

Pakistan's democracy, in terms of the competition for power between its elected civilian politicians, might be regarded as the front office of government. The more powerful back office belongs to the deep state of the military-intelligence leadership.

Imran challenged the deep state near the outset of his political journey, arguably out of naivety, embraced the deep state during his political ascent, arguably out of pragmatism, and is again challenging the deep state, either out of desperation that cooperation did not work or out of the confidence that he really has awoken and effectively controls enough of the mass population, specifically the youth demographic (c60% of the 230mn population is under age 30).

Perhaps, Imran's precedent shows that, on the way up, a challenger cannot rise without help from elements within the deep state. If the deep state's influence extends not just into domestic security but also into aspects of the elected government and the elections themselves, the mainstream media, the judiciary and international relations, then challenging that deep state from the outset is likely a lost cause.

And his precedent also shows that governing too is not possible without the acquiescence of the deep state. Arguably, the chain of events leading to the demise of Imran's government in early 2022 started with disagreement over his favoured successor as head of the army, or, perhaps, at least, the unwillingness of the incumbent army chief to accept that the prime minister should have the casting vote on the appointment.

The paradox for a political challenger is that their mass appeal is grounded in challenging the vested interests at the centre of which lies a deep state, but that deep state is so entrenched that neither the growth of the challenger's movement nor its ultimate shot at governing can happen without the acquiescence of that same deep state.

A deep state often centres around the military because of its monopoly control of overwhelming brute force domestically, but usually includes other allied vested interests.

  • The monarchy plays a role in Thailand, religious authorities play a role in Egypt, Iran and Pakistan.

  • Natural resource owners can be an important component, eg Colombia, Nigeria, Russia and Zimbabwe, just as other commercial interests can, eg India and Kenya have both seen some of the most powerful vested commercial interests shift from a landowning elite to an industrial one.

  • In de jure one-party states, eg China and Vietnam, or de facto one-party states, eg Bangladesh or South Africa, the leadership of the party can dominate the deep state.

And deep states are not unique to emerging market democracies – what else was US President Eisenhower referring to in 1961 when he warned about the 'military-industrial' complex?

Related reading – Pakistan: Khan's support endures despite repression, implying Army is split, August 2022

Military spend relative to the economy in emerging markets

3) Independence in foreign relations and balancing US-China is hard

US-China decoupling has made it increasingly difficult for an emerging economy to tip-toe a neutral path between them.

The neutral path for Pakistan is particularly narrow because of the concentration of US attention historically, from its proxy war via Pakistan with the USSR in Afghanistan, to its post-9/11 invasion of Afghanistan, to its concern over security in its regional ally India, and China more recently, from its investment via the China Pakistan Economic Corridor (CPEC) to its common Himalayan territorial friction with India.

In this context, Imran has incorporated references to both the US and China in his populist message: establishing self-respect is paramount in foreign policy and falling into client-state relations with either the US or China is a grave error.

This stance has yielded mixed results.

  • US – With the US, on the hand, after pushing back against tweets by former President Trump, in which he criticised Pakistan, Imran was ultimately warmly welcomed to the White House in January 2020. But, after relations cooled markedly with the US in the transition to President Biden, Imran did not hesitate to implicate the US in the alleged, behind-the-scenes, skullduggery that precipitated the defection of coalition MPs and the defeat of his government in the parliamentary vote of no confidence in April 2022.

  • China – There is less visibility over the state of Imran's relations with China. Although the attempt by his government to revisit long-term power purchase contracts signed with electricity plants constructed under the CPEC appeared to cool economic relations with China (albeit this coincided with a pull-back in Belt and Road overall and the Covid pandemic), the military's effective response and Imran's reasoned diplomatic response to India's Balakot air incursion in February 2019 confirmed to China that Pakistan was a viable partner in balancing India on the Himalayan border, Imran shied away from publicly joining allegations of China's repression of its Uyghur population, and Imran attended the Beijing Winter Olympics opening ceremony in February 2022.

The critical point is that Imran's relations with any foreign power, whether the US, China or those in the GCC, were not sufficiently strong to save his government when it fell out with domestic powers.

Imran's example might suggest that, without decisive foreign support, a political challenger cannot thrive. And, for a challenger in an economy like Pakistan, with its persistent twin deficits, the crutch of a foreign sponsor is even more important. No sponsor will step forward to save someone who is not a pliable client.

The point, in the case of Imran, is that the continual compromise, on rhetoric and policy, required to maintain any particular foreign sponsorship is simply inconsistent with a political mission that is built, in terms of foreign policy, on independence and the pursuit of national self-interest.

Emerging markets, across Turkey and the GCC, Eastern Europe (eg Hungary), South Asia (Sri Lanka), South East Asia (Indonesia, Malaysia, the Philippines, Thailand and Vietnam), Sub-Saharan Africa (eg Ethiopia, Kenya and Nigeria), and LatAm (eg Argentina, Ecuador) are grappling with how to balance their relations with the US and China.

Arguably, those that have done so most successfully are the ones with the strongest political and economic positions domestically, eg the GCC monarchies, and, to a degree, Bangladesh (with an export growth engine and a de facto one-party state) and Vietnam (with an export growth engine and a de jure one-party state).

The example of Imran and, to a degree, President Erdogan in Turkey, might suggest that attempting such foreign policy independence is very difficult in advance of securing sufficient domestic political and economic gains.

Related reading – US, Europe, China: A Tripolar World hastened by the Russia-Ukraine War, March 2022

US-China-EU dominate Global Trade

US and EU have decisive Sanctions Capability

4) Anti-corruption crusade on the campaign, less so in government

A large part of Imran's popular appeal has been his identification of corruption in the established political parties and his vow to bring the leadership of those parties to justice.

It continues to sustain his message now that he is back in the opposition, having successfully portrayed his government's fall as engineered by a corrupt cabal spanning the military, intelligence, judicial and civilian political elite.

Regardless of the undoubted appeal of anti-corruption rhetoric, Imran's stint in government may offer a lesson in the counter-productive and ultimately futile effort in pursuing anti-corruption litigation.

Even if one assumes that the anti-corruption effort under Imran's government should not be conflated with the purges of political rivals seen in the one-party states of China or Vietnam, or in the monarchies of Qatar and Saudi Arabia, there is almost no lasting success to record from that effort, but a lot of wasted time and political capital.

There is a similarity here between large-scale corruption and crimes against humanity, of the sort considered in the International Criminal Court. In practical terms, allowing a brutish dictator an orderly exit from the stage may be a more effective way to move forward than a long, complicated, trial that may not be won by the plaintiff and where the cost of losing for the defendant is so great that they are left with no option but to fight, in some cases literally, to the death.

In addition to the difficulty in prosecuting large-scale corruption, is the counter-productive ripple that the associated imprisonments and court cases have on ongoing decision-making by bureaucrats and investment by entrepreneurs, out of fear of either an ongoing or future witch hunt.

Imran's story may offer the lesson that anti-corruption is a very powerful campaign tactic but, amid other pressing priorities and limits on trusted and capable staff in government, not a fruitful governing strategy, particularly in countries where the independence of the judiciary is fragile. As such, it might be considered a subset of populist economic policy proposals: best suited to the campaign or protest trail.

Consider the annulment of former and current president Lula's conviction in Brazil in March 2021 and, more broadly, the lack of any improvement in governance across LatAm following the 2014 Odebrecht-Lava Jato scandal and investigation (governments in 12 countries were implicated in collusion with construction companies, bribes and stolen state funds).

The conviction of former Malaysia prime minister Najib Razzak in July 2020 for corruption related to the 1MDB scandal, which took place over a decade earlier. Najib was able to avoid jail for another two years during his appeal. Throughout his investigation, trial, and appeal, Najib remained a key player within the largest single parliamentary party (UMNO). There are still a number of other high-profile politicians who face outstanding criminal charges but remain active in government, and currently, in the general election.

Related reading – Corruption in emerging and developed markets – an ESG blindspot, May 2022

Corruption composite index in emerging markets

5) Prudent economic policy sacrificed on the altar of populism

Under the tenure of Imran's government, there were some tangible economic gains, eg a return to higher growth (from negative 0.9% in fiscal 2020, to 5.7% in 2021, and 6.0% in 2022, according to the Pakistan Economic Survey), accelerating growth in exports (from 7.5% in fiscal 2020, to 14% in 2021, to 39% in 2022) and a wider social safety net (increasing by 60% the number of beneficiaries from the low income support scheme, known as BISP, between fiscal 2018 and 2022).

But, faced with unpopular choices in macroeconomic policy, Imran's government opted for populism on more than one occasion, eg first, delaying approaching the IMF when it started its term in 2018 with an inherited balance of payments crisis, and second, when, under pressure and unsure of its survival, in early 2022, introducing a set of energy subsidies (albeit in the form of a temporary relief package) that arguably derailed the IMF deal to which it had, by then, agreed.

And, despite much talk for years beforehand of sorting out state-owned enterprises, very little change took place in the largest liabilities, eg Pakistan Airlines, Railways, and Steel, as well as the local electricity distribution companies and the electricity sector's circular debt.

What we do not know is how Imran's government would have fared without the global calamities of the Covid pandemic, very high fuel and food prices, and higher US dollar and interest rates – the gains mentioned above were ultimately overwhelmed by import growth, accelerating inflation and a loss of confidence from foreign portfolio investors.

Should Imran return to power, he is likely going have to build his reputation for prudent economic policy in the eyes of the foreign capital providers (multilateral, bilateral and private sector) on which the economy will, for the foreseeable future, depend.

So far, the lesson from Imran's experience in government is that structural economic reform takes a long time and any populist detour is severely punished by foreign portfolio investors.

Countries reliant on external capital flows likely need a rare combination of a strong and lasting political mandate for reform as well as a sustained period of benign external conditions. That assessment could be applied arguably to most emerging markets currently in or seeking IMF programs.

Related reading – Central bank independence: An adult in the room, whether UK or emerging markets?, September 2022

Pakistan Fiscal Deficit worsened under Imran's government but mitigating factors: Covid, commodity price spike, floods

6) Charismatic leadership leads the revolution but inhibits its institutionalisation

A revolutionary challenge to a political and economic status quo requires mass disaffection and charismatic leadership. Imran has unquestionably provided the latter.

However, the downside of charismatic leaders is that their movement is so reliant on them that the institutional structure and succession candidates are not sufficiently developed for the movement to outlive them.

The PTI in Pakistan has a key-person problem, which is perhaps why the recent assassination attempt took place. Without Imran, the PTI may not retain the ability to mobilise the mass population, let alone channel that mobilisation into an organised movement for change.

The paradox of the charismatic leader is as important in a political challenger movement as it is in an incumbent government: the centralised control of power gets things done but leaves the broader organisation vulnerable to the loss of that central controller.

Key-person risk could be applied to a number of emerging market political leaders: eg Xi in China, Modi in India, Muhammed bin Salman in Saudi Arabia and Erdogan in Turkey.

Related reading – Xi Jinping and key person risk in emerging markets, November 2021

Key person risk: Leaders' longevity in emerging markets

7) Championing moderate Muslim multilateralism worries some

A moderate interpretation of Islam has featured consistently in Imran's rhetorical appeal since the 1996 outset of his journey in formal politics.

This constant messaging has helped secure perhaps the largest, most easily mobilised and most powerful element in his support base – the youth segment, most of whom have no living memory of his final act as a cricketer, leading Pakistan to victory in World Cup three decades ago.

The median age in Pakistan is 23 years old, ie the average citizen was born three years after the founding of PTI.

This moderate interpretation has competed with the much more radical, fundamentalist one peddled in Pakistan during and after the martial law administration of Zia-ul-Haq in the 1980s.

When in power, Imran, to a degree, internationally championed multilateral moderate Islamism, cultivating relations spanning Mahatir in Malaysia, to Erdogan in Turkey and to Muhammad bin Salman in Saudi Arabia (including attending the Future Investment Initiative in Riyadh soon after the Khashoggi Affair).

This culminated in Pakistan hosting the Organisation of Islamic Cooperation (OIC) – a group of 57 majority-Muslim states, founded in 1969, which claims to "safeguard and protect the interests of the Muslim world in the spirit of promoting international peace" – in March 2022.

However, the OIC is more of a talking shop than a coordinated bloc capable of leveraging its scale to wield global influence or to arbitrate disputes among its own members (of which there have been many since 1969). And it may be that few countries outside the OIC wish to see it grow into a meaningful multilateral body – eg China was a 'special guest' and Russia was an 'observer' at the OIC this year – and, over time, Imran's relationships span the range of OIC members more than those of the leaders of other large members, ie Iran, Indonesia, Nigeria, Saudi Arabia and Turkey.

Moreover, not all countries within the OIC necessarily sympathise with a moderate interpretation of Islam nor wish to see any moral authority shift to a pro-democracy advocate like Imran.

Related reading – The Islamic Bloc: OIC a talking shop more than power base, but this could change, March 2022

Organisation of Islamic Cooperation – 57 member states