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Ahmed Ali / Orange, CA

:: Positive Trend As Growth Returns To Pakistan, Hopes Rise on Terror Front

:: Exports, Malls Enjoy Boom, As West
Ramps Up Aid; But Will Militants Notice?'Economics Isn't Everything'

:: By JAY SOLOMON, ZAHID HUSSAIN
and SAEED AZHAR Staff Reporters of THE WALL STREET JOURNAL

One recent afternoon in Islamabad, Pakistan, 2,000restless men in long beards and white robes descended upon the offices of the state-owned cellular-telephone company. They weren't screaming anti-Western slogans or protesting this Islamic nation's support for the U.S.: They were clamoring to get mobile phones on sale for a limited time only.

"They're waiving the fees!" said 23-year-old banker Shahid Latif. "Everybody's getting one.” Pakistan is experiencing an economic renaissance, largely obscured by a steady flow of darker news about al Qaeda fugitives, terrorist plots and rogue nuclear proliferations. Driven by fiscal reforms and a big dose of Western aid, the Pakistani economy grew 6.4% during the year ended in June. That's more than double the rate in the year prior to Islamabad's 2001 decision to back the Bush administration’s war on al Qaeda.

Pakistan's exports have nearly doubled over the past six years. Manufacturing output grew nearly 17% last year, and Islamabad is sitting on a record $12 billion in foreign-exchange reserves --four times the amount it held before the 9/11 attacks. Pakistan has tapped international credit markets and cracked down on a notorious black market that U.S. officials believe has helped fund militant Islamicgroups. Falling interest rates boosted automobile sales roughly 45% last year.

To U.S. officials, Pakistan is emerging as a laboratory for how Western economic orthodoxy can contribute to stability in countries fighting Islamic extremism. They hope that economic development and structural reforms will sap the appeal of militant groups in the Islamic world's third-most-populous country.

Critics point out that Pakistan's growth has so far benefited few outside the cities, leaving many of the poorest behind. Democratic reforms are lagging, and many Pakistanis are skeptical that Gen. Pervez Musharraf's military-led government can bring long-term prosperity. A committed minority of extremists may continue to disrupt Washington's agenda no matter what happens to the economy.

"Support for Jihad has nothing to do with poverty or unemployment," said mobile-phone salesman Muhammed Zareef, from his stall in the heart of Peshawar's Sadder market. Although his business is flourishing, he still professes his support for
Afghanistan's ousted Taliban government and its fight against U.S. forces over the border.

Gen. Musharraf inherited a country on the verge of insolvency when he and a group of senior military officers removed Pakistan Prime Minister Nawaz Sharif from office in a bloodless coup in October1999. The government was then channeling more than 60% of its revenues into servicing debt, leaving little for public works or social programs.

Foreign-exchange reserves had plunged below $400million, barely enough to finance two weeks of imports. Pakistan found it near impossible to tap global financial markets after Washington slapped economic sanctions on it for its nuclear tests.

Gen. Musharraf moved quickly to recruit some of his country’s top economic minds back from abroad. In addition to Prime Minister Shaukat Aziz, a top Citicorp Inc. executive, Pakistan's leader also wooed men who had reached senior positions at the World Bank, Asian Development Bank and the International Monetary Fund.

His new economic team quickly resurrected a dormant IMF program by implementing a string of tough fiscal measures, which included slashing subsidies, devaluing
the Pakistani currency, and allowing the market to set interest rates. They also sold off state-owned companies and removed a slew of tariff barriers.

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