DIPLOMACY, TRUST, AND INVESTMENT: THE ROLE OF US–PAKISTAN RELATIONS IN SHAPING PAKISTAN’S ECONOMIC CLIMATE

Abstract

The objective of this study is to explore the connection between Pakistan's investment climate and US–Pakistan relations, especially foreign direct investment (FDI) inflows. This study aims to investigate how the economic impacts of these two countries' diplomatic storms and stresses have affected investors' faith and performance within the economy. This study adopts a mixed-methods research approach, with quantitative analysis of FDI trends (2010-2024) and qualitative analysis using a thematic approach to policy documents, trade agreements, and academic literature. This study concludes that FDI inflows to Pakistan are irregular and highly responsive to the external diplomatic environment and the country's internal structural challenges. In the quantitative results, the level of U.S.-Pakistan relations tracks moderate growth in FDI inflows when relations are good and a decrease when relations are bad. But the qualitative analysis shows that diplomatic relations alone are not enough for the country to achieve long-term investment growth. Trust deficit, institutional weakness, and domestic economic issues such as inefficient regulations, low energy supply, and inconsistent policies greatly undermine investor confidence. Another lesson from the study is the need to create a space for dialogue via institutional channels such as the Trade and Investment Framework Agreement (TIFA), but these are poorly implemented. The study's findings show that Pakistan's investment climate is affected by geopolitical relations and governance systems. Based on the research findings, there is a need for sustainable improvements in FDI, which can be achieved by strengthening diplomatic relations with the US and promoting wide-ranging economic reforms to gain investor confidence and stability in the country's economy.