Political Economy of a Post-Colonial State Economic Development of Pakistan 1947-2018 Shahid Hussain Raja Omar Hayat Raja

Political Economy of a Post-Colonial State Economic Development of Pakistan 1947-2018 Shahid Hussain Raja Omar Hayat Raja

transition from centralized economies to capitalist economies in the former socialist states, a change which resulted in drastically lowering of incomes in these countries. Financial crises of 1990s almost sealed the special status of growth as a magic wand.
Chapter-1: Introduction
The pendulum again started shifting.in the 2000s. when the growth itself came under microscopic scrutiny. It was seen essential but not considered as an end itself; rather, it was viewed as a means to achieve some higher objective i.e., improving the quality of life of every citizen. Growth for the sake of growth was considered neither good economics nor good politics; it must be multi-dimensional, accompanied by suitable structural changes, avoiding resource intensive development and speculative investment.
Theories of economic growth keep on changing with the passage of time in response to the changes in the objective realities and subjective perceptions of those propounding these theories. Learning lesson from the success of planned growth through state in the Union of Soviet Socialist Republics (USSR), conventional wisdom advocated in the 1950s and 60s that the government could be the driving force for accelerating the rate of growth of a developing country for which rapid industrialization through capital accumulation was the only requirement. At the same time, integration into the world was necessary for certain key products, yet it was neither necessary nor sufficient for growth; hence import substitution was considered a prerequisite for take-off. Foreign Direct Investment was to be avoided but government borrowing was acceptable preferably from formal sources etc.
And this line of argument is still in vogue. Now the conventional wisdom is advocating that the growth must not only be inclusive, but it should also be participatory-people oriented, people centred and participated by all the stakeholders. In this age of rapidly globalizing world, no country can grow alone. Globalization may be threat to some sectors of the political economy, but it also presents opportunities for rapid overall growth. Jobless growth always leads to economic inequality. Hence job creation must be the defining component of any growth strategy etc.
This book attempts to explain the development experience of a post-colonial state in the backdrop of these shifting ideas about growth.
In the 1970s all these ideas came under heavy scrutiny on the basis of empirical evidence. Downplaying the role of the state as a guarantee of economic success of a country, government came to be viewed as a hindrance in this process as its failure was considered more devastating and pervasive than market failure. Similarly, capital accumulation lost its pre-eminence as a crucial determinant of economic growth and was listed as important but not the main determinant of economic progress. Instead, increasing human capital in the form of better education, skills and health took precedence.
Pakistan was a typical underdeveloped state when it started its journey as an independent nationstate on 14th of August 1947, as a result of the dissolution of the British Indian Empire. It was facing almost the same myriad challenges every post-colonial state was grappling with in those days. Boldly accepting these challenges ranging from revolution of rising expectations of the masses on the one hand and becoming an independent, confident and prosperous state in the comity of nations on the other, the new state started its journey literally from a scratch.
Further, eulogising the role of the private sector in productive investment, it was suggested that the trade liberalization, rather than import substitution, was now the key to rapid economic growth as it would bring forth efficiency gains and discipline the domestic producers. Declaring state to state foreign development assistance as detrimental for the healthy growth of indigenous private sector, Foreign Direct Investment (FDI) was recommended as a panacea for overcoming the shortage of capital in the country.
Despite being one of the least developed countries in the world suffering from acute shortage of critical educated and trained human resource, Pakistan initiated formal planning process with whatever talent it had and managed to grow at a fairly impressive rate of 4 per cent per year through the first decade of the nation’s existence. Prudent economic management coupled with some fortuitous events helped it to outpace its rate of population growth which never came below 3% per annum.
However, rapid economic growth of China and India, both growing with different systems during the period when there was a gradual but substantial slowdown in growth rates of the developed countries during the 1980s (“Lost Decades”), brought a paradigm shift in the thinking about the development process. There was a pronounced scepticism about the cause, content and course of economic growth and the pendulum shifted towards the poverty alleviation and human development.
Come 1960s. Thanks to rapidly escalating Cold War, generous military and civilian aid started flowing in, enabling the Pakistani state to strengthen its private sector by pursuing a development model which can be cited as a fine example of what was the conventional wisdom under the Modernization
During the 1990s, this new thinking was reinforced by the experience of the economic management
theory. Pakistan’s economy grew at an un-precedented rate of 6% per anum for almost a decade accompanied by all-round structural changes. However, it was unable to successfully manage the contradictions created by rapidly modernising a predominantly traditional society,; it dismembered into two, its eastern part becoming Bangladesh and the western part became Pakistan in 1971.
the world whle it is 23 largest economy in the world in terms of Purchasing Power Parity (PPP).
Because of her burgeoning population crossing 210 million, her per capita income of US$ 5030 (2018), places her in middle income countries group. Pakistan is one of the Next Eleven, the eleven countries that, along with the BRICs, have a potential to become one of the world’s large economies in the 21st century.
In order to rectify the socioeconomic contradictions created as a result of pursuing the capitalist development model mentioned above, and to provide social justice to those who were left out in that process, the Bhutto regime toyed with the idea of socialist transformation of the country in the early 1970s. He therefore brought fundamental structural changes in all the sectors of the political economy and built economic institutions resulting in the emergence of state capitalism through massive nationalization program. However, he had to pay a heavy price for challenging the entrenched classes and was himself dethroned and later executed.
According to Goldman Sachs, by 2050, with an estimated GDP of $3.33 trillion, Pakistan is expected to become world’s 18th largest economy. According to the list of “32 Most Powerful Economies In The World By 2050” published by The Independent in 2017, Pakistan ranks at number 17; ahead of South Korea, Italy, Canada, Spain, Australia and Netherlands.
This book is all about these attempts and U-turns, failures and achievements and so on.
1980s saw the reversal of that short aberration in the overall economic policy of the political economy of Pakistan introduced by Bhutto; de-nationalisation and de-regulation of economy put the economy back on track of the capitalist model. Soviet intervention in Pakistan’s next door neighbour, Afghanistan resulted in massive military and civilian assistance to Pakistan, sustaining the military regime and accelerating the economic growth.
Divided in twelve chapters, it starts with recounting the initial conditions at the time of her independence-acute shortages of physical, financial and economic resources at its disposal, the administrative handicaps, the abysmal state of infrastructure etc. It then examines in a bit detail, the efforts made during the seven decades of her existence as an independent nation-state to transform its political economy from an underdeveloped stage to the one it is now.
1990s saw acceleration of that policy through massive economic liberalisation and global integration of Pakistan economy. However, less friendly external environment and inept macroeconomic management during the 1990s could not yield the results expected. Rates of economic growth remained slightly above the rate of population growth and inflation crossed the double digits year after year. Consequently, poverty rose to 33%, the foreign debt ballooned to nearly the entire GDP of Pakistan, the highest in South Asia.
During these seven decades, Pakistan initiated formal planning process in the 1950s and strengthened its industrial sector in the 1960s, toyed with the idea of socialist transformation of the country in the 1970s for a short period and then adopted economic liberalisation and global integration as cornerstones of its economic management and growth policy.
Chapter eleven of the book sums up the development experience—what Pakistan did marvellously, what it did marginally and where it failed miserably during her development journey. It ends with the stock taking of the political economy of Pakistan-where it stands now by carrying out the SWOT Analysis of Pakistan’s economy.
2000s witnessed the reversion of political governance of the state to its military phase when Pakistan became a front line state in the wake of 9/11. It brought the Americans in this part of the world and with it started the usual inflow of military and civilian aid. It sustained both, the military rule and the economy which grew by the military rate of growth of more than 6/7 per cent per year, doubling the national GDP in seven years. With a phenomenal expansion in Pakistan’s urban middle class, Pakistan became one of the four fastest growing economies in the Asian region during 2000-07. This phase was followed by the advent of democratic era in 2008 in which Pakistan’ economy again reverted to growing at the civilian rate of growth of 3 to 4 per cent which is continuing till present.
Annexure B at the end of the book is an analysis of the factors responsible for the dismemberment of pre-1971 Pakistan and the lessons other developing countries can learn from this traumatic episode of Pakistan’s history.
th
With more than US$ 300 Billion GDP in nominal terms Pakistan, is now the 44″ largest economy in
1980s:de-nationalisation and de-regulation of economy put the economy back on track of the capitalist model. Soviet intervention in Afghanistan resulted in massive foreign assistance to Pakistan, sustaining the military regime and accelerating the economic growth.
Summary Chapter One: Introduction
Theories of economic growth keep on changing with the passage of time
1990s: massive economic liberalisation and global integration of Pakistan economy. However, less friendly external environment and inept macroeconomic management during the 1990s could not yield the results expected. Consequently, poverty rose to 33%, the foreign debt ballooned to nearly the entire GDP of Pakistan, the highest in South Asia.
1950s/6os: success of state planning in USSR and of post war Europe by Marshall Plan convinced policy makers in developing countries that planned development by state could accelerate rate of growth for which rapid industrialization through import substitution is the best strategy
2000s: reversion of political governance of state to its military phase; 9/11 resulted in usual inflow of aid which sustained both, the military rule and the economy which grew by 6/7% PA. Pakistan became one of the four fastest growing economies in the Asian region during 2000-07
1970s:government failure was considered more devastating than market failure, capital accumulation lost its preeminence. Instead increasing human capital, trade liberalization, rather than import substitution and Foreign Direct Investment (FDI) was recommended
2010s:This phase was followed by the advent of democratic era in 2008 in which Pakistan’ economy again reverted to growing at the civilian rate of growth of 3 to 4 per cent which is continuing till present.
1980s: substantial slow down in growth rates of the developed countries during the 1980s brought a pronounced scepticism about the cause, content and course of economic growth and the pendulum shifted towards the poverty alleviation and human development.
Divided in twelve chapters, this book is all about these attempts and U-turns, failures & achievements and describe in detail the initial conditions at the time of her independence, the efforts made during the seven decades of her existence as an independent nation-state to transform its political economy from an underdeveloped stage to the one it is now.
1990s: Financial crises of 1990s almost sealed the special status of growth as a magic wand. Stabilisation through macroeconomic management and good governance replaced the old narratives
2000s: growth is not considered as an end itself; rather, it is viewed as a means to improving the quality of life of every citizen. Growth must be multi-dimensional, accompanied by suitable structural changes, avoiding resource intensive development and speculative investment.
2010s: growth must not only be inclusive, but it should also be participatory-people oriented, people centred and participated by all the stakeholders. Globalization presents opportunities for rapid overall growth. Jobless growth always leads to economic inequality. Hence job creation must be the defining component of any growth strategy etc.
This book attempts to explain the development experience of a post-colonial state in the backdrop of these shifting ideas about growth.
1947: typical underdeveloped state at independence on 14th of August 1947,facing myriad challenges, shortages of human and financial resources, administrative handicaps, abysmal state of infrastructure etc
1950s:Pakistan started its journey literally from a scratch, initiated formal planning process and managed to grow 4% PA due to prudent economic management coupled with some fortuitous events
1960s. Thanks to Cold War, generous foreign aid strengthened its private sector. Pakistan’s economy grew at an un-precedented 6% PA for almost a decade accompanied by all-round structural changes. However, contradictions created by rapidly modernising dismembered into two
1970s:Bhutto started socialist transformation of country,brought fundamental structural changes, built economic institutions resulting in the emergence of state capitalism through massive nationalization
The Past
Chapter 2: The Inheritance
History has a very long shadow-policies formulated and actions taken in one period have their short term and long-term repercussions, some spanning over several decades. Some are visible and can be easily traced to any decision taken in one epoch. However, some impacts cannot be pinpointed to a particular decision because of interaction of multiple factors in any situation.
Although Pakistan is only seven-decades old nation-state, its federating units are proud inheritors of thousands of years old Indus Valley Civilisation. Main reason for the emergence of Pakistan was the failure of the dominant Muslim elite of British India in extracting sufficient constitutional guarantees from their counterparts, namely dominant Hindu elite for a substantial share in the political decisionmaking once the colonial rulers left India after the dissolution of the British Indian Empire..
What is Pakistan today, like any other country, it is the cumulative result of all those policies formulated and implemented by the successive ruling elites of the country in 60 years of her existence.
Let us have a brief review of the history of Pakistan’s economic development since her independence, to learn a few lessons for our future guidance
They rightly or wrongly, depending on which side of the political fence you are, feared that in the absence of these safeguards, the Muslim minority in an independent India would gradually lose its cultural identity and would become a politically and economically marginalized underclass, another subservient caste, a second-class citizen in a predominantly Hindu India. These perceptions had been reinforced by the step-motherly treatment Muslim masses got during the brief Congress rule in the provincial governments which it formed after the 1937 elections-a foretaste of things to come. Failing to obtain these assurances and guarantees from the leaders of the Indian Congress, the Indian Muslims launched the movement for the creation of a separate homeland once the British left India.
No doubt, Pakistan was created in the name of Islam, yet role of Islam has been overemphasized in all the narratives regarding the creation of Pakistan as an independent sovereign nation-state. In order to succeed, every movement of this magnitude needs some sort of emotional underpinning to arouse the passions of the general public for ensuring their maximum participation. Religion, race and language have been common battle cries throughout history in this respect. However, use of Islam as a battle cry for Pakistan Movement was more to do with objective realities than a deliberate choice of the leaders of the movement. That’s why the Pakistan Movement, though couched in religious terminology, was basically a movement by the downtrodden Muslim community of India to safeguard their socioeconomic interests and fulfil their dreams of improving the quality of life in a country where they could live according to their cherished dreams.
Thus, for a common man, Pakistan was the Promised Land, an El Dorado to redress all his grievances and remove his deprivations. He was not sophisticated enough to estimate the financial constraints of the new-born country, regarded the creation of the new country as a heaven in which there would be no money-lender, no ahrti (middleman), no scarcity of food, shelter and clothing.
However, they were in a big shock.
When Pakistan came into existence it inherited more than 8, 50,000 km of land mass which was divided in two wings, one of which was only 15 %of the total but contained 54 % of the population. In between these two wings lay 1600 km of a hostile country, waiting and hoping for the collapse of the new state within 6 months of its coming into existence. Two Nations Theory which provided moral backing and political justification for the division of British India was neither relevant for the integration of diverse nationalities nor sufficient to create a new nation. Nation building demanded a shared vision, duly formulated with consensus, a formally approved constitution or a social contract between the state and the citizens and institutions to implement this social contract in letter and spirit. The aspirations for Pakistan that had been so important to Muslims in Muslim-minority provinces and the goals for the new state these urban refugees had had in their minds were not always compatible with those of the traditional rural people already inhabiting Pakistan, whose support for the concept of Pakistan came much later. Pakistani society was polarized from its inception.
underdeveloped and inherited only 34 industrial units of insignificant importance. East Pakistan producing 70 per cent of world jute was without any jute mill; West Pakistan, most suited for cotton did not have any textile mill worth the name. Although Karachi was a modern port with substantial trading and business activity, much of Pakistan was on the fringes of the British Indian Empire, not linked to the industrialization that had taken place in central India. Around 90 % of the people lived in the countryside, and there were only 8 towns with a population of more than 100,000. Pakistan being a predominantly an agricultural country was not a wealthy country as its major sector i.e., agriculture, did not produce a sufficient surplus to create the wealth needed for industrialisation.
Notwithstanding the fact that all the communities and nationalities opting for Pakistan were inheritors of rich social and cultural traditions, it was an underdeveloped country in the classic sense of the word it is used in economic literature. If any student of development economics wanted to know the characteristics of an under developed country, all he had to do was study Pakistan at the time of its independence. Some of the salient features of the political economy of Pakistan at the time of her independence in 1947 can be enumerated as follows;
Disarrayed Service Sector:
Its service structure was in total disarray with the migration of non-Muslims who had dominated the service sector in pre-independence Pakistan. Mass scale exodus of administrative talent, financial capital and entrepreneurship, historically under-represented in British India due to imperatives of colonial development and strategic compulsions of the occupying power, meant there were very few people who could run the government offices, social services, financial institutions and commercial enterprises. Arrival of more than one million traumatized refugees who were without any assets but full of expectations from a country which was still reeling from the pangs of birth, added to the miseries of the state which was almost financially bankrupt and administratively decimated by en masse emigration of their key personnel. Hindus and Sikhs, who had traditionally managed much of the commercial activity of West Pakistan, were replaced largely by Urdu-speaking Muslims from India. Although very passionate about the new country, they were no match for the experience of those who departed. Most of them headed for Karachi and other cities in Sindh, where they took the jobs vacated by departing Hindus.
Agricultural Backwardness:
Pakistan inherited a predominantly agrarian economy in which more than 60 per cent of her GDP was being contributed by its agriculture sector which was also absorbing more than 70 per cent of her labour force and provided bulk of its exportable surplus. However, this sector was still at the primitive stage where capitalist development had not made any inroads. Dominated by big land owners who owned large tracts of land where they had limited incentive to increase productivity to earn more income. On the other hand, the vast majority of tenants who tilled these lands, did not have the means to raise the productivity.
External Hostilities :
Soon after the creation of Pakistan, Afghanistan laid claims on the Pakistani areas situated along the Pakistan-Afghanistan border. These irredentist claims from Kabul were based on the ethnic unity of tribes straddling the border with the emotional appeal of “Pakhtunistan,” homeland of the Pashtuns. However, Pakistan upheld the treaties Britain had signed with Afghanistan and refused to discuss the validity of the Durand Line as the international border. Relations with Afghanistan were hostile, resulting in the rupture of diplomatic and commercial relations and leading Afghanistan to cast the only vote against Pakistan’s admission to the United Nations (UN) in 1947.
Consequently, it was basically a subsistence agricultural rural economy, with extremely poor level of rudimentary infrastructure, technological penetration or application of modern techniques of agricultural farming. After the migration to India of the Sikh farmers who were instrumental in making Punjab the Breadbasket of British India, Pakistan’s agricultural sector was facing acute shortage of skilled labour force and resourceful landlords.
While hostilities with Afghanistan were at the most an irritant, it was much more serious with India. It started with battle of water in the Punjab, when India stopped the supply of water from the head works given to India through Radcliff Award; it went to Kashmir where war started with India over Kashmir. Consequently, India withheld the release of the money which came to Pakistan’s share as a result of division of assets at a time when it was needed the most.
Lack of Industrial Base: Same was the case with its industrial sector. Pakistan was made up of states that were mostly
When Pakistan came into existence it inherited more than 8, 50,000 km of land mass which was divided in two wings, one of which was only 15 %of the total but contained 54 % of the population. In between these two wings lay 1600 km of a hostile country, waiting and hoping for the collapse of the new state within 6 months of its coming into existence. Two Nations Theory which provided moral backing and political justification for the division of British India was neither relevant for the integration of diverse nationalities nor sufficient to create a new nation. Nation building demanded a shared vision, duly formulated with consensus, a formally approved constitution or a social contract between the state and the citizens and institutions to implement this social contract in letter and spirit. The aspirations for Pakistan that had been so important to Muslims in Muslim-minority provinces and the goals for the new state these urban refugees had had in their minds were not always compatible with those of the traditional rural people already inhabiting Pakistan, whose support for the concept of Pakistan came much later. Pakistani society was polarized from its inception.
underdeveloped and inherited only 34 industrial units of insignificant importance. East Pakistan producing 70 per cent of world jute was without any jute mill; West Pakistan, most suited for cotton did not have any textile mill worth the name. Although Karachi was a modern port with substantial trading and business activity, much of Pakistan was on the fringes of the British Indian Empire, not linked to the industrialization that had taken place in central India. Around 90 % of the people lived in the countryside, and there were only 8 towns with a population of more than 100,000. Pakistan being a predominantly an agricultural country was not a wealthy country as its major sector i.e., agriculture, did not produce a sufficient surplus to create the wealth needed for industrialisation.
Notwithstanding the fact that all the communities and nationalities opting for Pakistan were inheritors of rich social and cultural traditions, it was an underdeveloped country in the classic sense of the word it is used in economic literature. If any student of development economics wanted to know the characteristics of an under developed country, all he had to do was study Pakistan at the time of its independence. Some of the salient features of the political economy of Pakistan at the time of her independence in 1947 can be enumerated as follows;
Disarrayed Service Sector:
Its service structure was in total disarray with the migration of non-Muslims who had dominated the service sector in pre-independence Pakistan. Mass scale exodus of administrative talent, financial capital and entrepreneurship, historically under-represented in British India due to imperatives of colonial development and strategic compulsions of the occupying power, meant there were very few people who could run the government offices, social services, financial institutions and commercial enterprises. Arrival of more than one million traumatized refugees who were without any assets but full of expectations from a country which was still reeling from the pangs of birth, added to the miseries of the state which was almost financially bankrupt and administratively decimated by en masse emigration of their key personnel. Hindus and Sikhs, who had traditionally managed much of the commercial activity of West Pakistan, were replaced largely by Urdu-speaking Muslims from India. Although very passionate about the new country, they were no match for the experience of those who departed. Most of them headed for Karachi and other cities in Sindh, where they took the jobs vacated by departing Hindus.
Agricultural Backwardness:
Pakistan inherited a predominantly agrarian economy in which more than 60 per cent of her GDP was being contributed by its agriculture sector which was also absorbing more than 70 per cent of her labour force and provided bulk of its exportable surplus. However, this sector was still at the primitive stage where capitalist development had not made any inroads. Dominated by big land owners who owned large tracts of land where they had limited incentive to increase productivity to earn more income. On the other hand, the vast majority of tenants who tilled these lands, did not have the means to raise the productivity.
External Hostilities :
Soon after the creation of Pakistan, Afghanistan laid claims on the Pakistani areas situated along the Pakistan-Afghanistan border. These irredentist claims from Kabul were based on the ethnic unity of tribes straddling the border with the emotional appeal of “Pakhtunistan,” homeland of the Pashtuns. However, Pakistan upheld the treaties Britain had signed with Afghanistan and refused to discuss the validity of the Durand Line as the international border. Relations with Afghanistan were hostile, resulting in the rupture of diplomatic and commercial relations and leading Afghanistan to cast the only vote against Pakistan’s admission to the United Nations (UN) in 1947.
Consequently, it was basically a subsistence agricultural rural economy, with extremely poor level of rudimentary infrastructure, technological penetration or application of modern techniques of agricultural farming. After the migration to India of the Sikh farmers who were instrumental in making Punjab the Breadbasket of British India, Pakistan’s agricultural sector was facing acute shortage of skilled labour force and resourceful landlords.
While hostilities with Afghanistan were at the most an irritant, it was much more serious with India. It started with battle of water in the Punjab, when India stopped the supply of water from the head works given to India through Radcliff Award; it went to Kashmir where war started with India over Kashmir. Consequently, India withheld the release of the money which came to Pakistan’s share as a result of division of assets at a time when it was needed the most.
Lack of Industrial Base: Same was the case with its industrial sector. Pakistan was made up of states that were mostly
against them and the Khan and brought about their accession in 1948.
The assets of British India were divided in the ratio of seventeen for India to five for Pakistan by a decision of the Viceroy’s Council in June 1947 reflecting the relative size and populations of the two countries. It was therefore agreed that Pakistan would be paid 750 million rupees of the 4 billion rupees in the Reserve Bank. The first 200 million rupees were paid. Then war broke out over Kashmir and India refused to pay the rest, saying Pakistan would only use it to buy arms to fight against India. It was only after Gandhi went on hunger strike that a further tranche of 500 million rupees was paid. A financial agreement was reached in December 1948, but the actual settlement of financial and other disputes continued until 1960.
Broken Economic Complementarity:
Dividing the Subcontinent on religious basis and carving out new borders of independent states resulted in discarding the principles of complementarity with devastating consequences for Pakistan because of its being on the periphery. After severing ties with India, Pakistan lost the major market for its commodities. West Pakistan, for example, traditionally produced more wheat than it consumed and had supplied the deficit areas in India. Cotton grown in West Pakistan was used in mills in Bombay and other West Indian cities. Similarly the main consumer of Jute, the commodity produced in East Pakistan, was now in India. On the other hand, commodities such as coal and sugar were in short supply in Pakistan as they had traditionally come from areas now part of India. And much of Punjab’s electricity was imported from Indian power stations.
Administrative Handicaps:
Pakistan lacked the machinery, personnel, and equipment for a new government. Even its capital, Karachi, was a second choice–Lahore was rejected because it was too close to the Indian border. Division of the all-India services of the Indian Civil Service and the Indian Police Service was also difficult. Out of a total of 1,157 Indian officers, only 101 were Muslim. Among them, ninety-five officers opted for Pakistan; they were joined by one Christian, eleven Muslim military officers transferring to civilian service, and fifty Britons, for a total of 157. But only twenty of them had had more than fifteen years of service, and more than half had had fewer than ten years. These men who formed the core of the Civil Service of Pakistan, were the architects of the administrative, judicial, and diplomatic services of a new state and proved indispensable in running the government machinery during Pakistan’s first two decades.
Trade War:
The two dominions decided to allow free movement of goods, persons, and capital for one year after independence, but this agreement broke down. In November 1947, Pakistan levied export duties on jute; India retaliated with export duties of its own. The trade war reached a crisis in September 1949 when Britain devalued the pound, to which both the Pakistani rupee and the Indian rupee were pegged. India followed Britain’s lead, but Pakistan did not, so India severed trade relations with Pakistan.
Communal Riots:
Above all other concerns were the violent communal riots which broke out soon after the announcement of the Radcliffe Award for the demarcation of borders between India and West Pakistan. The actual boundaries of the two new states were not even known until August 17, when they were announced by the Commission. Muslims fleeing India were attacked by the Hindus and Sikhs while their counterparts were similarly attacked by the Muslims in those areas falling within the jurisdiction of Pakistan. No one was prepared for the communal rioting and the mass movements of population that followed the June 3, 1947 London announcement of imminent independence and partition. The most conservative estimates of the casualties were 250,000 dead and 12 million to 24 million refugees.
The outbreak of the Korean War (1950-53) and the consequent price rises in jute, leather, cotton, and wool as a result of wartime needs, saved the economy of Pakistan. New trading relationships were formed, and the construction of cotton and jute mills in Pakistan was quickly undertaken. Although India and Pakistan resumed trade in 1951, both the volume and the value of trade steadily declined; the two countries ignored bilateral trade for the most part and developed the new international trade links they had made.
Princely States Issue:
The India Independence Act left the rulers of 625 princely and semi-independent states theoretically free to accede to either dominion. The frontier princely states of Dir, Chitral, Amb, and Hunza acceded quickly to Pakistan as did the predominantly Muslim states of Bahawalpur and Khairpur ruled by Muslim rulers. However, the Khan of Kalat in Baluchistan declared independence on August 15, 1947. Other Baloch tribal chiefs also expressed their preference for a separate identity. Pakistan took military action
Defence Needs:
As a result of the division of military assets in 1947, Pakistan started its life with a seriously underresourced military force which it badly needed to ensure its external defence and internal security. The British were, at first, reluctant to divide the armed forces but eventually it was agreed that they should be split 36%: 44% between Pakistan and India and that too along religious lines. All 16 ordnance factories were in India, which refused to hand any over. Consequently, Pakistan had no factories capable of making military goods. India eventually agreed to pay 60 million rupees in lieu of handing over ordnance factories and this was used by the Pakistani government to build an ordnance factory at Wah. The military supplies which India agreed to hand over sometimes did not arrive, or when they did, they were often old, worn, damaged and obsolete.
Civic Amenities:
In the last decade of colonial rule in India, the writ of the state had been gradually waning due to increasing intensity of the anti-imperialistic agitation launched by the native Indians as well as the necessity of the British government to concede to their demands for gaining their cooperation for their war efforts. Consequently, less resources and attention were paid to the development and maintenance of social services like health, education and other civic amenities. Areas later falling within the new state of Pakistan suffered the most on account of this neglect as these were situated at the borders of the British Indian Empire and less well-connected to the rest of India.
Resultantly, communicable disease like cholera, malaria and a number of other water-borne diseases affected a large section of the people of these regions. It was compounded by the lack of resources human, financial and physical at the disposal of the new state. In 1948, there were only 211 doctors and 2,825 hospital beds in east Bengal. West Pakistan had better health facilities but far short of requirements. There were only a few district level secondary schools. In higher education, there were only three universities, and a few colleges, schools and religious madrasahs. Both the wings were woefully short of skilled manpower and the facilities for imparting technical skills. More than three million people had died during the great famine of Bengal of 1943, leaving behind poor, wretched and landless members of their families for whom the state was ill prepared to provide adequate livelihoods.
Summary Chapter Two: The Inheritance at 1947
I Pakistan, a 5000 years old society, came into existence as independent country after dissolution of British Indian Empire as a result of independence struggle by the Muslim minority in British India who considered themselves to be a nation, about their future | Thus Pakistan Movement, though couched in religious terminology, was basically a movement by the downtrodden Muslim community of India to improve the quality of life in a country where they could live according to their cherished dreams. I However, when Pakistan came into existence it was an underdeveloped country. Some of the salient features of the political economy of Pakistan at the time of her independence in 1947 can be enumerated as follows; I Agricultural Backwardness: Pakistan inherited a subsistence agricultural rural economy, with extremely poor level of rudimentary infrastructure, technological penetration or application of modern techniques of agricultural farming. After the migration to India of Sikh farmers, Pakistan’s agricultural sector was facing acute shortage of skilled labour force and resourceful landlords. I Lack of Industrial Base: Same was the case with its industrial sector and inherited only 34 industrial units of insignificant importance. without any jute mill; any textile mill worth the name. I Disarrayed Service Sector: Mass scale exodus of administrative talent, financial capital and entrepreneurship, meant there were very few people who could run the government offices, social services, financial institutions and commercial enterprises. | External Hostilities : Hostilities with Afghanistan on eastern border and with India on the west.. It started with battle of water in the Punjab, it went to Kashmir where war started with India which withheld the release of the money which came to Pakistan’s share I Administrative Handicaps: Pakistan lacked the machinery, personnel, and equipment for a new government. Out of a total of 1,157 Indian officers, only ninety-five officers opted for Pakistan; I Communal Riots: No one was prepared for the communal rioting and the mass movements of population that followed the June 3, 1947, London announcement of imminent independence and partition. The most conservative estimates of the casualties were 250,000 dead and 12 million to 24 million refugees. 1 Princely States Issue: The India Independence Act left the rulers of 625 princely and semi-independent states theoretically free to accede to either dominion. Pakistan took military action against them and the khan and brought about their accession in 1948. I Broken Economic Complementarity: After severing ties with India, Pakistan lost the major market for its two major commodities namely cotton and jute while commodities such as coal and sugar were in short supply as they had traditionally come from areas now part of India. And much of Punjab’s electricity was imported from Indian power stations. I Trade War: The trade war between the two countries reached a crisis in September 1949 when Britain devalued the pound. India followed Britain’s lead, but Pakistan did not, so India severed trade relations with Pakistan. New trading relationships were formed, and the construction of cotton and jute mills in Pakistan was quickly undertaken. I Defence Needs: Pakistaninherited seriously under-resourced military force to ensure its external defence and internal security. All 16 ordnance factories were in India, which refused to hand any over. The military supplies handed over were often old, worn, damaged and obsolete. I Civic Amenities: Areas later comprising Pakistan were situated at the borders of the British Indian Empire and less well-connected to the rest of India. Resultantly, communicable disease like cholera, malaria and a number of other water-borne diseases affected a large section of the people of these regions. It was compounded by the lack of resources human, financial and physical at the disposal of the new state.
Chapter-3: 1950s-Democratic Pakistan-1
Democratic Pakistan-1 lasted from her creation on 14th August 1947 to the imposition of Martial Law on 7th of October 1958 during which the country went through several traumatic experiences. As if departing of the founder of Pakistan within almost one year of her creation, followed by the tragic assassination of his deputy after three years were not enough, Pakistan had to fight a war with India which put both the countries on a long path to hostilities, draining their resources on futile pursuit instead of spending them on social and human development of their respective populations. She witnessed great political uncertainty during this period. There were more than ten changes of governments within a span of decade. During this period of great social, economic and political turbulence, in the backdrop of pangs of birth, sheer survival of Pakistan is the second miracle after her creation itself.
only by the desire of the ruling elite to kick start the economic development but was also influenced by the following two developments in the global economy;
1 Success of Marshal Plan: In the war-torn Europe, successful execution of multi-billion Marshal Plan created a hope among the policy makers in the developing countries that massive injection of capital could pull them out of centuries of underdevelopment within decades. Little did they realize that Marshal Plan, based on Keynesian economics type of interventions succeed only in those countries which have strong institutions evolved over centuries. War-ravaged European countries were just going through transitory disruption or recession for which Keynesian economics provides best remedial tools. On the other hand, the conditions in the underdeveloped countries demanded injection of massive doses of capital, accompanied by structural and institutional changes across the entire spectrum of political economy over a long period of time to come out of underdevelopment 1 Soviet Russian Success: Stories of rapid development through rigorous planning of Soviet Russia and other countries in the Eastern Europe were also instrumental in popularizing the idea of planned development.
In this backdrop, one cannot but laud the efforts made by those at the helms of affairs during the first decade of its independence, the first of the four democratic phases of Pakistan’s history. During this period, despite all the handicaps mentioned above, Pakistan initiated its development process. Starting literally from a scratch, it initiated formal planning process, strengthened its private sector, built economic institutions, started construction of infrastructure, built factories, exported produce and was in a position to resist the pressure to devalue its currency while majority of the developing countries were doing the same.
Influenced by the above two success stories, interestingly under two different systems of economic management, were instrumental in shaping the perceptions of policy makers in the developing countries in favour of development planning as a necessary tool of economic development. It was reinforced by the western development scholars, who served as advisers in these countries,
Creation of Pakistan coincided with the start of Cold War in which the two super powers of the day were jostling for winning over developing countries to their respective camps for achieving their strategic interests. India chose Soviet Union; we went for USA camp by joining two collective defence treaties. Now condemned by everyone, these arrangements provided the necessary security umbrella for a new-born weak country against the perceived aggressive designs of a bigger neighbour. Concessional supply of military equipment and training for our armed forces relieved the state of the pressure to allocate resources for defence spending providing fiscal space to spend scarce resources thus saved on developmental projects. Financial assistance and advisory services provided by the foreign experts played a crucial role in shaping the development strategies adopted in the 1950s.
Planned Growth
State therefore started to play a predominant role in the economic development of the country for which several essential institutions were created. Soon after establishing a central bank in 1948, the Prime Minister Liaquat Ali Khan, recognising the need for and importance of an independent institution for systematic planning and development, established the Development Board in the Ministry of Economic Affairs in 1948. This Board drafted a six-year development plan in 1950 which was later on included in the Colombo Plan for Cooperative Economic Development in South and South East Asia. In 1953, this Board was elevated to the level of Planning Commission with the Prime Minister as its Chairman. Zahid Hussain, former Governor of the State Bank of Pakistan was appointed its first deputy chairman.
Economic Policies of 1950s:
While the new state was grappling with the multifarious problems and challenges ranging from security and state building to rehabilitation and nation building, it also started moving towards a systematic planned development within the framework of a mixed economy heavily tilted towards capitalistic mode of economic management. Seemingly contradictory, this decision was necessitated not
Rapid Industrialisation
Main thrust of the national economic policy, formulated by this high-powered Planning Commission, was rapid industrialisation of the country not only to develop its abundant natural resources but also to meet the growing needs of consumer goods by establishing those industries. For this purpose, Industrial
Policy of 1948 laid down foundations of future industrialization by adopting the same strategies which were globally accepted under the name of import substitution. Propounded by leading Latin American development economists, the Dependency Theory provided moral and theoretical justification for import substitution which in any way was the most convenient and practical industrial policy in the backdrop of acute shortages of manufactured goods in ex colonies. In essence it implied
1 Quantitative restrictions on import of manufactured goods to generate abnormal profits for those producing them locally 1 Imposition of taxes on the export of raw material to make their availability for domestic industry at cheaper rates than the others 1 Keeping the exchange rate overvalued to ensure cheap import of capital goods and the raw material needed for establishing and running domestic industries 1 Cascading structure of import duties to allow capital goods and raw material for manufacturing sector at cheaper rates as compared to manufactures goods, 1 Squeezing the peasants by keeping the terms of trade in favour of industry vis a vis agriculture, 1 Liberal tax concessions and non-tax incentives to industrialists
All the above measures created a synergetic impact with industrialization becoming an engine of growth for which the Industrial Policy of 1948 had laid out a comprehensive framework. Huge backlog of infrastructure created a vacuum for construction industry which boomed at the annual average rate of 6.8% while manufacturing grew even more rapidly-@9.6% per annum. Within one decade Pakistan was able to build factories, export produce and was in a position to resist the pressure to devalue its currency at the time when majority of the developing countries were adopting currency depreciation as an important tool of economic policies. It gave the direction Pakistan was to play in the next 4 decades and lay the preconditions to take off which were to prove extremely useful for the big push the development process got in the 1960s.
However, this stellar achievement came at a price.
Neglecting Agriculture
In its zeal to industrialize the country as rapidly as possible, Pakistan’s agriculture sector was ruthlessly squeezed. While the terms of trade remained against agriculture, policy of maintaining strong currency deprived the farmers of any windfall gains as a result of Korean War. Consequently, Pakistan had to pay a heavy price for this ill-informed policy and was forced to import wheat from USA on concessionary basis. Pakistan suffered its first and only economic decline in her entire history when its GDP went into negative in 1951-52. Acceptance of foreign aid and expertise became a norm rather than exception in our policy formulation, resource management and resource generation.
Development of Private Sector
Taking full advantage of these conducive fiscal, monetary and commercial policies, the private sector, dominated by the Muslim trading community from Bombay, played a significant role in augmenting the efforts of the state to put the country on the development road. Lack of time, resources and expertise on the part of state was also another major reason for larger than life role played by the private sector in the early development efforts. They reaped windfall gains due to overall shortage of goods in the country coupled with the huge backlog of infrastructure which had created a vacuum for construction industry which boomed at the annual average rate of 6.8%.
Dominant State Role
Dominant role of state which provided all the facilities to the private sector for its growth inevitably helped in the advent of the ill-famed Licence Raj whereby the policy of licensing for import of goods and foreign exchange resulted in misuse of authority for personal gains by those responsible for issuance of these licences. It not only sowed the seeds of corruption in the country which is still reaping its bitter fruits but also resulted in fomenting a culture of patrons and clients in all spheres of her political economy. Nexus between the state apparatus and the business community developed in which the state functionaries doled out tax payers’ money to the businesses in return for financial quid pro quo. Private sector tasted the fruits of subsidies and since then has been dependent upon the state largess to overcome their operational inefficiencies
Import Substitution
Korean War was a shot in the arm for Pakistan’s nascent private sector which profited hugely as a result of manifold rise in the prices of two major produce of Pakistan-cotton and jute. In fact the profits earned by the commercial classes as a result of this war bonanza, paved the way for the emergence of commercial cum mercantilist class of Pakistan which was to play a very dominant role in the succeeding decade. Korean War also temporarily solved the foreign exchange problem of the country, giving it confidence not to devalue the currency even when all around currencies were being devalued in response to depreciating pound sterling-the major global currency at that time.
Assessment
Seeds of Secession
Although the successor regime of Ayyub Khan has been rightly blamed for the secession of East Pakistan from West Pakistan and becoming an independent country, seeds of this secession were in fact sown in this period. Besides political mis-governance, policy of allowing free hand to the market forces led to the accentuation of the inherited inter provincial economic disparity between the two wings, ultimately
Results
strengthening the hands of those who wanted an independent country.
Not enough and appropriate affirmative measures were to accelerate the economic development of the Eastern wing on priority basis and on massive scale to reduce the economic disparity exiting between the two wings as a historical baggage. In fact, instead of spending more on the development of East Pakistan, there was a massive transfer of resources from East Pakistan to West Pakistan on official and private level. This trend continued during the successor regime of Ayyub Khan; rather it accentuated the already deteriorating situation resulting in the catastrophe which was waiting to happen.
Summary Chapter 3: Democratic Pakistan 1/ 1950s
A. Initial Conditions & Developments/Events during regime tenure
I Pakistan in 1947- Typical post colonial state/underdeveloped with abysmal socioeconomic indicators. Extreme shortage of physical infrastructure and financial and economic resources. Backward agriculture, non-existent industry, rudimentary services sector. 1 Formidable challenges- Huge influx of refugees, outflow of capital & expertise Border hostilities on both fronts-India and Afghanistan Challenges of state building, nation building and creating a welfare state | Political uncertainty- Departing of founder of Pakistan followed by assassination of PM, existential threat and political uncertainty throughout the first decade after independence I External environment-Start of Cold War, end of Colonialism, dominance of dependency theory
B. Policies Adopted by the Government
I Planned Growth-Pakistan started its development through economic planning stressing on capital accumulation as the main driver of growth for two reasons n Success of planning in USSR convinced the policy makers of importance of state role in economic planning and resource extraction n Success of Marshall Plan convinced them of the importance of capital in economic development I Rapid Industrialisation- For this Pakistan adopted strategy of rapid industrialization through import substitution due to two reasons n Firstly, critical shortage of essential goods necessitated & facilitated import substitution industrialisation n Secondly, it was the globally accepted strategy in almost all post-colonial developing countries under US influence I Foreign Aid-Advent of Cold War helped Pakistan to get massive civil and military aid I Private Sector Development-Steep price rise of cotton and jute due to Korean War helped Pakistan’s nascent private sector which profited by exporting jute and cotton | Import Substitution-State thus formulated Industrial Policy 1948 which favoured globally accepted capitalist development/import substitution Some of policies adopted by state to achieve objective of rapid industrialisation through import substitution were 1. Quantitative restrictions on import of manufactured goods 2. Imposition of taxes on the export of raw material 3. Keeping currency overvalued to ensure cheap import of capital goods/raw material needed for the industry 4. Cascading structure of import duties to allow capital goods and raw material for manufacturing sector at cheaper rates 5. Squeezing the peasants by keeping the terms of trade in favour of industry vis a vis agriculture 6. Liberal tax concessions and non-tax incentives to industrialists
C. Success Stories of the Period
1 Survival and Growth-Despite handicaps, Pakistan grew @ 3.1 percent per annum throughout this period
wwwwwwwwwwwwwwwww.y ……vy w wyw… decline when its GDP went into negative in 1951-52 } I Neglecting Human Development-Badly neglected its human resource and social sectors }
COLUL Duuuury-vreueu ECUILOTILLC LLSLLLLLLONS UNLU JormuluLeu pruuere policies I Development of Private Sector-Started construction, built factories to hand over to private sector. Within one decade was able to develop robust private sector which built consumer industry, meeting not only domestic demand but also started exporting I Resisted Devaluation-Soon in position to resist pressure to devalue its currency while majority of developing countries were devaluing
D.Failures of the Period
I Capitalist Mode-Put Pakistan on capitalist development mode which it pursued for 7 decades with one small deviation during Bhutto period of semi-socialist model I Culture of Patronage-Emergence of commercial mercantilist class of Pakistan which was to play a very dominant role in the succeeding decade Developed industrial culture of state protection for profiteering. Advent of ill-famed Licence Raj-misuse of authority for personal gains, sowed seeds of corruption in the country.economic disparity these policies created I Seeds of Secession-Free hand to market forces led to accentuation of inherited inter provincial economic disparity between the two wings. Seeds of secession of East Pakistan were strengthen because of the vast I Neglecting Agriculture-Agriculture badly neglected forcing Pakistan to import wheat from USA and succumb to her pressure for a long time. Neglect to agriculture resulted in Pakistan’s first and only economic decline when its GDP went into negative in 1951-52 } I Neglecting Human Development-Badly neglected its human resource and social sectors }
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Political Economy of Pakistan under General Ayyub
agriculture resulting in development of high yielding varieties of crops was a God send opportunity for a country like Pakistan having vast agricultural resources. Agriculture was witnessing tremendous growth all over the world thanks to rapid advances made in the west and now the MNCs were eager to push this agricultural modernisation in the developing countries for their own profit maximisation. 1 Indus Water Treaty Windfall: Domestically, Indus Basin Water Treaty resulted in expansion of irrigation network, greater water storage capability making it possible to bring huge areas under cultivation. Conclusion of Indus Basin Water Treaty, besides bringing in huge inflow of foreign resources, ensured availability of water for start of much awaited Green Revolution in Pakistan.
Economic Policies of Ayyub Period
Advised by the Harvard Group of economists, he started an ambitious programme of economic restructuring of the political economy of the country by carrying out far reaching social, economic and political reforms.
The legendary but controversial period of the first of the three military phases of Pakistan is the socalled ‘Decade of Development of 1960s which started with the imposition of Martial Law on 7th of October 1958 by a civilian President who was ousted in turn within 20 days by the same general who was entrusted with the carrying out the Martial Law. After consolidating his grip on the power, General Ayyub started development process to create his legitimacy. The General was lucky in the sense that the global environment was extremely conducive for a person like him.
1 Golden Period of World Economy: He came into power in the midst of an exceptionally favourable global economic environment, known as golden period of the Washington Consensus. End of World War-2 had resulted in the formation of global institutions which were keen to provide a stable world economic order standing on the bedrock of a strong global currency. Marshall Plan pumped billions of dollars for the reconstruction of war ravaged European economies without creating inflationary pressures due to excess capacity created during the war. Europe had not become a fortress so far with the result that there were less restrictions for exports of goods to the developed countries. 1 Advent of Cold War: In the wake of escalating Cold War, USA needed strongarm military men to rule in geo-politically important allies to further American interests. They were willing to provide advisory services, financial resources and access to her markets for purchase of machinery and export of manufactured goods to all those who were willing to join their camp. His unsolicited offer to USA to send Pakistani troops in aid of allied forces fighting against China in 1952 Korean War was well received by the Pentagon. His visit to USA as armed forces chief without getting permission from the civilian government cemented those personal ties between him and the decision makers in America. How much role USA played in his eventually overthrowing a civilian government in Pakistan, is anybody’s guess but he was well rewarded in terms of financial assistance and advisory services during his tenure 1 Global Science & Technology Revolution: Scientific breakthrough in agriculture resulting in development of high yielding varieties of crops was a God send opportunity for a country like Pakistan having vast agricultural resources.
Institutional Building and Strengthening:
Long term sustained economic growth is not possible without the existence of vibrant socioeconomic institutions. Planning Commission was, therefore, made a very powerful institution by placing it under the President’s Secretariat and staffing it with the best of the economic brains, local and foreign, with the President himself as its Chairman. Learning from the failure of first five-year plan, this Commission prepared and executed the second five year plan with astounding results in terms of timely completion of the projects envisaged and the results achieved.
One of the reasons for the successful execution of the development schemes was the manning of the important economic and commercial institutions of the state by competent and committed persons and giving them maximum financial and administrative autonomy. Most of the institutions created to foster growth of private sector -Pakistan Industrial Development Corporation (PIDC), PICIC, Industrial Development Bank of Pakistan (IDBP), Agricultural Development Bank of Pakistan (ADBP) etc. were headed by the bureaucrats. Multifunctional role of state as the regulator, facilitator, and service provider was the cornerstone of the economic management of the country in which the bureaucracy played a very active part. To top it off, the political economy of Pakistan stood on the bedrock of a presidential form of government cemented with the astute political re-engineering through local government structures.
Massive doses of foreign aid in the backdrop of benign external environment explained above proved the crucial driver of growth. Consequently, economy grew at a speed that Pakistan was touted as a fine example of what was the conventional wisdom under the Modernization theory. Pakistan showed
Consistency and Continuity of Policies:
Declaring the private sector as the vanguard of development, the military regime continued the policies adopted during the first decade but with great gusto- liberal subsidized credit, import restrictions, tax and non-tax concessions, foreign exchange controls, overvalued currency and differentiated exchange rates exchange control etc. Exports surged due to extremely favourable concessions given under the Exports Bonus Vouchers Scheme which allowed the exporters to keep back a certain portion of their exports earnings in foreign exchange and import goods otherwise banned.
to break stranglehold of big land lords on the political economy of the rural areas. Besides restricting alienation of land, either though inheritance or sale, at the minimum economic unit of 12.5 acres, the centuries’ old land tenure system was improved by giving greater legal protection to tenants against their arbitrary evictions by the landlords.
Foreign aid in the form of extremely concessionary loans, outright grants and purchase of grains to be paid in local currency under PL-480 was the biggest and most crucial driver of this stellar growth during the Ayyub period. By easing the foreign exchange position of the country, it not only contained inflation but also made capital goods available to the private sector at less than international prices
In order to accelerate the scope and speed of Green Revolution, introduction of science and technology in all agricultural activities was encouraged by the state as a conscious policy. In this connection, three developments played a crucial role.
1 Firstly, the agriculture was witnessing tremendous growth all over the world thanks to rapid advances made in the west and now the MNCs were eager to push this agricultural modernisation in the developing countries for their own profit maximisation. 1 Secondly Indus Basin Water Treaty resulted in expansion of irrigation network, greater water storage capability making it possible to bring huge areas under cultivation. 1 Thirdly, newly created Agricultural Development Bank of Pakistan extended generous loans to the rich and middle class farmers for purchase of agricultural
inputs and machinery and for the installation of tube wells. All these measures resulted in impressive growth rates of agriculture releasing resources for industrial development and providing an extended market for the industrial goods.
Creating Inequalities for Growth:
Accepting and using income inequality as a means of generating savings which could be ploughed back into investment and hence rapid industrialisation, was the hallmark policy of the Ayyub Khan era. Interestingly Dr. Mahboob ul Haq, who developed the concept of Human Development Index later on, was the member of Harvard Advisory Group which guided the Decade of Development of Pakistan in the 1960s.
These people were obsessed with the GDP not as a measure of development but as the end itself. For this they recommended the creation of inequality as a strategy for increasing the rate of growth of GDP because they firmly believed that income inequality puts resources in the hands of rich people who save more than they consume while poor people consume more than they save. It was assumed with a religious finality that trickle down of these benefits of growth would take care of social justice objectives of growth.
Assessment
Ayyub Khan’s period has been eulogised by every writer who has written anything about the history of economic development of Pakistan.
Agriculture as a Base:
Realising the crucial role of agriculture as a base for the rapid industrial development and learning lessons from the past neglect of agriculture which led to widespread food shortages in the country during the 1950s, he enacted far reaching reforms in the agriculture sector for increasing its productivity. Although agriculture had been undergoing capitalist development during the last one hundred years, albeit at a snail pace, it was during the 1960s when it was given a boost by carrying out requisite land reforms, institutional strengthening and application of science and technology.
Impressive Recorded Growth Rates:
Leaving aside the allegation of figure fudging which has been become customary, there was an impressive and consistent rate of economic growth. Pick up any book or read any article dealing with the economic progress of Pakistan and you will find ample facts and figure about the achievement of Pakistan in accelerating her rate of economic growth in such a short period. After all a consistent rate of growth of more than 6.8% per annum with manufacturing registering an increase of around 10 % and exports 7 per cent is not a mean achievement. Agriculture witnessed an impressive growth rate of more than 6 % which eased the inflationary pressures considerably below 4%. These developments helped in containing the trade deficit which despite massive imports was around 6.7 % of GNP. Pakistan was considered to be a model of capitalistic economy in 1960’s.
Putting a ceiling of 100 acres on rain fed areas and of 500 acres in irrigated ones, an effort was made to break stranglehold of big land lords on the political economy of the rural areas. Besides restricting alienation of land, either though inheritance or sale, at the minimum economic unit of 12.5 acres, the
Creation of Externalities:
Consistency and Continuity of Policies:
Declaring the private sector as the vanguard of development, the military regime continued the policies adopted during the first decade but with great gusto- liberal subsidized credit, import restrictions, tax and non-tax concessions, foreign exchange controls, overvalued currency and differentiated exchange rates exchange control etc. Exports surged due to extremely favourable concessions given under the Exports Bonus Vouchers Scheme which allowed the exporters to keep back a certain portion of their exports earnings in foreign exchange and import goods otherwise banned.
to break stranglehold of big land lords on the political economy of the rural areas. Besides restricting alienation of land, either though inheritance or sale, at the minimum economic unit of 12.5 acres, the centuries’ old land tenure system was improved by giving greater legal protection to tenants against their arbitrary evictions by the landlords.
Foreign aid in the form of extremely concessionary loans, outright grants and purchase of grains to be paid in local currency under PL-480 was the biggest and most crucial driver of this stellar growth during the Ayyub period. By easing the foreign exchange position of the country, it not only contained inflation but also made capital goods available to the private sector at less than international prices
In order to accelerate the scope and speed of Green Revolution, introduction of science and technology in all agricultural activities was encouraged by the state as a conscious policy. In this connection, three developments played a crucial role.
1 Firstly, the agriculture was witnessing tremendous growth all over the world thanks to rapid advances made in the west and now the MNCs were eager to push this agricultural modernisation in the developing countries for their own profit maximisation. 1 Secondly Indus Basin Water Treaty resulted in expansion of irrigation network, greater water storage capability making it possible to bring huge areas under cultivation. 1 Thirdly, newly created Agricultural Development Bank of Pakistan extended generous loans to the rich and middle class farmers for purchase of agricultural
inputs and machinery and for the installation of tube wells. All these measures resulted in impressive growth rates of agriculture releasing resources for industrial development and providing an extended market for the industrial goods.
Creating Inequalities for Growth:
Accepting and using income inequality as a means of generating savings which could be ploughed back into investment and hence rapid industrialisation, was the hallmark policy of the Ayyub Khan era. Interestingly Dr. Mahboob ul Haq, who developed the concept of Human Development Index later on, was the member of Harvard Advisory Group which guided the Decade of Development of Pakistan in the 1960s.
These people were obsessed with the GDP not as a measure of development but as the end itself. For this they recommended the creation of inequality as a strategy for increasing the rate of growth of GDP because they firmly believed that income inequality puts resources in the hands of rich people who save more than they consume while poor people consume more than they save. It was assumed with a religious finality that trickle down of these benefits of growth would take care of social justice objectives of growth.
Assessment
Ayyub Khan’s period has been eulogised by every writer who has written anything about the history of economic development of Pakistan.
Agriculture as a Base:
Realising the crucial role of agriculture as a base for the rapid industrial development and learning lessons from the past neglect of agriculture which led to widespread food shortages in the country during the 1950s, he enacted far reaching reforms in the agriculture sector for increasing its productivity. Although agriculture had been undergoing capitalist development during the last one hundred years, albeit at a snail pace, it was during the 1960s when it was given a boost by carrying out requisite land reforms, institutional strengthening and application of science and technology.
Impressive Recorded Growth Rates:
Leaving aside the allegation of figure fudging which has been become customary, there was an impressive and consistent rate of economic growth. Pick up any book or read any article dealing with the economic progress of Pakistan and you will find ample facts and figure about the achievement of Pakistan in accelerating her rate of economic growth in such a short period. After all a consistent rate of growth of more than 6.8% per annum with manufacturing registering an increase of around 10 % and exports 7 per cent is not a mean achievement. Agriculture witnessed an impressive growth rate of more than 6 % which eased the inflationary pressures considerably below 4%. These developments helped in containing the trade deficit which despite massive imports was around 6.7 % of GNP. Pakistan was considered to be a model of capitalistic economy in 1960’s.
Putting a ceiling of 100 acres on rain fed areas and of 500 acres in irrigated ones, an effort was made to break stranglehold of big land lords on the political economy of the rural areas. Besides restricting alienation of land, either though inheritance or sale, at the minimum economic unit of 12.5 acres, the
Creation of Externalities:
and share cropping started to give place to owner-operated farming culminating in Green Revolution. It not only accelerated growth but also resulted in technological penetration even in agricultural sector. Consequently there was massive migration of surplus farm labour from the agriculture sector to the cities available as industrial labour. Urbanisation grew at a rapid speed and small towns grew all along the main roads.
If we apply this typology of Simon Kuznets, we could say that Pakistan’s economy of the 1960s badly needed pro-equity policies which, if applied, were not a waste of resources but rather an investment in, even the prerequisite, for future growth. However, the archtects of economic policy of the day went the opposite way. Consequently, the results of relentlessly pursuing growth for the sake of growth in Pakistan during the 1960s were so devastating that even its architect, Dr. Mahboob ul Haq converted to one of its biggest critics and popularized the idea of human development as measure of development of a country. It resulted in the creation of Pakistan’s notorious 22 richest families who owned 66% of industrial capital and also controlled 97% of banking and insurance business, creating crises of confidence and legitimacy for architect of this model.
However, all the economic progress made by Pakistan during this period was not an unqualified success as it is normally described. It came at a price, part of which we are still paying
Overrated Growth Performance:
Economic contributions of Ayyub era have been overrated in two ways. It is historical fact that the pace of development is always very rapid in the initial stages of economic development as there is lot of infrastructure to build which invariably increases your figures. Look at the growth rates of China during the 1980s and 1990s solely because of massive infrastructural development. Secondly, figure fudging, that bane of our economic management, for which Pakistan was once fined during the Musharraf period in 2005, started with this era and it was openly alleged that some of the figures were cooked and did not tally. Whether this was by design or due to incompetency of the Statistics Bureau, is not clear.
This development was one of the major factors for the dismemberment of Pakistan at the end of this “Decade of Development”. Revelation that these families belonged to Western wing of the country created great resentment among the public in the Eastern wing about the systematic exploitation of East Bengal by the ruling elites of West Pakistan in connivance with their native business class.
Flawed Model of Growth:
Idea of growth through inequality was not only morally reprehensible but logically flawed and practically counter productive. Left to themselves, income inequalities are inevitable in a market mechanism for which state has to devise some mechanism to minimise their extent and offset its impact. However, if the growth model is itself based on the very existence, rather deliberate creation of income inequalities to create investible surplus, then the results are disastrous for the society as well as for the economy. Exactly the same happened during the 1960s. Ill-famed theory of trickle down never worked because it was structurally impossible to redistribute the fruits of growth based on capitalistic model. Patterns of growth determine the patterns of consumption-you cannot distribute cars made for the rich to the poor in place of bread.
Aid Dependence:
All the three military phases of Pakistan’s history are known for massive inflow of foreign aid in the wake of some fortuitous events happening outside the borders of Pakistan. Ayyub Khan, who had offered to send Pakistani troops to Korea without the permission of the civilian government in 1952, was the favourite of the Pentagon. This over dose of foreign aid did spur the growth rates but left indelible marks on the political economy of the country. Heavily capitalistic industrialisation dependent on imported raw material created less jobs and more excess capacity. This perception, based on fairly hard core evidence, of unequal utilization of foreign assistance in terms of regional allocation further accentuated the perceptions of exploitation among the Bengalis, who openly revolted against this iniquitous system and opted to leave the federation.
According to Simon Kuznets every income distribution should be judged by three criteria: adequacy(ensuring even the poorest have an income level consonant with local customs), equity (absence of discrimination on any ground except for affirmative action to protect the under-priviledged ) and efficiency (cost-effective achievement of objectives). When it comes to the interaction between equity and efficiency, Kuznets believes that the very achievement of higher growth rates requires greater equity, because inequity leads to the fragmentation of society and political instability.
Import-substitution Industrialization:
Import substitution industrialization works up to a limit, afterwards high tariffs barriers conceal the actual costs of producing the goods which are valued at distorted domestic prices. When the inputs and outputs are realistically valued at global prices, most of these industries add negative values. High dosage of foreign aid coupled with multiple exchange rates of an overvalued currency under the Export Vouchers Scheme played havoc with the factor intensity ratio of the industrial units established during the Ayyub period. Highly capital intensive techniques of production showed very impressive growth figures but did not absorb the growing labour force, creating social tensions and increasing poverty in the country. It led to the growth of consumer goods industries which were heavily dependent on imported raw material. It made them non-competitive in the global markets with the result that there was huge excess capacity
If we apply this typology of Simon Kuznets, we could say that Pakistan’s economy of the 1960s badly
Neglect of Social Sectors:
Aggressive capitalistic development caused serious economic, social and political tensions. Social sectors were neglected and not adequate funds were allocated for the improvement of education, health and skill formation. Real wages dropped while regional disparity increased with concentration of economic power in both industry and agriculture sectors. Karachi and Central Punjab developed at the cost of rest of the country creating resentment and feeling of neglect especially on the part of people of East Pakistan (now Bangladesh)
manufactured goods while east had few goods to trade and those also consisted of agricultural raw material which traditionally fetches lower prices as compared to manufactured goods.
The West Pakistani businessmen who owned almost the entire industry located in East Pakistan used to transfer all the profits earned from East Pakistan to western wing instead of investing wholly or partially in East Pakistan. Similar was the position in respect of banking system, which was owned by them.
Last but not the least was public finance. Majority of the taxes imposed were spent on defence and administration, heavily dominated by the West Pakistanis. I”
In Annexure B at the end of the book,’ I have discussed in detail the historical and geopolitical context of the breakup of Pakistan and argued that the separation of East Pakistan from its western counterpart was inevitable, yet it could have been a smooth divorce rather than a violent rupture due to bad governance and economic mismanagement particularly during the Ayub regime. Relevant portions of that article are reproduced for connectivity of the narrative.
“There were two biggest grievances of the Bengalis against West Pakistan.
Firstly, not taking appropriate affirmative actions to accelerate the economic development of the Eastern wing on priority basis and on massive scale to reduce the economic disparity exiting between the two wings as a historical baggage.
Secondly, instead of spending more on the development of East Pakistan, there was a massive transfer of resources from East Pakistan to West Pakistan on official and private level.
Leaving aside the claims and counterclaims about the estimated quantum of resources transferred annually from East to West Pakistan, the fact remains that there was a systematic system of resource transfer through several means.
Erroneous pride in a strong currency, more as a counterpoise to Indian hegemony and less for economic prudence, resulted in overvalued exchange rate which undermined the competitiveness of jute, the major earner of foreign exchange of East Pakistan. On the other hand overvalued exchange rate heavily favoured the importing classes of West Pakistan, encouraging a healthy growth of an aggressive private commercial sector in the western wing. East Pakistan failed to develop this vanguard of economic growth at a time when all the preferences were available for the industrialists
As the receipts from the export of jute were received and recorded in West Pakistan, less than half of it was spent on the development of eastern wing due to strong incentives under market mechanism in the western wing of the country. Same was the case with the foreign aid received by the government of Pakistan.
Another source of transfer of resources was the inequitable terms of trade between the two provinces for the supply of goods and services from one wing to other. West wing supplied manufactured goods while east had few goods to trade and those also consisted of agricultural raw material which traditionally fetches lower prices as compared to manufactured goods.
vumuiy vilupui 4• muy i UNIJLUU 1/1y5v-iyuu-vui. ayyuu
I Decline in Real Wages-Real wages dropped, regional disparity increased leading to concentration of economic power in both industry/agriculture
A. Initial Conditions & Developments/Events during this Regime
1 Exceptionally favourable global economic environment-period of Washington Consensus; greater aid, with less trade restrictions } I Global Cold War environment conducive for him-USA provided massive financial aid/market access } I Period of great scientific breakthrough in agriculture globally led to advent of Green Revolution in Asia including Pakistan} I Conclusion of Indus Basin Water Treaty, bringing in huge inflow of foreign resources, ensured availability of water for Green Revolution
B. Policies Adopted by the regime
1 Planned Growth-Started ambitious programme of economic development to compensate public for dictatorship I Savings through Income Inequalities-Using income inequality for generating savings to plough back into investment and hence rapid industrialisation through import substitution 1 Capitalist Model-Past policies of capitalist development-import restrictions, tax/non tax concessions, over valued exchange rates etc I Surplus from Agriculture Agriculture development by land reforms, institutional strengthening and application of science and technology.to create surplus for the industry
C. Success Stories of the period
1 Impressive Growth Record-Consistent rate of growth of more than 6.8% per annum for a decade. Manufacturing registering an increase of around 10 %. Multidimensional growth-externalities/structural changes. Exports increased by 7 per cent PA} I Green Revolution-Agriculture witnessed an impressive growth of more than 6%} I Macroeconomic Stability-Inflationary pressures considerably below 4%. Containing trade deficit around 6.7% of GNP. }
D. Failures of the Regime
1 Over-rated Successes-Economic contributions of Ayyub overrated-allegations of figures fudging I foreign aid based growth-Based on huge dose of foreign aid, resulted in abortive take off when it dried I Inequitable Growth-Creation of deliberate economic inequalities resulted in acute inequalities. With oppressive political system inequitable economic system hastened country’s break up 1 Import Substitution rather than Export Promotion-Import substitution reduced incentives for export promotion} 1 Squeezing the peasants-Agriculture was badly squeezed to benefit industry I Less Job Creation-Heavily capitalistic industrialisation dependent on imported raw material created less jobs and more excess capacity. 1 Over-valued Currency with multiple rates-Multiple exchange rates of overvalued currency under Export Vouchers Scheme distorted factor intensity ratio of industry 1 Human Development Neglected-Social sectors were neglected, inadequate funds allocated for the improvement of education, health and skill formation. I Decline in Real Wages-Real wages dropped, regional disparity increased leading to concentration of economic power in both industry/agriculture
Chapter 5:1970s-Democratic Pakistan-2
Political Economy of Pakistan under Zulfiqar Ali Bhutto
Zulfiqar Ali Bhutto came into power after the dismemberment of united Pakistan in 1971 and stayed as its supreme leader for five and a half years till he was removed on 5th of July, 1977 and finally executed by his own out of turn hand picked army chief, General Zia on April 4, 1979. His tenure cannot be properly appreciated without keeping in view the special domestic and global environment in which he came to power and ruled this new country.
1 Exceptional Times: Zulfikar Ali Bhutto’s period was an exceptionally trying and tumultuous time in the history of Pakistan which had been recently militarily humiliated and dismembered into two. There was great despondency among the people about the future of the country which was facing an existential threat not only from outside but even from inside from those regions which had been left marginalised in the development process and political dispensation. Accumulation of social economic and political power at the centre thanks to Ayyub era policies had accentuated the centrifugal tendencies in the smaller provinces of the country and there were insurgency in one province. 1 Financial Crises: Long period of conflicts, crises and war with India resulting in loss of half of the country had created severe financial crises for the country. These were aggravated by the throw forward of adverse effects of Ayyub Khan’s economic policies had created. The 1973 OPEC (Oil Producing and Exporting Countries) price increases played havoc with Pakistan’s import bill and the balance of payments deteriorated. This was a severe problem for the government because the state treasury did not hold much reserve. 1 Social Discontent: Modernisation process initiated during the 1960s had inevitably created massive social tensions in the wake of dysfunctional political system and imperatives of the capitalist model of growth. While masses have been squeezed to extract resources for rapid industrialisation, the fruits of development had not trickled down as expected, thanks to inherent flaws in the model. Capitalist system of production, imported raw materials and capital intensive industrial units led to non-exploitation of indigenous natural and human resources giving rise to unemployment. Population explosion made the situation even more acute due to demographic transition. People were yearning for redistributive reforms, provision of civic amenities, fulfilment of basic needs and to redress the inequities created during the last decade
1 Global Turmoil: At global level it was a period of great turmoil- geopolitically, financially and economically. Old economic order based on Washington Consensus was giving way to new system which had not yet taken roots. After decades of hostilities, USA was forced to approach China for rapprochement as there was rift emerging between China and USSR. USA wanted to pitch China against Soviet Union. Global world economic order got its first severe jolt when the Arab countries, after the 1973 Arab Israel war, raised the price of oil manifold. This was a game changer in global economy as it suddenly started shifting the centres of economic and financial control, leading to global recession. At the same time, delinking of dollar from gold -the bed rock of global economic stability of four decades, led to the first financial crises after the end of the World War 2. 1 American Hostility: Unlike his predecessor, Bhutto was not America’s choice; he was the product of the circumstances over which USA had no control. Americans, fearing their impending defeat in Vietnam were looking for ways to take revenge from USSR and fulfil their desire to break it up by bleeding it to death in its soft belly – Afghanistan. They wanted stable Pakistan ruled by a strongman like Ayyub. Bhutto was never their choice but the Americans were forced to accept him as chief executive of the country they considered extremely crucial for carrying out their plans with the help of their other henchmen-Shah of Iran, royal house of Saud and president Sadaat of Egypt. 1 Pakistani Prime Minister Bhutto initially sided with this scheme; however he soon realised the destabilising impact of such an adventure and retracted. Cognizant of the crucial importance of Pakistan in their designs to lure Soviet Union in the killing fields of Afghanistan, Henry Kissinger specially came to Pakistan to convince him but Bhutto’s refusal to go along with the American scheme, cost him his life later on. I Massive Floods: In August 1973, floods of intensive magnitude swept across the extent of the country, the first natural calamity of this nature to have inundated the country. The immediate result was in the shape of sky rocketing price hikes in consumer goods. As if it was not enough, cotton crop continued to be affected by pests and floods. OPEC oil price increased in 1973 and world recession thereafter impacted badly on ports and exports. Recurrent cotton crops failure and floods in 1973, 1974 (with pest attack) and 1976 affected agriculture and exports growth.
Economic Policies of Bhutto
The challenge confronting Bhutto was not only to revive the weak economy which had started declining since early 1969 and was on the brink of disaster but also to address the distributional issues. In
order to fulfil the promises he made during the elections to ameliorate the conditions of the poor sections of society and to lessen the regional and class disparities created during the Ayyub regime, he launched a series of economic and financial reforms including nationalisation of industrial units, land reforms, banking reforms and other social reforms.
nationalization. If not nationalised, these would have anyway died of their own death because of their heavy debt profile and stoppage of foreign aid which was their main source of establishment and survival. However, in 1973 a series of nationalizations of industrial units were started which culminated in the takeover of rice husking mills in 1976.Nationalisation of these units had more to do with political expediency and less with any economic rationality.
Currency Rationalisation:
When Bhutto took over, Pakistani rupee was not only heavily overvalued but there were multiple exchange rates due to the operation of Exports Bonus Voucher scheme which had been introduced as a short-term measure to boost exports but was continued under pressure of the vested interests. Besides distorting the economic structure, it was adversely affecting the agriculture sector, exports and growth of heavy industries in the country. To rectify the economic distortions created by this overvalued exchange rate and boost the exports, Bhutto regime devalued the currency by 59 % creating incentives for the exporters to increase the exports
Mega Projects:
One of the remarkable achievements of Bhutto regime was the initiation of mega projects in the country. Besides establishing the Port Qasim, Pakistan Steel Mills and the Heavy Mechanical Complex (HMC), it initiated the work on several cement and fertilizer factories and the Indus Highway. Work also started on the Nuclear Power Development Program and the Lowari Pass Tunnel. In 1971, Pakistan had been dismembered through Indian military intervention. To prevent recurrence of such an event in the future, Pakistan sought to develop a military deterrence for which Bhutto launched the most ambitious and costly project of developing nuclear bomb
These mega projects and the basic industries laid the foundations for future growth and development from which his successor benefited. However, the style of economic management Bhutto adopted reduced the role of Planning Commission as well as its capacity to offer advice to the political decision-makers.
Nationalisation:
Import-substitution industrialization in the 1950s was by default because of severe shortages of the consumer goods, providing lucrative incentives for the private sector for establishing consumer goods industries. During Ayub era it was by design. It had no doubt put Pakistan on the trajectory of rapid growth but had now run its steam and its negative after effects were emerging. Capital goods industry had been totally neglected due to easy availability of profitability in a protected market for consumer goods. Proverbial shyness of the private sector to avoid unnecessary risks and lack of finances at their disposal to establish capital goods industries had led to a lopsided industrial structure.
1960s was the time to start rectifying this anomaly but it was lost. Foreign assistance coupled with generous fiscal and non-fiscal concessions to the industrialists during the Ayub period continued the same pattern of industrial development with few exceptions. There was excess capacity impeding against competitiveness of the goods produced to export. Lastly, rising inflation in the western countries had made the import of capital goods expensive beyond the capacity of the private sector. Coupled with the decline in international demand for Pakistani goods put a seal on the viability not to speak of their expansion. The nationalized units brought with them accumulated losses of Rs.254 million. These could have survived only due to heavy injection of finance by the state.
Banking Reforms/Nationalisation: There was fourfold motive for carrying out reforms in the banking sector.
1 Firstly, there was an urgent need to break the monopoly of the 22 families which had more than 95 % ownership in the banking and insurance business of the country and were ruthlessly used to accumulate wealth for themselves. 1 Secondly, agricultural sector was badly neglected in their access to finance as more than 80% of savings from the rural areas were disbursed among the industrialists. 1 Thirdly, almost all the banks and insurance corporations had become bankrupt due to their lending operations in former East Pakistan. To protect the interests of the depositors, shareholders and policyholders, bailing them out through nationalisation was the only option. 1 Fourthly, financial resources were desperately needed for the expansion and up gradation of the industrial units nationalised and put under government ownership and management because foreign donors were suffering from aid fatigue and had used East Pakistan crises as a pretext to stop aid-the main driver of Ayub khan’s growth.
Bhutto regime tried to redress this imbalance and started it by nationalisation of heavy industry and brought it into the fold of public ownership immediately after seizing reins of the government in January 1972.Less than 20% of the total industrial structure, these thirty-one industrial units were fewer than ten categories of basic industries, mostly capital and intermediate goods producing sector. Thus most of the privately owned industrial units being in the consumer goods sectors remained unaffected by the
Consequently, Bhutto nationalised the banks and also created new financial institutions. Banking
accompanied at the same time, by a substantial expansion of economic and technical cooperation with the Arab Gulf states.
reforms were introduced to provide more opportunities to small farmers and business such as forcing banks to ensure 70% of institutional lending should be for small land holders of 12.5 acres or less, which was a revolutionary idea at a time when banks only clients were the privileged classes. The number of bank branches rose, from 3,300 to more than 5,700 or by 75% from December 1971 to November 1976 covering all towns and villages with a population of 5,000 in accordance with targets set after the nationalisation of banks.
Land Reforms:
Land reforms in the form of ceilings on land holding and improvement of tenurial relations in favour of tenants were carried out in three phases during the Bhutto regime. In the first phase, in March 1972 individual land ceilings were reduced to 300 acres of un-irrigated land and 150 acres of irrigated land. Eviction of tenants was declared illegal, water rates and agricultural tax was to be paid by the landlord, not the tenant. Payment for the purchase of seed was also to be paid by the landlord.
Social Sector Reforms:
Another major area of economic reforms in which Bhutto had great stakes was the social sector that had been most neglected during the Ayub regime. The government, therefore, paid greater attention to this sector particularly in the fields of health and education which in the Third Five Year Plan received 3.8 per cent and 4.7 per cent respectively of the total government development outlay. Universalizing the elementary school was promised and privately managed schools and colleges were nationalized which had been hitherto the strong preserves of the elite. In health sector a number of new medical colleges were established in fulfilling a long standing demand of the urban middle classes for health and medical training facilities.
In its second phase in November 1975, the land tax was abolished for those peasants with holdings under 25 acres and was progressively increased for those with greater holdings. This resulted in benefitting 7.2 million middle medium-sized farmers and peasants in the country and improved the conditions of small and medium-sized farmers and tenants. In December 1976, the government announced to distribute about 2 million acres of cultivable state land among 100,000 peasant families. At the same time, the land holding ceiling was reduced to 200 acres for un-irrigated land and 100 acres for irrigated land.
Assessment
The economic policies of the Bhutto government are one of the most discussed topics in the literature of the development studies of Pakistan. His nationalisation policy has been criticised the most. It is alleged that by nationalising industries and financial institutions, he did serious damage to the efforts made for economic development during 1960s and resulted in economic inefficiency and mis-allocation of resources. Some critics have even ascribed political motives more than the economic rationale for this nationalisation i.e. an attempt by the feudal lobby to clip the wings of industrialists, who had grown immensely strong under President Ayyub. Leaving aside this debate let us discuss some of the resultsgood or bad, of his policies
Manpower Export:
The Middle East oil price boom was a disaster for Pakistan on the one hand as it resulted in exponential rise in her import bill. However, it also proved to be a window of great opportunities. Rejecting the pleas of the bureaucracy of maintaining strict controls on immigration by tight passport rules, Bhutto reversed this decade’s old restrictive policy and liberalised the issuance of travel documents for Pakistanis going abroad. This facilitated the export of manpower to the Middle East where massive construction activity was taking place in the wake of oil income windfall. Pakistan became one of the first and largest non-Arab Asian countries to actively engage in the large scale export of labour to the Middle East.
Economic Recovery:
As a result of economic and financial measures, Pakistan saw a healthy economic recovery within the first year of its dismemberment, thanks to excess capacity available in the industrial sector which was suitably used by the massive devaluation of Pakistani rupee. Additionally, the previous inter provincial trade between eastern wing and western was diverted to the Middle East and was counted as GDP growth through greater exports. By 1974, exports exceeded one billion dollars, showing a 60% increase over the combined exports of East and West Pakistan before separation. It was a remarkable success in the sense that the decade of the 1970s was the most volatile period, economically and financially due to 1973 Oil Crises. Even in the middle of the global recession, the national income of Pakistan increased by 15% and industrial production by as much as 20% in four years.
The annual number of Pakistanis employed abroad increased from less than 2000 in 1970 to more than 16,000 in 1974; this figure crossed 1.6 million in 1980. These expatriate Pakistanis sent more than 2 billion annually as remittances back home. These remittances not only helped Pakistan to in its foreign exchange reserves but brought a mini construction boom in the rural areas of Punjab and North West Frontier Province (now Khyber Pakhtun Khaw). This massive export of labour power from Pakistan was
Poverty Reduction:
Pro-poor policies adopted by the People’s Party government sharply reduced the level of absolute poverty in the country. Largely benefiting the farmers and the urban working classes, these policies helped
in reducing the percentage of the population living in absolute poverty falling from 46.50% in pre-Bhutto period to less than 30% by the end of 1979-80.
Agrarian Reforms:
Bhutto’s land reforms were a mixed bag of initiatives to transform the rural landscape of the country although they fell short of full-fledged agrarian reforms which could have brought fundamental structural changes in the political economy of the country. No doubt they affected a much larger number of landlords-around 100,000 as compared to fewer than 1000 under Ayyub reforms. Similarly, land holding ceilings imposed a lower limit on the individual ownership of land. However, they failed to make a substantial dent in the social, economic and political power of the big landlords in the political economy of the rural areas of Pakistan.
Monopoly Breaking:
Bhutto came into power with the slogan of breaking the concentration of economic power and took active measures to fulfil this promise. Although it adversely affected the growth rate of the economy, yet it did make a heavy dent in the concentration of wealth. By the time he was removed, the concentration of wealth had declined compared to height of the Ayyub Khan era when 22 families owned 66% of industrial capital, and also controlled banking and 97% of insurance. Although owners of the nationalised units were generously compensated later on, it did give a decisive blow to the industrial classes to invest the profits they had earned during the heydays of Ayyub.
In fact, soon after the 1970 election victory of the PPP, the feudal elite even within the party had already begun the partitioning, distribution and division of the land among family members and in the name of trusted tenants. However, the peasants, tenants and landless labour got new benefits that were made available in the form of residential plots and the exemption of land revenue. Secondly, through these reforms and other measures, Bhutto was able to arouse political consciousness among these downtrodden classes, making them an important force on the political dynamics of the country
Political Corruption:
Although corruption started right with the birth of Pakistan as a result of vast discretionary powers of the administrators made responsible for the allotment of lands and properties left by the migrating Hindus, it was by and large a bureaucratic phenomenon. During Ayyub period, military bureaucracy became partners when granting the licences for imports and awarding of contracts etc. However it was during Bhutto period that political elite and cadres actively got engaged in this process. Although Bhutto himself has not been blamed for any massive financial corruption, his period did see an exponential rise in the corruption as the temptations of the vast opportunities available for amassing wealth were too much to resist by the people who had joined People’s Party. Access to state corridors of power became synonymous with accumulating a private fortune. This unfortunate development has remained the hallmark of successive PPP regimes afterwards
Expansion of State Role:
State had been playing a larger than life role in the political economy of Pakistan since independence for obvious reasons. However this role expanded considerably during the Bhutto period through his massive nationalisation programmes. In July 1976 Bhutto’s government took an arbitrary and unexpected initiative of nationalising the flour mills, cotton ginning and rice husking mills. Besides over stretching the public sector, it was the most unpopular measure for which the PPP had to bear serious political costs. The small industrialists, traders and shopkeepers were outraged by these measures which threatened their livelihood. These were the people who played active part as opposition movement in paralysing economic activity during national strikes leading to the eventual downfall of the PPP government.
Whether the government was successful in clipping the wings of the industrial-financial families through this decision or not, the result was sheer mismanagement which intensified the governance crisis and economic slowdown. Unfortunately, jobs in these and other nationalised units were used for political patronage resulting in over-manning, inefficient management and poor financial performance of public sector. New public enterprises were started without taking into account their financial viability or established in far-flung areas for political objectives. In the absence of a sufficiently well-developed local infrastructure, most of these units always remained a burden on the national exchequer.
elite and cadres did indulge
Summary Chapter 5: 1972-1977/Democratic Pakistan 2/Bhutto
A. Initial Conditions & Developments/Events during regime tenure
| Exceptionally tumultuous time: dismembered Pakistan facing existential threat with crises of confidence among public about its survival I Plethora of issues: post-war adjustments financial crunch, rectifying economic contradictions, providing social justice to public. Simultaneously and immediately | External Shocks: 1973 OPEC oil price increases played havoc with Pakistan’s import bill and the balance of payments deteriorated while inflation galloped I American hostility-Unlike his predecessor, Bhutto was not America’s choice; he was the product of the circumstances over which USA had no control. I Natural Calamities: Massive Floods of August 1973, resulted in price hikes in consumer goods while cotton crop continued to be affected by pests and floods.
B. Policies Adopted by the regime
I Currency rationalisation: To rectify distortions created by overvalued exchange rate and to boost exports, devalued currency by 59 % I Industry nationalisation: 31 basic industrial units with accumulated losses of Rs.254 million needing heavy injection of loan nationalised I Financial reforms,Four motives for banking sector reforms-resources needed for bailout of nationalised units, monopoly breaking, efficiency gains, equity in loans I Manpower Exports: Export of manpower to Middle East: Encouraging export of manpower to take benefit from their oil price boom by removing travel restrictions I Land reforms: ceilings on land holding and improvement of tenurial relations in favour of tenants were carried out in three phases
C. Successes of the Regime
I Recovery against Odds: Pakistan’s economy grew on average at 4.8 % per annum, during this period despite dismal domestic conditions and adverse external shocks-restored the confidence of public I Exports Expansion: Devaluation helped utilizing excess capacity; exports showing 60% increase over combined exports of East and West Pakistan I Welfare State: Improved the socioeconomic conditions of the farm workers, tenants and factory workers by improving their terms of service/land tenure} I Poverty Reduction: Reduced % of population living in absolute poverty from 46.50% in pre-Bhutto period to less than 30% by 1979-80. I Mega Projects: Port Qasim, Steel Mills, Heavy Mechanical Complex, cement/ fertilizer factories,Indus Highway, Nuclear Power Development Program and the Lowari Pass
D. Failures of the Regime
I Land Reforms: fell short of agrarian reforms to bring fundamental structural changes & break political power of big landlords } | Expanded State Role: State role expanded considerably due to massive nationalisation resulting in emergence of state capitalism I Political Corruption: Although Bhutto himself not blamed for any massive financial corruption, political
Chapter-6:1980s-Military Pakistan-2
Political Economy of Pakistan under General Zia ul Haq,
fundamental human rights in return for political stability and economic opportunities. 1 Mega Projects: At the same time the mega projects Bhutto had started, came on ground increasing the rate of growth as well as relieving the country of importing fertilisers and other essential commodities. Similarly, labour exported during Bhutto period sent in billions of dollars in foreign remittances which eased the balance of payments position of the country.
Economic Policies of Zia
For General Zia, Islamisation of the economy, polity and society of the country was more important than the welfare of the people or socioeconomic development of the country. As such he gave economic growth least priority, yet some of the measures taken during his regime are worth noting.
If General Ayyub came into power by overthrowing the same civilian president who had appointed him as Chief Martial Law Administrator in 1958, General Zia took over the reins of the country by removing the same person who had hand picked him, out of turn, to serve as the chief of the armed forces of the country. Like his predecessor, Zia was also lucky that he got a very benign internal and external environment which helped him survive for more than a decade until God himself decided to take him back.
1 American Interests: Americans had been active in the soft belly of USSR namely Afghanistan to provoke its occupation of Afghanistan. For this they had been training Mujahedeen inside Pakistan with active connivance of Pakistan’s intelligence agency. Bhutto’s reluctance to go too far in this policy irked the USA and Henry Kissinger had to issue a warning to Bhutto in this respect. His removal and final execution should be seen in this context. Soon after his execution Soviet Union fell into the trap laid for the bear and invaded Afghanistan. Pakistan became a front line state for the furtherance of American interests in the region in particular and at the global level in general. With it came the usual perks-military aid, foreign assistance, advisory services and support for military ruthlessness I Fall of Shah: Iranian revolution of 1979 and with it the exit of USA from Iran was another godsend opportunity for Pakistan’s military ruler to provide his services as a trusted ally of USA in place of exiled Shah of Iran. I Middle East Bonanza: Although Middle East oil bonanza occurred a few years before Zia took over, it did help him in several ways. With greater oil revenues, Middle Eastern countries started a two decades long construction boom which absorbed hundreds and thousands of Pakistani labour, easing the domestic unemployment situation. It also pumped in billions of remittances in the rural areas of the country sowing the seeds of consumerism. At the same time he was able to market his Islamic credentials to the Arab sheikhs. Being a devout Muslim, he became much endeared to the ruling elites of the Middle East who bank rolled his programmes and provided him the necessary religious legitimacy among the public. 1 Emergence of Commercial Middle Class: More than three decades of economic development had created a strong commercial middle class which was more interested in law and order and economic progress than the humdrum of democracy. They acquiesced to the curtailment of their civil liberties and
Islamisation of Economy:
One of his landmark contributions towards Pakistan’s economy, the so called Islamisation of the economic transactions, was nothing more than changing the nomenclatures of all the economic practices and policies already in vogue in the political economy of Pakistan. As a part of general emphasis on Islamic values and codes of conduct, without introducing any substantial changes in actual business dealings, the institutionalization of zakat and introduction of interest free banking were the two most important measures of Islamizing economy. All lending and deposit rates were set on profit and loss sharing. Banks adopted the interest free banking but charged the same mark-up and advanced the loans on the same conditions as in normal banking system.
In June 1980, the Zakat and Usher Ordinance was promulgated whereby 2.5% was deducted from the bank accounts of Sunni Muslims on every first day of holy month of Ramadan. The amount thus collected was distributed among the needy through the zakat committees headed and staffed by his loyalists in every village and town. Farmers were liable to pay 5 per cent of their produce as Usher in place of land tax.
De-Nationalisation:
On the pressure of emergent commercial middle classes and less as a policy prescription, General Zia started reversing the nationalisation process initiated by Bhutto and three steel mill industries were returned to its previous owners in the first phase. Reverting to pre-Bhutto policy of greater reliance on private enterprise to achieve economic goals, a demarcation of exclusive public ownership was made that excluded the private sector from only a few activities. There was a clear switch over to liberalization of economy with generous fiscal and non-fiscal incentives for the private sector. For adoption of marketbased development strategy, government concluded three years Extended Fund Facility (EEE) with IMF in 1980 for several structural reforms aiming at financial deregulation and greater economic
generated pressures for rapid rural electrification and rural roads, rural electrification spending was 52% higher than original allocations while spending on rural roads exceeded targets by 29%.
Industrialisation:
Although state continued to play a large economic role in the 1980s with public-sector enterprises accounting for a significant portion of large-scale manufacturing, share of private sector investment grew from 33% in 1980 to 46% in 1989. The investment climate for the private sector was improved by providing guarantees against future nationalization. The industrial zone was established in the late 1970’s to attract foreign investment, speed up flow of modern technology, provide more job opportunities, raise skill and management standards and provide exporters a base for production in an environment free from import duties but the results were however disappointing as exports from the zone were relatively small. By the policy of keeping domestic wheat, rice and cotton prices low, the government was able to benefit the urban consumers and the industrialists at the cost of the agricultural producer.
Exports Promotion:
Generous incentives for manufactured exports in the form of rebates, particularly when Mahboob ul Haq became his finance minister in 1982, pushed exports to new heights. This exports push which contributed in reducing the relative dependence on worker remittances was strengthened by three measures taken by the government;
The export subsidies ranging from 7.5% to 12.5% were extended to all important manufactured exports.
Expansion of raw cotton production which in turn made possible a major expansion of cotton textiles. Over 60% of the increase in real value of exports over the decade was attributable to cotton, cotton textiles and garment exports.
Corporatisation:
In order to lay the foundation of Western styled corporate sector, he started the process of corporatisation, conceived and implemented by his Finance Minister Ghulam Ishaq Khan. The corporate sector of Pakistan, an elite business sector had been expanding in the country since long but the corporatisation process was formally initiated with the promulgation of the Companies Ordinance in 1984 that legally allowed a variety of formations in the mixed economy of Pakistan. Seen as a half-way house on the road to privatization, the effect of corporatization has been to convert state departments into public companies and interpose commercial boards of directors between the shareholding members and the management of the enterprises.
Introduction of a flexible exchange rate policy was also very instrumental in this exports expansion. Starting in 1982, Pakistan began to regularly adjust the value of the rupee, devaluing it from Rs. 9.90 per US dollar to Rs. 11.84 in 1982 and then gradually depreciated to Rs. 18 per US dollar by the end 1988. In fact the nominal exchange rate was devalued almost twice as fast as warranted by the relative change in prices between Pakistan and major trading partners.
Assessment
This process was not only continued but was given great boost when it was integrated in the privatization programme of Nawaz Sharif in 1990 who gave free hand to private sector to expand the economic activities in the country. The corporate sector remained to expand in Prime Minister Benazir Bhutto’s government who promoted the nationalization and privatization at once. In 2004, in a programme initiated by Prime Minister Shauket Aziz, the corporate sector fairly matured and became a strong and sizeable sector in the financial hubs of the country.
High Growth Rates:
As stated earlier, General Zia was only interested in Islamisation of the economy and did not take any proactive measures to boost its rate of growth. However, as good luck have been, the country experienced one of the highest growth rates in his 11 years of power, averaging more than 6.5% per annum. There was impressive industrial growth under Zia with manufacturing sector growing at the rate of nearly 9% per annum during his 11 years of rule as compared to 3.7% in 1972-77. This was in large part due to the massive public sector investments made by Bhutto in steel, cement, fertilizer and vehicle production. Pakistan’s manufactured exports increased fourfold from US $ 1.3 bill 1980 to US $5.6 bill in 1983 by growing at the rate of 7-8% per annum during the period.
Rural Development:
However, one thing for which he must be given full credit is the uplift of the rural areas, an off spin of his scheme to revive the local government institutions to create a constituency. These local body members and the hand picked members of the rump assemblies were given huge amounts to spend in their respective constituencies. Resultantly a fair amount was spent on rural regeneration and construction of rural infrastructure. Later on, initiation of five point programme of his Prime Minister Junejo gave a further boost to this rural uplift. The increased demand for services in rural areas following rising incomes generated pressures for rapid rural electrification and rural roads, rural electrification spending was 52%
Remittances/aid based Growth
This phenomenal rate of growth can be explained in three words-aid, remittances and informal economy. Thanks in large part to remittances from the overseas workers who went abroad as an initiative of Bhutto, the one whom he had overthrown and later on executed. Totalling around $3.2 billion/year for
current account receipts, and 40 per cent of her total foreign exchange earnings. As no prudent policy was initiated by the government to channelize these remittances, most of the amount send by the expatriates was spent by their relatives in buying land, construction of houses, purchase of durables etc.
High growth rate of the economy, good agricultural growth, and labour immigration influenced real wage rate and incidence of poverty.
Similarly, after the Soviet Union invaded Afghanistan in December 1979, Pakistan became a front line ally of the USA in its endeavour to make Afghanistan the killing fields for the Soviet forces. Jimmy Carter offered US$400 million in military and economic aid to Pakistan– an amount that Zia spurned and contemptuously termed “peanuts.” His successor Ronald Reagan increased this amount to US$3.2 billion over six years, equally divided between economic and military assistance. A separate arrangement was made for the purchase of forty F-16 fighter aircraft. In 1986 a follow-on program of assistance over a further period of six years was announced at a total of more than US$4 billion, of which 57 percent was economic aid and the rest military aid. It was this foreign aid which sustained the regime and the growth for more than a decade.
Social Sector Neglect:
Total public spending on education did increase to 2.7% of GNP by 1987-8 from 2% of GNP in 1976-7. Progress in increasing access of the population to basic health services was slow. Only modest gains were made in reducing infant mortality and increasing life expectancy. Primary school enrolment during 197788 expanded at an annual rate of only 4% only moderately faster than the growth rate of the population. Nearly 75% of the real increase in public sector development programme between the Fifth and the Sixth plan period was pre-empted by increase allocations for energy.
Burgeoning Informal Economy
One of the main drivers of this stellar performance was the exponential growth of informal economy which crossed the 50 per cent mark during his tenure. Afghan war brought money into the country which sustained his rule but it also resulted in exponential growth of informal economy. A large chunk of this informal economy consisted of drug money which came handy as a result of Pakistan’s misadventure in Afghanistan. Leaving aside the harmful effects of this dubious source of growth, it adversely affected the accuracy of the statistics gathered by the state agencies regarding total effective demand. Consequently, planning process suffered and still it is not possible to accurately calculate the mega data.
Inadequate Industrial Policy Framework:
While there were significant improvement during the Zia period in the industrial policy framework in terms of emphasis on the role of the private sector, greater import liberalization of industrial raw materials, and relatively strengthening of incentives for manufactured exports, not much was done to signal fundamental change in industrial policies which had hampered the structural change in manufacturing during the 1960’s and 1970’s.By the early 1980s, Easy Asian countries like China, Thailand, Malaysia, the Philippines and Indonesia were successfully following the lead of Korea, Taiwan, Hong Kong and Singapore to develop manufactured goods export aggressively. Inefficiency, industrial unrest, politicization and bureaucratization of industry resulted in adverse impact on productivity, investment climate and business confidence etc.
Jobless Growth
However, high economic growth during the Zia period did not receive special policy support for employment creation as it was not accompanied by a rapid rise in investment. It was inadequate in relation to both current needs and future requirements. Serious shortages on infrastructure, especially in the energy, transport, and urban development sectors are his legacies.
Anti-farmers Bias
By the policy of keeping domestic wheat, rice and cotton prices low, the government was able to benefit the urban consumers and the industrialists at the cost of the agricultural producer. Agriculture production reached peak in mid-1980’s thereafter starts falling mainly due to weak economic incentives, mechanization against smaller farmers, insufficient agriculture credit, low yielding seeds, salinity problems and weak input-output pricing signals.
Economic Prosperity:
Substantial economic growth and relatively low inflation during the Zia period did translate into broad based income growth for most income group. Average per capita GNP grew at an annual average of 3.3% per annum or by 4.3% during 1977-88 though the growth was much higher in the earlier period. Real wages which had increased during the Bhutto period, showed further increase during Zia’s rule. The annual earnings of two main wage groups of factory workers indicate an increase in nominal wage of around 150% over 1977-88. The wages of unskilled labourers tended to rise faster than those of skilled. High growth rate of the economy, good agricultural growth, and labour immigration influenced real wage
Macroeconomic Instability:
While Pakistan did witness high growth rates during Zia period of 6.5 per annum, these were accompanied with large fiscal and trade deficits. In 1980’s, the former crossed 7% of GNP while the trade deficit never came down from 9% of GNP. Consequently, it necessitated increase in money supply which hovered around 19%, fuelling inflation which almost touched double digits.
The government expenditures grew phenomenally from 10-11% to 27% of GDP with defence expenditures increasing from 5.5 to 7% of GDP over the period for obvious reasons. Interest payments
in 1976-7 to 4.9% of GDP in 1987-8, reflecting both the enormous growth in internal debt and the high interest rates at which the borrowing was done.
Domestic debt increased from 20.8% of GDP in mid-1981 to 42.2% of GDP in mid-1988. There was a much higher reliance on government borrowing from non-bank sources at relatively high interest rates of 14-15% per year. A greater reliance on these sources of financing meant that credit creation in the public sector and the overall rate of monetary expansion slowed down sharply in Zia period.
Substantial additional taxation undertaken in 1979-80 and 1986-7 yielded some improvement in tax to GNP ratio which increased from nearly 12% in 1978-9 to 16% in 1987-8. However, direct taxes continued to account for fraction of total revenue and, the dependence on foreign trade taxes became greater. On the other hand, the generous use of tax holidays further weakened the elasticity of the tax system. Besides keeping the agricultural sector exempt from taxation, the level of income and corporation tax revenue at 1.6% of GDP in 1987-8 was not only low, but also had not increased over the previous decade.
Summary Chapter 6: 1977-1988/Military Pakistan 2/Gen Zia
19%, fueling inflation which touched double digits. I Inadequate Industrial Policy Framework:not much done to fundamental change in industrial policies to make exports globally competitive
A. Initial Conditions & Developments/Events during regime tenure
I Rise of Commercial Middle Class: Three decades of economic development had created a strong, vibrant commercial classes needing political stability more than fundamental rights welcomed him and helped him survive for a decade I Soviet Union’s Invasion: USSR invasion of Afghanistan brought USA here with usual huge foreign military/civilian aid, leading to consumption-led growth I Remittances: Remittances from expatriates gone abroad in Bhutto era improved BOP situation, eased social tensions and boosting consumption I Mega Projects: started by Bhutto,came on ground increasing growth rate relieving need for importing fertilisers/essential commodities
B. Policies Adopted by the regime
I De-nationalisation: under pressure of emergent commercial middle classes, started reversing nationalisation to gain their confidence | Islamisation of Economy: Landmark contribution, by changing nomenclatures of all the economic practices and policies already in vogue I Structural Adjustment Programme:concluded with IMF for several structural reforms aiming at financial deregulation/liberalisation. } 1 Introduction of flexible exchange rate policy; Pakistan began to regularly adjust the value of rupee as per market forces within bands 1 Corporatisation to lay foundation of Western styled corporate sector, conceived and implemented by Ghulam Ishaq Khan.
C. Success Stories of the Regime
I High Growth Rates: Highest growth rates averaging more than 6.5% per annum during first part, and by 4.3% during his entire reign 1977. Manufacturing sector grew at the rate of nearly 9% per annum} I Private Sector Development: Share of private sector investment grew from 33% in 1980 to 46% in 1989. | Rural Development: uplift of the rural areas, an off spin of his scheme to revive the local government institutions to create a constituency.
D. Failures of the Regime
1 Squeezing peasants: By depressing prices of agricultural commodities to benefit the urban consumers and industrialists at cost of farmers I Hollow Growth: Pakistan’s phenomenal rate of growth can be explained in three words-aid, remittances and informal economy which crossed 50 % consisted of drug money } I Jobless Growth: Job creation did not receive special policy support as growth was not accompanied by a rapid rise in investment. Serious shortages on infrastructure, especially in the energy, transport, and urban development sectors are his legacies. } I Social Sector Neglect: Slow Progress in increasing access of the population to basic health services. Modest gains in life expectancy. I Macroeconomic Instability: High growth rates accompanied with large fiscal(7%) and trade deficits (9%) of GDP leaving crises for successors. It necessitated increase in money supply which hovered around 19%, fueling inflation which touched double digits.
Chapter-7:1990s-Democratic Pakistan-3
Political Economy of Pakistan under Benazir Bhutto/ Nawaz Sharif
Democratic Pakistan-3 came into existence as a result of an airplane crash which killed the Second General who ruled Pakistan for 11 years. As a result of general elections, Pakistan People’s Party came into power but could not complete even half of its tenure and was unceremoniously dismissed for corruption and incompetence. This was repeated with the successor Pakistan Muslim League which also exited before completing its half tenure. This repeated again two times till Military struck openly and another General came into power on 12th October, 1999.
However before describing the economic policies pursued by these political governments during this decade and assessing their impact, positive or negative, on the political economy of Pakistan we must keep in mind the following context
1 Post-dictatorship States: After the fall of General Zia, Pakistan entered into typical post dictatorial stage which is invariably characterized by dysfunctional democratic structures and culture, faltering economy because of stoppage of foreign aid which had propped the military rulers and a society divided on ethnic, religious and sectarian lines due to stalled nation building process through political process. Coupled with lack of experienced political leadership which had been side-lined during the dictatorial regime, the country remained adrift in this phase. Consequently, the new political leadership failed to improve the quality of life of a common man and after some time, people became disillusioned with them who had the institutional legitimacy but now faced the crises of performance legitimacy. Thus a decade long phase of instability started which saw coming into power four democratic governments and their unceremonious exit. All the four governments which came into power during the 11 years between the regimes of General Zia to that of General Musharraf faced this crisis of performance legitimacy. Lack of their political acumen and economic management were exploited by the non-democratic forces and the country remained adrift during this decade 1 Stoppage of Foreign Aid: Advent of democratic era 3 coincided with the breakup of USSR and with it need for Pakistan to serve as a front line state ended. America disengaged itself from regional politics of Asia and instead concentrated more on domestic front where recession was biting the middle classes and towards China which had started to flex its muscles to take its rightful place in the global arena. Resultant lower geopolitical status of Pakistan resulted in less aid and support, the main lifeline of political economy of Pakistan. 1 Formation of Single European Market: A stepping stone to the creation of
1 Formation of Single European Market: A stepping stone to the creation of present day European Union, formation of a Single European Market created great hype in the economic and financial circles about the polices of the new Europe towards exports from and aid to the developing countries 1 Accelerated Globalisation: Coming into operation of new World Trade Organisation rules, globalisation entered into its fourth stage with increasing integration of economics, communications, and culture across national boundaries. It started affecting, directly as well as indirectly, the governance structures, processes and culture in every country. With greater penetration of world institutions and MNCs, global issues relating to environment, child labour, women empowerment etc. became more and more domestic. They not only interfered in the policy formulation but acted direct through their proxies in the form of nongovernmental organizations in domestic policy formulation and implementation. 1 Changing State Role: State was undergoing a paradigm shift in response to realignment in the comparative power structure in the societies. Confident private sector and assertive civil society started forcing it to give them more space in policy making and implementation, shed its extra load and shift from all-encompassing role of service provider, enabler and regulator to merely regulation. At the same time demand for greater decentralization and devolution, giving more and more of its functions to the provincial and local levels gained momentum. These two simultaneous trends demanded redefinition of the roles and functions of the state functionaries necessitating requisite amendments in legal and regulatory frameworks, working norms and procedures. 1 Demographic Transition: Pakistan, like all the other developing countries was passing through the most crucial phase of its demographic transition in which rate of child births was gradually falling but due to rapidly falling death rates, its population was growing at unsustainable rate, creating a youth bulge on the one hand and the aging bulge on the other. With it came the rapid urbanization due to push and pull factors, creating crises of governance in the rapidly expanding cities. Challenges for the policy formulators as well those responsible for their implementation to find apt solutions for myriad problems these three trends are creating for a developing country. 1 Rising Democratic Aspirations: Although Pakistan came into existence as a result of democratic struggles but her citizens were denied the right of exercising their right to choose their representatives for half of their existence. However, modernization process which accompanied the industrialization efforts of post
colonial states had brought fundamental changes in the attitudes and behaviour of the citizens. Consequently, people were demanding greater say in public affairs, an open government, transparency in public dealing, and an accountable and responsible executive.
bulk of which were owned by the resident Pakistanis. Most of these accounts were opened to whiten their ill-gotten wealth at above market rates of interest without any fear of exchange risk as the government had to pay back in the currency in which they were deposited. However it did give government an opportunity to use them as state foreign exchange reserves which, strictly speaking, they were not.
Economic Policies in 1990s:
Although these were very turbulent times, politically and economically, yet in these periods of instability, the governments of both the Prime Ministers i.e., Benazir Bhutto and Nawaz Sharif respectively, followed the then world over popular supply side economic measures namely economic deregulation and liberalization, privatization and encouragement of private sector.
Infrastructure Development:
Nawaz Sharif is very fond of starting mega projects with motorways as his pet flagship. In this period not only he completed his Islamabad-Lahore Motorway project but went ahead with highly controversial Yellow Cab Scheme-doling out cars to people for plying taxis. Such schemes, financed by the loans ultimately resulted in thinning of foreign exchange reserves. At one stage these were less than US$ 150 million against the liabilities of US$ 12 Billion.
Privatization:
Nawaz Sharif went all out for the liberalization/deregulation of economy, de-nationalisation of nationalised industries and privatisation of state owned enterprises. Hailed as the most successful privatisation program in South Asia, Central Asia and the Middle East, top priority was given to denationalizing some 115 public industrial enterprises, abolishing the government’s monopoly in the financial sector, and selling utilities to private interests. By March 1992 control of twenty industrial units and two banks had been sold to private investors, and plans were under way to begin denationalizing several utilities, to end state monopolies in insurance, telecommunications, shipping, port operations, airlines, power generation, and road construction were also in various stages of implementation.
If Nawaz Sharif was fond of mega projects, Benazir went for power generation though private sector. Her policy of independent power producers did result in establishment of Independent Power Producers (IPPs) with one of the most attractive packages of incentives. This policy not only boosted the electricity generation capacity of the country but also resulted in inflow of foreign direct investment.
Assessment
It brought more than $ 9 billion (Rs. 476,421 million) from 167 fairly transparent transactions to the state coffers. 100% state owned enterprises in the chemical, textile, nitrogen fertilizer, cement, rice, and light engineering sectors, around 98% automobile industry,96% ghee mills and 100% units of Phosphate fertilizer were privatised. Similarly banking industry was also substantially privatised substantially due to which 80% of the banking sector came under private ownership.
Deregulation:
Investment reforms eliminated government sanction requirements, eased restrictions on re-patriable direct and portfolio investment from abroad, enabled foreign firms to issue shares in enterprises in Pakistan, and authorized foreign banks to underwrite securities on the same basis as Pakistani banks. This policy of greater liberalization and deregulation resulted in telecommunication revolution in the country
Slow Growth Rates:
Mainstream economic literature describes the 1990s as lost decades because of the slow GDP growth rate which remained, on average, 4.6% per annum. One writer has termed them as The Muddling Nineties (Ishrat). Some consider this a period of “growth crisis”. However this assessment is somewhat unfair and exaggerated because it is done without taking into account the following context.
1 American Disengagement: After the breakup of USSR in 1991, the USA disengaged herself from Afghanistan and with it importance of Pakistan was reduced. Consequently, between 1991-2000, Pakistan just received $429 million in aid, as opposed to $5 billion in the previous decade, and more than $9 billion in the next. Further, Pressler Amendment, passed in 1985 to put curbs on her for her nuclear programme, began hurting Pakistan by the 90’s almost leading to the collapse of Pakistan economy. 1 IMF Conditionalities: To meet the IMF Structural Adjustment Programme target of fiscal deficit 4% of GDP, cuts were applied on development budget which was reduced from 9.3% of GDP in 1981 to 3.5% in 1990s. This drastic cut in the development budget resulted in lower GDP growth rate and poor provision of social services to the low income groups. 1 Political Instability: Removal of two successive governments further
Dollarization:
His no-questions-asked opening of foreign currency accounts started dollarization of the Pakistan economy which within a short period became a safe haven for tax evaders and drug money, money laundering etc. At one time there were US$ 12 billion in foreign exchange accounts with Pakistani banks,
economy and money laundering.
accelerated this decline in GDP along with loss of confidence among foreign investors. Lack of political will of democratic regimes to implement structural adjustment programmes, poor law & order situation, bad governance, lack of transparency and corruption also took their toll. 1 Reduced FDI/Remittances: Not only the flow of foreign aid in the backdrop of American disengagement from Afghanistan stopped, there was marked decline in the Foreign Direct Investment which started moving towards China and other South East Asian countries. Crises were confounded by the reduced worker remittances after nuclear test, dollar freeze and row with Independent Power Producers for their alleged corruption and high tariff rates.
Macroeconomic Volatility:
This period saw the first signs of macroeconomic volatility which forced the Benazir Bhutto government to enter into an IMF programme for a bailout of 1.3 billion in return for greater economic liberalization. Although these were not the making of Benazir and were bequeathed to her yet failure of her economic team to address them properly made them worse. On the other hand, IMF bailout programmes also could not rectify the fundamental structural imbalances and failed miserably with economy suffering greater volatility which created classic Catch-22 position.
Increased fiscal deficit and BOP problems necessitated heavy dependence on IMF / World Bank economic policies and programmes which put greater leverage in economic decision making in the hands of IMF and World Bank eroding economic sovereignty of the country. Although the Nawaz Sharif government made considerable progress in liberalizing the economy, it failed to address the problem of a growing budget deficit, which in turn led to a loss of confidence in the government on the part of foreign aid donors.
Privatisation Dividends:
The large scale privatisation carried out during both the tenures of Nawaz Sharif was a win-win situation for all the stakeholders. Besides ensuring convenient availability of better goods and services at affordable prices to the general public, it also resulted in increased tax revenue to the state exchequer in the form of corporate taxes as well as dividend yields to the public on the one hand and to the state, which still holds substantial shareholding in these entities, on the other. Emergence of robust private sector induced investment, transfer of technology, improved management/productivity and introduction of international best practices in different sectors of the economy. Last but not the least, it created fiscal space for social sectors and infrastructure development resulting in employment generation and poverty reduction.
De-industrialization:
Trade reforms in terms of tariff reduction from 125% in 1992 to 35% in 2002 resulted in deindustrialization of the economy with closure of industrial units, which mainly could not withstand the international competition. It resulted in making service sector as the engine of growth of the country resulting in lopsided structural change. Thus, instead of a gradual shift from low productivity sector (agriculture) to high productivity sector (manufacturing) in the middle stage of its economic development and finally to services sector, the structural change has largely bypassed the middle stage. Consequently, Pakistan, from being a largely agrarian economy in terms of contribution to GDP, has become a services led economy, with services accounting for more than 50 per cent of the GDP.
Dollarization Fiasco:
Although dollarization policy of the state brought in the much needed foreign exchange without any efforts of the government and improved the liquidity position of the country, yet it had its own negative repercussions. This was a short term measure like the Bonus Vouchers Scheme of the 1960s and should have been properly monitored and eased out by prudent handling, yet it led to unnecessary complacence on the part of the policy makers. They did not take any concrete measures to rectify the structural imbalances of the economy which had created the liquidity crises in the first place.
As these were treated as the foreign exchange reserves which strictly speaking they were not, Pakistan economy became hostage to these foreign exchange accounts. Any crises of confidence-due to internal policy or exogenous development could wreak havoc upon the economy of a fragile economy of a weak state. All the economic policies, particularly the monetary policy was hamstrung with maintaining the confidence of the foreign currency deposit holders more than pursuing long term developmental objectives. It was also a loss making device as the state suffered huge losses due to payment of above market interest rates and exchange rate guarantee to their owners. It also escalated the black market
Human Suffering:
The first government of Benazir Bhutto of 1993-1995, continued the policies of both deregulation and liberalization carried out by her predecessor Nawaz Sharif and the tighter fiscal policies put in place by the interim government of Mr. Qureshi. Consequently, sharp increases in utility prices, new taxes, stiffer enforcement of existing taxes, and reductions in government spending hit hard the salaried and low income sections of the society, whose incomes do not increase in consonance with the price hike. Privatization and increase in the number of sick units led to the increase in unemployment while continuous devaluation of Pak Rupees, pushed the inflation high, through its impact on import prices, making the situation worse.
Summary Chapter Seven 1988-1999/Democratic Pakistan 3/Benazir
I Macroeconomic Volatility:forced Benazir Bhutto government to enter into IMF programme for bailout of US$1.3 billion with severe conditions. However, it also could not rectify fundamental structural imbalances of the economy resulting in greater volatility, put greater leverage in economic decision making in the hands of IMF/WB} I De-industrialization:Massive tariff reduction from 125% to 35% resulted in de-industrialization with services sector accounting for more than 50 per cent of GDP. } I Human Suffering:Liberalisation resulted in increased utility prices, new taxes/reductions in state spending which hit hard low income sections. Privatization led to increased unemployment while deindustrialisation aggravated the situation even further. Continuous devaluation of Pak Rupees, pushed the inflation high, through its impact on import prices, making the situation worse.
A. Initial Conditions & developments/events during regime tenure
I Breakup of USSR-leading to emergence of New World(Capitalist) Order I Soviet withdrawal from Afghanistan- leading to American disengagement from Af-Pak region, resulted in less aid and more sanctions for Pakistan I Accelerated Globalisation greater penetration of world institutions and MNCs, interfered in policy formulation in the developing countries} I Changing State Role: Confident private sector & civil society demanded more space in policy making, state to shed its extra load and shift to only regulation. I Demographic Transition: rapidly falling death rates led to high population growth,creating youth bulge, aging bulge and rapid urbanization } I Rising Democratic Aspirations: citizens demanding an open government, transparency in public dealing, and an accountable and responsible executive.
B. Economic Policies Adopted by the regime
I Liberalization/deregulation of economy- de-nationalisation of nationalised industries and privatisation of state owned enterprises}
Investment reforms- eliminated government requirements, eased restrictions on re-patriable direct/portfolio investment from abroad } 1 Dollarization: opening of foreign currency accounts started dollarization of the Pakistan economy which eased BOP situation I Infrastructure Development: mega projects with motorways, by Nawaz Sharif and power projects by Benazir Bhutto
C. Successes of the period
1 Growth Rates; 1990s were not lost decade as generally stated; despite all odds, GDP growth rate averaged 4.6% PA} I Dollarization brought much needed foreign exchange and improved liquidity position in short term , | Privatisation Dividends.convenient availability of better goods and services at affordable prices,increased tax revenue, dividend yields | Emergence of robust private sector induced investment, transfer of technology, improved management/productivity/global best practices I Infrastructure Development- Benazir went for power generation though IPPs which removed load shedding. Nawaz Sharif constructed motorways,improved ease of doing business
D. Failures of the Period
I Dollarization Fallout- brought much needed foreign exchange but created long term problems By treating foreign exchange accounts as foreign exchange reserves, Pakistan economy became hostage to these accounts. It was also a loss making device due to payment of above market interest rates and exchange rate guarantee to their owners. Pakistan became safe haven for tax evaders and drug money, money laundering etc 1 Structural Reforms Neglected-Easy foreign exchange did not force policy makers to take any concrete measures to rectify structural imbalances of the economy }
Chapter 8: 2000s-Military Pakistan-3
Political Economy of Pakistan under General Musharraf
being the most sanctioned country in the world due to its decision to go nuclear a year ago. Keeping in view the precarious budgetary position, Musharraf had no choice but to enter into IMF programme. However, Pakistan was lucky that this programme was a highly concessional one-poverty reduction, a phenomenon with which all the global economic institutions had become obsessed with during the 1990s. Meanwhile remittances rocketed, especially from Pakistanis in America, reflecting fears that the USA and the European countries might freeze their assets. Remittance flows also became more visible as America cracked down on the informal hawala money-transfer system, which it thought was being used by terrorists.
General Musharraf, again an out of turn hand picked army general, overthrew the civilian government of Nawaz Sharif in October 1999 at a time when Pakistan was in dire straits-economically and geopolitically. Her economy was collapsing and was almost heading towards default-thanks to economic mismanagement of the country as well as the result of sanctions imposed for her nuclear option. However, he was lucky like his two illustrious predecessors-Ayyub and Zia. 9/11 happened a year later and suddenly he became the leader of a front line state in the war against global terrorism, the non-NATO ally-Pakistan. Not only sanctions were relaxed and loans were restructured on long term soft terms but Pakistan was flooded with military and financial assistance in return for her services in the global war against terrorism.
9/11 Bonanza:
Soon after the 9/11, Pakistan joined the coalition to fight the war against terrorism and with it came the real financial bonanza for the country in the shape of written-off loans amounting to almost $2 billion, debt rescheduling amounting to $12.5 billion, resulting in cash flow savings of nearly $3 billion through to 2004 and as much as $8 billion in US military assistance that did not appear on the budget books. All this was in return for allowing the US to use Pakistan’s airspace and a couple of our air bases, grant of land access to Afghanistan and employment of our army, police and paramilitary units to capture al Qaeda members fleeing from Isaf troops occupying Afghanistan.
Economic Policies of Musharraf Period
Soon after grabbing the power, General Musharraf launched a very ambitious “seven-point agenda” to set the order in the country, revive a sick economy, reduce corruption, rebuild national confidence and so on. For this purpose, an employee of the Citi Bank, Mar. Shauket Aziz, a chartered accountant by profession was handpicked by Musharraf as his finance minister who effectively ran the economy of Pakistan.
This fiscal reprieve, combined with reforms in the banking sector and plenty of spare capacity, provided the basis for Pakistan’s burst of growth. As the economy recovered, capital flight was reversed, leading to speculation in land and stocks. Low interest rates and more readily available consumer credit encouraged private consumption in durable goods and land purchase, contributing to a modest construction boom.
Consumerism as Engine of Growth
While General Ayub ran the country as a Military Bureaucratic State and Zia governed it as a Garrison State, Pakistan was now a Military Banker State. While the men in uniforms ensured the facade of a political tranquillity in the country through their dictatorial tactics, military efficiency in running all the important institutions by heading and staffing them with army officers, on the economic side Shauket Aziz was given free hand to run the economy on the banking corporation style. Country was flooded with cheap credit which led to consumption led growth at unprecedented rate. Within 3 years there was turnaround in the official economy of Pakistan and impressive figures started coming out of nowhere. In the financial year 2004/2005 it grew by 8.6%, the highest figure for two decades, followed by a 6.6% rise in the next financial year.
The stock market index in Karachi rose by over 1,000% in a few years. With more than $13 billion in foreign reserves, up from $1.7 billion in 1999, the rupee remained stable, almost pegged at 60 while public debt as a share of GDP came down from 80% in 2000 to 54% in 2007. Foreign direct investment started flowing in boosted by privatisations. However, 9/11 tragedy brought financial bonanza for Pakistan which saw massive doses of foreign aid. These were augmented by the foreign workers’ remittances, mostly through legal channels. Reserves started building up with accompanied exchange rate stabilisation
Assessment
Liberalization 2.0 :
Continuing with the policies of his immediate predecessor, Mr. Shauket Aziz introduced few liberal reforms, slashed import tariffs and energy subsidies, introduced a sales tax and stepped up privatisations. However, it was a herculean task to revive an economy which was at the brink of disaster as a result of being the most sanctioned country in the world due to its decision to go nuclear a year ago. Keeping in
Impressive Growth:
Pakistan’s economy witnessed a major economic transformation; Pakistan’s economy grew at an average rate of just over 7 per cent between 2004 and 2007. Country’s real GDP increased from $60 billion to $170 billion, with per capita income rising from under $500 to over $1000 during this period.
a massive privatisation campaign, netting $8.4 billion as foreign direct investment. The volume of international trade increased from $20 billion to nearly $60 billion.
Pakistan’s imports surged, far outstripping exports, setting the stage for the biggest balance of payments crisis in the country’s history. By 2008, the country’s imports had crossed US$ 40 billion, with exports financing less than 50pc of import payments. Imports stunted the country’s manufacturing sector. The share of Pakistan’s manufacturing sector in GDP declined, as did its share in employment and new investment. During this period, a number of industries either shut down or came under pressure. Rampant under-invoicing and unchecked smuggling compounded the problems of industry.
The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government’s social policies contributed to a reduction in poverty and improvement in many social indicators
Hollow Growth
No doubt Pakistan witnessed a growth rate of more than 7 per cent in the heydays of Musharraf-Aziz period but it was a hollow growth driven by soft consumption (more than 17%) and imports (more than 49 %). All this growth had a dark side which only came to light when economic performance was thoroughly scrutinised.
Structural Reforms Neglected:
Thanks to rising foreign remittances, constant upgrading of Pakistan’s ratings, Foreign Direct Investment, foreign aid and interest rates even below inflation rates, economy grew with leaps and bounds but soon over heated due to inherent resource constrained which overtook the easy money spurred growth. Economy was overheating for wrong reasons-real estate bubble, stock exchange bubble, commodities bubble.2007/8 global financial and economic crises punctured these bubbles and Pakistan recorded the highest fiscal deficit of more than 8% as government was reluctant to take corrective measures and kept on subsidising the higher imported oil and commodities. Private investment increased by only 4.6 per cent while public investment fell by 5 % resulting in deterioration of infrastructure.
Leaving aside the charge of figure fudging for which this regime was penalised for the first time in the history of Pakistan in the form of forfeiture of certain portion of its SDRs, the growth of Pakistan was overwhelmingly consumption driven. Spurred by the easy availability of cheap credit, it discouraged savings which accounted for a modest 15% of GDP. The consumer boom caused imports to double in the first four years alone while exports, dominated by low-value textiles, could not keep up with the result that the trade deficit widened to $11.5 billion. To finance it, the government had to eat into its foreignexchange reserves, and eventually to let the rupee depreciate. But it exacerbated another ugly effect of consumer-led growth: inflation which started climbing in the last year of his regime at 8%.
Financial Reforms Neglected:
On the fiscal side no improvement was made to increase the tax to GDP ratio-rather the wealth tax was abolished to cover the tax evasion of the ruling elites. Consequently inflation started galloping, imports became far more than exports swelling the gap. High debt ratio, escalating poverty, lagging maintenance of infrastructure are some of the legacies of the regime which had to leave unceremoniously. To top it all was the stable exchange rate policy-the Argentinian disease – which we had inherited from our 1950s.it not only resulted in drawing down of our foreign exchange reserves but also hit hard the export competitiveness at a time when it was needed the most.
After joining the war on terrorism Pakistan became again the front line state for which it was compensated with huge doses of military aid. However, her loans, which it was finding difficult to pay, were not written off; rather they were just rolled over for a decade with the result that after the fall of Musharraf regime, the new elected government was forced to pay these through her nose.
Neglect to Agriculture:
Although Pakistan is no more a predominantly agricultural country, thanks to rapid strides it has made in her quest for industrial transformation, agriculture still occupies a prominent place in Pakistan’s overall economic structure. Being a pivot around which all other economic activities move, it is a major contributor to the country’s economy in terms of GDP, foreign exchange earnings, employment generation, raw material for manufacturing industry (primarily textile) and the most vital, national food security.
Anti-Export Bias:
The nominal exchange rate was kept stable for several years, resulting in a real appreciation of the rupee instead of pursuing a rational exchange rate policy as a tool to promote their exports. In addition, the State Bank of Pakistan (SBP) flooded the economy with cheap credit used to finance import-based consumption. Import tariffs were reduced drastically, signing up lower bound’ tariffs under the World Trade Organisation than most other developing countries. And to top it all, Pakistan also went ahead and signed up to a Free Trade Agreement (FTA) with China in 2006.As a result of these misplaced policies, Pakistan’s imports surged, far outstripping exports, setting the stage for the biggest balance of payments
Growth rates of GDP are directly and proportionately dependent on the performance of agricultural sector and not vice versa-higher the growth rate of agriculture, the greater the rate of growth of GDP and so on. However, it is the misfortune of the agriculture sector of Pakistan that it always gets a step motherly
We were displaced by some more corrupt countries!
Aziz period when agriculture got a raw deal from the both the gentlemen. While agricultural prices remained depressed, no concrete measures were taken for rural uplift or improving the quality of life of an ordinary farmer.
Corruption:
Despite all the rhetoric of curbing corruption, Pakistan earned the worst score of 2.6 out of 10 on corruption perception scale issued by the Transparency International during this period. Although Pakistan exited from the list of top ten most corrupt countries in the world yet it was not due to any domestic improvement as Pakistan’s scores fluctuated between 2.1 and 2.6 (out of 10) during this period. We were displaced by some more corrupt countries!
Summary Chapter Eight : 2000-2008/Military Pakistan 3/Musharraf
Rampant under-invoicing and unchecked smuggling compounded the problems of industry. I Corruption, despite all the claims, increased during his period
A. Initial Conditions & developments/events during regime tenure
I Financial Crises-Pakistan was in dire straits-Its economy was collapsing thanks to economic mismanagement sanctions imposed for her nuclear option. Precarious budgetary position forced Pakistan to go for IMF bailout I War on Terror-His good luck; 9/11 happened after two years, made him leader of front line state in war against global terrorism, the non-NATO ally. Sanctions relaxed, loans were restructured on long term on very soft conditions flooded with usual military/financial aid I Greater Remittances-Remittances by expatriate Pakistanis in America/Europe sky rocketed, fearing that USA/European countries might freeze their assets. Remittance flows also became more visible due to crack down on informal hawala money-transfer system to curb terror financing I Support of Commercial/religious classes-As usual, full backing of business community, middle class and religious parties yearning for stability more than political freedom
B. Policies Adopted by the regime
I Consumerism-fiscal space provided by foreign aid, roll over of foreign loans and huge inflow of remittances was used to promote consumption added by liberal consumption loans by the banks I Over-valued currency-Over-valued exchange rate pegged at fixed rate} I Private Sector led Growth-Generous tax/non-tax subsidies to businessmen} | Economic Liberalisation-Import tariffs reduced drastically. Signed Free Trade Agreement (FTA) with China
C. Successes of the regime
1 Impressive Growth-Within 3 years there was turnaround in the official economy of Pakistan which grew by average growth rate of 6% PA during his tenure. Real GDP increased from $60 billion in 2000 to $170 billion in 2008 The stock market index in Karachi rose by over 1,000% in a few years. I Foreign Reserves-More than $13 billion in foreign reserves, up from $1.7 billion in 1999, I Exchange Rate Stability-Rupee remained stable, almost pegged at 60 1 Improved Debt Profile-Public debt as % of GDP came down from 80% in 2000 to 54% in 2007. Foreign direct investment started flowing in boosted by privatisations.
D. Failures of the regime
I Hollow Growth-growth through consumption made possible by huge military aid,remittances and cheap money rather than hard core investment hid grim economic weaknesses i.e high debt ratio, escalating poverty, lagging maintenance of infrastructure. Biggest balance of payments crisis in country’s history.US$ 40} 1 Figure-fudging-Figure-fudging for which his regime was heavily penalised by IMF I Loss of export competitiveness-Dollar pegging led to loss of exports competitiveness I Decline in manufacturing-Imports stunted country’s manufacturing sector whose share in GDP declined, as did its employment & new investment. Number of industries either shut down/came under pressure. Rampant under-invoicing and unchecked smuggling compounded the problems of industry. I Corruption, despite all the claims, increased during his period
Unapuoi-y. Zuvo-vcivClaus I Anslan -4
Political Economy of Pakistan under PPP- Asif Zardari
government was forced to pay these loans at a time when the economy had nosed down as a result of global oil and financial crises of 2007/8.
Popular unrest forced General Musharraf to exit in 2008 leading to the start of another democratic era-the Democratic Pakistan-4. For the first time since independence, not only a duly elected government came into power and democratically elected federal and provincial governments and legislatures completed their constitutionally mandated tenures in Pakistan but also handed over power to their successors the same way.
Economic Policies of PPP-4:
It is indeed a Herculean task to discern even a credible consistent economic policy adopted by the PPP regime during their five years of misrule from 2008 to 2013. Part of the reason for this inability of the regime was the inexperience of the team Zardari chose, its frequent reshuffling and sheer bad luck. All the time they were engaged in fire fighting and less time and energy was spent on long term policy formulation.
Keeping in view the chequered history of political development in Pakistan it was indeed a significant landmark for the country in its democratic transition. It can also take credit for some overdue structural reforms- devolution of powers to provincial governments, better distribution of financial resources of the country among the federation and the constituent federating units through national finance commission, curtailment of presidential powers and institution of an independent election commission and judiciary.
Social Safety Nets:
Probably the only best initiative taken by the Pakistan People’s Party government during their entire tenure of five years from 2008-2013 was the start of a fairly comprehensive social safety net programme for providing much needed relief to the poorest of the poor living below the poverty line of one dollar a day. Named after the assassinated leader of the PPP, the Benazir Income Support Programme is a nonconditional cash transfer program aiming at cushioning the negative effects of slow economic growth, the food crisis and inflation on the poor, particularly women, through the provision of cash transfers of PRs. 1,000/month to eligible families.
However, PPP has been unfortunate in all their terms, short ones of 1990s and full terms of 19972-77 and then 2008-13. In 1970s, PPP inherited a dismembered Pakistan, a demoralized and traumatised nation and a declining economy which had to face the worst floods as well as the worst financial crises from outside. Benazir Bhutto took reins of the country in 1988 when inflow of foreign aid which had sustained a military ruler for 11 years dried.
She again came into power in 1992 in the wake of great financial crises and had to leave the government in 1995.
Its long term objectives include supporting the achievement of Millennium Development Goals (MDGs) to eradicate extreme and chronic poverty, to empower of women and to achieve universal primary education. With an initial grant of 34 Billion rupees in its first year, BISP is currently the largest aid program in Pakistan and the government’s third largest budgetary allocation and accounts for 0.3% of Pakistan’s GDP.
Their second full term lasted from 2008 to 2013 which experienced Pakistan’s worst-ever combination of external threats, including the severest recession since 1929 globally and massive floods resulting in colossal damage to the crops and water standing in lower Sindh for months. Same misfortune was waiting for them in their fourth tenure.
In its first year of launching, more than 3 million Pakistani families received cash transfers through BISP; this figure accounts for 15% of the general population and 40% of the population below the poverty level. In 2010, the program was expanded to cover 5 million low-income families which are receiving more than 65 billion rupees per annum; this amount is expected to increase to 90 billion in near future.
Zardari government came to power in 2008 when the global economies experienced the worst economic recession since the great depression of the 30s. The demand for Pakistani goods declined and investment flows dried up, thus starving Pakistani industries.
After joining the war on terrorism Pakistan became again the front line state for which it was compensated with huge doses of military aid. However, her loans were not written off; rather they were just rolled over for a decade with the result that after the fall of Musharraf regime, the new elected government was forced to pay these loans at a time when the economy had nosed down as a result of global oil and financial crises of 2007/8.
Improving Agricultural Terms of Trade:
Thanks to their rural support, PPP always adopts a farmer friendly approach. Although not formally announced, main features of their agricultural policy can be gleaned from the consistency of measures they took in pursuit of agricultural development i.e. reliance on setting the prices right and reversing the sectoral terms of trade in favour of agriculture by rationalizing the prices of agricultural inputs and outputs, provision of fairly generous subsidies and aggressive procurement of surplus food grains whenever needed.
affluent middle class in the country, estimated by Asian Development Bank to be around 69 million on the one side and the phenomenal rise in corporate profits despite all the global recession, internal security situation and declining foreign direct investment on the other, owe a lot to these farmers’ friendly policies of the PPP. Obviously it had a lot to do with their vote bank which is overwhelmingly rural and majority of their elected members were rural elite and represented the agricultural lobbies.
The result was catastrophic for low to mid-income households who faced limited opportunities to earn a living, while the cost of living continued to climb. While the foreign debt of the country ballooned from $45 billion in 2008 to over $65 billion in 2012, the government debt to GDP ratio rose from 55 per cent in 2008 to 60 per cent in 2012.
Stock Market Boom:
Pakistan’s stock market has never performed as a barometer of economic health of the country and the financial performance of its listed companies. It is more like a casino, a fact amply borne out of its performance during the PPP-4 performance. While the economic growth was dismal at best, the stock markets in Pakistan continued to climb throughout to reach new heights. Even with the worsening of law and order and a near complete collapse of the power sector that crippled the manufacturing sector, the KSE 100 index continued to reach new heights, fuelled most likely by speculative investment and short profit taking
Lack of Road-map:
No doubt, Peoples’ Party government inherited very tumultuous times made worse by internal disasters and external shocks, but it is unfortunately a sad commentary on their performance that the leadership of the party did not take any appropriate corrective measures to tackle these challenges. Although the speed, intensity and dimension of exogenous shocks in the forms of escalating food, fertilizer and fuel prices were of extraordinary proportions, the PPP government exhibited total naiveté in addressing the challenges arising out of these shocks.
Assessment
While rest of the world was taking corrective measures and adjusting to emerging situation, regime in power was unable to set its house in order. They were even unable to find suitable persons to head some very important ministries- finance, commerce, petroleum and natural resources etc., remained without ministers for more than a year. In short, PPP’s performance during her fourth stint can be described as PPP-Poor Planning and Performance!
Lack of Economic Vision:
First 100 days are very crucial for any new government to give a vision and a roadmap; PPP failed to do so even in its first six month, having little sense of direction and purpose. Although Pakistan’s growth remained positive throughout 2008-13, yet the PPP-4 government is frequently termed as Pakistan’s worst performing government. While the Musharraf regime posted 6 per cent to 8 per cent economic growth rates, the Zardari government couldn’t muster even a 4 per cent GDP growth. The lacklustre economic growth resulted in a sustained higher than usual unemployment rate that lasted throughout its five-year democratic rule.
Social Safety Nets:
Although best initiate of the PPP-4, there were several overall flaws in the Benazir Income Support Program design. The amount RS 1,500 per month was considered to be on the lower side and not enough to move impoverished families above the poverty line. Another major flaw with BISP is its lack of conditionality. Conditional cash transfer programs in Latin America have experienced greater degrees of success because recipient families must meet certain requirements before receiving a cash payment. These programs build human capital through requiring recipients to enroll their children in primary education, participate in health and nutrition seminars, and visit health care providers.
With dismal growth rates, rampant inflation, massive corruption and macroeconomic instability which incurred more debt than all previous governments combined, the lacklustre economic growth resulted in a sustained higher than usual unemployment rate that lasted throughout its five-year democratic rule. It seems they were not in charge of political economy of the country. While its foreign policy was in the hands of military, its economic policies were dictated by the IMF and other global donors. Whatever may be the reason, this crisis of confidence led to capital flight, draw-down of foreign exchange reserves, and rapid currency depreciation. Pakistan requested help from friendly countries which did pledge substantial amounts but gave less and the inordinate delay in their disbursement diluted their usefulness.
There have also been accusations of corruption and political favouritism. By some estimates, only 50-60 per cent of beneficiaries actually receive cash payments from BISP. The previous method of identifying families through the recommendation of Parliamentarians was flawed. Many have claimed that Parliamentarians simply recommended their own family and friends to receive cash payments. It has been pointed out that there is a disproportionate number of families receiving BISP aid in geographic areas where the ruling Pakistan People’s Party dominates. Beneficiaries have also complained that the postal service charges an additional RS 100 to RS 200 for each delivery of payment.
The result was catastrophic for low to mid-income households who faced limited opportunities to
Summary Chapter Nine: 2008-2013/ PPP-Asif Zardari
Chapter-10: 2013-17/Pakistan Muslim League-3
Political Economy of Pakistan under Nawaz Sharif
A. Initial Conditions & developments/events during regime tenure
I Global Financial Crises: Started with worst global economic recession, sky rocketing of oil prices/essential commodities I BOP and macroeconomic instability foreign aid reduced after USA lost interest while remittance declined, investment flows dried up. Decade long rolled over loans matured was forced to pay these loans at a time when the economy had nosed down I Floods: Worst floods since 1973-most of Sindh remained sub-merged under water for a year. crops damaged 1 Riots: riots after death of Benazir damaged infrastructure in Sindh I Terrorism: witnessed worst kind of terrorism-home grown and foreign sponsored.
B. Policies Adopted by the regime
I Go with the Flow: Herculean task to discern credible consistent economic policy adopted by PPP regime during their five years of rule from 2008 to 2013. I Benazir Income Support Programme -social safety net programme for providing non-conditional cash transfer program for the poor, 1 Improving Agricultural Terms of Trade: by rationalizing the prices of agricultural inputs and outputs, provision of fairly generous subsidies and aggressive procurement of surplus food grains whenever needed.
C. Successes of the Regime
I Social Safety Nets: Start of comprehensive social safety net programme for providing much needed relief to the poorest of the poor living below the poverty line of one dollar a day. INFC Award: 7th National Finance Commission awarded massive resources to the provinces easing their financial capacity to spend on social sectors I Agricultural Development: Pro-farmer policies had spin off effects all around. Mushroom growth of affluent middle class phenomenal corporate profits despite global recession} I Stock markets continued to climb throughout to new heights, fueled most likely by speculative investment and short profit taking
In 2013, for the first time since independence, democratically elected federal and provincial governments and legislatures completed their constitutionally mandated tenures in Pakistan and second successive democratically elected government took over. Pakistan Muslim League-Nawaz came into power after winning the election of 2013 with a huge majority. This was the third time Nawaz Sharif became Prime Minister of Pakistan. He served until July 28, 2107 when Supreme Court of Pakistan disqualified him to hold any public office. The PML-N government completed its 5 years term in May 2018 with Shahid Khaqan Abbasi as new Prime Minister in office. Before assessing their performance one must keep in mind the peculiar situation which awaited the new government.
1 Terrorist Activities: Nawaz Sharif Government inherited four types of conflicts, crises and wars-domestic sectarian terrorism in urban areas, Baloch insurgency in its geographically largest province, blow back of Global War on Terrorism in its tribal areas adjacent to Afghanistan and proxy was with India being fought across the borders in Afghanistan. Announcement by the USA/NATO to draw down their engagement in the never-ending conflict had emboldened the terrorists and they had increased the frequency and intensity of their terrorist activities inside Afghanistan with serious security repercussions inside Pakistan. Consequently, state was forced to allocate substantial resources for fighting these wars. 1 Financial Crises: The outgoing government had left the country in a pretty terrible state of economic and financial mess by their incompetent handling of the economy. Dwindling foreign exchange reserves, macro-economic imbalances, increasing inflation and falling exports were some of their legacies. Pakistan’s attraction as an investment destination had already been blighted less due to terrorism and more due to their economic mismanagement. 1 Power Crises: While power crises were the product of the lack of planning during the Musharraf/Shauket Aziz period, it was aggravated by the Pakistan People’s Party by not taking proper corrective measures during their 5 years of misrule. Consequently, when the Pakistan Muslim League (N) took over, load shedding up to eight hours in the cities and more than 14 hours in the rural areas was the norm. 1 Agitational Politics: Although 2013 elections were very fair as compared to the past practices of rigged elections, opposition parties particularly Imran Khan started levelling allegations of vote rigging. Failing to get a positive response from
D. Failures of the Regime
I Macroeconomic Mismanagement: PPP-4 government termed as Pakistan’s worst with dismal growth rates, rampant inflation, massive corruption and macroeconomic instability with debt burden I Power Crises: While power crises were product of lack of planning by Musharraf regime period, it was aggravated by PPP by not taking proper corrective measures in their tenure }
Implementing their stated policy and acting upon the directions of the IMF/World Bank, the Nawaz Sharif regime actively and vigorously pursued the policy of economic liberalization and deregulation. Known for its pro private sector leanings because not only the Prime Minister was one of the leading industrialists of the country but the team he gathered around him also consisted of businessmen or have extensive business interests, implemented the policy of economic liberalization with full passion.
judicial system of the country to redress his grievances, he resorted to to a sustained campaign of confrontation with the new government. Though the PML government survived but it was a bruised survival resulting in less than expected performance from Nawaz Sharif. 1 Civil -Military Relations: If Imran Khan was an irritant for the government of Nawaz Sharif, the civil military relations proved to be headache for him. Initially cordial, they started deteriorating after one and a half years to such an extent that he had to surrender a lot of space to the armed forces to survive. It adversary affected the performance of the regime 1 Heightened Expectations: While the state was beset with the problem mentioned above, the society was expecting some sort of miracle from the new regime for redressing their grievances-job opportunities, power, price stability, prosperity.
Privatisation
In his last two stints in the 1990s as prime minister, Nawaz Sharif had adopted liberalization/deregulation of economy, de-nationalisation of nationalised industries and privatisation of state owned enterprises as an article of faith and reaped handsome dividends. Hailed as the most successful privatisation program in South Asia, Central Asia and the Middle East, it brought more than $ 9 billion (Rs. 476,421 million) from 167 fairly transparent transactions to the state coffers. Accordingly, the new regime also follwed the same strategy and chalked out an ambitious plan of privatisation of the state owned enterprises to eliminate/reduce the huge state subsidies being given to those SOEs. Some very positive developments helped the PML-N in its endeavour to carry out its agenda.
Not only there was a broad spectrum consensus on the need and benefits of privatisation/ deregulation in the country but a robust private sector was ready to take on big State Owned Enterprises. Unconditional support of international organisations particularly of World Bank and International Monetary Fund and availability of a comprehensive legal and institutional framework which had matured during the last 20 years would have gone a long way in expeditious privatisation process. Thirdly given the emergence of an aggressively penetrative social/electronic media, an extremely intrusive civil society and a very activist judiciary, the process would have been very transparent.
Economic Policies of Nawaz Sharif
After taking the oath as the Finance Minister of the new government, Ishaq Dar announced a 14-point ‘future roadmap’ aimed at achieving over seven per cent growth by 2018 and making Pakistan a globally competitive and prosperous country with particular emphasis on macroeconomic stability through inclusive growth. For this purpose, addressing poverty incidence and unemployment while improving socio-economic indicators, including health and education were the main aims of the government. He fixed the following targets for the achievement of above mentioned aims;
1 containing inflation to single digit; 1 bringing down fiscal deficit to 4pc; l increasing foreign exchange reserves to $22 billion, l improving investment-to-GDP ratio to 20pc 1 ensuring industrial sector growth by 8pc; 1 bringing down public debt to 55pc of GDP; l increasing tax-to-GDP ratio to 15pc and l increasing exports to $32 billion; 1 spending 4pc of GDP on education and health sectors; 1 alleviating poverty and supporting vulnerable sections of society;
I reducing power outages and meeting the shortage of natural gas Keeping in view the peculiar circumstances under which the government of PML completed its five years, we must give credit to their team for making significant progress in almost all the above areas. Some of the policies adopted by them to implement their agenda were as follows
Nawaz Sharif regime therefore tried to improve the financial health of the State Owned Enterprises before privatising them totally or giving their management to strategic investors. For this purpose, these enterprises were to be restructured as commercial organisations under professional management by inducting eminent professionals and those with sufficient corporate experience. Disinvestment of their non-core activities and induction of private sector even in their core activities were also on the cards. Unfortunately, little progress could be made in this respect for reasons more to do with politics than economics.
Investment Climate:
In order to improve the investment climate in the country, it formulated an ambitious Investment Strategy 2013-17 that hinged upon five pillars namely public-private sector dialogue for policy formulation, FDI generation and promotion campaign, investment facilitation, development of special economic zones (SEZs) and coordination networks with stakeholders. It was well received by the business
Economic Liberalization:
community and helped the country to boost the private investment. However, the real investment booster was the China-Pakistan Economic Corridor (CPEC) Although CPEC was signed during the previous regime, yet the project saw progress in the tenure of Prime Minister Nawaz Sharif. A collection of infrastructure projects originally valued at $46 billion, the value of CPEC projects increased to US$ 62 billion and is intended to rapidly modernize Pakistani infrastructure and strengthen its economy by the construction of some modern transportation networks, numerous energy projects, and special economic zones.
rates which gave confidence to the financial markets in the country.
Macroeconomic Stability.
One of the stellar successes of the government was the macroeconomic stability it brought to economic management of the country. While it brought down the fiscal deficit from more than 8% to around 4%, inflation never crossed 6% throughout the five years of its tenure. Consequently, interest rate was also brought down to 42-year low, forex reserves crossed, USD 23 billion and remittances hovered around USD 20bn
Exchange Rate Stability:
Keeping the past tradition, PML (N) government pursued to maintain a fixed parity between the dollar and the Pakistani rupee at 100 for a dollar. As a result of this, the real effective exchange rate appreciated nearly 12 pc between December 2013 and July 2014 compounding the financial crises more than it could solve.
Urban Development and Connectivity:
True to their socioeconomic background, concentration of their vote bank and their fascination with highly visible gigantic brick and mortar structures as well as the imperatives of the rapidly urbanising Pakistan, the Nawaz Sharif government put in their best efforts to improve the urban areas of the country and improving their connectivity through construction of motorways.
Assessment
Improved Growth Performance:
To properly assess the performance of Nawaz Sharif government we must keep in mind the peculiar circumstances in which it came into power and situation which obtained throughout their tenure due to agitational politics of the country. While it inherited the crucial issues of external security, internal law and order, depleting foreign exchange reserves and energy shortages, yet the global financial institutions consistently gave it high marks for its prudent handling of the economy. While the GDP growth rate crossed 5 % for the first time in a decade and unemployment rate declined from 6.2% in FY 2013 to 5.9% in 2017 , the government was successful in completing the IMF Programme (first ever completion of the IMF program in country’s history). Successfully negotiated loan agreements with the World Bank, IMF and ADB. improved foreign exchange reserves and maintained stable exchange
Privatisation
It conducted a few successful capital market transactions by offloading another tranche of its shares in its already privatised entities i.e., United Bank Limited ($400 million) and Pakistan Petroleum Ltd. (Rs15.3bn). It was also successful in selling shares of Oil and Gas Development Corporation Limited ($800 million) and Habib Bank Limited, to fetch around $2 Billion. Pakistan successfully floated Euro Bonds worth US$ 2 Billion in international markets after a gap of seven years. However, there were two issues with the privatisation programme of the government
1 Firstly, the divestment of balance shares in an already privatised entity cannot be called privatisation. In fact, privatisation is strategic sale of substantial shares along with transfer of management of a state owned enterprise to a competent private sector investor who could inject the much needed cash and bring about fundamental structural changes in the operations and management of the enterprise. 1 Secondly, this time around the privatisation process was a great deal challenging for several reasons. The number of units to be privatised was not as large as they were when he started the ‘third generation privatisation’. Secondly, not only the number of such entities was limited, they were what we can say ‘hard core SOEs’ riddled with structural rigidities and management inadequacies. They needed lot of hard core reforms before they could be privatised. 1 Thirdly domestic and international financial crisis resulted in huge losses of SOES which served as a disincentive to attract investors. 1 Lastly managing public interest in industries with social repercussions such as power and transportation as well as the limitations imposed on the federation of seeking provincial concurrence in each transaction as a result of 18th constitutional
amendment were other handicaps in the speedy privatisation of state units While some progress was made with Railways, almost all the other state owned enterprises
improvement in the existing power plants and rationalising the tariff structure particularly in recovery of electricity bills.
technology and operating on imported raw material – coal and iron ore was a non-starter from the start. Despite having a monopoly in the Pakistani market, it has rarely made money. These fundamental disadvantages meant that, even with good, honest management, PSM is not a viable enterprise; it must be shut down. Privatization is not an option because the project by design is a loss making proposition.
Power Projects:
PML-N government must be given full credit for trying its best to increase the electricity generation capacity of the country and had been successful to a large extent in its endeavours s. It framed a long term energy policy which was well received by the private sector and foreign investors resulting in substantially reducing the load shedding in the country. When PML-N came into power, Pakistan was facing acute power shortage with long hours of load shedding across Pakistan.
Exchange Rate Stability:
With the exception of Bhutto, all the 43 governments formed in Pakistan since her independence have been very fond of strong currencies, a policy which after some time distorts the economy so much that when they leave the office, the successor has to clean the mess left by them. In fact there is nothing sacrosanct about a stable exchange rate. That is precisely one of the major reasons for the Japanese growth as they kept on improving their competiveness by adopting both the methods. Chinese learnt the lesson from them and have kept their currency undervalued.
During its five years of constitutionally mandated tenure, PML-N, government was successful in in completing the power projects started earlier and initiated several new projects. Consequently, with addition of more than 10,000 megawat electricity into the national grid, the hours of load shedding have been reduced from 18 hours per day to around 4/6 hours daily. Pakistan and Qatar signed a US$ 16 billion dollar liquefied natural gas (LNG) deal in 2016. whereby Qatar will sell LNG to Pakistan for 16 years to meet domestic energy requirements.
PML (N) government was no exception; pursuing to maintain a fixed parity between the dollar and the Pakistani rupee at 100 for a dollar, the real effective exchange rate appreciated nearly 12pc between December 2013 and July 2014 adversely affecting growth in exports. Granting of GSP by the EU plus only halted the nosedive of our exports. Since then, the government has allowed a creeping depreciation of the currency which has been propping up the exports a bit.
Neglect to Agriculture:
Agriculture has never got the treatment it deserves on account of its importance in the political economy of the country whether the dominant elite belonged to the urban areas or the rural. However, after the dominance of urban commercial elite in the policy formulation process of the country during the last two decades, it has got a step motherly treatment even during the so-called farmer friendly regime of the Pakistan People’s Party. There were two ways in which Pakistan’s agricultural sector suffered during PML regime-adverse terms of trade and less allocation for rural development. While spending huge resources for the development of civic amenities in the cities, it neglected the rural areas. Urban areas do need good public goods and services but so do the rural areas where the conditions of roads, schools, hospitals are deplorable. Not only there is an acute shortage of these facilities in the villages, there are complaints of shortage of staff to man these health and educational schools where they exist.
However there were four issues in these efforts of the government
1 Firstly, in its pursuit to improve the availability of electricity before it went to polls in 2018, the government gave scant attention to the costs involved in this respect. High profile but high cost projects pursued will not only impinge upon the people’s capacity to pay but would also adversely affect the competitiveness of the commerce and industry and balance of payments in the long term. Putting together all of the government’s intended projects, even at today’s depressed prices for LNG and coal, the total import bill for fuel will shoot up to $23 billion to $25bn in the next five to seven years. 1 Secondly, it did not give adequate attention to the transmission capacity and the quality of the system to transmit the electricity from one corner to the other. The system which is already blamed for more than 30 % line losses will not be able to withstand the added load 1 Thirdly, it neglected the proper mix of electricity generation by relegating the hydal and nuclear sources of electricity generation which are the most cost effective alternatives for a country like Pakistan. 1 Fourthly, there is still a lot of scope in improving the situation if there is efficiency improvement in the existing power plants and rationalising the tariff structure
Similarly, agricultural terms of trade went from bad to worse during the PML government, more by design and less by default. They wanted to keep the prices of agricultural prices depressed to avoid any labour unrest or urban agitation in case food inflation crossed the permissible limits. They failed to realise that if we did not incentivize the farmers to produce food commodities by paying them fair returns it would result in reduced production of the very food crops which were supposed to keep the general price level stable either due to loss in productivity of their crops or diversion of land use to more lucrative cash crops.
rate of the economy.
Although the MSCI’s index of Pakistani shares had started rising before the PML government assumed power but they escalated after formal induction of the new government and did not look back. Since the start of 2012, when a tax amnesty allowed previously hidden cash to be invested in stocks, they had risen by more than 80% in dollar terms-ahead of global indices as well as Pakistan’s peers among frontier markets, which were less liquid and less open to foreign capital than others.
Surprisingly, the market did not fall even during the worst political crises thanks largely to foreign portfolio investors which saw the PML government as friendlier to business and took advice and credit from the IMF. Reforms were drafted and privatisations scheduled. A $2 billion bond issue was many times oversubscribed. Pakistan’s listed firms had a handsome average return on equity of more than 25%. The market was cheap relative to its frontier-market peers, with shares priced at 8.5 times earnings on average.
Worsening Debt Profile
Economic management of the country by the PML government resembled to a large extent with the Latin American governments of the 1970s-fixation with exchange rate stability, mega projects, huge borrowing. It resorted to acquisition of relatively expensive commercial debt although much cheaper and longer maturity debt was available from the World Bank and ADB for undertaking structural reforms. And this was the most worrying development, considering our external debt indebtedness was already worse than that of our regional neighbours. Our sovereign commercial debt attracted a rate of 8.25pc, compared with 4.25pc to 6.9pc paid by these countries.
Our external liabilities at commercial interest rates therefore exceeded 35pc of the country’s total external debt, at a time when the principal and interest on the government’s external obligations alone is around 20pc and overall debt 224pc respectively of export earnings, with footloose foreign portfolio investment of $2.8bn that could flow out any time. Moreover, Euro/Sukuk bonds of $2bn are at variable rates which will ascend when interest rates are raised by the US Federal Reserve. The servicing of the $5bn stock of bonds at high interest rates and the management of the heavy repayments of external obligations would adversely affect the country’s repayment ability, especially given the depressed growth rate of the economy.
Summary Chapter Ten: 2013-2018/PML
liquid/less open to foreign capital
A. Initial Conditions & developments/events during regime tenure
| Economic Mess: Started with terrible financial mess with dwindling foreign exchange reserves, macroeconomic imbalances and falling exports I Terrorism: Pakistan’s attraction as an investment destination had already been blighted due to terrorism plus economic mismanagement. I Power Shortages: Load shedding of 8 to18 hours in cities/rural areas I Agitation: Agitational politics by Imran Khan paralysed the state for two years I Worsening Civil-Military relations: turned sour and nosedived during the second half of the political government I China Pakistan Economic Corridor-CPEC started bringing foreign investment along with usual boost to economic activities
D. Failures of the regime
I Neglect to Agriculture:Dominance of urban commercial elite,resulted in adverse agri-terms of trade/ less allocation for rural development. } | Excessive Exchange Rate Stability:Strong currency adversely affected export competitiveness and encouraged imports with BOP crises 1 Cost-Ineffective Projects: Scant attention to costs, transmission capacity while neglecting proper energy mix , efficiency improvement and rationalising the tariff structure I Social Sector Neglect: Too much priority to brick and mortar and less attention to human resource development and social sectors like health and education I Worsening Debt Profile:fixation with exchange rate stability amd mega projects resorted to huge borrowing at expensive commercial rates
B. Policies Adopted by the regime
Macroeconomic stability: containing inflation, fiscal deficit, increasing foreign exchange reserves, increasing tax collection, increasing exports
Reducing Load Shedding: Reducing power outages and meeting the shortage of natural gas by constructing new power plants under CPEC and importing gas from Qatar | Economic Liberalization: vigorously pursued economic liberalization and deregulation due to pro private sector leanings of the ruling family 1 Improving Investment Climate: Investment Strategy 2013-17 formulated for FDI generation, investment facilitation, special economic zones (SEZs) 1 Exchange Rate Stability: Maintain fixed parity between dollar and Pakistani rupee at 100 for a dollar, real effective exchange rate appreciated nearly 12pc first year 1 Restructuring SOEs: To improve financial health of State Owned Enterprises (SOEs) before privatising them, restructured as commercial organisations under professional management I Urban Development: Imperatives of rapidly urbanising Pakistan, necessitated improvement of urban areas and their connectivity through construction of motorways I Loans: Government successfully negotiated loan agreements with WB, IMF,ADB. while huge funds came under the CPEC for various infrastructure projects
C. Success stories of the regime
I Trust Deficit Reduced: Despite crucial issues of security, solvency and shortages,consistently got high marks for its prudent handling of the economy. Improved foreign exchange reserves and stable exchange rates gave confidence to the financial markets in the country. I Privatisation: Conducted successful capital market transactions by offloading another tranche of its shares in its already privatised entities to fetch $2 Billion. | Foreign Investment/Loans: Successfully floated Euro Bonds worth US$ 2 Billion in international markets many times oversubscribed as Pakistan’s listed firms have a handsome return on equity of more than 25%. while working on $1bn international Sukkuk when Nawaz ousted I Energy: Framed long term energy policy,well received by private sector and foreign investors.reduced load shedding from 18 to less than 8 hours I Stock market boom; rose by more than 80% far ahead of global indices & Pakistan’s peers which are less liquid/less open to foreign capital
Chapter-11: The Balance Sheet
Evolution of Political Economy of Pakistan
civilian rule. Low growth rates of 1950s corresponded with the civilian rule while high growth rates were achieved during the Military rule of 1960s and so on. Spurred by the massive inflow of foreign aid, military and civilian, during these military hegemons, Pakistan economy witnessed phenomenal growth rates.
Present is by and large an un-finished agenda of the past. What are the main features of the political economy of Pakistan have been the result of the initial conditions Pakistan inherited as a colonial heritage in 1947 and the policies and strategies adopted by the 23 military regimes and political governments Pakistan witnessed in its 7 decades of post-independence period. So where does Pakistan stand in terms of economic progress today with reference to her position in 1947? Has she done good, very good, bad? Has she been able to bring desired structural transformation? Are these rates in accordance with its potential? How this growth can be compared with reference to other countries which started the journey with the same initial conditions? What costs have been paid for this growth by the people? Have the fruits of growth been equitably distributed? Was this growth sustainable and indigenous or was it always spurred by the injections of foreign aid?
However, at the end of each high-growth period, the structural constraints of a low domestic savings rate and slow export growth were manifested in fiscal and balance of payments pressures. It invariably induced a subsequent slowdown in GDP growth due to serious deficiencies in basic economic structure of the country-uneven growth clusters, inadequate infrastructure, low human development, un-diversified export bag etc.
Less than Potential Growth Performance:
In vertical analysis, comparing its performance with its potential, one really feels saddened by her lacklustre performance. Despite all the handicaps with which Pakistan started its journey she could have done far better than what the above facts and figures reveal. Countries grow in their own momentum even if no conscious and deliberate efforts are made by the state in this respect.
These are very pertinent but tough questions and there are no easy answers except saying on the one hand and on the other hand’ type of explanations for the growth performance. Here we do the same.
Impressive but Inconsistent Growth Rates:
The average growth rate of Pakistan has been not bad, in fact fairly impressive for the last sixty-nine years of its existence as an independent country. Growth has occurred in brief spurts followed by sharply declining GDP growth. The average annual GDP growth during the 1950s was 4% which were followed by more than 6% growth rates achieved during the 1960s. Early 1970s saw growth rates of around 4% which accelerated to 6% in the late 1970s 1980s to be followed by a sharp decline in the subsequent decade of 1990s. Another spurt occurred during 2000s when GDP growth reached 6.25 per cent, declining sharply to 2.62 per cent under the subsequent years and still continuing
After all Europe’s success owes it to the ingenuity of her business class more than that of the state. Here the state devoted so much resources and efforts for accelerating this very rate of growth and still stand at where our 70 million children are out of school, 30 per cent living below the poverty line etc. It is not the question of glass half full or half empty. It is human tragedy and suffering, not a philosopher’s glass of water.
However, these rates have not been consistent throughout this period; very high rates in one year have been invariably followed by dismal performance the next year and so on with few exceptions here and there. There is a structural inability to sustain growth over a long period of time.
Impressive Socioeconomic Structural Transformation:
This growth performance has been accompanied by an all rounded, though not very spectacular, structural transformation of the political economy of the country. In linear analysis, comparing today’s Pakistan with that of 1947, there has been marked difference between the two stages of her economic development. Take any socioeconomic indicator and you will find impressive improvement, despite all the reservations about the inadequacy or accuracy of data collection and its interpretation. From a population of 35 million people in 1947 living in present day Pakistan, now around 200 million people reside here, showing the improved health care facilities made available to them.
Two Different Streams of Growth Rates:
Economists used to taunt India for growing at the Hindu rate of growth of 2.5% for several decades after independence. Pakistan can also share this taunt with a caveat; we have followed two different rates of growth-military rate of growth of more than 6 % and a civilian rate of growth of 4%. Relatively high GDP growth rates were achieved mainly during the three military regimes as all the above growth years corresponded with the military regimes while unfortunately all the low growth years occurred during the civilian rule. Low growth rates of 1950s corresponded with the civilian rule while high growth rates were
Her Gross Domestic Product has grown from US$ 5 Billion to more than US$ 270 Billion with a per capita income of US$ 1350 -not a mean achievement. In Purchasing Power Parity terms, she is the 26th largest economy in the world with a per capita income of US$4500 which places her in the middle income countries of the world. Agriculture now contributes only 20 per cent in this GDP as compared to more than 50 per cent in the 1950s. On the other hand, industry is now more than 25 per cent while services
Futility of Cross Country Comparison of growth Performance:
Comparing Pakistan’s performance with other developing countries, particularly with those which started their journey at the same time as we did, is an exercise in futility because of peculiar nature of circumstances of each country. Such comparison is a good way of judging where we stand in terms of various socioeconomic indicators but does not give us any criterion to judge our policy makers for their ineptitude or to eulogize their good wok. May be there were just fortuitous circumstances which pushed them up while we are hamstrung due to historical baggage or geographical misfortune. South Korea was developed as a province of colonial Japan which constructed first class infrastructure, created institutions and developed its human resources as per its own standards. The development we inherited was the spin off of the imperial imperatives of a colonial power which used us as a colony, not a province of UK.
For example a quick glance would reveal the following global trends in different decades adopted
1 1950s-Planned development/Capital accumulation 1 1960s-Excessive emphasis on growth/trickle down 1 1970s-Social justice through state capitalism 1 1980s-Denationalisation, de-regulation 1 1990s-Privatisation, dollarization, liberalization 12000s-Growth through consumerism
12010s-Poverty Alleviation, infrastructure develop Secondly, and more interestingly, the economic policy regime, on the other hand, has only changed twice in all of Pakistan’s history. The liberal private sector-led growth model that was put in place in the 1950s and accelerated in the 1960s was rolled back by Bhutto in the 1970s and became the socialist economic model. Since the rejection of this model in 1977 and the revival of the liberal model, the general thrust of economic policy has remained unaltered.
Widespread and Consistent Perception of Vulnerability:
Historically, Pakistan’s overall economic output (GDP) has grown every year since Independence with one exceptional year of 1950-51 when it went into negative on account of bad agricultural sector performance. Despite this record of sustained growth, paradoxically Pakistan’s economy had always been construed as unstable and highly vulnerable to external and internal shocks. It looks all the strange that an economy which has proved to be unexpectedly resilient in the face of multiple adverse events ranging from the dismemberment of the country in 1971 on the one hand to the various global financial crises of 1970s, of 1998 and of 2008/9 on the other should carry this stigma.
Persistent Obsession with Overvalued Rupee:
Whether civilian or the military, almost every regime in Pakistan had an obsession with over-valued and excessively rigid exchange rate. It started with the early development experience when Pakistan did not follow Indian example of devaluing its currency vis a vis British pound and it paid dividends thanks to Korean War. Then it became a favourite strategy of the policy makers throughout our history, supported by the importer’s class who always benefit from an overvalued exchange rate.
A country which fought four wars with India, hosted four million refugees for two decades, remained under severe economic sanctions and is presently at war with terrorists, home-grown and foreign, for the last one decade cannot be construed as a weak economy. May be the basic resilience of the Pakistan economy owe it to its thriving informal economy which according to different estimates ranges from 50% to 90% of the total economy. May be we pass judgement about the state of economy on the basis of the figures about the formal economy which are deceptive in the face of the above mentioned unrecorded economy thriving in Pakistan.
There is nothing sacrosanct about an inflexible exchange rate kept stable through artificial means.. Simply put, a country has to find external markets for which its exportable surplus must be competitive. That demands either your costs of production should be lower or your cost of exchange (value of your currency) should absorb the increased costs and must be devalued to that extent. That is precisely one of the major reasons for the Japanese growth as they kept on improving their competitiveness by adopting both the methods. A short term measure cannot be continued for a long term if it has inherent structural flaws; rigid exchange rates have that flaw.Keeping currency unreasonably high distorts economy so much that successors have to clean the mess left by them.
Regime neutral Consistent Economic Policies:
Pakistan has seen twenty-three governments in the past sixty nine years, including fourteen elected or appointed prime ministers, five interim governments and thirty-three years of military rule under four different leaders. However, whatever the composition of the ruling elite in any regime, the economic policies of the every government exhibit two consistent traits. First is the eagerness to adopt any globally accepted development ideas and policies without considering theier long ternm effects on the economy. For example a quick glance would reveal the following global trends in different decades adopted
1 1950s-Planned development/Capital accumulation
Agriculture Still Occupies a Prominent Place:
Although Pakistan is no more a predominantly agricultural country, thanks to rapid strides it has made in her quest for industrial transformation, agriculture still occupies a prominent place in Pakistan’s overall economic structure. Being a pivot around which all other economic activities move, it is a major contributor to the country’s economy in terms of GDP, foreign exchange earnings, employment generation, raw material for manufacturing industry (primarily textile) and the most vital, national food security.
political interconnectedness and its economic and financial linkages-backward and forward, horizontal and vertical. Its performance still dictates all our macro indicators – growth rates of the economy, poverty profile, foreign exchange reserves, inflationary pressures etc. In view of this positive association mentioned above, the pursuit of a high growth policy in agriculture should be the cornerstone of Pakistan’s future development strategy.
factor productivity to the growth process of Pakistan. During the period 1960-2005, about 80 per cent of Pakistan’s GDP growth rate was explained by capital accumulation and labour expansion, whereas Total Factor Productivity or TFP contributed the remaining 20 per cent of the overall growth. (TFP is a variable which accounts for effects in total output not caused by traditionally measured inputs of labour and capital. If all inputs are accounted for, then TFP can be taken as a measure of an economy’s long-term technological change or technological dynamism.)
Lopsided Structural Change in Recent Past:
Structural change, a fundamental characteristic in the growth and development, entails a gradual shift from low productivity sector (agriculture) to high productivity sector (manufacturing) in the middle stage of its economic development and finally to services sector. In the case of Pakistan, the structural change has largely bypassed the middle stage and Pakistan, from being a largely agrarian economy in terms of contribution to GDP, has become a services led economy, with services accounting for more than 50 per cent of the GDP. Even though the services sector has become the main driver of growth in Pakistan, its potential contribution to employment is limited as compared to the manufacturing sector. Therefore, the agriculture sector continues to provide more than 40% employment to the country’s labour force. This shows that a major part of the labour force is stuck in the low productivity sector.
According to a well-researched report, over the period 1998-2007, total factor productivity in the overall manufacturing sector increased by only 0.9 per cent. This implies that the growth of the manufacturing sector has been mainly driven by growth inputs i.e., labour and capital, and the contribution of total factor productivity has been fairly low. This evidence suggests that Pakistani firms have consistently failed to replace less productive assets with more productive ones
Private Sector as Main Driver of Growth:
Despite an active role played by the state in the economic development of the country, the initiative in driving the economy can be credited to the private sector. The agricultural sector, representing 20 per cent of GDP, is owned and managed by private farmers. Manufacturing, with a few odd exceptions, is under the control of private firms. Wholesale and retail trade, transportation (with the exception of railways and Pakistan International Airlines), personal and community services, finance and insurance, ownership of dwellings and the construction sector all fall within the purview of the private sector.
The service sector employs above 30 per cent of the labour force while the industrial sector employs only 20 per cent. Given the deteriorating performance of the manufacturing sector in the past years, most of the workers move from the agricultural sector to the services sector implying that the sector with highest value addition has the lowest share in terms of employment. This is a matter of concern since the movement of labour from low productivity sectors (agriculture) to relatively high productivity sectors (such as manufacturing) is what generates the surplus that spurs growth.
Only public administration, defence services and public utilities are directly managed and operated by the government. Imports and exports of goods and services are also privately managed. A rough approximation would indicate that goods and services produced, traded and distributed by the private sector amount to 90 per cent or more of the national income while the government directly or indirectly owns, manages, controls or regulates the remaining 10 per cent of national income. So it is the strength of private initiative, with all its flaws, operating in a relatively liberal policy environment, which has been the main driver of long-term economic growth in Pakistan.
Slow Speed of Specialisation:
Pakistan’s development has also been graduating towards specialisation at a very slow speed as against the empirical evidence of a ‘U’shaped relationship between a country’s income level and its degree of product specialization- high at low levels of income per capita at the initial stages of development. But as the country becomes richer it tends to diversify to produce and export a wider range of relatively more sophisticated goods till its income reaches a level where specialization increases in technologically advanced and high value-added goods. This implies that increased product diversification is a middle stage in the process of structural change and an important driver of sustained growth of a country.
Limited contribution of Total Factor Productivity:
Another peculiar characteristic of the manufacturing sector has been the limited contribution of factor productivity to the growth process of Pakistan. During the period 1960-2005, about 80 per cent of Pakistan’s GDP growth rate was explained by capital accumulation and labour expansion, whereas Total
Summary Chapter-Eleven: The Balance Sheet
above, the pursuit of a high growth policy in agriculture should be the cornerstone of Pakistan’s future development strategy. I Lopsided Structural Change in Recent Past: The structural change has largely bypassed the middle stage and Pakistan, from being a largely agrarian economy in terms of contribution to GDP, has become a services led economy, with services accounting for more than 50 per cent of the GDP. This is a matter of concern since the movement of labour from low productivity sectors (agriculture) to relatively high productivity sectors (such as manufacturing) is what generates the surplus that spurs growth. I Slow Speed of Specialisation: Pakistan’s development has also been graduating towards specialisation at a very slow speed as against the empirical evidence of a ‘U’ shaped relationship between a country’s income level and its degree of product specialization-high at low levels of income per capita at the initial stages of development. But as the country becomes richer it tends to diversify to produce and export a wider range of relatively more sophisticated goods till its income reaches a level where specialization increases in technologically advanced and high value-added goods. I Limited contribution of Total Factor Productivity: According to a well-researched report, over the period 1998-2007, total factor productivity in the overall manufacturing sector increased by only 0.9 per cent. This implies that the growth of the manufacturing sector has been mainly driven by growth inputs i.e., labour and capital, and the contribution of total factor productivity has been fairly low. This evidence suggests that Pakistani firms have consistently failed to replace less productive assets with more productive ones I Private Sector as Main Driver of Growth: Despite an active role played by the state in the economic development of the country, the initiative in driving the economy can be credited to the private sector in all economic sphere-agricultural sector, Manufacturing, Wholesale and retail trade, transportation etc all fall within the purview of the private sector. 1 Only public administration, defence services and public utilities are directly managed and operated by the government. So it is the strength of private initiative, with all its flaws, operating in a relatively liberal policy environment, which has been the main driver of long-term economic growth in Pakistan.
Evolution of Political Economy of Pakistan
So where does Pakistan stand in terms of economic progress today with reference to her position in 1947? Has she done good, very good, bad? These are very pertinent but tough questions and there are no easy answers. Here we try to answer these.
| Impressive but Inconsistent Growth Rates: The average growth rate of Pakistan has been fairly impressive for the last 70 years: however, these rates have not been consistent throughout this period. There is a structural inability to sustain growth over a long period of time. Growth has occurred in brief spurts followed by sharply declining GDP growth. I Two Different Streams of Growth Rates: we have followed two different rates of growth-military rate of growth of more than 6% and a civilian rate of growth of 4%. However, at the end of each high-growth period, the structural constraints of a low domestic savings rate and slow export growth were manifested in fiscal and balance of payments pressures, a subsequent slowdown in GDP growth. I Less than Potential Growth Performance: Despite all the handicaps with which Pakistan started its journey she could have done far better than what the above facts and figures reveal. Here the state devoted so much resources and efforts for accelerating this very rate of growth and still stand at where our 70 million children are out of school, 30 per cent living below the poverty line etc. | Impressive Socioeconomic Structural Transformation: all rounded, though not very spectacular, structural transformation of the political economy of the country. From a population of 35 million people in 1947 living in present day Pakistan, now around 200 million people reside here, showing the improved health care facilities made available to them. In Purchasing Power Parity terms, she is the 26th largest economy in the world with a per capita income of US$4500 which places her in the middle income countries of the world. I Futility of Cross Country Comparison of growth Performance: Comparing Pakistan’s performance with other developing countries, particularly with those which started their journey at the same time as we did, is an exercise in futility because of peculiar nature of circumstances of each country. South Korea was developed as a province of colonial Japan which constructed first class infrastructure, created institutions and developed its human resources as per its own standards. The development we inherited was the spin off of the imperial imperatives of a colonial power which used us as a colony, not a province of UK. I Widespread and Consistent Perception of Vulnerability: Despite this record of sustained growth, paradoxically Pakistan’s economy had always been construed as unstable and highly vulnerable to external and internal shocks. May be the basic resilience of the Pakistan economy owe it to its thriving informal economy which according to different estimates ranges from 50% to 90% of the total economy. I Regime neutral Consistent Economic Policies: Pakistan has seen twenty-three governments in the past 70 years. The economic policy regime, on the other hand, has only changed twice in all of Pakistan’s history. The liberal private sector-led growth model that was put in place in the 1950s and accelerated in the 1960s was rolled back by Bhutto in the 1970s and became the socialist economic model. Since the rejection of this model in 1977 and the revival of the liberal model, the general thrust of economic policy has remained unaltered. I Agriculture Still Occupies a Prominent Place: Although Pakistan is no more a predominantly agricultural country, agriculture still occupies a prominent place in Pakistan’s overall economic structure.in terms of GDP, foreign exchange earnings, employment generation, raw material for manufacturing industry (primarily textile) and the most vital, national food security. In view of this positive association mentioned
Chapter-12: Conclusion
However it failed miserably in some fields
1 Dismembered within 25 years of existence, 1 failing to keep image of a peaceful country I losing the writ of the state in vast areas 1 dismal human development record 1 Vast poverty and inequality
Story of Pakistan’ development makes an interesting reading-how a country with lot of baggage of underdevelopment and sets of contradictions and constraints, starts its development journey literally from a scratch and keeps on stumbling from phase to phase, adopting with religious fervour the mainstream globally accepted development ideas, policies and strategies, which are current at that time. From an exclusive emphasis on growth and trickle down of 1960s, she took a U-turn and tried to redistribute the fruits of growth in 1970s. Failing miserably in this endeavour which resulted in an expanded state capitalism, she started denationalizing everything in the following decades and adopted the new mantra of liberalization. She is now struggling to remove poverty in the midst of glaring extravagances of certain classes to avoid bursting at the seams of society.
What can be done to rectify the above weaknesses is the topic of my next book namely ‘Pakistan Economy in 21 Century- Challenges & Response
So what is the final verdict?
Well, like any other post colonial state, it has some stellar successes to its credit while on the other had it has failed miserably in few areas. For example
1 1950s-sheer survival in the face of heavy odds against its being a viable economy, stable polity or a homogeneous society 1 1960s-green revolution and fighting a wr with meagre resources 1 1970s-surviving the breakup of its one part and rising again like phoenix 1 1980s-accommodatin more than 3.5 million Afghan refugees for a decade 1 1990s-becpming nuclear power
th With more than US$ 300 Billion GDP in nominal terms Pakistan, is now the 44″ largest economy in the world whle it is 23″largest economy in the world in terms of Purchasing Power Parity (PPP).
Because of her burgeoning population crossing 210 million, her per capita income of US$ 5030 (2018), places her in middle income countries group. Pakistan is one of the Next Eleven, the eleven countries that, along with the BRICs, have a potential to become one of the world’s large economies in the 21st century.
According to Goldman Sachs, by 2050, with an estimated GDP of $3.33 trillion, Pakistan is expected to become world’s 18th largest economy. According to the list of “32 Most Powerful Economies In The World By 2050” published by The Independent in 2017, Pakistan ranks at number 17; ahead of South Korea, Italy, Canada, Spain, Australia and Netherlands.
Location 3937
Annexure A: Two Nations Theory-Myths and Reality
playwright, poet and essayist, who was one of the founding fathers of the Hindu nationalism, needs special attention.
Advocating national unity based on Hindu religion to be the fundamental criterion of nationalism, Mitra maintained that “Hindu nationality .. embraces all of Hindu names and Hindu faiths throughout the length and breadth of Hindustan”. He described the Hindus of India as a nation that was better than the Muslims and the Christians and spent all his wealth establishing schools, gymnasiums and theatres to train Hindus to emerge as a nation.
Basis of the partition of the British India in 1947 and the justification for the creation of Pakistan, the Two Nations Theory suggested that the Hindus and Muslims of India were two separate nations on the basis of their respective cultural markers particularly their religious beliefs and practices, and hence needed their own separate geographical spaces in which they could govern their lives according to their distinct sociocultural moorings and political bearings.
Later on Bhai Paramanand, one of the leading members of the Hindu reformist movement the Arya Samaj, and Lajpat Rai,a prominent Congress leader, described the Hindus and Muslims as being two separate nations and called for a clear partition of the region into a Hindu India and non-Hindu India.”
Indian Muslims in general and the leadership of the Indian Muslim League of the pre-partition Subcontinent in particular, have been blamed or eulogised, depending on which side of the fence you are, for crafting and popularising this Theory’. Historians, Hindus and Muslims alike, who are opposed to the creation of Pakistan, have been criticising the Muslim League for adopting a communal philosophy which not only partitioned the Subcontinent and disrupted the centuries-old Hindu-Muslim unity in the region but also divided the Indian Muslims.
Similarly, MS Golwalker – the supreme leader of the radical Hindu organisation the Rashtriya Swayamsevak Sangh (RSS) – published his book, ‘We, Or Our Nationhood Defined in 1939 and propagated what can be equated with “ethnic cleansing” by saying asserted that the minority communities of India (specifically, Muslim) should merge with the Hindu nation or perish. Interestingly, Golwalker cited the example of the Nazi Germany’s eradication of the Jews as a way to deal with minorities who refused to adapt to the culture of the national race
They fail to understand that no theory springs out of thin air but is always the intellectualisation of objective ground realities. Similarly, Two Nations Theory was the theoretical construct of the objective conditions of the second half of the Indian socio-political scene. It was the cumulative result of the communalisation of Indian politics in which both the Hindu nationalists and Muslim revivalists took active part for advancing their respective socio-political agenda. Speaking at a seminar in Lahore on 7th May 2018, Mani Shankar Ayyar, a prominent Indian politician crdeted Sarvarkar for propagating the Two Nations Theory. He said
It is interesting to note that the Indian National Congress gladly accepted the separate identity of the Indian Muslims when depriving them of their majority in the two most populous provinces (Punjab and Bengal) while signing the Lucknow Pact in 1916. It was adopted much later by the leaders of the Indian Muslim League after the dominant Muslim elite of united India failed to extract sufficient constitutional guarantees from their counterparts namely dominant Hindu elite for an adequate share in the political decision making once the British left India.
“Present situation in India is an abhorrent one. In 1923 a man called VD Savarkar invented a word which doesn’t exist in any religious text, ‘Hindutva’. So the first proponent of the two nation theory was the ideological guru of those who are currently in power in India.”
They rightly or wrongly, depending on which side of the political fence you are, feared that in the absence of these safeguards, the Muslim minority would gradually lose its cultural identity and would become a politically and economically marginalized underclass, another subservient caste, a second class citizens in a predominantly Hindu India. These perceptions had been reinforced by the step motherly treatment Muslim masses got during the brief Congress rule in the provincial governments which it formed after the 1937 elections-a foretaste of things to come.
Although Shankar Ayyar is correct that Sarvarkar coined the word, ‘Hindutva’ (i.e. Hinduness) in his book by the same name and kept on insisting till his death that there are two nations in India: Hindus and the Muslims’, yet he was just one of the leading Hindu intellectual who had been expressing similar views before him. In this connection the work done by Nabagopal Mitra, (1840-1894) an Indian playwright,
In order to succeed, every movement of this magnitude needs some sort of emotional underpinning to arouse the passions of the general public for ensuring their maximum participation. Religion, race and language have been common battle cries throughout history in this respect. In order to press for their demands, they used the term Two Nations Theory which provided them a moral narrative and political
being a separate nation, not a community, and hence entitled to have a separate state. Pakistan Movement, though couched in religious terminology, was basically a movement by the downtrodden Muslim community of India to safeguard their socioeconomic interests and fulfil their dreams of improving the quality of life in a country where they could live according to their cherished dreams.
Jaswant Singh in his remarkable book on partition of the Subcontinent, has admitted that Pakistan Movement “was not an Islamic movement. It was simply for the political rights of a minority.” It was their last option, not the first choice as is evident from the acceptance of Cabinet Mission Plan by the Muslim League when a last effort was made by the British to leave a united India as their legacy.
Post Partition Status of Two Nations Theory
After the creation of Pakistan this battle cry lost its relevance as there were no two nations now in Pakistan as everyone, whether a Hindu or a Christian or a Muslim, was a Pakistani. However, there was a need for a political narrative for two reasons.
1 Firstly, continuing with the two nation theory as the cornerstone of Pakistan’s existence created problems at conceptual and practical levels. If the purpose of the Two Nations Theory was to achieve a separate homeland for the Indian Muslims, insistence on continuing with this Theory as the cornerstone of new country’s ideology meant that the creation of Pakistan had failed to achieve its objective. At the same time, it would leave an open ended option for any minority within Pakistan to demand for separation, citing cultural, religious or ethnic persecution as justification. 1 Secondly, there was a need for a new political narrative to serve as a gelling bond for the millions of people living in a state geographically divided in two wings, both of which were separated by 1000 miles of hostile country. Accordingly, the First National Educational Conference held in November 1947 recommended the propagation of Pakistan ideology. However, the religious lobby which had remained almost side-lined during the freedom struggle became very active to get political space and used this very neutral term Pakistan Ideology for this purpose by equating it with Two Nations Theory.
Annexure B: Why do Countries Break? Lessons from pre-1971 Pakistan
almost impossible to pinpoint a single cause for this complex issue, we can discuss it under the following five headings whose synergetic impact resulted in the dismemberment of pre-1971 Pakistan namely (a) Historical Baggage (b) Political Governance (c) Economic Management (d) Social Dissonance and (d) Regional and global geopolitics.
‘Wrong political decisions are like tuberculosis, easy to cure but difficult to detect in the beginning; once belated they become easy to detect but difficult to cure.’
Machiavelli
Introduction
Most of the present day developing countries are the ex-colonies of European powers which, after the dissolution of the colonial empires, got independence. Majority got new borders with new ethnic, racial and cultural identities. Some were entirely new nations accommodated in newly-carved states with arbitrarily drawn borders. Pakistan is one such country which came into existence as an independent nation-state on August 14, 1947 after the dissolution of the British Indian Empire.
Historical Baggage:
Pakistan inherited more than 8,50,000 km of land mass which was divided in two wings one of which was only 15 %of the total but contained 54 %of the population. In between these two wings lay 1600 km of hostile country waiting and hoping for the collapse of the new state sooner rather than later. Newly carved out state of Pakistan contained 5 major and more than 12 minor nationalities which no doubt had successfully launched a movement for the creation of an independent nation-state of their own but were a far cry from calling themselves a one nation. However, despite all the above mentioned diversity, the provinces, states and regions comprising West Pakistan had several markers of becoming a nation over a period of time. Geographical contiguity of the territories comprising West Pakistan, their racial stock, Islamic fervour of the people and the common script of their languages (i.e. Arabic) spoken in these regions were fairly sufficient indicators of their becoming a distinct nation in not so far future.
On the other hand Bengal, part of which became East Pakistan, was a different ball game. Although Bengali Muslims took active part in the creation of Pakistan, their homeland was destined to be a separate nation-state from the start. Separated from West Pakistan by 1000 miles of hostile territory, its people were of different racial stock with distinct cultural identity and spoke a completely different language. British Indian Government’s decision of 1880 to change the script of the Bengali language from Arabic, which is the same script in which Urdu is written, and replacing it by Deva Nagri script can be the starting point for the creation of Bangladesh.
Pakistan was carved out of erstwhile Indian subcontinent to provide a homeland to those Indian Muslims who perceived themselves to be a distinct nation on the basis of several markers of nationhood. One of these markers, and a predominant one, was their Islamic identity. They did not want to live in a post-colonial united India which would be dominated by the Hindus, fearing economic injustices, political marginalisation and social subservience. After a short struggle, mostly nonviolent as compared to the experience of other countries which got independence in the post-World War 11, Indian Muslims were able to get a separate homeland for them in 1947.
However just after 25 years of its existence as an independent sovereign state, Pakistan broke into two pieces- the first though not the last, post-colonial state to suffer this fate. Its bifurcation into two independent states has been subject of intense debate since then because it was one of the most significant events in modern history after the conclusion of the Second World War.
In the succeeding paragraphs, we will discuss the major reasons for the breakup of Pakistan and learn lessons from this momentous event.
Bengali Muslims, who chose to opt for Pakistan, shared only their religion with the people of other provinces in West Pakistan, which was too weak a bond to keep them attached to their compatriots under a single flag. Two Nation Theory which provided moral and political justification for the division of India, was neither relevant for integrating these two distinct nationalities nor sufficient to create a new nation which demanded far more than mere religious affinity. A prescient indication of their destiny as two separate independent nation-states was given in the 1940 Lahore Resolution which demanded division of India on religious basis but proposed two Muslim states. Taking a cue from this Resolution, a proposal for an independent United Bengal was mooted by Prime Minister H. S. Suhrawardy in 1946, but was opposed by the British colonial authorities. The East Pakistan Renaissance Society advocated the creation of a sovereign state in eastern British India. Keeping these two nation-states under one federation was a Herculean task which needed a long term vision incorporated in appropriate institutional arrangements and implemented by a capable leadership. With few exceptions, those who ruled Pakistan after her creation as an independent state woefully lacked qualities of great statesmanship.
Causes of Breakup
Like all momentous events, separation of East Pakistan from the united Pakistan and gaining independence, had deep historical roots and varied social, economic and political reasons. As it is difficult, almost impossible to pinpoint a single cause for this complex issue, we can discuss it under the following
Another historical baggage was the vast disparity in terms of level of economic development and political representation between the two wings comprising Pakistan. Bengal remained economically underdeveloped and underrepresented in political set up and organs of the state during the colonial period, more by choice and less by default for many diverse reasons. Firstly, even if we disregard the hypothesis that Bengal was punished for its role in 1857 uprising, it was not prudent to develop it industrially as it directly competed with Britain in textile manufacturing; its development would have adversely affected the British exports. Secondly developing infrastructure in flood prone region was not as cost effective, beneficial and strategically important as central and northern India. Thirdly, commercial importance of Calcutta relegated the need for the development of east Bengal into secondary position.
long term prudent polices to sort them out. All the social and economic indicators pointed towards the above mentioned great gap existing between the two wings. It necessitated formulation of comprehensive socioeconomic policies to bridge these wide differences in the standards of living of the people of both wings. This was all the more necessary in the backdrop of Pakistan Movement which no doubt couched in religious terminology, was based on hard-core of economic reasons. Religion provided the moral justification, symbols and slogans but it was the broader economic deprivations which provided the main impetus for the separatism.
There was thus an urgent need to develop a long term vision, duly formulated with consensus along with a formally approved constitution and democratic institutions to implement this social contract between the state and the citizens in letter and spirit. It also needed devising affirmative action policies, rapid but inclusive economic development, greater social equality, and appropriate political representation, equitable share in the administrative and security organs of the state to remove the feelings of deprivations among the Bengali Muslims.
Same was the case in terms of administrative and political representation in governance structures and organs of the state. Bengalis in general and Bengali Muslims in particular had been systematically kept out of the decision making processes in Colonial India after the cataclysmic events of 1857 which had created serious doubts about the loyalty of the Bengalis towards British rulers. In contrast, regions and nationalities of northern India, which played the decisive role in crushing the rebellion, got very preferential treatment in their representation in institutions responsible for policy formulation and implementation. Resultantly Bengali Muslims had scant representation in state organs like armed forces, law enforcement agencies, civilian bureaucracy etc. during the colonial period. Pakistan inherited this vast disparity but took too much time to rectify these historical injustices.
Unfortunately the relative inexperience coupled with the short sightedness of those who ruled the country after independence let the historical forces take its own course which clearly pointed towards separation right from the day one. Ayub Khan has been blamed a lot, and rightly so, for the separation of East Pakistan, for pursuing a flawed economic development model and inappropriate political reengineering through basic democracies. However earlier regimes cannot be absolved of the errors of omissions and commission resulting in the fall of Dhaka.
Consequently when British Indian Empire dissolved, the two wings constituting Pakistan were far apart, not only geographically but also economically despite the fact that the areas becoming part of Pakistan were themselves far behind in terms of economic development compared with what India inherited. Its agriculture was still at the primitive stage where capitalist development had not made any inroads. It was basically a subsistence agricultural rural economy, with extremely poor level of rudimentary infrastructure, technological penetration or application of modern techniques of agricultural farming. Same was the case with its industrial sector, which inherited 34 industrial units of insignificant, almost all of them located in West Pakistan. East Pakistan producing 70 per cent of world jute was without any jute mill.
This historical baggage of disparity between the two wings in terms of economic development and representation in various state organs was to play the most crucial role in subsequent inter-provincial relations culminating in their separation and dismemberment of Pakistan.
Inordinate delay in framing of constitution resulting in their failure to hold general elections at national level, thereby failing to create a national democratic forum for airing and listening of grievances of smaller provinces can be cited as the most important negligent act of the ruling elite of 1950s. It also seriously undermined the intuitional legitimacy of the state which let the market forces play full role without state stepping in to rectify the distortions created by these very forces resulting in accentuation of historical disparity already existing between the two wings.
Secondly in its efforts to have adequate safeguards in Colonial India, the Muslim League always stressed for the weak centre and maximum provincial autonomy, a theme, which echoed in the provincial assemblies voting for Pakistan. However, after Pakistan came into existence, the imperatives of the new state forced the ruling elite to change the equation. It would be a strong centre in a federation which could guarantee the preservation of the new state. This paradigm shift didn’t go well with smaller provinces in general and with East Bengal in particular because the Centre was heavily dominated by the Punjab, thanks to the historical developments mentioned above. Heavy emphasis on strong centre deprived the Bengalis of effective representation in the corridors of power. On the contrary despite their numerical
Political Governance:
Like all post-colonel states Pakistan inherited a lot of socio-political baggage of underdevelopment, regional disparities in political representation and other myriad economic contradictions, which needed long term prudent polices to sort them out. All the social and economic indicators pointed towards the
and were deprived of their majority through due process of law i.e. parity. The constitution which was passed in 1956 did not have an upper house to represent the unity of the country and the equality of the provinces.
Another source of transfer of resources was the inequitable terms of trade between the two provinces for the supply of goods and services from one wing to other. West wing supplied manufactured goods while east had few goods to trade and those also consisted of agricultural raw material which traditionally fetches lower prices as compared to manufactured goods.
If the political power was in the plains of Punjab, commerce was in Karachi, both in West Pakistan. Thus all the socioeconomic and political policies formulated by the government had a pro-western wing bias in implementation though not in intention or rhetoric. When the Bengalis expressed their resentment against the poor treatment meted out to them by overwhelmingly defeating Muslim League at the hands of Jugtu Front, a coalition of nationalist elements in East Pakistan, its government was unceremoniously dismissed within two months and a West Pakistani was appointed as governor. Second time they were treated like this was after the elections of 1970 when Awami League, which stood for the same principles in Pakistan as was Muslim league in pre-partition India namely safeguarding the rights of the oppressed community, was not handed over power despite having majority in elections.
The West Pakistani businessmen who owned almost the entire industry located in East Pakistan used to transfer all the profits earned from East Pakistan to western wing instead of investing wholly or partially in East Pakistan. Similar was the position in respect of banking system, which was owned by them.
Last but not the least was public finance. Majority of the taxes imposed were spent on defence and administration, heavily dominated by the west Pakistanis.
Economic Mismanagement:
There were two biggest grievances of the Bengalis against West Pakistan. One was not taking appropriate affirmative actions to accelerate the economic development of the Eastern wing on priority basis and on massive scale to reduce the economic disparity exiting between the two wings as a historical baggage.
Secondly, instead of spending more on the development of East Pakistan, there was a massive transfer of resources from East Pakistan to West Pakistan on official and private level. Leaving aside the claims and counterclaims about the estimated quantum of resources transferred annually from East to West Pakistan, the fact remains that there was a systematic system of resource transfer through several means.
Social Dissonance:
While it is very comfortable to put all the blame squarely on the ruling elites of Pakistan for the separation of East Pakistan from its Western wing, it must be remembered that the civil society cannot be absolved of the portion of blame for this fiasco resting on their shoulders. It was the social and cultural degradation of Bengali people and their culture in West Pakistan which can be held responsible for the alienation of Bengalis. Not only the governing elites, even the public and the civil society considered Bengalis as inferior race and their culture heavily influenced by the Hinduism. Their contributions to freedom movement were not properly recognised nor were their culture appreciated. It is the irony of the fate that the Bengalis, who were in majority, had to pay human sacrifice for the recognition of their language as one of the official languages of Pakistan.
Erroneous pride in a strong currency, more as a counterpoise to Indian hegemony and less for economic prudence, resulted in overvalued exchange rate which undermined the competitiveness of jute, the major earner of foreign exchange of East Pakistan. On the other hand overvalued exchange rate heavily favoured the importing classes of West Pakistan, encouraging a healthy growth of an aggressive private commercial sector in the western wing. East Pakistan failed to develop this vanguard of economic growth at a time when all the preferences were available for the industrialists
Regional Geopolitical Imperatives:
Lord Palmerstone has rightly said that there are no permanent friends or enemies in international relations, only permanent interests. India’s permanent interest lay in its domination of South Asia and beyond according to their well-defined Pannikar Doctrine (named after KM Panikkar) which emphasized the importance of the Indian Ocean for the defense of India. According to Panikkar, the British had kept out other imperialist powers from the Indian Ocean to protect their interests. India being the successor to the British Raj, should therefore, use the same principle to incorporate other states and keep external forces from the Sub Continent.” Pakistan was a hindrance in the realisation of this dream of Indian ruling elite.
As the receipts from the export of jute were received and recorded in West Pakistan, less than half of it was spent on the development of eastern wing due to strong incentives under market mechanism in the western wing of the country. Same was the case with the foreign aid received by the government of Pakistan.
Cutting it to size became the overriding objective of Indian foreign policy for which the East Pakistan crises gave them a God- sent opportunity. Making the arrival of more than a million refugees as a humanitarian issue and a threat for their national security, India started preparing for a decisive war with
international and bilateral forums.
Unfortunately the Pakistan’s military rulers could not read the writing on the wall, grasp the rapidly changing scenarios and remained complacent, to say the least. Even their military acumen is doubtful. Defending every inch of a vast country with limited resources and hostile population was not the right strategy; defending the capital would have been better option giving an opportunity for a negotiated settlement after stalemate. Consequently, Pakistan lost the war and with it half of its country opted to become another nation-state.
Lessons for Post-Colonial States
What are the lessons one can learn from the dismemberment of Pakistan within 25 years of coming into existence?
1 Vision Needed: You cannot rewrite the history but you must have a clear cut vision for the future backed by a definite roadmap. This vision must include a blue print for redressing the inequities created as a result of colonial wrongdoings. Centrifugal tendencies are inherent in any post-colonial state because of boundaries left behind by the retreating colonial powers and the mix of nationalities clubbed together to live within these boundaries. It needs a very careful and prudent planning process with a five pronged broad spectrum attack-economic inclusion, democratic empowerment, affirmative action, mainstreaming and social justice. 1 Provincial Reengineering: While you cannot change the international borders howsoever arbitrary they may have been left by the ex-colonial masters, you must re-demarcate the internal boundaries according to the wishes of the people. If one province is too big in terms of population or its share in the power structure, there is a need to balance this anomaly by carving out new regional entities on the basis of language which is one of the most important markers of a distinct nationality. Predominant position of one province or region, perceived as exploiting the smaller provinces, is an anathema for any federation 1 Democracy Works: Democracy has been much maligned for its alleged shortcomings such as corruption, mismanagement, economic disruptions and slow economic growth etc. However despite all these allegations, democracy is still the best form of governance humanity has ever experimented with. Let it run its course. Frequent, free and fair elections will ultimately prop up capable leadership over a period of time, accountable to the public. Only genuine leaders elected through popular universal franchise are capable of holding the federating units together; dictatorship always leave the countries broken and in a mess. 1 Cultures Evolve: You cannot force cultural homogeneity through the barrel of
1 Cultures Evolve: You cannot force cultural homogeneity through the barrel of the gun or state edicts. Evolution of a peculiar national culture takes time in which each federating unit contributes. Let the hundred flowers of different varieties and hues bloom rather than having a garden full of roses only. Unity in diversity is the hallmark of a true federation. Give respect to every major language spoken and let a national language evolve over a period of time. 1 Institutions Matter: Soon after independence people are very emotional about their newfound nation-state; however these sentimental legitimacy must be converted into institutional legitimacy by strengthening the service delivery institutions through improving their efficiency and effectiveness and broadening their ownership. Some of the institutions which matter the most are armed forces, law and order agencies, judicial institutions and nation building departments like health, education and general administration. 1 Civil society organisations and media are two very powerful institutions which can play a crucial role in making or breaking of a country. Timely and forceful articulation of grievances of deprived regions by these institutions should be taken seriously and addressed appropriately. They are also instrumental in creating and fostering common denominators of cultural and social homogeneity in a country. Stifling them will deprive the policy makers of a useful channel of two way communication with the populace. 1 Growth Matters: Growth matters because it is only through growth that poverty can be alleviated and inequalities reduced but content of growth and equitable distribution of fruits of growth matter more. Patterns of growth envisaged in the initial stages determine the prosperity of certain regions and deprivation of others in the long run. Let the market forces work but state must always be correcting the anomalies these forces always create due to the inherent logic of the capitalistic model of growth which is no doubt far more efficient than other modes but is also efficient is all its negative fallout. As every student of economics knows market forces left to themselves not only create inequalities but accentuate and reinforce them. That is why Adam Smith gave a special role for the state when he stated1 “The third and last duty of the sovereign or commonwealth, is that of erecting and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual, or small number of individuals; and which it, therefore, cannot be expected that any individual, or small number of individuals, should erect or maintain. The performance of this duty requires, too, very different degrees of expense in the
become easy to detect but difficult to cure.’
1 Incremental Changes: Do not go for revolutionary and drastic changes just for the sake of structural transformation. Law of unintended consequences may sabotage all your good intentions. Incremental changes allow you time for midterm correction and pay dividends in broader perspectives 1 Devolution Works: Devolution of powers and decentralisation of service delivery institutions, backed by equitable distribution of resources is one of the key instruments to curb centrifugal tendencies among the regions feeling marginalisation. Devolution can hold any federation together by helping to prevent or reduce conflict because they reduce actual or perceived inequities between various regions or between a region and the central government. 1 Early Warning Indicators: Federations do not break overnight. Their seeds of destruction take time to germinate. There is always a time to salvage the situation before it is too late provided the leadership is responsible and responsive, civil society is aggressive and media is vigilant. Keep an eye on early warning signs of centrifugal tendencies and address them in time and sagaciously. What Machiavelli said five hundred years ago is still applicable. ‘Wrong political decisions are like tuberculosis, easy to cure but difficult to detect in the beginning; once belated they become easy to detect but difficult to cure.’
Annexure C: Why Military Regimes in Pakistan Show Impressive Economic Growth Rates?
No doubt, Pakistan achieved a remarkable rate of economic growth during his era, it is a fact that the economic contributions of Ayyub regime have been overrated in two ways. Firstly, it is an historical fact that the pace of development is always very rapid in the initial stages of economic development as there is lot of infrastructure to build which invariably increases your figures. Look at the massive growth performance of China which owes it to the huge investment made by them in infrastructural development. Secondly, figure fudging, that bane of our economic management, for which Musharraf government was penalized in the form of confiscation of our SDRs in 2005, started with this era. It was openly alleged that some of the figures were cooked and did not tally
Before Man Mohan Singh’s far sighted economic reformation put India on high growth trajectory during the 1990s, economists used to taunt India for growing at the Hindu rate of growth of 2.5% for several decades after independence. Pakistan can also share this taunt with a caveat; we have followed two different rates of growth-military rate of growth of more than 6% and a civilian rate of growth of 4%.
A cursory glance at the 70 years growth profile of Pakistan would reveal that relatively high GDP growth rates were achieved mainly during the three military regimes; all the low growth years occurred during the civilian rule. For example, low growth rates of 1950s,early 1970s and 1990s were coincidental with the democratic eras while high growth rates were achieved during the 1960s,late 1970s and then in 2000s- when the country was under the military dictatorships. One graph is enough to explain my contention.
Was it sheer coincidence of fortuitous circumstances or there is some inherent logic of its own? Answer to this question depends upon the perspective you are using. However, to me there were two main reasons for this phenomenon. Firstly, single minded attention of the military dictators to economic development to compensate the people for depriving them of the political freedom and thus provide legitimacy to their rule. Secondly, and more importantly, the massive inflow of foreign aid, military and civilian, during these periods of military dictatorship. Let me explain
Second dictator General Zia was also an American choice. Americans had been active in the soft belly of USSR namely Afghanistan to provoke its occupation of Afghanistan. Soviet Union fell into the trap laid for the bear and invaded Afghanistan. Pakistan became a front-line state for the furtherance of American interests in the region in particular and at the global level in general. With it came the usual perksmilitary aid, foreign assistance, advisory services and support for military ruthlessness
Similarly, third military ruler of Pakistan General Musharraf was lucky like his two illustrious predecessors-Ayyub and Zia. 9/11 happened a year later and suddenly he became the leader of a front-line state in the war against global terrorism, the non-NATO ally-Pakistan. Not only sanctions were relaxed and loans were restructured on long term soft terms but Pakistan was flooded with military and financial assistance in return for her services in the global war against terrorism. This fiscal reprieve, combined with plenty of spare capacity, provided the basis for Pakistan’s burst of growth.
With almost zero debt repayments foreign exchange reserves stabilised and started increasing with the arrival of foreign military aid. 9/11 tragedy brought another financial bonanza for Pakistan which saw massive doses of foreign workers’ remittances, mostly through legal channels. Reserves started building up with accompanied exchange rate stabilisation
Low interest rates and more readily available consumer credit encouraged private consumption in durable goods and land purchase. These not only contributed to a modest construction boom and property bubble but also the stock exchange bubble. The stock market index in Karachi rose by over 1,000% in a few years. By pursuing the policy of maintaining over-valued exchange rate, severe blow was dealt to long term export growth. rupee remained stable, almost pegged at 60 while public debt as a share of GDP came down from 80% in 2000 to 54% in 2007. Foreign direct investment started flowing in boosted by privatisations.
First military dictator of Pakistan, General Ayyub came into power during an exceptionally favourable global economic environment, known as golden period of the Washington Consensus. In the wake of escalating Cold War, USA needed strong-arm military men to rule in geopolitically important allies to further American interests. They were willing to provide advisory services, financial resources and access to her markets for purchase of machinery and export of manufactured goods to all those who were willing to join their camp. How much role USA played in his eventually overthrowing a civilian government in Pakistan, is anybody’s guess but he was well rewarded in terms of financial assistance and advisory services during his tenure
No doubt, Pakistan achieved a remarkable rate of economic growth during these periods Pakistan reained under military dictatorship. However, we should take these achievements with a spinch of salt. Not only these stellar achievements have been but lot of figure fudging has been blamed fo behind
initial stages of economic development as there is lot of infrastructure to build which invariably increases your figures. Look at the massive growth performance of China which owes it to the huge investment made by them in infrastructural development. Secondly, figure fudging, that bane of our economic management, for which Musharraf government was penalized in the form of confiscation of our SDRs in 2005, started with this era. It was openly alleged that some of the figures were cooked and did not tally
industries. Another bolt from the blue was the massive floods resulting in colossal damage to the crops and water standing in lower Sindh for months. Lastly, the loans which were rolled over for a decade during Musharraf regime, the new elected government was forced to pay these loans at a time when the economy had nosed down because of global oil and financial crises of 2007/8.
However, at the end of each high-growth period, the structural constraints of a low domestic savings rate and slow export growth were manifested in fiscal and balance of payments pressures. It invariably induced a subsequent slowdown in GDP growth due to serious deficiencies in basic economic structure of the country-uneven growth clusters, inadequate infrastructure, low human development, un-diversified export bag etc.
On the other hand the bad performance of the civilian regimes throughout has been more to do with bad luck than bad policy formulation, planning or implementation. For example during first ten years of after independence, it was the civilians ruling the country. However, anyone who has a rudimentary knowledge of the economic history of Pakistan knows the dismal initial conditions with which Pakistan started its journey.
Pakistan inherited a predominantly agrarian economy dominated by big land owners with extremely poor level of rudimentary infrastructure, technological penetration or application of modern techniques of agricultural farming. Same was the case with its industrial sector which inherited 34 industrial units of insignificant importance. Its service structure was in total disarray Mass scale exodus of administrative talent, financial capital and entrepreneurship, historically underrepresented in British India due to imperatives of colonial development and strategic compulsions of the occupying power, meant there were very few people who could run the government offices, social services, financial institutions and commercial enterprises. Arrival of more than one million traumatized refugees who were without any assets but full of expectations from a country which was still reeling from the pangs of birth, added to the miseries of the state which was almost financially bankrupt and administratively decimated by en masse emigration of their key personnel. Hindus and Sikhs.
In 1970s, PPP inherited a dismembered Pakistan, a demoralized and traumatised nation and a declining economy which had to face the worst floods as well as the worst financial crises from outside. Benazir Bhutto took reins of the country in 1988 when inflow of foreign aid which had sustained a military ruler for 11 years dried. She again came into power in 1992 in the wake of great financial crises and had to leave the government in 1995.
Same misfortune was waiting for them in their fourth tenure. Zardari government came to power in 2008 when the global economies experienced the worst economic recession since the great depression of the 30s. The demand for Pakistani goods declined and investment flows dried up, thus starving Pakistani industries. Another bolt from the blue was the massive floods resulting in colossal damage to the crops
About the Author
After serving the people and the state of Pakistan as a civil servant for more than three decades, Mr. Shahid Hussain Raja retired in January 2012 as Federal Secretary to the Government of Pakistan. During his 34 years of service he held various senior management positions in the federal and provincial governments in Pakistan and abroad. Apart from holding important government positions, he has been on various boards of corporations, committees and investigation panels gaining useful experience of working in the private corporate sector. Throughout his career he has been interacting with UN Agencies (UNIDO, FAO, IFAD, WFP, WTO and WIPO) as well as other donor and multilateral agencies.
His vast experience of government and corporate sectors has taught him how to develop vision and mission of large organisations, articulate strategies, prepare roadmaps and marshal human and financial resources to achieve the aims and objectives envisioned. His expertise covers;
Structural analysis of public policies, their implementation and impact to gauge their efficiency and effectiveness
Imparting training to mid-level and senior government officers for improving their decision making and service delivery skills. Governance and Civil Service Reforms including transparency and accountability
Formulation of viable agriculture sector policies and strategies for enhancing its sustainability and profitability
He actively participates in social welfare activities by initiating various projects particularly related to sports, health, education and special children from the platform of Raja Humid Mahmud Memorial Trust, an NGO co-founded by him in memory of his late elder brother. I also remained as the Patron in Chief of Green Growth Pakistan, a Not for Profit NGO established by him in association with some of his colleagues to raise awareness among the opinion makers and policy formulators about the social issues of Pakistan
Besides doing his Masters in Economics as well as in Political Science from the Punjab University, Lahore, he has done his M.Sc. in Defence and Strategic Studies from the Quaid-e-Azam University, Islamabad, Pakistan and Post Graduate Diploma in Development Studies from the University of Cambridge, United Kingdom. He has also attended a 6-week Executive Development Program at the JF Kennedy School of Government, Harvard University, Boston, USA.
Kindly feel free to contact him at Twitter: https://twitter.com/Shahid H Raja LinkedIn: https://www.linkedin.com/in/shahidhussainraja/