Presented To: Mr. Aqeel Baig

Presented by: Farida Brohi (4382)

INTRODUCTION

On assuming power on December 20th 1971,Bhutto promised to make a new Pakistan out of the West Wing and to restore national confidence. Bhutto inherited a new Pakistan that had been defeated in war by India and he came to power as Pakistan’s first democratically elected leader.

Asserting the principle of civilian leadership, Bhutto introduced a new constitution with a modified parliamentary and federal system. He attempted to control and reform the civil service and took steps to revitalize a stagnant economy and better conditions for the poor under the banner of Islamic socialism.

Bhutto’s charisma was rooted in his embodiment of popular aspirations for social justice – “Roti, Kapra, Makaan”.

He projected himself as a man of the people in contrast with the ‘drawing room’ politicians and maintained that ‘his voice was the peoples voice, his speeches their speeches’.

ISLAMIC SOCIALISM

Islamic Socialism was used as an instrument to solve the socio-economic issues facing the country.

“Socialism refers to any social system in which all means of production e.g. land, building and important companies are owned and managed by the state/government and the people in general make use of the available resources under an economic plan for their welfare”

NATIONALIZATION

OBJECTIVE OF NATIONALIZATION

To eliminate poverty and discrimination in Pakistan with more equal distribution of wealth.

Absence of competition in many industries lead to a form of monopoly capitalism that was harmful to the economy.

Nationalization would allow a more efficient resource allocation.

To use the capital available with the bank for rapid national development & social welfare

Nationalization

The manifesto had said that those means of production that are the generators of industrial advance or on which depend other industries must not be allowed to be vested in private hands.

Secondly, that all enterprises that constitute the infrastructure of national economy must be in public ownership.

Thirdly, that institutions dealing with medium of exchange, that is banking and Insurance must be nationalized.

*The economic policies of Bhutto government rested on the premise that the control of leading enterprises was to be in the hands of the state.

THE REAL PICTURE

Nationalization of industries was intended to break the economic potential of any possible political opposition.

At the same time it placed the government tremendous power of patronage, resources and employment opportunities which could be used for the support of the party.

The first phase of Nationalization took place in the LSM sector essentially in the capital and intermediate goods industry.

The Nationalization program was later extended to the Vegetable Oil sector and then to cotton ginning and rice milling.

The Nationalization of banks and Insurance Companies was a critical assault on the close link that had built up between Industrial and Financial Capital since the mid 1950’s.

Nationalization

January 1972: Public Take over of 31 large firms in 10 basic industries: iron and steel, basic metals, heavy engineering, motor vehicle assembly and manufacture, heavy and basic chemicals, petrochemicals, cement and public utilities.

March 1972: Management and control of 32 life insurance companies.

May 1972: Banking Reforms; State Bank of Pakistan extends control over scheduled banks.

June 1972: Labor Reforms.

August 1972: Health Reforms

Nationalization

September 1972-1974: Nationalization of educational institutes.

June 1973: Trade in Cotton and Rice Nationalized.

September 1973: Vegetable Oil, petroleum marketing and shipping nationalized.

January 1974: Nationalization of all private and domestically owned banks.

August 1976: Cotton ginning, rice husking and flour milling nationalized

Bhutto Government was in hurry in order to Nationalize the industries without even thinking of its consequences on the Industries.

Investor’s confidence was shattered as Mr. Bhutto kept on breaking his own promises of not further Nationalizing the Industries.

Mr Mubashir Hasan (Finance Minister) said once after the nationalization of Banks that Banks are not Industries , they are Financial Institutions.

No policy was announced even after years of Nationalization, hence it was total uncertainty.

Nationalization

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Industries

The public sector industrial units were not well-managed and thus were not able to contribute to the industrial development of the nation.

At the same time the manner of implementing the nationalization policy created a scare among the remaining private sector entrepreneurs.

Nationalization

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Industries

In 1972-73 these units employed 40,817 persons and the number went up to 64,463 in 1976-77, a rise of 58%.

Production did not increase correspondingly ,in many cases it declined ,there was a sharp decline in productivity.

Over the six year period (1971-72 to 1976-77)labour productivity declined in 39 units out of 54 units examined, salaries wages and other benefits as a whole are estimated to have increased by 322%.

Despite the increase recorded in sales volume (in money terms due to price increases) net earnings were negative on large capital invested in these undertaking.

Nationalization

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Nationalization Industries

Among the industrial units profits were available only in the cement sector where repeated price increases were introduced.

A number of industrial units were setup without any economic considerations. (Larkana Sugar Mill)

Out of the 54 units only 15 units were in position to maintain positive profitability position during all the six years (1972-77).

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Industries

11 out of 54 units recorded losses throughout the period while another 7 enterprises sustained losses for 4 to 5 years.

For the financial year (1976-77) 25 out of 54 units had suffered losses of Rs 308.77 million, while 29 had earned profits of Rs 269.40 million with an aggregate loss of Rs 39.37 million.

Reviewing the cumulative position of the entire period, it was observed that 32 of these enterprises had accumulated reserves of 429.77 million while 29 units had accumulated losses of 750.69 million on their balance sheet at the end of 1976-77 ( Net accumulated loss of 320.92 million)

Nationalization

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Nationalization

Industries

Labor productivity declined in case of 39 units. As many as 30 units were operating on an average below

70 percent of installed capacity.

At the end of financial year 1977-78 there were 12 units which had a negative net worth as compared to only 2 units having a negative net worth in 1970-71.

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Nationalization

Claim of reasonable price Industries

A major justification that the government had advanced for taking over industries in the public sector was that it would ensure regular supply of various commodities at reasonable price.

However far from stabilizing prices at reasonable levels, the government after taking an industry under monopoly control, increased prices mainly to cover inefficiencies in management.

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Nationalization

Private sector industries

Even greater damage was caused by the private sector’s growing distrust of the government intentions towards its future role.

About 80% of production flows from the private sector.

Sharp fall in investment by private sector.

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Industrial Investment

1320

897

441

359434

538

461

63 71 48

134

322

942

1171

0

200

400

600

800

1000

1200

1400

1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77

Total Private Sector Public Sector

20

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Nationalization The major sector to suffer was textiles, the premier industry of

Pakistan.

The textile sector is highly export oriented and its operating efficiency can be maintained only if 45 to 50 percent of the goods produced are exported.

One of the principal reason was frequent revision in the export duties.

Between May 1972 and June 1974 the duty on yarn was changed on eight different occasions before being abolished.

Similarly duty on cotton cloth between may 1972 and June 1974 was increased on 7 different occasions.

By the time the duties were ultimately abolished in august 1974 considerable damage has been done to the export potentialities for these commodities and the country had lost some of its traditional markets.

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Nationalization Banking

In January 1974, all commercial banks except foreign banks were nationalized without consulting the State Bank.

Banks were now under influence of the MNAs, MPAs, and other politically influential people who pressurized them for their benefit at the expense of the state.

Many federal and provincial ministers were able to obtain large loans under the Small Loans and Agricultural Credit Scheme for Small Farmers.

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Nationalization Banking

Many politicians of the ruling party were also able to get appointments in banks for their supporters due to political pressure. In one bank there were as many as 569 appointments.

Similar case was with promotions, where the party supporters used to get promotions regardless of their skills.

Banks were also directed to advance loans for the construction of 5-star hotels without any regard to judge their profitability.

The reported loans and advances amounted Rs263.2 million advanced to the hotels such as Hyatt and Sheraton in compliance with directives from the Prime Minister himself.

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Nationalization

Rs in million

s

Habib Bank Ltd. 274.1

National Bank of Pakistan 128.5

United Bank Ltd. 60.9

Muslim Commercial Bank 44.7

Allied Bank Ltd. 18.7

Total 526.9

Total advances given by banks from 1974 to 1977 under irresistible political and administrative pressure or influence, outstanding in 1977 amounted to Rs.526.9 million.

Mainly MNAS and MPAS benefited from them

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Nationalization

National shipping corporation

Recruitment in various cadres of NSC was made on recommendations of Ministers and other influential persons.

Out of 223 appointments between 1975-77, 187 were made by Mr. Mumtaz Ali Bhutto.

Wasteful expenditures by minister Misuse of funds in penthouse. Misuse of funds in custom duty on purchase of new cars. Maintanenance of cars and others.

REFORMS

LAND REFORM

In 1972, Bhutto pushed through land-ceiling legislation to reduce the size of land holdings and to redistribute confiscated surplus land.

Legislation restricted ceiling on ownership on irrigated land from 500 to 150 acres; on un-irrigated land from 1000 to 300 acres

Surplus land was to revert to government without any compensation to the landlords and distributed free to the landless.

Landowners were allowed to retain an additional 50 acres above the ceiling if they invested in tractors and tube wells.

Generous tax exemptions were granted for the purchase of agricultural machinery and land development

Feudal had little difficulty in retaining control over land through division within family members as intra-family transfer of land was allowed

Only around 75,000 farmers were benefited from this reform

Official statistics showed that by 1977 only about 520,000 hectares had been surrendered, and nearly 285,000 hectares had been redistributed among about 71,000 farmers.

Another interesting point to note was that the lands of the army officers were not considered under this legislation.

The success of reforms was crucially depended on resumption of maximum area held in ownership or possession in excess of prescribed ceiling. Published studies by economists had estimated the resumable area at around 2.8 million acres but it has found that the area actually resumed is less than 1.25 million acres.

Gross favoritism was shown by the former PM to a number of persons in high position through Gifts with no justification in law

Consequences• The implementation of the reforms was also arbitrary.

Landlords hostile to the regime were targeted, while those loyal to PPP were left alone. As a consequence, more and more landlords flocked to the party.

• The total land seized for redistribution was less then 1 percent in punjab and 3 percent in sindh

• The ceiling was on individual rather than family ownership they had little difficulty in retaining control over land through division within family member

• The further reduction holding 300 acres to 240 acres. surplus land was to revert to government without compensated to land lord and distributed free to the landless ppp supporter

Distribution of land on the political basis to get more and more ppp workers

Only 1 % landless tenant and small owners benefited by there measures

39% of the area resumed under the 1972 reforms is still held by the government despite the presence of a large number of landless cultivators

Difference b/w 1972 & 1959 Land Reforms

The most prominent feature of the 1972 reforms was that, unlike in 1959, land resumed from land owners would not receive any

compensation, and this land was to be distributed free to the landless tenants.

Consequences

LABOR REFORMS

Comprehensive labor reforms were introduced by the Government in July 1972

They guaranteed to the workers their long over due fundamental rights of freedom.

Association and collective bargaining, assurance of greater security of service; representation in management, group-insurance, old age pension, free education for children and housing and medical facilities were provided to the laborers.

As like other reforms Labor Reform met with unforeseen consequences, which diminished the appreciation of beneficiaries.

Encouraged by the reforms, workers flexed their muscles in a series of strikes, which hit production in the poorly- managed newly nationalized heavy industries.

The business confidence was eroded by this reform and resulted in decline in investments across the industrial sectors, leading to rise in unemployment.

EDUCATION REFORMS

March 1972, the New Education Reforms were announced.

Universal and free education up to class (x) throughout the country in three phases. Under this scheme all educational institutions are to be nationalized. These institutions are now open to gifted students from all over the country without regard to their financial status and social background.

So far about 400 colleges and several schools have been nationalized in the provinces of Sindh and the Punjab. The college teachers have also been given a respectable position in society.

HEALTH REFORMS

This was the most neglected sector independence.

No health scheme could succeed because the common man did not have the means to meet the cost of drugs.

To obviate this, it was necessary as a first step to make medicines available within the reach of the common man by bringing down the prices and rationalizing their means.

To achieve this goal, an act called the Drug act, 1972, was enacted which prohibited the manufacture and import of any drugs under brand names after 23 December, 1972 and their sale after 31 March, 1973.

ECONOMIC INDICATORS

1. GROWTH RATE

During 1972-77 the average annual growth rate of GDP was 4.6%, compared with 6.8% in 1960s

With major crops in agricultural sector and large scale manufacturing in industry sector following short of even the modest overall growth rate of the economy.

Average annual growth rate of agriculture during the period was 2.1%

Slower agricultural growth was result of exceptionally adverse weather conditions, both drought and floods, with sub sectors comprising major crops, livestock and fishing being mainly accountable for that.

Average annual growth rate of industry during the period was 5.8%

Within industry, the annual average growth rate of output in the large-scale manufacturing decelerated to 3.8% during 1972-77, lower than the growth rate of 13.4% attained in the 60s.

The main reason was nationalization of “commanding heights” of the economy and the attendant inefficiency because of poor and inexperienced management and politicizing of economic decision-making.

2. SAVINGS AND INVESTMENT

National savings during the same period averaged only 9.3% of current GNP.

Deterioration in external terms of trade, worsening fiscal situation, reduced incentives for the private sector investment under a socialistic regime and Uncertainty about the future were factors affected the saving rate.

BALANCE OF PAYMENTS

One of the most unfavorable trends for the Pakistani

economy in the Bhutto years was the balance of

payments difficulties.

Newly launched modernization drive and the

establishment of basic industries, such as steel, increased

the demand for imports

The exports doubled from $728 million (1972-73) to

$1132 million (1976-77); and imports increased fourfold

from $852 million (1972-73) to $2418 million (1977).

Workers remittances increase from $136million in 1972-73 to $

578million in 1976-77. Increase was due to movement of labor

to middle east following the oil boom and devaluation of

Pakistani rupee

On an average from 1972-77 the current account deficit was

$675 million per annum

This dramatic difference between import and export growth lined

the way for a sharply rising debt burden and dependence on

external loans. 

Bridge the growing deficit in trade and balance of payments, the

Bhutto regime was forced to turn to foreign sources

INFLATION

Year Inflation rate (%)

1971 / 72 4.69

1972 / 73 9.7

1973 / 74 29.98

1974 / 75 26.73

1975 / 76 11.66

1976 / 77 9.24

1977 / 78 6.89

• Bhutto regime saw Pakistan’s one of the worst inflationary period.

• The value of money eroded during that period. Inflation in the Bhutto era was about 18%, where as it was only 3% in the 60’s.

REASON FOR HIGH INFLATION

A sharp increase in monetary expansion

A sharp rise in international oil prices

A rise in world inflation

Devaluation of Pakistani currency

Increase in money supply

DEVALUATION OF RUPEE

Devalued the rupee by 56.7 percent

It was commonly recognized that the rupee was overvalued and

that boost was needed for exports after the loss of the East

Pakistan market

Export bonus scheme was abolished

Exports increased by 40% between 1972 and 1974.

Pakistan found new markets for its commodity exports – mainly

sugar, rice and cotton.

FISCAL POLICY

The overall fiscal deficit also increased averaging at 8.4% for the five years.

The period of 1973-77 the overall expenditure has increased and averaging at 28.9%

The main reason for the increasing deficit is the increase in development expenditure, the Nationalization policy and Debt financing

MONETARY POLICY

The State Bank raised the bank rates gradually from 5% to 10% during 1972 to 1977, also the interest on bank advances and bank deposits were adjusted upward.

National Credit Consultative Council was formed in 1972 whose function was to examine the overall credit situation in the country and indicate the credit limits for the public and private enterprises.

Credit ceiling although a power full measure of credit control failed to achieve its objective because credit requirement worked out on the bases of highly ambitious targets of production and investment were usually large

Monetary assets during 1972-77 expanded at an average rate of 18.8% per annum.

The rate of domestic credit expansion was 23.3% per annum.

WHY NATIONALIZATION FAILED??

Nationalization of industries was more importantly done to demolish the powers of the elite “twenty-two families” then to reduce poverty or discrimination in Pakistan.

The public sector industrial units were not well-managed and thus were not able to contribute to the industrial development of the nation.

At the same time the manner of implementing the nationalization policy created a scare among the remaining private sector entrepreneurs.

A major justification that the government had advanced for taking over industries in the public sector was that it would ensure regular supply of various commodities at reasonable price. However far from stabilizing prices at reasonable levels, the government after taking an industry under monopoly control, increased prices mainly to cover inefficiencies in management.

By government’s takeover of educational institutions adversely affected the development of basic education as well as the quality of education.

CONCLUSION Almost all of his Reform are theoretically good but

implemented as worst as possible. Corruption, mismanagement, political interference is the key factor of Bhutto reform.

However, some external uncontrollable factors like separation of eastern wing adversely affected the economy.

Besides there were some “ Bad Luck Factors” Devaluation of Pakistani Rupee (1972). Massive floods (1973). Increase in oil prices (1974 onwards). Huge failure of cotton crop. Worst floods in Pakistan’s History (1976-77)