History Pakistan Economy

HISTORICAL DEVELOPMENTPAKISTAN

ECONOMIC POLICY

INTRODUCTION:

At in dependence Pakistan simultaneously created and disrupted by the partition of British India was widely considered an economic monstrosity. The country was amongst the poorest in the world and had no industries to speak of, almost no industrial raw materials, and no significant industrial or commercial groups. It was difficult to see how Pakistan’s economy could grow more rapidly than its population. Economic chaos and political disintegration seemed more likely. The 1950s were a period of apparent stagnation and mounting economic problems, when early dire predictions seemed to be fulfilled.

1947-58: EXCHANGE RATES, TRADE POLICIES AND IMPORT SUBSTITUTING INDUSTRIALIZATION:

The most striking feature of pakistan’s economy after independence was the marked contrast between its vast natural resources and its extreme industrial backwardness. A country producing nearly 75% of the worlds production of jute did not posses a single jute mill. There was an annual production of over 1.5 million bales of good quality cotton, but very few textile mills to utilize it. There was an abundant production of hides and skins, wool, sugarcane and tobacco- to name a few of the important products-but Pakistan’s considerable resources in minerals, petroleum and power remained untapped. On the basis of this assessment, the government felt that Pakistan would need to seek, in the first place, to manufacture in its own territories, the products of its raw materials, in particular jute, cotton, hides and skins for which there is an assured market at home or abroad. At the same time, to meet the requirements of the home market, efforts will be made to develop consumer-goods industries for which Pakistan is a present dependent on outside sources.

The result of these objectives was that between 1949 and 1958 the growth rate of industry in Pakistan was amongst the most rapid for any country in the world. In united Pakistan large scale manufacturing grew at a phenomenal 23.6% between 1949 and 1954, and afterwards, by the still very impressive 9.3 %up to 1960. The investment rate more than doubled during the 1950s. In west Pakistan the growth rates were more impressive with large scale manufacturing growing at 19.1 % between 1949 and 1958.

The main features of the 1950s was the establishment and expansion of the large scale manufacturing sector, which ranged from a high annual growth rate of 28.7% in 1953/4 to a low 4.9% in 1957/8. With industry growing at high rates, there was reverse picture in the agriculture sector, which only once in this period achieved double digit growth rates. Agriculture stagnated to the extent that its growth was not even enough to cope with the growth in population, resulting in a fall in per capita consumption of food grain and the need to import food as well. A

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stagnant agriculture in a predominantly agricultural economy meant a slowly growing economy. The major impact of economic policy in the 1950s was to transfer income away from agriculture and from urban consumers and to the new and rapidly growing manufacturing sector.

THE IMPACT OF THE EXCHANGE RATES:

The areas that became Pakistan were net importers of industrial goods from India and produced agricultural commodities such as cotton wheat and jute. After independence a customs union between India and Pakistan existed through the use of a common currency, but this was broken up in 1949. The same year also saw the government of Pakistan taking one of its most important decisions, which had a vital impact on the development in the country.

The pound sterling was devalued as were the currencies of numerous countries including that of India. The reason why the Pakistani government did not devalue its own currency at that moment is one of the most controversial questions of the period. One reason why this decision was taken was to announce to the world that Pakistan was an independent country and did not mimic Indian economic policy. Other reason was to continue to sell raw jute to india at a now higher price and to be able to import machinery and capital goods at a cheaper price. The Pakistani government imposed some controls on imports and exports in order to manage trade with countries that had devalued, as their imports were now cheaper by not devaluing , the interests of pakistan’s exportable raw materials remained protected. However India suspended the trade between the two countries and refused to accept Pakistan,s stand. The consequences of the Indian retaliation could have been quite catastrophic wither Pakistan would have been forced to devalue or Pakistan had to find new markets.

The Korean war broke out in june and their was a fear that t might trigger world war three so countries began stock pilling and storing raw materials. Jute and cotton were both in heavy demand and Pakistan was able to make spectacular profits on its exports. Not only that but demand was world wide. Import controls that had been imposed only a few months before were again liberalized. Trade between india and Pakistan resumed after 18 months but on a smaller scale then before.

The Korean boom lasted till 1952 by mid 1951 jute and cotton prices began to decline, there were clear signs that the market was heading for a recession , but Pakistan was too slow to react and policies continued as if nothing happened. Jute and cotton prices fell as did export earnings and Pakistan was facing a serious balance of payment crises and sharply falling reserves. The government again decided not to devalue the reason for this was that capital goods were now needed to start the process of industrialization and a devaluation would have raised their prices. Hence government resorted to the imposition of the controls instead.

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The decision not to devalue may with hindsight, have been the critical decision that started Pakistan on the road to industrial and economic development. With controls imposed on imports, especially on consumer goods the prices of these goods increased sharply in the domestic market which changed the terms of trade in favor of industry and against agriculture.

THE TRADE POLICY REGIME;

The trade policy adopted by Pakistan had three major aspects :1. Overvaluation of the rupee relative to other countries2. Use of quantitative controls on imports to regulate the level and composition of

imported good.3. Highly differentiated structure of tariffs on imports and export taxes on the two

principle agricultural exports: jute and cotton.

With lower tariffs on intermediate and capital goods tight controls over the import of luxuries, control on other consumer goods. The principle determinant of the structure of imports and the set of domestic relative prices was the import licensing system. Licensing was used explicitly as a protective or exchange saving device.

CONSEQUENCES AND END RESULTS:

The type of protective policy pursued in Pakistan can be put simply as follows1. Produce anything that can be reasonably produced domestically 2. Once production has started domestically ban imports of competing goods so as to save

foreign exchange.

Import substitution progressed easily and very rapidly in those industries that had the highest protection that is consumption goods, and those that had cheap and ready access to domestically produced, primarily agricultural, raw materials such as cotton jute and leather. The significant increase in exports was from the newly established manufacturing industries, Pakistan was in a position to produce export surplus aswell. In many ways these results indicate the success of the first phase of impost substitution, where the emphasis was consumer goods rather then capital goods. Due to the restrictive measures enforced on the economy, profit rates in industry were very high. The annual returns on investment ranged from 50 to 100 % in early 1950s but droped to between 20 and 50 % in latter part of the decade. The pattern of industrial development resulted inevitably in a high degree of concentration of the nascent industrialists who made money in Korean boom. In 1950 there were 3000 individual firms in

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Pakistan out of which only seven individual families or foreign corporations constituted 25% of all private industrial assets in united Pakistan.

Despite some negative consequences of the economic policies pursued by the government in Pakistan in the first decade , it would be fair to say that they initiated an era of industrial growth and development which laid the foundation for the decade of development between 1958 and 1968.

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AYUB KHAN: DECADE OF DEVELOPMENT

Between 1958 and 1962, Ayub Khan used martial law to initiate a number of reforms that reduced the power of groups opposing him. Ayub Khan adopted an energetic approach toward economic development that soon bore fruit in a rising rate of economic growth. Land reform, consolidation of holdings, and stern measures against hoarding were combined with rural credit programs and work programs, higher procurement prices, augmented allocations for agriculture, and, especially, improved seeds to put the country on the road to self-sufficiency in food grains in the process described as the Green Revolution.

FIVE YEAR PLANS:

First Five-Year Plan (1955-60). In practice, this plan was not implemented, however, mainly because political instability led to a neglect of economic policy, but in 1958 the government renewed its commitment to planning by establishing the Planning Commission.

The Second Five-Year Plan (1960-65) surpassed its major goals when all sectors showed substantial growth. The plan encouraged private entrepreneurs to participate in those activities in which a great deal of profit could be made, while the government acted in those sectors of the economy where private business was reluctant to operate. This mix of private enterprise and social responsibility was hailed as a model that other developing countries could follow. Pakistan's success, however, partially depended on generous infusions of foreign aid, particularly from the United States. After the 1965 Indo-Pakistani War over Kashmir, the level of foreign assistance declined. More resources than had been intended also were diverted to defense. As a result, the Third Five-Year Plan (1965-70), designed along the lines of its immediate predecessor, produced only modest growth.

LAND REFORMS:

The Land Reform Commission was set up in 1958, and in 1959 the government imposed a ceiling of 200 hectares of irrigated land and 400 hectares of unirrigated land in the West Wing for a single holding. In the East Wing, the landholding ceiling was raised from thirty-three hectares to forty-eight hectares . Landholders retained their dominant positions in the social

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hierarchy and their political influence but heeded Ayub Khan's warnings against political assertiveness. Moreover, some 4 million hectares of land in West Pakistan, much of it in Sindh, was released for public acquisition between 1959 and 1969 and sold mainly to civil and military officers, thus creating a new class of farmers having medium-sized holdings. These farms became immensely important for future agricultural development, but the peasants benefited scarcely at all.

He subsidized fertilizers and modernized agriculture through irrigation development, spurredindustrial growth with liberal tax benefits. In the decade of his rule, gross national product rose by 45% and manufactured goods began to overtake such traditional exports as jute and cotton. It is alleged that his policies were tailored to reward the elite families and the feudal lords. During the fall of his dictatorship, just when the government was celebrating the so-called "Decade of Development", mass protests erupted due an increasingly greater divide between the rich and the poor.

He shunned prestige projects and stressed birth control in a country that has the seventh largest population in the world: 115 million. He dismissed criticism with the comment that if there was no family planning, the time would surely come when "Pakistanis eat Pakistanis." In foreign affairs, he retained his ties to the West and to the United States in particular, allowing the United States to use the Badaber and Peshawar airbase for U-2 flights over the then Soviet Union.

INDUSTRIALIZATION:

Ayub Khan's era is known for the industrialization in the country. The new regime of Ayub Khan disbanded many of the controls that had been imposed following the post-korean war recession in 1952. He created an environment where the private sector was encouraged to establish medium and small-scale industries in Pakistan. This opened up avenues for new job opportunities and thus the economic graph of the country started rising. In 1959 there was a fundamental reordering and change in the method of directing industrialization through trade policy and a series of liberal policies were introduced which remained in effect till 1965. The main emphasis of the new trade policy in 1959 shifted away from direst controls and towards indirest controls on imports, and on domestic prices of other goods.

It was the export bonus scheme launched in 1959 that was considered to be the key to the import liberalization process in Pakistan. The scheme allowed a free market in the bonus vouchers for certain commodities. The Export Bonus Vouchers Scheme (1959) and tax incentives stimulated new industrial entrepreneurs and exporters. Bonus vouchers facilitated access to foreign exchange for imports of industrial machinery and raw materials. Tax concessions were offered for investment in less-developed areas. These measures had important consequences in bringing industry to Punjab and gave rise to a new class of small industrialists.

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In addition the earlier closed and selective import licensing scheme of the 1950s, which was based on the importers ability to importduring the Korean boom of 1950-2, was replaced in 1961 by the open General license(OGL), which allowed newcomers to enter the trading sector. The new traders made substantial profits and gains from processing import licenses. The most market friendly change was the introduction of the Free List”, which permitted the import of certain goods without any license. The free List was extended over time from 4 items to 50 in 1964. The tariff structure continued to be used as a signaling device, as it had been in the 1950s. the bias against producing machinery and equipment locally continued, as the import duty on these items was still the lowest, thus making it easier to import these goods rather than produce them at home. The main reason why the government could be so generous in its import policy in the first half of 1960s was critically linked to the availability of foreign aid, which increased from 2.5 percent of GNP in mid 1950s to 7 percent of GNP in mid 1960s.

In 1965 the Free List suffered serious setbacks as foreign aid was curtailed, and due to the resulting foreign exchange squeeze, the import liberalization policies were abandoned and many new import controls were introduced.

The governments import licensing scheme was to suppose to encourage the private sector to invest, just as the EBS was a means for exporters to acquire additional foreign exchange by exporting more. The exchange rate had been over valued in the 1950s, but the EBS compensated for that and boosted exports, especially of manufactured goods. The scheme transferred a subsidy to exports, and the export of raw jute fell from 60 percent of total exports in 1958 to 20% in 1968, while exports of cotton and jute textiles increased from 8.3% to 35% in this period, and exports of other manufacturers increased tenfold from 2 to 20 %. The EBS also had a positive impact on imports making raw materials and machinery easier and cheaper. This resulted in low prices for agricultural inputs, while EBS transferred subsidies to manufactured exports. Due to EBS and import licensing and liberalization strategy large-scale manufacturing increased from 8% per annum between 1955 and 1960 to 17% between 1960 an 1965 in the second five year plan the controls reimposed following the foreign exchange and aid curtailment caused this growth to fall to about 10% in the second half of the 1960s.

None of the growth in industry during the period of second five year plan was due to the import substitution, instead domestic demand and absorption rate were the dominant factors. As foreign aid had increased so had imports and even though manufacturing output grew to impressive rates due to the import policies and foreign resources, imports increased at a faster pace. Growth in investment goods was by far the fastest of all sectors during the early 1960s.. the reason according to Asian bank was that since this sector was most dependent on imported raw materials, it benefitted most from import liberalization. Another reason why import substitution slowed down was the EBS, which encouraged the export of manufactured goods.Pakistan’s growth rate of 5.065 was far higher than many comparable countries, indicating both technological dynamism and dynamic allocative efficiency in a comparative perspective.

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GREEN REVOLUTION:

This green revolution was responsible for very high growth rates of the late 1960s. The term "Green Revolution" is used for big increases in wheat and rice yields in developing countries from the 1960s brought about by new high-yielding crop strains combined with the use of fertilizers and agricultural chemicals. It was launched in Asia in 1960 at the International Rice Research Institute in the Philippines; rice is the staple food for people living in Southeast Asia. Southeast Asia as discussed herein consists of Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Thailand, and Vietnam but excludes Brunei and Singapore. The Green Revolution in Southeast Asia as was a technology package comprising improved high-yielding varieties of rice, irrigation or controlled water supply, improved moisture utilization, fertilizers and pesticides, and associated management skills. Some two decades later, several Southeast Asian countries adopted more of a market approach to rural finance. At the same time, local governments improved rural infrastructures such as transportation, telecommunication, postal, irrigation, and electrical systems to assist large and small farmers previously beyond the reach of technological innovations. The utilization of this technology package in suitable socioeconomic environments has resulted in greatly increased yields and incomes for many farmers in Southeast Asia.

The Green Revolution, a transformation in the organization of South Asian agriculture that took place mainly between 1964 and 1978, was attendant upon the adoption of high-yielding varieties (HYV) of major crops, including rice, wheat, maize, and some millets. While farmers traditionally planted seeds selected each year from their own crops, seeds for the high-yielding varieties were created in central facilities by systematic selection, hybridization, and genetic transfer. These HYV cultigens do not breed true to type, and pests and diseases constantly evolve adaptations to the new varieties. Consequently, once farmers adopted them, they became dependent on this large and advanced technological infrastructure. The result is a system of peasant agriculture that combines traditional farm management with some of the world's most advanced agricultural science.

Although the new cultigens are often described as "miracle" varieties, they do not produce increased yields under all conditions. They give increased yields primarily in response to heavier and more regular water, fertilizer, and pest control. Without such inputs, the yields of the new varieties are not consistently better than the yields of the traditional varieties, and they may be worse. Accordingly, even though adoption of the HYV crops has been widespread in South Asia, the benefits have depended largely on the quality of the agricultural-support structure in the several countries. Where yields of HYV cultigens have increased, as a rule the yields of many traditional varieties have increased also (Leaf 1998: 109–112). The transformation has been most widespread and most successful in India, followed by Sri Lanka and Pakistan. The effect has been marginal in Bangladesh and Nepal.

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The core methods for transferring desired characteristics from one species to another were initially developed in two major international laboratories. Beginning in 1942, wheat and maize were developed at the International Maize and Wheat Improvement Center in Mexico under the combined sponsorship of the Mexican government and the Rockefeller Foundation, headed by Norman Borlaug (b. 1914). Beginning in 1960, rice varieties were developed at the International Rice Research Institute (IRRA) in the Philippines, sponsored by the Rockefeller Foundation and the Philippine government and based on the Mexican model. Later, millets were developed in India by the Indian Council for Agricultural Research (ICAR), again in collaboration with the Rockefeller Foundation, with a view toward replicating what had been done to improve the yields of commercial millets in the United States.

FOREIGN AID, THE PRIVATE SECTOR, AND INEQUALITIES:

Foreign aid contributed significantly to Pakistan’s growth from late 1950’s ; without it the rapid increase in development in the 1960s could not have been possible. The system which operated in Pakistan came very close to being called Foreign Aid Dependent Regime in which mechanics of the industrial growth were in one way or another made dependent on foreign aid inflows.

Once the aid stopped, so did the growth in the economy. And while foreign aid mattered the conditions to the aid made the role of the private sector paramount. There was also an explanation of the economic development model of the 1960s which not only rested its premise on the leading role of the private sector but also justified increasing inequalities. This was the Doctrine of Functional Inequality. The outcome was the concentration of wealth and income in the industrial sector.

Seven of the seventeen Pakistani Banks were under the direct control of the monopoly houses, accounting for 60% of the total deposits and 50% of loans and advances. Between 1958-1970 65% of total loans, disbursed by PICIC went to 37 monopoly houses, with the largest 13 of these accounting for about 70 % of these loans. 22 families controlled 66% of industrial assets, 70% of insurance and 80% of total banking assets. On the other hand there was no substantial increase in the level of real wages.

Economists, especially in East Pakistan, were great critics of this policy and argued that all the growth and development that had taken place was in West Pakistan and that there had been a transfer of resources from east to west.

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EDUCATION REFORMS:

He also tried to raise the education standards of the country by introducing educational reforms. He was the first Pakistani ruler who attempted to bring in land reforms but the idea was not implemented properly. Labor, law and administrative reforms were also introduced during his regime. Ayub Khan also initiated Family Laws in the country. He planned a new city and moved the capital from Karachi to Islamabad in 1962.

REFORMS OF FAMILY AND MARRIAGE:

In 1955 a legal commission was set up to suggest reforms of the family and marriage laws. Ayub Khan examined its report and in 1961 issued the Family Laws Ordinance. Among other things, it restricted polygyny and "regulated" marriage and divorce, giving women more equal treatment under the law than they had had before. It was a humane measure supported by women's organizations in Pakistan, but the ordinance could not have been promulgated if the vehement opposition to it from the ulama and the fundamentalist Muslim groups had been allowed free expression. However, this law which was similar to the one passed on family planning, was relatively mild and did not seriously transform the patriarchal pattern of society.

FOREIGN POLICY:

As President, Ayub Khan allied Pakistan with the global U.S. military alliance against the Soviet Union. This in turn led to major economic aid from the U.S. and European nations, and the industrial sector of Pakistan grew very rapidly, improving the economy, but the consequences of cartelization included increased inequality in the distribution of wealth. It was under Ayub Khan that the capital was moved from Karachi to Rawalpindi, in anticipation of the construction of a new capital: Islamabad. In 1960, Khan's government signed the Indus Waters Treaty with archrival India to resolve disputes regarding the sharing of the waters of the six rivers in the

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http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Indus_Waters_Treaty

http://en.wikipedia.org/wiki/Islamabad

http://en.wikipedia.org/wiki/Rawalpindi

http://en.wikipedia.org/wiki/Karachi

http://en.wikipedia.org/wiki/Soviet_Union

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Punjab Doab that flow between the two countries. Khan's administration also built a major network of irrigation canals, high-water dams and thermal and hydroelectric power stations.[6]

Despite the Indus Waters Treaty, Ayub maintained icy relations with India. He established close political and military ties with Communist China, exploiting its differences with Soviet Russia and its 1962 war with India. To this day, China remains a strong economic, political and military ally of Pakistan.

Every thing was moving in the right direction for Ayub Khan till the start of the Indo-Pakistan War of 1965. The performance of the Pakistani army was good but the war caused a rapid decline of the country's economy. He is also criticized his role at the Tashkent Declaration. Many believe that he negated the victory on the battlefield with a defeat at the negotiating table. His right-hand man, Zulfiqar Ali Bhutto, also turned against him and launched his own party, the Pakistan Peoples Party, with the aim to remove Ayub from power. The Awami League under Sheikh Mujib-ur-Rahman started propagating his rule as pro West Pakistan and claimed that his policies had snatched away the Bengali's rights. The rest of the political parties formed an alliance, the Democratic Action Committee, with a one-point agenda, i.e. the removal of Ayub Khan's government.

In addition, Ayub's policies of concentrating political power in his own hands, his control over the press and media, imposing state of emergency in the country, and his interference in religion were also responsible for his downfall. Adding insult to injury, Ayub Khan decided to celebrate a decade of his rule in 1968 and made exaggerated claims about the development in the country.

By the end of 1968, the public resentment against the Ayub's regime touched a boiling point and an anti-Ayub movement was launched by the urban-middle class; including students, teachers, lawyers, doctors, and engineers. The Joint Labor Council called for a labor strike. Demonstrations and agitation swept the whole country. Law and order broke down and Ayub was left with no other option but to step down.

CRITICISMS:

Government corruption and nepotism, in addition to an environment of repression of free speech and political freedoms increased unrest. Criticisms of his sons and family's personal wealth increased, especially his son's actions after his father's election in the allegedly rigged 1964 Presidential elections against Fatima Jinnah is a subject of criticism by many writers. Gohar Ayub, it is said led a victory parade right into the heartland of Opposition territory in Karachi, in a blatantly provocative move and the civil administrations failure to stop the rally led to a fierce clashes between opposing groups with many locals being killed.

Gohar Ayub also faced criticisms during that time on questions of family corruption and cronyism through his business links with his father-in-law retired Lt. General Habibullah Khan


http://en.wikipedia.org/wiki/Habibullah_Khan_Khattak

http://en.wikipedia.org/wiki/Lt._General

http://en.wikipedia.org/wiki/Nepotism

http://en.wikipedia.org/wiki/China

http://en.wikipedia.org/wiki/Ayub_Khan#cite_note-5%23cite_note-5

http://en.wikipedia.org/wiki/Punjab_region


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Khattak. One Western commentator in 1969 estimated Gohar Ayub's personal wealth at the time at $4 million dollars, while his family's wealth was put in the range of $10-$20 million dollars.

Ayub began to lose both power and popularity. On one occasion, while visiting East Pakistan, there was a failed attempt to assassinate him, though this was not reported in the press of the day.

Aggravating an already bad situation, with increasing economic disparity in the country under his rule, hoarding and manipulation by major sugar manufacturers resulted in the controlled price of 1 kg sugar to be increased by 1 rupee and the whole population took to the streets.As Ayub's popularity plummeted, he decided to give up rule. In 1971 when war broke out, Ayub Khan was in West Pakistan and did not comment on the events of the war. He died in 1974.

1972 -1977 THE BHUTTO YEARS

The performance of the Bhutto regime must be seen in the context of the circumstances in which it took and the problems that it inherited. Some studies, when examining the performance of the Bhutto period, lump the post Ayub three years with the Bhutto period which distorts the facts. While their may have been no implementation of the five year plan produced between 1970 to 1977 , to evaluate the performance of the Bhutto regime the correct time frame needs to be kept in mind.

BADLUCK FACTOR:


http://en.wikipedia.org/wiki/West_Pakistan

http://en.wikipedia.org/wiki/Rupee

http://en.wikipedia.org/wiki/Habibullah_Khan_Khattak


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BHUTTO’S NATIONALIZATION PROGRAM:



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ECONOMIC POLICIES AND PERFORMANCE:

Bhutto’s economic policies made a sharp break from the pro private sector strategies of the earlier years.The people’s party had promised the nationalization of all basic industries and financial institutions. 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 the national economy must be in public ownership. Thirdly that institutions dealing with the medium of exchange that is banking and insurance must be nationalized.

The first phase of nationalization took place in the large scale manufacturing sector , essentially in the capital and intermediate goods industry. The nationalization programe was later extended to the vegetable oil sector and then to cotton ginning and rice milling. The nationalization of banks and insurance companies was critical assault on the close link that had built between industrialist and financial capitalists in the mid 1950s.

The parties promises to urban organized labor as to rural peasants and agricultural workers were fulfilled within 6 months of coming to power through the labor reforms and land reforms of 1972. The devaluation of the Pakistani rupee by 131percent had important repercussions and Removed at one stroke the subsidy the industrialists had received in the earlier period because of an over valued exchange rate.Together with the increase in procurement prices of agricultural goods made a deliberate attempt to alter the pro-industry anti-culture bias of the previous growth stratergy.The export bonus scheme a key feature of 1960s was also abandoned.IMPACT OF THE POLICIES:

The impact of government policies must be seen in context with the lost of east Pakistan. 18 % of the west imports came from the east. Exports in 1972 increased by 153 % over the previous years and manufactured exports grew by 19 % in 1973.The growth in exports was a key factor in the growth in industrial output between 1972 and 1974. Agricultural output also rose and this was attributed to the higher support prices for wheat , rice, sugar and timely and adequate supply of

essential inputs. Availability of credit also played a vital role in the improved performance for after the government had tightened its control over the banking system, more credit was



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available to the export sector and to small farmers. The export refinance scheme was started by state bank of Pakistan in 1973 and its lending rate was lower than the nominal banking rate. After about two and a half years impressive growth the last three years by the Bhutto government saw the trend substantially reversed with dismal growth rates.

One outcome of the nationalization measures was the complete reversal of public and private investment. In 1974 the height of the nationalization program private sector investment was only 15% of its 1969 level. Public sector investment , which was 5 % of the total in 1970 rose to 75% at the end of Bhutto era. Private investment had already started to climb down even before nationalization stuck it down in 1972, which indicates that growth in large scale manufacturing had slowed, was a trend which continued into the 1970s. The private sector had lost all its trust in the government , for Bhutto had broken his promises . his assurance of no further nationalization prior to nationalizing the vegetable oil industry no longer seemed meaningful.

GENERAL ZIA UL HAQ (1977-1988)SIR AIJAZ RASHEED 16


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OVERVIEW

The longest rule ever by a single individual in Pakistan, that is, 57 years is by General Zia ul Haq. According to World Development Report 1990, during 80-88 Pakistan’s GDP growth rate was 6.5 percent. According to World Bank, manufacturing GDP grew at an annual average rate of 9.5 percent between 1977 and 1986, and investment in medium and large scale industry grew at an average of 18.2 percent per annum, while total private industrial investment expanded at 15.6 percent per annum. In both the Fifth and Sixth Five Year Plans (1978-83 and 1983-88), actual growth rates exceeded the targets of 12 percent and 9 percent, respectively, a rare occurrence in Pakistan’s economic record.

Zia’s regime consists of three sub periods: 1977-81, which was the period of cautious attempts at dismantling existing government policies and restoring confidence in the private sector, while simultaneously trying to gain political legitimacy; 1982-5, a more forceful drive towards Islamization which followed the regime’s consolidation of power; and 1985-8, the attempt to disengage the government from direct control of the economy.

One of the most important concerns of the new Zia regime in mid-1977 was the need to restore business confidence and, particularly, private sector confidence and motivation, in order to revive investment in industry and agriculture so as to improve the economy’s performance substantially. Like the military government of Ayub Khan, General Zia ul Haq also made the decision that the private sector was to play the leading role in the industrial sector. The earliest steps taken by the Zia government to appease the private sector was the denationalization of a number of agro-based industries. In December 1977, a number of basic and heavy chemical and cement industries were opened up to the private sector.

It was anticipated that first step of Zia’s government would be large scale denationalization and the return of assets seized and nationalized under the Bhutto regime. However very little denationalization took place and the major contribution by the Zia government in the early years was to give a clear signal to the private sector that the government expected future growth to come from its increased participation in industrial activity. The existing public industrial sector was quite large employing over 50,000 persons and a massive investment programme of over Rs40 billion was underway. Thus it was not practical for the Government to undertake any large scale denationalization. Original owners were only prepared to take the units back if the losses accumulated since nationalization in 1972 were written off and the surplus workers fired. The government could not do that because of political and administrative reasons. Neither was it possible to abandon the industrial sector investment programme because a large proportion of the funds had been either spent or committed in the form of international contracts. To restore the confidence of the private sector, the agricultural



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processing industries taken over in 1976 were denationalized, and a number of industrial incentives similar to those existing during the 1960s were introduced. As for public sector industries, a programme for improving efficiency and profitability was initiated and the investment programme was restricted to ongoing projects and to the balancing, modernization and replacement. In the early years of the Zia’s government, public sector output increased much more rapidly than private sector large scale manufacturing output, but in the second half of the ten years, the growth of the private sector was faster.

FIVE YEAR PLANS

The new government reinstated the system of five year plans and the Fifth Five Year Plan was launched in 1978/79. The investment programme of the Fifth Five Year Plan gave very high priority to producer and investment goods industries with industries based on raw materials next in line. Apart from bringing back the private sector, the stress on the use of indigenous raw materials in industry was also seen as important to revive the sluggish performance of the agriculture sector. Growth in large scale manufacturing was projected at the highly ambitious rate of 12 percent per annum, a target which was surprisingly achieved.

The Sixth Five Year Plan (1983-88) marks the beginning of the process of deregulation and liberalization, which was carried out with much greater force after 1988 when Pakistan’s economy became completely subservient to IMF and World Bank directives. Export led industrialization was mentioned for the first time as a policy goal, and there was an emphasis on the broadening of manufactured exports towards higher value-added items.

ISLAMIZATION

The policy measure that distinguishes the Zia regime from all others was that of Islamization. In fact, it became General Zia’s government and his own mission to purify Pakistani society from all the ills and evils that had become ingrained. Islamic laws were enacted and Commissions formed, and even the economy was brought under the influence of economic laws and principles. The key features of the Islamization process involved the transformation of the entire society and intra-social relationships in conformity with the tenants of Islam, social justice in every walk of life by following the Islamic principles, especially in the distribution of income and wealth in favor of the poor, and the elimination of interest charged by banks.



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REREGULATION AND LIBERALIZATION

Amongst the more important initiatives in pursuit of deregulation and liberalization in this period were an increase in the investment sanction limit; drastic reduction in the list of specified industries; reduction of tariffs on a number of raw materials, intermediate and capital goods; introduction of a three year liberal trade policy and upgrading of an Industrial Incentives Reform Cell (IIRC) into a tariff commission in 1989 to make recommendations on fiscal anomalies and effective protection. A series of measures introduced to deregulate industrial operations in the cement, oil seeds and fertilize industries. Private investment permitted in cement production and state owned enterprises substantially reduced and cement imports permitted. A similar package of de regulation and reform was adopted for the oil seeds sector and a major divesture programe was initiated by the public ghee corporation.

Along with these measures, important steps were taken to liberalize and encourage foreign trade. Prior to 1983, imports were either considered to be “free” or “tied” and goods that were neither of the two lists were banned. In 1983 this system was changed and a negative list was introduced, where everything not on that list was now importable. Perhaps the most important and far reaching economic decision taken by the government was to remove the fixed peg of the Rupee to Dollar by introducing a managed float of the currency in 1982. As a result between 1982 and 1987-88 the Rupee was devalued by 38.5% with an average devaluation of 7.7% per annum. The biggest impact was expected to come in export performance. Conventional wisdom has it that Pakistan’s export performance has been sluggish because of an overvalued exchange rate. Correcting for the exchange was seen as the most important step in devising an incentive structure geared towards exports. Devaluation was also expected to perform an important export substitutive function. Devaluation will enhance prices of imported capital and intermediate goods. The World Bank, not surprisingly, was particularly happy with the results of the deregulation and liberalization policies of the sixth plan. It calculated that the private sector’s share in total fixed investment increased from 38 percent in FY83 to 42 percent in FY88 and in the manufacturing sector its share in investment rose from 51 percent to 83 percent.

CAUSES OF HIGH GROWTH AND THE SUCCESS OF THE ZIA REGIME

On the whole the manufacturing sector in Pakistan has recorded impressive growth rates during the 1977-88 periods. As we have attempted to show the principle reason for this performance has been a result of two important phenomena:



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The coming on stream of the public sector provided the requisite diversity in the manufacturing sector. This resulted in both the once and for all gains that such large investments are expected to bring in and secondly in the linkage effects that it created.

The revival of confidence in the private sector to invest in industry once again after the brief interlude of the Bhutto regime.

The underlying reason for high rates of growth and investment for growth in output was floating demand in the economy as a whole. Because of the remittances from the Gulf and a growing agricultural and services sector consumption demand increased. Investment demand, on the other hand, was enhanced by high resource inflows from the international community particularly the US, because of Pakistan’s strategic role in Afghan war.

The other critical factor was the foreign assistance in the form of both US aid, following the invasion of Afghanistan by the Soviet Union, and remittances by Pakistani workers contributed very significantly.

CRITICISIMS

Although the growth figures are very impressive there has been a very different picture if we see the productivity growth figures. The aggregate of total factor productivity is 0.3 percent per annum which is low as compared to the 5 percent growth in the 1960s. TFP contribution to overall growth during the decade has been low. As much as 82.3 percent of the overall growth was due to the growth in the capital stock, 14.5 percent to labor and only 3.17 percent to TFP growth. There had been very little growth in employment in almost all industries between 1975 and 1986, and that the growth in labor productivity has also fallen in many industries. Although the wearing apparel industry experienced the greatest increase in employment, it also saw output fall by nearly 19 percent. The decade of 1980s has been a period of relatively high growth in manufacturing value added, the growth in manufacturing employment has remained insignificant. This partly represents more an increase in capital industry than labor absorption during the period of accelerated expansion.

The 1977-88 period is unique in Pakistan’s economic history for exhibiting high output growth without corresponding improvements in the efficiency of factor use in the manufacturing sector. Much of this growth in output was financed by foreign remittances and aid flows coming into the country. We also saw that policies were not altered even when it was abundantly clear that they were harmful for growth and productivity. In particular the existence of negative ERPs (effective rates of protection) for certain industries, the regulatory regime of the period and the



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lack of incentives for the value addition in the textile sector were identified as important policy errors.

THE AGE OF STRUCTURAL ADJUSTMENT (1988 TO 1997)

The Seventh Five Year Plan (1988-93) was commissioned at the same time as the IMF/WORLD bank induced conditionality was accepted by the government in the pretext of a structural adjustment programme. The plan had set ambitious targets for overall reforms in the industrial sector and included further deregulation, privatization, tariff reform and regulation of foreign investment.

There was another three year agreement (1988-91) with the IMF was concerned and highlighted industrial policy in the form of limiting the list of specified industries, de-regulating business decisions, phasing out industrial location policies over a three year period and provision of infrastructural services at prices that reflect economic costs, enhancing export incentives, reducing the level of protection accorded to different industries, reducing the list of restricted imported items as well as those subject to quantitative restrictions, phasing out all tariff exemptions by 1990/91 except duty drawback for exporters, exemptions for import of capital equipment in key industries and reasonable baggage allowances.

In addition to these there has been an increase in the level of indirect taxation (in the form of general sales tax) by July 1990, withdrawal of subsidies on gas, electricity, telephones and fertilizers, an increase in producer prices of major crops (wheat, cotton, sugarcane, rice and oil seeds) and in the prices of petroleum products, a 12.5 percent reduction in the public sector development programme during the agreement period and restriction on government borrowing and credit allocation to the private sector.

The World Bank in its review of the programme of 1988-91, felt that the economy responded well to these policy reforms. Progress in implementing structural reforms to promote private sector activity has been exceptional during the last four years despite three changes in government during this period. A major emphasis of the structural adjustment programme was on the enhancement of growth by encouraging the private sector, which was supposed to take a lead role. Amongst the investment and industrial policies followed was a forceful programme of liberalizing the economy from government control. Not only the sanctioning of private



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investment and import licensing abolished, but also a number of other regulatory restrictions including registration of technical and foreign loan agreements, procedures for employment of foreign workers were also removed. Areas of investment previously reserved for the public sector were opened to the private sector including power generation, commercial and development banking and air and sea transport. As a result the industrial value added grew by 6.3% p.a. during this period. Manufacturing, electricity and water expanded by 5.9% and 11.3% p.a. on average, respectively.

The other three year programme that is of 1993-1996 also urged to continue pursuing the private sector agenda aggressively and to increase the level and efficiency of private investment and activity by deregulating the economy and promoting competition as well as increasing foreign direct investment(FDI) and foreign portfolio investment. However there were variation in comparison of actual industrial production with the targets set and the planners usually indulge in readjusting the targets in light of the data so that when they realize that their original targets are not being met, they revise the targets to more closely approximate likely outcomes.

The growth rate of the manufacturing in the 1990s compared to the 1980s fell from a very impressive 8.21 percent average annual increase over the decade to only 4.8 percent for the 1990s. In 1996/97 the growth for the industrial sector was minus 0.1 percent. With the privatization programme of all governments since 1988, the percentage of public investment has also declined. While the governments relied on the private sector to lead Pakistan to higher levels of development, private investments as a percentage of GDP has also fallen. At the same time the cost of borrowing went up with the rates of interest to borrowers of capital increasing to 20-23 percent in 1997 from 12 percent in 1990. Previously the rate of interest in Pakistan was a controlled and regulated rate which was kept low to around 6 percent in the 1980s was liberalized (increased) and supposedly made market determined as a consequence of reforms in the financial sector. Similarly the prices of utilities were set according to market which led to an increase in prices of gas, electricity and petroleum inputs, all having an impact on final products.



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GENERAL PERVEZ MUSHARAF

Pervez Musharraf began his coup with a seven-point agenda, announced on October 17, 1999. Exactly eight years and ten months later, let's take a quick look at what exactly has been "achieved".

SEVEN-POINT AGENDA:The seven point agenda included, "Rebuild national confidence and morale", "Strengthen the federation, remove inter-provincial disharmony and restore national cohesion", "Devolution of power to the grass roots level", "Revive the economy and restore investor confidence", "Ensure law and order and dispense speedy justice", "Depoliticise state institutions", and "Ensure swift and across the board accountability.

Only the most audaciously ill-informed can claim that these agenda items have been achieved. On devolution, supporters of the former General would say that he indeed was able to create local governments. Unfortunately, although local governments seem to have been established for good, the manner in which they were shoved down the throats of the provinces was counter-productive. Perhaps even more importantly, by stripping the bureaucracy of its regulatory role at the grassroots level, devolution made a mortal enemy from day one, the District Management Group (DMG). Not only has the DMG suffered as a result, but Pakistan has too, losing hundreds of its brightest civil servants to foreign universities, donor agencies and multilateral organisations. In the end, the elite bureaucracy always wins. The DMG will have their day and their way with the Local Government Ordinances, weakening an already fragile local government setup and reinforcing its own powers.



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The other area in which Musharraf might think he has a case to make for success is the reviving of the economy. For certain, all the bankers in shiny suits from whom he took advice seem convinced about the brilliance of their economic model. Since Musharraf's emergency, the stock market lost over $30 billion in market cap, the foreign reserves shrunk by about half, inflation is now flirting with the 20% threshold and investor confidence is in tatters. Those advisers then have some audacity then to suggest that the fundamentals are strong. The truth is that while the middle class did indeed expand during the Musharraf era, this had more to do with capital injections after 9/11, than it did with good policy. Most crucially, since 9/11 Pakistan grew not because of the paltry $10 billion that Congress sneezed into Pakistan, but rather the consistently growing remittances from hardworking Pakistanis all over the world. At last count, since 2001 cumulative remittances are at least double what the Americans have provided in aid. Those remittances drove a real estate explosion, and helped banks fuel unprecedented consumption for Pakistanis who grew up on Fauji cornflakes and Pakistan Steel widgets. Of course they would consume their way into a serious current account imbalance. Managing all of this would have been a real achievement for Musharraf. Instead, his advisers have deserted him, and gone back to their real jobs: selling used cars to the next gullible investor.

The rest of the items on the seven point agenda have not only not been achieved, they have actually regressed. National confidence is bruised by unprecedented terrorism and deprivation. The military brand, once the blue-chip jewel of the Pakistani ethos, has been politicised and monetised. National cohesion has gone to the dogs, with terrorists having a field day while progressive Pakistanis are under siege for being bold and beautiful, and practicing Muslims in Pakistan under siege for being bearded and veiled. The provinces are sick of being treated like children, with a federal government constantly expanding and crowding out the provinces. Pakhtun children wonder why their land is an acronym, while Baluch children wonder why only the warlords get a share of the gas royalties. Punjabi children grow up wondering why everybody outside the Punjab has a chip on their shoulder and Sindhi children don't grow up as Sindhis, but rather as members of the rural or urban quota. The tenuous link between the tribes of FATA and the federation has been fatally wounded. Accountability has become a punch line, with Musharraf mocking his agenda by forcing the incorruptible General Amjad to resign as NAB Chairman in 2001, and capping the mockery with promulgating the National Reconciliation Ordinance in 2007.Pakistan's Economic Comparison 1999 to 2007

Pakistan’s economy grew by 100% — to become $ 160 billion Revenue grew by 100% — to become $ 11.4 billion Per Capita Income grew by 100% — to become $ 925 Foreign Reserves grew by 500% — to become $ 17 billion Exports grew by 100% — to become $ 18.5 billion


http://presidentmusharraf.wordpress.com/2008/07/01/economic-comparison-1999-2007-and-beyond/


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Textile exports grew by 100% — to become $ 11.2 billion Karachi Stock Exchange grew by 500% — to become $ 75 billion Foreign Direct Investment grew by 500% — to become $ 8.4 billion Annual Debt servicing decreased by 35% — to become 26% Poverty decreased by 10% — to become 24% Literacy ratio grew by 10% — to become 54% Public development Funds grew by 100% — to become Rs 520 billion

President Musharraf’s vision and policies helped Pakistan come out of the list of Highly Indebted Poor Countries (HIPC) while setting it on path of prosperity, growth and economic reforms. The world financial institutions like the World Bank & ,IMF and ADB have been praising Pakistan for its reforms, fiscal policies and macro-economic achievements.

POVERTY ALLEVIATION:

Pakistan show tremendous reduction in poverty during the period 2000 - 2007. According official figures, the poverty level dropped from 34% to 24% and the overall living standard improves dramatically.

EDUCATION:

Under Musharraf's tenure, Pakistan saw exceptional setup of 47 universities, including Virtual University, under the supervision of Higher Education Commission.[48] Most of the universities were of international standards.

Pakistan now has a total of 245,682 educational institutions in all categories, including 164,579 (i.e. 67 per cent) in the public sector and 81,103 (i.e. 100 per cent) in the private sector, reports the National Education Census (NEC-2005). The census — jointly conducted by the Ministry of Education, the Academy of Educational Planning and Management (AEPAM) and the Federal Bureau of Statistics (FBS) — reveals that the number of private-sector institutions has increased from 36,096 in 1999-2000 to 81,103 in 2005, i.e. by 100 per cent. 45,007 Educational Institutions have increased in Musharraf Era.

MUSHARAF’S LEGACY:

The once ever-declining rupee stood stable at around 60-61 to a dollar since Musharraf took over. Of the 184 member countries of the IMF, Pakistan’s rate of economic growth 7% is one of the best in the world. The Karachi stock market is now above 13,000 points and worth around


http://en.wikipedia.org/wiki/Musharaf#cite_note-47


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$65 billion. Now foreign debt servicing has lowered to become 28%. Our exports increased to become $18 billion.

1. Pakistan economy is among the fastest growing economies in the world as its economy has reached the size of $160 billion from a mere $70 billion in 1999. Pakistan attracted a record FDI of $6 billion last year.

2. 2007: National revenues had swelled from Rs 308 billion during 1988-99 to around Rs 800bn in 2007; and FBR estimates now 2.8 million Income Tax payers.

Year Total CBR Direct Indirect Custom Sales Central excise 1998-99 308.5bn 110.4bn 198.1bn 65.3bn 72bn 60.8bn 2005-06 712.5bn 224.6bn 487.9bn 138.2bn 294.6bn 55bn

3. Public sector development program (PSDP) has also grown from Rs 80 billion in 1999; to Rs 520 billion in 2007.

4. FACT: The rate of growth in Pakistan Large Scale Manufacturing (LSM) is at a 30-year high. Construction activity is at a 17-year high.

5. FACT: The Infrastructure Industries Index, which measures the performance of Seven industries, i.e. Electricity generation, Natural gas, Crude oil, Petroleum products, Basic metal, Cement and coal, has recorded a 26.2 percent growth in Industrial sector of Pakistan.

6. FACT: Jan 14: Pakistan now has a total of 245,682 Educational institutions in all categories, including 164,579 (i.e. 67 per cent) in the public sector and 81,103 (i.e. 100 per cent) in the private sector, reports the National Education Census (NEC-2005).The census — jointly conducted by the Ministry of Education, the Academy of Educational Planning and Management (AEPAM) and the Federal Bureau of Statistics (FBS) — reveals that the number of private-sector institutions has increased from 36,096 in 1999-2000 to 81,103 in 2005, i.e. by 100 per cent. 45,007 Educational Institutions have increased in Musharraf Era.

7. FACT: Pakistan is 3rd in world in Banking profitability, a report of IMF said. On the IMF chart, Pakistan’s banking profitability is on third position after Colombia and Venezuela. On the IMF chart India is on 36th position and China is on 40th position.

8. FACT: Pakistan globally ranks 10th among the countries which were among the most active in perusing pro-business policies. A report “Doing Business in 2006? co-sponsored by World Bank and International Finance Corporation (IFC).

9. In 1999 what we earned as GDP: we used to give away 64.1 % as foreign debt and liabilities. Now in 2006, what we earn as GDP: we give ONLY 28.3 % as foreign debt and liabilities. Now we are SAVING 35 % of Our GDP for economic growth.

10. According to Economic Survey 2005. Poverty in Pakistan in 2001 was 34.46%. And, now after 7 years of Musharraf; Poverty in 2005 was 23.9%. Poverty DECREASED by 10.56%. Overall, 12 million people have been pushed out of Poverty in 2001 -2005!



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11. Literacy rate in Pakistan has increased from 45% (in 2002) to 53% (in 2005). And, Education now receives 4% of GDP and English has been introduced as compulsory subject from grade 1.

12. 12-4-07: The IT industry, which was virtually non-existent seven years ago, has grown to be worth $2 billion of which $1 billion is export related. It rregistered a 50% growth. 55 foreign IT companies have already entered the market. Now the sector employed 90,000 professionals.

13. 30-1-08: The government has decided to set up a modern hospital cum Medical University in collaboration with the Harvard Medical International, USA, at a cost of Rs 18 billion. The university will be built at the Defence Housing Authority (DHA), Islamabad. A total of 2,500 students will be taught at the graduate level, while additional 600 seats will be available for postgraduate research courses.

14. Nov 2006: President Musharraf says that Pakistan will set up Nine Engineering World Class Science and Technology Federal Universities by 2008 with foreign assistance. He said the institutions of higher learning would be established in collaboration with Italy, South Korea, Japan, France, Sweden, Netherlands, Germany, Austria and China. The Cost of building these Foreign Universities will be above Rs 96.5 billion.

The Vice Chancellors, Heads of department, Professors and Faculty of the planned university will be from these Foreign Universities; while the Examination system, Quality assurance followed and the Degree awarded will also be from these Foreign Universities.

15. Government has approved to give at least 4% of GDP to Education in 2007 budget.16. In 1999-2000 there were 31 Public Universities. Now 2005-2006 there are 49 Public

Universities.

MUSHARRAF'S ECONOMIC LEGACY :

Regardless of the criticism of President Musharraf's politics or personality, there is general agreement among independent economists that President Musharraf left Pakistan's economy in much better shape than he found it when he seized power in 1999.

Here are some key highlights of the result of Musharaf era economy:

1. Pakistan's tax base and government revenue collection more than doubled from about Rs. 500b to over Rs. 1 trillion.

2. Pakistan's GDP more than doubled to $144b since 1999.

3. Most recent figures in 2007 indicate that Pakistan's total debt stands at 56% of GDP, significantly lower than the 99% of GDP in 1999.


http://www.riazhaq.com/2008/08/musharrafs-economic-legacy.html


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4. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01.

5. In spite of the election-related political turmoil, Pakistan’s economy maintained its momentum in 2007, growing by 7%, slightly more than the 6.6% for 2006. Agricultural sector growth recovered sharply, from 1.6% in 2006 to 5% in 2007, while the manufacturing sector growth continued at 8.4% in 2007, slightly more moderate than the 10% for 2006. Services grew at 8% in 2007, down from 9.6% in 2006.

6. The strong consumer demand in Pakistan drove large investments in real estate, construction, communications, automobile manufacturing, banking and various consumer goods. Millions of new jobs were created. By all accounts, the ranks of the middle class swelled in Pakistan during Shaukat Aziz's term in office. According to Tara Vishwanath, the World Bank's lead economist for South Asia, about 5% of Pakistanis moved from the poor to the middle class in three years from 2001-2004, the most recent figures available.

7. The Karachi stock market surged ten fold from 2001 to 2007.The one sore spot that sticks out in President Musharraf's and Shaukat Aziz's record is their lack of attention to the rising energy needs of the country. Appropriate planning should have comprehended new power plants to support growth forecasts. There were other mistakes as well, such as the decision to export wheat in 2007 that created shortages and price hikes that helped bring down the PML (Q) government and ultimately led to President Musharraf's departure.


http://southasiainvestor.blogspot.com/2008/01/wheat-crisis-in-pakistan.html

http://southasiainvestor.blogspot.com/2008/01/pakistans-energy-crisis.html

http://www.riazhaq.com/2008/07/shaukat-azizs-economic-legacy.html

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Since the takeover by the PPP-PML(N) coalition, there has been a sharp decline in Pakistan's economy. Summing up the current economic situation,the Economist magazine in its June 12 issue says as follows:" (The current) macroeconomic disarray will be familiar to the coalition government led by the Pakistan People's Party of Asif Zardari, and to Nawaz Sharif, whose party provides it “outside support”. Before Mr Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. But since then, as the IMF remarked in a report in January, there has been a transformation. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01. The government's debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4billion as recently as in October.In addition to the improved economy, President Musharraf enabled proliferation of independent radio and television stations, and an expanded middle class, which ultimately led to his downfall. With Musharraf out, the independent media will, hopefully, continue to play a significant role in holding the new rulers accountable to the people.

CONCLUSION:



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I now turn to the policy lessons learnt from the experience of last 50 years and the success achieved in reforming and restructuring Pakistan’s economy during the last four years. With experiments running from state controls ,liberalization, socialism, reversal to market mechanism, deregulation and privatization, there is today almost a consensus on the broad contours of economic policy in the country although the modalities, policy instruments and nuances differ as they ought to. My reading of the last 15 years suggests that the general thrust of Pakistan’s economic policies broadly reflects the following lessons learnt from the past:

(a) Central planning has been a failure as it leads to low productivity, lackof innovation, lack of incentives, poor quality goods and services andlow investment in human resources. Bureaucratic judgment is a poor substitute for market’s judgment on allocation of scarce resources.

(b) Licensing to open, operate, expand, close business by the government functionaries is a sure way to promote rent-seeking in the economy for the benefits of a few while keeping the majority poor. The basic business decisions should not be made for the businessmen by the bureaucrats. 14

(c) Public sector ownership and management of business, production, distribution and trade do not capture the commanding heights but lead to a fall into the deep morass of inefficiency, waste and corruption.

(d) Import substitution behind high tariffs not only protects a few thousand inefficient producers but also penalizes the millions of consumers with shoddy and expensive goods, which they do not particularly want. Profits at world prices are negative in these protected industries thus leading to inefficient utilization of capital and labour.

(e) Over regulation, controls and inspection of all kinds on the private sector not only hike up the cost of doing businesses, subdues entrepreneurship but also make a few wily politicians and bureaucrats rich at the expense of the prosperity of the country.Private monopolies and oligopolies were nurtured under the cover of these controls.

(f) High tax rates on individuals and corporates are counter-productive as they raise costs, discourage effort and initiatives and lead to widespread tax evasion and have unintended consequences of owering overall revenue collection.

(g) Banks and financial institutions owned and managed in public sector offering cheaper credit and/or directed credit have a pernicious effect 15 on economic growth as credit decisions are



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made on the basis of political connections rather than on the merit of the proposal. Value subtracting enterprises are set up while real opportunities forbusinesses that contribute to output and employment are missed.

(h) Administered prices of key commodities and utilities are the worstpossible means of insulating the poor segment of the population from the onslaught of market forces. Instead these prices create shortages in the economy and hit the poor hardest by denying them access to essential commodities or services.

(i) Subsidies on inputs such as fertilizers, seeds, electricity, water, gas, petroleum, etc. incur heavy budgetary costs but benefit the well-to-do classes and highly influential individuals rather than those for whom the subsidies are intended.

(j) Foreign investment and multinational corporations are not evils that should be shunned but are the most important conduits for transfer of technology, managerial skills, organizational innovation in addition to much needed capital and foreign exchange. They should be welcomed and made to feel comfortable in their operations.


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