Review of the previous lecture

Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe policy can be used to offset this inherent instability.

Critics of active policy emphasize that policy affects the economy with a lag and our ability to forecast future economic conditions is poor, both of which can lead to policy being destabilizing.

Advocates of rules for monetary policy argue that discretionary policy can suffer from incompetence, abuse of power, and time inconsistency.

Critics of rules for monetary policy argue that discretionary policy is more flexible in responding to economic circumstances.

Review of the previous lecture

Advocates of a zero-inflation target emphasize that inflation has many costs and few if any benefits.

Critics of a zero-inflation target claim that moderate inflation imposes only small costs on society, whereas the recession necessary to reduce inflation is quite costly.

Advocates of reducing the government debt argue that the debt imposes a burden on future generations by raising their taxes and lowering their incomes.

Critics of reducing the government debt argue that the debt is only one small piece of fiscal policy.

Review of the previous lecture

Advocates of tax incentives for saving point out that our society discourages saving in many ways such as taxing income from capital and reducing benefits for those who have accumulated wealth.

Critics of tax incentives argue that many proposed changes to stimulate saving would primarily benefit the wealthy and also might have only a small effect on private saving.

Lecture 29

Overview of Pakistan EconomyInstructor: Prof.Dr.Qaisar AbbasCourse code: ECO 400

Lecture Outline

Economic eras

Structural Changes In Pakistan

65 years of developmentLaying the Foundations:1947-1958 Features

Predominantly agrarian, undeveloped and newly independent nation

Little industry, few services and no infrastructure

Adverse international conditions and precarious domestic situation

Attempts of bureaucracy to keep Pakistan on its feet

Lack of capital

Trade surplus

The Decade of Development:1958-1968Achievements

Considerable economic growth and development

Significant leaps were made in industrial and agriculture production

Model Capitalist Economy

High growth rate in manufacturing sector

Increase in exports

Progress in agriculture sector

Policy Failures

Increased disparities in incomes

Concentration of economic prosperity

Social sectors were neglected

Little or no increase in real wages

Trade was highly controlled and closed

Distortion of local markets b/c of overvaluation of exchange rate

The Decade of Development:1958-1968

The bad Luck Years:1971-1977Achievements

Foundations for future growth and development

Basic industries were setup

Base for a capital goods industry

Middle East boom

Illiberal economic policies

Foreign exchange earnings doubled because of devaluation

FailuresEvents beyond control affected economic program of this era

Downward trend in growth

Nationalization

Cotton crops failure and floods affected Pakistans exports

Crisis in balance of payments

Devaluation of Pakistani rupee

The bad Luck Years:1971-1977

The second Military Government 1977-1988Achievements

Liberal economic policies

Higher industrial growth

Second economic revolution because of remittances from the Middle East and aid from abroad

Emergence of middle class

Policy Failures

Martial rule inflicted deep rooted damage to Pakistani society

Drugs and arms culture in Pakistan

Confusion of policies

Underutilization of resources (foreign aid and remittances)The second Military Government 1977-1988

The Era of Structural Adjustment:1988-1998Achievements

Return of democracy

Era of structural adjustment

Economic liberalization and stabilization

Privatization

Reduction in tariff rates to increase exports

Policy FailuresMacro economic crisis

High taxation

Low spending in social sectors

Trade reforms resulted in deindustrialization

Continuous devaluation in the Pakistani rupee

Increased in the administrated prices of utilities

High inflation rate

Unemployment

Privatization without proper policy

Loss of sovereignty for the Pakistani state and its people

The Era of Structural Adjustment:1988-1998

Economic Situation:1998-2004FeaturesAcceleration in economic growth

Increase in industrial production

Rise in exports earnings

Strong upsurge in investment

Pre-payment of high cost external debt

Increase in foreign exchange reserve

Strategic re-entry into the international capital markets

Increase in spending on Education

Increase in FDI

2005-2007The economy picked up further in FY2005,

-with GDP growth coming in at over 8.4% for the first time in 8 years. -With sound macroeconomic fundamentals achieved and key sectors strengthened by reforms implemented in the 4-5 years, -the economy was well positioned to sustain 7% or more growth in the medium term.

ADBs Asian Development Outlook 2005

Sect oral Contribution to the GDP growth (%points)

Sector2006-072007-082008-092009-102010-11Agriculture0.920.230.860.130.26Industry2.280.38-0.032.09-0.02Manufacturing1.550.92-0.691.010.55Services3.613.080.891.542.15Real GDP (FC)6.813.681.723.762.39

Structural Changes In PakistanStructural Change

Modern economics has given clear evidence that changes in levels of some basic magnitudes are generally associated with changes in composition, which imply STRUCTURAL CHANGE

Reasons of Structural ChangesTo modernize the economy

To industrialize the economy

To pace capital accumulation in the economy

Main Sources of Structural Changes

Growth of population (natural or immigrant)

Application of technical and mechanized processes of production which change quantity of output per unit of input

Technical progress which generates a continuous growth of real per capita incomes which implies a growth of demand for goods and services

Structural Changes Pakistan today is less than half of the country it was in 1947. The contribution made by East Pakistan to Pakistans society and economy was huge.

Pakistan is basically an agricultural country is no longer true. The services sector has replaced agriculture as the dominant sector of the economy, contributing almost half of GDP.

Process and extent of UrbanizationIn 1951 only 17% of West Pakistan lived in areas designated as Urban; today estimate suggest that above 40* live in cities and towns.

Emergence and consolidation of middle class

The nature of exports from Pakistan has also changed dramatically.

Feudalism in Pakistan died a very long time ago.

Pakistan: basic indicators,1947-2011

195119972011Population (millions)33.78140180.72Contribution to GDP by sector(%)Agriculture53.224.221Manufacturing7.826.412Others39.049.467

An Economic and Social Agenda For Improvement

Restore confidence

Initiate and sustain technological change

Foster stability and trust in social and cultural relationship

Recommended BooksIshrat Husain, Pakistan: The economy of an elitist state, Oxford University Press.

Zaidi, S. Akbar,(1999),Issues in Pakistan Economy, Oxford University Press.

Saeed, K. Amjad,(2007)Economy of Pakistan, Institute of Business Management, Lahore.

Economics Survey of Pakistan (Latest Issues), Economic Advisors Wing, Ministry of Finance, Government of Pakistan