ROLE OF THE STATE IN PAKISTAN’S ECONOMY

ASSESSING THE PAST AND EXPLORING FUTURE CHALLENGESBY: DR. PARVEZ HASAN

By: Ali Hassan

Introduction

According to the Author, although Pakistan has made some notable progress in its macroeconomic framework it still has a long way to go particularly in private sector development

There is a pivotal role of the state for economic development which is not just confined to mitigating the severity of negative market externalities

What can the government do?

The author identifies 4 areas where the Pakistani govt. can draw a path for the economic growth of the country:

1. Establish a proper vision2. Properly managing the rising defense

budget3. identification and provision of essential

public goods4. proper resource mobilization

Proper Planning

This can essentially be done by analyzing how the international community planed for economic development

Pakistan has been compared to that with the Soviet Union and how a high defense budget crumbed the economy

how China and India have become more export oriented by proper state planning

Proper Planning cont.

South Korea in the 1960-1970 and how their government under saw a long term plan to develop skill in its human resource and promote capital intensive technique’s

Malaysia’s example was also given to explain how an equitable distribution of wealth can actually be established in a country

An analysis on what direction and policies have been used in the past to stimulate a better Pakistani Economy.

State and Economy in Pakistan 1950-2000

VISION

DEFENSE SPENDING

PRIVATE VS PUBLIC SECTOR

Early Years

Policy thinking and development in early years were primarily focused above 4 things:

1) Building defense capability 2) Rapid industrialization3) Reducing dependence on trade with

India4) Seeking large scale US military and

economic assistance

Ayub Khan’s Era

Put economic and social development high on his agenda

US assistance was still used, but mobilized in a better way

Long term water and power investments Speedy spread of green revolution Relatively low military spending till 1965

Z.A Bhutto’s Rule

Came into power with the slogan “roti, kapra, makan”

Followed socialism without a clear notion

Undertook large scale Nationalization Quality of governance declining for the

first time in Pakistan Root cause to the lack of Private sector

development in Pakistan

Zia-ul-Haq Period

From an economic point of view he was the least ideological and least innovative

Economic growth out of sheer luck because the occurrence of 3 events:1. completion of Tarbela Dam2. worker remittances3. external assistance for Afghan Mujhahedin

Did little to deal with serious structural problems

Zia-ul Haq period cont.

Heavy dependence on cotton based exports

Inelastic Tax system Shift of priorities from development to

defense (defense spending increased 9% per annum)

fiscal deficits increased debt burden sharply

Into the 21st century

The responsibility of sorting out the difficulties fell to a succession of weak political democratic governments which followed Haq

There were both growth and government failures involved

Due to the high population growth and defense spending pressure deteriorated the governments power which further declined the quality of governance and taxing ability

So what changed and by how much in the Era of President Gen Musharraf.

Economy under Musharraf

Macroeconomic Management Due to the occurrence of 9/11 external

grants and substantial concessionary assistance have been provided increasing foreign exchange reserves

The Public debt to GDP ratio has declined

Non-interest and non-defense spending has doubled

However their have been certain external shocks

Defense Spending

The analysis of defense spending is complicated by two facts:

1. defense pensions moved to civilian budget

2. National income figures were revised

An overall beter picture but still the defence spending is 1/3 of government revenue

The military outlaw is being supported by the US government

Private Sector Development

Direct foreign private investment has totaled $7.3 billion

Cost of doing business is decreasing 3 major problems still persist

1. inefficiency of public owned power sector

2. not enough privatization3. no major export development

investment

Taxation and Income Distribution Although the burden of several taxes

have been removed it is still regressive Employment has increased however

with income discrepancies as population is also rising

The overall education spending is 2% of GDP

Major living standard discrepancies in urban and rural populations

Looking Ahead

Certain recommendations1. Enlightened modernization2. Better relations between India3. Reduce government centralization4. Promote export oriented business5. A taxation effort and authority need to

be developed in parallel6. Better distribution of growth benefits