Background of Pakistan Economy a historical perspective

Pakistan Economy
Lahore School of Economics
INTRODUCTION
PAKISTAN ECONOMY :
A HISTORICAL
PERSPECTIVE
1

Pakistan Economy
Economic Overview
• Size of the Economy : 240 bil USD (44th largest in terms of GDP)
• GDP per capita: $1254
• Population : over 190 million
• Inflation : 8-10%
• Average interest rate :10-12% (current 8.5%)
• Pakistan’s exports:
--textiles
-- primary products
• Main imports
– Machines & transport equip.
– Mineral fuels, etc
– Chemicals
2

Pakistan Economy
3

Pakistan Economy
Top-10 low cost source countries for Textile, 2006 (in % of world exports)
4

Pakistan Economy
Labor force:
5
59.2 million (9th largest)
note: extensive export of labor (Malaysia, Kuwait, and Qatar)
Labor force -by occupation:
agriculture: 45%
industry: 13.7%
services: 26.6%
Unemployment rate:
6.4% (2011 est.)
5.2% (2009 est.)
note: substantial underemployment exists
Literacy rate (above10): 58%
Life Expectancy: females – 66.1years
male - 64.3years
Oversees employment is encouraged to reduce
the unemployment burden within the country
and to enhance remittances

Pakistan Economy
1947
30 million people with per capita income of 100$
Today with over 180 million people, our per capita income in
2011 was 1372$
6

Pakistan Economy
Countries GDP per Capita (2012)
US $
India 1,503
China 6,091
USA 51,749
Norway 99,636
7

Pakistan Economy
8

Pakistan Economy
9

Pakistan Economy
SECTORAL COMPOSITION
10
The economy of Pakistan has been
historically an agriculture based
economy. (53% AT 1947) However,
over the years the economy has
experienced a structural change.

Pakistan Economy
Agriculture
 Agriculture had suffered greatly from the floods in the summer of 2010 but
the growth rate picked up to 3.1% from 2.4% last year.
 Major crops such as sugarcane, cotton and rice witnessed substantial growth.
 A negative growth of wheat production was registered due to late receding of
flood waters in lower Sindh which hampered the timely cultivation of wheat
crop.
 Livestock, fisheries and forestry have shown modest growth
11

Pakistan Economy
Manufacturing
– The growth of the manufacturing sector is estimated at 3.6%
compared to 3.1% last year.
– There are severe constraints faced by the industry such as:
• Flood driven supply chain interruptions
• Deteriorating law and order
• Reduction in gas supplies
• Acute energy shortages
12

Pakistan Economy
Services
• The Services sector has registered a growth rate
of 4.02 percent.
Largely attributable to growth in technical and skill-based
services, such as telecommunications, software
development, as well as in accounting and finance.
13

Pakistan Economy
Current Issues?
Pakistan, has suffered from decades of internal political disputes and low
levels of foreign investment.
Over the past few years, low growth and high inflation led by a spurt in
food prices have increased poverty.
Inflation remains the top concern among the public, climbing from 7.7%
in 2007 to almost 12% in 2011, before declining to 10% in 2012.
Pakistani rupee has depreciated since 2007 as a result of political and
economic instability.
Pakistan's current account deficit (416 million us $)
External Debt: 59383 Million US $
14

Pakistan Economy
Pakistan’s registered income
tax payers – 1.7 million
The highest amount of
income tax paid (2010) was
Rs 50 lakhs (5 million)
15

Pakistan Economy
GOVERNANCE
 A cross-country comparison shows that institutional weakness at all levels of government; the
judiciary; civil services; law enforcement; regulatory bodies; and agencies for oversight and
accountability, are directly responsible for poor economic growth.
 In the case of Pakistan, most governance indicators have weakened in recent years
In a recent study on the ease of doing business released by the World
Bank, Pakistan slipped from 96 to 105, out of 183 countries
evaluated.
16

Pakistan Economy
GOVERNANCE
• Governance consists of the traditions and institutions by which
authority in a country is exercised. This includes the process by
which governments are selected, monitored and replaced; the
capacity of the government to effectively formulate and
implement sound policies; and the respect of citizens and the
state for the institutions that govern economic and social
interactions among them.
17

Pakistan Economy
Other challenges?
Expanding investment in education,
healthcare, and electricity production,
and reducing dependence on foreign
donors.
• The ever-increasing cost of war
on terror, high inflation,
infrastructural issues and slowing
down of economic growth all are
adversely affecting the social
indicators.
• A unprecedented damage has
been caused by the recent flood
pushing more people into
poverty
• The power sector is in dire need
of massive investment.
18

Pakistan Economy
Problems after Partition and Independence
19
Political &
Social Issues
• Refugee problem
• Transfer of assets
• Kashmir issue
• Canal water dispute
• Lack of
Infrastructure
Economic
Issues
• Agriculture
• Industry
• Trade
Policy Issues
• No constitution till
1956
• Conservative
policies

Pakistan Economy
Pakistan Economy
The Early Year
1947-1958
The Formative Phase
20

Pakistan Economy
Overview
1. The economy as inherited by Pakistan in 1947, with a focus on the Industrial sector
2. The broad development priorities of the government in 1947-1958
3. The development of the industry in 1947-58
4. The government’s role in development
5. The public image of the private entrepreneur during the period.
21

Pakistan Economy
Pakistan’s inherited economy
• Pakistan was predominantly an agro based economy, with no
modern industry or modern banking or commercial
establishment.
• Pakistan had industrial assets worth RS 580 million only.
(contribution to Income was very less)
• Areas that were included in Pakistan supplied agricultural
products to the other parts of India, while it was dependent on
the basic supply of manufacturing and consumer goods.
(West Pakistan had only 3 small cotton textile mills, while there was only 1 jute mill in East Pakistan)
22

Pakistan Economy
• Small number of cement production and minor industries like
food products, sporting goods and surgical instruments.
• Out of 14,677 registered factories in united India, only 1414
became a part of Pakistan and 41.2% of these were small scale
establishments.
• Issue with the industries in Pakistan?
23

Pakistan Economy
• Example: Non Muslims owned 165 out of 215 small scaled factories in
Lahore.
In Karachi, 80% of the land property and almost all foreign trade was in
the hands on Non Muslims.
• Khoja Ismailis and Dawoodi Bohras in Sindh were involved in trade.
Situation was even poor in East Pakistan.
• Hindus and other non Muslims left everything in Pakistan and migrated to
India. Situation was to some extend compensated by the inflow of
Muslims from India.
24

Pakistan Economy
DEVELOPMENT PRIORITIES OF THE
GOVERNMENT
• First Constitution in 1956.
• Colombo Plan (1951)
• First Five Year Plan (1955-1960)
The rehabilitation of Refugees
The commitment to strengthen defence capacity
Industrialization
25

Pakistan Economy
• Refugee Problem
– 14.5 million people crossed the borders
– 7,226,000 Muslims came to Pakistan from India
– 7,249,000 Hindus and Sikhs moved to India from Pakistan
– About 5.5 millions settled in Punjab Pakistan and around 1.5 millions settled in Sindh.
• Increase in Defence Expenditure
26

Pakistan Economy
• Industrialization:
i. Arms and ammunitions
ii. Generation of HEP
iii. Manufacturing of railway wagons, telephones and wireless
equipment.
Tools:
i. Over valued Exchange Rates with import controls
ii. Low taxes and fiscal incentives
iii. Agricultural raw material and food prices were kept low.
PIDC was established.
27

Pakistan Economy
DEVELOPMENT OF INDUSTRY
The Establishment of Muslim Merchant Capital (1947-1952)
o Inflow of Muslim trading communities from India
o Memons, Bohras and Khuwajas settled in Karachi.
o Memons (about 100,000) were the largest community to
immigrate. They took over the textile and kirana trade.
o Another Industrial center developed Lahore-Lyallpur area of
Punjab.
o Adamjee and Ispahanis in East Pakistan.
28

Pakistan Economy
• Over valued the Exchange Rate with controls and quotas
• After British devaluation in September 1949, India also
followed the devaluation.
• Tax allowances, fiscal incentives, easy loans etc.
Despite government’s incentives to the private sector, it was slow
in moving into the industry.
29

Pakistan Economy
30
• Korean War (1950-1952)
• Large increase in the prices of raw materials in the foreign
market, especially for raw jute and raw cotton.
• Liberal Trade Policy.
• Large groups of traders emerged which ultimately lead to:
Expanding foreign contacts
Large scale book keeping and accounting
Better management
Building of foreign exchange reserves

Pakistan Economy
• Large incentive to reinvest in industries.
• Hence in early 1950’s the industrial sector grew at a high
growth rate at about 21% per annum.
• Import Substitution Phase.
31

Pakistan Economy
• Growing Economic Problems: (1956-1958)
• Population grew at a higher rate than the rate of food
production which meant that food had to be imported.
• Problems
• Pakistan devalued rupee.
32

Pakistan Economy
Government’s role in the development of private sector
• Infrastructure development.
• Controls on foreign exchange : import licenses were given
• Government determined the kinds of investments and production .
• Producers were subject to profit controls, labor legislatures and a
complex system of reporting to the government agencies.
• Pakistani civil service (CSP) had the authority. They distrusted the
businessmen and thought of themselves as the guardian of national
interest.
• Problem with the businessmen.
33

Pakistan Economy
• W. Pakistan fairly well developed
• E. Pakistan 240 miles of roads
Railways and Roads
• Public Transport Data is unavailable
• Private Motor Cars: 14000 in W. Pakistan, 2600 in E. Pak
Transport
• 1948-9: 50 MW
Electric Generation
Capacity
• 16%Literacy Rates
• 1948-9, 16500Telephones
Shortages of Infrastructure
34

Pakistan Economy
More Problems to Cope With
Disputes with India over Transfer of Assets
• The assets of British India were divided in the ratio of 17:5.
• Division of the all-India services of the Indian Civil Service and the Indian Police Service was also
difficult.
• Only 101 out of a total of 1,157 Indian officers were Muslim.
35

Pakistan Economy
List of Problems to Cope With
Canal Water Dispute
In 1948, India cut off the water in canals flowing to Pakistan.
The Indus Waters Treaty was signed in 1960. It was agreed that the amount of water
available from the Indus would be increased by various engineering works funded
by the World Bank.
Kashmir
The maharaja of Jammu and Kashmir, unpopular among his subjects, was reluctant
to decide on accession to either dominion.
The UN Security Council eventually brought about a cease-fire between Pakistani
and Indian troops, which took place on January 1, 1949.
36

Pakistan Economy
Pakistan Economy
Ayub’s era
1958-1968
37

Pakistan Economy
Introduction
• Military take over by General Ayub Khan in October 1958
• There had been considerable deterioration in the economic
and political situation in the country
• Economic and social reforms were high on Ayub’s agenda
▫ These reforms included economic planning and providing basic needs
such as food to the overall public of Pakistan.
38
** Ayub Khan over took Sikandar Mirza
** in 9 years 9 prime ministers had changed hands

Pakistan Economy
Some positives
1. High average annual economic growth rate
Growth Targets
▫ First Five Year Plan: 3%
▫ Second Five Year Plan: 5%
▫ Third Five Year Plan: 6.5%
• GDP growth in Pakistan of nearly 7% per annum during the 1960s was exceeded among large
countries only by Korea, Thailand and Mexico.
• Agricultural growth rate in Pakistan rose to a peak of 6.3% annual rate during 1965-1970 as
record increases were registered in the production of wheat and rice.
• Problem?
39
First Five Year Plan 1955-1960
Second Five Year Plan 1960-1965
Third Five Year Plan 1965-1970

Pakistan Economy
1950’s 1960’s
East Pakistan
Overall 1.9 4.0
Agriculture 1.9 2.7
Non-agriculture 2.9 5.0
West Pakistan
Overall 3.1 6.7
Agriculture 1.4 5.0
Non-agriculture 5.0 7.9
40
Measured by GDP growth, economic performance in Pakistan in the 1960s
clearly exceeded initial expectations.
Overall growth was double in the
decade of 60s compared to the
decade of 50s in both wings of the
country
Reasons:
Massive increase in investment
Technological breakthrough in
agriculture
Better policies

Pakistan Economy
2.Large increase in Investment
 During 1960-1965 real investment grew very rapidly, reaching a peak of
21.5% of GDP in 1964-1965 before declining rather sharply to 14.6% in
1969-1970.
 Private investment growth in West Pakistan during 1960-1965 was
explosive as it increased over three folds in short period of just five years.
• It declined by 20% in next five years but still during the 1960s, real private
fixed investment more than doubled, grew faster than public investment,
and accounted for nearly half of the total fixed investment by 1969-1970.
41

Pakistan Economy
Reasons for increased investment:
1. Political stability
2. Liberalization of investment controls
3. Availability of foreign exchange
• The increase in investment contributed to an
increase in economic growth naturally.
42

Pakistan Economy
3. Inflation
• Inflation remained in check - the average annual rate of growth of
prices was only 3.3%
• As a part of the package of measures to fight inflation, government
borrowing from the banking system for financing fiscal deficits was
reduced sharply.
• Other measures?
43
Direct control on prices, distribution
and movement of goods
1960’s was the only period when
public savings were materialized
Effort to increase tax by indirect
method were kept at minimum

Pakistan Economy
4.Significant amount of tax mobilization
 The 1960s were the only period in Pakistan’s fiscal history when significant public savings
 Emphasis on direct taxation
 Needs of additional defence spending were met by additional taxation.
The Third Plan, helped to increase the ratio of taxes from 6.1 % of GDP in
1959-60 to 7.6% in 1969-70.
44

Pakistan Economy
Problems and Failures
1.Negligence of Social sector – particularly after 1965
• Pre occupation with increasing long term investment in water and
power and raising food grain production after 1966 led to major
neglect of Social sector investments.
• Ignored education and health.
45

Pakistan Economy
• 2.Foreign Aid and Domestic Savings
Large increase in flow of foreign assistance due to:
▫ Domestic political stability
▫ Strong political alignment with US through Pakistan’s membership in CENTO
and SEATO
▫ CENTO: Central Treaty Organization
 Adopted in 1955 by Iraq, Turkey, Pakistan, Iran and Britain
46

Pakistan Economy
– SEATO: South East Asian Treaty
• Formed in 1954,
• Comprised of Australia, Great Britain, France, New Zealand, Pakistan, the Philippines,
Thailand, and the United States,
• Objective: Collective defence against aggression in south eastern Asia and the south
western Pacific:
• Abolished in 1977.
47

Pakistan Economy
Political alignment with the US through Pakistan’s
membership in:
Central Treaty Organization (CENTO) -1954
South East Asian Treaty Organization (SEATO) - 1955
By the mid 60s net foreign aid flows were financing
over one third of total investment spending, over
45% of imports and meeting much of the gap in
food grain supply for Pakistan as a whole.
48

Pakistan Economy
 Foreign aid ->  domestic saving effort
• Excessive concentration on foreign aid
mobilization led to relative neglect of the
domestic saving effort
• Led to the problems of foreign debt which we are
still facing today
49

Pakistan Economy
3.Widening Regional Disparities:
The sharp acceleration of growth in West Pakistan
during the 60s meant that even though the growth
rate in East Pakistan also increased significantly, the
regional disparity in incomes widened.
 In 1970, West Pakistan’s per capita GDP was at least
60 % higher than that of East Pakistan
50

Pakistan Economy
4. Defence versus Development
The squeeze on West Pakistan’s investment came from two resources:
– Sharp increase in defence spending
– Conscious effort to increase development outlays
• Following the war with India in 1965, defence allocations were given high priority
and phasing out of US military assistance after 1965 put additional burden on
domestic resources.
• Focus on the development of East Pakistan
51

Pakistan Economy
1965-1970 1965-1970
Planned Actual
Development Spending 30.00 21.75
Defence Spending 6.89 12.38
52
Table 3.3: Defence vs. Development
(Rs. Billion)
Thus development spending was lower than plan while
defense spending was twice more than planned.

Pakistan Economy
Pakistan Economy
53

Pakistan Economy
The Planning Commission
• What sets the 1960’s apart from the other periods in Pakistan’s economic history
is the central role given to the planning process as a tool of economic policy
making and coordination
• General role: to approve five year and other plans
• Provided staff
• Reviewed plans etc
• Surprises??
1.Population growth
2.People were investing a lot for profit, more than expected
3.Role of Planning and Development Departments of East and West Pakistan
54

Pakistan Economy
• Economic Policy Coordination was done in the
following areas:
1. Public Sector Bias
Why?
PICIC and IDBP became active.
Liberalizing investment
55
Active Participation of the government!

Pakistan Economy
2. Water and Power Investment
Massive investments including the Indus Basin Replacement Works
spending
Total water and power investments in West Pakistan during the 1960s
accounted for more than 50% of total public sector spending
The most explosive of Indo-Pakistan disputes was the question of
sharing the waters of the Indus basin.
 International Bank for Reconstruction and Development offered the offices of the Bank for the solution of the water
problem
56
On 1st August 1948, India cut off the supply of water from River Sutlej
and Ravi

Pakistan Economy
– A solution acceptable to both governments was agreed upon
in 1960 at the Indus Basin Development Fund Agreement at
Karachi. This treaty is commonly known as the "Indus Water
Treaty”
57
3 eastern rivers fall to Pakistan’s shares:
3 western rivers fall to India’s shares

Pakistan Economy
58

Pakistan Economy
• In a period of 10 to 13 years; Pakistan had to construct 2 dams,
5 barrages and 7 link canals financed by the Indus
Development Board.
• Role of Ghulam Ishaq Khan (first chairman of WAPDA)
– Tarbela Dam: Reluctant donors were persuaded to include Tarbela dam in Indus
Works.
• Completed in 1971, just in time when there was oil price hike (1973-OPEC)
which made thermal power extremely expensive
59

Pakistan Economy
Trade policy
 Like many developing countries, Pakistan did not give
importance to its exports during initial period.
Performance > Expectations
Between 1960 and 1970, West Pakistan exports increased by around 7
% annually, more or less in line with the growth of output
Turnaround in 1960s:
Due to expansion in the export of manufactured goods which
registered real annual growth of over 20% in the 1960s.
However, exports were narrowly focused on cotton textiles and
required large export subsidies through Export Bonus Scheme
There was no significant improvement in the structure of exports over
the period.
60

Pakistan Economy
Ayub Khan’s Policies – An Assessment
• Quickening the tempo for growth
• Dramatic turnaround in investment and growth in both East and West Pakistan.
• This development momentum was seriously disrupted by the 1965 war with India.
– Reduction in foreign aid availability and increased defence spending squeezed investment.
• Growth of GDP remained high both in East and West Pakistan in the second half of
1960s but this was concentrated mostly in agriculture in West Pakistan.
• In economic policy terms, major failures were the perpetuation of the industrial and
trade policies of 1950s and an excessive reliance on external assistance.
61

Pakistan Economy
GREEN REVOLUTION & LAND REFORMS
Cause of golden era
62

Pakistan Economy
Background
• Objective:
– To study two important events; Green Revolution and Land Reforms which
resulted in the transformation of the agricultural sector
• Green Revolution:
– Refers to the phenomenon of the spectacular rise in agricultural production
(particularly the production of wheat and rice in the late 60’s and early 70’s)
as a result of the introduction of HYV’s
63

Pakistan Economy
Green Revolution
-15
-10
-5
0
5
10
15
20
Agricultural Growth Rates; 1949-69
64
11.7%
During 1966/7 and 1967/8 the years when Green Revolution was at its
peak, agriculture output increased by 11.7%.

Pakistan Economy
Green Revolution
• Dismal performance of agriculture in the
formative years; 1949-58
– Average annual growth rate was 1.43%, less than
half of the population growth rate.
• Marked change in performance during 60s.
65

Pakistan Economy
Green Revolution
• Decade of 60s: Spectacular growth in agriculture took place in two
phases:
– FY60-FY64: Average annual grow rate: 3.7%
• Main cause: Increase in irrigation facilities, mainly tube-wells
• B/w FY61 and FY65; 25000 new tube-wells were installed.
• Farm area serviced by tube-wells doubled
– FY65 to FY 70: Average annual growth rate was 6.3%
• Main cause: irrigation was supplemented with:
1. HYV seeds for wheat and rice
2. Chemical fertilizers
3. Pesticides
66

Pakistan Economy
Green Revolution
– Green revolution was at its peak between FY67-FY68.
– Overall: Most important ingredient of the Green Revolution’s technology
package was availability of water, as and when required.
– Was largely concentrated only to Indus basin (Punjab)
67

Pakistan Economy
Green Revolution
• HYV Seeds for Wheat:
International Wheat and Maize Improvement Center established in Mexico in
1943
Developed the dwarf high yielding variety of wheat, which tripled Mexican
wheat production between 1944 and 1967
 Wheat acreage under HYV’s, in UDC’s, increased from 10,000 hectares in 1965 to
over 17 million in 1973.
Provided impetus for adoption of HYV’s in food deficit countries (e.g. India,
Pakistan, Turkey etc.)
Mexico-Pak wheat seeds were experimented and reproduced in large areas.
68

Pakistan Economy
Green Revolution
• HYV Seeds for Rice:
– International Rice Research Institute (IRRI) founded in Philippines in
1962.
– Lester Brown discovered the high yielding miracle dwarf variety of
rice, known as IRRI-6
– Rice acreage under the HYV, in UDC’s, increased from 49,000
hectares in 1965 to 16 million in 1973
69

Pakistan Economy
Green Revolution in Pakistan
• Green revolution a resounding success as far as
production, growth and output are concerned;
• Wheat production increased by 91% b/w 1960-70
• Rice production increased by 141% over the same
period.
• Production of other crops- not related to HYV seeds
also increased because of non-seed factors (irrigation,
pesticides, fertilizers) in the technology package.
70

Pakistan Economy
The Green Revolution in Pakistan
• The First Plan: accorded low priority to agriculture
• 2nd Plan: agricultural development accorded a higher
priority
• 1960 – 65: all important food and cash crops (wheat,
rice, cotton, sugarcane) recorded meaningful
productivity gains
• 1965 – 70 shows phenomenal growth rates:
– food grains: 18% p.a.
– Cotton: 6%
– Sugarcane: 8%
71

Pakistan Economy
Factors behind the Revolution
Prime vehicles of change:
1. the massive switch over to HYV’s
2. Consumption of fertilizers: three fold increase from
111.8 thousand tonnes to 381.9 thousand tonnes
(1967 – 72)
3. Area covered by plant protection: 1.7 million spray
acres to 4.14 million (1967 – 72)
4. Tube-wells
5. Tractors
72

Pakistan Economy
Factors behind the Revolution:
Tube wells
• Most important ingredient in the technology
package was water since the HYV seeds and
fertilizer package were critically dependent on it
• Tube wells increased from few hundred in 1960
to 75,000 in 1968 and 156,000 in 1975.
73

Pakistan Economy
Factors behind the Revolution: Tube wells
Issues:
• Location: High concentration in rich districts with 91% in 1968 in
Punjab
– Caused interregional disparities to grow
• Given size and cost, mainly installed by landowners with over 25
acres of land
• Depended on ability to borrow money
74

Pakistan Economy
Encouraged by:
• The provision of cheap credit (though ADBP)
• Overvalued exchange rate made tractors
cheap
• Liberal credit Policy
• Loans
75

Pakistan Economy
Factors behind the Revolution:
Tractorization
• As a result tractors increased from 2,000 in
1959 to 18,909 in 1968 to 27,329 in 1975.
• 58% in Lahore, Multan and Bahawalpur districts
• Close link between tube well and tractor
ownership – 75%
76
*Agriculture Development Bank of Pakistan

Pakistan Economy
Factors behind the Revolution
6. Agricultural Price Policy:
– Heavy subsidies given on tractors, tube wells, pesticides and
fertilizers: low input policy
– High output price policy for food and cash crops to correct the
balance in favor of the agricultural sector: agricultural prices raised
substantially
7. Increased credit availability
– Five fold increase in credit disbursement by ADBP
– Commercial banks also start lending more
77

Pakistan Economy
Impact of the Green Revolution
1. Increase in productivity and avoidance of economic
stagnation
2. Employment displacing impact
3. Impact on Income distribution
4. Impact on Regional Disparities
78

Pakistan Economy
1. Increase in productivity
• Increases in productivity in various food crops, which
helped overcome food crisis in many developing countries
• Averted possible famines and large-scale starvation in Asia
and Africa
• Increased marketable surplus, which was used to meet the
increasing demands of urban consumers => avoided
economic stagnation
79

Pakistan Economy
2. Employment Displacing Effect
• Greater mechanization of the agricultural
process => employment displacing
• Partly neutralized the employment generating
effect
• WB-ADB report: the introduction of a new
tractor on average displaced 10 manual workers
=> 60,000 job lost during 1968 – 72. 80

Pakistan Economy
3. Impact on Income distribution
• Negative influence on income distribution
– The success of HYV’s depended on optimal and
simultaneous use of fertilizers, water and pesticides
– Small farmers did not have resources to purchase these
inputs.
– Large farmers had easier access to credit, canal water
supplies and other extension services
1968: only about 4% of the total tube wells were installed by
small farmers (13 acres of land), while 70% were owned by
farmers possessing more than 25 acres.
81

Pakistan Economy
4. Impact on Regional Disparities
The areas selected for experimentation were the most
fertile, most optimally irrigated and most prosperous.
Since new technologies were concentrated in affluent
areas, regional disparities were aggravated
Pakistan: Baluchistan and NWFP failed to reap the
benefits of modern inputs
Burki: ‘it was the farmers who owned b/w 50 and 100
acres of land, almost all of them in the Punjab, who
produced ‘Pakistan’s’ Green Revolution
82

Pakistan Economy
1973 – 77: Green Revolution runs out of
Steam
• Causes:
– Deterioration in the quality of seed
– Defective pattern of adoption: farmers were handicapped due to financial
and management constraints
– Water requirement of the new technology not fully met
– Water-logging and salinity in the Punjab
83

Pakistan Economy
Background
• Land Reforms:
– Important mechanism for changing ownership
and wealth patterns.
– Implies a redistribution of land away from large
landholders to those who are often landless.
– Two sets of land reforms have occurred in
Pakistan – 1959 and 1972
84

Pakistan Economy
Land Reforms
• A long history of land reform attempts.
• Reason for failure:
– Landlords was the most significant class in the
Muslim League
• 50% of councilmen in Punjab were large landlords
• 60% of councilmen in Sind were large landlords.
85

Pakistan Economy
Land Reforms - 1959
• Put ceilings on landholdings
• Small amount of land handed over; Moreover
most was uncultivated land
• Important feature: assumed land to be sold to
landless tenants
• Loopholes: intra-family and intra-households
transfers allowed.
86

Pakistan Economy
Land Reforms - 1972
• Ceilings further lowered
• Small amount of land handed over; Moreover
most was uncultivated land
• Important feature: surrendered land would
not receive any compensation and land to be
given free to landless tenants
• Only 1% of landless benefited from the
reforms
87

Pakistan Economy
Land Reforms
• Highly skewed land ownership is the single most retarding factor in agriculture
• Land ownership structure has not changed despite land reforms of ’59 and ’72
• Land reforms largely neutralized due to transfer of land in favor of relatives, b/c
ceilings were fixed per person rather than per family
• Land surrendered was largely fallow and barren
• Additional land reforms do not seem politically possible at the moment
88

Pakistan Economy
AGRICULTURAL TAX
Should agricultural income be taxed in Pakistan or not?
89

Pakistan Economy
Arguments for taxing agricultural income
1. Government needs to increase the tax to GDP ratio (RS 250-
300 billion of revenue could be earned)
2. Put the tax in promoting agricultural (by particularly giving
this money to small land lords)
3. Make the agricultural tax progressive in nature
4. Agriculture shouldn’t be treated important as compared to
other sectors.
90

Pakistan Economy
Arguments against taxing Agricultural Income
1. It will discourage small land owners
2. Percentage of large land holdings has been decreased due to
inheritance laws.
3. Collecting agricultural tax is complex
4. Costs have already gone up due to the removal of many
subsidies and 17% imposition of VAT
5. Food inflation
6. Unemployment
91

Pakistan Economy
PHASE III - BHUTTO
1972-77
92

Pakistan Economy
Early Life
• Son of Shahnawaz Bhutto.(wealthy landlord of Sindh)
• Born at a time (1927) when the struggle for Independence
was approaching its climax.
• Shahnawaz residence at Bombay was a popular meeting spot
for leaders, hence Bhutto developed a sense of politics in his
early life.
• Got a Law degree from University of Oxford after which he
returned to Pakistan and started teaching in the Karachi
University.
93

Pakistan Economy
• On October 22, 1958 Bhutto joined Ayub
Khan’s government as the minister of power
and natural resources.
• In January 1963, he became the minister of
foreign affair. (big achievements: negotiations of an oil
exploration agreement with USSR in 1961, and development
of close ties with China)
94

Pakistan Economy
Emergence in politics
• Keen interest in politics
• Declining popularity of Ayub Khan.
• Increasing popularity among labor class
• PPP was formed in November 1967.
• 1970 elections
• PPP rose to Power
95

Pakistan Economy
BHUTTO’S EXPERIMENT WITH SOCIALISM
• The early 1970s were the most traumatic and turbulent years of Pakistan’s political
and economic history.
• The political impasse resulted in the ill-considered military action in East Pakistan in
March 1971
• start of the armed conflict with the separatists who were given full support by India
• A chain of conflicts began which eventually led to a War with India, Pakistan’s
military defeat, leading to the creation of an independent state of Bangladesh in
December 1971.
• In West Pakistan Bhutto was brought into power by Pakistan's military and was
President till 1977.
• Bhutto undertook large scale nationalization of industry, insurance and banking
• extending the state control of the modern sector significantly.
96

Pakistan Economy
BHUTTO’S EXPERIMENT WITH SOCIALISM
• Bhutto’s government also took full control of country’s educational system by nationalizing
private educational establishments.
• The economic consequences of the separation of East Pakistan and the large and unexpected
oil shocks in 1973 led to major changes and problems faced by Bhutto’s regime.
• Agricultural output during the same year also suffered a lot because of adverse weather
conditions, both draught and floods which caused the economic growth to slow down,
inflation accelerated and macroeconomic imbalances widened.
• The large scale inflows of foreign capital and remittances after 1973 cushioned the impact of
the steep rise in the oil import bill.
97

Pakistan Economy
Macroeconomic Management
• During the five years of Bhutto's government the
annual growth rate of economy averaged 4.9%
and this followed the virtual stagnation of GDP at
1.7% annual growth in the transition years 1970-2.
• With the deteriorating economic and political
relations with East Pakistan and eventual breakup
of the country, the slow down of growth was
inevitable.
98

Pakistan Economy
Nationalization
• PPP came into power with the slogan of “Roti, Kapra and Makan”
Reason for nationalization????
• The government took over the management and control of thirty-one industrial
units in January 1972 in ten basic industry groups including iron and steel, heavy
engineering, motor vehicles, heavy chemicals and cement.
• In March 1972, the government took over the management and control of thirty-
two life insurance companies.
• The Pakistani banks were not nationalized till 1974.
• Cotton export and cooking oil industries were nationalized during 1973.
99

Pakistan Economy
Nationalization
• The final wave of nationalization during the Bhutto period came in
July 1976 when government unexpectedly took over about three
thousand cotton ginning factories, rice and flour mills with a total
turnover of Rs.14 billion and employing 3,000 persons.
• The nationalization of heavy industries, insurance and banking were
part of the relatively well thought out actions to curb the power of
22 families, whereas the decision to nationalize cotton export trade,
edible oil industry and agro processing units were largely ad hoc,
responding either to economic or political pressures.
• Board of Industrial Management (BIM) was established in 1972.
• What was left for the private sector?.
100

Pakistan Economy
Issues with Nationalization
• Handed over of these entities to the bureaucracy instead of professional
corporate management
• Bhutto made the mistake of nationalizing small and medium industry (Pakistan
National Alliance)
• Damaged the confidence of the investors
• Other impacts:
drastic fall in production & GDP growth which consequently led to low
savings & tax collection, public sector overweighed, sick industries, fall
in production and most importantly increase in corruption
101

Pakistan Economy
Social Services - Education
New educational policy- March 1972,
• Outlined an ambitious program of educational development including:
– Free and universal education up to class VIII,
– Strengthening of technical education,
– Teacher’s welfare program
– Improvement in education quality
– An educational program for women in the rural areas.
• The immediate focus was the nationalization of private educational
institutions.
• Take over of private educational institutions adversely affected the
development of basic education as well as the quality of education.
102

Pakistan Economy
Social Services - Education
• Only about one third of the education expenditures were directed at the
primary level.
• Total government expenditures on education increase from Rs.0.8 million in
1971-2 to Rs.2.8 million in 1976-7 which represented increase in real terms of
around 50% over the period.
• Female education at the primary level showed improvement in Bhutto’s period,
as females accounted for 36% of growth at the primary school enrollment level
and 55% of growth in teachers during 1972-7.
103

Pakistan Economy
Social Services - Health
Health policy - 1972
– Extension of health facilities to rural areas
– Expansion of medical education
– Shift to the production of generic drugs to avoid the soaring prices of brand named
medicines.
• In northern areas of Pakistan people were trained as health guards who were to
provide basic medical facilities.
• As a proportion of GDP the growth in health sector was from 0.4% in 1971-2 to
0.8% in 1976-7.
• Number of basic health units increased from 249 in 1971 to 786 in 1977 and the
number of rural health centre increased from 87 to 256 over the period and
1900 health guards were trained.
104

Pakistan Economy
Foreign Trade Adjustment
The separation of East Pakistan did not lead to a major decline in Pakistan’s exports and there
were three principal reasons for this:
1. Exports of primary products from West Pakistan, such as cotton and rice which constitute of
about half of the inter-wing trade in the 60s were sold below the international prices to
East Pakistan because of national policies
2. The real devaluation of the exchange rate in May 1972 facilitated the shifts to international
markets.
3. The boom in the international economy and commodity markets in 1972-3 increased the
demand for Pakistan’s exports.
105

Pakistan Economy
106
• On the imports side, there were two lists.
. Free (A)
. tied (B)
• Import licenses had to be taken from the
government

Pakistan Economy
Pattern of growth
• The major sources of growth during the period were construction, public
administration, and defense and service sector.
• The construction boom was closely related to the rapid growth in investment.
• Real investment expanded by 50% between 1972-73 and 1976-77 and the rate of
investment as per GDP recovered from a low of less than 13% to over 19% over
the four year period.
• The beginning of the boom in worker remittances also had positive effects on
the expansion of the service sector.
107

Pakistan Economy
Oil price shocks
• External payment position worsened due to rise of international oil prices
at the end of 1973
• Oil and Petroleum Exporting Countries (OPEC) formed in 1970’s
• At the peak of oil prices in 1972, Pakistan’s oil import bill was over 6% of
GDP.
• For Pakistan official grants and loans from Middle Eastern oil exporting
countries also increased, so the financing of the enlarged deficit did not
pose major problems.
108

Pakistan Economy
External debt problem
Pakistan had to face rising debt servicing burden of the existing debt in the 70’s.
• As political crises began in 1971 and as the economy stumbled, Pakistan found itself
unable to meet debt service obligations.
• The seriousness of the problem can be judged from the fact that the debt service
payments due in 1971-2 would have absorbed over 40% of Pakistan’s foreign exchange
earnings during that year.
• The fresh assistance from abroad relatively neutralized the effect of oil increases.
109

Pakistan Economy
Energy Prices
• It was the lack of suitable price adjustment in energy, which did the most harm in economic terms,
through direct subsidies from the budget for energy
• Between 1973 and 1976, import cost of petroleum had increased by 300%.
• Gas prices were kept low to promote the use of an indigenous but unfortunately scarce source of
energy.
• As a result of subsidy on energy prices, energy consumption growth remained high, incentives for
increased production especially for oil and gas were not strong, and dependence on imported energy
remained high.
• In 1970 energy consumption expanded 30% faster than growth in GNP with obvious adverse
consequences for the balance of payments.
• Reduced income from gas and electricity sales reduced the capability of WAPDA, KESC and Sui Gas to
finance expansion from internal resource
110

Pakistan Economy
Budget deficits
• Government deficits which had increased in 1970-2 due to
1. Difficult economic condition
2. Political condition
3. Military operations in East Pakistan
• Government deficits showed further explosive growth during the Bhutto years.
• The budget deficit averaged over 8% of GDP compare with fiscal deficits of 2-3% of GDP in
the 50’s and 4-5% in the 60’s.
• The high rising burden of defense expenditure was a root cause of fiscal imbalance.
• The decision to increase defense expenditure following the separation of East Pakistan was
important political decision made for the demoralized Pakistan army.
111

Pakistan Economy
Inflationary Pressure
• The growing fiscal deficit, combined with imported inflation
resulted from higher international oil prices, had serious
inflationary consequences.
112

Pakistan Economy
Wheat Subsidy
• The government was slow to adjust wheat procurement prices because of concern with
the urban consumers.
• The wheat procurement price was increased only gradually to around Rs.1 per kilo in
1975-6 from Rs.0.5 per kilo in 1969-70.
• The efforts to keep wheat prices relatively low provided strong incentives for raw cotton.
• The ratio of cotton to wheat prices generally was far more favorable during the 70s than in
60s.
• In order to compensate farmers for wheat prices, which were well below international
prices through out the 70s, and price of cotton, the government continued to provide
large direct subsidies on fertilizers and pesticides and equipment for plant protection.
113

Pakistan Economy
Wheat Subsidy
• Increase in fertilizer subsidies in the mid 70’s was the result of both rising fertilizer
imports and exceptionally high international prices of fertilizers.
• Producer’s prices were kept below international level after allowing for reasonable
efforts to mitigate large fluctuations; this triggered the need to maintain input
prices at low level.
• The burden of both direct and indirect subsidies was felt ultimately on the budget
and since the large budgetary deficits were financed during 70’s at the margin by
borrowing from banking system, the consumer paid the price through a higher level
of domestic inflation.
114

Pakistan Economy
Labor Policy
• Comprehensive labor policy announced in February 1972;
– measures to improve the income and the bargaining position of labor.
– procedures for speedy and just settlement of disputes
– a fair share in profits
– participation in the management of industry
– better housing, health and education facilities.
– better work environment
• This extended the benefits of reforms to another 1.2 million workers
• but elicited a strong negative response from the large number of small
businesses which became subject to a whole new set of regulations.
115

Pakistan Economy
Labour policy
• The new labor policy added about 12% to the cost of labor
• thus met resistance even by the managers of state enterprises.
• Labor policy combined with uncertainty about the attitude of the government about
the private sector acted as strong disincentive to further investment in large-scale
industry in the private sector
116

Pakistan Economy
Tax policy
• The government was not able to use the tax policy as an effective instrument of resource
mobilization.
• Profits of nationalized enterprises fell off rather quickly as inefficiencies crept in and growth
slowed down.
• Collection from incomes and corporate tax during the 70’s did not exceed 1% of GDP.
• The essential inelasticity of tax system remained intact with its heavy dependence on indirect
taxes and especially certain duties.
117

Pakistan Economy
Public Investments
• The extension of the role of the public sector was not confined to
nationalization and increased public sector investment in industry.
• There was a massive increase in other areas of public investment as
the total public sector development spending increased from 4.7% of
GDP in 1971-72 to 11.7% of GDP in 1976-77.
• The share of public investment in gross domestic fixed capital
formation had grown from 49% in 1969-70 to nearly 70% in 1976-77.
118

Pakistan Economy
Reaching the poor
• Food, clothing and shelter for the poor were a key slogan of the founders of the PPP and it
was this platform which had brought Bhutto to power.
• Large parts of Bhutto’s economic and social programs such as: land reforms, labor policy,
educational reform, sharp expansion in public development spending, credit policies for small
farmers and businessmen were aimed at improving the living standards of the poor.
• While there was a defined reduction in absolute poverty after 1971-72, majority of the
improvement occurred after 1976.
• Between 1976-79 worker remittances, a major source of poverty reduction increased from US
$ 562 million to US $ 1749 million.
• Slow economic growth, high level of inflation and ineffective social policies and spending
frustrated distribution goals even though they were pursued aggressively.
119

Pakistan Economy
Pakistan Economy
PHASE IV - ZIA
1977-88
120

Pakistan Economy
Zia’s Back ground
• Born in 1924 in Jullundur to a lower middle class Arian family.
• Belonged to a religious family
• Joined the Indian Army in 1945.
• Zia’s rise in army hierarchy was not spectacular but he gained
respect for being honest, loyal, humble and a competent
commander.
121

Pakistan Economy
Fall of Bhutto
• In March 1976, Zia was chosen as the Chief of Army Staff by Bhutto
– Why? Bhutto wanted a weak and servile general in command of the armed forces. However, Zia’s
appointment turned out be a crucial error in Bhutto’s judgment
• Adverse economic conditions
• PPP policies of nationalization
• Growing misuse of power during PPP’s government
• Allegations of rigging in 1977 elections
• Feelings of disappointment and opposition – middle and working classes turned
against Bhutto
• Zia stepped in…. “Operation Fair play” Justification??
122

Pakistan Economy
Zia’s Rise to Power
• Martial Law was imposed by General Zia-ul-Haq in 1977.
• Bhutto was put under house arrest
• Zia took over with the declared purpose of resolving the rift between Bhutto’s PPP and
the combined opposition to hold free and fair elections within 90 days.
• Due to Bhutto’s public popularity, Zia feared that he could return to power through free
elections, therefore the elections were postponed. Zia gave 2 reasons for this:
 Accountability
 Islam
• Bhutto then charged with the murder of a political opponent was found guilty and
hanged on 4th April 1979.
• Accused for the murder of Nawab Muhammad Ahmed Khan
123

Pakistan Economy
Major Events during Zia’s Era
• Disbanded the idea of "Parliamentary democracy" after he banned all political parties in Pakistan.
– An alternative system, Majlis-e-Shoora, in 1980.
– Members were intellectuals, scholars, ulema, journalists, economists, and professionals in different fields.
• 1984 Referendum - with the option being to elect or reject the General as the future President. 95% of votes
were cast in favor of Zia
• Elections in 1985: most political parties boycotted the elections (MRD), Zia appointed Muhammad Khan Junejo
as the prime minister
• 1988 Ojhri Camp disaster occurred at a military storage center located in Rawalpindi
– used as an ammunition depot for Afghan mujahedeen fighting against Soviet forces from Afghanistan.
– The camp exploded killing more than 1,300 people
124
Shoora acted like the board of advisors to the president

Pakistan Economy
1979 Soviet Invasion
• On 25 Dec 1979, the Soviet Union invaded Afghanistan – provided support to Zia’s
regime
• How?
– Soviet threat was enough to slow down civilian movements against military regime
– The presence of anti-American regime (USSR) in Iran, made Pakistan a means to provide aid to
anti-Soviet Afghan guerillas (Mujahedeen)
– Pakistan – major recipient of US aid
– Oil rich Arab states also provided Pakistan with substantial aid
125

Pakistan Economy
Industrial Policy & Performance of Economy
• The government took measures to restore the private sector’s confidence in
the economy;
– Agro-processing industry that had been nationalized were returned to actual owners
– Allowed the private sector to invest in industries that had been in the public sector
domain since the early 1970s.
– Zia brought Mr. Habibullah and Mr. Mustapha Gokal into his council.
– Introduced efficiency program in the public sector –Balancing, Modernization and
Replacement (BMR) programs
– Efforts to reduce red tape bureaucracy
126
BMR = Balancing Modernization and Replacement

Pakistan Economy
• Fiscal Incentives
– Special Fiscal Incentives – for special objectives e.g. development of a particular industry (tax
holidays, exemption of import duty)
– General Incentives – tax credit on investments, up to 100% exemption on duties
• Export Promotion
– Major concessions through export rebates
– Import facilities for exporters
– Income tax concessions
– Export financing at concessionary rates ( custom duty paid was utilized for funding exports
– Low interest credit
– Shift to flexible exchange rate
– Problem as indicated by the Pakistan Institute for Development Economics (PIDE) study?
o problem with fiscal incentives: Pakistan became a country with high capital labour ratio while it should have been a labour
intensive one
o problem with export: PIDE stated that inefficient industries came into existence.
127

Pakistan Economy
• Import Liberalization
– List of importable items (positive and negative list)
– Move from quantitative restrictions to tariffs
• However, despite all these efforts investment was going into real estate,
resulting in rapidly rising property prices
• Whitener Bonds and Exchange bearer certificates
128

Pakistan Economy
Economic Performance
129
1958-68 1972-77 1977-88
GDP Growth Rate 5.6 4.92 6.6
Agriculture 5.5 1.68 4.41
Manufacturing 6.4 3.2 9.2

Pakistan Economy
Economic Performance - Industry
• Industrial growth was impressive as Manufacturing sector growth over 1977-88 averaged over
9% as compared to 3.7% in 1972-77.
• Large scale manufacturing grew even faster than the small scale
• The main reasons behind this rapid growth in industry were:
– Large public sector investments during Bhutto’s time resulted in major increases in steel,
cement, fertilizer and vehicle production.
– Incentives for manufactured exports were strengthened by the introduction of a flexible
exchange rate policy after 1982
– The investment climate for the private sector was improved by providing guarantees against
future nationalization
– clearer demarcations of activities between the public and the private sector
– additional tax concessions.
130

Pakistan Economy
Economic Performance - Agriculture
• Agriculture growth rate – 4.4% in 1978-83 & 3.9% in 1983-88
• Reasons for growth
– Wheat and cotton production rose
– Domestic fertilizer production tripled during the first half of 80’s.
– The government price policies after 1980 improved agricultural incentives, especially for wheat.
– The agricultural growth also benefited from strong growth in livestock. The livestock grew
annually by 5.5% in the 80’s
– The high burden of fertilizer and wheat subsidies on the budget finally led to a review of
agricultural policies in the early 80’s and a substantial upward adjustment of both fertilizer and
wheat prices.
– The agricultural expansion was mainly due to the past investment and exogenous technical
change.
– Improved seeds and modern input
– Other measures
131

Pakistan Economy
Economic Performance – Worker Remittances
• Worker emigration to Middle East
• During 1977-83, the rapid rise in worker remittances had pushed GNP growth
rate to an annual record of 7.6% per annum.
• In the first half of the 1980’s, worker remittances were almost as important a
source of foreign exchange as merchandise exports.
• They helped Pakistan build the foreign reserves and helped the government in
meeting its foreign debts.
• Unfortunately, the workers remittances boom did not translate into a
significantly higher rate of national savings and investments.
• Most of the remittances were directed to consumption and this played a major
role in reducing poverty.
132

Pakistan Economy
Worker Remittances
Selected Years US $ Million As % of GDP
1972-3 136 2.1
1976-7 578 3.8
1982-3 2,886 10.1
1987-8 2,013 5.2
1990-1 1,848 4.1
1993-4 1,455 2.3
133

Pakistan Economy
Exchange Rate and Trade Policy
• Pakistan in 1982 shifted to flexible exchange rate
• The rupee was devalued from Rs. 9.90 per $ to Rs. 11.84 in 1982 and
then gradually depreciated to Rs. 18 per $ by the end 1988.
• Between 1982 and 1988, there was a substantial real depreciation of the
rupee
• This real devaluation assisted the overall export expansion of 7-8% per
annum during the period and contributed in a significant way in reducing
the relative dependence on worker remittance.
• By 1988 exports were more than double the level of remittances.
134

Pakistan Economy
Rising Debt Burden
• Interest payments had become the fastest growing element in government
expenditures during 1977-88, rising from 1.9% of GDP in 1976-7 to 4.9% of GDP in
1987-8.
• The main element in the rising of fiscal debt burden has been the interest payments
on domestic debt reflecting both the enormous growth in internal debt and the high
interest rates at which the borrowing was done.
• There was a much higher reliance on government borrowing from non bank sources
at relatively high interest rates of 14-15% per year.
135

Pakistan Economy
Social Progress
• Real wages which had increased during the Bhutto period, showed further increase during Zia’s rule.
• Primary school enrolment during 1977-88 expanded at an annual rate of only 4% only moderately
faster than the growth rate of the population.
• The increased demand for services in rural areas following rising incomes generated pressures for
rapid rural electrification and rural roads,
– Rural electrification spending was 52% higher than original
allocations while spending on rural roads exceeded targets by 29%.
• Substantial economic growth and relatively low inflation during the Zia period did translate into
broad based income growth
• Average per capita GNP grew at an annual average of 3.3% per annum during 1977-88 though the
growth was much higher in the earlier period
• Progress in increasing access of the population to basic health services was slow. Only modest gains
were made in reducing infant mortality and increasing life expectancy.
136

Pakistan Economy
Islamization of the Economy
• Announcement of a plan for the implementation of an Islamic economic system
in February 1980.
– Institutionalization of zakat
– Introduction of interest free banking
• The aim was to free the economic order from exploitation and provide equal
socio economic opportunities for the needy.
• Under the Zakat Ordinance (Usher Ordinance), most financial assets in the
banking system and saving instruments were made subject to 2.5% deduction
annually on account of zakat.
• Riba was banned. 137

Pakistan Economy
Islamization of the Economy
• Even assuming that all the benefits were to the lowest 20% income households and
that the administration expenses were minimal, the zakat donation would have
augmented the income of this group by only 2%.
• Islamization also affected the interest rate policy. Technically all lending and deposit
rates were set on profit and loss sharing by 1988
– The move to profit and loss sharing as such did not make big difference to the process of financial
deepening that is increase in share of monetary assets to GDP.
– The ratio of the total monetary assets to GNP, which suffered a sharp decline in Bhutto’s period due to
higher inflation and uncertainty about the future of private enterprise, had recovered to 36.5% to 1980.
138

Pakistan Economy
Zia years
There were four factors which helped Zia prolong his rule:
• Efforts to Islamize society to strengthen his political support.
• Soviet occupation of Afghanistan and Zia’s highly successful efforts to mobilize and coordinate
considerable external assistance for mujahedeen from diverse sources such as the US and
Saudi Arabia increased his political standing and control after 1980.
• Zia extended the role of the army in governance through extensive use of military
intelligence, appointment of senior officers to key positions
• Economy under Zia enjoyed a high and sustained rate of growth.
– Economy expanded to nearly 6.6% per annum
– Inflation rate declined during 77-78 and it remained around 7%
– Broad sharing of the benefits of growth.
– Real wages increased.
139

Pakistan Economy
Pakistan Economy
PHASE V - Democracy
1988-99
140
Lecture 9

Pakistan Economy
141
Fall of Zia
• August 17 1988, Aircraft crashed and along with General Zia-ul-Haq
29 other people died
• Policies of Zia:
– Disbanded the idea of "Parliamentary democracy“
– 1984 Referendum
– 1988 Ojhri Camp disaster
– Soviet Union invaded Afghanistan
– Economic growth averaged 6.6% per annum
– Pakistan in 1982 shifted to flexible exchange rate
– Rising Debt Burden
– Worker Remittances
– Fiscal Deficit
– Islamization

Pakistan Economy
Democratic Era 1988-99
• Bhutto 1988-1990
• Nawaz Sharif 1990-1993
• Bhutto 1993-1996
• Nawaz Sharif 1997-1999
142

Pakistan Economy
Bhutto 1988-1990 – Major Events
• 1988 Elections – PPP won but not an absolute majority. Nawaz’s IJI (Islamic Jamhouri Etihad)
formed government in Punjab
• BB’s relationship with President Ishaq was strained by the 8th Amendment that Zia
introduced, giving powers to President to dismiss an elected government
• BB’s attempt to acquire control brought her into conflict with both the President and armed
forces
• The bureaucracy has been divided by hiring party workers to senior government posts,
bypassing the bureaucratic hierarchy
• Ethnic violence in Karachi and Hyderabad – dividing PPP and MQM. Army was called
• 6th August 1990, BB’s government dismissed. Charged with rampant corruption, massive
civil disturbance in Sindh, confrontation between federal and provincial governments
143

Pakistan Economy
Nawaz 1990-93 – Major Events
• October 1990 Elections – Nawaz won with absolute majority
• However, friction between army and government was inevitable
• Intensified violence in Sindh destabilize Nawaz both in his relationship with army and
in his political coalition building
• Army launched a “cleanup” mission in Karachi and branded MQM as “a terrorist
organization”
• Nawaz’s Islamic Law bill did not bridge the differences and many parties in the
coalition left
• Meanwhile BB mended fences with army and president
• Conflict between Nawaz and President Ishaq became serious over 8th Amendment –
Nawaz government dismissed
• Petition by Nawaz Sharif and supreme court responded
• Supreme court intervened – considered dismissal as “excess of power”
• Army stepped in by threatening of martial law and Nawaz stepped down in compliance
144

Pakistan Economy
Bhutto 1993-96 – Major Events
• 1993 Elections – PPP largest party in NA but did not have an absolute majority,
coalition governments
• BB remained cautious in her interactions with army
• BB kept a check on her coalition partner, Nawaz by her loyal bureaucrats
• BB became embroiled in growing conflict with judiciary
• Growing tensions between government and MQM in Karachi, Sunni Shia riots.
• Murder of BB’s brother Murtaza Bhutto in 1995, he led a faction of PPP to challenge
BB’s government in Sindh
• 1996 President Farooq Ahmed Khan Leghari dismissed government
145

Pakistan Economy
Nawaz 1997-99 – Major Events
• February 1997 Elections – absolute majority
• Nawaz used his two third parliamentary majority to legislate the 13th
Amendment – swept away powers from president to dissolve
assemblies
• Aug 1997 – crisis developed in judiciary to reinstate the 8th
Amendment. Army refused to provide support and Leghari was forced
to resign
• Nawaz’s personalized decisions caused friction between army and
political parties
• Kargil episode May1999, forced to make unconditional withdrawal,
blamed COAS Musharraf
• October 12 1999, Martial Law imposed by General Pervez Musharraf
146

Pakistan Economy
• Economic growth slowed down during 1988-99. GDP growth averaged 4.5%
compared to 6.6% during 1977-88
• Real income per capita grew at 1.3% per annum
• Reasons:
– Low rates of savings and investments
– Politicized decision making in allocating public resources
– Structural problems in LSM
– financial and political turmoil
– growing imbalances in the budget growing financial vulnerability.
– Long term investment in infrastructure was neglected
– No serious efforts were made to mobilize domestic resources in the public sector for
development
• The rate of inflation accelerated during 1988-96 and exceeded 12% per
annum during 1993-6.
147

Pakistan Economy
• Total investment as a percentage of GNP was 17% and after peaking
around 19% in early 1990s, declined to 14% in 1999
• Private sector’s share of total capital increased from 48% in 1988 to 57%
in 1999
• Most of the private investment occurred in the manufacturing sector and
over 90% of it was in the large scale manufacturing sector
• In absolute terms private investment increased from 8% of GDP to a peak
of 10% in early 1990s
• However, domestic savings did not increase by as much as private
investment
• Private investment was being financed by foreign investment and loan
inflows
148

Pakistan Economy
Shift towards Private Sector
• The elected governments of BB and Nawaz set about liberalizing the
economy by activating the private sector
• Between 1988-1990, BB hired Rothschild & Sons to outline a privatization
strategy and identify privatization targets
• However, all attempts failed except privatization of 10% ownership of PIA
was completed
• Government stepped up the rate of privatization in 1991 (Nawaz’s gov)
• The privatization commission, established in January 1991 identified 115
industrial units to be privatized
149

Pakistan Economy
Shift towards private sector
• In early 1991, the Nawaz Sharif government provided a forceful push to private
sector involvement in the economy by a broad based program of privatization,
deregulation and relaxation of controls on foreign exchange and investment.
• Main objective:
– reduce the drain of government resources caused by losses of state
owned enterprises
– to create great opportunities for private sector investments because
the public sector resources for development had become very scarce.
• The entry of the private sector into fields such as power generation, high way
construction, airlines, shipping, and banking was actively sought and controls
private sector investment were relaxed substantially.
• By the mid 1993 64 units had been privatized and another 4 were privatized in
mid 1955. 51% of the shares of MCB were privatized.
150

Pakistan Economy
• New chairman of Privatization, Mr. Naveed Qamar was a close
friend of Zardari.
• BB sold shares of PTCL (but managed by the government) and
Kot Addu power plant which was WAPDA’s largest generating
unit with 1.6 GW generating capacity (but managed by the
minority stakeholders)
151

Pakistan Economy
Shift towards private sector
Criticism:
• Lack of transparency, corruption and concentration of wealth in a few
hands
– E.g.: monopoly in cement where Mian Mansha got five cement factories and
gained monopoly power- he also owned majority shares in MCB
• Only 22% of privatized units performed better and 34% were
performing worse ~ ADB study
– 20 privatized units were closed
152

Pakistan Economy
Fiscal Deficits
• In the real sense, the inability to control fiscal deficits was the root cause  high
inflation.
• The fiscal deficits peaked during the first Nawaz regime at an average of 8% of GDP
before settling at 6.5% for the rest of the democratic years
• Tax revenues declined from 14% to 13% despite increased tax rates
• Direct taxes as a percentage of total government revenues increased from 10% in
1988 to 23% in 1999
• Expenditure remained high due to pet projects
153

Pakistan Economy
Debt Growth
• Given the high level of fiscal deficits, the rapid growth in government debt
continued as domestic public debt increased from Rs 20 billion in the mid
1988 to an estimate Rs 30.3 billion by mid 1999.
• Public sectors external debt  nearly doubled  Domestic Debt burden
also increased to finance fiscal deficits
• Interest payments on public debt rose to 6.1% of GDP.
• Pakistan came close to default.
154
2011- external debt around $59 billion
2013- $65.8 billion

Pakistan Economy
Agriculture & Industry
• Declining importance
– Public expenditure on agriculture declined from 20% of total budget to just 8%
– Share of GDP declined from 31% in early 1980s to 26% in 1999
– Growth rate slowed from 5.4% to 4.4%
– Share of agricultural products in exports also declined
• Textile industry – Cloth production grew at 3% per year
– Widespread crop virus in early 1990s
– Inability to move into higher value addition
– Lacked adequate quality control
• Sugar industry became key area
– From 45 in 1988 to 78 sugar mills by 1999
155

Pakistan Economy
Financial Sector
• Liberalization of foreign currency account 1991
– Pakistani residents could hold foreign currency accounts on the same basis as Pakistanis abroad – exchange
rates were adjusted
– Deposits jumped from $3bil to $7bil
– Freezing in 1998 -> loss of investor confidence
• Loan defaults
– loans were issued on the basis of political motivations rather than economic assessment
• Stock Market
– Restrictions on foreign investment removed in 1991
– Explosive gains – unsustainable (deficits)
156

Pakistan Economy
Social Development
• At the beginning of 1990’s
– Human development indicators such as life expectancy at birth, infant mortality, adult literacy rate, and
primary school enrollment ratios compared unfavorably with most other low income countries, including
India and Bangladesh.
• Primary enrollment ratio varied widely across provinces.
• Junejo government 1986-8: gave initial push for social expenditures, in particular for education
• The current budget for social services went up sharply from 1.7% of GDP in 1991-2 to 2.2% in 1993-4.
157

Pakistan Economy
Social Development
• Total government expenditure on education in 1994-5 was 2.5% of GDP.
• The rise in female enrollment ratio from 31% to 57% over the same period was particularly
notable
• In 1992, with the assistance of the World Bank, a comprehensive Social Action Program
(SAP) was designed:
– It aimed at improving and expanding primary education , basic health care, family planning, and rural
water supply and sanitation (RWSS)
158

Pakistan Economy
Pet projects
Politicized infrastructural development
• Nawaz Sharif
– Motorway
• 1991: signed contract with Daewoo to build a four lane motorway by 1995
– Yellow Cabs
• Easy loans to import duty free vehicles
• Banks were unable to trace 50-60% of the vehicles on defaulted loans
159

Pakistan Economy
Pet projects
• Benazir Bhutto
– Power Sector
• 1994: 19 agreements for independent power projects (IPPs)
• Subsequent problems with high tariffs
– Social Action Programs
• Designed by World Bank – aimed at improving primary education, health care, family planning,
rural water and sanitation
160

Background of Pakistan Economy a historical perspective

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Destacado

Destacado (20)

Similar a Background of Pakistan Economy a historical perspective

Similar a Background of Pakistan Economy a historical perspective (20)

Más de Ayesha Majid

Más de Ayesha Majid (20)

Último

Último (20)

Background of Pakistan Economy a historical perspective

Notas del editor