Background of Pakistan Economy a historical perspective

Pakistan Economy

Lahore School of Economics 1

INTRODUCTIONPAKISTAN ECONOMY :A HISTORICAL PERSPECTIVE

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

Pakistan Economy


Pakistan Economy


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

Pakistan Economy


Labor force: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


194730 million people with per capita income of 100$

Today with over 180 million people, our per capita income in 2011 was 1372$

Pakistan Economy


Countries GDP per Capita (2012)US $

India 1,503

China 6,091

USA 51,749

Norway 99,636

Pakistan Economy


Pakistan Economy


SECTORAL COMPOSITION

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

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

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.

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 $

Pakistan Economy


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

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 yearsIn 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.

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.

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.

Pakistan Economy


Problems after Partition and IndependencePolitical &

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

Lahore School of Economics

Pakistan Economy


The Early Year 1947-1958

The Formative Phase

Pakistan Economy


Overview

1. The economy as inherited by Pakistan in 1947, with a focus on the Industrial sector2. The broad development priorities of the government in 1947-19583. The development of the industry in 1947-584. The government’s role in development5. The public image of the private entrepreneur during the period.

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)

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?

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.

Pakistan Economy


DEVELOPMENT PRIORITIES OF THE GOVERNMENT

• First Constitution in 1956.• Colombo Plan (1951)• First Five Year Plan (1955-1960)

The rehabilitation of RefugeesThe commitment to strengthen defence capacityIndustrialization

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

Pakistan Economy


• Industrialization:i. Arms and ammunitionsii. Generation of HEPiii. Manufacturing of railway wagons, telephones and wireless equipment.Tools:iv. Over valued Exchange Rates with import controlsv. Low taxes and fiscal incentivesvi. Agricultural raw material and food prices were kept low.PIDC was established.

Pakistan Economy


DEVELOPMENT OF INDUSTRY

The Establishment of Muslim Merchant Capital (1947-1952)o Inflow of Muslim trading communities from Indiao 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.

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.

Pakistan Economy


• 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 accountingBetter managementBuilding 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.

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• 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.

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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.

Pakistan Economy


• W. Pakistan fairly well developed • E. Pakistan 240 miles of roadsRailways and Roads

• Public Transport Data is unavailable• Private Motor Cars: 14000 in W. Pakistan, 2600 in E. PakTransport

• 1948-9: 50 MWElectric Generation Capacity

• 16%Literacy Rates

• 1948-9, 16500Telephones

Shortages of Infrastructure

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.

Pakistan Economy


List of Problems to Cope WithCanal 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.

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Pakistan Economy


Pakistan Economy


Ayub’s era1958-1968

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.

** Ayub Khan over took Sikandar Mirza** in 9 years 9 prime ministers had changed hands

Pakistan Economy


Some positives1. High average annual economic growth rateGrowth 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?

First Five Year Plan 1955-1960Second Five Year Plan 1960-1965Third 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

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 countryReasons:Massive increase in investmentTechnological breakthrough in agricultureBetter 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.

Pakistan Economy


Reasons for increased investment:

1. Political stability2. Liberalization of investment controls 3. Availability of foreign exchange

•The increase in investment contributed to an increase in economic growth naturally.

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?

Direct control on prices, distribution and movement of goods1960’s was the only period when public savings were materializedEffort 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.

Pakistan Economy


Problems and Failures1.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.

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

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.

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.

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

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

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

Pakistan Economy


1965-1970 1965-1970

Planned ActualDevelopment Spending 30.00 21.75

Defence Spending 6.89 12.38

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


Other Events

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 growth2.People were investing a lot for profit, more than expected3.Role of Planning and Development Departments of East and West Pakistan

Pakistan Economy


•Economic Policy Coordination was done in the following areas:

1. Public Sector BiasWhy?

PICIC and IDBP became active.Liberalizing investment

Active Participation of the government!

Pakistan Economy


2. Water and Power InvestmentMassive 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

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”

3 eastern rivers fall to Pakistan’s shares:3 western rivers fall to India’s shares

Pakistan Economy


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

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.

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.

Pakistan Economy


GREEN REVOLUTION & LAND REFORMSCause of golden era

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

Pakistan Economy


Green Revolution

1949-50

1950-51

1951-52

1952-53

1953-54

1955-56

1956-57

1957-58

1958-59

1959-60

1960-61

1961-62

1962-63

1963-64

1964-65

1965-66

1966-67

1967-68

1968-69

-15

-10

-5

0

5

10

15

20

Agricultural Growth Rates; 1949-69

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.

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 rice2. Chemical fertilizers3. Pesticides

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)

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.

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

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.

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%

Pakistan Economy


Factors behind the RevolutionPrime 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-wells5. Tractors

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.

Pakistan Economy


Factors behind the Revolution: Tube wellsIssues:• 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

Pakistan Economy


Encouraged by:• The provision of cheap credit (though ADBP)• Overvalued exchange rate made tractors

cheap• Liberal credit Policy• Loans

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%

*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

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

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

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.

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 services1968: 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.

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

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

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.

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.

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

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

Pakistan Economy


AGRICULTURAL TAXShould agricultural income be taxed in Pakistan or not?

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 nature4. Agriculture shouldn’t be treated important as compared to

other sectors.

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Pakistan Economy


Arguments against taxing Agricultural Income

1. It will discourage small land owners2. Percentage of large land holdings has been decreased due to

inheritance laws.3. Collecting agricultural tax is complex4. Costs have already gone up due to the removal of many

subsidies and 17% imposition of VAT5. Food inflation6. Unemployment

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Pakistan Economy


PHASE III - BHUTTO1972-77

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.

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)

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

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.

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.

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.

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.

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?.

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

Pakistan Economy


Social Services - EducationNew 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.

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.

Pakistan Economy


Social Services - HealthHealth 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.

Pakistan Economy


Foreign Trade AdjustmentThe 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.

Pakistan Economy


• 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.

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.

Pakistan Economy


External debt problemPakistan 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.

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

Pakistan Economy


Budget deficits• Government deficits which had increased in 1970-2 due to1. Difficult economic condition2. Political condition3. 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.

Pakistan Economy


Inflationary Pressure

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

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.

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.

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.

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

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.

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.

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.

Pakistan Economy


Pakistan Economy


PHASE IV - ZIA1977-88

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.

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??

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

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

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

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

BMR = Balancing Modernization and Replacement

Pakistan Economy


Industrial Policy & Performance of 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 oneo problem with export: PIDE stated that inefficient industries came into existence.

Pakistan Economy


Industrial Policy & Performance of 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

Pakistan Economy


Economic Performance

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.

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

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.

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

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.

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.

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.

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.

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.

Pakistan Economy


Zia yearsThere 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.

Pakistan Economy


Pakistan Economy


PHASE V - Democracy1988-99

Lecture 9

Pakistan Economy


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

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

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

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

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

Pakistan Economy


Macroeconomic Management • 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.

Pakistan Economy


Macroeconomic Management• 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

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

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.

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)

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

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

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.

2011- external debt around $59 billion2013- $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

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)

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.

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)

Pakistan Economy


Pet projectsPoliticized 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

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

Background of Pakistan Economy a historical perspective

Economy & Finance

Transcript of Background of Pakistan Economy a historical perspective