PAKISTAN

HISTORICAL DEVELOPMENT ECONOMIC

POLICY

INTRODUCTION:

At in dependence Pakistan simultaneously created and disrupted by the

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

1947-58: EXCHANGE RATES, TRADE POLICIES AND IMPORT

SUBSTITUTING INDUSTRIALIZATION:

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

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

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

THE IMPACT OF THE EXCHANGE RATES:

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

The pound sterling was devalued as were the currencies of numerous

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

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

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

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

THE TRADE POLICY REGIME;

The trade policy adopted by Pakistan had three major aspects :

1. Overvaluation of the rupee relative to other countries
2. Use of quantitative controls on imports to regulate the level and
composition of imported good.
3. Highly differentiated structure of tariffs on imports and export taxes on
the two principle agricultural exports: jute and cotton.

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

CONSEQUENCES AND END RESULTS:

The type of protective policy pursued in Pakistan can be put simply as

follows
1. Produce anything that can be reasonably produced domestically
2. Once production has started domestically ban imports of competing
goods so as to save foreign exchange.

Import substitution progressed easily and very rapidly in those industries

that had the highest protection that is consumption goods, and those that
had cheap and ready access to domestically produced, primarily agricultural,
raw materials such as cotton jute and leather. The significant increase in
exports was from the newly established manufacturing industries, Pakistan
was in a position to produce export surplus aswell. In many ways these
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results indicate the success of the first phase of impost substitution, where
the emphasis was consumer goods rather then capital goods. Due to the
restrictive measures enforced on the economy, profit rates in industry were
very high. The annual returns on investment ranged from 50 to 100 % in
early 1950s but droped to between 20 and 50 % in latter part of the decade.
The pattern of industrial development resulted inevitably in a high degree of
concentration of the nascent industrialists who made money in Korean boom.
In 1950 there were 3000 individual firms in Pakistan out of which only seven
individual families or foreign corporations constituted 25% of all private
industrial assets in united Pakistan.

Despite some negative consequences of the economic policies pursued by

the government in Pakistan in the first decade , it would be fair to say that
they initiated an era of industrial growth and development which laid the
foundation for the decade of development between 1958 and 1968.

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AYUB KHAN: DECADE OF DEVELOPMENT

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

FIVE YEAR PLANS:

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

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

LAND REFORMS:

The Land Reform Commission was set up in 1958, and in 1959 the government imposed a
ceiling of 200 hectares of irrigated land and 400 hectares of unirrigated land in the West Wing
for a single holding. In the East Wing, the landholding ceiling was raised from thirty-three
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hectares to forty-eight hectares . Landholders retained their dominant positions in the social
hierarchy and their political influence but heeded Ayub Khan's warnings against political
assertiveness. Moreover, some 4 million hectares of land in West Pakistan, much of it in Sindh,
was released for public acquisition between 1959 and 1969 and sold mainly to civil and military
officers, thus creating a new class of farmers having medium-sized holdings. These farms
became immensely important for future agricultural development, but the peasants benefited
scarcely at all.

He subsidized fertilizers and modernized agriculture through irrigation development,

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

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

INDUSTRIALIZATION:

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

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

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

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

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

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

GREEN REVOLUTION:

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

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

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

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

FOREIGN AID, THE PRIVATE SECTOR, AND INEQUALITIES:

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

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

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

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

EDUCATION REFORMS:

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

REFORMS OF FAMILY AND MARRIAGE:

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

FOREIGN POLICY:

As President, Ayub Khan allied Pakistan with the global U.S. military alliance against the Soviet
Union. This in turn led to major economic aid from the U.S. and European nations, and the
industrial sector of Pakistan grew very rapidly, improving the economy, but the consequences of
cartelization included increased inequality in the distribution of wealth. It was under Ayub Khan
that the capital was moved from Karachi to Rawalpindi, in anticipation of the construction of a
new capital: Islamabad. In 1960, Khan's government signed the Indus Waters Treaty with
archrival India to resolve disputes regarding the sharing of the waters of the six rivers in the
Punjab Doab that flow between the two countries. Khan's administration also built a major
network of irrigation canals, high-water dams and thermal and hydroelectric power stations.[6]

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

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

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

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

CRITICISMS:

Government corruption and nepotism, in addition to an environment of repression of free speech

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

Gohar Ayub also faced criticisms during that time on questions of family corruption and
cronyism through his business links with his father-in-law retired Lt. General Habibullah Khan
Khattak. One Western commentator in 1969 estimated Gohar Ayub's personal wealth at the time
at $4 million dollars, while his family's wealth was put in the range of $10-$20 million dollars.

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

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

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1972 -1977 THE BHUTTO YEARS

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

BADLUCK FACTOR:

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BHUTTO’S NATIONALIZATION PROGRAM:

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ECONOMIC POLICIES AND PERFORMANCE:

Bhutto’s economic policies made a sharp break from the pro private sector
strategies of the earlier years.The people’s party had promised the
nationalization of all basic industries and financial institutions. The manifesto
had said that “those means of production that are the generators of
industrial advance or on which depend other industries must not be allowed
to be vested in private hands. Secondly that all enterprises that constitute
the infrastructure of the national economy must be in public ownership.
Thirdly that institutions dealing with the medium of exchange that is banking
and insurance must be nationalized.

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

The parties promises to urban organized labor as to rural peasants and

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

The impact of government policies must

be seen in context with the lost of east
Pakistan. 18 % of the west imports
came from the east. Exports in 1972
increased by 153 % over the previous
years and manufactured exports grew
by 19 % in 1973.
The growth in exports was a key factor
in the growth in industrial output
between 1972 and 1974. Agricultural
output also rose and this was attributed
to the higher support prices for wheat , rice, sugar and timely and adequate
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supply of essential inputs. Availability of credit also played a vital role in the
improved performance for after the government had tightened its control
over the banking system, more credit was available to the export sector and
to small farmers. The export refinance scheme was started by state bank of
Pakistan in 1973 and its lending rate was lower than the nominal banking
rate. After about two and a half years impressive growth the last three years
by the Bhutto government saw the trend substantially reversed with dismal
growth rates.

One outcome of the nationalization measures was the complete reversal of

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

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GENERAL ZIA UL HAQ (1977-1988)

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

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

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

It was anticipated that first step of Zia’s government would be large scale
denationalization and the return of assets seized and nationalized under the
Bhutto regime. However very little denationalization took place and the
major contribution by the Zia government in the early years was to give a
clear signal to the private sector that the government expected future
growth to come from its increased participation in industrial activity. The
existing public industrial sector was quite large employing over 50,000
persons and a massive investment programme of over Rs40 billion was
underway. Thus it was not practical for the Government to undertake any
large scale denationalization. Original owners were only prepared to take the
units back if the losses accumulated since nationalization in 1972 were
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written off and the surplus workers fired. The government could not do that
because of political and administrative reasons. Neither was it possible to
abandon the industrial sector investment programme because a large
proportion of the funds had been either spent or committed in the form of
international contracts. To restore the confidence of the private sector, the
agricultural processing industries taken over in 1976 were denationalized,
and a number of industrial incentives similar to those existing during the
1960s were introduced. As for public sector industries, a programme for
improving efficiency and profitability was initiated and the investment
programme was restricted to ongoing projects and to the balancing,
modernization and replacement. In the early years of the Zia’s government,
public sector output increased much more rapidly than private sector large
scale manufacturing output, but in the second half of the ten years, the
growth of the private sector was faster.

FIVE YEAR PLANS

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

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

ISLAMIZATION
The policy measure that distinguishes the Zia regime from all others was
that of Islamization. In fact, it became General Zia’s government and his own
mission to purify Pakistani society from all the ills and evils that had become
ingrained. Islamic laws were enacted and Commissions formed, and even the
economy was brought under the influence of economic laws and principles.
The key features of the Islamization process involved the transformation of

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the entire society and intra-social relationships in conformity with the

tenants of Islam, social justice in every walk of life by following the Islamic
principles, especially in the distribution of income and wealth in favor of the
poor, and the elimination of interest charged by banks.

REREGULATION AND LIBERALIZATION

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

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

percent.

CAUSES OF HIGH GROWTH AND THE SUCCESS OF THE ZIA

REGIME
On the whole the manufacturing sector in Pakistan has recorded impressive
growth rates during the 1977-88 periods. As we have attempted to show the
principle reason for this performance has been a result of two important
phenomena:
• The coming on stream of the public sector provided the requisite
diversity in the manufacturing sector. This resulted in both the once
and for all gains that such large investments are expected to bring in
and secondly in the linkage effects that it created.
• The revival of confidence in the private sector to invest in industry
once again after the brief interlude of the Bhutto regime.

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

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

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

the period of accelerated expansion.

The 1977-88 period is unique in Pakistan’s economic history for exhibiting

high output growth without corresponding improvements in the efficiency of
factor use in the manufacturing sector. Much of this growth in output was
financed by foreign remittances and aid flows coming into the country. We
also saw that policies were not altered even when it was abundantly clear
that they were harmful for growth and productivity. In particular the
existence of negative ERPs (effective rates of protection) for certain
industries, the regulatory regime of the period and the lack of incentives for
the value addition in the textile sector were identified as important policy
errors.

THE AGE OF STRUCTURAL ADJUSTMENT (1988 TO 1997)

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

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

In addition to these there has been an increase in the level of indirect

taxation (in the form of general sales tax) by July 1990, withdrawal of
subsidies on gas, electricity, telephones and fertilizers, an increase in
producer prices of major crops (wheat, cotton, sugarcane, rice and oil seeds)
and in the prices of petroleum products, a 12.5 percent reduction in the
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public sector development programme during the agreement period and

restriction on government borrowing and credit allocation to the private
sector.

The World Bank in its review of the programme of 1988-91, felt that the
economy responded well to these policy reforms. Progress in implementing
structural reforms to promote private sector activity has been exceptional
during the last four years despite three changes in government during this
period. A major emphasis of the structural adjustment programme was on
the enhancement of growth by encouraging the private sector, which was
supposed to take a lead role. Amongst the investment and industrial policies
followed was a forceful programme of liberalizing the economy from
government control. Not only the sanctioning of private investment and
import licensing abolished, but also a number of other regulatory restrictions
including registration of technical and foreign loan agreements, procedures
for employment of foreign workers were also removed. Areas of investment
previously reserved for the public sector were opened to the private sector
including power generation, commercial and development banking and air
and sea transport. As a result the industrial value added grew by 6.3% p.a.
during this period. Manufacturing, electricity and water expanded by 5.9%
and 11.3% p.a. on average, respectively.

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

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

utilities were set according to market which led to an increase in prices of
gas, electricity and petroleum inputs, all having an impact on final products.

GENERAL PERVEZ MUSHARAF

Pervez Musharraf began his coup with a seven-point agenda, announced on

October 17, 1999. Exactly eight years and ten months later, let's take a
quick look at what exactly has been "achieved".

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

Only the most audaciously ill-informed can claim that these agenda items
have been achieved. On devolution, supporters of the former General would
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say that he indeed was able to create local governments. Unfortunately,

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

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

The rest of the items on the seven point agenda have not only not been
achieved, they have actually regressed. National confidence is bruised by
unprecedented terrorism and deprivation. The military brand, once the blue-
chip jewel of the Pakistani ethos, has been politicised and monetised.
National cohesion has gone to the dogs, with terrorists having a field day
while progressive Pakistanis are under siege for being bold and beautiful,
and practicing Muslims in Pakistan under siege for being bearded and veiled.
The provinces are sick of being treated like children, with a federal
government constantly expanding and crowding out the provinces. Pakhtun
children wonder why their land is an acronym, while Baluch children wonder
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why only the warlords get a share of the gas royalties. Punjabi children grow
up wondering why everybody outside the Punjab has a chip on their shoulder
and Sindhi children don't grow up as Sindhis, but rather as members of the
rural or urban quota. The tenuous link between the tribes of FATA and the
federation has been fatally wounded. Accountability has become a punch
line, with Musharraf mocking his agenda by forcing the incorruptible General
Amjad to resign as NAB Chairman in 2001, and capping the mockery with
promulgating the National Reconciliation Ordinance in 2007.
Pakistan's Economic Comparison 1999 to 2007
• Pakistan’s economy grew by 100% — to become $ 160 billion
• Revenue grew by 100% — to become $ 11.4 billion
• Per Capita Income grew by 100% — to become $ 925
• Foreign Reserves grew by 500% — to become $ 17 billion
• Exports grew by 100% — to become $ 18.5 billion
• Textile exports grew by 100% — to become $ 11.2 billion
• Karachi Stock Exchange grew by 500% — to become $ 75 billion
• Foreign Direct Investment grew by 500% — to become $ 8.4 billion
• Annual Debt servicing decreased by 35% — to become 26%
• Poverty decreased by 10% — to become 24%
• Literacy ratio grew by 10% — to become 54%
• Public development Funds grew by 100% — to become Rs 520 billion

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

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

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

Pakistan now has a total of 245,682 educational institutions in all categories,

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

MUSHARAF’S LEGACY:

The once ever-declining rupee stood stable at around 60-61 to a dollar since
Musharraf took over. Of the 184 member countries of the IMF, Pakistan’s rate
of economic growth 7% is one of the best in the world. The Karachi stock
market is now above 13,000 points and worth around $65 billion. Now
foreign debt servicing has lowered to become 28%. Our exports increased to
become $18 billion.
1. Pakistan economy is among the fastest growing economies in the
world as its economy has reached the size of $160 billion from a
mere $70 billion in 1999. Pakistan attracted a record FDI of $6 billion
last year.
2. 2007: National revenues had swelled from Rs 308 billion during
1988-99 to around Rs 800bn in 2007; and FBR estimates now 2.8
million Income Tax payers.
Year Total CBR Direct Indirect Custom
Sales Central excise
1998-99 308.5bn 110.4bn 198.1bn 65.3bn 72bn
60.8bn
2005-06 712.5bn 224.6bn 487.9bn 138.2bn
294.6bn 55bn
3. Public sector development program (PSDP) has also grown from Rs 80
billion in 1999; to Rs 520 billion in 2007.
4. FACT: The rate of growth in Pakistan Large Scale Manufacturing
(LSM) is at a 30-year high. Construction activity is at a 17-year
high.
5. FACT: The Infrastructure Industries Index, which measures the
performance of Seven industries, i.e. Electricity generation, Natural
gas, Crude oil, Petroleum products, Basic metal, Cement and coal, has
recorded a 26.2 percent growth in Industrial sector of Pakistan.
6. FACT: Jan 14: Pakistan now has a total of 245,682 Educational
institutions in all categories, including 164,579 (i.e. 67 per cent) in
the public sector and 81,103 (i.e. 100 per cent) in the private sector,
reports the National Education Census (NEC-2005).
The census — jointly conducted by the Ministry of Education, the
Academy of Educational Planning and Management (AEPAM) and the
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Federal Bureau of Statistics (FBS) — reveals that the number of

private-sector institutions has increased from 36,096 in 1999-2000
to 81,103 in 2005, i.e. by 100 per cent. 45,007 Educational
Institutions have increased in Musharraf Era.
7. FACT: Pakistan is 3rd in world in Banking profitability, a report of IMF
said. On the IMF chart, Pakistan’s banking profitability is on third
position after Colombia and Venezuela. On the IMF chart India is on
36th position and China is on 40th position.
8. FACT: Pakistan globally ranks 10th among the countries which were
among the most active in perusing pro-business policies. A report
“Doing Business in 2006? co-sponsored by World Bank and
International Finance Corporation (IFC).
9. In 1999 what we earned as GDP: we used to give away 64.1 % as
foreign debt and liabilities. Now in 2006, what we earn as GDP: we
give ONLY 28.3 % as foreign debt and liabilities. Now we are SAVING
35 % of Our GDP for economic growth.
10. According to Economic Survey 2005. Poverty in Pakistan in 2001
was 34.46%. And, now after 7 years of Musharraf; Poverty in 2005 was
23.9%. Poverty DECREASED by 10.56%. Overall, 12 million people
have been pushed out of Poverty in 2001 -2005!
11. Literacy rate in Pakistan has increased from 45% (in 2002) to 53%
(in 2005). And, Education now receives 4% of GDP and English has
been introduced as compulsory subject from grade 1.
12. 12-4-07: The IT industry, which was virtually non-existent seven
years ago, has grown to be worth $2 billion of which $1 billion is
export related. It rregistered a 50% growth. 55 foreign IT companies
have already entered the market. Now the sector employed 90,000
professionals.
13. 30-1-08: The government has decided to set up a modern hospital cum
Medical University in collaboration with the Harvard Medical
International, USA, at a cost of Rs 18 billion. The university will be
built at the Defence Housing Authority (DHA), Islamabad. A total of
2,500 students will be taught at the graduate level, while additional
600 seats will be available for postgraduate research courses.
14. Nov 2006: President Musharraf says that Pakistan will set up Nine
Engineering World Class Science and Technology Federal
Universities by 2008 with foreign assistance. He said the institutions
of higher learning would be established in collaboration with Italy,
South Korea, Japan, France, Sweden, Netherlands, Germany, Austria
and China. The Cost of building these Foreign Universities will be above
Rs 96.5 billion.

The Vice Chancellors, Heads of department, Professors and Faculty of the

planned university will be from these Foreign Universities; while the
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Examination system, Quality assurance followed and the Degree awarded

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

MUSHARRAF'S ECONOMIC LEGACY :

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

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

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

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

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

4. Pakistan attracted over $5 billion in foreign direct investment in the 2006-

07 fiscal year, ten times the figure of 2000-01.

5. In spite of the election-related political turmoil, Pakistan’s economy

maintained its momentum in 2007, growing by 7%, slightly more than the
6.6% for 2006. Agricultural sector growth recovered sharply, from 1.6% in
2006 to 5% in 2007, while the manufacturing sector growth continued at
8.4% in 2007, slightly more moderate than the 10% for 2006. Services grew
at 8% in 2007, down from 9.6% in 2006.

6. The strong consumer demand in Pakistan drove large investments in real

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

7. The Karachi stock market surged ten fold from 2001 to 2007.

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

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

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CONCLUSION:

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

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

(b) Licensing to open, operate, expand, close business by the government

functionaries is a sure way to promote rent-seeking in the economy for the
benefits of a few while keeping the majority poor. The basic business
decisions should not be made for the businessmen by the bureaucrats. 14

(c) Public sector ownership and management of business, production,

distribution and trade do not capture the commanding heights but lead to a
fall into the deep morass of inefficiency, waste and corruption.

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

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

(f) High tax rates on individuals and corporates are counter-productive as

they raise costs, discourage effort and initiatives and lead to widespread tax
evasion and have unintended consequences of owering overall revenue
collection.

(g) Banks and financial institutions owned and managed in public sector
offering cheaper credit and/or directed credit have a pernicious effect 15 on
economic growth as credit decisions are made on the basis of political
connections rather than on the merit of the proposal. Value subtracting
enterprises are set up while real opportunities for
SIR AIJAZ RASHEED 31
 PAKISTAN
HISTORICAL DEVELOPMENT ECONOMIC
POLICY

businesses that contribute to output and employment are missed.

(h) Administered prices of key commodities and utilities are the

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

(i) Subsidies on inputs such as fertilizers, seeds, electricity, water, gas,

petroleum, etc. incur heavy budgetary costs but benefit the well-to-do
classes and highly influential individuals rather than those for whom the
subsidies are intended.

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

SIR AIJAZ RASHEED 32