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insafresearchwinsafresearchwin Insaf Research IRW Finding solutions for a better Pakistan Pakistan Tehreek-e- Insaf
insafresearchwinsafresearchwin Insaf Research IRW Finding solutions for a better Pakistan Pakistan Tehreek-e- Insaf

Insaf Research


Finding solutions for a better Pakistan

Pakistan Tehreek-e-

Insaf Research



Central Secretariat


Street No. 84,

Sector G-6/4,




Tel: 92-51-2270744


Pakistan. Tel: 92-51-2270744 searchwinginsafresearchwingins afresearchwinginsafresearchwin













Committee on Economics

Pakistan Economic Research Report

Insaf Research Wing (IRW) is a part of Pakistan Tehreek-e-Insaf (movement for justice a political party, PTI). IRW was created in 2009 to carry out research in order to find solutions for problems in Pakistan. The foremost goal of IRW is to keep people of Pakistan and PTI informed and prepared.

The wing is composed of committees. Each committee addresses issues related to its field of expertise. The committees defined as of yet are (i) Socio-Political (ii) Technological (iii) Defense (iv) Energy (v) Poverty alleviation (vi) Industrialization (vii) Healthcare (viii) Foreign affairs (ix) Media/public relations (x) Membership (xi) Expatriates (xii) Education (xiii) Surveying (xiv) Economics (xv) Environment.

The research reports/papers are either commissioned by the central executive committee of PTI or committee members of IRW. PTI members can also suggest IRW to consider researching on a matter they find important. IRW welcomes any contributions in the form of scholarly work addressing important issues. Nevertheless, after the author(s) sends the document it is peer reviewed before getting published. In the process of peer review the document is technically analyzed and scrutinized. The procedure is necessary to maintain quality control. However, varying opinions & ideas are not penalized.

Apart from working on research reports/papers which shed light on problems and provide basic solutions, IRW undertakes the task of preparing extensive policies for PTI. These detailed and in-depth policy documents are a combination of input from several professionals who are well versed in the subject. IRW also serves as a check on the reigning government’s policies.

The Wing does not follow a preset ideology while carrying out research. IRW does not endorse any opinion presented in a published report/paper as an official position. Likewise, several research reports/paper on a similar subject published by IRW can have contradictory recommendations though it should be noted that these point of views are sole responsibility of the author(s). Very rarely when there is a complete consensus on a certain research report/paper within IRW only then it is recommended to PTI for official perusal. Any published document by the wing does not constitute it as an official position of PTI unless otherwise stated.

Insaf Research Wing works at a national level but its members are located throughout the world bringing in the much needed international experience. IRW practices an open membership policy valid for all Pakistanis regardless of religion or race. Nevertheless, members of other nationalities from international organizations interested in helping Pakistan are always welcome to join IRW.

Published reports of IRW can be accessed at PTI’s website www.insaf.pk. The headquarter of IRW is located at PTI’s Central Secretariat, Street No. 84, Sector G-6/4, Islamabad, Pakistan.

Copyright © 2009 by Pakistan Tehreek-e-Insaf All rights reserved.

The contents of this report/paper cannot be reproduced without prior permission of IRW.

Committee on Economics

Pakistan Economic Research Report

Table of Contents

Executive Summary





Chapter 1: Introduction


1.1 Background Information


1.2 Research Aim and Objectives



Chapter 2: Functions of an Economy

2.1 Making of an Economy


2.2 Economic Growth


2.3 Monetary & Fiscal Policy


2.4 Types of economic systems


2.5 Parameters of economic growth


2.6 Arguments against and for privatization, regulation and deregulation



Chapter 3: Different Economies and Systems

3.1 Key factors behind the economic success of Southeast Asian economies


3.2 Key economic drivers of Nordic countries


3.3 Research on Venezuelan economy


3.4 Poverty Reduction Initiatives


3.5 Hugo Chavez economic policies



Chapter 4: The Banking System

4.1 Islamic Banking


4.2 Role of World Bank, IMF, the Paris Club, Asian Development Bank (ADB)


4.3 Role of EU, NAFTA, GCC



Chapter 5: Current Pakistani Economic State


5.1 Manufacturing Industry


5.2 Services Industry


5.3 Agriculture Industry


5.4 Tourism Industry


5.5 Role of Foreign Aid



Chapter 6: Recommendations







Committee on Economics

Pakistan Economic Research Report

Executive Summary

Pericles, head of the Athenian state, member of the democratic party, statesman, political philosopher and the ranking member of the board of generals, eloquent about the threats to ancient Athens at the height of its power around the year 461 B.C., said “what I fear more than the strategies of our enemies is our own mistakes”. Indeed Pericles was right: our enemy is our own mistakes. The strategies we employ will, in the end decide our fate.

The incumbent Pakistani governments consistent mistakes threaten to harm ourselves and those associated with us. At a time when, Pakistan should be expanding the base of public spending, firmly taking control over its financial institutions, national resources and industries and enlarging public employment opportunities, the country has gone in to reverse to relinquish national development plans and hand over the economic decision making to the private banking, foreign companies and multinational corporations. A shame for a country of 170 million people blessed with natural resources both capital and land.

The aim of the report is to analyze the current Pakistani economic state and provide guidance towards a socio economic policy in line with the manifesto of the party. An extensive secondary research was carried out examining and presenting various viewpoints. The development challenges for Pakistan include a complete overhaul of the current economic system. To achieve accelerated and sustained broad-based economic growth an economic emergency should be declared, a five year Keynesian measures should be implemented, that is public ownership of key industries and undertaking key infrastructure project in transport, oil gas and minerals and telecommunication sectors. For the rural areas focusing on the important agriculture sector taking in to account water management, infrastructure development, livestock and fisheries. Chairman Khan has announced an education emergency when PTI comes in to power; the author believes an economic emergency of the same kind should also be considered.

The analysis of the various economic systems and countries highlighted the need for an economy comprising of 3 tiers: tier 1, a self supporting economy comprising of agricultural and manufacturing, 2 nd tier consisting of service based economy incorporating leisure & tourism, banking, arts and entertainment, 3 rd tier intellectual based economy focusing on science and technology, armament, space, medicine and genetics.

The fact of the matter is that Pakistan urgently needs an alternative path of political development. It needs radical progressive economic planning compatible with the emerging revolutionary models being initiated in several countries in Latin America, notably Venezuela. In short Pakistan needs to deliver viable economic programs to its general masses and restore its cultural edifice with its ideal historical values of collective community development, social harmony, heritage, justice and enactment of the principles of a welfare state.

Committee on Economics

Pakistan Economic Research Report


The original idea of the report transpired through the formation of Insaf Research Wing (IRW) conceptualized by Mr. Ali Hammad Razza. The inception of the economic committee led to invigorating discussions about various issues affecting the Pakistani economy. This led to the realization of researching an analysis of various factors, which affect the Pakistani economy and the wider exploration of the field of economics.

Preparation and completion of this study was a challenging and an invigorating experience, as some of the committee members did not have prior familiarity to the field of economics or the study of this depth. Along the way personal difficulties led some committee members to curtail their involvement. However I would like to thank the IRW members for their valuable suggestions.

The economic committee would also like to express thanks to their family and friends for their support, encouragement, constructive criticism and suggestions throughout the course of the research work.

Lastly it is hoped that this report will be used in stimulating thought, self reflection and valuable discussion amongst Central Executive Committee (CEC), PTI members, academics and provide as valuable a learning experience for them as it has for the author.

Committee on Economics

Economic Research: Pakistan

Chapter# 1:


1.0 Introduction

Islamic Republic of Pakistan is located in South Asia and borders Central Asia and the Middle East. It has

a 1,046 kilometre (650 mile) coastline along the

Arabian Sea and Gulf of Oman in the south, and is bordered by Afghanistan and Iran in the west, the Republic of India in the east and the People's Republic of China in the far northeast. Tajikistan also lies adjacent to Pakistan but is separated by the narrow Wakhan Corridor. 1 Pakistan is a federation of four provinces, a capital territory and federally administered tribal areas. The estimated population of Pakistan is 172,800,000 making it the world's sixth most-populous country. 2 With a growing population and limited resources the economic challenges for Pakistan are immense; moreover these challenges are intertwined with

various geopolitical factors.

Though the Pakistani administration claims that poverty has decreased from 33% to 25%, several international organizations reports indicate that poverty has in fact risen to 37%. 3 Evidently the administration is simply manipulating the numbers. For example Lahore is a city of six million people. It has a single state-run general hospital that provides treatment to patients with neuro-surgical ailments. The sick from Lahore, the surrounding areas and far off villages in Punjab suffer the indignities of the overcrowded wards and inadequate facilities of the hospital. In the context of the contemporary needs of the masses, political correctness and a progressive socio-political ideology, the political establishment of Pakistan should be planning urban and rural development based on zonal structures –

each zone with manageable community and population size, its own state funded hospital, health service clinics, elementary and high schools, local judicial courts, police and an efficient transport and communication infrastructures. However after eight years of General Mushraf’s rule, incessant preaching of enlightened moderation and the non-stop blowing of trumpets of an economic recovery miracle the Pakistani nation stands today at the verge of an economic disaster. 4

The state of the Pakistani economy can somewhat be compared to the state of the European countries notably Britain which was ravaged by two major world wars. After the Second World War, Britain had emerged effectively bankrupt, with an overstretched economy and massive popular expectations of economic and social improvement.


The famous economist J M Keynes persuaded the British policy makers of a big programme of post- war social reform, and a phased liberalization of international trade and payments. Keynes demonstrated that the unemployment rate depended upon the level of aggregate demand, the sum of total consumption and total investment. His remedy to reduce mass British unemployment was to expand investment by a programme of public works, which would create additional consumption by the workers employed and further waves of consumption and investment as new incomes were generated and additional expenditure made at each round. The Labour governments of 1945-1951 enacted a political programme rooted in collectivism including the nationalisation of industries and state direction of the economy.

Economists conventionally divide industry (the production of goods and services for financial gain) in to primary, secondary and tertiary sectors. The primary sector is concerned with growing or extracting natural products and includes agriculture, fishing forestry, mining and extraction

1 Encarta Encyclopedia 2000

4 Dr H Mehdi (2007) The Nemesis, political articles &

analysis, Lahore, Heritage Publications

Alan Booth (2001) the British economy in the twentieth century, London, Palgrave

2 Population reference Bureau - www.prb.org 3 Dr H Mehdi (2007) The Nemesis, political articles & analysis, Lahore, Heritage Publications


Committee on Economics

Economic Research: Pakistan

of minerals. In the secondary or manufacturing sector, raw materials are processed in to physical goods so they acquire added value. Everything else falls within the tertiary sector, which is concerned with the supply of all forms of service. 6 These distinctions are useful, but the boundaries are not always clear, especially between manufacturing and services. As economies develop, the primary sector becomes relatively less important in terms of output, though actual output may continue to grow. The tertiary sector made the biggest single contribution to output growth in most developed twentieth century countries.

The importance of human capital formation to the processes and pace of economic growth is fundamental. For example, the high level of skill among manual workers was a decisive advantage in Britain’s industrial revolution and the shortage of skilled workers in those countries seeking to follow Britain’s lead was almost certainly a decisive disadvantage. However Britain’s advantage in the mid twentieth century sharply declined and during the phase of high unemployment in the 1970’s many manufacturing companies complained that they could not fill vacancies for skilled and technical workers. In their study of matched (by type of product, size of firm, scale of production) firms in the British and German machine tools industries, Daly and colleagues (1985) found that Germans productivity levels were 50-80 percent higher than British. The authors identified three basic differences between firms in the two countries. German firms used more production engineers to ensure that workflows and handling equipment were fully utilized. German supervisory staff tended to be better qualified than British at ensuring that the machines were properly set up and used for the appropriate tasks and that workers were adequately directed. Finally German firms had proportionately twice as many skilled workers. 7 In a similar comparison of matched firms in the furniture trade, German firms made higher quality

6 Prais, S. J. 1995. productivity, education and training: an international perspective, Cambridge, CUP

7 Daly, A. D.M.W.N and Wagner, K (1985) Productivity Machinery and Skills in a sample of British and German Manufacturing Plants: results of a pilot enquiry’ NIER, 111: 48-61

products at higher efficiency levels. The reason for the German advantage in these cases resulted less from vocational skills but from higher attainment in mathematics at school and continuing education that enabled German workers to operate computer controlled machines that could not be used in Britain. 8 These studies were small in scale and generally have unknown relevance to the wider

Although fascinating studies but one should not forget they are small in scale, do not control for the state of market demand and have unknown relevance to the wider twentieth century. But what they do show is unequivocal link between education, training and productivity.

For Pakistan the basic economic infrastructure is there however lack of governance and skilled workers is one of the biggest obstacles. With a PTI government the key will be establishing an expat skills department within each Pakistani high commission in Western Europe, Japan, America and the tiger economies of Southeast Asia. These expat skills department will be further subdivided according to various fields i.e. medicine, mechanical engineering, poverty alleviation, finance, banking, leisure & tourism etc. Mass recruiting of key individuals with experience and relevant educational qualifications should then be sought and their skills matched in reforming various segments of the Pakistani economy.

1.1 Background information

The twentieth century saw a major expansion of the role of government both as a producer of goods and services and as a regulator and stabilizer of the national economy. The Western world has come a full circle in their economic approach. Controversy raged for many years in the economic world over the proper role of government in an economy and it was especially fierce during the twentieth century. Left to its own devices the miracle of free market economic was widely triumphed since the

8 Alt, J and Chrystal A 1983. political economics, Brighton, Wheatsheaf

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Economic Research: Pakistan

late 1970’s. The unbridled and unregulated western economies however came close to a meltdown beginning 2007 and came to rely on government for massive bailouts. The state’s role as the only powerful force to reverse the present decline now remains unchallenged.

Whilst the western world comes to term with the present economic crisis and governments praised for their decisive action to stabilize the market system. A complete opposite remedy is being prescribed to the Pakistani government to cure its economic ills namely privatization and massive loans.

Since Pakistan’s inception in 1947, the military gained prominence in the state apparatus as a result of the first war with India. After the death of the founding father, Jinnah, in 1948, Pakistani politics was riddled was the problem of factionalism. The political contest took place on three fronts:

- Amongst the various political groups for the control of the state.

- Between the civil and military bureaucracy and the political class

- Between the military and other dominant civilian actors.

One of major cause of the debilitating state of the Pakistani economy is the continuous bickering of the dominant political leadership in the country. For instance, Liaquat Ali Khan, the country’s first prime minister manipulated politicians in the Punjab in his interest. However, when confronted with the situation of losing control of the largest province to a dominant leader of the Muslim league in the Punjab, Mumtaz Daultana, Liaquat Ali Khan connived with the governor general to dissolve the assembly and bring the province under the direct control of the central government. This situation continued for two years until the elections in March

1951. 9

factionalism inside the political parties also divided party politics along regional lines. While the Awami league concentrated its efforts in East Pakistan (now Bangladesh) the Muslim league dominated the politics in the western wing of the country. Such political factionalism led to frequent dismissal of governments. From 1947 to 1958 Pakistan had seven prime ministers and eight cabinets. 10 Furthermore the extravagant and viceregal behaviour of the political elite set it apart from the common people. The civil bureaucracy was as powerful as in India. The main difference, however, between the two civil bureaucracies was in their approach to military power and political control. While the Indian civil bureaucracy recognised and accepted the dominance of the politicians and established control over the armed forces through strengthening of the ministry of defence (MoD), Pakistan’s civil bureaucracy chose to partner with the bureaucracy – represented by a bureaucrat turned politician Ghulam Mohammad, the governor general during the early 1950’s viewed the military as a junior partner capable of keeping the raucous politicians at bay. The governor general’s trust lay more in the army generals than the civilian prime ministers. 11 To make itself more relevant for the state, the military strengthened itself institutionally through enhancing its control over defence and foreign policy making. The political leadership was far too fragmented to establish control over the military and issues of national security. The senior generals especially Ayub Khan, who was the first army chief, insisted that the defence matters were the military’s forte. 12 The political conflict between the political and military leadership finally ended in the first takeover by the army in 1958. The years from 1958-1971 saw a crucial transformation in civil military relations, during which the army established itself as the key political force.

The first constitution was promulgated in 1956, nine years after the country’s creation. The

9 Ayesha Siddiqa (2007) Military INC, inside Pakistan’s military economy, London, Oxford University Press

10 Abbas Hassan (1979) the state in post colonial societies: Pakistan and Bangladesh in harry goulbourne (ed), politics and state in the third world, Hong Kong, Macmillan

11 Clloughly B (1999) the history of Pakistani army, Karachi, Oxford University Press

Ayesha Siddiqa (2007) Military INC, inside Pakistan’s military economy, London, Oxford University Press


Committee on Economics

Economic Research: Pakistan

The 1971 saw a return to democracy after the humiliating loss by the army of East Pakistan. Despite the majority won by Rehman’s Awai league in the elections of 1970, the west Pakistani establishment which included the military and other dominant classes was uncomfortable with the idea of transferring power to the Bengalis, whom they considered ethnically inferior. 13

From 1971-77, Zulfiqar ali Bhutto’s rule saw restoration of confidence in Pakistani people, nationalization of industries, land reforms and most importantly setting the country towards the path of becoming a nuclear power. To his critics however Bhutto was like a Machiavellian prince, as he tried to maximize his power through adopting a dual approach of propagating populist measures and coercing other players. From the standpoint of Bhutto’s relationship with the military he made the blunder of miscalculating the resilience of the armed forces in thwarting the strategic changes he had brought about in their management. The military capitalized in Bhutto’s dependence on military force for building his personal political power. It emerged from the ashes of 1971 sufficiently strengthened for another takeover in


The period from 1977-88, 1988-99 and 1999-2005 saw martial law, period of unstable democracy and then back to another coup in 1999, until 2007 when elections were held again following the assassination of Benazir Bhutto.

The military in Pakistan is a formidable political player with greater influence than any other actor. For example the military’s internal economy is operating at three levels and in three segments of the economy, agriculture, manufacturing and the service sector through their main four subsidiaries – the Fauji Foundation (FF), Army Welfare Trust (AWT), Shaheen Foundation (SF) and Bahria Foundation (BF). Moreover there are also three major public sector organizations National Logistic Cell (NLC), Frontier Works Organization (FWO) and Special Communication Organization (SCO) directly

13 Ayesha Siddiqa (2007) Military INC, inside Pakistan’s military economy, London, Oxford University Press

involved in profit making activities. Together with other major economic players such as the House of Habib Ittefaq Group of companies, Hashoo group, Dawod Group and the feudal lords, such as Seth Abid, Ghulam Mohammad Mehr, Ghulam Mustafa, Asif Ali Zardari etc. (Shahid ur-Rahman, who owns Pakistan) Thus what emerges is a quagmire of interrelated interests between the political, military, landed feudal and the industrial class. The much-tooted economic growth of Pakistan is linked with the changing fortunes of these ruling elites and not the common man mired in poverty.

1.2 Research Aim and Objectives

This research papers aims to understand and study the various economic factors necessary for economic growth and then correlating that to provide guidance towards the formation of a socio- economic policy for PTI.

The introduction mentioned development of Britain and other European powers ravaged by the two world wars came out with a complete overhaul of their socio-economic system. Analyzing these changes, together with investigating different economic models and theories in order to provide PTI members a beforehand knowledge of the problems with the current system and their actual solutions is the aim of this study. It would also serve as a check on the current government's actions on the accounts of economy.

For the purpose of this study, relevant areas were researched from the plethora of information available. This study entailed the use of interpretative approach that is; it is the people who construct their own reality. As study of human nature has always been complex due to the fickle nature of human beings.

The analysis of the current Pakistani economic state showed up a dire state of affairs: inadequate infrastructure, mass unemployment, double-digit inflation, rampant corruption, crony capitalism etc.

Committee on Economics

Economic Research: Pakistan

Conflicts of interest in literally every industry have crippled economic growth; injection of foreign loans, aid and remittances from overseas Pakistani’s are currently keeping the economic system afloat. The state of the Pakistani elite running the economy can be co-related with what an American cultural anthropologists Clifford Geertz asserted; ‘man is an animal trapped in a web of significance he himself has spun’.

The rest of this study is structured as follows: In chapter two analysis of the field economics is undertaken, citing and co-relating theories, models, and frameworks from a variety of academic sources. Chapter three describes the different economic models and examines economic growth of some of the Southeast Asian countries and the socialist model currently propagated by the charismatic Venezuelan leader Hugo Chavez. Thereafter chapter four describes the Islamic banking concepts, alongside the role of the IMF, World Bank and other donor organization. Chapter five discusses the current state of the Pakistani economy, looking at key industries such as agriculture, manufacturing, and services. Finally chapter six draws conclusion and examines the issues in respect to the theories and frameworks outlined in the previous chapters.

Committee on Economics

Economic Research: Pakistan

Chapter# 2:

Functions of an Economy

2.1 Making of an Economy

Economics is the study of systems of production and distribution. In essence it is the analysis of the ways in which societies produce and distribute goods and services. Any system for deciding what is produced, how it is produced and who gets to consume it, whether it is the system of an entire planet as in the global economy or a defined segment of society in an economy and can be understood in economic terms. 14


Macroeconomics and Microeconomics.





Macroeconomics focuses on the study of whole systems of production and distribution, that is, whole economies and large sectors of the economies. Whereas microeconomics focuses on individual economic entities, such as a single business or single household, or on specific economic activities such as employment and prices.

An economy is made up of factors of productions i.e. land, labour, capital and entrepreneurship combined together to create goods and services for consumption. 15 Economies are structured in to three main sectors, primary (incorporating the agriculture, forestry, fishing sector) secondary (manufacturing cars, food processing, steel making etc) and tertiary (services sector such as transport, leisure & tourism, financial services, health and education etc) Then there are the markets at international, national and local level where buyers and sellers meet for exchange of goods and

services. Economists group buyers and sellers together. For instance there is an international market for oil where large companies and governments buy and sell oil. There are also national markets for oil. Not every company or government involved in the buying and selling of oil in the UK will be involved in the US or the Malaysian oil markets. There are also regional and local oil markets. All these markets are interlinked but they are also separate. 16

The three most important western economists were: Adam Smith, Karl Marx and John Maynard Keynes. Each developed economic theories that were put in to practice and affected the world’s economies for generations.

Adam smith (1723-1790), a Scottish philosopher published his famous book, the wealth of nations in 1776, the year of America’s declaration of independence in which he explained why some nations are rich while other are not. Theories of labour productivity, wealth accumulation and productivity growth were delved in to by smith, later expanded by generations of economists. Smith founded what is known as classical economics i.e. the idea that free markets can regulate themselves. The key doctrine of classical economics is that a laissez-faire attitude by government toward the marketplace will create the greatest good for the greatest number of people and generate economic growth. 17

Karl Marx (1818-1883) a German economist and political scientist looked at capitalism from a more pessimistic and revolutionary viewpoint. Marx believed that once the capitalist has set up the means of production, all value is created by the labour involved in producing. In Marx’s view, presented in his 1867 tome Das Kapital (Capital), capitalist’s profits come from exploiting labour that is underpaying workers for the value that they are actually creating. This situation of management exploiting labour underlies the class struggle that Marx saw at the heart of capitalism and he

14 Paul A Samuelson & William D Nordhaus (1998) Economics, London, McGraw-Hill 15 A. Anderton (2006) Economics, 4 th edition, Harlow, Causeway Press

16 A. Anderton (2006) Economics, 4 th edition, Harlow, Causeway Press

17 Stephen L Slavin (1988) Economics a self teaching guide, Wiley & Sons

Committee on Economics

Economic Research: Pakistan

predicted that the struggle would destroy capitalism in the end. Ultimately in Marx’s view society moves to a two-class system of a few wealthy capitalists and a mass of underpaid, underprivileged workers. Marx’s thinking had a tremendous impact on the USSR (Union of Soviet Socialist’s Republics) in the twentieth century. However it is important to note socialist centrally planned economies have proven far less efficient at producing and delivering goods and services.

John Maynard Keynes (1883-1946) British economist came up with different views from those of Karl Marx and Adam smith. Keynes argued government can play a crucial role in stimulating private sector investment. He favoured an approach of using the government’s power to spend, tax and borrow to keep the economy stable. 18 This policy was adapted in America during the great depression and in Europe after the Second World War. During the UK recession of early 1980s the conservative government did the opposite and cut government spending. However the recent recession in the western world has seen taking up the Keynes policies again.

2.2 Economic Growth

Economists define economic growth as the rate of change of productive potential over time. Productive potential is what the economy can produce when all factors of production (land and raw materials, labour, capital and entrepreneurship) are fully employed. 19

In order to understand economic growth, one must look at how Western Europe developed so rapidly after two major world wars. For example the number of deaths caused by the Second World War in Europe is estimated at about 40 million and over 30 million Europeans had transplanted or dispossessed. Most countries suffered a large fall in

GNP between 1938 and 1946. In many countries exports had dropped to almost nil, meat production declined by one third and bread output fell by 60% of pre war. Malnutrition was serious in occupied countries. 20 There was much talk of growing chaos and discontent followed by another war. This can be likened to more or less the present situation in Pakistan, where all areas of the economy are in ruin, severe power and water shortages - war raging in the northern areas and constant threat of terrorism in major cities across the country.

One of the major reasons Western Europe recovered so rapidly was thorough planning mainly by the USA but to a lesser extent Britain and Canada. During the last two years of the Second World War, the United States directed the creation of the institutions which would allow the new world system to function. These fell in to three main areas: money, trade and international disputes. The first allied conference on long-term economic problems was held in May 1943. It concentrated on food supply and led to the creation of the food and agriculture organization of the United Nations (FAO) at the end of 1944 with Britain a founding member. The desire to spare the world further armed conflicts was reflected in creation of the United Nations organisation set up in 1946. The currency problems were to be avoided in future by setting up of a world currency and payments systems in which gold reserves would be replaced by the US dollar as the basis of the value of national currencies. 21 Unlike gold, the supply of the US dollar would expand in step with the size of the American economy and consequently of the world economy of which it formed so large a part. This system was agreed at the Bretton woods conference in New Hampshire in 1944. The conference led to the establishment in 1945 of the international monetary fund (IMF), a US funded structure for international payments. IMF, which was designed to help countries with serious balance of payments deficits to achieve parity, was

20 Anthony Sutcliffe (1996) An economic & social history of western Europe since 1945, London, Longman Publishing Ltd

21 Anthony Sutcliffe (1996) An economic & social history of western Europe since 1945, London, Longman publishing ltd

18 Stephen L Slavin (1988) Economics a self teaching guide, Wiley & Sons

19 Alan Booth (2001) the British economy in the twentieth century, London, Palgrave

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Economic Research: Pakistan

intended to function for a short time only, until member countries had stabilized their accounts. More lasting was intended to be the work of the World Bank, which was set up by the conference to make development loans to third undeveloped countries. 22

Central to the development of Western Europe was the marshal plan, named after the US secretary of state, George C Marshal. This plan sought to integrate Western Europe in to a single economic area, mainly on the basis of free trade but also along US approved political lines. The plan involved the provision of $13 billion over a period of four years. Officially titled the European recovery programme (ERP) the fourteen countries had to sign agreements committing themselves to a strong production effort, expansion of their foreign trade, the maintenance of financial stability and the development of European economic cooperation.

One criterion of the success of reconstruction in Western Europe is the time it took for economic activity to return to its pre-war level. UK, France Germany Italy were all at the pre-war level in manufacturing and agriculture in 1950/51, 5 years after the war.

investments during the war yet were unlikely to attract private capital quickly enough in the post war years. The government also launched a big programme of road improvement and construction in 1955 and the M1 Britain’s first London to Birmingham motorway was built. 23 The concept of the ordered economy achieving full employment was largely the work of John Maynard Keynes, the academic economist who became an advisor to the treasury during the war. The vision of the British welfare state was based on employment and related services by William Beveridge, an academic economist and former civil servant in 1942. Departmental proposals for health services, education and town planning soon followed. Public optimism about the plans was boosted by the increasing success of the British war effort, which suggested that national planning backed by massive public expenditure could achieve goals from which all would benefit. This confidence which contrasted with the orthodox budgetary views and non interventionist policies prevailing before the war contributed to a growing electoral support for the labour party which was able to present itself not only as the party of the masses but also as the party of modernity and national progress.

Britain’s economic growth after the war depended on boosting its exports, minimising its imports together with reducing its borrowing. The Labour government maintained wartime levels of high taxation, the system of production quotas and rationing. High taxation financed the new welfare activities without heavy borrowing, consumption was kept firmly in check and rationing became even less generous then in wartime. The government gave priority to the development of the capital goods and export industries, raw materials and agriculture. Between 1946 and 1949 the British government passed legislation to nationalise power, transport coalmines, iron, and the bank of England. This was directed towards efficiency and high output than a socialist system of production. The industries chosen for nationalisation were essential to production rather than consumption. All had suffered from lack of maintenance and

France’s economic problem after the liberation was less acute than in most European countries. She was virtually self sufficient in food and many raw materials. More over French economy recovered quickly and as early as 1947 industrial production had returned to the level of 1938. The idea of national planning was hugely anticipated and widely entertained in the political and administrative circles at the end of the war. The leading civil servants led by Charles de Gaulle’s close associate Jean Monnet were especially interested in economic planning. In the late 1945 Jean Monnet brought together a small team of civil servants in two rooms at a hotel for his planning work. This intimate group of the type favoured by Jean Monnet quickly drew up an outline five year plan (the Monnet plan) taking effect from 1947 the plan was designed to create a climate for the

23 Anthony Sutcliffe (1996) An economic & social history of western Europe since 1945, London, Longman Publishing Ltd

22 D. H. Aldcroft (1993) the European economy 1914-1990 3 rd edition, London, Routledge

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confident growth of industrial production in both the private and public sectors. It emphasized investment in industries crucial to the growth of production – energy, transport, steel, cement and agricultural machinery. Its basic feature was the setting of growth targets for industrial groups over five year periods. Twenty-four modernization commission set up in 1946 and 1947 fixed the details of the targets in each sector. Civil servants, industrialist and trade unions sat in each commission. The plan produced a planning partnership between the state and the industry. The workers were not only involved in the planning but also in the execution, through the post war system of factory councils set up by de Gaulle in February 1945 as an anti-class conflict measure. The Monnet plan reflected the widespread interest in Western Europe in achieving full resource utilization. More practically however the Monnet plan can be seen as the appropriate response to the needs of an economy, which in some sectors was fully developed yet was very backward in others. French modernization was visible to all by the later 1950’s, the government had established a number of investment funds and these together with existing public resources and the aid from the marshal plan greatly eased the flow of credit with banks and the stock market providing an increasing volume of capital. 24 Sheer hard work and good leadership enabled Western Europe to progress rapidly from the destruction of the war compared to the rest of the world at the time.

As societies achieved maturity in the twentieth century, three things happened: real income per head rose to a point where a large number of persons gained a command over consumption which transcended basic food, shelter and clothing and the structure of the working force changed in ways which increased not only the proportion of urban to total population, but also the proportion of the population working in offices or in skilled factory jobs. 25 In Thomas Mann’s novel of three

generations, the first sought money; the second born to money sought social and civic position; the third born to comfort and family prestige looked to the life of music. This suggests the changing aspirations of generations as they place a low value on what they take for granted and seek new forms of satisfaction.

2.3 Monetary & Fiscal Policy

Fiscal Policy

Fiscal policy is the use of government spending and revenue collection to influence the economy. The two main instruments of fiscal policy are government spending and taxation. 26 Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:

Aggregate demand and the level of economic activity; aggregate demand is the total of all expenditures in the economy at given price.

The pattern of resource allocation;

The distribution of income.

Price level

Most governments have four major macroeconomic policy goals. These are to achieve full employment with little or no inflation in a high growth economy with external balance (current account) equilibrium. Fiscal policy can be used to achieve a wide variety of objectives. For example, it can be used to improve standards of healthcare through increased spending on the health services of a country. It can be used to make incomes less unequal by taxing the better and giving benefits to the less well off. In Pakistan the key date in the year for fiscal policy is the day of the budget which occurs in May. In the Budget the treasury minster gives a forecast of government spending and taxation in the coming financial year.

24 Anthony Sutcliffe (1996) An economic & social history of western Europe since 1945, London, Longman Publishing Ltd

25 W.W Rostow. (1990) the stages of economic growth – a non communist manifesto, 3 rd edition, Cambridge, Cambridge University Press

26 Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey, Pearson Prentice Hall.

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National expenditure is one of the three ways of calculating national income, usually measures as GDP. National expenditure is made up of four components:

1. Consumption:





households on good and services.

2. Investment: This is spending by firms and individuals on goods which will aid in production and may well accumulate wealth in the future.

3. Government Spending: This includes current spending on wages and salaries. It also includes spending by government on investment goods for example, new roads or new schools.

4. Exports minus Imports: Foreigners spend money on goods produced in the domestic economy; hence it is part of national expenditure. However, households, firms and governments also spend money on goods produced abroad.

The UK government has been responsible for between 40 and 50 % of national expenditure over the past 20 years. The main areas of national expenditure are the National Health Service (NHS), defense, education and roads. In addition the government is responsible for transferring large sums of money around the economy through its spending on social security and national insurance benefits. This is financed mainly through taxes, such as income tax and Value Added Tax (VAT).

Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve the economic objectives of price stability, full employment, a balance or surplus in the current account and economic growth. For example, to dampen inflationary pressures, the government can increase taxes and keep spending constant, to decrease the level of disposable income of individuals thus, inhibiting consumers spending power thus reducing demand pull inflation. To stimulate growth and reduce unemployment, the government can decrease income taxes and keep spending constant, to create greater incentives for the unemployed to seek jobs (as disposable income would increase), thus consumption would increase as a result of

greater employment levels, leading to a greater output, thus resulting in economic growth. 27

Monetary Policy

Monetary policy is the manipulation of monetary variables, (i.e. interest rates, the money supply and the volume of credit) to maintain a stable, growing economy with low inflation and unemployment. The main instruments of monetary policy include the rate of interest, and the money supply. 28

Rate of interest

In the UK, US, and EU, the rate of interest is not set by the governments, but is set by independent central banks, for example, since 1997, monetary policy has been controlled by the independent Bank of England. Central banks are responsible for the issue of notes and coins that are sold to the banking system and manage a country’s gold and currency reserves.

The rate of interest can be altered in order to adjust aggregate demand in the economy to ensure if it as close as it can be to the trend rate of growth. Changes in the rate of interest can affect aggregate demand in various means, such as:

Savings: Higher interest rates create incentives to save more, as savers would receive more interest on their savings (thus they would save more out of their disposable income and spend less). Therefore consumption would fall reducing aggregate demand.

The exchange rate: A fall in the rate of interest in the domestic economy would lead to less foreign savings, thus there would be less demand for the currency. As fewer visitors would buy the domestic currency thus reducing its value in the global markets of currency.

The housing market: Most houses in western economies are bought using mortgages, thus changes in the rate of

27 A. Anderton (2006) Economics, 4 th edition, Harlow, Causeway Press

A. Anderton (2006) Economics, 4 th edition, Harlow, Causeway Press


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interest would affect the demand of mortgages and in turn the housing market. Consumption and investment: Drops in the rate of interest would encourage individuals and firms to take out loans in order to consume and/or invest. Consumption and investment are components of aggregate demand thus changes in the two components would ultimately alter aggregate demand.

The money supply

The supply of money in the economy and the rate of interest are completely interlinked as the rate of interest determines the price of money, thus as the price of money decreases, economic theory would suggest an increase in the quantity of money.

However, using the interest rate to control the money supply would give an indirect short-term response. There are a variety of other ways to control the money supply in a more direct manner.

Firstly, the central bank can assign a percentage of a bank’s financial assets as reserve assets; these are kept in liquid form (for example cash) and must be held if the bank is to lend out money. If the central bank wishes to increase the money supply, the amount of money being held by the central bank in the deposit increases, thus they are able to offer more money. This technique is named open market operations.

Secondly, the central bank can sell different forms of government debt, such as bonds to the non- financial sector; if this is successful, then the money supply would decrease, as money is being transferred from the public into the central bank (money held by the central bank is not counted in the money supply). The contrary is also possible i.e. bonds can be bought back in order to decrease the money supply.

Thirdly, the government can increase the money supply by borrowing; in the UK this is known as the public sector net cash requirement (PSNCR). The money is raised in two ways, which includes borrowing from the non-banking sector and

printing money by selling government debt to the banking sector.

US Monetary Policy

The Federal Reserve System is the central bank of the United States, which oversees and regulates the commercial banking system and formulates and implements the monetary policy. The Federal Reserve has three main responsibilities:

1. Oversee and regulate banking institutions and protect the rights of consumers who utilise credit

2. Devise and implement a monetary policy for the nation in order to maintain the stability of the financial system

3. Provide financial services to certain sectors of the economy, such as the public sector, financial institutes and the US government

The Federal Open Market Committee (FOMC) is the key policymaking body in the Federal Reserve System and makes the key decisions regarding the bank’s open market operations. The FOMC has 12 members who meet a minimum of 4 times a year in Washington and at each meeting the committee member’s vote for the ideal long-run policy objective for growth in the money supply.

2.4 Types of Economic Systems

Around the world different communities, nations and regions have different economic systems, of which some of the most obvious examples are:

1) Traditional economic systems

2) Pure market systems

3) Command and mixed systems

1) Traditional Economic Systems: Refer to systems that are based on tradition where children do the same things their parents did and follow their example. Thus, boys would have the same occupation as their fathers and this would involve farming, hunting, artisanship, etc. Girls on the other

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hand, would get involved in the occupation of their mothers, which would typically involve cooking, cleaning, sewing, fieldwork, housework, etc. Traditional systems of production do not change significantly overtime and the pattern of production stays the same more or less with the occasional new invention. A clear definition of private property may not exist in a traditional system unlike other economic systems. Accordingly, in a traditional system a lot of property is common property, such as common grazing lands, fishing grounds, agricultural plots, etc. In addition, the allocations of certain roles, which include production, within the members of a society depend on long established traditions. This would mean that members of society would rarely change their allocated role in the economy, even after generations. Thus, tradition and not resources answered the basic economic questions of what to produce, how to produce and how to distribute. Prime examples of the traditionalistic system include remote societies found in such places as the Canadian arctic, the Himalayas, the Amazon jungle and isolated parts of Papua New Guinea. 29

2) Pure Market System: In this type of market, there are large numbers of consumers who decide what goods and services to buy and at what quantities. In addition, assumptions are made that there are a large number of firms who will cater to the demand of consumers by producing the products they want and buying the necessary inputs accordingly. In a pure market system, the individual decisions of both buyers and sellers determine the allocation of resources and the distribution of output. The central characteristics of a pure market system are freedom of choice, private ownership and competition. These decisions are based on the forces of demand and supply. Thus, while the market answers the basic economic questions the state is relegated to play a role in maintaining law and order and external defence. Pure market systems have never really existed in practice.

3) Command System: Also called a centrally planned system, is an extreme on the opposite side

of the spectrum. In a command system, a central authority or central planning committee would make all the decisions regarding the basic economic questions of what to produce, how to produce and distribute. The market has no influence in the allocation of resources and state owns or heavily regulates the use of most if not all property and other production resources. Private individuals and the forces of demand and supply will not influence the decision process. Instead, a central planning committee will oversee all the production activities and income distribution. Thus, while pure market economies rely on individual decisions and private property, command economies rely on collective decision-making and collective ownership or resources. 30 Central planning was a strong trend during the 20 th century and at one point, almost one-third of the population lived under a centrally planned system to deal with basic economic questions. Prime exampled included the former Soviet Union, Cuba, North Korea and China. However the system is no longer in wide spread use and many countries begun opting for a mixed system and enacted reforms to create a market- orientated economy.

While the main theories of economic systems revolve around traditional, pure market or centrally planned systems, economies in the real world are a hybrid of market, traditional and centrally planned economies leading to Mixed economies.

In a Mixed Economy, both the markets and governments have significant influence on the economic decisions of resource allocation and income distribution. The level of mixture of free market policies and government control differs from economy to economy. For example the economies of the US and UK are more liberal than the economies of France or China. In addition, this mixture is not restricted to a general economy but may also differ from sectors, industries, regions, etc. Thus the defence sector or industry in many countries are heavily controlled or monitored by governments while commercial industries of information and technology are more laissez-faire.

30 Lipsay, Richard and Chrystal, Alex. (2004) Economics - 10th edition. NewYork, Oxford University Press

29 Truett, Lila and Truett, Dale (1987) Economics;. London, Times Mirror/Mosby College

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Governments in mixed economies will seek to achieve certain goals through intervention in the markets, with policy tools such as the monitory and fiscal policies.

rigid cultural guidelines. 31 Innovation is nearly impossible since people rarely change their occupations and methods of production remain the same for generations due to tradition and culture.

Economic Systems Advantages and Disadvantages

Advantages of a pure market system

Advantages of a traditional system

Traditional systems work well for isolated communities and ensure that resource allocation and critical jobs are distributed and maintained. This sort of system works best for a small community that is reliant on a limited number of critical jobs. In many tribal systems, parents and elders teach the children and there is no sort of formal education system. Thus, it is practical for children to follow on the footsteps of their parents.

Another important advantage of this system is that in most cases, it reduces the problem of over consumption and surpluses since the production of goods and services are only used when needed. Traditional systems have most often benefited small tribes and communities such as those found in Canadian arctic, the Himalayas, the Amazon jungle and isolated parts of Papua New Guinea allowing them to function in extreme and isolated conditions.

Disadvantages of a traditional system

A pure market system drew its strength on freedom of choice and enterprise, Private ownership of resources and competition. These strengths allow a pure market system to foster an environment of continuous innovation and the highest possible levels of efficiency in terms of resource allocation and output. The forces of demand and supply are influenced by price, which allow pure market system to adapt to changes in demand and supply efficiently thus minimising waste and poor management. A pure market profit motivated system presents a strong incentive for individuals to work hard and for firms to innovate and increase the quality of goods at the same time. Hence in terms of quality and prices, goods produced in market economies surpass those produced in command and traditional systems. 32

Disadvantages of a pure market system

Pure market systems also suffer from significant drawbacks, referred to as market failures. The following highlight some of the main market failures:

Traditional economic systems may help societies function but one of their biggest flaws is that they inhibit change and thus keep a society stagnated socially and economically. For example, the Masai tribes of Africa have depended on a traditional economy based on cattle rising for centuries. Everyone’s role is determined based on his or her ownership and tending of cattle. Thus, cattle are the symbol of wealth and every family strives to maximise the size of its herd. However, this also means as the size of the tribes increase so does the size of the herds. This in turn has made pasture lands into deserts due to overgrazing, creating very harsh conditions for the Masai and their herds. Even with the obvious implications of a wealth system based on cattle, the tribe still adheres to its

- Discrepancy between social and private benefits and costs: In a pure market system firms and individuals make their decisions based on private costs and benefits, and almost as always ignore the total societal benefits and costs.

- Monopolization: Contrary to the competitive spirit of a pure market system, there are no inherent characteristics within a pure market system to prevent the formation of monopolies or the ability for firms and labour to obtain monopolistic

31 Truett, Lila and Truett, Dale (1987) Economics;. London, Times Mirror/Mosby College

Lipsay, Richard and Chrystal, Alex. (2004) Economics - 10th edition. NewYork, Oxford University Press


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power in order to further their own interests at the expense of the interests of society.

- Distribution of income: Under a pure market system, individuals receive their income based on the ownership and use of their productive resources. However, not all individuals are born with the same talents or have the same amount of resources at their disposal. Based on this principle a pure market system would imply that individuals who have no talents or productive resources should receive no income.

- Specialisation and alienation: A free market economy seeks to encourage specialisation and the division of labour however this results in monotonous and repetitive work that could seriously affect the morale and long-term productivity of labour.

A pure market system being a theoretical extreme

has no real world examples since governments will

always intervene to address these flaws. The credit crunch of 2007/08 demonstrates succinctly the need for government role and intervention in order

to create the necessary safeguards to protect all its

citizens from market failures.

Advantages of a command system

The advantages of a command system, as envisioned by Karl Marx and others were that if the government plans all of the economic activity it would create an equal and just distribution of output amongst its citizens. Accordingly, citizens were guaranteed jobs in industries regardless of their efficiency and they were given state sponsored goods and services, holidays, pensions, etc.

Disadvantages of a command system










- Lack of co-ordination: Central planners had to co-ordinate all the economic decisions of production, investment, trade and consumption by both producers and consumers. This needed a vast amount of information and predictions that needed to be collected and processed which proved to be impossible, resulting in bottlenecks in production throughout the economy.

- Failure of quality control: Factories were more interested in meeting their quota requirements than quality control since it was meeting the quotas that brought rewards and failing to do so brought about punishments from the central planning authority. Thus, managers used whatever methods possible, including improper production methods and materials to satisfy their quota requirements instead of meeting quality standards. This resulted in the production of goods of inferior quality.

- Misplaced incentives: One of the best features of a command economy was complete job security, but this also crippled industries. As there were no incentives to work hard and no penalty for sluggish work, which subsequently meant many industries operated below optimum levels.

Thus the advantages of command economies were the equitable distribution of national output but at the cost of controlling each element of the economy. Nations such as the former Soviet Union, China, Cuba heavily embraced and were the chief advocates of the command economic system until its systematic failure and rejection in the late 20 th century. 33

While command systems had grand ideals of equality and fairness, the system had inherent flaws and ran into a number of practical difficulties.

33 Lipsay, Richard and Chrystal, Alex. (2004) Economics - 10th edition. NewYork, Oxford University Press

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The advantages of the mixed system

A mixed economy seeks to combine the advantages of both systems. Thus a mixed system will benefit from free market principles such as freedom of choice and enterprise, private ownership of resources and competition while also addressing the flaws of a pure market system by intervening in markets to achieve goals of economic freedom,

equitable distribution of income, full employment with price stability and economic growth. Thus, in a mixed system the market and the government would be significant factors. The market would address the flaws of the government while the government would address market failures. The

mix of government and market systems ultimately

decide the effectiveness of a mixed economy.

Disadvantages of a mixed system

The main problem with mixed systems is the

chance of imbalance being created where either

the market or the government control more of the

running of the economy. The recent credit crunch in the western world is a prime example of government’s lax attitude towards interferences, which consequently lead to the near melt down of many economies around the world. Moreover it is often the vulnerable elements of society that are

put at risk and suffer the most.

2.5 The Parameters of Economic Growth

The main parameters of economic growth are the

Gross Domestic Product (GDP) and Gross National

Income (GNI). 34

The GDP refers to the value of total output actually

produced in the whole economy over a period, usually a year. The calculation of the GDP is done

by either adding up total spending (GDP spending based) or adding up total income (GDP income based).

34 Lipsay, Richard and Chrystal, Alex. (2004) Economics - 10th edition. NewYork, Oxford University Press











Private consumption: This refers to spending by individuals on goods and services, produced and sold to the final users during the year. This excludes the purchasing of new houses since it is considered as investment, while including any final consumption spending of non-profit making institutions serving households.


Government consumption: This refers to all spending on goods and services made by the government over the year. Government spending is typically valued based on the cost rather than the market value. This is because some services provided by the government cannot be valued with a specific market price. Importantly, in the calculation of GDP only current spending on goods and services will be into account. Thus, expenditure on transfer payments, which refer to government spending not made in return for currently produced goods and services will not be included in the calculation of GDP.


Investment: Refers to future spending on production goods, subdivided into three categories:

3.1 Changes in inventories: These are the stocks of finished and unfinished output held by firms. The main purpose of input stocks is to ensure a smooth production if there is short- term disruption in the supply of inputs, while a stock of outputs would help firm meet their output commitments even if there is a short- term fluctuation in the price of output sales. Since these stocks are an investment, an accumulation of these stocks are considered to be an increase in current investment while a reduction in stocks will count as a decrease in current investment. In addition, these stocks are accounted for based on their value on the market rather than their cost to firms so far.

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This is because expenditure-based measure of GDP includes the value of what final spending on these goods would be, assuming they been sold, even if that is not the case.

3.2 Fixed capital formation: Capital goods refer to goods manufactured in order to aid the production process. Thus, capital goods may include computers, machines, factories, etc. Accordingly, an increase in capital goods would be an increase in investment. This also called a fixed investment or fixed capital formulation.

3.3 Net accumulation of valuables: Some goods are neither consumed nor used in the production process. These goods are valued for their intrinsic beauty, sentimental value or for their expected appreciation in value. Examples of such goods include art, jewellery and music records. The net acquisitions of these valuables are included in the national accounts as a form investment.

4.0 Net exports: Refer to the difference between total exports and total imports. This is an important factor since the GDP measures the amount of goods and services produced within

a given country. Only a certain amount of the

spending value on imported goods or materials can be accounted by the importing country while the rest will be accounted by the exporting country. Therefore, in order to determine the spending value on domestic production activities, the GDP should exclude the value of imports since spending on

imported goods and services will contribute to

a foreign economy’s GDP. The value of exports

will be included since even though the goods will not be consumed in the domestic economy itself, the payments for the exported goods by foreign economies will contribute towards the

domestic economy’s GDP.

When calculating the GDP, an important difference arises in terms of the price of goods and services. 35 This is because the price paid for many goods and services by consumers may not equal the sales revenues of producers. This is especially true when considering taxes and subsidies. With the imposition of taxes, producers receive less than what consumers pay while the imposition of subsidies will mean producers receive more than consumers pay. Accordingly, basic prices will refer to the prices of products as received by producers. While market prices refer to the prices that paid by consumers. Since all spending categories are calculated using market prices, GDP will also be calculated using market prices, the price paid by consumers and not that received by producers.

GDP based on income refers to adding up incomes of owners of resource inputs such as land, labour, capital, etc. Accordingly, national income is determined by three main factors:


Operating Surplus: Business income after labour and material costs but before paying direct taxes, levied on a firm’s income (profits). Operating surpluses may also include the financial surplus of organizations other than companies, such as universities. Once a firm earns profits it will distribute a portion among its shareholders while saving the rest. Profits that are both distributed and undistributed are included in the calculation of GDP.


Mixed incomes: Certain groups and individuals have mixed incomes since it is not clear what proportion of their income is equal to their wage and which proportion is equal to the profit of a business. Examples would include consultants who work on short-term contracts, the self-employed who run sole trader businesses and partnerships where the partners of a business own the business as well.

35 Lipsay, Richard and Chrystal, Alex. (2004) Economics - 10th edition. NewYork, Oxford University Press

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3.0 Compensation to workers: This refers to the gross wages of labour. Wages include home pay, taxes and pension fund contributions.

GNI refers to the total income earned by the country. In contrast GDP only refers to the output and the income earned in the country.

2.6 Privatization, Regulation and Deregulation

Since the fall of the Soviet Union, there has been a growing trend in both the developed and developing economies to reduce government involvement in a country’s economy.

Arguments for privatisation and deregulation

the growth in the recent decades. Innovation in terms of new products and new productions methods created in oligopolistic market structures improve production methods and raise the quality of life via better quality goods at relatively cheaper prices. Examples include the automobile, medical and telecommunications industries. Many governments have come to realize that as long as they can keep firms in an oligopolistic market competing instead of co-operating then there is no need to intervene and regulate these industries. 36

The worldwide enthusiasm for privatisation and deregulation stems from the modern belief that private companies operating in free markets are far more efficient and innovative than governments.

Notions of nationalised industries being superior to private firms in areas of efficiency, productivity growth, and industrial relations, largely proved inaccurate judging by the experience of the ex-communist countries. Instead, nationalised industries became notorious for waste, lack of innovation and rising costs that heavily burdens the taxpayers.

Falling logistical costs and the boom in information communication systems such as the Internet have exposed domestic industries to unprecedented levels of international competition. This puts pressure on domestic firms to become more flexible and cost effective, which in turn puts pressure on governments to reduce regulation and increase privatisation. In addition, international competition reduces the concern over high national concentration ratios.

In many cases, regulatory bodies sometimes had the effect of reducing rather than increasing competition.

However, some would argue that government regulation and nationalization is sometimes necessary as rules and regulations are potent tools for addressing market failures.

Accordingly, some of the most compelling arguments for regulation and nationalization are as follows:

Social stability: Governments tend to nationalize failing firms in order to ensure secure employment. They might nationalise entire industries in order to protect jobs from international competition.

Monopoly power: A fundamental goal of regulatory commissions and government laws would be to promote competition among firms. However perfect competition could result in higher per unit costs of production. This is the reason why some industries within an economy maintain a natural monopoly. Natural monopolies exist when there are large economies of scale and the cheapest way to produce the good or service would be

In spite of being inefficient, oligopolistic market structures have provided much of

36 Truett, Lila and Truett, Dale (1987) Economics;. London, Times Mirror/Mosby College

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to have it produced by one firm. Public utilities would be an example of a natural monopoly. In return for allowing the existence of natural monopolies, governments will regulate the prices by establishing fair return pricing systems or price ceilings.

Externalities: Some production activities result in social costs and social benefits. However, the price of a good or service does not always reflect the social costs and benefits. For example, while some production facilities may create pollution that might affect people in the adjoining area, the health or cleaning costs of that pollution will not be reflected in the price of that good. Accordingly, governments will have to intervene and create laws or tax polluting firms to force them to behave responsibly. While governments will try to regulate negative externalities, they will also try to encourage goods and services with positive externalities such as vaccinations and education. Tools to encourage positive externalities include tax breaks, subsidies, etc.

Law and order: Other reasons for regulation include preventing financial fraud and protecting consumers and stakeholders. Lax regulation in economic systems could result in fraud, dangerous production methods, and unfair financial practices, as was so evident in the recent economic downturn. Thus, governments need to oversee financial transactions, production methods (especially for food and drugs), accounting practices etc. 37

37 Lipsay, Richard and Chrystal, Alex. (2004) Economics - 10th edition. NewYork, Oxford University Press

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Chapter# 3:

Economies & Systems

4.1% recorded in other developing countries, which adhered to a strategy of ISI during the same period. Also during this period the real per capita income of these major Asian NICs grew by 6.9% in comparison to 1.6% recorded in other developing countries.

3.1 Key factors behind Newly Industrialised countries in South-East Asia

The Newly Industrialised Countries (NICs) of Asia refer to a group of countries in Asia, which experienced high levels of economic growth and development especially during the latter half of the 20 th century. Major Asian NICs, also known as The Asian Tigers, include Singapore, Taiwan, South Korea, and Hong Kong. 38 Recent additions to the list of NICs in Asia include Malaysia, China and Indonesia. The prime reason for their above average economic growth has been the Export Oriented Industries (EOI) and heavy industrialisation. That in turn raised the per-capita income and general living standards of the countries in question. The development strategy based on EOI was a sharp contrast to many other developing countries of the time, which were creating a strategy based on Import Substitution Industries (ISI). All the Asian tigers and some of the recent NICs share a certain general characteristics concerning their economic and political structures. A study of these characteristics is as follows:

Development performance

According to the World Development report, during the period of 1963-1973, the GDP of the major Asian NICs grew at 9.5% per year. This growth rate was much higher than average GDP growth rate of

During the period of 1973-1985, the GDP of major NICs grew at 7.7% while other developing countries grew at 2.5%. In addition to these growth rates, real per capita income grew by 5.9% compared to a negative growth rate of -0.1 recorded in other developing countries. These statistics further underscored the resilience EOI development models adopted by these Asian NICs. 39

Other Asian economies such as Malaysia, Indonesia and China also recorded above-average economic growth rates, which put them within the top twenty fastest growing economies during the period of 1965-1985. However, large populations meant real-capita rates were much lower than the major Asian NICs.

As mention earlier, one reason for the success of these Asian NICs was the adoption of an EOI, which were inherently market oriented policies that helped reduce costs and increase efficiency.

In contrast, the ISI strategy adopted by many other Asian economies complimented a centrally planned economy. To maintain an ISI strategy, countries had to adopt various controls on their economies including multiple exchange rates, tariffs, exchange and price controls, licenses and quotas. These controls eventually resulted in a suppression of economic growth, social costs, and economic inefficiency. Furthermore, ISI policies resulted in an underutilization of surplus labour and the perpetuation of poverty and unemployment.

38 The Foundations of Rapid Economic Growth: The Case of the Four Tigers. Gulati, Umesh C. 2, s.l. :

American Journal of Economics and Sociology, Inc., 1992, Vol. 51.

39 Central Intelligence Agency. The World Factbook. (2009) : Directorate of Intelligence

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Under colonialism

Many of the Asian NICs were ruled at some point by colonial powers. The colonial powers economic policies were a significant factor with regards to Asian NICs.

Both Korea and Taiwan were under Japanese rule for most part of the early 20 th century. Japanese firms invested heavily in the agricultural sector of Korea and Taiwan and installed Japanese management to oversee the administration and development of the sector. Over time the Japanese development strategy evolved into a combination of state organization, central banking, Zaibatsu and strong military force. Prior to world war two, the Japanese began large-scale infrastructure projects in its colonies to prepare them for heavy industrialization. 40 As a result, industrial growth in Korea during1910-1940 was recorded at 10% per year. Mining and manufacturing grew by 244% during the period of 1929-1941. This in turn helped increase the trade volume from 380 million yen to 4,175 million yen during the period of 1929-1941. As a percentage of GDP, trade increased from 1.8% to 53.5%. In Taiwan industrial growth grew by 6% per year during 1912-1940 - while factory jobs rose from 60,000 to 256,000.

Singapore was an important trade center under the British Empire occupying a strategically geographically advantageous position. Thus, Singapore was exposed to a very early tradition of trade. In fact during the period of 1871-1902, there was an increase in trade growth from $67 million to $431 million. By 1930 Singapore became a major world centre for the petroleum industry as well. The tradition of trade and EOI has been almost a constant feature of the Singaporean economy except for a brief period of ISI during 1963-1965. 41

40 The Foundations of Rapid Economic Growth: The Case of the Four Tigers. Gulati, Umesh C. 2, s.l. :

American Journal of Economics and Sociology, Inc., 1992, Vol. 51

41 The Foundations of Rapid Economic Growth: The Case of the Four Tigers. Gulati, Umesh C. 2, s.l. :

American Journal of Economics and Sociology, Inc., 1992, Vol. 51

Role of the state

The role of the state has been crucial in the development of Asian NICs. Accordingly, some of the many initiatives of these governments are as follows:






industrial development.


Encouraging and developing a strong tradition of export led growth.

Devoting resources to ensure high levels of education

Helping to create and maintain an ethnic and social homogeneity

Creating an environment that encouraged savings and investment

With regards to Korea and Taiwan, the governments were deeply influential in the modernization of their economies. However, this modernization especially during the colonial period was a blend of authoritarianism and capitalism. Accordingly, the state maintained an authoritarian nature with regards to politics, but used capitalistic principles with regards to the economy. Thus, an ideology of familial hierarchy and filial loyalty was encouraged and the direction of the economies was subject to explicit planning but the allocation of resources was subject to market determination.

Singapore also featured a highly interventionist strategy. This strategy was centered on providing fiscal and monetary incentives to firms regardless of their country of origin. Thus, Singapore was able to attract large amounts of foreign capital and foreign enterprises. The state also took an active role in hosting vital business enterprises using state resources. This sort of positive engagement made Singapore one of the friendliest countries to operate a business in.

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America Aid

Another important factor that played heavily in the EOI strategy of the Asian NICs was US foreign aid. Based on similar principles to the Marshall plan, American aid to South Korea totaled $13 billion while aid to Taiwan totaled $5.6 billion during the period of 1945-1978. The aid was used to finance an import surplus and capital formulation until the mid 1960s. 42

American aid also helped build up the military of South Korea and Taiwan. This in turn helped bring about discipline and education to the vast majority of the population, resulting in relatively strong human capital. Education and discipline also helped to create a new generation of administrators and bureaucrats for state enterprises that were highly qualified and efficient. American aid was also used as a tool to coax these nations to open their markets and switch to EOI. The US used its influence and hegemony in the region to force these countries to switch from ISI to EOI. To help facilitate open market reforms in these countries, the US opened its markets without demanding reciprocity initially in an effort to highlight the value of free trade and economic welfare of open market polices.

Politico-Strategic factors

There are a few general similarities between the various social and political characteristics of the different Asian NICs. One of the main characteristics is the complete political insulation, which provided the governments of these NICs with sufficient freedom to deal with, or to contain, rent- seeking preferences of bureaucrats. Secondly, the timely land reforms in countries such as Korea and

42 The Foundations of Rapid Economic Growth: The Case of the Four Tigers. Gulati, Umesh C. 2, s.l. :

American Journal of Economics and Sociology, Inc., 1992, Vol. 51

Taiwan allowed governments to eliminate a potential source of opposition to industrial initiatives. Thirdly, the liquidation or silencing of opposition groups in countries such as Korea, Taiwan and Singapore. Thus, many of the Asian NICs were only able to fully implement EOI strategies after complete consolidation of power and insulation from opposition.

Another important feature was the insulation from labour unions. Thus, management was given vast amount of powers with regards to labour especially when it came to recruitment, dismissal, transfer and promotion. For example, South Korea introduced various repressive measures to control trade union activities and made strikes illegal. In Singapore, after the defeat of the Barisan Socialist party, union leaders were jailed and union deregistered. All political activities of the unions were also prohibited.


The critical factor for economic growth of these Asian NICs has been the developmentalist state, which has insulated itself from domestic pressure through political authoritarianism and used market mechanisms to achieve its development goals. Accordingly, the developmentalist state draws its legitimacy from high-speed growth and job opportunities. Its commitment and capacity to implement development strategies was propelled by two preconditions: Firstly, political closure and secondly, economic institutional consolidation. Apart from the direct influence of the state, the history of these countries with regards to colonialism and American influence in the region during the cold war, have all paved the way for these NICs to adopt strong EOI strategies and record high growth and development levels.

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3.2 Key Economic Drivers of Nordic Countries

Some of the features of socialist economies have developed in the western capitalistic economies. This is not due to ideological reasons but governments have taken active responsibility for maintaining an adequate standard of living for their citizens.









Significant amounts of government intervention and planning in the economy.

Nationalisation of industries especially those that are declining and that might fail under private ownership.

A comprehensive welfare state with an emphasis

on transfers to households and publicly provided social services financed by high taxes.

A lot of public and/or private spending on

investment in human capital, including child care and education as well as research and development


A set of labour market institutions that include strong labour unions and employer associations, significant elements of wage coordination, relatively generous unemployment benefits and a prominent role for active labour market policies.

The four Nordic countries consist of Denmark, Finland, Norway and Sweden. These fully scaled welfare states include a mixed economy with welfare programmes based upon universalistic criteria. According to the Musgrave distinction between the three branches of government, the following are some of the main policy commitments made in the Scandinavian economic model: 43

43 Torben M. Andersen, Bengt Holmström, Seppo Honkapohja (2007) . THE NORDIC MODEL - Embracing globalization and sharing risks, Yliopistopaino, Helsinki , Taloustieto Oy

The allocative branch: Allocation of approximately 25% of GDP to a number of services that is either provided at subsidised rates or free. These include health care, education, social services, government agencies and infrastructure. The local government, which includes primary and secondary communes, is responsible for distributing these services.

The redistributive branch: Redistribution in terms of generous transfer programmes, including pensions, child allowances, unemployment and sickness benefits. The level of compensation ranges from 75 to 100 per cent, depending on the programme, the country and the time-period.

The stabilisation branch: Incentives or programmes aimed at creating full employment. These programs include public works, worker detrainment programmes. Macroeconomic regimes used to be orthodox Keynesianism economic policies but currently suppressing inflation gets more attention.

The Scandinavian model implies that the government and its duties are extensive in all three branches of the government. Accordingly, Nordic countries have the highest level of public expenditure and the largest number of public sector employees in the Organization for Economic Co-operation and Development (OECD) countries in comparison to the private sector.

While Scandinavia has suffered from low productivity and economic growth in the 1970s as well as severe financial crises in the early 1990s, it has shown strong economic flexibility and capacity for structural change. Currently Nordic countries are some of the most innovative and technologically advanced countries in the world in addition to having open financial markets, a stable system of corporate governance, low rates of unemployment and macroeconomic stability.

There are three broad categories for the factors of economic growth based on the Nordic model: 44

44 Torben M. Andersen, Bengt Holmström, Seppo Honkapohja (2007) . THE NORDIC MODEL - Embracing globalization and sharing risks, Yliopistopaino, Helsinki , Taloustieto Oy

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Exogenous factors such as geographical location, climate, natural resources, culture.

Institutional factors such as the economic system, political freedom, a highly established legal system and rule of law, high literacy and health standards.

Direct results of economic policies such as free trade and factor mobility, a tax system favourable to labour supply, favourable entrepreneurship, solid infrastructure, strong transport and communication facilities.

While the first and second factors play a part in the Nordic economic prosperity, it is the third factor that is most important. Favourable economic growth and relatively free trade policies along with specialization has long been a characteristic of the Nordic countries. Furthermore, labour unions, while politically influential have not been opposed to government policies, nor have they resisted the introduction of new technologies, productivity improvements and other structural changes in the economy, which in some cases have resulted in the displacement of labour. Public spending in the Nordic countries is mostly on childcare, education, infrastructure and labour. Thus, the spending itself offsets part of the negative effect of high rates of taxes levied on citizens. This along with a strong government sector that is both efficient and accountable has created a viable public sector. These factors are further highlighted below:

Employment and Productivity: Nordic countries feature a balance between high productivity and high employment. Average working hours in Nordic countries are lower than countries like Spain and Portugal but productivity is higher. In the case of other continental countries, Nordic countries may have a comparatively less productive worker force but higher employment rates. Nordic countries also feature a high rate of labour force participation of women. These factors allow Nordic countries to achieve a high level of GDP per capita. However, disposable income and private consumption per capita are low in Nordic countries, since the public

sector absorbs a large fraction of the income generated in the economy. 45

Growth and Technology: The growth performance of the Nordic economies has been closely associated with the increased use of new technologies. Nordic countries have consistently shown a willingness to participate and adopt Information and communication technology (IT) developments. Nordic countries were some of the first to adopt new IT and had high shares of IT capital in comparison to most countries in the 1990s. Since then, Nordic countries have made significant contributions to IT growth.

Nordic countries top the league terms of expenditure on IT as a share of GDP and the number of computers per 1000 people, According to the World Economic Forum, Sweden occupies the first position, Finland 2nd and Denmark the 4 th position. As of 2004, the share of IT in total industrial production in Finland and Sweden was 11% and 7% respectively, while its role in Denmark and the rest of Europe is modestly significant.

Education: Nordic countries invest heavily in education and children in these countries spend comparatively more years in education than many other OECD countries. In terms of expenditure on education, Denmark and Sweden spend between 4- 5% of GDP on education, while Finland spends between 3.5%-4% of GDP.

Regulatory reforms: The degree of competition between firms in an economy is an important element in the Total Factor Production (TFP). One way of public policy to influence competition is thorough regulatory reforms. Accordingly, a less regulated economy will result in the establishment of more firms leading to higher levels of competition. Another result of a less regulated economy is higher investment levels of firms. Nordic countries have some of the least regulated economies within the OECD.

Promoting innovations and facilitating start-ups:

The two main indicators used to measure

45 Ersson, Jan Erik Lane and Svante. Comparative political Economy-. s.l. : Pinter Pub Ltd.

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innovative activities and start-ups of new production that are relevant for long-term growth are Venture Capital (VC) and financing and investment in R&D. In terms of VC, Nordic countries are well ahead of the rest of Europe. The same is true for the share of investment that goes into different forms of high-technology activities. In terms of R&D spending as a share of GDP, Nordics spend between 2.5%-3.5% of GDP, compared to approximately 2% spent in the EU15 or the US. 46

In conclusion, a number of observations can be derived concerning the economic growth in Nordic countries. Firstly, information technology played a significant role in the Nordic economies, a result of the high levels of early investment and continued enthusiasm in IT developments. Secondly, the importance of technological changes was recognised and adapted to especially in Finland and Sweden. Thirdly, there is a significant variation in the growth rates for conventional capital, while Denmark and Sweden have had growth in conventional capital; it has played almost no part in the rapid growth of Finland during the latter half of the 1990s. In the case of IT and Non-IT capital services, Nordic countries invested heavily during the IT boom of the nineties.

46 Torben M. Andersen, Bengt Holmström, Seppo Honkapohja (2007) . THE NORDIC MODEL - Embracing globalization and sharing risks, Yliopistopaino, Helsinki , Taloustieto Oy

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3.3 Venezuelan economy

The Venezuelan economy has recently featured a vast nationalisation drive under its president Hugo Chavez. As of 2009, Venezuela’s GDP based on Public Private Partnership was $353.5 billion following a contraction of almost 2% of GDP. However Inflation currently stands at 27% of GDP and is expected to further increase to 35%-40%. A significant factor of growth in the Venezuelan economy is oil, as of 2009 Venezuela had 99.38 billion bbl worth of proven oil reserves. Venezuela is also the 10 th largest producer of oil and the 10 th largest exporter of oil in the world. Oil accounts for around 30% of GDP, 90% of exports and 50% of fiscal income. Apart from oil, Venezuela is also a significant producer of natural gas. 47

during this time. Firstly, the long-run growth performance of the economy based on the centralized industrial strategy was becoming increasingly weaker. In the period of 1973-88, the GDP per capita decreased by 15%. Secondly, the fall in oil exports resulted in the decrease of resources used for patronage and this induced several actors such as labour unions, businesses to reduce their loyalty to the party system and demand for structural changes. Real exports per capita during period of 1950-80 averaged US$1550 but this decreased to US$1150 during the period of 1980- 90. Along with this trend, oil prices collapsed by 50% in 1986. Furthermore, oil exports per capita plummeting to an annual average of less than US$600 in the period of 1968-88. This sudden dip in oil prices and its resulting consequences highlighted the vulnerabilities of oil dependent exports. 48

The Venezuelan economy prior to 1998

Since the creation of a democratic system in Venezuela in 1958, the historical mechanism of economic development was a centralized state monitored system run by the executive and brokered by the political parties.

During the course of the decades Venezuela developed a string of serious economic problems. The problems reached a peak during the Lusinchi administration (1968-88) with a balance of payments crisis in 1988. The Lusinchi government featured a populist macro-management with price controls, multiple exchange rate regimes, that resulted in wide spread corruption and distortions. In three years, the fiscal deficit averaged 7.6% of GDP. In 1988, inflation reached 30% and the current account deficit had accumulated to US$6.2 billion. Apart from these economic problems and the balance of payments crisis there were also various political problems that plagued Venezuela

The economic problems of the Venezuelan economy prompted the next government led by Carlos Andres Perez to pursue ambitious liberalization reforms in Latin America. The liberalization plan known as the "great turnaround" included the unification and massive devaluation of the exchange rate, trade liberalization, privatization and financial deregulation, including freeing of interest rates, elimination of nearly all restrictions on foreign investment, and the introduction of tax reforms, including the introduction of value-added taxes.

The full implementation of the trade liberalization reforms was a remarkable political achievement. However, per capita GDP declined by 2.7% during the liberalization period (1990-1998). In addition, the manufacturing growth declined from annual average of 4.3% during 1980-90 to 1.5% during 1990-98. While non-oil growth did increase, -0.1 during 1980-90 to 2.3% during 1990-98 it was still lower that the previous 3 decades and collapsed again to -1.9% during 1998-2002. In addition, despite the fact that capitalist surplus appropriation

47 Economic Liberalization, Political Instability and State Capacity in Venezeuela. John, Jonathan Di. s.l. : Sage Publications, Ltd., 2005, Vol. 26.

48 Central Intelligence Agency. The World Factbook. (2009) s.l. : Directorate of Intelligence

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and rents were increasing, private sector investment rates declined during the 1990s. Capital flight was nearly the same as the accumulated surplus in the current account balance of payments (US$15 billion) in the same period. The liberalization reforms exposed a significant weakness concerning the inability of the state to regulate the banking system. As Venezuela experienced major collapse in the banking sector, the lack of supervisory and regulatory mechanisms, along with blatant corruption and theft of government bailout funds by bankers (estimated at close to US$ 7 billion) in the form of capital flight led to large-scale bank closures. In addition, the government had to nationalize many of the economy's largest commercial banks in 1994 and 1995. The cost of the bailout was equal to 18% of the GDP and recorded as the fifth most severe banking crisis in the world during the period of 1975-95. Moreover the liberalization program created wide spread political instability. This instability resulted in the riots of 1989 that required the government to order the military to intervene. This also prompted Hugo Chavez, a Lt Colonel to launch an unsuccessful military coup in 1992. 49

Venezuela under Hugo Chavez

Before Chavez assumed office, he made a number of populist declarations. Amongst his various pledges, he promised to double the minimum wage to 3000 Bolivars per day and ending reliance on foreign loans. In addition he also promised to make Latin America a powerful player on the world stage.

Populist initiatives:

Minimum Wage: Chavez and his political declarations appealed to a majority of Venezuelans

49 The Chávez Phenomenon: Political Change in Venezuela. Danopoulos, Ronald D. Sylvia and Constantine P. s.l. : Taylor & Francis, Ltd., 2003, Vol. 24.

who were mired in poverty despite being the third largest oil exporter to the US. Early in his term in office he raised the minimum wage, the salaries of government employees and teachers by 20%. To further appeal to his core base of supporters, he paced a tax on rents, which appealed to the poor and increased the government revenue.

Land Reform and Agriculture: Chavez also envisioned a program of relocation that he hoped to reinvigorate the agricultural sector of the country. The program aimed to relocate the slum dwellers to the abandoned factory towns in the interior of the country with government assistance regarding housing and infrastructure. However, critics claim that the program failed to achieve the desired out-migration from the cities and the funds could have been used to renovate the oil production infrastructure. Another Chavez imitative with regards to land reform was a tax on unused land. This tax was aimed at forcing large landholders (those with an excess of 5000 hectares) who controlled much of the arable land to sell their land or allow the government to carry out its land reform programme. The policy is aimed to increase agricultural production but is very different from the US and EU policies where farmers are compensated for over production by government.

Other: In addition to these initiatives, Chavez also set up a Value Added Tax (VAT) to help stem the growing deficits. 50

3.4 Poverty Reduction Initiations

Chavez has extensively used the revenues of the Petróleos de Venezuela, S.A (PDVSA) to mobilize his social programs to help the vast poor segments of

50 Daniel, Frank Jack. (2009) FACTBOX:

Venezuela's nationalizations under Hugo Chavez., Reuters

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the population. Social programmes such as free schooling, medical care and infrastructure improvements have all helped reduce poverty by 30% during 1995-2005. In addition, extreme poverty had fallen from 32% to 19% during the same period. Further social indicators such as primary schooling, access to clean drinking water, infant mortality rates and per-capita income have all improved since Chavez took office.

Health indicators during the period of 1998-2006 where Infant, mortality has decreased by over one third, falling from 21.4 to 13.7 deaths per 1,000 live births. Likewise, child mortality has fallen by over one third, from 26.5 to 17.0 deaths per 1,000 live births. The greatest benefit has been for children between the ages of one and eleven months: post neonatal mortality has been cut by more than half, falling from 9.0 to 4.2 deaths per 1,000 live births. This is largely attributed to free medical treatement provided by cuban doctors under the oil for skills and /or food programme Veneuzela has with a number of Latin American countries. 51

Access to food and improvements in nutrition has increased. During the period of 1998-2006, Average caloric intake has risen from 91.0% to 101.6%. During the same period, malnutrition related deaths decreased by more than 50 %, from 4.9 to 2.3 deaths per 100,000 in population. Two new programs have helped reach this goal. Firstly, the PAE School feeding program, which provides a free breakfast, lunch, and snacks. This program started in 1999 and served close to 250,000 students and has since started covering more than 4 million students in 2008. Secondly, the Mercal network of government food stores that began operating in 2003. Initially it sold close to 45,662 metric tons of

51 The Chávez Phenomenon: Political Change in Venezuela. Danopoulos, Ronald D. Sylvia and Constantine P. s.l. : Taylor & Francis, Ltd., 2003, Vol. 24.

deeply discounted food and has since raised that level to 1.25 million metric tons in 2008. 52

Education also featured highly on the government’s agenda culminating in the creation of two new programs. One of which was the Rebas Mission created in 2003 to provide secondary education for returning adults. The program helped graduate more than 500,000 students. The other was a large- scale literacy programme called the Mision Robinson. Between 2003 and 2004, Chavez launched a number of social and economic support including Mission Robinson, Mission Sucre and Mission Ribas (for providing free education for millions of Venezuelans), Mission Guaicaipuro (to protect the livelihood, religion, land, culture and rights of Venezuela's indigenous peoples), Mission Vuelta al Campo and Mission Barrio Adentro (constructing, funding and refurbishing secondary and tertiary public health care facilities and construction of thousands of free medical clinics for the poor), Mission Arbol (an environmental program of reforestation) and Mission Mirinda that established a National Militia. He also enacted food and housing subsidies. 53

In 2008, 62.9% of Venezuelans bought subsidized food from the Food Market Network (Mercal). The Chavez government formed 100,000 cooperatives to create jobs and redistribute the oil-rich country's wealth. The government offers cooperatives exemption from all taxes as well as interest-free loans. The movement is changing the nature of Venezuelan society, putting quality of life and solidarity above the profit motive. Due to his reforms, family income among the poorest stratum grew more than 150% between 2003 and 2006. According to official sources, the percentage of people below the national poverty line has decreased significantly during the Chavez years,

52 Mark Weisbrot, Rebecca Ray and Luis Sandoval. (2009) The Chávez Administration at 10 Years: The Economy and Social Indicators, Washington, D.C. :

Centre For Economic Policy Research,

53 www.countercurrents.org/basit020209.htm

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from 48.1% in 2002 to 12.3% in 2007. Since 1999, 2.7 million Venezuelans no longer are impoverished, 437,000 in 2008 alone; extreme poverty stood at 42% earlier in the 1990s; today it's 9.1%. The government earmarked 44.6% of the 2007 budget for social investment, with 1999-2007 averaging 12.8% of GDP. GDP growth rates were 18% in 2004, 9% in 2005 and 9.6% in the first half of 2006, with the private sector growing at a 10.3% clip. In March 2006 the Communal Council Law was approved, whereby communities that decide to organize themselves into a council can be given official state recognition and access to federal funds and loans for community projects. This skips the local and state governments that are perceived as corrupt. From 2004 to the first half of 2006, non- petroleum sectors of the economy showed growth rates greater than 10%. Datos reports real income grew by 137% between 2003 and Q1 2006. Unemployment dropped by 7 %. The World Bank calculated a 10% drop in poverty.

3.5 Economic Policies

Investment: While the Chavez government seeks to encourage private investments rather than establish state-industries, the instability of the Bolivar, the leftist rhetoric of the government and the nationalization of major industries has discouraged both wealthy domestic and foreign investors. Even though Chavez publically stated that he will enforce the 1996 law that assures investors that their assets will not be confiscated. 54

Exchange rates: To maintain purchasing power, the regime initially resisted devaluing the Bolivar. However, due to the mounting international pressure and an exodus in domestic capital, the government reluctantly floated the Bolivar in February 2002. This resulted in an immediate

54 The Chávez Phenomenon: Political Change in Venezuela. Danopoulos, Ronald D. Sylvia and Constantine P. s.l. : Taylor & Francis, Ltd., 2003, Vol. 24.

devaluation of the currency by 30%, which in turn caused interest rates to increase and prompted the public to withdraw their savings from the banks. To shore up the Bolivar, the government sought to use the foreign reserves and the US$ 17 billion fund decreased to US$ 14 billion within a matter of weeks. To counter the impact of the fiscal austerities, the government announced a US$ 2 billion dollar package to improve jobs, education and health. The devaluation and the deficits triggered anti-regime protests in Caracas and elsewhere. The protests set the stage for a tacit American backed coup in April 2002 and Chavez was briefly overthrown but returned to power shortly afterwards. In 2005, Chavez fixed the currency in 2005 and two years ago re-launched it as the “strong bolívar”, at 2.15 to the dollar. However, in January 8th 2009, Chavez devalued the currency by 50% in order to boost the oil price, its main exports. Venezuela operates, two exchange rates, priority imports such as food and medicines are purchased at 2.60 bolívares to the dollar, with a rate of 4.30 for the rest. 55


Chavez has nationalized a number of companies in the energy, communications, construction and other strategic industries. Some of the firms nationalized thus far are as follows: 56

Oil: In 2007, Chavez's government took a majority stake in four oil projects operating in the Orinoco river basin worth an estimated total of $30 billion. U.S. companies Exxon and ConocoPhillips quit the nation over the move and filed arbitration claims against Venezuela. France's Total and Norway's

55 The Economist. Venezuela's devaluation. The Economist . [Online] The Economist News Paper Ltd., 4 January 2010. http://www.economist.com/world/americas/displaysto



Daniel, Frank Jack. (2009) FACTBOX:

Venezuela's nationalizations under Hugo Chavez., Reuters

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StatoilHydro received around $1 billion in compensation after reducing their holdings. Britain's BP and America's Chevron remained as minority partners. High oil prices provided Chavez with the initiative he needed to nationalise the oil industry. However, analysts say that he has failed to upgrade and renovate various oil production related infrastructure and as oil prices fall, international oil firms will regain the advantage since they poses the technology and expertise needed to exploit Venezuela's offshore oil reserves.

Telecommunications: The Chavez government nationalized the nation's largest telecommunications company CANTV, buying out U.S.-based Verizon Communications 28.5% stake for $572 million.

Power: In 2007, Venezuela expropriated the assets of U.S. based AES Corp in Electricidad de Caracas, the nation's largest private power producer. The government paid AES $740 million for its 82 percent stake in the company. Financial analysts described the deal as fair for AES.

Cement: In April 2009, Chavez announced the government takeover of the cement sector, targeting foreign companies such as Switzerland’s Holcim, France's Lafarge, and Mexico's Cemex. Lafarge and Holcim agreed to stay on as minority partners. Venezuela has taken over the operations of Cemex, the nation's largest cement producer.

Finance: In 2009, Government of Chavez attempted to nationlise Banco de Venezuela, a division of Spanish banking conglomerate Grupo Santander to help him channel state resources. However the government had to put the takeover on hold amidst claims of government financial woes.

Steel: In 2008, Venezuela took operational control of the country's largest steelmaker Sidor, previously controlled by Argentine steelmaker Ternium. The takeover followed months of strikes and frequent disputes between management and union leaders.

In conclusion as Chavez strives to transform the Venezuelan economy in to a socialist one backed by the use of oil and foreign exchange reserves. It can be argued that nationalising a variety of firms in key sectors has discouraged foreign investors and reduced productivity. Critic’s claim those close to Chavez usually run nationalised firms regardless of their skills, thus corruption and nepotism is a massive problem in the nationalised companies. The Venezuelan economy at present is dependent on its oil reserves. The lack of broader infrastructure spending and structural reforms has failed to develop alternative non-oil industries, which leaves Venezuela’s economy vulnerable to oil shocks. Furthermore, the confrontational behaviour towards Europe and US has damaged Venezuela’s credibility and access to technology and expertise in these markets. However despite immense negative criticism from the western media of Chavez’s economic policies, he still draws in wide spread support amongst the poor masses, his poverty alleviation measures have helped lift millions of poor Venezuelans out of absolute poverty, provided basic education, medical and infrastructure facilities. Moreover Chavez attained all these progress in the midst of coup attempts (including a failed coup in April 2002), general strikes and lockouts conducted by the corporates and the elite with the support of foreign countries. On the world stage Hugo Chavez took an unrelenting stand against the Anglo American hegemony and the brutalities shown by the Zionists in Palestine and Lebanon, increasing his appeal beyond the borders of Venezuela.

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Chapter# 4: The Banking System

The first banks were the religious temples of the ancient world, established sometime during the third millennium B.C but the modern Western economic and financial history is usually traced back to the coffee houses of London, The London Royal Exchange was established in 1565. At that time moneychangers were already called bankers, though the term "bank" usually referred to their offices, and did not carry the meaning it does today. There was also a hierarchical order among professionals; at the top were the bankers, who did business with heads of state. Around the time of Adam Smith (1776) there was a massive growth in the banking industry. Within the new system of ownership and investment, the state's intervention in economic affairs was reduced and barriers to competition were removed.

Global banking and capital market services proliferated during the 1980s and 1990s as a result of a great increase in demand from companies, governments, and financial institutions, but also because financial market conditions were buoyant and, on the whole, bullish. In recent years rowing internationalization and opportunity in financial services has entirely changed the competitive landscape, as many banks have demonstrated a preference for the “universal banking” model so prevalent in Europe and US. Universal banks are free to engage in all forms of financial services, make investments in client companies, and function as much as possible as a “one-stop” supplier of both retail and wholesale financial services.

Many such possible alignments could be accomplished only by large acquisitions, and by the end of 2000, a year in which a record level of financial services transactions with a market value of $10.5 trillion occurred. The top ten banks commanded a market share of more than 80% and the top five, 55%. Of the top ten banks ranked by market share, seven were large universal-type banks (three American and four European), and the

remaining three were large U.S. investment banks who between them accounted for a 33% market share.

4.1 Islamic Banking

Islamic banking is defined as banking system, which is in consonance with the spirit, philosophy and values of Islam and governed by the principles laid down by the Shariah. Interest free banking is a narrow concept denoting a number of banking instruments or operations, which avoid interest. Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Shariah but also to avoid unethical practices. In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services. The model of Islamic banking system leads towards the achievement of a system, which helps achieve economic prosperity.

The philosophy of Islamic banking takes the lead from Shariah. According to which, Islamic banking cannot deal in transactions involving interest/riba (an increase stipulated or sought over the principal of a loan or debt). Further, they cannot deal in the transactions having the element of Gharar or Maiser. Moreover, they cannot deal in any transaction, the subject matter of which is invalid (haram in the eyes of Islam). Islamic banks focus on generating returns through investment tools, which links the gain on capital with its performance. The operations of Islamic banking are based on sharing the risk, which may arise through trading and investment activities using contracts of various Islamic modes of finance.

Basic Principles of Islamic Banking

There are at least six basic principles, which are taken into consideration while executing any Islamic banking transaction. These principles differentiate a financial transaction from a Riba/interest based transaction to an Islamic banking transaction.

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Sanctity of contract: Before executing any Islamic banking transaction, the counter parties have to satisfy whether the transaction is halal (valid) in the eyes of Islamic Shariah. This means that Islamic bank’s transaction must not be invalid or voidable. An invalid contract is a contract, which by virtue of its nature is invalid according to Shariah rulings. Whereas a voidable contract is a contract, which by nature is valid, but some invalid components are inserted in the valid contract. Unless these invalid components are eliminated from the valid contract, the contract will remain voidable.

Risk sharing: Islamic jurists have drawn two principles from the saying of prophet Muhammad (SAW). These are “Alkhiraj Biddamaan ” and “Alghunun Bilghurum”. Both the principles have similar meanings that no profit can be earned from an asset or a capital unless ownership risks have been taken by the earner of that profit. Thus in every Islamic banking transaction, the Islamic financial institution and/or its deposit holder take(s) the risk of ownership of the tangible asset, real services or capital before earning any profit.

No Riba/interest: The word "Riba" means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). This definition of Riba is derived from the Quran and is unanimously accepted by all Islamic scholars. Islamic banks cannot lend money to earn additional amount on it. However as stated in point above, banks earn profit by taking risk of tangible assets, real services or capital and passes on this profit/loss to its deposit holders who also take the risk of their capital.

Economic purpose/activity: Every Islamic banking transaction has certain economic purpose/activity. Further, Islamic banking transactions are backed by tangible asset or real service.

Fairness: Islamic banking inculcates fairness through its operations. Transactions based on dubious terms and conditions cannot become part of Islamic banking. All the terms and conditions embedded in the transactions are properly disclosed in the contract/agreement.

No invalid subject matter: While executing an Islamic banking transaction, it is ensured that no invalid subject matter or activity is financed by the Islamic financial transaction. Some subject matter or activities may be allowed by the law of the land but if the same are not allowed by Shariah, these can not be financed by an Islamic bank.

Islamic Modes of Finance are divided in to the following three main categories:









Non-Participatory modes of Finance


Murabaha, b) Musawamah


Salam, d) Istisna


Ijarah, f) Ijarah wa Iqtina


Sub contracts


Wakalah, b) Kafalah, c) Rahn

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4.2 Role of World Trade Organisation, IMF, the Paris Club and the Asian Development Bank (ADB)

World Trade Organisation: Established in 1995 and headquartered in Geneva, the World Trade Organization (WTO), was to become a permanent replacement for a provincial GATT with greater powers and a wider agenda. The WTO emerged with a new legal structure for multilateral trading and a dispute settlement mechanism with much more power to enforce rulings over non-tariff barriers than existed in the past. 57 As of 2009, there were 153 member nations in the WTO accounting for more than 90% of world trade. 58

The World Trade Organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalising trade agreements, and a dispute resolution process aimed at enforcing participants adherence to WTO agreements which are signed by representatives of member governments and ratified by their parliaments. Most of the issues that the WTO focuses on derive from previous trade negotiations.

WTO mandate is to help Least developed countries (LDC) by: 59

Non-discrimination and enhanced market access for exports: Non-discrimination centres on the Most Favoured Nation (MFN) clause, whereby tariff concession made to one country have to extend to all. In addition, LDCs benefit since industrial nations cannot discriminate in favour of products produced in LDCs. However, for a country to gain increased market access it must be willing to open its own market. However, partner countries will only be obliged to enter negotiations if the domestic

57 Patricia Owens, John Baylis, Steve Smith (2004) Globalisation and World Politics, OUP, Oxford

58 World Trade Organization. WTO Annual Report


59 Mattoo, Aaditya and Subramanian, Arvind (2004) The WTO and the poorest countries: the stark reality, International Monetary Fund-Research Dept

markets are sufficiently attractive. Hence, countries with small markets are inherently disadvantaged based on the principle of reciprocity since their markets may not be attractive enough for others to enter trade negotiations. In addition, when negotiating, LDCs may have to allow access to international competition within their infant industries, thus further loosing the ability to develop sustainable local firms.

Incentives for trade reform: In theory, WTO works to spearhead trade reform and reduction in trade barriers in LDCs by creating an overall reduction in trade barriers between nations and chairing talks aimed at the dismantlement of existing trade barriers. Thus joining the WTO gives governments the ability to justify certain trade reforms in order to compete with international competition. In reality, dismantling of trade barriers is also a reciprocal process and if the markets of countries are too small then their trading partners may not find it worthwhile to enter negotiations that will help spearhead reforms and dismantling trade barriers in the smaller nations. Accordingly, many argue that recent trade negotiations such as the Uruguay round have not have not had a significant impact on trade liberalization in developing countries.

The trade dispute resolution mechanism: When LDCs have trade disputes with larger members the WTO offers arbitration and legal services aimed at conflict resolution. It has also recently created systems to help LDCs realize their right and obligations. This way LDCs have a better chance to make their grievances addressed by the international community. In practice however, dispute resolution mechanisms do not have an effect on powerful trading partners such as the EU and the USA, as not only can they afford any legitimate retaliation. In addition, they often circumvent their way through legal loopholes and threaten retaliatory measures. Moreover the bureaucracy and legal procedures can draw on for long-periods of time. Thus, LDCs may suffer from

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strong retaliatory measures from powerful trading partners. 60

International Monetary Fund (IMF): Established in 1945 and headquartered in Washington DC. The primary objective of IMF is to oversee the short- term cross-border money flows and foreign exchange. Since 1979, it has also formulated stabilization and systematic economic transformation policies for states concerning debt and economic transition. The IMF has a weighted voting system which broadly reflects a member nation’s relative size in the world economy. Accordingly, a nation’s quota will determine the contributions it is obliged to make to the IMF. Additionally, the quota determines the allocation of the international reserve unit called Special Drawing Rights (SDR). In 2009, the G-20 group of industrialised nations agreed to boost the lending capacity of the IMF to $750 billion. As of 2009, the fund boasted a membership of 186 countries. In recent years, it has sought to reform itself by rebalancing the quota system to give developing countries a stronger voice and make changes to its governance, lending and structural adjustment programs. 61

Over the years, the fund has drawn many critics and supporters. Some of the main arguments brought forward by both parties are as follows: 62

Relief funds and lender of last resort: Supporters of the fund point out the help IMF has provided countries avert bankruptcy by extending relief funds and acting as a lender of last resort. There are numerous examples and crisis where the fund extended aid and loans to help countries make structural adjustments, shore up foreign reserves and cover expenditure. Without this sort of aid, many countries would have to default on existing loans or continue to borrow with large interest or

60 Chris Brown, Kirsten Ainley (2009) Understanding Internatinal Relations, 4th Edition, London, Palgrave Macmillan

61 Patricia Owens, John Baylis, Steve Smith (2004) Globalisation and World Politics, OUP, Oxford

62 The IMF's Role in Structural Adjustment. Collier, Paul and Gunning, Jan Willem, Blackwell Publishing for the Royal Economic Society, 1999, Vol. 109.

simply go bankrupt, in effect ruining their international standing with investors and plunging into social and political instability.

Technical and financial assistance provided:

Supporters of the IMF claim the fund has helped many nations address the structural flaws of their economies efficiently and effectively than they could have done without access to the IMF funding and expertise. The IMF has also various support and technical resources that it deploys to help nations solve economic instability and advice them on policymaking.

Critics, on the other hand argue that the structural adjustment plans of the IMF have only exasperated economic problems for developing countries. Thus, they argue that the IMF has reduced growth and living standards via its policies. Accordingly, there are three main criticisms of the IMF’s structural adjustment policies and its role in LDCs: 63

Through the flawed design of its structural programmes, there were many adverse consequences on low-income households. Accordingly, low-income households suffered directly from falling incomes or suffered indirectly from a reduction in social provisions. While the fund identified a number of flaws within the economies that it was intervening in, not all the flaws could be fixed at once due to poor political will and administrative problems, thus the fund’s policies actually did more harm than good in some instances.

Another problem with the fund and its aid programs was its insistence on conditionality of assistance not only for the occasional crisis management but also for the continuous process of economic policymaking, or in other words the transfer of economic sovereignty from a nation to the fund. While this could be justified when an economic crisis is the doing of the government, but hard to justify when an economic crisis is due to the collapse of international markets. The requirements

63 The IMF Strikes Back. Rogoff, Kenneth. 134, s.l. :

Washingtonpost.Newsweek Interactive, LLC, 2003.

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of the IMF actually undermine the commitment for reform as most often governments do not fully commit themselves to reforms since they feel forced into it.

Another criticism is the aid structural adjustment programs and conditionality requirements can result in the misallocation of aid resources. Governments in the third world countries often spend on programs that do not benefit the poor but rather on projects with their business interest. In addition, the attempt to use aid to induce policy reform has tended to target aid on countries with poor policies, thus, unless the aid actually improves the already poor policies then it would be the least effective method of reducing poverty. Thus, poor nations get flooded with cash but because their economic systems are not capable of absorbing all the funds, a lot of it is wasted or misused. Another problem is that simultaneously perusing a strategy of reducing government expenditure while raising taxes reduces the effectiveness and defeats the purpose of aid in the policy area where aid is most effective. Thus, structural reforms and aid funds can be incompatible at times. Nevertheless it is reasonable to assume that the IMF will continue to be a relevant and important international financial force in the world economy.

The Paris club is an informal group of creditor nations, founded in 1956. It has no permanent members and all member states function on the principle of consensus. The Paris club came to the limelight during the debt crisis that gripped developing countries during the 1980’s and early 1990’s. Its original goal was to provide short-term liquidity for debtor countries to prevent default. In the recent decades, it has provided longer maturity periods, debt cancellation and other features to help heavily indebted nations reduce their debt burden. While it is an informal club, it has a lot of influence in the international financial system and international financial institutions such as the IMF, which also plays an advisory role during its meetings with debtor nations.

club bypassing potential legal and political barriers. 64 Supporters of the club point out the grace periods, cutting of debt amounts and in some cases writing off debt. The decision process of the club is also shorter and its ability to significantly write off debts or postpone repayment periods and terms has given the fund a unique ability to influence the development and stability of large number of nations.

However its critics point out the difficult debt servicing payments and conditions on nations that the club imposes exasperating the situation for debtor nations. Moreover while promising many nations to write off debts and extend grace periods, however these promises depend on complex procedures that in turn question creditor nation’s commitment towards debt relief. There is relatively less oversight compared to other international lending organizations as to how the aid money is spent. 65 Thus, nations can invest the money on programs or goods that won’t improve the living standards of their citizens without facing criticism

Asian Development Bank (ADB) was set up in 1966 to help facilitate development in Asian countries. The bank has a weighted voting system, with 80% of the votes being distributed based on the proportion of the capital subscriptions of the members. As of 2009, the bank had 67 members. In 2009 the ADB governors agreed to triple the ADB’s capital base from $55 billion to $165 billion. 66

The bank aims to help developing countries in Asia by providing access to loans and grants via its ordinary capital resources programme which claims to offer favourable or near-market repayment terms. The bank also offers assistance on infrastructure, regional integration, environment and financial sector developments and helps countries identify and design projects, improve institutions and formulate development strategies via grants. One of the other touted benefits of the bank is its main stakeholders and staff are based in Asia.

64 Juan Carlos, Matthew Martin (2001) The Paris Club, London, Debt Relief International Ltd

65 Juan Carlos, Matthew Martin (2001) The Paris Club, London, Debt Relief International Ltd

66 Wikipedia – www.wikipedia.org - ADB

In comparison to IMF and other financial institutions, the Paris Club is an informal group of creditors hence nations can appeal directly to the

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However, critics have pointed out a number of flaws in the ADB. The bank is accused of being irresponsible for giving out loans to governments with poor human right record.

There are also relatively large amount of voting rights concentrated in the hands of a few which distorts the decision making process of the bank by not allowing a majority of the members to have a greater say. Critics argue that the ADB may not be necessary since many institutions such as World Bank fulfil the same functions of the ADB. In addition, many countries in Asia such as India borrow directly from the World Bank.

4.3 Role of EU, NAFTA, GCC

European Union

The European Union is built on a unique institutional system. The Member States delegate sovereignty for certain matters to independent institutions, which represent the interests of the Union as a whole, its Member States and its citizens.

The treaty on the European Union, known as the Maastricht Treaty, which entered into force in 1993, created a single structure for the European Union made up of three pillars:

The European Communities (Pillar 1)

Policy areas for which the European community is responsible include: economic and monetary affairs, agriculture, asylum and immigration, transport, employment, trade, social welfare, culture, consumer protection, health, industry, research and technology; economic and social cohesion, the environment and development aid.

Common foreign and security policy (Pillar 2)

Actions taken under this pillar aim to develop a common foreign and security policy. Common foreign and security decisions are taken on the basis of cooperation between the Member States. However, decisions of principle are passed,

common positions are set out and joint actions are carried out.

Cooperation on justice and home affairs (pillar 3)

The aim of this pillar is to provide all European citizens freedom, security and justice by jointly preventing crime, terrorism, racism and xenophobia. Similar to pillar two, this policy takes place on the basis of collaboration between the individual countries.

European Union (EU) is also an example of a common market system that has tariff free trade amongst its members, common barriers to trade with the rest of the world and free movement of labour and capital amongst members. 67 The EU is the successor to the European Community (EC), which traces its roots back to post World War Two Europe. The EU currently has 27 members and is the largest economy in terms of GDP (based on Purchasing Power Parity (PPP)) and the second largest trade bloc after NAFTA, accounting for 21% of PPP gross world product as of 2009. As of 2008, the EU remains as the world’s largest exporter and importer. 68

The single market came into existence with the signing of the single market act in 1986. It sets the path for removing all remaining barriers and creating a fully integrated market in 1992. One significant factor in the EU integration was the regulatory system. The single market financial system is set on a dual set of principles: home country authorization and host conduct business rules. Meaning a firm can trade throughout the union by the home regulator, but that trade itself must obey local laws in the country concerned. The Maastricht Treaty, signed in 1992 formally created the EU and furthered the integration of the single market. It also created the euro, a common currency in 1999. This feature made the pricing system more transparent and eliminated exchange rate risk. In addition to the common currency, the treaty created a social charter and stronger fiscal criteria. Since the Maastricht treaty, there have

67 Lipsay, Richard and Chrystal, Alex. (2004) Economics - 10th edition. NewYork, Oxford University Press 68 Central Intelligence Agency. The World Factbook (2009) Directorate of Intelligence

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been three other significant treaties: Amsterdam (1997), Nice (2001) and the Lisbon (2007) focusing on integrating the social, legal and constitutional characteristics of the Union members. 69

Thus far, the main advantages of the single market system as follows:

By removing non-tariff barriers, the single market aims to allow countries to exploit their comparative advantage through specialisation.

With the dismantlement of trade barriers, firms were able to grow and reduce costs. This helped increase trade in industries for both goods and services.

Increased competition between large


established companies companies.


Lower prices: The competition and liberalization helped create lower prices.

Due to the common set of standards adopted throughout Europe, consumers can be sure of the quality of their goods and services no matter which EU country they are in.

However, the EU is largely dominated by the political and economic clout of Britain, France, Italy and Germany and the smaller newly acquired eastern European countries complain about the pressure of high corporate tax rates to the levels of Western Europe, thereby discouraging investment and losing some of the advantages of cheap labour. There are also pressure to adopt existing EU regulations on health and safety along with other social and legal measurers that exasperates the problems for new members.

The EU does encourage free market trading and market liberalization both internally and externally with its trading partners. The further rounds of

69 Wenger, Andreas and Zimmermann, Doran (2006) International Relations - From the cold war to the Globalized World, Lynne Rienner Publishers

integration and deregulation have boosted the EU’s position as both an economic powerhouse and a strong voice in international institutions. However, the EU still has a lot of liberalization to do, especially concerning its agricultural sector and the common agricultural policy (CAP), which guarantees a minimum price for EU farmers and thus blocks out foreign competition. However, while the agricultural sector maybe a huge flaw in the EU’s commitment to free trade and liberalization, most of its other industries are highly liberalised and open to competition.


The North American Free Trade Agreement (NAFTA) is the most basic and least comprehensive form of trade-liberalizing agreements. It allows for tariff free trade among the member countries but gives them the ability to impose their own trade restrictions on imports of other countries. 70 This also means, that unlike the EU, NAFTA members must maintain customs points at their respective boarders to make sure that imports into the free area does not enter through the member that is levying the lowest tariff on each item. NAFTA members must also agree on rules of origin to determine if goods are made in a member country and thus allowed to be traded duty-free or if they do not meet the criteria for duty-free and must be subjected to duties when traded within the free trade area.

NAFTA traces its roots to an agreement signed in 1988 between Canada and the USA, instituting free trade on all goods and most non-government services. In effect, this made the world’s largest flow of international trade between two countries. In 1993, this agreement became NAFTA due to the modification, which resulted from the renegotiation of the Canada-USA agreement in order to include Mexico. 71 Implementation of NAFTA began on the 1 st of January 1994. NAFTA is

70 John Cavanagh, Sarah Anderson, Jaime Serra and J. Enrique Espinosa, et al (2002) Debate: Happily Ever NAFTA? Washingtonpost.Newsweek Interactive, LLC 71 Wenger, Andreas and Zimmermann, Doran (2006) International Relations - From the cold war to the Globalized World, Lynne Rienner Publishers

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the largest trade block in the world in terms of GDP (PPP).

Some of the benefits of NAFTA are:

1. Removal of trade barriers: NAFTA’s goal to remove most trade barriers between its members has been partially successful. This includes the abolishment of all agricultural trade tariffs between USA and Canada. Due to the reduction in trade barriers, trade between NAFTA members has increased significantly.

2. Position in world economic affairs: As the EU and regional organizations around the world have gained a more economic power in recent years the US, Canada and Mexico have sought to reinforce their economic positions via NAFTA. Accordingly, one of NAFTA’s objectives is to counteract trade discriminations of the EU and Asian regional trade blocs.

However, there are negative consequences of NAFTA. Some of the main arguments brought forward by critics include the following: 72

1. Transfer of jobs and labour rights: After the agreement, critics argued that there was a large-scale transfer of low skill and low-wage jobs from the US and Canada to Mexico. This was because the Mexican economy featured a relatively cheaper workforce. This transfer of jobs was blamed for the rising unemployment in various low-skill and low-wage industries throughout the US and Canada. Some critics also point out that NAFTA has failed to protect the rights of workers due to its weak labour union and labour protection laws. Thus, they claim that it has failed to achieve one of its key social objectives. In fact, many critics claim that Mexico, considered the worst affected member concerning labour, has seen real wages actually fall since the creation of NAFTA.

72 John Cavanagh, Sarah Anderson, Jaime Serra and J. Enrique Espinosa, et al (2002) Debate: Happily Ever NAFTA? Washingtonpost.Newsweek Interactive, LLC

2. Agriculture and poverty: critics claim that NAFTA, which removed tariffs on agriculture, has flooded Mexico with cheap corn imports from its partners, which have heavily damaged the local agricultural industry. The cheap imports have allegedly increased rural unemployment, especially amongst small- scale farmers and raise general poverty in rural areas. A testament to this fact is the increase in rural poverty from 79% in 1994 to 82% in 1998. Critics also claim that general poverty in Mexico rose from 51% 1993 to more than 58% in 1997.

NAFTA embodies a commitment to free trade and its objectives are congruent with those of the WTO. Accordingly, many see it as a positive force in regional trade affairs and supporters of NAFTA claim that it has achieved all its fundamental objectives. NAFTA has brought about a significant reduction in tariffs and a rise in trade amongst NAFTA members within a relatively short period. However, NAFTA has been beneficial to business owners and elites in all three countries, but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. agribusiness, and negative impacts on U.S. workers in manufacturing and assembly industries who lost jobs.

The Gulf Corporation Council (GCC); established on 25 th of May 1981 consists of six Gulf States, the United Arab Emirates, Saudi Arabia, Qatar, Oman and Bahrain (26). The GGC was created primarily to improve regional security for its members against a militant and aggressive stance adopted by Iran. In economic terms, one significant agreement between members of the GGC was the unified economic agreement, which was signed in November 1981. It sought to bring about a gradual reduction in common custom tariffs over a five- year period, the adoption of a common economic, social and defense policies and a common currency. 73 The main source of strength for the economies of the GGC is oil and gas. Accordingly, they account for some 15% of oil production and

73 . Kechichian, Joseph A (1985) The Gulf Cooperation Council:

Search for Security, Taylor & Francis, Ltd

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possess over 40% of the world's known oil reserves. The GGC also has approximately 5%-6% of the petrochemical market and a similar share of world refining capacity.

The GGC has successfully created a number of regional institutions such as the Gulf Investment Corporation, which has started operating several joint development projects including a refinery in Oman. However, there are various obstacles for further economic and political integration of the GGC mainly due to the lack of political will and differences amongst the members. Like the WTO, the GGC is also committed to the removal of internal tariffs and the gradual liberalization of its member economies. However, due to the slow progress in terms of economic integration and policy harmonization, the GGC has been relatively less effective in many areas in comparison to other more successful trading blocs.

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Chapter# 5:

Current Pakistani Economic State

This chapter will look at the current state of the Pakistani economy analysing key industries and sectors. Officially the economy of Pakistan is the 26th largest economy in the world in terms of purchasing power, and the 47th largest in absolute dollar terms. 74 Pakistan's economy primarily encompasses textiles, chemicals, food processing and agriculture. Pakistan’s military has independently developed a small arms industry mainly targeting the African, gulf and Asian countries such as SriLanka. The Pakistani air force produced its first home made fighter planes in conjunction with China.

Pakistan’s main export goods are: textile goods (garments, bed linen, cotton cloths, and yarn), rice, leather goods, sports goods, chemicals manufactures, carpets and rugs. Its main export markets: United States 22.4%, UAE 8.3%,UK 6%, China 5.4%, Germany 4.7% (2006 est.). Its imports are: Petroleum, Petroleum products, Machinery, Plastics, Transportation equipment, Edible oils, Paper and paperboard, Iron and steel, Tea. Main import partners are China 14.7%, Saudi Arabia 10.1%, UAE 8.7%, Japan 6.5%, United States 5.3%, Germany 5%, Kuwait 4.9% (2006 est.)

Pakistan was a poor and predominantly agricultural country when it gained independence in 1947 from British occupied India. However the Second World War had just ended, European countries particularly Germany and France had been devastated by both the human and material costs. On the eastern front Japan had been nuclear bombed by the USA virtually ruining the country for generations to come. Yet in all three cases, these

countries not only recovered but went on to become world’s largest and strongest economies. Yet Pakistan with sufficiently developed infrastructure and agricultural advantage failed not only to excel and become the Asian tiger it so had hoped but steadily took a downhill stride and can now be compared to the countries of the sub Sahara Africa. The question as to what went wrong consists of a multitude of factors but are largely attributed to economic mismanagement, rampant corruption, military coups, deterioration in law & order, fiscally imprudent economic policies which caused a large increase in the country's public debt and led to slower growth in the 1990s and wars with India.

Since the beginning of 2009, Pakistan's economic outlook has not looked bleaker. Security concerns stemming from the nation's role in the war on terror have created great instability and led to a decline in foreign direct investment (FDI) particularly from overseas Pakistanis. Concurrently, the insurgency has forced massive capital flight from Pakistan to the Gulf. Combined with high global commodity prices, the dual impact has shocked Pakistan's economy, with gaping trade deficits, high inflation and a crash in the value of the Rupee, which has fallen from 60-1 USD to over 80-1 USD in a few months. The international credit agencies such as Standards & Poor’s (S&P) and Moody’s investors lowered Pakistan’s foreign currency debt rating to CCC-plus from B, just several notches above a level that would indicate default. The cost of protection against a default in Pakistan’s sovereign debt trades at 1,800 basis points, according to its five year credit default swap, a level that indicates investors believe the country is already in or will soon be in default. 75

The report will now give a brief insight in to the different industries of Pakistan. Its worth noting that the subjects discussed below ought to be further researched in their own right. As they provide researchers and party members a fertile ground to further expand upon.

74 www.wikiepdia.org - Pakistan

75 www.businessweek.co.uk

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5.1 Manufacturing Industry

Pakistan ranks forty-first in the world and fifty-fifth worldwide in factory output. Pakistan's industrial sector accounts for about 24% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 66% of the merchandise exports and almost 40% of the employed labor force. Other major industries include cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals, machinery, cocaine, and food processing. 76

Both the Mushraaf regime and the current Zardari government’s economic policies aim to diversify the country's industrial base by privatizing large- scale assets. As a result the public sector accounts for a shrinking proportion of industrial output.

Before 1947 there was little manufacturing in the area that makes up present-day Pakistan. Its primary role was as a supplier of raw materials, including cotton, to industrial hubs across British India, such as Bombay. In general, manufacturing still works with relatively basic technologies, generates few value-added products, and has a narrow production base, i.e., it does not diversify into many different product groups. Textiles are Pakistan's primary industry, and in 1999 accounted for 8.5 percent of the gross domestic product, 31 percent of total investment, 38 percent of industrial employment, and almost 60 percent of total exports. Pakistan is Asia's eighth-biggest textiles exporter, with export revenues of US$5.7 billion in the first half of 2000. Export growth has been declining since a recent peak of 6.1 percent in 1996. The prime reason being unstable political situation and lack of large scale investments to modernise plants. As a result progress is expected to fall short of targets, notably to be among Asia's top 5 exporters with sales of US$14 billion. 77


spinning and weaving, leaving garment manufacturing to highly fragmented small to

large textile firms concentrate on



76 www.worldbank.com – country search Pakistan 77 www.nationsencyclopedia.com/economies/Asia- and-the-Pacific/Pakistan

medium-scale producers. The industry, particularly its spinning and weaving sectors, has been under pressure since the mid-1990s, owing to increased competition in the international market, financial mismanagement within the industry, and rising global demand for value-added textiles, as well as the increase in production capacity in other developing countries. Pakistan's textile sector must move to higher value-added production to meet challenges and opportunities beyond 2005, when quotas are removed and tariff barriers lowered, as mandated by the World Trade Organization (WTO). This will expose Pakistan's mills to intense competition from China, Asia's largest textile exporter.

Pakistan’s other major industry is food processing, generating an estimated twenty seven percent of value-added production and making up sixteen percent of the total employment in the manufacturing sector. Major sub-sectors of Pakistan's food industry are cooking oils and hydrogenated vegetable oils, sugar, flour, tea, dairy products, beverages, and canned foods. The fish, meat, and fruit and vegetable sectors remain underdeveloped, partly for lack of adequate infrastructure, including storage and transportation facilities. A small quantity of processed foods is imported to feed a few supermarkets catering to the country's elite. The vast agricultural resources and the country's geographic location make Pakistan an ideal country for investment in the food sector. Several foreign firms have entered the market and established their own presence as manufacturers, or established joint ventures with local partners such as Nestle. The fastest growing sectors are beverages—including carbonated soft drinks and juice and juice-flavoured drinks— poultry, and edible oils. 78

Pakistan Steel, with an annual capacity of 1.1 million tons, is Pakistan's only integrated steel plant. Attempts to privatise this highly sought out asset by the Musharaf regime were thwarted by the chief justice Chaudhry Muhammad. The plant is located near Port Bin Qasim, 25 kilometers (15.5 miles) east of Karachi. The steel mill was

78 www.nationsencyclopedia.com/economies/Asia- and-the-Pacific/Pakistan

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constructed with technical assistance from the former Soviet Union, and currently employs about 20,000 workers. Iron ore, manganese, and cocking coal for the plant are all imported.

Leather is one of the other major foreign exchange earners for Pakistan. The leather and leather products industry is labour-intensive (directly employing more than 200,000 workers), and there are over 500 tanneries in Pakistan. This industry has shown huge potential in large part to its successful progression from the export of raw hides and skins and semi-processed leather towards high value- added finished leathers and leather products (including leather jackets, gloves, footwear, and sporting goods). The tanning sector is concentrated in Punjab, where manufacturing units process primarily buffalo and cow hides; tanneries in Sindh process primarily goat and sheepskins. The local market for leather is limited, and about eighty percent of production is exported. More sophisticated machinery and productivity increases can be expected to further boost exports. Pollution, especially through tannic acid and dyes, is a serious problem for this industry.

Pakistan’s other hidden industry is the country’s immense reserves of various minerals and natural resources. Important minerals found in Pakistan are gypsum, limestone, chromites, iron ore, rock salt, silver, gold, precious stones, gems, marble, copper, coal, graphite, sulphur, fire clay, silica. The salt range in Punjab province has the largest deposit of pure salt found anywhere in the world. Baluchistan province is a mineral rich area having substantial oil and gas reserves which have not been exploited to their full capacity or fully explored, although the musharaf government and the Zardari regime have begun to develop this region of the country and to tap into the immense resources found there. The province also has significant quantities of copper, chromite and iron, and pockets of antimony and zinc in the south and gold in the far west. Natural gas was discovered near Sui in 1952, and the province has been gradually developing its oil and gas projects over the past fifty years.

Moreover major reserves of copper and gold in Baluchistan’s Rekodiq area have been discovered in

early 2006. The Rekodiq mining area has proven estimated reserves of 2 billion tons of copper and 20 million ounces of gold. According to the current market price, the value of the deposits has been estimated at about $65 billion, which would generate thousands of jobs. The discovery has ranked rekodiq among the world's top seven copper reserves. The rekodiq project is estimated to produce 200,000 tons of copper and 400,000 ounces of gold per year, at an estimated value of $1.25 billion at current market prices. The copper and gold are currently traded at about $5,000 per ton and $600 per ounce respectively in the international market.

North West Frontier Province accounts for at least seventy-eight percent of the marble production in Pakistan. Pakistan is home to some of the finest and purest grades of marble, granite and slate found in the world. Much of the grade A marble that is exported out of European countries like Italy actually have their origins in Pakistan which previously lacked fine polishing and processing machinery. The Federal Bureau of Statistics provisionally valued this sector at Rs.211, 851 million in 2005 thus registering over 99% growth since 2000. 79

In FY 2002-03, real growth in manufacturing was 7.7%. The industry comprises 453 textile mills: 50 integrated units; and 403 spinning units, with 9.33 million spindles and 148,000 rotors, The capacity utilization was 83% for spindles and 47% for rotors during 2003.

Pakistan also has extensive energy resources, including the fourth-largest coal reserves in the world and a large hydropower potential, although this is confined to the northern region of the country. Large deposits of coal were discovered at Thar over a decade ago by the Sindh arid zone development authority. In 1991, enormous coal deposits were conferred by the geological survey of Pakistan and the United States agency for international development.

Pakistan's Thar Desert contains the largest coal reserves discovered to date, covering an area of

79 www.statpak.gov.pk

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10,000 square kilometers. The Thar coalfield, should it be developed, will yield over 200 billion ton of coal used to produce electricity, it will yield sufficient power to make Pakistan self-sufficient in electrical power. Pakistan has reserves of natural gas, but these will start to diminish by 2010.

Since the discovery of Thar coal in 1991 very little development work or study has been initiated. Thar coal has low calorific value but is environmentally friendly with a low Sulfur content. The Thar coal deposits extend across the border and they are currently being mined for power generation in Rajistan in India. India has no reservations about the use of these coal deposits. Coal extraction from Thar will be a development requiring three to four years before coal is made available for use. The ideal situation would be that Government of Pakistan uses the coal to reduce the country’s dependence on hydro projects; the only alternative method is to develop the Thar coal via international financing. This is possible only by inviting international power companies to invest in Pakistan and provide the required funding for the development of the Thar coalfield. 80

Pakistan’s other hidden industry is that of precious Gems. Along with Afghanistan the country is believed to hold up to 30-40 percent of the world's emerald deposits with the precious stone fetching up to $2,000 per carat depending on quality. Most of the country's gems, including emeralds, garnet, pink topaz, spinel and tourmaline are located underground in North West Frontier Province (NWFP). However due to spiralling insecurity in Pakistan since the September 11, 2001 attacks on the United States. The nuclear-armed nation was thrust in to the heart of the war on terror drastically reducing profits from this industry as foreign investors stayed away. 81







5.2 Services Industry

Pakistan's service sector accounts for 54% of GDP, transport, storage, communications, finance, and insurance account for 24% of this sector, and wholesale and retail trade about 30%. Pakistan is trying to promote the information industry and other modern service industries through incentives such as long-term tax holidays.

A government agency Pakistan Software Export

Board (PSEB) was set up to promote the IT, BPO (business process outsourcing) and the call centre industries in Pakistan. The body’s responsibility is to

administer programs in the areas of human capital and company capability development, IT Park development, international marketing, industrial research, public policy and facilitation. Salaries in Pakistan are lower by 30% than in neighbouring India but the country suffers from a politically unstable and lawlessness image. Pakistan has similar characteristics that have made India successful as an outsourcing hub, such as its low- cost, skilled, english-speaking staff but the IT industry in Pakistan is still in its early stages, and companies have very little experience in the business and lack the ability to scale their operations. The government body set up is unable

to help due to inept people and processes.

One of the largest IT services firms with operations

in Pakistan is NetSol Technologies NetSol is based in

California but was founded in Pakistan in the mid- 1990s, and it has about 600 engineers in the country working on projects for global clients. The Government of Pakistan has allowed 100% equity ownership and 100% repatriation of profits to foreign investors. Major tax incentives, such as tax exemption for companies, have been allowed until 2016 but rampant corruption and ill-defined tax

procedures hamper the development of IT industry.

Pakistans other major service industy is the comunications industry. Where by the Pakistan

Telecommunication Company Ltd has emerged as a successful Forbes 2000 conglomerate with over US

$1 billion in sales in 2005. Mobile telephone market

has exploded fourteen fold since 2000 to reach a

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Economic Research: Pakistan

subscriber base of 91 million users in 2008, one of the highest mobile densities in the entire world. In addition, there are over 6 million landlines in the country with 100% fibre-optic network and coverage via WLL in even the remotest areas. Moreover not many people outside Pakistan know, for example, that the country has over 63 million mobile phone subscribers for a population of about 164 million people. The percentage of Pakistan's population using mobile phones is more than that of India, which is seen as a key Asian market for mobile-phone vendors. 82 The contribution of telecom sector to the national exchequer was Rs 110 billion in the year 2007-08 on account of general sales tax, activation charges and other steps as compared to Rs 100 billion in the year 2006-07. The World Bank estimates that it takes about 50 days to get a phone connection in Pakistan. 83

In Pakistan, following are the top mobile phone operators:

1. Mobilink (Parent: Orascom, Pakistan/Egypt)

2. Ufone (Parent: PTCL, Pakistan/UAE)

3. Telenor (Parent: Telenor, Norway)

4. Warid (Parent: Abu Dhabi Group, UAE)

Zong (recently been acquired by China Mobile for US$ 450 million).

5.3 Agricultural Industry

Agriculture is a vital sector of Pakistan's economy and accounted for 26% of the GDP in 1999-2000, according to government estimates. The sector directly supports three-quarters of the country's population, employs half the labour force, and contributes a large share of foreign exchange earnings. The main agricultural products are cotton, wheat, rice, sugarcane, fruits, and vegetables, in addition to milk, beef, mutton, and eggs. Pakistan

82 http://pcworld.about.com/od/workplace/Troubled-


83 www.worldbank.com/pakistan

depends on one of the world's largest irrigation systems to support production. There are 2

principal seasons. Cotton, rice, and sugarcane are produced during the kharif season, which lasts from May to November. Wheat is the major rabi crop, which extends from November to April. The key to

a much-needed improvement of productivity lies in

a more efficient use of resources, principally land

and water. However, change is dependent on the large landowners who own 40 percent of the arable land and control most of the irrigation system, which makes widespread reform difficult. Assessments by independent agencies, including the World Bank, show these large landholdings to be very unproductive. Pakistan is a net importer of agricultural commodities. Annual imports total about US$2 billion and include wheat, edible oils,

pulses, and consumer foods.

Pakistan is one of the world's largest producers of raw cotton. The size of the annual cotton crop—the bulk of it grown in Punjab province—is a crucial barometer of the health of the overall economy, as

it determines the availability and cost of the main

raw material for the yarn-spinning industry, much of which is concentrated around the southern port city of Karachi. Official estimates put the 1999-2000 harvest at some 11.2 million 170-kilogram bales, compared with the 1998-99 outturns of 8.8 million bales and the record 12.8 million bales achieved in 1991-92. The government recently intervened in the market to boost prices and to encourage production. A major problem is that the cotton crop is highly susceptible to adverse weather and pest damage, which is reflected in crop figures. After peaking at 2.18 million tons in 1991-92, the lint harvest has since fluctuated considerably, ranging from a low of 1.37 million tons in 1993-94 to a high

of 1.9 million tons in 1999-2000.

The 2000-01 wheat crops was forecast at a record 19.3 million tons, compared to 17.8 million tons produced during the previous year. This increase is due largely to favourable weather and a 25-percent increase in the procurement price to about US$135 per ton. About 85 percent of the crop is irrigated. Despite the record production, Pakistan will continue to be a major wheat importer. The government has imported an average of US$2.4

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Economic Research: Pakistan

million annually over the past 5 years. The United States and Australia are the major suppliers. Demand for wheat is increasing from Pakistan's rapidly growing population as well as from cross- border trade with Afghanistan.

Pakistan is also a major rice exporter and annually exports about 2 million tons, or about 10 percent of world trade. About 25 percent of exports are Pakistan's famous fragrant Basmati rice. Rice is Pakistan's second leading source of export earnings. Private traders handle all exports. Pakistan's main competitors in rice trade are Thailand, Vietnam and India.

Tobacco is grown mainly in the North-West Frontier Province and Punjab and is an important cash crop. Yields in Pakistan are about twice those for neighbouring countries largely due to the extension services provided by the industry. Quality, however, is improving only slowly due to problems related to climate and soil. Farmers have started inter- cropping tobacco with vegetables and sugarcane to increase returns. About half of the total production is used for cigarette manufacturing and the remainder used in traditional ways of smoking (in hand-rolled cigarettes called birris, in water pipes, and as snuff). The share of imported tobacco is increasing gradually in response to an increased demand for high-quality cigarettes.

Minor crops account for only 5 percent of total cultivated area; these include oilseeds (sunflower, soybean), chillies, potatoes, and onions. Domestic oilseed production accounts only for about 25% of Pakistan total edible oil needs. As a result, Pakistan spends more than US$1 billion annually in scarce foreign exchange to import edible oils, while its oilseed processing industry operates at less than 25 percent of capacity due to an inadequate supply of oilseeds. For 2000-01 total oilseed production was forecast to decrease 10% to 3.6 million tons. The government has highlighted development of the oilseed sector as a priority.

Pakistan's fishing industry is relatively modest, but has shown strong growth in recent years. The domestic market is quite small, with per capita annual consumption of approximately 2 kilograms.

About 80 percent of production comes from marine fisheries from 2 main areas, the Sindh coast east from Karachi to the Indian border, and the Makran coast of Baluchistan. Ninety percent of the total marine catch is fish; the shrimp, which constitute the remainder are prized because of their greater relative value and demand in foreign markets. During 1999-00, total fish production was 620,000 tons, of which 440,000 tons consisted of sea fish and the remainder were fresh-water species. About one-third of the catch is consumed fresh, 9% is frozen, 8% canned, and about 43% used as fish meal for animal food.

Livestock accounts for 40% of the agricultural sector and 9% of the total GDP. Principal products are milk, beef, mutton, poultry, and wool. During 1999, the livestock population increased to 120 million head. That same year Pakistan generated 970,000 tons of beef, 640,000 tons of mutton, and 190,000 tons of poultry. In an effort to enhance milk and meat production, the Musharaf government launched a comprehensive livestock development project with Asian Development Bank assistance. Poultry production provides an increasingly popular low-cost source of protein. Modern poultry production is constrained by high mortality, high incidence of disease, poor quality chicks, and poor quality feed, combined with an inadequate marketing system. Frozen poultry have only recently been introduced.

Forests cover an area of 4.2 million hectares or about 5 percent of the total area of Pakistan. The principal forest products are timber, principally for house construction, furniture, and firewood. Many of the country's wooded areas are severely depleted as a result of over-exploitation. The government has restricted cutting to protect remaining resources—though corruption often jeopardizes environmental efforts—and has lowered duties to encourage imports. Forestry production has since declined from 1.07 million cubic meters in 1990-91 to 475,000 cubic meters in 1998-99. Pakistan imports an estimated US$150 million of wood products annually to meet the

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requirements of a growing population and rising demand by wealthy elite. 84

Politics play a very large part in the agricultural industry. For example in south of Punjab Vehari district where cotton, wheat, rice and sugar cane are main agricultural products. The area is dominated by few landlords such as "Khichi", "Doltana", "Bhabha", "Mitru", "Jatt" and "Dogar" families. All involved in parliamentary politics and have total control over the local police and the judicial setup. There is no clear political division among the landlords even in single family but PPP and PML-N are the largest parties.

5.4 Tourism Industry

Pakistan offers vistors a diverse array of cultures, people and landscapes.The country's attractions range from the ruins of ancient civilizations such as Mohenjo-daro, Harappa and Taxila, to the Himalayan hill stations, which attract those interested in field and winter sports. Pakistan is home to several mountain peaks over 7000m, which attracts adventurers and mountaineers from around the world, especially K2. 85 The northern parts of Pakistan have many old fortresses, towers and other architecture as well as the Hunza and Chitral valleys, the latter being home to the small pre-Islamic animist kalasha community who claim descent from the army of Alexander the Great. In Punjab is the site of Alexander's battle on the Jhelum River and the historic city Lahore, Pakistan's cultural capital, with many examples of Mughal architecture such as the Badshahi Masjid, Shalimar Gardens, Tomb of Jahangir and the Lahore Fort.

In 2009, The World Economic Forum’s Travel & Tourism Competitiveness Report ranked Pakistan as one of the top 25 tourist destinations for its World




85 www.wikipedia.org – Tourism/Pakistan

Heritage sites. Ranging from mangroves in the South, to the 5,000-year-old cities of the Indus Valley Civilization —Mohenjo-daro and Harappa. However like other industries lack of government attention, environmental degradation and complete disregard of the importance of the tourism sector has meant the rapid deterioration of this vital industry. The present and previous governments have consistently ignored the tourism industry resulting in huge losses to the growth and development opportunities offered by the sector.

5.5 Role of Foreign Aid

Pakistan has been a recipient of foreign aid since its existence. This aid has been in the form of grants, tied aid, project aid and huge inflows intended to keep the foreign exchange reserves at a safe level to cope with industrialization related liberal import policy. Foreign aid has played very important role in the economic development of Pakistan. In the beginning Pakistan received very little aid from international monetary agencies like World Bank and IMF. Industrialization process began in Pakistan after the late 50s and to fulfill the demand of intense development activity, increased reliance on foreign resources became inevitable. 86 In the economic history of Pakistan five-year planning scenario is also responsible for foreign aid. Government of Pakistan had to request for the foreign aid for the completion of the five years targets and the volume of foreign aid increased with the introduction of every five-year plan.

Due to geo-political developments around its borders Pakistan received liberal assistance packages during the decade of 60’s and 80’s. There was lavish foreign aid and military assistance to Pakistan due war in Afghanistan. The inflows of generous foreign aid reached its peak in the era of General Zia. However the composition and terms of foreign aid changed considerably from grants and

86 Abbas. S.A. & Brecher, I. (1993). Foreign Aid & Industrial Development in Pakistan, Karachi, Vanguard

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grant like assistance to hard term loans over the years. The share of grants and grant like assistance in the total commitments was 80% during the first five-year plan (1955-60). It was dropped to 46% during the second five year plan (1960-65) and continued to decline thereafter, averaging 31% during the third five year plan (1965-70) and 10% in the fourth five year plan (1970-75). 87

The major sources of foreign economic assistance to Pakistan have been the consortium, non- consortium, and Islamic countries. The foreign aid to Pakistan consortium consists of 11 countries, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Norway, Sweden, UK and USA. Consortium is the single largest source, which provides 81% of total foreign aid. It consists of 47% on bilateral and 34% multilateral basis. 88

Foreign aid is granted to reduce the budget deficit, trade promotion, environmental spending, humanitarian relief, peacekeeping and the promotion of political transitions to democracy. However foreign aid fails as a development policy because it destroys the incentives of the marketplace and extends the power of the ruling elites. Because it leads the Third World away from the free market, it actually increases Third World poverty. It must be emphasized that free trade alone will not solve all of the problems of Third World poverty. It will not eliminate the shackles of government regulation and intervention that dominate the Third World economies. That task can only be done by the people of the third world themselves. Yet, eliminating foreign aid and instituting free trade will at least encourage Third World peoples to develop institutions such as independent judiciary and media, private property rights and free markets which will lead to growth and prosperity.

Unnecessary foreign aid is like a slow poison and beggars have no choice but to live with indignity. Ours is the age of economic salvation and an institutionalized siege. The fate of a nation is changed by the will of its people and political leaders not by the foreign masters. Economic independency is the daunting goal but not the impassable gulf. There is the theft of 600 billions of different taxes in Pakistan and revenue of 143 billion is wasted through smuggling every year. Furthermore corrupted elites of politicians and bureaucrats have at least $ 50 billion in foreign banks. All these looted money should be regained. Tax system along with the complete abolishment of smuggling should be institutionalized. More emphasis should be made on agriculture sector along with small business industries. Efforts should be made to export high-tech products. Self-reliance and economic stability can be achieved by joint giant effort. Pakistan is blessed with immense human and natural resources - it is a pity that the country is catastrophically been mismanaged by the inept ruling class of military, bureaucrats and politicians.

87 Alesiana A. and Dollar, D. (1998). Who gives foreign aid to whom and why? Cambridge, National Bureau of Economic Research.

88 Abbas. S.A. & Brecher, I. (1993). Foreign Aid & Industrial Development in Pakistan, Karachi, Vanguard

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Chapter# 6:


Throughout the report, the author analysed various economic theories and economies of Asian, Latin American and European countries and highlighted both the negative and positive aspects. Finally this section will collate all of the highlighted points and aim to present guidelines for senior party leadership and PTI members/worker to further research and develop.


Like many other developing countries where 45 to 80 % of the population derives its livelihood, agriculture is the key-determining sector in the economy of Pakistan. Contribution of agriculture to GDP in 2000-2001 was 24.6 % and in 2001-2002 it has declined to 24.1 %. Size of land holding in Pakistan is very small and has decreased over time. According to agricultural census, there are 5.1 million farms in the country and 93% of these are small and marginal farms accounting for 60 % of the total cultivated area. The large farms are only 7 % of the total farms accounting for 40 % of the total cultivated area. The current economic direction of the country is headed towards disaster unless emergency measures are taken to rectify numerous distortions in virtually every industry. Manufacturing sector produced the output of 3.3 percent in 2008-2009 recorded as the weakest in history, which was expected to grow by 7.5 percent, caused by the continuing tension between the Zardari government against the Supreme Court.

Pakistan is a big producer of food crops and other farm produce and has the potential to cash in on the rising trend of food prices by formulating and implementing strategies aimed at making the country a major exporter of cash crops and value- added agribusiness products. For that to happen,

however, there needs to be substantially increase budgetary spending for programmes and projects in the agricultural, rural development, irrigation, horticulture, livestock, small and medium enterprises and trade promotion sectors.

One of the major opportunities for Pakistani farm produce lies in China, which is a significant importer of farm produce, with the rising demand being fuelled partly by the growth in population and partly by rising per capita income levels and high GDP growth. According to one estimate, China's annual import of farm produce has exceeded $10 billion a year. This rising trend in imports is expected to continue, making China a big potential market for Pakistani farm produce. The two countries enjoy excellent relations and China is now looking to import large quantities of fruit and other farm produce from Pakistan. Chen Neiz Wge, a Chinese agricultural expert visited Pakistan in 2009, and agreed to issue a quarantine certificate, allowing the import of Pakistani mangoes. The Chinese Quarantine and Quality Control Bureau declared Pakistani mangoes pest-free and of good quality. Last year, for the first time, pears grown in western China were transported overland to Pakistan, using the KKH (Karakoram Highway). The same route can readily be used to transport Pakistani mangoes and other fruit to western China.

Fruit exports to China (not just mangoes but many other varieties as well, including citrus fruit) could become an important source of foreign exchange earning for Pakistan, with volumes eventually running into hundreds of millions of dollars a year. According to an interim report prepared by Rural Partnerships Limited, in association with Enterplan Limited and SEBCON (Pvt) Limited under the Asian Development Bank-financed Technical Assistance Project. The overall trends that are apparent for fruit production in Pakistan are those while the total area of production has increased, the overall production has decreased. The report highlights problems in Balochistan with the drought and subsequent water shortage that has seriously cut the yields of apples, peaches, apricots and grapes. Exports of fruit products continue, but production

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Economic Research: Pakistan

fails to take account of this segment of the market, which has potentially high value, but stringent quality requirements. Moreover cool chain distribution and cold storage of fruit and vegetables is another problem that needs to be urgently addressed. As accurate data on the current cold store numbers and capacities throughout the country are not available. Also, much of the existing inventory of cold store equipment is dominated by old designs prior to the influence of thermal efficiency and energy conservation being fully appreciated.

estimated losses are at Rs800 billion. With these huge losses, the investment available for the agricultural sector shrinks. Lack of investment lowers the average crop yields, which are one of the lowest in the world. The agricultural economy suffers from different shocks:

1. The first shock is the lack of transparent and effective institutional support and government intervention;

2. The second is the loss of wastage.

3. The third is lack of adequate investment and

4. The fourth is abysmally low national yields.

Despite being the world's fourth-largest cotton producer, Pakistan needed to import around 1.6 million bales of high-grade cotton in fiscal 2003-04 to meet the growing demand in local textile mills. For the first time in years, the mills imported at least 300,000 bales of cotton from India to bridge the supply gap in the local market. The irony, however, is that while domestic prices of cotton in

Pakistan soared to record highs last year, the price of raw cotton in the international market has hovered at the 60 US cents per pound level in New



This creates a vicious cycle and these issues need to



The existing agricultural marketing departments are being handled by provinces through the directorate of marketing, which works under the Director General Extension. In Punjab, PAMCO has been created with a limited mandate. In Sindh, they are governed by the Agriculture Produce Market Act of 1939. Not different from any other public sector organisation, the marketing department is focusing

for gaps in the latter that distorts the spirit of the act. Marketing is one of the major problems of agriculture, while organisations responsible for the limited role of managing wet markets do not take care of poor infrastructure and the rights of growers. The weakest link in agriculture is the extension services. There are others as well but one can argue that what is important is that knowledge is not being imparted to the farmers. Given the current poor food security systems, short-term





Nothing better illustrates the need for a big agricultural producer like Pakistan to focus on value-addition in its effort to boost export earnings and promote higher levels of GDP growth. Agribusiness value-addition strategies - not just in the cotton sector but right across the board of the whole agricultural sector - should therefore be one of the key elements of PTI’s agricultural policy. 89

There are a number of problems and challenges faced by the consumers and the growers. When these two major players are given raw deals, there is an automatic spill over of this on foreign exchange earnings and the cartels of hoarders and middlemen create a parallel economy. In addition to this, it is estimated that approximately 35% of agricultural production is wasted because of the lack of storage, pre-post harvest technology, temperature-controlled storages and transportation, know-how etc. On this count, the

89 www.pakissan.com/english/agri.overview/cashing.i



Pakistan to date has taken dictation from the World Bank on extension and the Training & Visit programme borrowed from Israel to improve its agricultural methods. The cost incurred by Pakistan has been immense. It is not possible to take a programme from another source and make it work in another cultural context. With limited chance of increasing land and water resources, future growth has to come largely from diversification in line with market demand and productivity increase, which will require major changes in systems, policies, and

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institutions for agriculture. And the most important change required is redefinition of the role of government in agriculture, which would be crucial in making agriculture competitive in the global market.

The appropriate role of government is to become the enabler of smoothly functioning markets through institutional and regulatory reforms that facilitate private sector activities and market efficiency. Where market failure is not an issue and where intervention in the past led to marked inefficiency, the strategy to be adopted now is to balance the government's role through policy reforms and allowing limited market liberalisation. This means that recognising the role of the private sector is the first step toward rationalising public sectors' role in agriculture. This also means that government must reshape its investments and public expenditure on agriculture.

The Government has a role in the development of infrastructure, especially rural infrastructure for

agricultural growth. In this area, PTI’s agricultural policy makers should focus on developing major programme of lining of watercourses to improve water delivery, in addition to programmes for better water management (through user's association) and farm-to-village road construction, which would improve the distribution of inputs and the marketability of outputs, especially high-value



The key measure of success in agriculture is going

to be influenced by efforts to reduce rural poverty. In a labour-abundant economy such as Pakistan, subsidies on capital (heavy machinery such as combine harvesters) are inappropriate because they distort factor markets and lead to labour displacement. It is, therefore, important that PTI pursues a policy of removing subsidies to mechanisation that displace labour without increasing output significantly, as the present government has a role to undertake directed development spending toward the small farmers




One of the key planks of PTI’s agricultural policy

should be the correction of distortions in land market. Lessons from President Chavez’s land reforms should be considered where the government sought to break the huge ownership of land held by a few wealthy and powerful landlords. This approach should be carefully planned, as land reforms did not do well in the past. But some important measures can be implemented immediately. Foremost is providing security of tenure to may farmers, especially tenants-at-will, thereby improving responsiveness to incentives and creating better incentives for long-term investments. Property rights can be reinforced by improving and streamlining land registration by establishing a system of permanent title deeds and computerisation of land records. These records should be properly maintained, updated and easier to access. An independent body should be set up for settling land disputes and eliminating artificial government incentives to large holders, such as low machinery prices and unequal access to credit.

The following key points should be considered for further research and thought by senior PTI leadership:

- Planning for land reforms should be sought out. Liaison with Venezuela’s Hugo Chavez to understand how they carried out their land reforms.

- Undertaking massive infrastructure programmes across the country similar to the one’s carried out by Britain, France, Germany and Japan after the second world way, building roads, railways, subways, power plants, schools, hospitals etc. Financial and human resources would be sought from highly skilled but marginalised overseas Pakistani and domestic populace. The country already has established public sector and private companies but they are mired in corruption and tax evasion practices.

- Overhauling the current tax system. The recent budget highlighted plans to raise in taxes about Rs1.5tr this year. Population of Pakistan is about 170 million, which

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Economic Research: Pakistan

comes to roughly Rs9, 000 each per year. 90 Government of Pakistan also uses other sources to raise money, borrowing and selling off state assets, and asking for aid from anyone willing to give. But still, what we can raise ourselves in taxes accounts for most of what our government can spend. And the plan to instigate mass infrastructure and education programmes can be fully costed for once reforming and collection of taxes becomes a norm. Many of Pakistan’s rich have tens of millions of dollars in assets. And the middle class numbers tens of millions of people. The resources of the country are enormous. The incompetent and morally bankrupt Zardari regimes have just made a collective decision not to use them for the benefit of everyone but themselves. Pakistani’s currently pay only about 10% of GDP in taxes. (GDP is our total economy, what all of us together earn in a year.) Meanwhile, Sri Lankans pay 15% of their GDP in taxes, Indians pay 17% Turks pay 24 %, Americans pay 28 % and Swedes pay the highest at 50 %. 91 Moreover raising taxes does not depend on foreign policy, getting approval from the IMF, World Bank or Uncle Sam. It does not require a breakthrough in technology or a year of good rain. It’s under our control.

- With a PTI government, if we reformed and instigated clean and accountable taxes starting from the government like chairman Khan envisages. For example, when PTI comes in to power and the income from taxes is raised from 10 per cent of GDP to 12 per cent. This would give the treasury Rs300bn a year. This could be used to rent a million classrooms for Rs10, 000 per month, give jobs as teachers to a

90 www.dawn.com/wps/wcm/connect/dawn-content-



91 www.dawn.com/wps/wcm/connect/dawn-content-



million graduates for Rs15, 000 per month, and ensure that every single child in our country receives a decent education. By raising taxes to the level of Sri Lanka, 15 % of GDP, would generate additional revenue equal to twice our official defence budget. Match India at 17 %of GDP and the additional money would equal a staggering 25 times Pakistan’s current education, health and housing budgets combined. Hence the massive infrastructure, educational, health, welfare programmes that are in PTI manifesto can be implemented with an accountable tax regime. There’s no doubt that much of officialdom is corrupt. But so are we, the citizens. Every time we accept a fake receipt, or fail to declare a bit of income, we are stealing from our country in precisely the same way our politicians and bureaucrats are. Our thefts as taxpayers might be comparatively small, but that is because taxes are so low in our country to begin with. At the moment, we feed off each other. As we citizens start to display more probity in tax, we are likely to demand more probity in how our money is spent, and our strengthening courts and media are likely to help us get it. The tax revolution is not going to happen overnight. It will take time. But there is good reason to hope PTI will start the revolution that will lead the country to the path of prosperity in line with the Quaid’s and Allama Iqbal’s vision.

- Creation of a new body “Agricultural Development Authority (ADA)” tasked to carry out development and dissemination of new agricultural technology development, poverty alleviation, small farmer development, protection of environment, quality control and implementing international rules and regulations. This body will only focus on rural development across the four provinces delegating substantial control to locally created bodies on the ground.

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- In 2007 President Chavez announced that Venezuela would be formally pulling out of the IMF and the World Bank, having paid off its debts of around $3 Billion five years ahead of schedule and so saving US $8 million. Chavez then announced the creation of a regional bank, the Bank of the South, and acted against the Washington consensus by supporting alternative models of economic development, and has advocated cooperation among the world's poor nations. The party’s economic spokesperson should establish contact with the Chavez administration in gaining a thorough understanding of their programmes and then modifying them according to Pakistan’s needs.


The author is a banker. He has work experience in banking and finance. He is a post graduate of Brunel University (London, UK) in MSc Management. [E-mail: asad_muk@yahoo.co.uk]

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Economic Research: Pakistan


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Bigg, David, Fisher, Stanely and Dornbusch, Rudiger. Economics. s.l. : Mcgraw Hill Companies, 2007. ISBN


Wenger, Andreas and Zimmermann, Doran. International Relations - From the cold war to the Globalized World. s.l. : Lynne Rienner Publishers,Inc, 2006.

Debate: Happily Ever NAFTA? John Cavanagh, Sarah Anderson, Jaime Serra and J. Enrique Espinosa, et al. 132, s.l. : Washingtonpost.Newsweek Interactive, LLC, 2002.

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Whither the World Bank and the IMF? Krueger, Anne O. 4, s.l. : American Economic Association, 1998, Vol. 36.

IMF. IMF statistical data. s.l. : IMF, 2009.

Online Resources



















www.wikipedia.org – Pakistan, Islamic Banking




Committee on Economics

Economic Research: Pakistan


List of 38 official ministries of Pakistan.


Makhdoom Amin






Dr. Arbab Alamgir






Ch. Ahmed






Abdul Qayyum



Khan Jatoi

Defence Production


Mir Hazar Khan Bijarani



Hameed ullah Jan Afridi



Makhdoom Shah




Foreign Affairs



Mir Aijaz Hussain Jakhrani







Housing and works


Nazar muhammad




food and Agriculture


Syed Mumtaz



Alam Gilani

Human Rights


Mian Manzoor



Ahmed Wattoo

Industries & Production


Waqar Ahmed






Information &


Mr. Qamar Zaman Kaira

Broadcasting / Kashmir Affairs and Northern Areas


Rehman A. Malik



Humayun Aziz

Livestock and Dairy Development




Mr. Justice ( Retd)



Abdul Razzaq A. Thahim

Local Government and Rural Development


Shahbaz Bhatti



Dr. Zaheeruddin



Babar Awan

Parliamentary Affairs






Planning and Development


Dr. Firdous Ashiq Awan

Population Welfare


Mir Israrullah




Postal Services


Syed Naveed






Haji Ghulam



Ahmed Bilour



Syed Hamid Saeed Kazmi

Religious Affairs


Ms. Samina Khalid Ghurki

Social Welfare and Special Education


Pir Aftab Shah Jilani



Najamuddin Khan

State and Frontier Regions


Lal Muhammad




Special Initiatives


Rana Muhammad



Farooq Saeed

Textile and Industry



Raja Pervaiz




Water & Power


Shahid Hussain




Youth Affairs

Committee on Economics

Economic Research: Pakistan


32 Noor ul haq Qadri

Zakat & ushr


33 Dr. Farooq Sattar

Overseas Pakistanis


34 Babar Ghuri

Ports & Shipping


35 Azam Khan Swati

Science & Technology


Mulana Att ur 36 rehman


Syed Khursheed

Ahmed Shah

Labour & Manpower





Muhammad Khan

Narcotics Control




State Bank of Pakistan

BANKS OPERATING IN PAKISTAN ∑ State Bank of Pakistan 1. First Women Bank Limited 2. National

1. First Women Bank Limited

2. National Bank of Pakistan

1. First Women Bank Limited 2. National Bank of Pakistan 3. Industrial Development Bank 4. Punjab

3. Industrial Development Bank

4. Punjab Provincial Cooperative Bank

5. SME Bank

6. Zarai Taraqiati Bank

Cooperative Bank 5. SME Bank 6. Zarai Taraqiati Bank 7. Allied Bank of Pakistan, Karachi 8.

7. Allied Bank of Pakistan, Karachi

8. Arif Habib Bank Limited, Karachi - (Formerly Arif Habib Rupali Bank)

9. Askari Bank, Rawalpindi

10. Atlas Bank, Karachi

11. Bank AL Habib, Karachi

12. Bank Alfalah, Karachi

13. Barclays Bank,Karachi

14. Crescent Commercial Bank, Karachi. 'Saudi based Samba financial group Acquired Crescent Commercial Bank and now it is renamed as Samba Bank Ltd'

15. Faysal Bank, Karachi www.faysalbank.com

16. Habib Bank, Karachi

17. Habib Metropolitan Bank, Karachi

18. JS Bank

19. KASB Bank, Karachi

20. MCB Bank Limited (formerly Muslim Commercial Bank), Islamabad

21. Mybank Limited, Karachi

22. NIB Bank, Karachi

23. PICIC Commercial Bank, Karachi NIB Bank Limited has acquired PICIC Group including Picic Commercial Bank Ltd.'

24. Saudi Pak Non-Commercial Bank, Karachi

25. Soneri Bank, Karachi

26. Union Bank, Karachi - Standard Chartered Bank has acquired Union Bank

27. United Bank, Karachi

28. Bank Of Punjab, Lahore

29. Citi bank,Islamabad

30. Standard chartered Bank Ltd,Karachi

31. ABN Amro Bank Ltd,Karachi Now merged in RBS (Royal Bank of Scottland)

32. HSBC Ltd,lahore

merged in RBS (Royal Bank of Scottland) 32. HSBC Ltd,lahore 33. Pak China Investment Company Limited,

33. Pak China Investment Company Limited, Islamabad

34. Pakistan Industrial Credit and Investment Corp Limited, Karachi 'NIB Bank Limited Acquired PICIC Group, Including Picic Commercial Bank Limited'

35. Pak Kuwait Investment Company Limited, Karachi

36. Pak Libya Holding Company Limited, Karachi

37. Pak-Oman Investment Company Limited, Karachi

38. Saudi Pak Industrial and Agricultural Investment Company (Pvt) Limited, Islamabad

39. House Building Finance Corporation, Karachi

40. Investment Corporation of Pakistan, Karachi

Karachi 40. Investment Corporation of Pakistan, Karachi 41. Al-Towfeek Investment Bank Limited 42. Invest Capital

41. Al-Towfeek Investment Bank Limited

42. Invest Capital Investment Bank Limited

Committee on Economics

Economic Research: Pakistan

43. Atlas Investment Bank Limited

44. Crescent Investment Bank Limited

45. Escorts Investment Bank Limited

46. First Credit and Investment Bank


47. First International Investment Bank Limited

48. Fidelity Investment Bank Limited

49. Franklin Investment Bank Limited

50. Islamic Investment Bank Limited

51. Jahangir Siddiqui Investment Bank Limited

52. AMZ Securities

53. Orix Investment Bank (Pakistan) Limited

54. Prudential Investment Bank Limited

55. Trust Investment Bank Limited

Investment Bank Limited 55. Trust Investment Bank Limited 56. First Credit & Discount Corp Limited 57.

56. First Credit & Discount Corp Limited

57. Prudential Discount & Guarantee House Limited

58. National Discounting Services Limited

59. Speedway Fordmetall (Pakistan) Limited

Services Limited 59. Speedway Fordmetall (Pakistan) Limited 60. Asian Housing Finance Limited 61. Citibank Housing

60. Asian Housing Finance Limited

61. Citibank Housing Finance Company Limited

62. House Building Finance Corporation

63. International Housing Finance Limited

Corporation 63. International Housing Finance Limited 64. Pakistan Venture Capital Limited 65. Pakistan Emerging

64. Pakistan Venture Capital Limited

65. Pakistan Emerging Ventures Limited