Economic Profile Pakistan 1947-2013
Pakistan got its independence from the British occupation on 14th August 1947. Since emergence of the state on the political background of the world, economically, it has experienced a bumpy ride all together. Many reasons for this are given by the experts and arguments are presented as to how the situation can be remedied but situation has gradually worsened over the years.
Economic and social outcomes in Pakistan over the last sixty years are a mixture of paradoxes. Pakistani economy grew at a fairly impressive rate of 6 percent per year through the first four decades of the nation's existence. A feat achieved by a very few nations. In spite of rapid population growth during this period, per capita incomes doubled, inflation remained low and poverty declined from 46% down to 18% by late 1980s, according to eminent Pakistani economist Dr. Ishrat Husain. This healthy economic performance was maintained through several wars and successive civilian and military governments in 1950s, 60s, 70s and 80s until the decade of 1990s, now appropriately remembered as the lost decade.
Politically, however, the interplay of religious fundamentalism, sectarianism, ethnic cleavages and regional economic disparities has made the country volatile and unstable. Various East Asian countries that were behind Pakistan in the 1960s have surged far ahead in most economic and social indicators. Pakistan has thus been unable to realize its potential. South Korea is a prime example of this case. In 1960’s both counties were almost at the same economic stage but owing to the inability to implement the economic plans appropriately, the gap between the two states widened with the passage of time in South Korea’s favor.
Despite sharing a common historical, cultural and social milieu, Pakistan and India have pursued different paths since independence in 1947. Both countries have done reasonably well in improving their economies and reducing absolute poverty levels. India has, however, emerged as a stable and vibrant democracy while Pakistan has spent half of its post-independence years under military dictatorships and is currently struggling to quell an Islamic insurgency in the northwest part of the country. The democracy–development nexus appears to be well entrenched in the case of India, while it is faltering in Pakistan. A great deal of recent literature has suggested that China and India are the typical representatives of authoritarian and democratic regimes, but fewer attempts have been made to resolve this puzzle in the case of India and Pakistan, two countries that are more akin to each other and share a common legacy.
In order to address these questions it is useful to revisit the essential dimensions of Pakistan’s economic and political history, a history which can be divided into six distinct periods:
• The Flat Fifties, 1947 to 1958
• The Golden Sixties, 1958 to 1969
• The Socialist Seventies, 1971 to 1977
• The Revivalist Eighties, 1977 to 1988
• The Muddling Nineties, 1988 to 1999
• The Reforming Hundreds, 1999 to 2007
Period I: The Flat Fifties, 1947 to 1958
Pakistan came into existence as a moth-ridden country at the time of the partition of India. The British-controlled provinces of Punjab and Bengal were each divided into two parts. East Punjab and West Bengal formed part of modern-day India; West Punjab and East Bengal, along with three other provinces, together formed Pakistan. The physical separation between eastern and western Pakistan, with Indian territory in between, put Pakistan at a serious disadvantage from its inception.
This era marked the government of Liaquat Ali Khan and initiation of First Fiver Yearly Plan. It was initiated by Ministry of Finance (MoF), studied and developed by the Economic Coordination Committee (ECC) and framed after the Russian example. The plan was based on the theory of Cost of Productoin value, and also covered the areas of Trickle-Down economic system. State Bank of Pakistan was established to kick start the economic engine of the nation and major economic infrastructural expansions took place in the process. Currency war between Pakistan and india was also a highlight of this era which started with the devaluation of pound sterling and refusal of exchange in PKR by indian authrorites in 1949. In the mid 1950, these relations were restored and trade resumed between the two nations.
This era also marked the start of the Korean War which led to economic bloom the local economy but the growth was retarded by the assassination of Liaqat Ali Khan in October 1951. In 1953 the plan collapsed althogher due to want of funds. The plan was initiated unsystematically, inadequate staff and lack of ambition is listed among few of the many causes. Also the shortage of consumer goods like food, clothes, medicines and sharp fall in production due the monsoon floods of 1951-52 and 1952-53 were a decisive force to hinder the progress of the nation. Thus, in the end, Prime Minister Khawaja Nazimuddin was forced to end the program after sending his request to provide economic assistance from the United States and other friendly counties.
In 1955, Prime minister Muhammad Ali Bogra again revived the plan and published in 1956. After reassessing, the programme was again launched with focusing (as highest priority) on agricultural development, and the strong emphasis placed on rapidly increasing the developmental effort in East-Pakistan and in the less-developed areas of West Pakistan. Prime minister Huseyn Suhrawardy of Awami League gave much priority to food development, agriculture and social development in both states. The concept of Collective farming was introduced by Suhrawardy as part of his agricultural policies and around 27.0Mn rupees were spent in order to organised the agricultural in the country. However, this programme was built entirely in the absence of much essential information and basic statistics.
In practice, this plan was not implemented because of its enormous size that lacked the physical and personnel assistance. The shortage of technical knowledge also devastated the programme. The Awami League's government also had shortage of foreign exchange to execute the plan, and was unable to find outside assistance to fulfill its commitment to the first five-year plans.
The seeds of separation were further sown when the Muslim League lost the 1954 provincial elections in East Bengal due to a growing disaffection with the ruling political elite in West Pakistan. This elite from the Punjab province, instead of coming to grips with the grievances of East Bengal, adopted a confrontational strategy to consolidate their power by merging all four western Pakistan provinces into one province. As a result, East Pakistanis were antagonized when their province, which contained the majority population, was forced to accept parity with newly-formed West Pakistan in the Parliament. The three smaller consolidated provinces—North-West Frontier Province (NWFP), Sindh and Baluchistan—also protested Punjab’s attempt to establish hegemony.
The political atmosphere was too vitiated; political instability was too acute; tensions between the different tiers of the government were so damaging; the challenge of setting up the organs of a new state was so formidable; and the influx of millions of refugees from India was too demanding. As a result, economic management took a back seat in this formative phase of Pakistan’s life.
Period II: The Golden Sixties, 1958 to 19695
Ayub Khan, the first military dictator of Pakistan, assumed complete control of the state in October 1958 and reigned over the golden period of Pakistan’s economic history. With the help of Harvard advisors, Khan vigorously implemented the Planning Commission on Economic Management and Reforms with impressive results.
Despite the failure of first five-year plans, the programmes were revived and restated by the military government. The second five-year plans gave highest priority to heavy industrial development, advancement in literature and science, and had single underlying purpose: "to advance the country as far as possible, within the next five years, along the road of these long-range objectives.
GDP growth in this decade jumped to an average annual rate of 6 percent from 3 percent in the 1950s. The manufacturing sector expanded by 9 percent annually and various new industries were set up. Agriculture grew at a respectable rate of 4 percent with the introduction of Green Revolution technology. Governance improved with a major expansion in the government’s capacity for policy analysis, design and implementation, as well as the far-reaching process of institution building. The Pakistani polity evolved from what political scientists called a “soft state” to a “developmental” one that had acquired the semblance of political legitimacy. By 1969, Pakistan’s manufactured exports were higher than the exports of Thailand, Malaysia and Indonesia combined. Though speculative, it is possible that, had the economic policies and programs of the Ayub regime continued over the next two decades, Pakistan would have emerged as another miracle economy.
However, the perception that income inequalities between the East and West had increased substantially and that wealth was concentrated in the hands of twenty-two families fuelled resentment among Bengalis who accused Ayub’s regime of reducing the East to an internal colony.
After the 1965 Indo-Pakistani War over Kashmir, FDI declined and economic constraints were imposed on Pakistan. The third five-year plan was designed along the lines of its immediate predecessor, produced only modest growth.The country had become urbanised by 1970 and 10% population lived in rural areas as compared to 1950. The third five-year plans promoted the activities of private sector investment and tend to increase the directly productive investment for the stable Financial sector development.
The third programme focused on Gross national product (GNP) growth which was increased at 122% and had focused on the enhancing the capabilities of private sector to operate in the country. The size of the third programme was determined in the light of a careful evaluation of the recent experience under the second programme. Although the third programme successfully ran for the first three years of the Third Five-Year Plan, but at the end, the third programme proved to be even more of a disappointment in terms of proclaimed production goals.The performance of the third programme was undeniable that led the economical disaster in the country. Dramatically, the agriculture growth sharply declined and desperately devastated the farming class of the country.
Authoritarian regimes devoid of legitimate political power use the instruments of state power to win or maintain coalitions, build up new alliances or take coercive measures against recalcitrant individuals and groups. Ayub’s attempt to win legitimacy, introducing the Basic Democracies system, in fact caused his regime a loss of popularity and credibility. This disaffection with the military regime was exploited by Sheikh Mujibur Rahman and his Awami League Party. The arrest and trial of Mujibur under the Agartala conspiracy case turned him into a popular leader in East Pakistan. His six-point agenda of autonomy became the manifesto of the Awami League which swept the 1970 elections in East Pakistan with a resounding majority. The reimposition of martial law and transfer of power to the Army chief, Yahya Khan, exposed the fragility of the guided democracy system.
Yahya Khan’s reluctance to transfer power to Sheikh Mujibur, the elected majority leader, reinforced Bengali suspicion and mistrust toward the Pakistani Army and West Pakistan. The post-25 March 1971 events led to a civil war that, with India’s strong backing, ended in the emergence of the independent state of Bangladesh. The break-up of Pakistan had a traumatic effect on the national psyche and negated the very concept upon which Pakistan was founded. Although East Pakistan benefited from Ayub’s economic reforms, the fact that these benefits were perceived as a dispensation from a quasi-colonial military regime to its colony—East Pakistan—proved to be lethal. According to I.A. Rehman, “[The] Central Establishment decided on a trade-off between autonomy and development but this maneuver failed in East Pakistan and it is unlikely to succeed in Balochistan and the tribal areas. The lesson is: no federating unit will surrender its rights to autonomy in exchange for any development works however huge their fall out.”
The overthrow of Ayub’s political system also reversed the economic system that had served the country so well. To outsiders, Pakistan was a model developing economy to emulate, but domestically there was a total rejection of this economic model.
The fourth five-year plans were abandoned after the successful succession of the East-Pakistan, and the brutal defeat at the hands of intense rival, India. Virtually, all fourth five-year planning was bypassed by the government of Prime minister Zulfikar Ali Bhutto. Under Bhutto, only annual plans were prepared, and they were largely ignored.
The fourth year plan was replaced by nationalization program by the then government.
Period III: The Socialist Seventies, 1971 to 1977
Zulfikar Ali Bhutto took advantage of the resentment against Ayub’s economic policies and promised to restore the principles of distributive justice and equity to the forefront of Pakistan’s development strategy under the slogan of Islamic socialism.
Bhutto’s populist policies of nationalizing industries, banks, insurance companies, educational institutions and other organizations, derailed Pakistan’s journey toward modernization and faster economic development. This setback hit Pakistan so badly that the East Asian countries that were lagging behind Pakistan in growth and economic indicators in the late 1960s not only overtook it but also became huge success stories. The oil price shock of the 1970s as well as droughts, floods and the withdrawal of external assistance did not help the situation, either. The growth rate in the 1970s fell to 3.7 percent per annum from the 6 percent recorded in the 1960s. Worst of all, the main plank on which the Bhutto government came to power social justice proved to be extremely weak. Income inequalities rose compared to the previous period while inflation accelerated, averaging 16 percent between 1971 to 1977, thereby hurting the poor.15 The large-scale manufacturing sector performed very sluggishly, netting a growth rate of only 3 percent, primarily sparked by vast public sector investment.
The idea that government control of the commanding heights of the economy can best spearhead industrial growth, allocate resources and invest in the activities that it considers a priority not only failed to materialize but antagonized the private sector. The lesson learned from this experience was that good populist politics are bad for the economy.
Period IV: The Revivalist Eighties, 1977 to 1988
The overthrow of the Bhutto government by a military coup in July 1977 and the ascendancy of a right wing military leader, General Zia ul-Haq, halted the socialist experiment. Political party activity was soon banned, thereby limiting political participation to the local level only. This small liberty, however, could not mask the centralization of political power in the hands of one man.
Zia ul-Haq used religion to provide legitimacy to his takeover and subsequent rule, asserting that Islam should be a unifying force for overcoming ethnic, linguistic and other propensities prevailing in the country. Centralization and personal control over the affairs of the state thus became easy to manage under this paradigm. The nexus between the military regime and components of the religious right, such as Jamaat-e-Islami, was extended to engulf the Islamic militant groups that participated in the Afghan war against the Soviets. The roots of present Islamic fundamentalism in Pakistan can be traced to this period.
Zia benefited from participating in the campaign to overthrow the Soviet Union in Afghanistan, as large amounts of military and economic assistance from the United States flowed into Pakistan. The long-term costs were, however, colossal. The spread of Kalashnikovs and drug culture, ethnic and sectarian violence, the smuggling of goods and the emergence ofjihadist parties can all be traced back to the 1980s.18 Madrassahs and training camps for militant groups proliferated during this period. State laws were modified, new Shariah courts were established and the educational curriculum was revised to inculcate a more hard-line or radical Islamic way of life.
Economic conditions, however, did improve: The Fifth Five-Year Plan (1978–83) was an attempt to stabilise the economy and improve the standard of living of the poorest segment of the population. Increased defense expenditures and a flood of refugees to Pakistan after the Soviet invasion of Afghanistan in December 1979, as well as the sharp increase in international oil prices in 1979-80, drew resources away from planned investments. Nevertheless, some of the plan's goals were attained. Many of the controls on industry were liberalised or abolished, the balance of payments deficit was kept under control, and Pakistan became self-sufficient in all basic foodstuffs with the exception of edible oils. Yet the plan failed to stimulate substantial private industrial investment and to raise significantly the expenditure on rural infrastructure development.
The sixth five-year plans represented a significant shift toward the private sector. It was designed to tackle some of the major problems of the economy: low investment and savings ratios; low agricultural productivity; heavy reliance on imported energy; and low spending on health and education. GDP grew at 6.6 percent annually, with agriculture at 4 percent and the manufacturing sector at 9 percent. Fiscal deficits, however, widened to 8 percent of GDP despite a decline in development expenditure. Domestic borrowing to finance these deficits did not weaken growth immediately but had serious repercussions for public finances and macro-economic stability in the 1990s. As a consequence, Pakistan had to approach the International Monetary Fund (IMF) for assistance in 1988.
Period V: The Muddling Nineties, 1988 to 1999
Nine different governments (four interim-appointed, four elected and one following the military coup of October 1999) ruled Pakistan in this period. Like the 1950s, when eight successive governments were formed, this period saw heightened political instability. Despite far-reaching reforms introduced in 1991, economic indicators once again fell sharply in contrast with the 1980s for several reasons other than political instability.
The failure to implement successive agreements led to the loss of Pakistan’s credibility among the international financial community. The confidence of local investors eroded when the foreign currency deposits of Pakistanis were suddenly frozen. Foreign investors were unhappy as all the power purchase agreements were re-opened and criminal action was initiated against Hubco, Pakistan’s largest foreign-owned power generation company. The GDP growth rate decelerated to 4 percent. While the agriculture sector recorded higher output, growth of the manufacturing sector was low. The investment ratio fell to 13.9 percent during 1998 and 1999 as foreign savings, which formerly bridged the gap between national savings and investment, dried up in May 1998.
The persistence of fiscal (above 7 percent of GDP) and external deficits (4 to 5 percent of GDP) led to the accumulation of large levels of domestic and external debt throughout the decade. Development expenditures took a major hit and GDP dropped to 3 percent from 8 percent in the first half of the 1980s. Social sector expenditures were squeezed to accommodate higher debt service and defense expenditures. Total external debt levels became unsustainable, rising from $20 billion in 1990 to $43 billion (47.6 percent of GDP) in 1998. Exports stagnated and Pakistan lost its market share in a buoyant world trade environment. The incidence of poverty nearly doubled from 18 to 34 percent, and the unemployment rate rose as well. Social indicators lagged behind other countries in the region. The Human Development Index of the United Nations Development Programme ranked Pakistan in one of its lowest development categories.
At least four main factors determined Pakistan’s economic performance in the 1990s. First, political instability and frequent changes in the government followed by a reversal of decisions taken by the preceding government created an environment of uncertainty and a lack of predictability. Second, there was widespread mis governance by the two major political parties ruling the country during this period. Personal, parochial and party loyalty considerations dominated decision making while institutions were bypassed. Third, there was a lack of political will to make timely and difficult decisions. The cumulative effect of avoiding and postponing such decisions, coupled with the failure to correct the distortions at the right time, proved too costly. Fourth, there were unforeseen exogenous shocks, such as the nuclear testing in May 1998 that shook investors’ confidence, accelerated the flight of capital, led to the imposition of economic sanctions and disrupted external economic assistance.
An interesting paradox is that the economic policies of both major political parties, the Pakistan Muslim League (PML) and the Pakistan People’s Party (PPP), who took turns ruling during the 1990s, were similar and could not be faulted. Both parties were committed to deregulation, privatization, liberalization, greater reliance on market forces and other economic reforms. The supporters of PML and PPP argued that the dismissal of the Nawaz Sharif government in 1993 and of the Benazir government in 1996 did not allow positive trends to persist. It can only be speculated whether the economic output for the decade would have been better had these governments completed their terms in office. Poor governance would have been largely offset by the continuity in policies, programs and projects. The stop-and-go cycle faced by Pakistani economic actors imposed enormous costs in terms of macroeconomic instability.
This era marked two 5 yearly plans. The seventh plans provided for total public-sector spending of Rs350 billion. Of this total, 36.5% was designated for energy, 18% for transportation and communications, 9% for water, 8% for physical infrastructure and housing, 7% for education, 5% for industry and minerals, 4% for health, and 11% for other sectors. The plan gave much greater emphasis than before to private investment in all sectors of the economy. Total planned private investment was Rs292 billion, and the private-to- public ratio of investment was expected to rise from 42:58 in FY 1988 to 48:52 in FY 1993. It was also intended that public-sector corporations finance most of their own investment programmes through profits and borrowing.
In August 1991, the government established a working group on private investment for the Eighth Five-Year Plan (1993–98). This group, which included leading industrialists, presidents of chambers of commerce, and senior civil servants, submitted its report in late 1992. However, in early 1994, the eighth plan had not yet been announced, mainly because the successive changes of government in 1993 forced ministers to focus on short-term issues. Instead, economic policy for FY 1994 was being guided by an annual plan.
From June 2004, the Planning Commission gave a new name to the Five Year Plan - Medium Term Development Framework (MTDF). Thirty two Working Groups then produced the MTDF 2005-2010.
Period VI: The Reforming Hundreds, 1999 to 2007
In October 1999, the incoming military government was faced with four main challenges: heavy external and domestic indebtedness; high fiscal deficit and low revenue generation capacity; rising poverty and unemployment; and a weak balance of payments with stagnant exports.
The country faced a serious external liquidity problem as its reserves were barely sufficient to buy three weeks of imports and could not possibly service its short-term debt obligations. Workers’ remittances decreased by $500 million, foreign investment flows dwindled by $600 million, official transfers turned negative and Pakistan had no access to private capital markets. In the domestic sector, the declining tax-to-GDP ratio and inflexible expenditure structure, whereby 80 percent of revenues were preempted to debt servicing and defense, constrained the government’s ability to increase the level of public investment.
Structural policy reforms combined with an improvement in economic governance laid the foundations for accelerated growth from 2002 to 2007. The economic growth rate averaged 7 percent, up from 3.1 percent in 2001 to 2002. Poverty was reduced by between 5 and 10 percentage points, depending upon the methodology used. The unemployment rate also fell from 8.4 percent to 6.5 percent and approximately 11.8 million new jobs were created between 1999 and 2008. Gross and net enrollment ratios at the primary school level recorded upward movement. The re-profiling of the stock of debt brought down the debt-to-GDP ratio from 100 percent to 55 percent. Foreign exchange reserves increased to cover six months’ imports from a few weeks’ imports. The fiscal deficit remained below or slightly above 4 percent of GDP. The investment rate grew to 23 percent of GDP and an estimated $14 billion of foreign private capital inflows financed many sectors of the economy. The exchange rate remained fairly stable throughout the period.
Since then, the elected government has not pursued the unfinished agenda of reforms with the same vigor and commitment. Governance issues that characterized the 1990s have begun to rear their ugly heads once more. The situation worsened after March 2007, when the government became embroiled in a judicial crisis. The preoccupation with the impending elections resulted in serious lapses in economic management as key adjustment decisions to escalating international oil and commodity prices were postponed. The assassination of the most popular leader of the country, Mohtarma Benazir Bhutto, plunged the country into a state of uncertainty while the transition from the military to the civilian-elected government was not managed properly. Lack of attention to economic issues by the incoming government further contributed to macroeconomic instability and created an atmosphere of crisis in the country. The global financial turmoil and the recession in OECD countries did not help either. So while domestic factors were mainly responsible for Pakistan's economic crisis, adverse external conditions worsened the problem; the global financial turmoil hampered foreign private inflows and the recession in OECD countries reduced the demand for Pakistani exports.
Political Instability and Economic Growth
Pakistan has seen twenty-three governments in the past sixty years, including: fourteen elected or appointed prime ministers, five interim governments and thirty-three years of military rule under four different leaders. Excluding the military and interim governments, the average life span of a politically elected government has been less than two years. If the five-year period of Bhutto is excluded, then the average span falls to 1.6 years.
The economic policy regime, on the other hand, has only changed twice in all of Pakistan’s history. The liberal private sector-led growth model that was put in place in the 1950s and accelerated in the 1960s was rolled back by Bhutto in the 1970s and became the socialist economic model. Since the rejection of this model in 1977 and the revival of the liberal model, the general thrust of economic policy has remained unaltered.
Authoritarian vs. Democratic Regimes
In Pakistan, the debate over whether authoritarian or democratic regimes have delivered better results in terms of economic performance has been quite fierce since General Khan took power in 1958. The spurts in economic growth during the 1960s, 1980s and 2000s, when the country was governed by military dictators, have led many to conclude that authoritarian regimes are better suited to bring about economic development. Parallels are drawn with China, Indonesia, Korea and Singapore.
Detractors of the authoritarian regimes, however, have skillfully torn apart the economic performance record of the Ayub, Zia and Musharraf periods. Since the legitimacy and perpetuation of these regimes were justified on the basis of good economic outcomes, those opposed to these regimes have assailed the very economic record that has been espoused as their achievement. Such detractors lay out three arguments.
First, they argue that the United States had always been more favorably disposed toward Pakistan’s military dictators, as they are relatively more obsequious and subservient to the American interests. Thus, it is the acceleration of inflows of foreign assistance to Pakistan that led to the observed higher growth rates rather than sound economic policies, better governance and the efficient utilization of resources. Although empirical evidence to substantiate this argument hardly exists, it has become popular folklore: Ayub was rewarded for his close economic and military ties with the United States in confronting the Soviet Union; Zia ul-Haq received a boost as $5 billion was channeled through Pakistan for Afghanistan’s mujahideen; and Musharraf’s decision to openly support the United States in the war on terror brought in approximately $10 billion of military assistance.
Second, the solid record of high growth rates under military regimes is believed to result invariably in adverse distributional consequences. The Ayub period is blamed for the widening regional disparities that led to the secession of East Pakistan. Zia ul-Haq’s policies were criticized for their failure to deal with structural weaknesses or reverse the damage done by the policies of nationalization. According to Parvez Hasan, “Zia’s economic policies represented a rather sharp contrast between reasonably satisfactory short-term economic management and an almost total neglect of long-term policy issues. The long period of political stability and sustained growth under Zia ul-Haq offered major opportunities for dealing with the underlying structural issues but these were not exploited.” Musharraf’s economic strategy, which made Pakistan one of the fastest growing Asian economies, was also dismissed on the same grounds: that consumer-led, credit-induced, service-focused growth neglected agriculture and the manufacturing sectors, making the rich richer and the poor poorer. While the World Bank and Asian Development Bank publicly acknowledged a significant decline in the incidence of poverty and International Labor Organization (ILO) experts validated the fall in the unemployment rate, the authenticity of the poverty and unemployment data has been challenged. It became the norm to practice selective acceptance of government-produced data showing negative trends and outright rejection of the data from the same source showing positive trends.
The third line of argument is quite persuasive. Economic accomplishments devoid of political legitimacy, however impressive they may be, prove to be short lived. Without the involvement and participation of the people, elegant and technically sound economic solutions developed by authoritarian regimes are quickly replaced once the regime changes, causing irreparable losses to the economy. The recent example whereby good initiatives taken by the Musharraf regime were either suspended deprived of funds or abolished completely attests to this phenomenon. Some of these initiatives, such as revitalizing higher education and expanding adult literacy and health programs have been brought to a grinding halt. The Devolution Plan of 2001, which decentralized the delivery of basic services to local levels, is at serious risk of abandonment.
The phenomenon of abandoning the previous government’s plans and policies is not confined to the military-civil transitions but also from one elected civilian government to the other. Benazir Bhutto rightly embarked upon public-private partnerships by inviting independent power producers (IPPs) from the private sector to set up electricity generation plants to overcome power shortages. The IPPs were put on hold by the new government, which alleged that corruption was involved in the awarding of contracts. In another example, the incoming Bhutto government suspended the motorway project initiated by the Nawaz Sharif government. By the time the project had resumed, time delays, cost over-runs, contract cancellations and legal entanglement had reduced the efficacy of the project.
Both the civilian-elected and military regimes have demonstrated the same characteristics and weaknesses—personality cult leadership, centralized decision-making, repression of opponents and cronyism. When one goes beyond labels and examines the actual behavior of military and civilian regimes, most distinctions appear superficial.
Pakistan has over the last sixty years been an authoritarian polity both under the civilian as well as military regimes. ‘Authoritarianism’ involves great relevance and obedience to authority and stands opposite to individualism and freedom that come with it. Both the civilian leaders coming from an agrarian and feudal social background and military leaders from the Command and Control structure of the armed forces have demanded absolute loyalty and compliance with their institutions of origin.
There has been a broad consensus among all major political parties on the general principles that should underpin Pakistan’s economic direction, namely:
• Central planning and bureaucratic judgment are poor substitutes for the market’s judgment in the allocation of scarce resources.
• Licensing to open, operate, expand and close business by government functionaries should be discouraged.
• Public sector ownership and management of business, production, distribution and trade leads to inefficiency, waste and corruption.
• Over-regulation, controls and restrictions of all kinds on the private sector hike up the cost of doing business.
• High tax rates on individuals and corporations are counterproductive as they discourage effort and initiative.
• Banks and financial institutions owned and managed by the public sector offering cheap credit and/or directed credit have a pernicious effect on economic growth.
• Administered prices of key commodities are the worst possible means of insulating the poor segment of the population from the onslaught of market forces.
• Subsidies on inputs such as fertilizers, seeds, water, etc., incur heavy budgetary costs and benefit the well-to-do classes rather than the poor.
• Foreign investment and multinational corporations are to be encouraged as they are important conduits for the transfer of technology, managerial skills and organizational innovation.
While the government’s implementation of policies, programs and projects has seen uneven and mixed results, the initiative in driving the economy can be credited to the private sector.
The agricultural sector, representing 20 percent of GDP, is owned and managed by private farmers. Manufacturing, with a few odd exceptions, is under the control of private firms. Wholesale and retail trade, transportation (with the exception of railways and Pakistan International Airlines), personal and community services, finance and insurance, ownership of dwellings and the construction sector all fall within the purview of the private sector. Only public administration, defense services and public utilities are directly managed and operated by the government. Imports and exports of goods and services are also privately managed. A rough approximation would indicate that goods and services produced, traded and distributed by the private sector amount to 90 percent or more of the national income while the government directly or indirectly owns, manages, controls or regulates the remaining 10 percent of national income. So it is the strength of private initiative, with all its flaws, operating in a relatively liberal policy environment, that has been the main driver of long-term economic growth in Pakistan.
In Pakistan, transitions from one political regime to another have been quite difficult, causing uncertainty and short-term reductions in the speed of economic growth. The transfer of power from the military to civilian regimes in 1971, 1988 and 2008 were marked with macroeconomic instability, a slowdown in economic activities, rising unemployment and inflation and the adoption of a wait-and-see attitude by investors. But economic recovery has also been resilient; short-term losses caused by political volatility have not been large enough to offset the positive long-term secular economic movement.