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Economic Development of Pakistan

By | on June 1, 2015 | 0 Comment

 

429Introduction

Pakistan was a 5000 years old society and 150 years old nation when, after the dissolution of British Indian Empire, it came into existence as an independent nation- state on 14th of August 1947. Main reason for the emergence of Pakistan was the failure of the dominant Muslim elite of united India in extracting sufficient constitutional guarantees from their counterparts, namely dominant Hindu elite for a substantial share in the political decision making once the British left India. They rightly or wrongly, depending on which side of the political fence you are, feared that in the absence of these safeguards, the Indian Muslims who considered themselves to be an independent nation, would gradually lose their cultural identity and would become an economically marginalized underclass in a predominantly Hindu India. These perceptions had been reinforced by the step motherly treatment Muslim masses got during the brief Congress rule in the provincial governments after the 1937 elections-a foretaste of things to come.

Every movement of this magnitude needs some sort of emotional underpinning to arouse the passions of the general public for ensuring their maximum participation for its successful execution. Religion, race and language have been common battle cries throughout history in this respect. However, the Pakistan Movement, though couched in religious terminology, was basically a movement by the downtrodden Muslim community of India to safeguard their socioeconomic interests and fulfill their dreams of improving the quality of life in a country where they could live according to their cherished dreams. The common man considered Pakistan to be the Promised Land, an Eldorado for all of his economic poverty and backwardness. He was not sophisticated enough to estimate the financial constraints of the new born country, regarded the creation of the new country as a  heaven in which there would be no Hindu money-lender, no ahrti, no scarcity of food, shelter and clothing.

However they were in a big shock. Muslim masses that chose to remain in or migrate to the new country were going to live in a state which comprised the territories of British Empire which had remained comparatively underdeveloped due to colonial imperatives. One is amazed to read the initial conditions with which Pakistan started its journey as an independent state-extreme shortage of physical, financial and economic resources at its disposal, influx of refugees and outflow of capital and expertise, the abysmal state of infrastructure etc. These myriad difficulties were compounded by the challenges which it had to respond to become an independent, confident and prosperous state in the comity of nations.

Development History

From one of the least developed countries in the world at the time of her independence, Pakistan is now the 26th largest economy in the world in terms of Purchasing Power Parity,( 44th largest in terms of nominal GDP). With per capita income of US$ 4550, Pakistan occupies at 140th place on this count in the world, thanks to her burgeoning population of 200 million people. Pakistan is one of the Next Eleven, the eleven countries that, along with the BRICs, have a potential to become one of the world’s large economies in the 21st century.

However this progress is not as impressive as it looks or should have been keeping her potential. Similarly her dismal social indicators, structural anomalies and income disparities leave much to be desired. Pakistan did marvellously in some fields while it failed miserably in other fields, most notably her failure to keep her geographical integrity by breaking into two within first 25 years of its post-colonial existence.

History has a very long shadow-policies formulated and actions taken in one period have their short term and long terms repercussions. Some are visible and can be easily traced to any particular decision taken in one epoch .However some impacts cannot be pinpointed to a particular decision because of interaction of multiple factors in any situation.

Let us have a brief review of the history of Pakistan’s economic development since her independence, in order to learn a few lessons for our future guidance

Democratic Pakistan-1: Keeping in view the initial conditions at the time of her independence mentioned above, we cannot but laud the efforts made by our forefathers during the first decade of her independence, the first of the four democratic phases of Pakistan’s history i.e. Democratic Pakistan -1. During this period, despite all the handicaps mentioned above, Pakistan started its perilous journey towards the realisation of the goals for which the country was created. Starting literally from a scratch, it initiated formal planning process, strengthened its private sector, built economic institutions and started construction of infrastructure. Main thrust of the national economic policy was rapid industrialisation of the country not only to develop its abundant natural resources but also to meet the growing needs of consumer goods by establishing those industries. For this purpose, Pakistan adopted the same policies which were globally accepted under the name of import substitution. In essence it implied;

  • quantitative restrictions on import of manufactured goods to generate abnormal profits for those producing them locally
  •  Imposition of taxes on the export of raw material to make their availability for domestic industry at cheaper rates than the others
  • Keeping the exchange rate overvalued to ensure cheap import ipf capital goods and the raw material needed for establishing and running domestic industries
  • Cascading structure of import duties to allow capital goods and raw material for manufacturing sector at cheaper rates as compared to manufactures goods,
  • squeezing the peasants by keeping the terms of trade in favour of industry vis a vis agriculture, liberal tax concessions and non-tax incentives to industrialists

All the above policies created a synergetic impact. Within one decade Pakistan was able to build factories, export produce and was in a position to resist the pressure to devalue its currency while majority of the developing countries were doing the same. However this stellar achievement came at a price.

  • Seeds of session of East Pakistan from its Western counterpart were strengthen because of the vast economic disparity these policies created
  • Agriculture was badly neglected forcing Pakistan to import wheat from USA and with that she had to succumb to her pressure
  • Greater role of the state in economic management became the norm rather than an exception
  • Private sector tasted the fruits of subsidies and since then has been dependent upon the state largess to overcome their operational inefficiencies
  • Nexus between the state apparatus and the business community developed in which the state functionaries doled out tax payers’ money to the businesses in return for financial quid pro quo

Military Pakistan-1: The next decade saw the start of the legendary but controversial period, the so-called decade of development of 1960s which started with the imposition of Martial Law on 7th of October 1958 by a civilian President. He was ousted in turn within 20 days by the same general who was entrusted with the carrying out the Martial Law and Pakistan entered into her first military phase. The General was lucky in the sense that the global environment was extremely conducive for military takeovers in the developing countries. USA needed strong-arm military men to rule in geopolitically important countries to further American interests. They were willing to provide advisory services, financial resources and access to her markets for purchase of machinery and export of manufactured goods to any country which toed their line.

 

Pakistan took full advantage of the opportunities provided by this environment. After consolidating his grip on the power, General Ayub started an ambitious programme of economic restructuring of the political economy of the country by carrying out far reaching social, economic and political reforms. Touted as fine example of what was the conventional wisdom under the Modernization theory, Pakistan showed impressive facts and figures in terms of economic indicators in almost all sectors. Besides continuing the policies adopted during the first decade but with grated gusto i.e. import restrictions, tax and non-tax concessions, overvalued exchange rates etc, Pakistan used income inequality as a means of generating savings which could be ploughed back into investment and hence rapid industrialisation. These were augmented by the massive doses of foreign aid conveniently backed by a political system, which cared less for fundamental rights and stressed more on fundamental statistics. However it fell like a house of cards when the sources and drivers of growth were stopped. It could not sustain its own weight because it was not a sustainable model. It was an abortive take off.

Democratic Pakistan-2: In 1971 Pakistan was dismembered into two, its eastern part becoming Bangla Desh and the western part became Pakistan. The phase of Democratic Pakistan -2 which started with coming into power of an elected government led by the most charismatic leader after Quaid e Azam, turned out to be the most tumultuous phase in the entire history of Pakistan. Two massive floods, one severe drought and two successive global oil and financial crises were too much for an underdeveloped country like Pakistan.

In order to rectify the economic contradictions created by the Ayub Model in the 1960s and to provide social justice to those who were left out in that process, the Bhutto regime brought fundamental structural and institutional changes in social, economic and political sectors. Bailing out the loss making industrial units which had run out of steam after the stoppage of foreign aid, Bhutto nationalised them. Later on he widened the scope of state capitalism by nationalising banks and small industrial units, initiating mega projects and creating financial institutions to finance them.

His three phase land reforms programme resulted in transfer of state and private land to the landless peasants as well as improving tenure relations in their favour. However too much of socio-political and economic restructuring of the country in a short span of five years resulted in alienation of several classes of society. Mega projects started by him consumed huge chunk of scarce resources. Being long gestation period projects, they took too much time to come on ground with the result that inflationary pressures built up during the intervening period created resentment in the masses which was successfully exploited by his opponents to topple his government.

Military Pakistan-2: After the fall of Bhutto, Pakistan again entered into a military phase under Zia. He outlasted the Russian occupation of Afghanistan during which the country received billions in foreign aid and propped up his government. He was also lucky that the two major initiatives of Bhutto started paying dividends in his tenure-mega projects of previous regime started production and the Pakistani expatriates, sent abroad during the Bhutto period, started sending almost two billion dollars per year in remittances. God was also kind to him as there were no major floods or droughts in his eleven years which saw agricultural production to grow at a steady rate of 4 per cent per year. With the help of these fortuitous events, he managed to show impressive results although his economic policies were just disaster had they been implemented in normal years. He got full support of burgeoning commercial classes which started replacing the old decision making process. Expanding informal market provided the necessary financial wherewithal to the economy which saw the rollback of privatization.

Democratic Pakistan-3: The decade which followed the exit of General Zia is generally known as ‘the lost Decade’ in which Benazir Bhutto and Nawaz Sharif became prime ministers of the country turn by turn in the game of musical chairs. Just like any other post- dictatorship state, the country remained adrift in this phase because it takes time and lot of sacrifices to straighten the economic and political governance of the states after the ouster of dictatorial and authoritarian regimes. However in even in this period of great political uncertainty, Pakistan took two major initiatives- privatisation of state owned enterprises and banks by the Nawaz Sharif government not only helped government to reduce its expenditure on subsidies but also resulted in better consumer services by the units privatised. Energy policy of the Benazir government encouraged the private sector to establish independent power plants which helped the country to remain surplus in producing electricity till 2008.

Military Pakistan-3: The course, content and direction of the development process of Pakistan during Military Pakistan -3, the Musharraf period, resembled the same as were its two military predecessors -Ayub and Zia. Although Pakistan was the most sanctioned country in the world after its decision to go nuclear in 1998,yet massive inflow of military assistance in the wake of 9/11, and subsequent war on global terrorism spurred the growth rate of the country. Touted as a sign of second take off, this stellar growth performance was mainly due to great spurt in consumption made possible by easy availability of credit at extremely affordable rates to the burgeoning middle classes. Hard core investment was neglected with the result that high growth rates of the economy hid the grim economic weakness of the country—high debt ratio, escalating poverty, lagging maintenance of infrastructure are some of the legacies of the regime which had to leave unceremoniously in 2008.

Democratic Pakistan-4: Forcible and ignominious exit of Musharraf witnessed the start of another democratic era-the Democratic Pakistan-4 during which a duly elected government of Pakistan People’s Party came into power.  PPP has been unfortunate in all their terms, short ones of 1990s and full terms of 19972-77 and then 2008-13. In 1970s, PPP inherited a dismembered Pakistan, a demoralized and traumatised nation and a declining economy which had to face the worst floods as well as the worst financial crises from outside. Benazir Bhutto took reins of the country in 1988 when inflow of foreign aid which had sustained a military ruler for 11 years dried. She again came into power in 1992 in the wake of great financial crises and had to leave the government in 1995.Their second full term lasted from 2008 to 2013 which experienced Pakistan’s worst-ever combination of external threats, including the severest recession since 1929 globally and massive floods resulting in colossal damage to the crops and water standing in lower Sindh for months. After joining the war on terrorism Pakistan became again the front line state for which it was compensated with huge doses of military aid .However her loans were not written off; rather they were just rolled over for a decade with the result that after the fall of Musharraf regime, the new elected government was forced to pay these loans at a time when the economy had nosed down as a result of global oil and financial crises of 2007/8.

Despite these misfortunes Pakistan’s growth remained positive, albeit low, throughout 2008-13 thanks to the pro-farmer policies of an agricultural friendly regime and improved export performance. However, economic management of the country during this period can be blamed for less these low growth rates which resulted in a sustained unemployment rate and sharp increase in consumer prices of more than 80 per cent in a short span of five years. Massive corruption, reduced development funds, macroeconomic instability, energy shortages and more debt than all previous governments combined left the country in a perpetual state of financial crises. While the foreign debt of the country ballooned from $45 billion in 2008 to over $65 billion in 2012, the government debt to GDP ratio rose from 55 per cent in 2008 to 60 per cent in 2012.

In 2013, for the first time since independence, democratically elected federal and provincial governments and legislatures completed their constitutionally mandated tenures in Pakistan and second successive democratically elected government took over. Its Finance Minister Ishaq Dar has announced a 14-point ‘future roadmap’ aimed at achieving over seven per cent growth by 2018 and making Pakistan a globally competitive and prosperous country with particular emphasis on macroeconomic stability through inclusive growth.Although it is too early to assess the performance of Nawaz Sharif government which inherited the crucial issues of external security, internal law and order, depleting foreign exchange reserves and energy shortages, yet the global financial institutions are consistently giving it high marks for its prudent handling of the economy. Government has successfully negotiated loan agreements with the World Bank, IMF and ADB. Improved foreign exchange reserves and stable exchange rates have given confidence to the financial markets in the country.

 

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