Evolution of Political Economy of Pakistan

By | on June 29, 2016 | 0 Comment

Story of Pakistan’ development makes an interesting reading-how a country with lot of baggage of underdevelopment and sets of contradictions and constraints, starts its development journey and keeps on stumbling from phase to phase, adopting with religious fervour the mainstream globally accepted development ideas, policies and strategies, which are current at that time. From an exclusive emphasis on growth and trickle down of 1960s, she took aU-turn and tried to redistribute the fruits of growth in1970s. Failing miserably in this endeavour which resulted in an expanded state capitalism, she started denationalizing everything in the following decades and adopted the new mantra of liberalization. She is now struggling to remove poverty in the midst of glaringe xtravagance of certain classes to avoid bursting at the seams of society.

So where does Pakistan stand in terms of economic progress today with reference to her position in 1947? Has she done good, very good, bad? Has she been able to bring desired structural transformation? Are these rates in accordance with its potential? How this growth can be compared with reference to other countries which started the irjourney with the same initial conditions? What costs have been paid for this growth by the people? Have the fruits of growth been equitably distributed? Was this growth sustainable and indigenous or was it always spurred by the injections of foreign aid?

These are very pertinent but tough questions and there are no easy answers except saying ‘on the one hand and on the other hand’ type ofexplanations for the growth performance. Here we do the same.

  1. Inconsistent Growth Rates: The average growth rate of Pakistan has been not bad, in fact fairly impressive for the last sixty five years of its existence as an independent country. However these rates have not been consistent throughout this period; very high rates in one year have been invariably followed by dismal performance the next year and so on with few exceptions here and there. There is a structural inability to sustain growth over a long period of time. Growth has occurred in brief spurts followed by sharply declining GDP growth. The average annual GDP growth during the 1950s were 4% which were followed by more than 6 % growth rates achieved during the 1960s. Early 1970s saw growth rates of around 4% which accelerated to 6% in the late 1970s/1980s to be followed by a sharp decline in the subsequent decade of 1990s. Another spurt occurred during 2000s when GDP growth reached 6.25 per cent, declining sharply to 2.62 per cent under the subsequent years and still continuing
  2. Two Different Streams of Growth Rates: Economists used to taunt India for growing at the Hindu rate of growth of 2.5% for several decades after independence. Pakistan can be also share this taunt with a caveat; we have followed two different rates of growth-military rate of growth of more than 6 % and a civilian rate of growth of 4%. Relatively high GDP growth rates were achieved mainly during the three military regimes as all the above growth years correspond with the military regimes while unfortunately all the low growth years occurred during the civilian rule. Low growth rates of 1950s corresponded with the civilian rule while high growth rates were achieved during the Military rule of 1960s and so on. Spurred by the massive inflow of foreign aid, military and civilian, during these military hegemons, Pakistan economy witnessed phenomenal growth rates. However at the end of each high-growth period, the structural constraints of a low domestic savings rate and slow export growth were manifested in fiscal and balance of payments pressures, which induced a subsequent slowdown in GDP growth due to serious deficiencies in basic economic structure of the country-uneven growth clusters, inadequate infrastructure, low human development, un-diversified export bag etc.
  3. Less than Potential Growth Performance: In vertical analysis, comparing its performance with its potential, one really feels saddened by her lackluster performance. Despite all the handicaps with which Pakistan started its journey she could have done far better than what the above facts and figures reveal. Countries grow in their own momentum even if no conscious and deliberate efforts are made by the state in this respect. After all Europe’s success owes it to the ingenuity of her business class and not the state. Here the state devoted so much resources and efforts for accelerating this very rate of growth and still stand at where our 70 million children are out of school, 30 per cent living below the poverty line etc. It is not the question of glass half full or half empty. It is human tragedy and suffering, not a philosopher’s glass of water.
  4. Impressive Socioeconomic structural Transformation: This growth performance has been accompanied by an all rounded, though not very spectacular, structural transformation of the political economy of the country. In linear analysis, comparing today’s Pakistan with that of 1947, there has been marked difference between the two stages of her economic development. Take any socioeconomic indicator and you will find impressive improvement, despite all the reservations about the inadequacy or accuracy of data collection and its interpretation. From a population of 35 million people in 1947 living in present day Pakistan, now around 200 million people reside here, showing the improved health care facilities made available to them. Her Gross Domestic Product has risen from US$ 5 Billion to more than US$ 270 Billion with a per capita income of US$ 1350 -not a mean achievement. In Purchasing Power Parity terms, she is the 26th largest economy in the world with a per capita income of US$4500 which places her in the middle income countries of the world. Agriculture now contribute only 20 per cent in this GDP as compared to more than 50 per cent in the 1950s. On the other hand industry is now more than 25 per cent while services sector contribute around 55 %. Pakistan is now more urbanised with 545 per cent living in urban towns and cities as compared to less than 10 per cent in the 1950s.
  5. Futility of Cross Country Comparison of growth Performance: Comparing her performance with other developing countries, particularly with those which started their journey at the same time as we did is an exercise in futility because of peculiar nature of circumstances of each country. Such comparison is a good way of judging where we stand in terms of various socioeconomic indicators but does not give us any criterion to judge our policy makers for their ineptitude or to eulogize their good wok. May be there were just fortuitous circumstances which pushed them up while we are hamstrung due to historical baggage or geographical misfortune. South Korea was developed as a province of colonial Japan which constructed first class infrastructure, created institutions and developed its human resources as per its own standards. The development we inherited was the spinoff the imperial imperatives of a colonial power which used us as a colony, not a province of UK.

Widespread and Consistent Perception of Vulnerability: Historically, Pakistan’s overall economic output (GDP) has grown every year since Independence with one exceptional year of 1950-51 when it went into negative on account of bad agricultural sector performance. Despite this record of sustained growth, paradoxically Pakistan’s economy had always been construed as unstable and highly vulnerable to external and internal shocks. It looks all the more strange that an economy which has proved to be unexpectedly resilient in the face of multiple adverse events ranging from the dismemberment of the country in 1971 on the one hand to the various global financial crises of 1970s, of 1998 and of 2008/9 on the other should carry this stigma. A country which fought four wars with India, hosted four million refugees for two decades, remained under severe economic sanctions and is presently at war with terrorists, home-grown and foreign, for the last one decade cannot be construed as a weak economy. May be the basic resilience of the Pakistan economy owe it to its thriving informal economy which according to different estimates ranges from 50% to 90% of the total economy. May be we pass judgements about the state of economy on the basis of the figures about the formal economy which are deceptive in the face of the above mentioned unrecorded economy thriving in Pakistan.

  1. Regime neutral Consistent Economic Policies: 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. 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.
  2. Agriculture still occupies a prominent place: Although Pakistan is no more a predominantly agricultural country, thanks to rapid strides it has made in her quest for industrial transformation, agriculture still occupies a prominent place in Pakistan’s overall economic structure. Being a pivot around which all other economic activities move, it is a major contributor to the country’s economy in terms of GDP, foreign exchange earnings, employment generation, raw material for manufacturing industry (primarily textile) and the most vital, national food In fact Pakistan’s survival and growth are directly dependent on its agriculture due to its socio-political interconnectedness and its economic and financial linkages-backward and forward, horizontal and vertical. Its performance still dictates all our macro indicators – growth rates of the economy, poverty profile, foreign exchange reserves, inflationary pressures etc. In view of this positive association mentioned above, the pursuit of a high growth policy in agriculture should be the cornerstone of Pakistan’s future development strategy.
  3. Lopsided Structural Change in Recent Past: Structural change, a fundamental characteristic in the growth and development, entails a gradual shift from low productivity sector (agriculture) to high productivity sector (manufacturing) in the middle stage of its economic development and finally to services sector. In the case of Pakistan, the structural change has largely bypassed the middle stage and Pakistan, from being a largely agrarian economy in terms of contribution to GDP, has become a services led economy, with services accounting for more than 50 per cent of the GDP. Even though the services sector has become the main driver of growth in Pakistan, its potential contribution to employment is limited as compared to the manufacturing sector. Therefore, the agriculture sector continues to provide more than 40% employment to the country’s labour force. This shows that a major part of the labour force is stuck in the low productivity sector. The service sector employs above 30 per cent of the labour force while the industrial sector employs only 20 per cent. Given the deteriorating performance of the manufacturing sector in the past years, most of the workers move from the agricultural sector to the services sector implying that the sector with highest value addition has the lowest share in terms of employment. This is a matter of concern since the movement of labour from low productivity sectors (agriculture) to relatively high productivity sectors (such as manufacturing) is what generates the surplus that spurs growth.
  4. Slow speed of specialisation: Pakistan’s development has also been graduating towards specialisation at a very slow speed as against the empirical evidence of a ‘U’ shaped relationship between a country’s income level and its degree of product specialization- high at low levels of income per capita at the initial stages of development. But as the country becomes richer it tends to diversify to produce and export a wider range of relatively more sophisticated goods till its income reaches a level where specialization increases in technologically advanced and high value-added goods. This implies that increased product diversification is a middle stage in the process of structural change and an important driver of sustained growth of a country.
  5. Limited contribution of Total Factor Productivity: Another peculiar characteristic of the manufacturing sector has been the limited contribution of factor productivity to the growth process of Pakistan. During the period 1960-2005, about 80 per cent of Pakistan’s GDP growth rate was explained by capital accumulation and labour expansion, whereas Total Factor Productivity or TFP contributed the remaining 20 per cent of the overallgrowth.(TFP is avariable which accounts for effects in total output not caused by traditionally measured inputs of labour and capital. If all inputs are accounted for, then TFP can be taken as a measure of aneconomy’s long-term technological change or technologicaldynamism.) According to a well researched report, over the period 1998-2007, total factor productivity in the overall manufacturingsector increased by only 0.9 per cent .This implies that the growthof the manufacturing sector has been mainly driven by growth ininputs i.e., labour and capital, and the contribution of total factorproductivity has been fairly low. This evidence suggests that Pakistani firms have consistently failed to replace less productive assets with more productive ones
  6. Private Sector as main driver of growth: Despite an active role played by the state in the economic development of the country, the initiative in driving the economy can be credited to the private sector. The agricultural sector, representing 20 per cent 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, defence 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 per cent or more of the national income while the government directly or indirectly owns, manages, controls or regulates the remaining 10 per cent of national income. So it is the strength of private initiative, with all its flaws, operating in a relatively liberal policy environment, which has been the main driver of long-term economic growth in Pakistan.

History of Economic Development of Pakistan (1947-2015) eBook: Shahid Hussain Raja: Kindle Store)


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