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Political Economy of Pakistan under General Ayub (1958-68)

By | on February 22, 2016 | 0 Comment

 

AyubThe legendary but controversial period of the first of the three military phases of Pakistan is 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 who was ousted in turn within 20 days by the same general who was entrusted with the carrying out the Martial Law. After consolidating his grip on the power, General Ayub started development process to create his legitimacy.  The General was lucky in the sense that the global environment was extremely conducive for a person like him.

  • He came into power in the midst of an exceptionally favourable global economic environment, known as golden period of the Washington Consensus. End of World War-2 had resulted in the formation of global institutions which were keen to provide a stable world economic order standing on the bedrock of a strong global currency. Marshall Plan pumped billions of dollars for the reconstruction of war ravaged European economies without creating inflationary pressures due to excess capacity created during the war. Europe had not become a fortress so far with the result that there were less restrictions for exports of goods to the developed countries.
  • In the wake of escalating Cold War, USA needed strong-arm military men to rule in geopolitically important allies 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 all those who were willing to  join their camp. His unsolicited offer to USA to send Pakistani troops in aid of allied forces fighting against China in 1952 Korean War was well received by the Pentagon. His visit to USA as armed forces chief without getting permission from the civilian government cemented those personal ties between him and the decision makers in America. How much role USA played in his eventually overthrowing a civilian government in Pakistan, is anybody’s guess but he was well rewarded in terms of financial assistance and advisory services during his tenure
  • Scientific breakthrough in agriculture resulting in development of high yielding varieties of crops was a God send opportunity for a country like Pakistan having vast agricultural resources. Agriculture was witnessing tremendous growth all over the world thanks to rapid advances made in the west and now the MNCs were eager to push this agricultural modernisation in the developing countries for their own profit maximisation.
  • Domestically, Indus Basin Water Treaty resulted in expansion of irrigation network, greater water storage capability making it possible to bring huge areas under cultivation. Conclusion of Indus Basin Water Treaty, besides bringing in huge inflow of foreign resources, ensured availability of water for start of much awaited green revolution in Pakistan.

Economic Policies of Ayub Period

Advised by the Harvard Group of economists, he started an ambitious programme of economic restructuring of the political economy of the country by carrying out far reaching social, economic and political reforms.

Institutional Building and Strengthening:

Long term sustained economic growth is not possible without the existence of vibrant socioeconomic institutions. Planning Commission was, therefore, made a very powerful institution by placing it under the President’s Secretariat and staffing it with the best of the economic brains, local and foreign, with the President himself as its Chairman. Multifunctional role of state as the regulator, facilitator, and service provider was the cornerstone of the economic management of the country in which the bureaucracy played a very active part. Most of the institutions created to foster growth of private sector –PIDC, PICIC, IDBP, ADBP etc. were headed by the bureaucrats. Political economy of Pakistan stood on the bedrock of a presidential form of government cemented with the astute political reengineering through local government structures.

Learning from the failure of first five year plan, this Commission prepared and executed the second five year plan with astounding results in terms of timely completion of the projects envisaged and the results achieved. Massive doses of foreign aid in the backdrop of benign external environment explained above proved the crucial driver of growth. Another reason for the success of economy was manning the important economic and commercial institutions of the state by competent and committed persons and giving them maximum financial and administrative autonomy. Consequently economy grew at a speed that Pakistan was touted as a 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.

Consistency and Continuity of Policies:

Declaring the private sector as the vanguard of development, she continued the policies adopted during the first decade but with great gusto- liberal subsidized credit, import restrictions, tax and non-tax concessions, foreign exchange controls, overvalued currency and differentiated exchange rates exchange control etc. Exports surged due to extremely favourable concessions given under the Exports Bonus Vouchers Scheme which allowed the exporters to keep back a certain portion of their exports earnings in foreign exchange and import goods otherwise banned. Foreign aid in the form of extremely concessionary loans, outright grants and purchase of grains to be paid in local currency under PL-480 was the biggest and most crucial driver of this stellar growth during the Ayub period. By easing the foreign exchange position of the country, it not only contained inflation but also made capital goods available to the private sector at less than international prices

Creating Inequalities for Growth:

Accepting and using income inequality as a means of generating savings which could be ploughed back into investment and hence rapid industrialisation, was the hallmark policy of the Ayub Khan era. Interestingly Dr. Mahboob ul Haq, who developed the concept of Human Development Index was the member of Harvard Advisory Group which guided the Decade of Development of Pakistan in the 1960s.These people were obsessed with the GDP not as a measure of development but as the end itself. For this they recommended the creation of inequality as a strategy for increasing the rate of growth of GDP because they firmly believed that income inequality puts resources in the hands of rich people who save more than they consume while poor people consume more than they save. It was assumed with a religious finality that trickle down of these benefits of growth would take care of social justice objectives of growth.

Agriculture as a Base:

Realising the crucial role of agriculture as a base for the rapid industrial development and learning lessons from the past neglect of agriculture which led to widespread food shortages in the country during the 1950s, he enacted far reaching reforms in the agriculture sector for increasing its productivity. Although agriculture had been undergoing capitalist development during the last one hundred years, albeit at a snail pace, it was during the 1960s when it was given a boost by carrying out requisite land reforms, institutional strengthening and application of science and technology.

Putting a ceiling of 100 acres on rain fed areas and of 500 acres in irrigated ones, an effort was made to break stranglehold of big land lords on the political economy of the rural areas. Besides restricting alienation of land, either though inheritance or sale, at the minimum economic unit of 12.5 acres, the centuries’ old land tenure system was improved by giving greater legal protection to tenants against their arbitrary evictions by the landlords.

In order to accelerate the scope and speed of Green Revolution, introduction of science and technology in all agricultural activities was encouraged by the state as a conscious policy. In this connection, two developments played a crucial role.

  • Firstly the agriculture was witnessing tremendous growth all over the world thanks to rapid advances made in the west and now the MNCs were eager to push this agricultural modernisation in the developing countries for their own profit maximisation.
  • Secondly Indus Basin Water Treaty resulted in expansion of irrigation network, greater water storage capability making it possible to bring huge areas under cultivation.

 

Newly created Agricultural Development Bank of Pakistan extended generous loans to the rich and middle class farmers for purchase of agricultural inputs and machinery and for the installation of tube wells. All these measures resulted in impressive growth rates of agriculture releasing resources for industrial development and providing an extended market for the industrial goods.

Assessment

Ayub Khan’s period has been eulogised by every writer who has written anything about the history of economic development of Pakistan.

Impressive Recorded Growth Rates:

Leaving aside the allegation of figure fudging which has been become customary, there was an impressive and consistent rate of economic growth. Pick up any book or read any article dealing with the economic progress of Pakistan and you will find ample facts and figure about the achievement of Pakistan in accelerating her rate of economic growth in such a short period. After all a consistent rate of growth of more than 6.8% per annum with manufacturing registering an increase  of around 10 % and exports 7 per cent is not a mean achievement Agriculture witnessed an impressive growth rate of more than 6 % which eased the inflationary pressures considerably below 4%. These developments helped in containing the trade deficit which despite massive imports was around 6.7% of GNP. Pakistan was considered to be a model of capitalistic economy in 1960’s.

Creation of Externalities:

This multi-dimensional growth produced certain externalities and socio-economic processes, most importantly the acceleration in capitalist development in the agricultural sector where tenancy farming and share cropping started to give place to owner-operated farming culminating in green revolution. It not only accelerated growth but also resulted in technological penetration even in agricultural sector. Consequently there was massive migration of surplus farm labour from the agriculture sector to the cities available as industrial labour. Urbanisation grew at a rapid speed and small towns grew all along the main roads.

However, all the economic progress made by Pakistan during this period was not an unqualified success as it is normally described. It came at a price, part of which we are still paying

Overrated Growth Performance:

Economic contributions of Ayub era have been overrated in two ways. It is historical fact that the pace of development is always very rapid in the initial stages of economic development as there is lot of infrastructure to build which invariably increases your figures. Look at the growth rates of China during the 1980s and 1990s solely because of massive infrastructural development. Secondly, figure fudging, that bane of our economic management, for which Pakistan was once fined during the Musharraf period in 2005, started with this era and it was openly alleged that some of the figures were cooked and did not tally. Whether this was by design or due to incompetency of the Statistics Bureau, is not clear.

Flawed Model of Growth:

Idea of growth through inequality was not only morally reprehensible but logically flawed and practically counterproductive. Left to themselves, income inequalities are inevitable in a market mechanism for which state has to devise some mechanism to minimise their extent and offset its impact. However if the growth model is itself based on the very existence, rather deliberate creation of income inequalities to create investible surplus, then the results are disastrous for the society as well as the economy. Exactly the same happened during the 1960s. Ill-famed theory of trickle down never worked because it was structurally impossible to redistribute the fruits of growth based on capitalistic model. Patterns of growth determine the patterns of consumption-you cannot distribute cars made for the rich to the poor in place of bread.

According to Simon Kuznets every income distribution should be judged by three criteria: adequacy, equity and efficiency. Adequacy is ensuring even the poorest have an income level consonant with local customs and economic ability of the society.  Equity is absence of discrimination whether it is discrimination in current incomes, as for example in racial or gender wage gaps, or in future possibilities (what we now call inequality of opportunity). Finally, efficiency is achievement of high growth rates. When it comes to the interaction between equity and efficiency, Kuznets believes that the very achievement of higher growth rates requires greater equity, be it because a significant part of the population is otherwise socially excluded, not allowed to contribute, or because it leads to the fragmentation of society and political instability.

If we apply this typology of Simon Kuznets, we could place Pakistan’s economy of the 1960s as being at that second point where pro-equity policies are not a waste of resources but rather an investment in, even the prerequisite, for future growth.

The results of relentlessly pursuing growth for the sake of growth in Pakistan during the 1960s were so devastating that even its architect, Dr. Mahboob ul Haq converted to one of its biggest critics and popularized the idea of human development as measure of development of a country. It resulted in the creation of Pakistan’s notorious 22 richest families who owned 66% of industrial capital and also controlled 97% of banking and insurance business, creating crises of confidence and legitimacy for architect of this model. This development was one of the major factors for the dismemberment of Pakistan at the end of this “Decade of Development”. Revelation that these families belonged to Western wing of the country created great resentment among the public in the Eastern wing about the systematic exploitation of East Bengal by the ruling elites of West Pakistan in connivance with their native business class.

Aid Dependence:

All the three military phases of Pakistan’s history are known for massive inflow of foreign aid in the wake of some fortuitous events happening outside the borders of Pakistan. Ayub Khan, who had offered to send Pakistani troops to Korea without the permission of the civilian government in 1952, was the favourite of the Pentagon. This over dose of foreign aid did spur the growth rates but left indelible marks on the political economy of the country. Heavily capitalistic industrialisation dependent on imported raw material created less jobs and more excess capacity. This perception, based on fairly hard core evidence, of unequal utilization of foreign assistance in terms of regional allocation further accentuated the perceptions of exploitation among the Bengalis, who openly revolted against this iniquitous system and opted to leave the federation.

Import-substitution Industrialization:  

Import substitution industrialization works up to a limit, afterwards high tariffs barriers conceal the actual costs of producing the goods which are valued at distorted domestic prices. When the inputs and outputs are realistically valued at global prices, most of these industries add negative values. High dosage of foreign aid coupled with multiple exchange rates of an overvalued currency under the Export Vouchers Scheme played havoc with the factor intensity ratio of the industrial units established during the Ayub period. Highly capital intensive techniques of production showed very impressive growth figures but did not absorb the growing labour force, creating social tensions and increasing poverty in the country. It led to the growth of consumer goods industries which were heavily dependent on imported raw material. It made them non-competitive in the global markets with the result that there was huge excess capacity created when foreign aid started trickling down.

Neglect of Social Sectors:

Aggressive capitalistic development caused serious economic, social and political tensions. Social sectors were neglected and not adequate funds were allocated for the improvement of education, health and skill formation. Real wages dropped while regional disparity increased with concentration of economic power in both industry and agriculture sectors. Karachi and Central Punjab developed at the cost of rest of the country creating resentment and feeling of neglect especially on the part of people of East Pakistan (now Bangladesh)

In another article here I have discussed in detail the historical and geopolitical context of the breakup of Pakistan and argued that the separation of East Pakistan from its western counterpart was inevitable, yet it could have been a smooth divorce rather than a violent rupture due to bad governance and economic mismanagement particularly during the Ayub regime. Relevant portions of that article are reproduced for connectivity of the narrative.

“There were two biggest grievances of the Bengalis against West Pakistan. 

  • Firstly, not taking appropriate affirmative actions to accelerate the economic development of the Eastern wing on priority basis and on massive scale to reduce the economic disparity exiting between the two wings as a historical baggage.
  • Secondly, instead of spending more on the development of East Pakistan, there was a massive transfer of resources from East Pakistan to West Pakistan on official and private level.

Leaving aside the claims and counterclaims about the estimated quantum of resources transferred annually from East to West Pakistan, the fact remains that there was a systematic system of resource transfer through several means.

  • Erroneous pride in a strong currency, more as a counterpoise to Indian hegemony and less for economic prudence, resulted in overvalued exchange rate which undermined the competitiveness of jute, the major earner of foreign exchange of East Pakistan. On the other hand overvalued exchange rate heavily favoured the importing classes of West Pakistan, encouraging a healthy growth of an aggressive private commercial sector in the western wing. East Pakistan failed to develop this vanguard of economic growth at a time when all the preferences were available for the industrialists
  • As the receipts from the export of jute were received and recorded in West Pakistan, less than half of it was spent on the development of eastern wing due to strong incentives under market mechanism in the western wing of the country. Same was the case with the foreign aid received by the government of Pakistan.
  • Another source of transfer of resources was the inequitable terms of trade between the two provinces for the supply of goods and services from one wing to other. West wing supplied manufactured goods while east had few goods to trade and those also consisted of agricultural raw material which traditionally fetches lower prices as compared to manufactured goods.
  • The West Pakistani businessmen who owned almost the entire industry located in East Pakistan used to transfer all the profits earned from East Pakistan to western wing instead of investing wholly or partially in East Pakistan. Similar was the position in respect of banking system, which was owned by them.
  • Last but not the least was public finance. Majority of the taxes imposed were spent on defence and administration, heavily dominated by the West Pakistanis.|”

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