Political Economy of Pakistan under Zulfiqar Ali Bhutto

By | on February 20, 2016 | 0 Comment

zulfikar aliZulfiqar Ali Bhutto came into power after the dismemberment of united Pakistan in 1971 and stayed as its supreme leader for five and a half years till he was removed on 5th of July, 1977 and finally executed by his own out of turn handpicked army chief, General Zia on April 4, 1979. His tenure cannot be properly appreciated without keeping in view the special domestic and global environment in which he came to power and ruled this new country.

  • Exceptional Times: Zulfikar Ali Bhutto’s period was an exceptionally trying and tumultuous time in the history of Pakistan which had been recently militarily humiliated and dismembered into two. There was great despondency among the people about the future of the country which was facing an existential threat not only from outside but even from inside from those regions which had been left marginalised in the development process and political dispensation. Accumulation of social economic and political power at the centre thanks to Ayub era policies had accentuated the centrifugal tendencies in the smaller provinces of the country and there were insurgency in one province.
  • Financial Crises: Long period of conflicts, crises and war with India resulting in loss of half of the country had created severe financial crises for the country. These were aggravated by the throw forward of adverse effects of Ayub Khan’s economic policies had created. The 1973 OPEC (Oil Producing and Exporting Countries) price increases played havoc with Pakistan’s import bill and the balance of payments deteriorated. This was a severe problem for the government because the state treasury did not hold much reserve.
  • Social Discontent: Modernisation process initiated during the 1960s had inevitably created massive social tensions in the wake of dysfunctional political system and imperatives of the capitalist model of growth. While masses have been squeezed to extract resources for rapid industrialisation, the fruits of development had not trickled down as expected, thanks to inherent flaws in the model. Capitalist system of production, imported raw materials and capital intensive industrial units led to non-exploitation of indigenous natural and human resources giving rise to unemployment. Population explosion made the situation even more acute due to demographic transition. People were yearning for redistributive reforms, provision of civic amenities, fulfilment of basic needs and to redress the inequities created during the last decade
  • Global Turmoil: At global level it was a period of great turmoil geopolitically, financially and economically. Old economic order based on Washington Consensus was giving way to new system which had not yet taken roots. After decades of hostilities USA was forced to approach China for rapprochement as there was rift emerging between China and USSR. USA wanted to pitch China against Soviet Union. Global world economic order got its first severe jolt when the Arab countries, after the 1973 Arab Israel war, raised the price of oil manifold. This was a game changer in global economy as it suddenly started shifting the centres of economic and financial control, leading to global recession. At the same time delinking of dollar from gold –the bed rock of global economic stability of four decades, led to the first financial crises after the end of the World War 2.
  • American Hostility: Unlike his predecessor, Bhutto was not America’s choice; he was the product of the circumstances over which USA had no control. Americans, fearing their impending defeat in Vietnam were looking for ways to take revenge from USSR and fulfil their desire to break it up by bleeding it to death in its soft belly –Afghanistan. They wanted stable Pakistan ruled by a strongman like Ayub. Bhutto was never their choice but the Americans were forced to accept him as chief executive of the country they considered extremely crucial for carrying out their plans with the help of their other henchmen-Shah of Iran, royal house of Saud and president Sadaat of Egypt.

Pakistani Prime Minister Bhutto initially sided with this scheme and ouster of two provincial governments bordering Afghanistan by him should be seen in this broader geopolitical context. However he soon realised the destabilising impact of such an adventure and retracted. Cognizant of the crucial importance of Pakistan in their designs to lure Soviet Union in the killing fields of Afghanistan, Henry Kissinger specially came to Pakistan to convince him but Bhutto’s refusal to go along with the American scheme, cost him his life later on.

  • Massive Floods: In August 1973, floods of intensive magnitude swept across the extent of the country, the first natural calamity of this nature to have inundated the country. The immediate result was in the shape of skyrocketing price hikes in consumer goods. As if it was not enough, cotton crop continued to be affected by pests and floods. OPEC oil price increased in 1973 and world recession thereafter impacted badly on ports and exports. Recurrent cotton crops failure and floods in 1973, 1974 (with pest attack) and 1976 affected agriculture and exports growth.

Economic Policies of Bhutto

The challenge confronting Bhutto was not only to revive the weak economy which had started declining since early 1969 and was on the brink of disaster but also to address the distributional issues. In order to fulfil the promises he made during the elections to ameliorate the conditions of the poor sections of society and to lessen the regional and class disparities created during the Ayub regime, he launched a series of economic and financial reforms including nationalisation of industrial units, land reforms, banking reforms and other social reforms.

Currency Rationalisation:

When Bhutto took over, Pakistani rupee was not only heavily overvalued but there were multiple exchange rates due to the operation of Exports Bonus Voucher scheme which had been introduced as a short term measure to boost exports but was continued under pressure of the vested interests. Besides distorting the economic structure, it was adversely affecting the agriculture sector, exports and growth of heavy industries in the country. To rectify the economic distortions created by this overvalued exchange rate and boost the exports, Bhutto regime devalued the currency by 59 % creating incentives for the exporters to increase the exports


Import-substitution industrialization in the 1950s was by default because of severe shortages of the consumer goods, providing lucrative incentives for the private sector for establishing consumer goods industries. During Ayub era it was by design. It had no doubt put Pakistan on the trajectory of rapid growth but had now run its steam and its negative after effects were emerging. Capital goods industry had been totally neglected due to easy availability of profitability in a protected market for consumer goods. Proverbial shyness of the private sector to avoid unnecessary risks and lack of finances at their disposal to establish capital goods industries had led to a lopsided industrial structure.

1960s was the time to start rectifying this anomaly but it was lost. Foreign assistance coupled with generous fiscal and non-fiscal concessions to the industrialists during the Ayub period continued the same pattern of industrial development with few exceptions. There was excess capacity impeding against competitiveness of the goods produced to export. Lastly, rising inflation in the western countries had made the import of capital goods expensive beyond the capacity of the private sector. Coupled with the decline in international demand for Pakistani goods put a seal on the viability not to speak of their expansion. The nationalized units brought with them accumulated losses of Rs.254 million. These could have survived only due to heavy injection of finance by the state.

Bhutto regime tried to redress this imbalance and started it by nationalisation of heavy industry and brought it into the fold of public ownership immediately after seizing reins of the government in January 1972.Less than 20% of the total industrial structure, these thirty-one industrial units were fewer than ten categories of basic industries, mostly capital and intermediate goods producing sector. Thus most of the privately owned industrial units being in the consumer goods sectors remained unaffected by the nationalization. If not nationalised, these would have anyway died of their own death because of their heavy debt profile and stoppage of foreign aid which was their main source of establishment and survival. However, in 1973 a series of nationalizations of industrial units were started which culminated in the take-over of rice husking mills in 1976.Nationalisation of these units had more to do with political expediency and less with any economic rationality.

Mega Projects:

One of the remarkable achievements of Bhutto regime was the initiation of mega projects in the country. Besides establishing the Port Qasim, Pakistan Steel Mills and the Heavy Mechanical Complex (HMC), it initiated the work on several cement and fertilizer factories and the Indus Highway. Work also started on the Nuclear Power Development Program and the Lowari Pass Tunnel. In 1971, Pakistan had been dismembered through Indian military intervention. To prevent recurrence of such an event in the future, Pakistan sought to develop a military deterrence for which Bhutto launched the most ambitious and costly project of developing nuclear bomb

These mega projects and the basic industries laid the foundations for future growth and development from which his successor benefited. However, the style of economic management Bhutto adopted reduced the role of Planning Commission as well as its capacity to offer advice to the political decision-makers.

Banking Reforms/Nationalisation:

There was fourfold motive for carrying out reforms in the banking sector.

  • Firstly, there was an urgent need to break the monopoly of the 22 families which had more than 95 % ownership in the banking and insurance business of the country and were ruthlessly used to accumulate wealth for themselves.
  • Secondly, agricultural sector was badly neglected in their access to finance as more than 80% of savings from the rural areas were disbursed among the industrialists.
  • Thirdly, almost all the banks and insurance corporations had become bankrupt due to their lending operations in former East Pakistan. To protect the interests of the depositors, shareholders and policyholders, bailing them out through nationalisation was the only option.
  • Fourthly, financial resources were desperately needed for the expansion and up gradation of the industrial units nationalised and put under government ownership and management because foreign donors were suffering from aid fatigue and had used East Pakistan crises as a pretext to stop aid-the main driver of Ayub khan’s growth.

Consequently, Bhutto nationalised the banks and also created new financial institutions. Banking reforms were introduced to provide more opportunities to small farmers and business such as forcing banks to ensure 70% of institutional lending should be for small land holders of 12.5 acres or less, which was a revolutionary idea at a time when banks only clients were the privileged classes. The number of bank branches rose, from 3,300 to more than 5,700 or by 75% from December 1971 to November 1976 covering all towns and villages with a population of 5,000 in accordance with targets set after the nationalisation of banks.

Land Reforms:

Land reforms in the form of ceilings on land holding and improvement of tenurial relations in favour of tenants were carried out in three phases during the Bhutto regime. In the first phase, in March 1972 individual land ceilings were reduced to 300 acres of un-irrigated land and 150 acres of irrigated land. Eviction of tenants was declared illegal, water rates and agricultural tax was to be paid by the landlord, not the tenant. Payment for the purchase of seed was also to be paid by the landlord.

In its second phase in November 1975, the land tax was abolished for those peasants with holdings under 25 acres and was progressively increased for those with greater holdings. This resulted in benefitting 7.2 million middle medium-sized farmers and peasants in the country and improved the conditions of small and medium-sized farmers and tenants. In December 1976, the government announced to distribute about 2 million acres of cultivable state land among 100,000 peasant families. At the same time, the land holding ceiling was reduced to 200 acres for un-irrigated land and 100 acres for irrigated land.

Manpower Export:

The Middle East oil price boom was a disaster for Pakistan on the one hand as it resulted in exponential rise in her import bill. However it also proved to be a window of great opportunities.. Rejecting the pleas of the bureaucracy of maintaining strict controls on immigration by tight passport rules, Bhutto reversed this decade’s old restrictive policy and liberalised the issuance of travel documents for Pakistanis going abroad. This facilitated the export of manpower to the Middle East where massive construction activity was taking place in the wake of oil income windfall. Pakistan became one of the first and largest non-Arab Asian countries to actively engage in the large scale export of labour to the Middle East.

The annual number of Pakistanis employed abroad increased from less than 2000 in 1970 to more than 16,000 in 1974; this figure crossed 1.6 million in 1980. These expatriate Pakistanis sent more than 2 billion annually as remittances back home. These remittances not only helped Pakistan to in its foreign exchange reserves but brought a mini construction boom in the rural areas of Punjab and North West Frontier Province (now Khyber Pakhtun Khaw). This massive export of labour power from Pakistan was accompanied at the same time, by a substantial expansion of economic and technical cooperation with the Arab Gulf states.

Social Sector Reforms:

Another major area of economic reforms in which Bhutto had great stakes was the social sector that had been most neglected during the Ayub regime. The government, therefore, paid greater attention to this sector particularly in the fields of health and education which in the Third Five Year Plan received 3.8 per cent and 4.7 per cent respectively of the total government development outlay. Universalizing the elementary school was promised and privately managed schools and colleges were nationalized which had been hitherto the strong preserves of the elite. In health sector a number of new medical colleges were established in fulfilling a longstanding demand of the urban middle classes for health and medical training facilities.


The economic policies of the Bhutto government are one of the most discussed topics in the literature of the development studies of Pakistan. His nationalisation policy has been criticised the most. It is alleged that by nationalising industries and financial institutions, he did serious damage to the efforts made for economic development during 1960s and resulted in economic inefficiency and mis-allocation of resources. Some critics have even ascribed political motives more than the economic rationale for this nationalisation i.e. an attempt by the feudal lobby to clip the wings of industrialists, who had grown immensely strong under President Ayub. Leaving aside this debate let us discuss some of the results-good or bad, of his policies

Economic Recovery:

As a result of economic and financial measures, Pakistan saw a healthy economic recovery within the first year of its dismemberment, thanks to excess capacity available in the industrial sector which was suitably used by the massive devaluation of Pakistani rupee. Additionally, the previous inter provincial trade between eastern wing and western was diverted to the Middle East and was counted as GDP growth through greater exports. By 1974, exports exceeded one billion dollars, showing a 60% increase over the combined exports of East and West Pakistan before separation. It was achieved and benefited with world was in the midst of the major 1973 Oil Crises and in the middle of global recession the national income of Pakistan increased by 15% and industrial production by as much as 20% in four years.

Poverty Reduction:

Pro-poor policies adopted by the People’s Party government sharply reduced the level of absolute poverty in the country. Largely benefitting the farmers and the urban working classes, these policies helped in reducing the percentage of the population living in absolute poverty falling from 46.50% in pre-Bhutto period to less than 30% by the end of 1979–80.

Agrarian Reforms:

Bhutto’s land reforms were a mixed bag of initiatives to transform the rural landscape of the country although they fell short of full-fledged agrarian reforms which could have brought fundamental structural changes in the political economy of the country. No doubt they affected a much larger number of landlords-around 100,000 as compared to fewer 1000 under Ayub’s reforms. Similarly, land holding ceilings imposed a lower limit on the individual ownership of land. However they failed to make a substantial dent in the social, economic and political power of the big landlords in the political economy of the rural areas of Pakistan. In fact, soon after the 1970 election victory of the PPP, the feudal elite even within the party had already begun the partitioning, distribution and division of the land among family members and in the name of trusted tenants. However, the peasants, tenants and landless labour new benefits that were made available in the form of residential plots and the exemption of land revenue. Secondly, through these reforms and other measures, Bhutto was able to arouse political consciousness among these downtrodden classes, making them an important force on the political dynamics of the country

Expansion of State Role:

State had been playing a larger than life role in the political economy of Pakistan since independence for obvious reasons. However this role expanded considerably during the Bhutto period through his massive nationalisation programmes. In July 1976 Bhutto’s government took an arbitrary and unexpected initiative of nationalising the floor mills, cotton ginning and rice husking mills. Besides overstretching the public sector, it was the most unpopular measure for which the PPP had to bear serious political costs. The small industrialists, traders and shopkeepers were outraged by these measures which threatened their livelihood. These were the people who played active part as opposition movement in paralyzing economic activity during national strikes leading to the eventual downfall of the PPP government.

Whether the government was successful in clipping the wings of the industrial-financial families through this decision or not, the result was sheer mismanagement which intensified the governance crisis and economic slowdown. Unfortunately, jobs in these and other nationalised units were used for political patronage resulting in over-manning, inefficient management and poor financial performance of public sector. New public enterprises were started without taking into account their financial viability or established in far-flung areas for political objectives. In the absence of a sufficiently well-developed local infrastructure, most of these units always remained a burden on the national exchequer.

Monopoly Breaking:

Bhutto came into power with the slogan of breaking the concentration of economic power and took active measures to fulfil this promise. Although it adversely affected the growth rate of the economy, yet it did make a heavy dent in the concentration of wealth. By the time he was removed, the concentration of wealth had declined compared to height of the Ayub Khan era when 22 families owned 66% of industrial capital, and also controlled banking and 97% of insurance. Although owners of the nationalised units were generously compensated later on, it did give a decisive blow to the industrial classes to invest the profits they had earned during the heydays of Ayub.

Political Corruption:

Although corruption started right with the birth of Pakistan as a result of vast discretionary powers of the administrators made responsible for the allotment of lands and properties left by the migrating Hindus, it was by and large a bureaucratic phenomenon. During Ayub period, military bureaucracy became partners when granting the licences imports and other granting of contracts etc. However it was during Bhutto period that political elite and cadres actively got engaged in this process. Although Bhutto himself has not been blamed for any massive financial corruption, his period did see an exponential rise in the corruption as the temptations of the vast opportunities available for amassing wealth were too much to resist by the people who had joined People’s Party. Access to state corridors of power became synonymous with accumulating a private fortune. This unfortunate development has remained the hallmark of successive PPP regimes afterwards


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