Political Economy of Pakistan: Past,Present and Future

Shahid Hussain Raja
Independent Consultant –Public Policy
www.shahidhussainraja.cim

 Introduction
 Global/National Environment
 Economic Policies
 Assessment
 Conclusion

 Following the Martial Law tradition, General Zia took over
the reins of the country by removing the same person,
Zulfiqar Ali Bhutto who had hand picked him, out of turn,
to serve as the chief of the armed forces of the country.
 Thanks to benign internal and external environment,
shrewd domestic and foreign policies and sheer luck
helped him survive fore than a decade until God himself
decided to take him back.
 Actions taken along with the decision not made during his
regime have changed the socioeconomic structure of the
country
 This presentation looks at his the economic policies of his
government and assesses their impact on the political
economy of the country taken

 Like General Ayub in 1950s, General Zia came
into power at a time which was most suitable
for army takeover
 Some of the benign domestic and
international factors which helped him to
grab the power and survive for a decade are
discussed in the next five slides

 Americans had been active in the soft belly of USSR namely
Afghanistan to provoke its occupation of Afghanistan. For this
they had been training Mujahedeen inside Pakistan with active
connivance of Pakistan’s intelligence agency.
 Bhutto’s reluctance to go too far in this policy irked the USA and
Henry Kissinger had to issue a warning to Bhutto in this respect.
 His removal and final execution should be seen in this context.
 Soon after his execution Soviet Union fell into the trap laid for
the bear and invaded Afghanistan.Pakistan became a front line
state for the furtherance of American interests in the region in
particular and at the global level in general.
 With it came the usual perks-military aid, foreign assistance,
advisory services and support for military ruthlessness

 Iranian revolution of 1979 and with it the exit
of USA from Iran was a bolt from the blue for
the Americans who now were looking for
someone to protect their interests in this part
of the world
 It was another godsend opportunity for
Pakistan’s military ruler to provide his
services as a trusted ally of USA in place of
exiled Shah of Iran.

 Although Middle East oil bonanza occurred a few years
before Zia took over, it did help him in two ways. With
greater oil revenues, Middle Eastern countries started a
two decades long construction boom which absorbed
hundreds and thousands of Pakistani labour, easing the
domestic unemployment situation.
 It also pumped in billions of remittances in the rural areas
of the country sowing the seeds of consumerism.at the
same time he was able to market his Islamic credentials to
the Arab sheikhs.
 Being a devout Muslim, he became much endeared to the
ruling elites of the Middle East who bank rolled his
programmes and provided him the necessary religious
legitimacy among the public.

More than three decades of economic development had
created a strong commercial middle class which was more
interested in law and order and economic progress than the
humdrum of democracy.
They acquiesced to the curtailment of their civil liberties and
fundamental human rights in return for political stability and
economic opportunities.
At the same time the mega projects Bhutto had started,
came on ground increasing the rate of growth as well as
relieving the country of importing fertilisers and other
essential commodities.
Similarly, labour exported during Bhutto period sent in
billions of dollars in foreign remittances which eased the
balance of payments position of the country.

Political Economy of Pakistan: Past,Present and Future

 For General Zia, Islamisation of the economy,
polity and society of the country was more
important than the welfare of the people or
socioeconomic development of the country.
 Although he gave economic growth least
priority, yet some of the measures taken
during his regime are worth noting.

One of his landmark contributions towards Pakistan’s economy,
Islamisaion of the economy was nothing more than changing the
nomenclatures of all the economic practices and policies already in
vogue without introducing any substantial changes in actual business
dealings
All lending and deposit rates were set on profit and loss sharing but
the bank charged the same mark-up and advanced the loans on the
same conditions as in normal banking system.
In June 1980, the Zakat and Usher Ordinance was promulgated
whereby 2.5% was deducted from the bank accounts of Sunni Muslims
on every first day of holy month of Ramadan. Farmers were liable to
pay 5 per cent of their produce as Usher in place of land tax
The amount thus collected was distributed among the needy through
the zakat committees headed /staffed by his loyalists in every village
/town.

On the pressure of emergent commercial middle classes and less as a policy
prescription, he started reversing the nationalisation process initiated by Bhutto
and three steel mill industries were returned to its previous owners in the first
phase.
Reverting to pre-Bhutto policy of greater reliance on private enterprise to
achieve economic goals, a demarcation of exclusive public ownership was made
that excluded the private sector from only a few activities.
There was a clear switch over to liberalization of economy with generous fiscal
and non-fiscal incentives for the private sector. For adoption of market-based
development strategy, government concluded three years extended fund facility
(EEE) with IMF in 1980 for several structural reforms aiming at financial
deregulation and greater economic liberalization.
However, state continued to play a large economic role in the 1980s with
public-sector enterprises accounting for a significant portion of large-scale
manufacturing. Share of private sector investment grew from 33% in 1980 to
46% in 1989.

The investment climate for the private sector was
improved by providing guarantees against future
nationalization.
The industrial zone was established in the late
1970’s to attract foreign investment, speed up flow
of modern technology, provide more job
opportunities, raise skill and management standards
and provide exporters a base for production in an
environment free from import duties
By the policy of keeping domestic wheat, rice and
cotton prices low, the government was able to
benefit the urban consumers and the industrialists at
the cost of the agricultural producer.

Although the corporate sector of Pakistan had been expanding in the
country since long yet the corporatisation process was formally
initiated with the promulgation of the Companies Ordinance in 1984
that legally allowed a variety of formations in the mixed economy of
Pakistan.
The effect of corporatization has been to convert state departments
into public companies and interpose commercial boards of directors
between the shareholding ministers and the management of the
enterprises.
This process was not only continued but was given great boost by his
successors particularly Nawaz Sharif who gave free hand to private
sector to expand the economic activities in the country.
In 2004, in a programme initiated by Prime Minister Shauket Aziz, the
corporate sector fairly matured and became a strong and sizeable
sector in the financial hubs of the country.

Like Ayub’s period, in Zia’s regime agricultural programme did not
favour farmers. However one thing for which he must be given full
credit is the uplift of the rural areas, an off spin of his scheme to
revive the local government institutions to create a constituency.
These local body members and the handpicked members of rump
assemblies were given huge amounts to spend in their respective
constituencies. Resultantly a fair amount was spent on rural
regeneration and construction of rural infrastructure. Later on,
initiation of five point programme of his Prime Minister Junejo gave
a further boost to this rural uplift.
The increased demand for services in rural areas following rising
incomes generated pressures for rapid rural electrification and
rural roads, rural electrification spending was 52% higher than
original allocations while spending on rural roads exceeded targets
by 29%.

Generous incentives for manufactured exports in the form of rebates,
pushed Pakistan’s manufactured exports fourfold from US $ 1.3 bill
1980 to US $5.6 bill in 1983 by growing at the rate of 7-8% per annum.
This exports push which contributed in reducing the relative
dependence on worker remittances was strengthened by three
measures taken by the government;
 The export subsidies ranging from 7.5% to 12.5% were extended to
all
 Expansion of raw cotton production which in turn made possible a
major expansion of cotton textiles.
 Introduction of a flexible exchange rate policy was also very
instrumental in this exports expansion. In fact the nominal exchange
rate was devalued almost twice as fast as warranted by the relative
change in prices between Pakistan and major trading partners.

 The country experienced one of the highest growth rates in his 11 years
of power, averaging more than 6.5% per annum. This phenomenal rate of
growth can be explained in three words-aid, remittances and informal
economy.
 Generous assistance by USA during this period helped his regime to
survive the internal pressures and external shocks
 Remittances from the overseas workers totalling around $3.2 billion/year
for most of the 1980s, accounted for 10 per cent of Pakistan’s GDP, 45
per cent of its current account receipts, and 40 per cent of her total
foreign exchange earnings.
 Afghan war brought money into the country which sustained his rule but
it also resulted in exponential growth of informal economy which crossed
the 50 per cent mark during his tenure.Leaving aside the harmful effects
of this dubious source of growth, it adversely affected the accuracy of the
statistics gathered by the state agencies regarding total effective demand.
Consequently planning process suffered and still it is not possible to
accurately calculate the mega data.

 There was impressive industrial growth under
Zia with manufacturing sector growing at the
rate of nearly 9% per annum during his 11
years of rule as compared to 3.7% in 1972-77.
 This was in large part due to the massive public
sector investments made by Bhutto in steel,
cement, fertilizer and vehicle production.
 However, high economic growth during the Zia
period did not receive special policy support
for employment creation as it was not
accompanied by a rapid rise in investment.

 Substantial economic growth and relatively low inflation
during the Zia period did translate into broad based
income growth for most income group. Average per capita
GNP grew at an annual average of 3.3% per annum or by
4.3% during 1977-88 though the growth was much higher
in the earlier period.
 Real wages which had increased during the Bhutto period,
showed further increase during Zia’s rule. The annual
earnings of two main wage groups of factory workers
indicate an increase in nominal wage of around 150% over
1977-88.
 The wages of unskilled labourers tended to rise faster than
those of skilled. High growth rate of the economy, good
agricultural growth, and labour immigration influenced
real wage rate and incidence of poverty.

Total public spending on education did increase to
2.7% of GNP by 1987-8 from 2% of GNP in 1976-7.
Progress in increasing access of the population to
basic health services was slow. Only modest gains
were made in reducing infant mortality and
increasing life expectancy.
Primary school enrolment during 1977-88 expanded
at an annual rate of only 4% only moderately faster
than the growth rate of the population. Nearly 75% of
the real increase in public sector development
programme between the Fifth and the Sixth plan
period was pre-empted by increase allocations for
energy.

While there were significant improvement during the Zia period in the
industrial policy framework in terms of emphasis on the role of the private
sector, greater import liberalization of industrial raw materials, and relatively
strengthening of incentives for manufactured exports, not much was done to
signal fundamental change in industrial policies which had hampered the
structural change in manufacturing during the 1960’s and 1970’s.
By the early 1980s, Easy Asian countries like China, Thailand, Malaysia, the
Philippines and Indonesia were successfully following the lead of Korea,
Taiwan, Hong Kong and Singapore to develop manufactured goods export
aggressively. Inefficiency, industrial unrest, politicization and
bureaucratization of industry resulted in adverse impact on productivity,
investment climate and business confidence etc.
By the policy of keeping domestic wheat, rice and cotton prices low, the
government was able to benefit the urban consumers and the industrialists at
the cost of the agricultural producer.Agriculture production reached peak in
mid-1980’s thereafter starts falling mainly due to weak economic incentives,
mechanization against smaller farmers, insufficient agriculture credit, low
yielding seeds, salinity problems and weak input- output pricing signals.

The government expenditures grew phenomenally from 10-11% to 27% of GDP with
defence expenditures increasing from 5.5 to 7% of GDP over the period for obvious
reasons. Interest payments became the fastest growing element in government
expenditures during 1977-88, rising from 1.9% of GDP in 1976-7 to 4.9% of GDP in
1987-8, reflecting both the enormous growth in internal debt and the high interest
rates at which the borrowing was done. Domestic debt increased from 20.8% of GDP
in mid-1981 to 42.2% of GDP in mid-1988.
There was a much higher reliance on government borrowing from non-bank sources
at relatively high interest rates of 14-15% per year. A greater reliance on these
sources of financing meant that credit creation in the public sector and the overall
rate of monetary expansion slowed down sharply in Zia period.
However substantial additional taxation undertaken in 1979-80 and 1986-7 yielded
some improvement in tax to GNP ratio which increased from nearly 12% in 1978-9
to 16% in 1987-8 although direct taxes continued to account for fraction of total
revenue and, the dependence on foreign trade taxes became greater. On the other
hand the generous use of tax holidays further weakened the elasticity of the tax
system.

While Pakistan did witness high growth rate of 6.5% during Zia
period , it was inadequate in relation to both current needs and
future requirements. That’s why serious shortages of
infrastructure, especially in the energy, transport, and urban
development sectors are his legacies.
Similarly, no prudent policy was initiated by the government to
channelize workers’ remittances, most of the amount remitted by
the expatriates was spent by their relatives in buying land,
construction of houses, purchase of durables etc. The results
from Export Processing Zone were disappointing as exports from
the zone were relatively small
These high growth rates were accompanied with large fiscal and
trade deficits. In 1980’s, the former crossed 7% of GNP while the
trade deficit never came down from 9% of GNP. Consequently it
necessitated increase in money supply which hovered around 19%,
fueling inflation which almost touched double digits.

Political Economy of Pakistan: Past,Present and Future

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