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  • 1. insafresearchwinsafresearchwin Insaf Research Wing Pakistan Tehreek-e-Insaf IRW Insaf Research Wingginsafresearchwinginsafresearch Central Secretariat Street No. 84,winginsafresearchwinginsafresea Finding solutions for a better Pakistan Sector G-6/4, Islamabad, Pakistan. Tel: 92-51-2270744rchwinginsafresearchwinginsafre Fax: 92-51-2873893 irw@insaf.pksearchwinginsafresearchwinginsafresearchwinginsafresearchwinginsafresearchwinginsafresearch Pakistan Economic Research Reportwinginsafresearchwinginsafresea An analysis of the Pakistan’s Economy along with other countriesrchwinginsafresearchwinginsafre 08 June, 2010searchwinginsafresearchwingins Author: Asad Mahmood Committee: Economicsafresearchwinginsafresearchwin Dossier # 001 Version # 001ginsafresearchwinginsafresearch Nature of Document: Reportwinginsafresearchwinginsafresearchwinginsafresearchwinginsafresearchwinginsafredisciplinejusticehumanityequalityfaithpietydisciplinejusticehumanityequalityin
  • 2. Committee on Economics Pakistan Economic Research ReportInsaf Research Wing (IRW) is a part of Pakistan Tehreek-e-Insaf (PTI) reporting to the secretary general. IRWwas created in 2009 to carry out research in order to find solutions for problems in Pakistan. The foremost goalof IRW is to keep people of Pakistan and PTI informed and prepared.The wing is composed of 9 committees. Each committee addresses issues related to its field of expertise. Thecommittees defined as of yet are (i) Socio-Political (ii) Information & Technology (iii) Economic (iv) Energy(v) Healthcare (vi) Corruption (vii) Foreign Affairs (viii) Education (ix) Environment.The research reports/papers are either commissioned by the central executive committee of PTI or committeemembers of IRW. PTI members can also suggest IRW to consider researching on a matter they find important.IRW welcomes any contributions in the form of scholarly work addressing important issues. Nevertheless, afterthe author(s) sends the document it is peer reviewed before getting published. In the process of peer reviewthe document is technically analyzed and scrutinized. The procedure is necessary to maintain quality control.However, varying opinions & ideas are not penalized.Apart from working on research reports/papers which shed light on problems and provide basic solutions, IRWaims to act as a conduit to the shadow cabinet and/or spokespersons aiding them with the task of preparingextensive policies for PTI. These inputs are from several professionals who are well versed in the subject. IRWalso serves as a check on the reigning government’s policies.The Wing does not follow a preset ideology while carrying out research. IRW does not endorse any opinionpresented in a published report/paper as an official position. Likewise, several research reports/paper on asimilar subject published by IRW can have contradictory recommendations though it should be noted thatthese point of views are sole responsibility of the author(s). Very rarely when there is a complete consensuson a certain research report/paper within IRW only then it is recommended to PTI for official perusal. Anypublished document by the wing does not constitute it as an official position of PTI unless otherwise stated.Insaf Research Wing works at a national level but its members are located throughout the world bringing in themuch needed international experience. IRW practices an open membership policy valid for all Pakistanisregardless of religion or race. Nevertheless, members of other nationalities from international organizationsinterested in helping Pakistan are always welcome to join IRW.Published reports of IRW can be accessed on the website. The headquarter of IRW is located at PTI’s CentralSecretariat, Street No. 84, Sector G-6/4, Islamabad, Pakistan.Copyright © 2010 by Pakistan Tehreek-e-Insaf All rights reserved.The contents of this report/paper cannot be reproduced without prior permission of IRW. 2Insaf Research Wing
  • 3. Committee on Economics Pakistan Economic Research Report Table of ContentsExecutive Summary 4Acknowledgements 51.0 Chapter 1: Introduction 6-7 1.1 Background Information 7-9 1.2 Research Aim and Objectives 9-102.0 Chapter 2: Functions of an Economy 2.1 Making of an Economy 11-12 2.2 Economic Growth 12-14 2.3 Monetary & Fiscal Policy 14-16 2.4 Types of economic systems 16-20 2.5 Parameters of economic growth 20-22 2.6 Arguments against and for privatization, regulation and deregulation 22-233.0 Chapter 3: Different Economies and Systems 3.1 Key factors behind the economic success of Southeast Asian economies 24-26 3.2 Key economic drivers of Nordic countries 27-29 3.3 Research on Venezuelan economy 30-31 3.4 Poverty Reduction Initiatives 31-32 3.5 Hugo Chavez economic policies 32-344.0 Chapter 4: The Banking System 4.1 Islamic Banking 35-36 4.2 Role of World Bank, IMF, the Paris Club, Asian Development Bank (ADB) 37-40 4.3 Role of EU, NAFTA, GCC 40-435.0 Chapter 5: Current Pakistani Economic State 44 5.1 Manufacturing Industry 45-47 5.2 Services Industry 47-48 5.3 Agriculture Industry 48-50 5.4 Tourism Industry 50 5.5 Role of Foreign Aid 50-516.0 Chapter 6: Recommendations 52-56Bibliography 57-58Appendix 59-61 3Insaf Research Wing
  • 4. Committee on Economics Pakistan Economic Research ReportExecutive SummaryPericles, head of the Athenian state, member of the democratic party, statesman, political philosopher and theranking member of the board of generals, eloquent about the threats to ancient Athens at the height of itspower around the year 461 B.C., said “what I fear more than the strategies of our enemies is our ownmistakes”. Indeed Pericles was right: our enemy is our own mistakes. The strategies we employ will, in the enddecide our fate.The incumbent Pakistani governments consistent mistakes threaten to harm ourselves and those associatedwith us. At a time when, Pakistan should be expanding the base of public spending, firmly taking control overits financial institutions, national resources and industries and enlarging public employment opportunities, thecountry has gone in to reverse to relinquish national development plans and hand over the economic decisionmaking to the private banking, foreign companies and multinational corporations. A shame for a country of170 million people blessed with natural resources both capital and land.The aim of the report is to analyze the current Pakistani economic state and provide guidance towards a socioeconomic policy in line with the manifesto of the party. An extensive secondary research was carried outexamining and presenting various viewpoints. The development challenges for Pakistan include a completeoverhaul of the current economic system. To achieve accelerated and sustained broad-based economic growthan economic emergency should be declared, a five year Keynesian measures should be implemented, that ispublic ownership of key industries and undertaking key infrastructure project in transport, oil gas and mineralsand telecommunication sectors. For the rural areas focusing on the important agriculture sector taking in toaccount water management, infrastructure development, livestock and fisheries. Chairman Khan hasannounced an education emergency when PTI comes in to power; the author believes an economic emergencyof the same kind should also be considered.The analysis of the various economic systems and countries highlighted the need for an economy comprising ndof 3 tiers: tier 1, a self supporting economy comprising of agricultural and manufacturing, 2 tier consisting of rdservice based economy incorporating leisure & tourism, banking, arts and entertainment, 3 tier intellectualbased economy focusing on science and technology, armament, space, medicine and genetics.The fact of the matter is that Pakistan urgently needs an alternative path of political development. It needsradical progressive economic planning compatible with the emerging revolutionary models being initiated inseveral countries in Latin America, notably Venezuela. In short Pakistan needs to deliver viable economicprograms to its general masses and restore its cultural edifice with its ideal historical values of collectivecommunity development, social harmony, heritage, justice and enactment of the principles of a welfare state. 4Insaf Research Wing
  • 5. Committee on Economics Pakistan Economic Research ReportAcknowledgementsThe original idea of the report transpired through the formation of Insaf Research Wing (IRW) conceptualizedby Mr. Ali Hammad Razza. The inception of the economic committee led to invigorating discussions aboutvarious issues affecting the Pakistani economy. This led to the realization of researching an analysis of variousfactors, which affect the Pakistani economy and the wider exploration of the field of economics.Preparation and completion of this study was a challenging and an invigorating experience, as some of thecommittee members did not have prior familiarity to the field of economics or the study of this depth. Alongthe way personal difficulties led some committee members to curtail their involvement. However I would liketo thank the IRW members for their valuable suggestions.The economic committee would also like to express thanks to their family and friends for their support,encouragement, constructive criticism and suggestions throughout the course of the research work.Lastly it is hoped that this report will be used in stimulating thought, self reflection and valuable discussionamongst Central Executive Committee (CEC), PTI members, academics and provide as valuable a learningexperience for them as it has for the author. 5Insaf Research Wing
  • 6. Committee on Economics Economic Research: Pakistan each zone with manageable community andChapter# 1: population size, its own state funded hospital, health service clinics, elementary and high schools,Introduction local judicial courts, police and an efficient transport and communication infrastructures. However after eight years of General Mushraf’s rule, incessant preaching of enlightened1.0 Introduction moderation and the non-stop blowing of trumpets of an economic recovery miracle the Pakistani nation stands today at the verge of an economicIslamic Republic of Pakistan is located in South Asia disaster.4and borders Central Asia and the Middle East. It has The state of the Pakistani economy can somewhata 1,046 kilometre (650 mile) coastline along the be compared to the state of the European countriesArabian Sea and Gulf of Oman in the south, and is notably Britain which was ravaged by two majorbordered by Afghanistan and Iran in the west, the world wars. After the Second World War, BritainRepublic of India in the east and the Peoples had emerged effectively bankrupt, with anRepublic of China in the far northeast. Tajikistan overstretched economy and massive popularalso lies adjacent to Pakistan but is separated by 1 expectations of economic and social improvement.the narrow Wakhan Corridor. Pakistan is a 5federation of four provinces, a capital territory andfederally administered tribal areas. The estimated The famous economist J M Keynes persuaded thepopulation of Pakistan is 172,800,000 making it the British policy makers of a big programme of post-worlds sixth most-populous country.2 With a war social reform, and a phased liberalization ofgrowing population and limited resources the international trade and payments. Keyneseconomic challenges for Pakistan are immense; demonstrated that the unemployment ratemoreover these challenges are intertwined with depended upon the level of aggregate demand, thevarious geopolitical factors. sum of total consumption and total investment. His remedy to reduce mass British unemployment wasThough the Pakistani administration claims that to expand investment by a programme of publicpoverty has decreased from 33% to 25%, several works, which would create additional consumptioninternational organizations reports indicate that 3 by the workers employed and further waves ofpoverty has in fact risen to 37%. Evidently the consumption and investment as new incomes wereadministration is simply manipulating the numbers. generated and additional expenditure made at eachFor example Lahore is a city of six million people. It round. The Labour governments of 1945-1951has a single state-run general hospital that provides enacted a political programme rooted intreatment to patients with neuro-surgical ailments. collectivism including the nationalisation ofThe sick from Lahore, the surrounding areas and far industries and state direction of the economy.off villages in Punjab suffer the indignities of theovercrowded wards and inadequate facilities of the Economists conventionally divide industry (thehospital. In the context of the contemporary needs production of goods and services for financial gain)of the masses, political correctness and a in to primary, secondary and tertiary sectors. Theprogressive socio-political ideology, the political primary sector is concerned with growing orestablishment of Pakistan should be planning urban extracting natural products and includesand rural development based on zonal structures – agriculture, fishing forestry, mining and extraction1 Encarta Encyclopedia 2000 4 Dr H Mehdi (2007) The Nemesis, political articles &2 Population reference Bureau - www.prb.org analysis, Lahore, Heritage Publications3 5 Dr H Mehdi (2007) The Nemesis, political articles & Alan Booth (2001) the British economy in theanalysis, Lahore, Heritage Publications twentieth century, London, PalgraveInsaf Research Wing 6
  • 7. Committee on Economics Economic Research: Pakistanof minerals. In the secondary or manufacturing products at higher efficiency levels. The reason forsector, raw materials are processed in to physical the German advantage in these cases resulted lessgoods so they acquire added value. Everything else from vocational skills but from higher attainment infalls within the tertiary sector, which is concerned mathematics at school and continuing educationwith the supply of all forms of service.6 These that enabled German workers to operate computerdistinctions are useful, but the boundaries are not controlled machines that could not be used in 8always clear, especially between manufacturing Britain. These studies were small in scale andand services. As economies develop, the primary generally have unknown relevance to the widersector becomes relatively less important in terms ofoutput, though actual output may continue to Although fascinating studies but one should notgrow. The tertiary sector made the biggest single forget they are small in scale, do not control for thecontribution to output growth in most developed state of market demand and have unknowntwentieth century countries. relevance to the wider twentieth century. But what they do show is unequivocal link betweenThe importance of human capital formation to the education, training and productivity.processes and pace of economic growth isfundamental. For example, the high level of skill For Pakistan the basic economic infrastructure isamong manual workers was a decisive advantage in there however lack of governance and skilledBritain’s industrial revolution and the shortage of workers is one of the biggest obstacles. With a PTIskilled workers in those countries seeking to follow government the key will be establishing an expatBritain’s lead was almost certainly a decisive skills department within each Pakistani highdisadvantage. However Britain’s advantage in the commission in Western Europe, Japan, America andmid twentieth century sharply declined and during the tiger economies of Southeast Asia. These expatthe phase of high unemployment in the 1970’s skills department will be further subdividedmany manufacturing companies complained that according to various fields i.e. medicine, mechanicalthey could not fill vacancies for skilled and technical engineering, poverty alleviation, finance, banking,workers. In their study of matched (by type of leisure & tourism etc. Mass recruiting of keyproduct, size of firm, scale of production) firms in individuals with experience and relevantthe British and German machine tools industries, educational qualifications should then be soughtDaly and colleagues (1985) found that Germans and their skills matched in reforming variousproductivity levels were 50-80 percent higher than segments of the Pakistani economy.British. The authors identified three basicdifferences between firms in the two countries.German firms used more production engineers to 1.1 Background informationensure that workflows and handling equipmentwere fully utilized. German supervisory staff tendedto be better qualified than British at ensuring that The twentieth century saw a major expansion ofthe machines were properly set up and used for the the role of government both as a producer of goodsappropriate tasks and that workers were and services and as a regulator and stabilizer of theadequately directed. Finally German firms had 7 national economy. The Western world has come aproportionately twice as many skilled workers. In a full circle in their economic approach. Controversysimilar comparison of matched firms in the raged for many years in the economic world overfurniture trade, German firms made higher quality the proper role of government in an economy and6 Prais, S. J. 1995. productivity, education and it was especially fierce during the twentiethtraining: an international perspective, Cambridge, century. Left to its own devices the miracle of freeCUP7 Daly, A. D.M.W.N and Wagner, K (1985) market economic was widely triumphed since theProductivity Machinery and Skills in a sample of 8British and German Manufacturing Plants: results of Alt, J and Chrystal A 1983. political economics,a pilot enquiry’ NIER, 111: 48-61 Brighton, WheatsheafInsaf Research Wing 7
  • 8. Committee on Economics Economic Research: Pakistanlate 1970’s. The unbridled and unregulated western factionalism inside the political parties also dividedeconomies however came close to a meltdown party politics along regional lines. While the Awamibeginning 2007 and came to rely on government league concentrated its efforts in East Pakistanfor massive bailouts. The state’s role as the only (now Bangladesh) the Muslim league dominatedpowerful force to reverse the present decline now the politics in the western wing of the country.remains unchallenged. Such political factionalism led to frequent dismissal of governments. From 1947 to 1958 Pakistan hadWhilst the western world comes to term with the seven prime ministers and eight cabinets. 10present economic crisis and governments praised Furthermore the extravagant and viceregalfor their decisive action to stabilize the market behaviour of the political elite set it apart from thesystem. A complete opposite remedy is being common people. The civil bureaucracy was asprescribed to the Pakistani government to cure its powerful as in India. The main difference, however,economic ills namely privatization and massive between the two civil bureaucracies was in theirloans. approach to military power and political control. While the Indian civil bureaucracy recognised andSince Pakistan’s inception in 1947, the military accepted the dominance of the politicians andgained prominence in the state apparatus as a established control over the armed forces throughresult of the first war with India. After the death of strengthening of the ministry of defence (MoD),the founding father, Jinnah, in 1948, Pakistani Pakistan’s civil bureaucracy chose to partner withpolitics was riddled was the problem of the bureaucracy – represented by a bureaucratfactionalism. The political contest took place on turned politician Ghulam Mohammad, the governorthree fronts: general during the early 1950’s viewed the military - Amongst the various political groups for as a junior partner capable of keeping the raucous the control of the state. politicians at bay. The governor general’s trust lay - Between the civil and military bureaucracy more in the army generals than the civilian prime and the political class ministers. 11 To make itself more relevant for the - Between the military and other dominant state, the military strengthened itself institutionally civilian actors. through enhancing its control over defence andOne of major cause of the debilitating state of the foreign policy making. The political leadership wasPakistani economy is the continuous bickering of far too fragmented to establish control over thethe dominant political leadership in the country. military and issues of national security. The seniorFor instance, Liaquat Ali Khan, the country’s first generals especially Ayub Khan, who was the firstprime minister manipulated politicians in the army chief, insisted that the defence matters were 12Punjab in his interest. However, when confronted the military’s forte. The political conflict betweenwith the situation of losing control of the largest the political and military leadership finally ended inprovince to a dominant leader of the Muslim league the first takeover by the army in 1958. The yearsin the Punjab, Mumtaz Daultana, Liaquat Ali Khan from 1958-1971 saw a crucial transformation in civilconnived with the governor general to dissolve the military relations, during which the armyassembly and bring the province under the direct established itself as the key political force.control of the central government. This situationcontinued for two years until the elections in March1951.9 10 Abbas Hassan (1979) the state in post colonial societies: Pakistan and Bangladesh in harryThe first constitution was promulgated in 1956, goulbourne (ed), politics and state in the third world,nine years after the country’s creation. The Hong Kong, Macmillan 11 Clloughly B (1999) the history of Pakistani army, Karachi, Oxford University Press9 12 Ayesha Siddiqa (2007) Military INC, inside Ayesha Siddiqa (2007) Military INC, insidePakistan’s military economy, London, Oxford Pakistan’s military economy, London, OxfordUniversity Press University PressInsaf Research Wing 8
  • 9. Committee on Economics Economic Research: PakistanThe 1971 saw a return to democracy after the involved in profit making activities. Together withhumiliating loss by the army of East Pakistan. other major economic players such as the House ofDespite the majority won by Rehman’s Awai league Habib Ittefaq Group of companies, Hashoo group,in the elections of 1970, the west Pakistani Dawod Group and the feudal lords, such as Sethestablishment which included the military and Abid, Ghulam Mohammad Mehr, Ghulamother dominant classes was uncomfortable with Mustafa, Asif Ali Zardari etc. (Shahid ur-Rahman,the idea of transferring power to the Bengalis, who owns Pakistan) Thus what emerges is a 13whom they considered ethnically inferior. quagmire of interrelated interests between the political, military, landed feudal and the industrialFrom 1971-77, Zulfiqar ali Bhutto’s rule saw class. The much-tooted economic growth ofrestoration of confidence in Pakistani people, Pakistan is linked with the changing fortunes ofnationalization of industries, land reforms and most these ruling elites and not the common man miredimportantly setting the country towards the path of in poverty.becoming a nuclear power. To his critics howeverBhutto was like a Machiavellian prince, as he triedto maximize his power through adopting a dualapproach of propagating populist measures and 1.2 Research Aim and Objectivescoercing other players. From the standpoint ofBhutto’s relationship with the military he made theblunder of miscalculating the resilience of the This research papers aims to understand and studyarmed forces in thwarting the strategic changes he the various economic factors necessary forhad brought about in their management. The economic growth and then correlating that tomilitary capitalized in Bhutto’s dependence on provide guidance towards the formation of a socio-military force for building his personal political economic policy for PTI.power. It emerged from the ashes of 1971sufficiently strengthened for another takeover in The introduction mentioned development of Britain1977. and other European powers ravaged by the two world wars came out with a complete overhaul ofThe period from 1977-88, 1988-99 and 1999-2005 their socio-economic system. Analyzing thesesaw martial law, period of unstable democracy and changes, together with investigating differentthen back to another coup in 1999, until 2007 when economic models and theories in order to provideelections were held again following the PTI members a beforehand knowledge of theassassination of Benazir Bhutto. problems with the current system and their actual solutions is the aim of this study. It would alsoThe military in Pakistan is a formidable political serve as a check on the current governmentsplayer with greater influence than any other actor. actions on the accounts of economy.For example the military’s internal economy isoperating at three levels and in three segments of For the purpose of this study, relevant areas werethe economy, agriculture, manufacturing and the researched from the plethora of informationservice sector through their main four subsidiaries available. This study entailed the use of– the Fauji Foundation (FF), Army Welfare Trust interpretative approach that is; it is the people who(AWT), Shaheen Foundation (SF) and Bahria construct their own reality. As study of humanFoundation (BF). Moreover there are also three nature has always been complex due to the ficklemajor public sector organizations National Logistic nature of human beings.Cell (NLC), Frontier Works Organization (FWO) andSpecial Communication Organization (SCO) directly The analysis of the current Pakistani economic state showed up a dire state of affairs: inadequate13 Ayesha Siddiqa (2007) Military INC, inside infrastructure, mass unemployment, double-digitPakistan’s military economy, London, Oxford inflation, rampant corruption, crony capitalism etc.University PressInsaf Research Wing 9
  • 10. Committee on Economics Economic Research: PakistanConflicts of interest in literally every industry havecrippled economic growth; injection of foreignloans, aid and remittances from overseasPakistani’s are currently keeping the economicsystem afloat. The state of the Pakistani eliterunning the economy can be co-related with whatan American cultural anthropologists CliffordGeertz asserted; ‘man is an animal trapped in a webof significance he himself has spun’.The rest of this study is structured as follows: Inchapter two analysis of the field economics isundertaken, citing and co-relating theories, models,and frameworks from a variety of academicsources. Chapter three describes the differenteconomic models and examines economic growthof some of the Southeast Asian countries and thesocialist model currently propagated by thecharismatic Venezuelan leader Hugo Chavez.Thereafter chapter four describes the Islamicbanking concepts, alongside the role of the IMF,World Bank and other donor organization. Chapterfive discusses the current state of the Pakistanieconomy, looking at key industries such asagriculture, manufacturing, and services. Finallychapter six draws conclusion and examines theissues in respect to the theories and frameworksoutlined in the previous chapters.Insaf Research Wing 10
  • 11. Committee on Economics Economic Research: Pakistan services. Economists group buyers and sellersChapter# 2: together. For instance there is an international market for oil where large companies andFunctions of an governments buy and sell oil. There are also national markets for oil. Not every company orEconomy government involved in the buying and selling of oil in the UK will be involved in the US or the Malaysian oil markets. There are also regional and local oil markets. All these markets are interlinked but they are also separate.162.1 Making of an Economy The three most important western economists were: Adam Smith, Karl Marx and John MaynardEconomics is the study of systems of production Keynes. Each developed economic theories thatand distribution. In essence it is the analysis of the were put in to practice and affected the world’sways in which societies produce and distribute economies for generations.goods and services. Any system for deciding what isproduced, how it is produced and who gets to Adam smith (1723-1790), a Scottish philosopherconsume it, whether it is the system of an entire published his famous book, the wealth of nations inplanet as in the global economy or a defined 1776, the year of America’s declaration ofsegment of society in an economy and can be independence in which he explained why some 14understood in economic terms. nations are rich while other are not. Theories of labour productivity, wealth accumulation andEconomics has two main branches: productivity growth were delved in to by smith,Macroeconomics and Microeconomics. later expanded by generations of economists. Smith founded what is known as classicalMacroeconomics focuses on the study of whole economics i.e. the idea that free markets cansystems of production and distribution, that is, regulate themselves. The key doctrine of classicalwhole economies and large sectors of theeconomies. Whereas microeconomics focuses on economics is that a laissez-faire attitude byindividual economic entities, such as a single government toward the marketplace will create the greatest good for the greatest number of peoplebusiness or single household, or on specific and generate economic growth.17economic activities such as employment and prices. Karl Marx (1818-1883) a German economist andAn economy is made up of factors of productionsi.e. land, labour, capital and entrepreneurship political scientist looked at capitalism from a morecombined together to create goods and services for pessimistic and revolutionary viewpoint. Marx 15 believed that once the capitalist has set up theconsumption. Economies are structured in to means of production, all value is created by thethree main sectors, primary (incorporating the labour involved in producing. In Marx’s view,agriculture, forestry, fishing sector) secondary(manufacturing cars, food processing, steel making presented in his 1867 tome Das Kapital (Capital),etc) and tertiary (services sector such as transport, capitalist’s profits come from exploiting labour thatleisure & tourism, financial services, health and is underpaying workers for the value that they are actually creating. This situation of managementeducation etc) Then there are the markets at exploiting labour underlies the class struggle thatinternational, national and local level where buyers Marx saw at the heart of capitalism and heand sellers meet for exchange of goods and14 16 th Paul A Samuelson & William D Nordhaus (1998) A. Anderton (2006) Economics, 4 edition, Harlow,Economics, London, McGraw-Hill Causeway Press15 th 17 A. Anderton (2006) Economics, 4 edition, Harlow, Stephen L Slavin (1988) Economics a selfCauseway Press teaching guide, Wiley & SonsInsaf Research Wing 11
  • 12. Committee on Economics Economic Research: Pakistanpredicted that the struggle would destroy GNP between 1938 and 1946. In many countriescapitalism in the end. Ultimately in Marx’s view exports had dropped to almost nil, meat productionsociety moves to a two-class system of a few declined by one third and bread output fell by 60%wealthy capitalists and a mass of underpaid, of pre war. Malnutrition was serious in occupiedunderprivileged workers. Marx’s thinking had a countries. 20 There was much talk of growing chaostremendous impact on the USSR (Union of Soviet and discontent followed by another war. This canSocialist’s Republics) in the twentieth century. be likened to more or less the present situation inHowever it is important to note socialist centrally Pakistan, where all areas of the economy are inplanned economies have proven far less efficient at ruin, severe power and water shortages - warproducing and delivering goods and services. raging in the northern areas and constant threat of terrorism in major cities across the country.John Maynard Keynes (1883-1946) Britisheconomist came up with different views from those One of the major reasons Western Europeof Karl Marx and Adam smith. Keynes argued recovered so rapidly was thorough planning mainlygovernment can play a crucial role in stimulating by the USA but to a lesser extent Britain andprivate sector investment. He favoured an Canada. During the last two years of the Secondapproach of using the government’s power to World War, the United States directed the creationspend, tax and borrow to keep the economy of the institutions which would allow the new 18stable. This policy was adapted in America during world system to function. These fell in to threethe great depression and in Europe after the main areas: money, trade and internationalSecond World War. During the UK recession of disputes. The first allied conference on long-termearly 1980s the conservative government did the economic problems was held in May 1943. Itopposite and cut government spending. However concentrated on food supply and led to thethe recent recession in the western world has seen creation of the food and agriculture organization oftaking up the Keynes policies again. the United Nations (FAO) at the end of 1944 with Britain a founding member. The desire to spare the world further armed conflicts was reflected in creation of the United Nations organisation set up2.2 Economic Growth in 1946. The currency problems were to be avoided in future by setting up of a world currency and payments systems in which gold reserves would beEconomists define economic growth as the rate of replaced by the US dollar as the basis of the valuechange of productive potential over time. of national currencies.21 Unlike gold, the supply ofProductive potential is what the economy can the US dollar would expand in step with the size ofproduce when all factors of production (land and the American economy and consequently of theraw materials, labour, capital and world economy of which it formed so large a part.entrepreneurship) are fully employed. 19 This system was agreed at the Bretton woods conference in New Hampshire in 1944. TheIn order to understand economic growth, one must conference led to the establishment in 1945 of thelook at how Western Europe developed so rapidly international monetary fund (IMF), a US fundedafter two major world wars. For example the structure for international payments. IMF, whichnumber of deaths caused by the Second World War was designed to help countries with seriousin Europe is estimated at about 40 million and over balance of payments deficits to achieve parity, was30 million Europeans had transplanted ordispossessed. Most countries suffered a large fall in 20 Anthony Sutcliffe (1996) An economic & social history of western Europe since 1945, London,18 Stephen L Slavin (1988) Economics a self Longman Publishing Ltd 21teaching guide, Wiley & Sons Anthony Sutcliffe (1996) An economic & social19 Alan Booth (2001) the British economy in the history of western Europe since 1945, London,twentieth century, London, Palgrave Longman publishing ltdInsaf Research Wing 12
  • 13. Committee on Economics Economic Research: Pakistanintended to function for a short time only, until investments during the war yet were unlikely tomember countries had stabilized their accounts. attract private capital quickly enough in the postMore lasting was intended to be the work of the war years. The government also launched a bigWorld Bank, which was set up by the conference to programme of road improvement and constructionmake development loans to third undeveloped in 1955 and the M1 Britain’s first London to 22 23countries. Birmingham motorway was built. The concept of the ordered economy achieving full employmentCentral to the development of Western Europe was was largely the work of John Maynard Keynes, thethe marshal plan, named after the US secretary of academic economist who became an advisor to thestate, George C Marshal. This plan sought to treasury during the war. The vision of the Britishintegrate Western Europe in to a single economic welfare state was based on employment andarea, mainly on the basis of free trade but also related services by William Beveridge, an academicalong US approved political lines. The plan involved economist and former civil servant in 1942.the provision of $13 billion over a period of four Departmental proposals for health services,years. Officially titled the European recovery education and town planning soon followed. Publicprogramme (ERP) the fourteen countries had to optimism about the plans was boosted by thesign agreements committing themselves to a strong increasing success of the British war effort, whichproduction effort, expansion of their foreign trade, suggested that national planning backed by massivethe maintenance of financial stability and the public expenditure could achieve goals from whichdevelopment of European economic cooperation. all would benefit. This confidence which contrasted with the orthodox budgetary views and nonOne criterion of the success of reconstruction in interventionist policies prevailing before the warWestern Europe is the time it took for economic contributed to a growing electoral support for theactivity to return to its pre-war level. UK, France labour party which was able to present itself notGermany Italy were all at the pre-war level in only as the party of the masses but also as the partymanufacturing and agriculture in 1950/51, 5 years of modernity and national progress.after the war. France’s economic problem after the liberation wasBritain’s economic growth after the war depended less acute than in most European countries. Sheon boosting its exports, minimising its imports was virtually self sufficient in food and many rawtogether with reducing its borrowing. The Labour materials. More over French economy recoveredgovernment maintained wartime levels of high quickly and as early as 1947 industrial productiontaxation, the system of production quotas and had returned to the level of 1938. The idea ofrationing. High taxation financed the new welfare national planning was hugely anticipated andactivities without heavy borrowing, consumption widely entertained in the political andwas kept firmly in check and rationing became even administrative circles at the end of the war. Theless generous then in wartime. The government leading civil servants led by Charles de Gaulle’sgave priority to the development of the capital close associate Jean Monnet were especiallygoods and export industries, raw materials and interested in economic planning. In the late 1945agriculture. Between 1946 and 1949 the British Jean Monnet brought together a small team of civilgovernment passed legislation to nationalise servants in two rooms at a hotel for his planningpower, transport coalmines, iron, and the bank of work. This intimate group of the type favoured byEngland. This was directed towards efficiency and Jean Monnet quickly drew up an outline five yearhigh output than a socialist system of production. plan (the Monnet plan) taking effect from 1947 theThe industries chosen for nationalisation were plan was designed to create a climate for theessential to production rather than consumption.All had suffered from lack of maintenance and 23 Anthony Sutcliffe (1996) An economic & social22 D. H. Aldcroft (1993) the European economy history of western Europe since 1945, London, rd1914-1990 3 edition, London, Routledge Longman Publishing LtdInsaf Research Wing 13
  • 14. Committee on Economics Economic Research: Pakistanconfident growth of industrial production in both generations, the first sought money; the secondthe private and public sectors. It emphasized born to money sought social and civic position; theinvestment in industries crucial to the growth of third born to comfort and family prestige looked toproduction – energy, transport, steel, cement and the life of music. This suggests the changingagricultural machinery. Its basic feature was the aspirations of generations as they place a low valuesetting of growth targets for industrial groups over on what they take for granted and seek new formsfive year periods. Twenty-four modernization of satisfaction.commission set up in 1946 and 1947 fixed thedetails of the targets in each sector. Civil servants,industrialist and trade unions sat in eachcommission. The plan produced a planning 2.3 Monetary & Fiscal Policypartnership between the state and the industry.The workers were not only involved in the planningbut also in the execution, through the post war Fiscal Policysystem of factory councils set up by de Gaulle inFebruary 1945 as an anti-class conflict measure. Fiscal policy is the use of government spending andThe Monnet plan reflected the widespread interest revenue collection to influence the economy. The two main instruments of fiscal policy arein Western Europe in achieving full resource government spending and taxation. 26 Changes inutilization. More practically however the Monnet the level and composition of taxation andplan can be seen as the appropriate response to the government spending can impact on the followingneeds of an economy, which in some sectors was variables in the economy:fully developed yet was very backward in others.French modernization was visible to all by the later  Aggregate demand and the level of1950’s, the government had established a number economic activity; aggregate demand isof investment funds and these together with the total of all expenditures in the economy at given price.existing public resources and the aid from the  The pattern of resource allocation;marshal plan greatly eased the flow of credit with  The distribution of income.banks and the stock market providing an increasing  Price level 24volume of capital. Sheer hard work and goodleadership enabled Western Europe to progress Most governments have four majorrapidly from the destruction of the war compared macroeconomic policy goals. These are to achieveto the rest of the world at the time. full employment with little or no inflation in a high growth economy with external balance (currentAs societies achieved maturity in the twentieth account) equilibrium. Fiscal policy can be used tocentury, three things happened: real income per achieve a wide variety of objectives. For example, ithead rose to a point where a large number of can be used to improve standards of healthcarepersons gained a command over consumption through increased spending on the health serviceswhich transcended basic food, shelter and clothing of a country. It can be used to make incomes lessand the structure of the working force changed in unequal by taxing the better and giving benefits toways which increased not only the proportion of the less well off. In Pakistan the key date in the yearurban to total population, but also the proportion for fiscal policy is the day of the budget whichof the population working in offices or in skilled occurs in May. In the Budget the treasury minsterfactory jobs. 25 In Thomas Mann’s novel of three gives a forecast of government spending and taxation in the coming financial year.24 Anthony Sutcliffe (1996) An economic & socialhistory of western Europe since 1945, London,Longman Publishing Ltd25 26 W.W Rostow. (1990) the stages of economic Sullivan, Arthur; Steven M. Sheffrin (2003). rdgrowth – a non communist manifesto, 3 edition, Economics: Principles in action. Upper Saddle River,Cambridge, Cambridge University Press New Jersey, Pearson Prentice Hall.Insaf Research Wing 14
  • 15. Committee on Economics Economic Research: PakistanNational expenditure is one of the three ways of greater employment levels, leading to a greater 27calculating national income, usually measures as output, thus resulting in economic growth.GDP. National expenditure is made up of fourcomponents: Monetary Policy 1. Consumption: This is spending by Monetary policy is the manipulation of monetary households on good and services. variables, (i.e. interest rates, the money supply and 2. Investment: This is spending by firms and the volume of credit) to maintain a stable, growing individuals on goods which will aid in economy with low inflation and unemployment. production and may well accumulate wealth in the future. The main instruments of monetary policy include 28 3. Government Spending: This includes the rate of interest, and the money supply. current spending on wages and salaries. It also includes spending by government on Rate of interest investment goods for example, new roads or new schools. In the UK, US, and EU, the rate of interest is not set 4. Exports minus Imports: Foreigners spend by the governments, but is set by independent money on goods produced in the domestic economy; hence it is part of national central banks, for example, since 1997, monetary expenditure. However, households, firms policy has been controlled by the independent Bank and governments also spend money on of England. Central banks are responsible for the goods produced abroad. issue of notes and coins that are sold to the banking system and manage a country’s gold andThe UK government has been responsible for currency reserves.between 40 and 50 % of national expenditure overthe past 20 years. The main areas of national The rate of interest can be altered in order toexpenditure are the National Health Service (NHS), adjust aggregate demand in the economy to ensuredefense, education and roads. In addition the if it as close as it can be to the trend rate of growth.government is responsible for transferring large Changes in the rate of interest can affect aggregatesums of money around the economy through its demand in various means, such as:spending on social security and national insurancebenefits. This is financed mainly through taxes, such  Savings: Higher interest rates createas income tax and Value Added Tax (VAT). incentives to save more, as savers would receive more interest on their savingsFiscal policy is used by governments to influence (thus they would save more out of theirthe level of aggregate demand in the economy, in disposable income and spend less). Therefore consumption would fallan effort to achieve the economic objectives of reducing aggregate demand.price stability, full employment, a balance or  The exchange rate: A fall in the rate ofsurplus in the current account and economic interest in the domestic economy wouldgrowth. For example, to dampen inflationary lead to less foreign savings, thus therepressures, the government can increase taxes and would be less demand for the currency. Askeep spending constant, to decrease the level of fewer visitors would buy the domesticdisposable income of individuals thus, inhibiting currency thus reducing its value in the global markets of currency.consumers spending power thus reducing demand  The housing market: Most houses inpull inflation. To stimulate growth and reduce western economies are bought usingunemployment, the government can decrease mortgages, thus changes in the rate ofincome taxes and keep spending constant, tocreate greater incentives for the unemployed to 27 thseek jobs (as disposable income would increase), A. Anderton (2006) Economics, 4 edition, Harlow, Causeway Pressthus consumption would increase as a result of 28 th A. Anderton (2006) Economics, 4 edition, Harlow, Causeway PressInsaf Research Wing 15
  • 16. Committee on Economics Economic Research: Pakistan interest would affect the demand of printing money by selling government debt to the mortgages and in turn the housing market. banking sector.  Consumption and investment: Drops in the rate of interest would encourage US Monetary Policy individuals and firms to take out loans in order to consume and/or invest. Consumption and investment are The Federal Reserve System is the central bank of components of aggregate demand thus the United States, which oversees and regulates the changes in the two components would commercial banking system and formulates and ultimately alter aggregate demand. implements the monetary policy. The Federal Reserve has three main responsibilities:The money supply 1. Oversee and regulate banking institutionsThe supply of money in the economy and the rate and protect the rights of consumers whoof interest are completely interlinked as the rate of utilise creditinterest determines the price of money, thus as the 2. Devise and implement a monetary policyprice of money decreases, economic theory would for the nation in order to maintain the stability of the financial systemsuggest an increase in the quantity of money. 3. Provide financial services to certain sectors of the economy, such as the public sector,However, using the interest rate to control the financial institutes and the US governmentmoney supply would give an indirect short-termresponse. There are a variety of other ways to The Federal Open Market Committee (FOMC) is thecontrol the money supply in a more direct manner. key policymaking body in the Federal Reserve System and makes the key decisions regarding theFirstly, the central bank can assign a percentage of bank’s open market operations. The FOMC has 12a bank’s financial assets as reserve assets; these are members who meet a minimum of 4 times a year inkept in liquid form (for example cash) and must be Washington and at each meeting the committeeheld if the bank is to lend out money. If the central member’s vote for the ideal long-run policybank wishes to increase the money supply, the objective for growth in the money supply.amount of money being held by the central bank inthe deposit increases, thus they are able to offermore money. This technique is named open marketoperations. 2.4 Types of Economic SystemsSecondly, the central bank can sell different formsof government debt, such as bonds to the non- Around the world different communities, nationsfinancial sector; if this is successful, then the money and regions have different economic systems, ofsupply would decrease, as money is being which some of the most obvious examples are:transferred from the public into the central bank(money held by the central bank is not counted in 1) Traditional economic systemsthe money supply). The contrary is also possible i.e. 2) Pure market systemsbonds can be bought back in order to decrease themoney supply. 3) Command and mixed systemsThirdly, the government can increase the money 1) Traditional Economic Systems: Refer to systemssupply by borrowing; in the UK this is known as the that are based on tradition where children do thepublic sector net cash requirement (PSNCR). The same things their parents did and follow theirmoney is raised in two ways, which includes example. Thus, boys would have the sameborrowing from the non-banking sector and occupation as their fathers and this would involve farming, hunting, artisanship, etc. Girls on the otherInsaf Research Wing 16
  • 17. Committee on Economics Economic Research: Pakistanhand, would get involved in the occupation of their 3) Command System: Also called a centrallymothers, which would typically involve cooking, planned system, is an extreme on the opposite sidecleaning, sewing, fieldwork, housework, etc. of the spectrum. In a command system, a centralTraditional systems of production do not change authority or central planning committee wouldsignificantly overtime and the pattern of production make all the decisions regarding the basic economicstays the same more or less with the occasional questions of what to produce, how to produce andnew invention. A clear definition of private distribute. The market has no influence in theproperty may not exist in a traditional system allocation of resources and state owns or heavilyunlike other economic systems. Accordingly, in a regulates the use of most if not all property andtraditional system a lot of property is common other production resources. Private individuals andproperty, such as common grazing lands, fishing the forces of demand and supply will not influencegrounds, agricultural plots, etc. In addition, the the decision process. Instead, a central planningallocations of certain roles, which include committee will oversee all the production activitiesproduction, within the members of a society and income distribution. Thus, while pure marketdepend on long established traditions. This would economies rely on individual decisions and privatemean that members of society would rarely change property, command economies rely on collectivetheir allocated role in the economy, even after decision-making and collective ownership or 30generations. Thus, tradition and not resources resources. Central planning was a strong trend thanswered the basic economic questions of what to during the 20 century and at one point, almostproduce, how to produce and how to distribute. one-third of the population lived under a centrallyPrime examples of the traditionalistic system planned system to deal with basic economicinclude remote societies found in such places as the questions. Prime exampled included the formerCanadian arctic, the Himalayas, the Amazon jungle Soviet Union, Cuba, North Korea and China. 29and isolated parts of Papua New Guinea. However the system is no longer in wide spread use and many countries begun opting for a mixed2) Pure Market System: In this type of market, system and enacted reforms to create a market-there are large numbers of consumers who decide orientated economy.what goods and services to buy and at whatquantities. In addition, assumptions are made that While the main theories of economic systemsthere are a large number of firms who will cater to revolve around traditional, pure market or centrallythe demand of consumers by producing the planned systems, economies in the real world are aproducts they want and buying the necessary hybrid of market, traditional and centrally plannedinputs accordingly. In a pure market system, the economies leading to Mixed economies.individual decisions of both buyers and sellersdetermine the allocation of resources and the In a Mixed Economy, both the markets anddistribution of output. The central characteristics of governments have significant influence on thea pure market system are freedom of choice, economic decisions of resource allocation andprivate ownership and competition. These income distribution. The level of mixture of freedecisions are based on the forces of demand and market policies and government control differssupply. Thus, while the market answers the basic from economy to economy. For example theeconomic questions the state is relegated to play a economies of the US and UK are more liberal thanrole in maintaining law and order and external the economies of France or China. In addition, thisdefence. Pure market systems have never really mixture is not restricted to a general economy butexisted in practice. may also differ from sectors, industries, regions, etc. Thus the defence sector or industry in many countries are heavily controlled or monitored by 30 Lipsay, Richard and Chrystal, Alex. (2004)29 Truett, Lila and Truett, Dale (1987) Economics;. Economics - 10th edition. NewYork, OxfordLondon, Times Mirror/Mosby College University PressInsaf Research Wing 17
  • 18. Committee on Economics Economic Research: Pakistangovernments while commercial industries of system based on cattle, the tribe still adheres to its 31information and technology are more laissez-faire. rigid cultural guidelines. Innovation is nearlyGovernments in mixed economies will seek to impossible since people rarely change theirachieve certain goals through intervention in the occupations and methods of production remain themarkets, with policy tools such as the monitory and same for generations due to tradition and culture.fiscal policies. Advantages of a pure market systemEconomic Systems Advantages and Disadvantages A pure market system drew its strength on freedom of choice and enterprise, Private ownership ofAdvantages of a traditional system resources and competition. These strengths allow aTraditional systems work well for isolated pure market system to foster an environment ofcommunities and ensure that resource allocation continuous innovation and the highest possibleand critical jobs are distributed and maintained. levels of efficiency in terms of resource allocationThis sort of system works best for a small and output. The forces of demand and supply arecommunity that is reliant on a limited number of influenced by price, which allow pure marketcritical jobs. In many tribal systems, parents and system to adapt to changes in demand and supplyelders teach the children and there is no sort of efficiently thus minimising waste and poorformal education system. Thus, it is practical for management. A pure market profit motivatedchildren to follow on the footsteps of their parents. system presents a strong incentive for individuals to work hard and for firms to innovate and increaseAnother important advantage of this system is that the quality of goods at the same time. Hence inin most cases, it reduces the problem of over terms of quality and prices, goods produced inconsumption and surpluses since the production of market economies surpass those produced in 32goods and services are only used when needed. command and traditional systems.Traditional systems have most often benefitedsmall tribes and communities such as those found Disadvantages of a pure market systemin Canadian arctic, the Himalayas, the Amazon Pure market systems also suffer from significantjungle and isolated parts of Papua New Guinea drawbacks, referred to as market failures. Theallowing them to function in extreme and isolated following highlight some of the main marketconditions. failures:Disadvantages of a traditional system - Discrepancy between social and privateTraditional economic systems may help societies benefits and costs: In a pure marketfunction but one of their biggest flaws is that they system firms and individuals make theirinhibit change and thus keep a society stagnated decisions based on private costs andsocially and economically. For example, the Masai benefits, and almost as always ignore thetribes of Africa have depended on a traditional total societal benefits and costs.economy based on cattle rising for centuries. - Monopolization: Contrary to theEveryone’s role is determined based on his or her competitive spirit of a pure market system,ownership and tending of cattle. Thus, cattle are there are no inherent characteristicsthe symbol of wealth and every family strives to within a pure market system to preventmaximise the size of its herd. However, this also the formation of monopolies or the abilitymeans as the size of the tribes increase so does thesize of the herds. This in turn has made pasturelands into deserts due to overgrazing, creating very 31 Truett, Lila and Truett, Dale (1987) Economics;.harsh conditions for the Masai and their herds. London, Times Mirror/Mosby College 32 Lipsay, Richard and Chrystal, Alex. (2004)Even with the obvious implications of a wealth Economics - 10th edition. NewYork, Oxford University PressInsaf Research Wing 18
  • 19. Committee on Economics Economic Research: Pakistan for firms and labour to obtain monopolistic The most critical of these flaws included the power in order to further their own following: interests at the expense of the interests of society. - Lack of co-ordination: Central planners had to co-ordinate all the economic decisions - Distribution of income: Under a pure of production, investment, trade and market system, individuals receive their consumption by both producers and income based on the ownership and use of consumers. This needed a vast amount of their productive resources. However, not information and predictions that needed all individuals are born with the same to be collected and processed which talents or have the same amount of proved to be impossible, resulting in resources at their disposal. Based on this bottlenecks in production throughout the principle a pure market system would economy. imply that individuals who have no talents or productive resources should receive no - Failure of quality control: Factories were income. more interested in meeting their quota requirements than quality control since it - Specialisation and alienation: A free was meeting the quotas that brought market economy seeks to encourage rewards and failing to do so brought about specialisation and the division of labour punishments from the central planning however this results in monotonous and authority. Thus, managers used whatever repetitive work that could seriously affect methods possible, including improper the morale and long-term productivity of production methods and materials to labour. satisfy their quota requirements instead of meeting quality standards. This resulted inA pure market system being a theoretical extreme the production of goods of inferior quality.has no real world examples since governments willalways intervene to address these flaws. The credit - Misplaced incentives: One of the bestcrunch of 2007/08 demonstrates succinctly the features of a command economy wasneed for government role and intervention in order complete job security, but this alsoto create the necessary safeguards to protect all its crippled industries. As there were nocitizens from market failures. incentives to work hard and no penalty for sluggish work, which subsequently meantAdvantages of a command system many industries operated below optimum levels.The advantages of a command system, asenvisioned by Karl Marx and others were that if the Thus the advantages of command economies weregovernment plans all of the economic activity it the equitable distribution of national output but atwould create an equal and just distribution of the cost of controlling each element of theoutput amongst its citizens. Accordingly, citizens economy. Nations such as the former Soviet Union,were guaranteed jobs in industries regardless of China, Cuba heavily embraced and were the chieftheir efficiency and they were given state advocates of the command economic system untilsponsored goods and services, holidays, pensions, its systematic failure and rejection in the late 20 thetc. century.33Disadvantages of a command systemWhile command systems had grand ideals ofequality and fairness, the system had inherent 33 Lipsay, Richard and Chrystal, Alex. (2004)flaws and ran into a number of practical difficulties. Economics - 10th edition. NewYork, Oxford University PressInsaf Research Wing 19
  • 20. Committee on Economics Economic Research: PakistanThe advantages of the mixed system GDP based on spending has four major components:A mixed economy seeks to combine the advantagesof both systems. Thus a mixed system will benefit 1.0 Private consumption: This refers to spendingfrom free market principles such as freedom of by individuals on goods and services, producedchoice and enterprise, private ownership of and sold to the final users during the year. This excludes the purchasing of new houses since itresources and competition while also addressing is considered as investment, while includingthe flaws of a pure market system by intervening in any final consumption spending of non-profitmarkets to achieve goals of economic freedom, making institutions serving households.equitable distribution of income, full employment 2.0 Government consumption: This refers to allwith price stability and economic growth. Thus, in a spending on goods and services made by themixed system the market and the government government over the year. Governmentwould be significant factors. The market would spending is typically valued based on the costaddress the flaws of the government while the rather than the market value. This is becausegovernment would address market failures. The some services provided by the governmentmix of government and market systems ultimately cannot be valued with a specific market price.decide the effectiveness of a mixed economy. Importantly, in the calculation of GDP only current spending on goods and services will beDisadvantages of a mixed system into account. Thus, expenditure on transfer The main problem with mixed systems is the payments, which refer to governmentchance of imbalance being created where either spending not made in return for currentlythe market or the government control more of the produced goods and services will not berunning of the economy. The recent credit crunch included in the calculation of GDP.in the western world is a prime example of 3.0 Investment: Refers to future spending ongovernment’s lax attitude towards interferences, production goods, subdivided into threewhich consequently lead to the near melt down of categories:many economies around the world. Moreover it isoften the vulnerable elements of society that areput at risk and suffer the most. 3.1 Changes in inventories: These are the stocks of finished and unfinished output held by firms. The main2.5 The Parameters of Economic Growth purpose of input stocks is to ensure a smooth production if there is short- term disruption in the supply ofThe main parameters of economic growth are the inputs, while a stock of outputs wouldGross Domestic Product (GDP) and Gross National help firm meet their outputIncome (GNI). 34 commitments even if there is a short- term fluctuation in the price of outputThe GDP refers to the value of total output actually sales. Since these stocks are anproduced in the whole economy over a period, investment, an accumulation of theseusually a year. The calculation of the GDP is done stocks are considered to be anby either adding up total spending (GDP spending increase in current investment while abased) or adding up total income (GDP income reduction in stocks will count as abased). decrease in current investment. In addition, these stocks are accounted34 Lipsay, Richard and Chrystal, Alex. (2004) for based on their value on the marketEconomics - 10th edition. NewYork, Oxford rather than their cost to firms so far.University PressInsaf Research Wing 20
  • 21. Committee on Economics Economic Research: Pakistan This is because expenditure-based When calculating the GDP, an important difference 35 measure of GDP includes the value of arises in terms of the price of goods and services. what final spending on these goods This is because the price paid for many goods and would be, assuming they been sold, services by consumers may not equal the sales even if that is not the case. revenues of producers. This is especially true when considering taxes and subsidies. With the 3.2 Fixed capital formation: Capital goods imposition of taxes, producers receive less than refer to goods manufactured in order what consumers pay while the imposition of to aid the production process. Thus, subsidies will mean producers receive more than capital goods may include computers, consumers pay. Accordingly, basic prices will refer machines, factories, etc. Accordingly, to the prices of products as received by producers. an increase in capital goods would be While market prices refer to the prices that paid by an increase in investment. This also consumers. Since all spending categories are called a fixed investment or fixed calculated using market prices, GDP will also be capital formulation. calculated using market prices, the price paid by consumers and not that received by producers. 3.3 Net accumulation of valuables: Some goods are neither consumed nor used GDP based on income refers to adding up incomes in the production process. These of owners of resource inputs such as land, labour, goods are valued for their intrinsic capital, etc. Accordingly, national income is beauty, sentimental value or for their determined by three main factors: expected appreciation in value. Examples of such goods include art, 1.0 Operating Surplus: Business income after jewellery and music records. The net labour and material costs but before paying acquisitions of these valuables are direct taxes, levied on a firm’s income (profits). included in the national accounts as a Operating surpluses may also include the form investment. financial surplus of organizations other than companies, such as universities. Once a firm earns profits it will distribute a portion among its shareholders while saving the rest. Profits4.0 Net exports: Refer to the difference between that are both distributed and undistributed are total exports and total imports. This is an included in the calculation of GDP. important factor since the GDP measures the amount of goods and services produced within 2.0 Mixed incomes: Certain groups and individuals a given country. Only a certain amount of the have mixed incomes since it is not clear what spending value on imported goods or materials proportion of their income is equal to their can be accounted by the importing country wage and which proportion is equal to the while the rest will be accounted by the profit of a business. Examples would include exporting country. Therefore, in order to consultants who work on short-term contracts, determine the spending value on domestic the self-employed who run sole trader production activities, the GDP should exclude businesses and partnerships where the the value of imports since spending on partners of a business own the business as imported goods and services will contribute to well. a foreign economy’s GDP. The value of exports will be included since even though the goods will not be consumed in the domestic economy itself, the payments for the exported goods by foreign economies will contribute towards the 35 Lipsay, Richard and Chrystal, Alex. (2004) domestic economy’s GDP. Economics - 10th edition. NewYork, Oxford University PressInsaf Research Wing 21
  • 22. Committee on Economics Economic Research: Pakistan3.0 Compensation to workers: This refers to the the growth in the recent decades. gross wages of labour. Wages include home Innovation in terms of new products and pay, taxes and pension fund contributions. new productions methods created in oligopolistic market structures improveGNI refers to the total income earned by the production methods and raise the qualitycountry. In contrast GDP only refers to the output of life via better quality goods at relativelyand the income earned in the country. cheaper prices. Examples include the automobile, medical and telecommunications industries. Many governments have come to realize that as2.6 Privatization, Regulation and Deregulation long as they can keep firms in an oligopolistic market competing instead of co-operating then there is no need to 36Since the fall of the Soviet Union, there has been a intervene and regulate these industries.growing trend in both the developed anddeveloping economies to reduce government The worldwide enthusiasm for privatisation andinvolvement in a country’s economy. deregulation stems from the modern belief that private companies operating in free markets are farArguments for privatisation and deregulation more efficient and innovative than governments.  Notions of nationalised industries being However, some would argue that government superior to private firms in areas of regulation and nationalization is sometimes efficiency, productivity growth, and necessary as rules and regulations are potent tools industrial relations, largely proved for addressing market failures. inaccurate judging by the experience of Accordingly, some of the most compelling the ex-communist countries. Instead, arguments for regulation and nationalization are as nationalised industries became notorious follows: for waste, lack of innovation and rising costs that heavily burdens the taxpayers.  Social stability: Governments tend to nationalize failing firms in order to ensure  Falling logistical costs and the boom in secure employment. They might information communication systems such nationalise entire industries in order to as the Internet have exposed domestic protect jobs from international industries to unprecedented levels of competition. international competition. This puts pressure on domestic firms to become  Monopoly power: A fundamental goal of more flexible and cost effective, which in regulatory commissions and government turn puts pressure on governments to laws would be to promote competition reduce regulation and increase among firms. However perfect privatisation. In addition, international competition could result in higher per unit competition reduces the concern over high costs of production. This is the reason why national concentration ratios. some industries within an economy maintain a natural monopoly. Natural  In many cases, regulatory bodies monopolies exist when there are large sometimes had the effect of reducing economies of scale and the cheapest way rather than increasing competition. to produce the good or service would be  In spite of being inefficient, oligopolistic market structures have provided much of 36 Truett, Lila and Truett, Dale (1987) Economics;. London, Times Mirror/Mosby CollegeInsaf Research Wing 22
  • 23. Committee on Economics Economic Research: Pakistan to have it produced by one firm. Public utilities would be an example of a natural monopoly. In return for allowing the existence of natural monopolies, governments will regulate the prices by establishing fair return pricing systems or price ceilings.  Externalities: Some production activities result in social costs and social benefits. However, the price of a good or service does not always reflect the social costs and benefits. For example, while some production facilities may create pollution that might affect people in the adjoining area, the health or cleaning costs of that pollution will not be reflected in the price of that good. Accordingly, governments will have to intervene and create laws or tax polluting firms to force them to behave responsibly. While governments will try to regulate negative externalities, they will also try to encourage goods and services with positive externalities such as vaccinations and education. Tools to encourage positive externalities include tax breaks, subsidies, etc.  Law and order: Other reasons for regulation include preventing financial fraud and protecting consumers and stakeholders. Lax regulation in economic systems could result in fraud, dangerous production methods, and unfair financial practices, as was so evident in the recent economic downturn. Thus, governments need to oversee financial transactions, production methods (especially for food 37 and drugs), accounting practices etc.37 Lipsay, Richard and Chrystal, Alex. (2004)Economics - 10th edition. NewYork, OxfordUniversity PressInsaf Research Wing 23
  • 24. Committee on Economics Economic Research: Pakistan 4.1% recorded in other developing countries, whichChapter# 3: adhered to a strategy of ISI during the same period. Also during this period the real per capita income ofEconomies & these major Asian NICs grew by 6.9% in comparison to 1.6% recorded in other developing countries.Systems During the period of 1973-1985, the GDP of major NICs grew at 7.7% while other developing countries3.1 Key factors behind Newly Industrialised grew at 2.5%. In addition to these growth rates,countries in South-East Asia real per capita income grew by 5.9% compared to a negative growth rate of -0.1 recorded in other developing countries. These statistics furtherThe Newly Industrialised Countries (NICs) of Asia underscored the resilience EOI developmentrefer to a group of countries in Asia, which models adopted by these Asian NICs. 39experienced high levels of economic growth anddevelopment especially during the latter half of the th20 century. Major Asian NICs, also known as The Other Asian economies such as Malaysia, IndonesiaAsian Tigers, include Singapore, Taiwan, South 38 and China also recorded above-average economicKorea, and Hong Kong. Recent additions to the growth rates, which put them within the toplist of NICs in Asia include Malaysia, China and twenty fastest growing economies during theIndonesia. The prime reason for their above period of 1965-1985. However, large populationsaverage economic growth has been the Export meant real-capita rates were much lower than theOriented Industries (EOI) and heavy major Asian NICs.industrialisation. That in turn raised the per-capitaincome and general living standards of thecountries in question. The development strategybased on EOI was a sharp contrast to many other As mention earlier, one reason for the success ofdeveloping countries of the time, which were these Asian NICs was the adoption of an EOI, whichcreating a strategy based on Import Substitution were inherently market oriented policies thatIndustries (ISI). All the Asian tigers and some of the helped reduce costs and increase efficiency.recent NICs share a certain general characteristicsconcerning their economic and political structures.A study of these characteristics is as follows: In contrast, the ISI strategy adopted by many other Asian economies complimented a centrally planned economy. To maintain an ISI strategy, countries hadDevelopment performance to adopt various controls on their economies including multiple exchange rates, tariffs, exchange and price controls, licenses and quotas. These controls eventually resulted in a suppression ofAccording to the World Development report, during economic growth, social costs, and economicthe period of 1963-1973, the GDP of the major inefficiency. Furthermore, ISI policies resulted in anAsian NICs grew at 9.5% per year. This growth rate underutilization of surplus labour and thewas much higher than average GDP growth rate of perpetuation of poverty and unemployment.38 The Foundations of Rapid Economic Growth: TheCase of the Four Tigers. Gulati, Umesh C. 2, s.l. : 39American Journal of Economics and Sociology, Inc., Central Intelligence Agency. The World Factbook.1992, Vol. 51. (2009) : Directorate of IntelligenceInsaf Research Wing 24
  • 25. Committee on Economics Economic Research: PakistanUnder colonialism Role of the stateMany of the Asian NICs were ruled at some point by The role of the state has been crucial in thecolonial powers. The colonial powers economic development of Asian NICs. Accordingly, some ofpolicies were a significant factor with regards to the many initiatives of these governments are asAsian NICs. follows:Both Korea and Taiwan were under Japanese rule  Creating high rates of agricultural andfor most part of the early 20th century. Japanese industrial development.firms invested heavily in the agricultural sector ofKorea and Taiwan and installed Japanese  Encouraging and developing a strongmanagement to oversee the administration and tradition of export led growth.development of the sector. Over time the Japanese  Devoting resources to ensure high levels ofdevelopment strategy evolved into a combination educationof state organization, central banking, Zaibatsu andstrong military force. Prior to world war two, the  Helping to create and maintain an ethnicJapanese began large-scale infrastructure projects and social homogeneityin its colonies to prepare them for heavyindustrialization. 40 As a result, industrial growth in  Creating an environment that encouragedKorea during1910-1940 was recorded at 10% per savings and investmentyear. Mining and manufacturing grew by 244%during the period of 1929-1941. This in turn helpedincrease the trade volume from 380 million yen to With regards to Korea and Taiwan, the4,175 million yen during the period of 1929-1941. governments were deeply influential in theAs a percentage of GDP, trade increased from 1.8% modernization of their economies. However, thisto 53.5%. In Taiwan industrial growth grew by 6% modernization especially during the colonial periodper year during 1912-1940 - while factory jobs rose was a blend of authoritarianism and capitalism.from 60,000 to 256,000. Accordingly, the state maintained an authoritarian nature with regards to politics, but used capitalistic principles with regards to the economy. Thus, anSingapore was an important trade center under the ideology of familial hierarchy and filial loyalty wasBritish Empire occupying a strategically encouraged and the direction of the economies wasgeographically advantageous position. Thus, subject to explicit planning but the allocation ofSingapore was exposed to a very early tradition of resources was subject to market determination.trade. In fact during the period of 1871-1902, therewas an increase in trade growth from $67 million to$431 million. By 1930 Singapore became a major Singapore also featured a highly interventionistworld centre for the petroleum industry as well. strategy. This strategy was centered on providingThe tradition of trade and EOI has been almost a fiscal and monetary incentives to firms regardlessconstant feature of the Singaporean economy of their country of origin. Thus, Singapore was ableexcept for a brief period of ISI during 1963-1965. 41 to attract large amounts of foreign capital and foreign enterprises. The state also took an active40 The Foundations of Rapid Economic Growth: The role in hosting vital business enterprises using stateCase of the Four Tigers. Gulati, Umesh C. 2, s.l. : resources. This sort of positive engagement madeAmerican Journal of Economics and Sociology, Inc.,1992, Vol. 5141 The Foundations of Rapid Economic Growth: The American Journal of Economics and Sociology, Inc.,Case of the Four Tigers. Gulati, Umesh C. 2, s.l. : 1992, Vol. 51Insaf Research Wing 25
  • 26. Committee on Economics Economic Research: PakistanSingapore one of the friendliest countries to Taiwan and Singapore. Thus, many of the Asianoperate a business in. NICs were only able to fully implement EOI strategies after complete consolidation of powerAmerica Aid and insulation from opposition.Another important factor that played heavily in the Another important feature was the insulation fromEOI strategy of the Asian NICs was US foreign aid. labour unions. Thus, management was given vastBased on similar principles to the Marshall plan, amount of powers with regards to labour especiallyAmerican aid to South Korea totaled $13 billion when it came to recruitment, dismissal, transferwhile aid to Taiwan totaled $5.6 billion during the and promotion. For example, South Koreaperiod of 1945-1978. The aid was used to finance introduced various repressive measures to controlan import surplus and capital formulation until the trade union activities and made strikes illegal. In 42mid 1960s. Singapore, after the defeat of the Barisan Socialist party, union leaders were jailed and unionAmerican aid also helped build up the military of deregistered. All political activities of the unionsSouth Korea and Taiwan. This in turn helped bring were also prohibited.about discipline and education to the vast majorityof the population, resulting in relatively strong Conclusionhuman capital. Education and discipline also helpedto create a new generation of administrators and The critical factor for economic growth of thesebureaucrats for state enterprises that were highly Asian NICs has been the developmentalist state,qualified and efficient. American aid was also used which has insulated itself from domestic pressureas a tool to coax these nations to open their through political authoritarianism and used marketmarkets and switch to EOI. The US used its mechanisms to achieve its development goals.influence and hegemony in the region to force Accordingly, the developmentalist state draws itsthese countries to switch from ISI to EOI. To help legitimacy from high-speed growth and jobfacilitate open market reforms in these countries, opportunities. Its commitment and capacity tothe US opened its markets without demanding implement development strategies was propelledreciprocity initially in an effort to highlight the value by two preconditions: Firstly, political closure andof free trade and economic welfare of open market secondly, economic institutional consolidation.polices. Apart from the direct influence of the state, the history of these countries with regards toPolitico-Strategic factors colonialism and American influence in the region during the cold war, have all paved the way for There are a few general similarities between the these NICs to adopt strong EOI strategies andvarious social and political characteristics of the record high growth and development levels.different Asian NICs. One of the maincharacteristics is the complete political insulation,which provided the governments of these NICs withsufficient freedom to deal with, or to contain, rent-seeking preferences of bureaucrats. Secondly, thetimely land reforms in countries such as Korea andTaiwan allowed governments to eliminate apotential source of opposition to industrialinitiatives. Thirdly, the liquidation or silencing ofopposition groups in countries such as Korea,42 The Foundations of Rapid Economic Growth: TheCase of the Four Tigers. Gulati, Umesh C. 2, s.l. :American Journal of Economics and Sociology, Inc.,1992, Vol. 51Insaf Research Wing 26
  • 27. Committee on Economics Economic Research: Pakistan commitments made in the Scandinavian economic 43 model:3.2 Key Economic Drivers of Nordic Countries The allocative branch: Allocation of approximately 25% of GDP to a number of services that is either provided at subsidised rates or free. These includeSome of the features of socialist economies have health care, education, social services, governmentdeveloped in the western capitalistic economies. agencies and infrastructure. The local government,This is not due to ideological reasons but which includes primary and secondary communes,governments have taken active responsibility for is responsible for distributing these services.maintaining an adequate standard of living for theircitizens. The redistributive branch: Redistribution in terms of generous transfer programmes, includingSome of the economic features include the pensions, child allowances, unemployment andfollowing: sickness benefits. The level of compensation rangesSignificant amounts of government intervention from 75 to 100 per cent, depending on theand planning in the economy. programme, the country and the time-period.Nationalisation of industries especially those that The stabilisation branch: Incentives or programmesare declining and that might fail under private aimed at creating full employment. These programsownership. include public works, worker detrainment programmes. Macroeconomic regimes used to beA comprehensive welfare state with an emphasis orthodox Keynesianism economic policies buton transfers to households and publicly provided currently suppressing inflation gets more attention.social services financed by high taxes. The Scandinavian model implies that theA lot of public and/or private spending on government and its duties are extensive in all threeinvestment in human capital, including child care branches of the government. Accordingly, Nordicand education as well as research and development countries have the highest level of public(R&D) expenditure and the largest number of public sector employees in the Organization for EconomicA set of labour market institutions that include Co-operation and Development (OECD) countries instrong labour unions and employer associations, comparison to the private sector.significant elements of wage coordination,relatively generous unemployment benefits and a While Scandinavia has suffered from lowprominent role for active labour market policies. productivity and economic growth in the 1970s as well as severe financial crises in the early 1990s, it has shown strong economic flexibility and capacityThe four Nordic countries consist of Denmark, for structural change. Currently Nordic countriesFinland, Norway and Sweden. These fully scaled are some of the most innovative andwelfare states include a mixed economy with technologically advanced countries in the world inwelfare programmes based upon universalistic addition to having open financial markets, a stablecriteria. According to the Musgrave distinction system of corporate governance, low rates ofbetween the three branches of government, the unemployment and macroeconomic stability.following are some of the main policy 43 Torben M. Andersen, Bengt Holmström, Seppo Honkapohja (2007) . THE NORDIC MODEL - Embracing globalization and sharing risks, Yliopistopaino, Helsinki , Taloustieto OyInsaf Research Wing 27
  • 28. Committee on Economics Economic Research: PakistanThere are three broad categories for the factors of achieve a high level of GDP per capita. However, 44economic growth based on the Nordic model: disposable income and private consumption per capita are low in Nordic countries, since the publicExogenous factors such as geographical location, sector absorbs a large fraction of the incomeclimate, natural resources, culture. generated in the economy. 45Institutional factors such as the economic system, Growth and Technology: The growth performancepolitical freedom, a highly established legal system of the Nordic economies has been closelyand rule of law, high literacy and health standards. associated with the increased use of new technologies. Nordic countries have consistentlyDirect results of economic policies such as free shown a willingness to participate and adopttrade and factor mobility, a tax system favourable Information and communication technology (IT)to labour supply, favourable entrepreneurship, developments. Nordic countries were some of thesolid infrastructure, strong transport and first to adopt new IT and had high shares of ITcommunication facilities. capital in comparison to most countries in theWhile the first and second factors play a part in the 1990s. Since then, Nordic countries have madeNordic economic prosperity, it is the third factor significant contributions to IT growth.that is most important. Favourable economic Nordic countries top the league terms ofgrowth and relatively free trade policies along with expenditure on IT as a share of GDP and thespecialization has long been a characteristic of the number of computers per 1000 people, AccordingNordic countries. Furthermore, labour unions, to the World Economic Forum, Sweden occupieswhile politically influential have not been opposed th the first position, Finland 2nd and Denmark the 4to government policies, nor have they resisted the position. As of 2004, the share of IT in totalintroduction of new technologies, productivity industrial production in Finland and Sweden wasimprovements and other structural changes in the 11% and 7% respectively, while its role in Denmarkeconomy, which in some cases have resulted in the and the rest of Europe is modestly significant.displacement of labour. Public spending in theNordic countries is mostly on childcare, education, Education: Nordic countries invest heavily ininfrastructure and labour. Thus, the spending itself education and children in these countries spendoffsets part of the negative effect of high rates of comparatively more years in education than manytaxes levied on citizens. This along with a strong other OECD countries. In terms of expenditure ongovernment sector that is both efficient and education, Denmark and Sweden spend between 4-accountable has created a viable public sector. 5% of GDP on education, while Finland spendsThese factors are further highlighted below: between 3.5%-4% of GDP.Employment and Productivity: Nordic countries Regulatory reforms: The degree of competitionfeature a balance between high productivity and between firms in an economy is an importanthigh employment. Average working hours in Nordic element in the Total Factor Production (TFP). Onecountries are lower than countries like Spain and way of public policy to influence competition isPortugal but productivity is higher. In the case of thorough regulatory reforms. Accordingly, a lessother continental countries, Nordic countries may regulated economy will result in the establishmenthave a comparatively less productive worker force of more firms leading to higher levels ofbut higher employment rates. Nordic countries also competition. Another result of a less regulatedfeature a high rate of labour force participation of economy is higher investment levels of firms.women. These factors allow Nordic countries to Nordic countries have some of the least regulated44 economies within the OECD. Torben M. Andersen, Bengt Holmström, SeppoHonkapohja (2007) . THE NORDIC MODEL - 45Embracing globalization and sharing risks, Ersson, Jan Erik Lane and Svante. ComparativeYliopistopaino, Helsinki , Taloustieto Oy political Economy-. s.l. : Pinter Pub Ltd.Insaf Research Wing 28
  • 29. Committee on Economics Economic Research: PakistanPromoting innovations and facilitating start-ups:The two main indicators used to measureinnovative activities and start-ups of newproduction that are relevant for long-term growthare Venture Capital (VC) and financing andinvestment in R&D. In terms of VC, Nordic countriesare well ahead of the rest of Europe. The same istrue for the share of investment that goes intodifferent forms of high-technology activities. Interms of R&D spending as a share of GDP, Nordicsspend between 2.5%-3.5% of GDP, compared to 46approximately 2% spent in the EU15 or the US.In conclusion, a number of observations can bederived concerning the economic growth in Nordiccountries. Firstly, information technology played asignificant role in the Nordic economies, a result ofthe high levels of early investment and continuedenthusiasm in IT developments. Secondly, theimportance of technological changes wasrecognised and adapted to especially in Finland andSweden. Thirdly, there is a significant variation inthe growth rates for conventional capital, whileDenmark and Sweden have had growth inconventional capital; it has played almost no part inthe rapid growth of Finland during the latter half ofthe 1990s. In the case of IT and Non-IT capitalservices, Nordic countries invested heavily duringthe IT boom of the nineties.46 Torben M. Andersen, Bengt Holmström, SeppoHonkapohja (2007) . THE NORDIC MODEL -Embracing globalization and sharing risks,Yliopistopaino, Helsinki , Taloustieto OyInsaf Research Wing 29
  • 30. Committee on Economics Economic Research: Pakistan the balance of payments crisis there were also various political problems that plagued Venezuela3.3 Venezuelan economy during this time. Firstly, the long-run growth performance of the economy based on the centralized industrial strategy was becomingThe Venezuelan economy has recently featured a increasingly weaker. In the period of 1973-88, thevast nationalisation drive under its president Hugo GDP per capita decreased by 15%. Secondly, the fallChavez. As of 2009, Venezuela’s GDP based on in oil exports resulted in the decrease of resourcesPublic Private Partnership was $353.5 billion used for patronage and this induced several actorsfollowing a contraction of almost 2% of GDP. such as labour unions, businesses to reduce theirHowever Inflation currently stands at 27% of GDP loyalty to the party system and demand forand is expected to further increase to 35%-40%. A structural changes. Real exports per capita duringsignificant factor of growth in the Venezuelan period of 1950-80 averaged US$1550 but thiseconomy is oil, as of 2009 Venezuela had 99.38 decreased to US$1150 during the period of 1980-billion bbl worth of proven oil reserves. Venezuela 90. Along with this trend, oil prices collapsed byis also the 10th largest producer of oil and the 10th 50% in 1986. Furthermore, oil exports per capitalargest exporter of oil in the world. Oil accounts for plummeting to an annual average of less thanaround 30% of GDP, 90% of exports and 50% of US$600 in the period of 1968-88. This sudden dip infiscal income. Apart from oil, Venezuela is also a oil prices and its resulting consequences highlighted 48significant producer of natural gas. 47 the vulnerabilities of oil dependent exports.The Venezuelan economy prior to 1998 The economic problems of the Venezuelan economy prompted the next government led by Carlos Andres Perez to pursue ambitious liberalization reforms in Latin America. TheSince the creation of a democratic system in liberalization plan known as the "great turnaround"Venezuela in 1958, the historical mechanism of included the unification and massive devaluation ofeconomic development was a centralized state the exchange rate, trade liberalization, privatizationmonitored system run by the executive and and financial deregulation, including freeing ofbrokered by the political parties. interest rates, elimination of nearly all restrictions on foreign investment, and the introduction of tax reforms, including the introduction of value-addedDuring the course of the decades Venezuela taxes.developed a string of serious economic problems.The problems reached a peak during the Lusinchiadministration (1968-88) with a balance of The full implementation of the trade liberalizationpayments crisis in 1988. The Lusinchi government reforms was a remarkable political achievement.featured a populist macro-management with price However, per capita GDP declined by 2.7% duringcontrols, multiple exchange rate regimes, that the liberalization period (1990-1998). In addition,resulted in wide spread corruption and distortions. the manufacturing growth declined from annualIn three years, the fiscal deficit averaged 7.6% of average of 4.3% during 1980-90 to 1.5% duringGDP. In 1988, inflation reached 30% and the 1990-98. While non-oil growth did increase, -0.1current account deficit had accumulated to US$6.2 during 1980-90 to 2.3% during 1990-98 it was stillbillion. Apart from these economic problems and lower that the previous 3 decades and collapsed47 Economic Liberalization, Political Instability and 48State Capacity in Venezeuela. John, Jonathan Di. Central Intelligence Agency. The World Factbook.s.l. : Sage Publications, Ltd., 2005, Vol. 26. (2009) s.l. : Directorate of IntelligenceInsaf Research Wing 30
  • 31. Committee on Economics Economic Research: Pakistanagain to -1.9% during 1998-2002. In addition, Minimum Wage: Chavez and his politicaldespite the fact that capitalist surplus appropriation declarations appealed to a majority of Venezuelansand rents were increasing, private sector who were mired in poverty despite being the thirdinvestment rates declined during the 1990s. Capital largest oil exporter to the US. Early in his term inflight was nearly the same as the accumulated office he raised the minimum wage, the salaries ofsurplus in the current account balance of payments government employees and teachers by 20%. To(US$15 billion) in the same period. The further appeal to his core base of supporters, heliberalization reforms exposed a significant paced a tax on rents, which appealed to the poorweakness concerning the inability of the state to and increased the government revenue.regulate the banking system. As Venezuelaexperienced major collapse in the banking sector,the lack of supervisory and regulatory mechanisms, Land Reform and Agriculture: Chavez alsoalong with blatant corruption and theft of envisioned a program of relocation that he hopedgovernment bailout funds by bankers (estimated at to reinvigorate the agricultural sector of theclose to US$ 7 billion) in the form of capital flight country. The program aimed to relocate the slumled to large-scale bank closures. In addition, the dwellers to the abandoned factory towns in thegovernment had to nationalize many of the interior of the country with government assistanceeconomys largest commercial banks in 1994 and regarding housing and infrastructure. However,1995. The cost of the bailout was equal to 18% of critics claim that the program failed to achieve thethe GDP and recorded as the fifth most severe desired out-migration from the cities and the fundsbanking crisis in the world during the period of could have been used to renovate the oil1975-95. Moreover the liberalization program production infrastructure. Another Chavez imitativecreated wide spread political instability. This with regards to land reform was a tax on unusedinstability resulted in the riots of 1989 that required land. This tax was aimed at forcing largethe government to order the military to intervene. landholders (those with an excess of 5000 hectares)This also prompted Hugo Chavez, a Lt Colonel to who controlled much of the arable land to sell theirlaunch an unsuccessful military coup in 1992. 49 land or allow the government to carry out its land reform programme. The policy is aimed to increase agricultural production but is very different fromVenezuela under Hugo Chavez the US and EU policies where farmers are compensated for over production by government.Before Chavez assumed office, he made a numberof populist declarations. Amongst his various Other: In addition to these initiatives, Chavez alsopledges, he promised to double the minimum wage set up a Value Added Tax (VAT) to help stem theto 3000 Bolivars per day and ending reliance on growing deficits. 50foreign loans. In addition he also promised to makeLatin America a powerful player on the world stage.Populist initiatives: 3.4 Poverty Reduction Initiations49 The Chávez Phenomenon: Political Change in 50Venezuela. Danopoulos, Ronald D. Sylvia and Daniel, Frank Jack. (2009) FACTBOX:Constantine P. s.l. : Taylor & Francis, Ltd., 2003, Venezuelas nationalizations under Hugo Chavez.,Vol. 24. ReutersInsaf Research Wing 31
  • 32. Committee on Economics Economic Research: PakistanChavez has extensively used the revenues of the deeply discounted food and has since raised that 52Petróleos de Venezuela, S.A (PDVSA) to mobilize his level to 1.25 million metric tons in 2008.social programs to help the vast poor segments ofthe population. Social programmes such as freeschooling, medical care and infrastructure Education also featured highly on the government’simprovements have all helped reduce poverty by agenda culminating in the creation of two new30% during 1995-2005. In addition, extreme programs. One of which was the Rebas Missionpoverty had fallen from 32% to 19% during the created in 2003 to provide secondary education forsame period. Further social indicators such as returning adults. The program helped graduateprimary schooling, access to clean drinking water, more than 500,000 students. The other was a large-infant mortality rates and per-capita income have scale literacy programme called the Misionall improved since Chavez took office. Robinson. Between 2003 and 2004, Chavez launched a number of social and economic support including Mission Robinson, Mission Sucre andHealth indicators during the period of 1998-2006 Mission Ribas (for providing free education forwhere Infant, mortality has decreased by over one millions of Venezuelans), Mission Guaicaipuro (tothird, falling from 21.4 to 13.7 deaths per 1,000 live protect the livelihood, religion, land, culture andbirths. Likewise, child mortality has fallen by over rights of Venezuelas indigenous peoples), Missionone third, from 26.5 to 17.0 deaths per 1,000 live Vuelta al Campo and Mission Barrio Adentrobirths. The greatest benefit has been for children (constructing, funding and refurbishing secondarybetween the ages of one and eleven months: post and tertiary public health care facilities andneonatal mortality has been cut by more than half, construction of thousands of free medical clinics forfalling from 9.0 to 4.2 deaths per 1,000 live births. the poor), Mission Arbol (an environmentalThis is largely attributed to free medical treatement program of reforestation) and Mission Mirinda thatprovided by cuban doctors under the oil for skills established a National Militia. He also enacted foodand /or food programme Veneuzela has with a and housing subsidies.53number of Latin American countries.51 In 2008, 62.9% of Venezuelans bought subsidizedAccess to food and improvements in nutrition has food from the Food Market Network (Mercal). Theincreased. During the period of 1998-2006, Average Chavez government formed 100,000 cooperativescaloric intake has risen from 91.0% to 101.6%. to create jobs and redistribute the oil-rich countrysDuring the same period, malnutrition related wealth. The government offers cooperativesdeaths decreased by more than 50 %, from 4.9 to exemption from all taxes as well as interest-free2.3 deaths per 100,000 in population. Two new loans. The movement is changing the nature ofprograms have helped reach this goal. Firstly, the Venezuelan society, putting quality of life andPAE School feeding program, which provides a free solidarity above the profit motive. Due to hisbreakfast, lunch, and snacks. This program started reforms, family income among the poorest stratumin 1999 and served close to 250,000 students and grew more than 150% between 2003 and 2006.has since started covering more than 4 million According to official sources, the percentage ofstudents in 2008. Secondly, the Mercal network of people below the national poverty line hasgovernment food stores that began operating in decreased significantly during the Chavez years,2003. Initially it sold close to 45,662 metric tons of 52 Mark Weisbrot, Rebecca Ray and Luis Sandoval. (2009) The Chávez Administration at 10 Years: The51 The Chávez Phenomenon: Political Change in Economy and Social Indicators, Washington, D.C. :Venezuela. Danopoulos, Ronald D. Sylvia and Centre For Economic Policy Research, 53Constantine P. s.l. : Taylor & Francis, Ltd., 2003, www.countercurrents.org/basit020209.htmVol. 24.Insaf Research Wing 32
  • 33. Committee on Economics Economic Research: Pakistanfrom 48.1% in 2002 to 12.3% in 2007. Since 1999, devaluation of the currency by 30%, which in turn2.7 million Venezuelans no longer are caused interest rates to increase and prompted theimpoverished, 437,000 in 2008 alone; extreme public to withdraw their savings from the banks. Topoverty stood at 42% earlier in the 1990s; today its shore up the Bolivar, the government sought to use9.1%. The government earmarked 44.6% of the the foreign reserves and the US$ 17 billion fund2007 budget for social investment, with 1999-2007 decreased to US$ 14 billion within a matter ofaveraging 12.8% of GDP. GDP growth rates were weeks. To counter the impact of the fiscal18% in 2004, 9% in 2005 and 9.6% in the first half of austerities, the government announced a US$ 22006, with the private sector growing at a 10.3% billion dollar package to improve jobs, educationclip. In March 2006 the Communal Council Law was and health. The devaluation and the deficitsapproved, whereby communities that decide to triggered anti-regime protests in Caracas andorganize themselves into a council can be given elsewhere. The protests set the stage for a tacitofficial state recognition and access to federal American backed coup in April 2002 and Chavezfunds and loans for community projects. This skips was briefly overthrown but returned to powerthe local and state governments that are perceived shortly afterwards. In 2005, Chavez fixed theas corrupt. From 2004 to the first half of 2006, non- currency in 2005 and two years ago re-launched itpetroleum sectors of the economy showed growth as the “strong bolívar”, at 2.15 to the dollar.rates greater than 10%. Datos reports real income However, in January 8th 2009, Chavez devalued thegrew by 137% between 2003 and Q1 2006. currency by 50% in order to boost the oil price, itsUnemployment dropped by 7 %. The World Bank main exports. Venezuela operates, two exchangecalculated a 10% drop in poverty. rates, priority imports such as food and medicines are purchased at 2.60 bolívares to the dollar, with a 55 rate of 4.30 for the rest.3.5 Economic Policies NationalizationInvestment: While the Chavez government seeks toencourage private investments rather thanestablish state-industries, the instability of the Chavez has nationalized a number of companies inBolivar, the leftist rhetoric of the government and the energy, communications, construction andthe nationalization of major industries has other strategic industries. Some of the firmsdiscouraged both wealthy domestic and foreign nationalized thus far are as follows:56investors. Even though Chavez publically statedthat he will enforce the 1996 law that assures 54investors that their assets will not be confiscated. Oil: In 2007, Chavezs government took a majority stake in four oil projects operating in the Orinoco river basin worth an estimated total of $30 billion.Exchange rates: To maintain purchasing power, the U.S. companies Exxon and ConocoPhillips quit theregime initially resisted devaluing the Bolivar. nation over the move and filed arbitration claimsHowever, due to the mounting international against Venezuela. Frances Total and Norwayspressure and an exodus in domestic capital, thegovernment reluctantly floated the Bolivar in 55 The Economist. Venezuelas devaluation. TheFebruary 2002. This resulted in an immediate Economist . [Online] The Economist News Paper Ltd., 4 January 2010. http://www.economist.com/world/americas/displaysto54 The Chávez Phenomenon: Political Change in ry.cfm?story_id=15287355 56Venezuela. Danopoulos, Ronald D. Sylvia and Daniel, Frank Jack. (2009) FACTBOX:Constantine P. s.l. : Taylor & Francis, Ltd., 2003, Venezuelas nationalizations under Hugo Chavez.,Vol. 24. ReutersInsaf Research Wing 33
  • 34. Committee on Economics Economic Research: PakistanStatoilHydro received around $1 billion in Steel: In 2008, Venezuela took operational controlcompensation after reducing their holdings. of the countrys largest steelmaker Sidor, previouslyBritains BP and Americas Chevron remained as controlled by Argentine steelmaker Ternium. Theminority partners. High oil prices provided Chavez takeover followed months of strikes and frequentwith the initiative he needed to nationalise the oil disputes between management and union leaders.industry. However, analysts say that he has failedto upgrade and renovate various oil productionrelated infrastructure and as oil prices fall, In conclusion as Chavez strives to transform theinternational oil firms will regain the advantage Venezuelan economy in to a socialist one backed bysince they poses the technology and expertise the use of oil and foreign exchange reserves. It canneeded to exploit Venezuelas offshore oil reserves. be argued that nationalising a variety of firms in key sectors has discouraged foreign investors and reduced productivity. Critic’s claim those close toTelecommunications: The Chavez government Chavez usually run nationalised firms regardless ofnationalized the nations largest their skills, thus corruption and nepotism is atelecommunications company CANTV, buying out massive problem in the nationalised companies.U.S.-based Verizon Communications 28.5% stake The Venezuelan economy at present is dependentfor $572 million. on its oil reserves. The lack of broader infrastructure spending and structural reforms has failed to develop alternative non-oil industries, which leaves Venezuela’s economy vulnerable to oilPower: In 2007, Venezuela expropriated the assets shocks. Furthermore, the confrontational behaviourof U.S. based AES Corp in Electricidad de Caracas, towards Europe and US has damaged Venezuela’sthe nations largest private power producer. The credibility and access to technology and expertisegovernment paid AES $740 million for its 82 in these markets. However despite immensepercent stake in the company. Financial analysts negative criticism from the western media ofdescribed the deal as fair for AES. Chavez’s economic policies, he still draws in wide spread support amongst the poor masses, his poverty alleviation measures have helped liftCement: In April 2009, Chavez announced the millions of poor Venezuelans out of absolutegovernment takeover of the cement sector, poverty, provided basic education, medical andtargeting foreign companies such as Switzerland’s infrastructure facilities. Moreover Chavez attainedHolcim, Frances Lafarge, and Mexicos Cemex. all these progress in the midst of coup attemptsLafarge and Holcim agreed to stay on as minority (including a failed coup in April 2002), generalpartners. Venezuela has taken over the operations strikes and lockouts conducted by the corporatesof Cemex, the nations largest cement producer. and the elite with the support of foreign countries. On the world stage Hugo Chavez took an unrelenting stand against the Anglo AmericanFinance: In 2009, Government of Chavez hegemony and the brutalities shown by the Zionistsattempted to nationlise Banco de Venezuela, a in Palestine and Lebanon, increasing his appealdivision of Spanish banking conglomerate Grupo beyond the borders of Venezuela.Santander to help him channel state resources.However the government had to put the takeoveron hold amidst claims of government financialwoes.Insaf Research Wing 34
  • 35. Committee on Economics Economic Research: Pakistan remaining three were large U.S. investment banksChapter# 4: The who between them accounted for a 33% market share.Banking System 4.1 Islamic BankingThe first banks were the religious temples of theancient world, established sometime during thethird millennium B.C but the modern Western Islamic banking is defined as banking system, whicheconomic and financial history is usually traced is in consonance with the spirit, philosophy andback to the coffee houses of London, The London values of Islam and governed by the principles laidRoyal Exchange was established in 1565. At that down by the Shariah. Interest free banking is atime moneychangers were already called bankers, narrow concept denoting a number of bankingthough the term "bank" usually referred to their instruments or operations, which avoid interest.offices, and did not carry the meaning it does Islamic banking, the more general term, is basedtoday. There was also a hierarchical order among not only to avoid interest-based transactionsprofessionals; at the top were the bankers, who did prohibited in Shariah but also to avoid unethicalbusiness with heads of state. Around the time of practices. In practical sense, Islamic Banking is theAdam Smith (1776) there was a massive growth in transformation of conventional money lending intothe banking industry. Within the new system of transactions based on tangible assets and realownership and investment, the states intervention services. The model of Islamic banking system leadsin economic affairs was reduced and barriers to towards the achievement of a system, which helpscompetition were removed. achieve economic prosperity.Global banking and capital market services The philosophy of Islamic banking takes the leadproliferated during the 1980s and 1990s as a result from Shariah. According to which, Islamic bankingof a great increase in demand from companies, cannot deal in transactions involving interest/ribagovernments, and financial institutions, but also (an increase stipulated or sought over the principalbecause financial market conditions were buoyant of a loan or debt). Further, they cannot deal in theand, on the whole, bullish. In recent years rowing transactions having the element of Gharar orinternationalization and opportunity in financial Maiser. Moreover, they cannot deal in anyservices has entirely changed the competitive transaction, the subject matter of which is invalidlandscape, as many banks have demonstrated a (haram in the eyes of Islam). Islamic banks focus onpreference for the “universal banking” model so generating returns through investment tools, whichprevalent in Europe and US. Universal banks are links the gain on capital with its performance. Thefree to engage in all forms of financial services, operations of Islamic banking are based on sharingmake investments in client companies, and the risk, which may arise through trading andfunction as much as possible as a “one-stop” investment activities using contracts of varioussupplier of both retail and wholesale financial Islamic modes of finance.services. Basic Principles of Islamic BankingMany such possible alignments could beaccomplished only by large acquisitions, and by theend of 2000, a year in which a record level of There are at least six basic principles, which arefinancial services transactions with a market value taken into consideration while executing anyof $10.5 trillion occurred. The top ten banks Islamic banking transaction. These principlescommanded a market share of more than 80% and differentiate a financial transaction from athe top five, 55%. Of the top ten banks ranked by Riba/interest based transaction to an Islamicmarket share, seven were large universal-type banking transaction.banks (three American and four European), and theInsaf Research Wing 35
  • 36. Committee on Economics Economic Research: Pakistan Sanctity of contract: Before executing any Islamicbanking transaction, the counter parties have tosatisfy whether the transaction is halal (valid) in the Fairness: Islamic banking inculcates fairnesseyes of Islamic Shariah. This means that Islamic through its operations. Transactions based onbank’s transaction must not be invalid or voidable. dubious terms and conditions cannot become partAn invalid contract is a contract, which by virtue of of Islamic banking. All the terms and conditionsits nature is invalid according to Shariah rulings. embedded in the transactions are properlyWhereas a voidable contract is a contract, which by disclosed in the contract/agreement.nature is valid, but some invalid components areinserted in the valid contract. Unless these invalidcomponents are eliminated from the valid contract, No invalid subject matter: While executing anthe contract will remain voidable. Islamic banking transaction, it is ensured that no invalid subject matter or activity is financed by the Islamic financial transaction. Some subject matterRisk sharing: Islamic jurists have drawn two or activities may be allowed by the law of the landprinciples from the saying of prophet Muhammad but if the same are not allowed by Shariah, these(SAW). These are “Alkhiraj Biddamaan ” and can not be financed by an Islamic bank.“Alghunun Bilghurum”. Both the principles havesimilar meanings that no profit can be earned froman asset or a capital unless ownership risks have Islamic Modes of Finance are divided in to thebeen taken by the earner of that profit. Thus in following three main categories:every Islamic banking transaction, the Islamicfinancial institution and/or its deposit holdertake(s) the risk of ownership of the tangible asset, 1) Participatory modes of Financereal services or capital before earning any profit. a)Moradabad b)MusharakahNo Riba/interest: The word "Riba" means excess, 2) Non-Participatory modes of Financeincrease or addition, which correctly interpreted a) Murabaha, b) Musawamahaccording to Shariah terminology, implies anyexcess compensation without due consideration c) Salam, d) Istisna(consideration does not include time value ofmoney). This definition of Riba is derived from the e) Ijarah, f) Ijarah wa IqtinaQuran and is unanimously accepted by all Islamicscholars. Islamic banks cannot lend money to earn 3) Sub contractsadditional amount on it. However as stated in a) Wakalah, b) Kafalah, c) Rahnpoint above, banks earn profit by taking risk oftangible assets, real services or capital and passeson this profit/loss to its deposit holders who alsotake the risk of their capital.Economic purpose/activity: Every Islamic bankingtransaction has certain economic purpose/activity.Further, Islamic banking transactions are backed bytangible asset or real service.Insaf Research Wing 36
  • 37. Committee on Economics Economic Research: Pakistan4.2 Role of World Trade Organisation, IMF, the markets are sufficiently attractive. Hence, countriesParis Club and the Asian Development Bank with small markets are inherently disadvantaged(ADB) based on the principle of reciprocity since their markets may not be attractive enough for others to enter trade negotiations. In addition, whenWorld Trade Organisation: Established in 1995 and negotiating, LDCs may have to allow access toheadquartered in Geneva, the World Trade international competition within their infantOrganization (WTO), was to become a permanent industries, thus further loosing the ability toreplacement for a provincial GATT with greater develop sustainable local firms.powers and a wider agenda. The WTO emerged Incentives for trade reform: In theory, WTO workswith a new legal structure for multilateral trading to spearhead trade reform and reduction in tradeand a dispute settlement mechanism with much barriers in LDCs by creating an overall reduction inmore power to enforce rulings over non-tariff trade barriers between nations and chairing talksbarriers than existed in the past.57 As of 2009, there aimed at the dismantlement of existing tradewere 153 member nations in the WTO accounting 58 barriers. Thus joining the WTO gives governmentsfor more than 90% of world trade. the ability to justify certain trade reforms in orderThe World Trade Organization deals with regulation to compete with international competition. Inof trade between participating countries; it reality, dismantling of trade barriers is also aprovides a framework for negotiating and reciprocal process and if the markets of countriesformalising trade agreements, and a dispute are too small then their trading partners may notresolution process aimed at enforcing participants find it worthwhile to enter negotiations that willadherence to WTO agreements which are signed by help spearhead reforms and dismantling traderepresentatives of member governments and barriers in the smaller nations. Accordingly, manyratified by their parliaments. Most of the issues argue that recent trade negotiations such as thethat the WTO focuses on derive from previous Uruguay round have not have not had a significanttrade negotiations. impact on trade liberalization in developing countries.WTO mandate is to help Least developed countries 59(LDC) by: The trade dispute resolution mechanism: When LDCs have trade disputes with larger members theNon-discrimination and enhanced market access WTO offers arbitration and legal services aimed atfor exports: Non-discrimination centres on the conflict resolution. It has also recently createdMost Favoured Nation (MFN) clause, whereby tariff systems to help LDCs realize their right andconcession made to one country have to extend to obligations. This way LDCs have a better chance toall. In addition, LDCs benefit since industrial nations make their grievances addressed by thecannot discriminate in favour of products produced international community. In practice however,in LDCs. However, for a country to gain increased dispute resolution mechanisms do not have anmarket access it must be willing to open its own effect on powerful trading partners such as the EUmarket. However, partner countries will only be and the USA, as not only can they afford anyobliged to enter negotiations if the domestic legitimate retaliation. In addition, they often circumvent their way through legal loopholes and57 Patricia Owens, John Baylis, Steve Smith (2004) threaten retaliatory measures. Moreover theGlobalisation and World Politics, OUP, Oxford58 bureaucracy and legal procedures can draw on for World Trade Organization. WTO Annual Report2009 long-periods of time. Thus, LDCs may suffer from59 Mattoo, Aaditya and Subramanian, Arvind (2004)The WTO and the poorest countries: the starkreality, International Monetary Fund-Research DeptInsaf Research Wing 37
  • 38. Committee on Economics Economic Research: Pakistanstrong retaliatory measures from powerful trading simply go bankrupt, in effect ruining their 60partners. international standing with investors and plunging into social and political instability.International Monetary Fund (IMF): Established in1945 and headquartered in Washington DC. Theprimary objective of IMF is to oversee the short-term cross-border money flows and foreign Technical and financial assistance provided:exchange. Since 1979, it has also formulated Supporters of the IMF claim the fund has helpedstabilization and systematic economic many nations address the structural flaws of theirtransformation policies for states concerning debt economies efficiently and effectively than theyand economic transition. The IMF has a weighted could have done without access to the IMF fundingvoting system which broadly reflects a member and expertise. The IMF has also various support andnation’s relative size in the world economy. technical resources that it deploys to help nationsAccordingly, a nation’s quota will determine the solve economic instability and advice them oncontributions it is obliged to make to the IMF. policymaking.Additionally, the quota determines the allocation of Critics, on the other hand argue that the structuralthe international reserve unit called Special adjustment plans of the IMF have only exasperatedDrawing Rights (SDR). In 2009, the G-20 group of economic problems for developing countries. Thus,industrialised nations agreed to boost the lending they argue that the IMF has reduced growth andcapacity of the IMF to $750 billion. As of 2009, the living standards via its policies. Accordingly, therefund boasted a membership of 186 countries. In are three main criticisms of the IMF’s structuralrecent years, it has sought to reform itself by adjustment policies and its role in LDCs:63rebalancing the quota system to give developingcountries a stronger voice and make changes to its Through the flawed design of its structuralgovernance, lending and structural adjustment programmes, there were many adverseprograms.61 consequences on low-income households. Accordingly, low-income households sufferedOver the years, the fund has drawn many critics directly from falling incomes or suffered indirectlyand supporters. Some of the main arguments 62 from a reduction in social provisions. While thebrought forward by both parties are as follows: fund identified a number of flaws within the economies that it was intervening in, not all the flaws could be fixed at once due to poor politicalRelief funds and lender of last resort: Supporters of will and administrative problems, thus the fund’sthe fund point out the help IMF has provided policies actually did more harm than good in somecountries avert bankruptcy by extending relief instances.funds and acting as a lender of last resort. Thereare numerous examples and crisis where the fund Another problem with the fund and its aidextended aid and loans to help countries make programs was its insistence on conditionality ofstructural adjustments, shore up foreign reserves assistance not only for the occasional crisisand cover expenditure. Without this sort of aid, management but also for the continuous process ofmany countries would have to default on existing economic policymaking, or in other words theloans or continue to borrow with large interest or transfer of economic sovereignty from a nation to the fund. While this could be justified when an60 Chris Brown, Kirsten Ainley (2009) Understanding economic crisis is the doing of the government, butInternatinal Relations, 4th Edition, London, Palgrave hard to justify when an economic crisis is due to theMacmillan61 Patricia Owens, John Baylis, Steve Smith (2004) collapse of international markets. The requirementsGlobalisation and World Politics, OUP, Oxford62 The IMFs Role in Structural Adjustment. Collier, 63Paul and Gunning, Jan Willem, Blackwell Publishing The IMF Strikes Back. Rogoff, Kenneth. 134, s.l. :for the Royal Economic Society, 1999, Vol. 109. Washingtonpost.Newsweek Interactive, LLC, 2003.Insaf Research Wing 38
  • 39. Committee on Economics Economic Research: Pakistanof the IMF actually undermine the commitment for club bypassing potential legal and political 64reform as most often governments do not fully barriers. Supporters of the club point out thecommit themselves to reforms since they feel grace periods, cutting of debt amounts and in someforced into it. cases writing off debt. The decision process of the club is also shorter and its ability to significantlyAnother criticism is the aid structural adjustment write off debts or postpone repayment periods andprograms and conditionality requirements can terms has given the fund a unique ability toresult in the misallocation of aid resources. influence the development and stability of largeGovernments in the third world countries often number of nations.spend on programs that do not benefit the poorbut rather on projects with their business interest. However its critics point out the difficult debtIn addition, the attempt to use aid to induce policy servicing payments and conditions on nations thatreform has tended to target aid on countries with the club imposes exasperating the situation forpoor policies, thus, unless the aid actually improves debtor nations. Moreover while promising manythe already poor policies then it would be the least nations to write off debts and extend grace periods,effective method of reducing poverty. Thus, poor however these promises depend on complexnations get flooded with cash but because their procedures that in turn question creditor nation’seconomic systems are not capable of absorbing all commitment towards debt relief. There is relativelythe funds, a lot of it is wasted or misused. Another less oversight compared to other internationalproblem is that simultaneously perusing a strategy lending organizations as to how the aid money isof reducing government expenditure while raising spent.65 Thus, nations can invest the money ontaxes reduces the effectiveness and defeats the programs or goods that won’t improve the livingpurpose of aid in the policy area where aid is most standards of their citizens without facing criticismeffective. Thus, structural reforms and aid fundscan be incompatible at times. Nevertheless it is Asian Development Bank (ADB) was set up in 1966reasonable to assume that the IMF will continue to to help facilitate development in Asian countries.be a relevant and important international financial The bank has a weighted voting system, with 80%force in the world economy. of the votes being distributed based on the proportion of the capital subscriptions of theThe Paris club is an informal group of creditor members. As of 2009, the bank had 67 members. Innations, founded in 1956. It has no permanent 2009 the ADB governors agreed to triple the ADB’smembers and all member states function on the capital base from $55 billion to $165 billion. 66principle of consensus. The Paris club came to thelimelight during the debt crisis that gripped The bank aims to help developing countries in Asiadeveloping countries during the 1980’s and early by providing access to loans and grants via its1990’s. Its original goal was to provide short-term ordinary capital resources programme which claimsliquidity for debtor countries to prevent default. In to offer favourable or near-market repaymentthe recent decades, it has provided longer maturity terms. The bank also offers assistance onperiods, debt cancellation and other features to infrastructure, regional integration, environmenthelp heavily indebted nations reduce their debt and financial sector developments and helpsburden. While it is an informal club, it has a lot of countries identify and design projects, improveinfluence in the international financial system and institutions and formulate development strategiesinternational financial institutions such as the IMF, via grants. One of the other touted benefits of thewhich also plays an advisory role during its bank is its main stakeholders and staff are based inmeetings with debtor nations. Asia. 64 Juan Carlos, Matthew Martin (2001) The ParisIn comparison to IMF and other financial Club, London, Debt Relief International Ltdinstitutions, the Paris Club is an informal group of 65 Juan Carlos, Matthew Martin (2001) The Pariscreditors hence nations can appeal directly to the Club, London, Debt Relief International Ltd 66 Wikipedia – www.wikipedia.org - ADBInsaf Research Wing 39
  • 40. Committee on Economics Economic Research: PakistanHowever, critics have pointed out a number of common positions are set out and joint actions areflaws in the ADB. The bank is accused of being carried out.irresponsible for giving out loans to governmentswith poor human right record. Cooperation on justice and home affairs (pillar 3)There are also relatively large amount of voting The aim of this pillar is to provide all Europeanrights concentrated in the hands of a few which citizens freedom, security and justice by jointlydistorts the decision making process of the bank by preventing crime, terrorism, racism andnot allowing a majority of the members to have a xenophobia. Similar to pillar two, this policy takesgreater say. Critics argue that the ADB may not be place on the basis of collaboration between thenecessary since many institutions such as World individual countries.Bank fulfil the same functions of the ADB. In European Union (EU) is also an example of aaddition, many countries in Asia such as India common market system that has tariff free tradeborrow directly from the World Bank. amongst its members, common barriers to trade with the rest of the world and free movement of4.3 Role of EU, NAFTA, GCC labour and capital amongst members.67 The EU is the successor to the European Community (EC), which traces its roots back to post World War TwoEuropean Union Europe. The EU currently has 27 members and is the largest economy in terms of GDP (based onThe European Union is built on a unique Purchasing Power Parity (PPP)) and the secondinstitutional system. The Member States delegate largest trade bloc after NAFTA, accounting for 21%sovereignty for certain matters to independent of PPP gross world product as of 2009. As of 2008,institutions, which represent the interests of the the EU remains as the world’s largest exporter andUnion as a whole, its Member States and its 68 importer.citizens. The single market came into existence with theThe treaty on the European Union, known as the signing of the single market act in 1986. It sets theMaastricht Treaty, which entered into force in path for removing all remaining barriers and1993, created a single structure for the European creating a fully integrated market in 1992. OneUnion made up of three pillars: significant factor in the EU integration was theThe European Communities (Pillar 1) regulatory system. The single market financial system is set on a dual set of principles: homePolicy areas for which the European community is country authorization and host conduct businessresponsible include: economic and monetary rules. Meaning a firm can trade throughout theaffairs, agriculture, asylum and immigration, union by the home regulator, but that trade itselftransport, employment, trade, social welfare, must obey local laws in the country concerned. Theculture, consumer protection, health, industry, Maastricht Treaty, signed in 1992 formally createdresearch and technology; economic and social the EU and furthered the integration of the singlecohesion, the environment and development aid. market. It also created the euro, a common currency in 1999. This feature made the pricingCommon foreign and security policy (Pillar 2) system more transparent and eliminated exchangeActions taken under this pillar aim to develop a rate risk. In addition to the common currency, thecommon foreign and security policy. Common treaty created a social charter and stronger fiscalforeign and security decisions are taken on the criteria. Since the Maastricht treaty, there havebasis of cooperation between the Member States. 67 Lipsay, Richard and Chrystal, Alex. (2004) Economics - 10thHowever, decisions of principle are passed, edition. NewYork, Oxford University Press 68 Central Intelligence Agency. The World Factbook (2009) Directorate of IntelligenceInsaf Research Wing 40
  • 41. Committee on Economics Economic Research: Pakistanbeen three other significant treaties: Amsterdam integration and deregulation have boosted the EU’s(1997), Nice (2001) and the Lisbon (2007) focusing position as both an economic powerhouse and aon integrating the social, legal and constitutional strong voice in international institutions. However,characteristics of the Union members.69 the EU still has a lot of liberalization to do, especially concerning its agricultural sector and theThus far, the main advantages of the single market common agricultural policy (CAP), whichsystem as follows: guarantees a minimum price for EU farmers and thus blocks out foreign competition. However,  By removing non-tariff barriers, the single while the agricultural sector maybe a huge flaw in market aims to allow countries to exploit the EU’s commitment to free trade and their comparative advantage through liberalization, most of its other industries are highly specialisation. liberalised and open to competition.  With the dismantlement of trade barriers, NAFTA firms were able to grow and reduce costs. This helped increase trade in industries for The North American Free Trade Agreement both goods and services. (NAFTA) is the most basic and least comprehensive form of trade-liberalizing agreements. It allows for  Increased competition between large tariff free trade among the member countries but established companies and local gives them the ability to impose their own trade companies. restrictions on imports of other countries.70 This  Lower prices: The competition and also means, that unlike the EU, NAFTA members liberalization helped create lower prices. must maintain customs points at their respective boarders to make sure that imports into the free  Due to the common set of standards area does not enter through the member that is adopted throughout Europe, consumers levying the lowest tariff on each item. NAFTA can be sure of the quality of their goods members must also agree on rules of origin to and services no matter which EU country determine if goods are made in a member country they are in. and thus allowed to be traded duty-free or if they do not meet the criteria for duty-free and must be subjected to duties when traded within the free trade area.However, the EU is largely dominated by thepolitical and economic clout of Britain, France, Italy NAFTA traces its roots to an agreement signed inand Germany and the smaller newly acquired 1988 between Canada and the USA, instituting freeeastern European countries complain about the trade on all goods and most non-governmentpressure of high corporate tax rates to the levels of services. In effect, this made the world’s largestWestern Europe, thereby discouraging investment flow of international trade between two countries.and losing some of the advantages of cheap labour. In 1993, this agreement became NAFTA due to theThere are also pressure to adopt existing EU modification, which resulted from theregulations on health and safety along with other renegotiation of the Canada-USA agreement insocial and legal measurers that exasperates the 71 order to include Mexico. Implementation ofproblems for new members. st NAFTA began on the 1 of January 1994. NAFTA isThe EU does encourage free market trading andmarket liberalization both internally and externally 70 John Cavanagh, Sarah Anderson, Jaime Serra and J. Enriquewith its trading partners. The further rounds of Espinosa, et al (2002) Debate: Happily Ever NAFTA? Washingtonpost.Newsweek Interactive, LLC69 71 Wenger, Andreas and Zimmermann, Doran (2006) Wenger, Andreas and Zimmermann, Doran (2006)International Relations - From the cold war to the Globalized International Relations - From the cold war to the GlobalizedWorld, Lynne Rienner Publishers World, Lynne Rienner PublishersInsaf Research Wing 41
  • 42. Committee on Economics Economic Research: Pakistanthe largest trade block in the world in terms of GDP 2. Agriculture and poverty: critics claim that(PPP). NAFTA, which removed tariffs on agriculture, has flooded Mexico withSome of the benefits of NAFTA are: cheap corn imports from its partners, which have heavily damaged the local 1. Removal of trade barriers: NAFTA’s goal to agricultural industry. The cheap imports remove most trade barriers between its have allegedly increased rural members has been partially successful. unemployment, especially amongst small- This includes the abolishment of all scale farmers and raise general poverty in agricultural trade tariffs between USA and rural areas. A testament to this fact is the Canada. Due to the reduction in trade increase in rural poverty from 79% in 1994 barriers, trade between NAFTA members to 82% in 1998. Critics also claim that has increased significantly. general poverty in Mexico rose from 51% 2. Position in world economic affairs: As the 1993 to more than 58% in 1997. EU and regional organizations around the NAFTA embodies a commitment to free trade and world have gained a more economic its objectives are congruent with those of the WTO. power in recent years the US, Canada and Accordingly, many see it as a positive force in Mexico have sought to reinforce their regional trade affairs and supporters of NAFTA economic positions via NAFTA. claim that it has achieved all its fundamental Accordingly, one of NAFTA’s objectives is objectives. NAFTA has brought about a significant to counteract trade discriminations of the reduction in tariffs and a rise in trade amongst EU and Asian regional trade blocs. NAFTA members within a relatively short period.However, there are negative consequences of However, NAFTA has been beneficial to businessNAFTA. Some of the main arguments brought owners and elites in all three countries, but has hadforward by critics include the following:72 negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. 1. Transfer of jobs and labour rights: After agribusiness, and negative impacts on U.S. workers the agreement, critics argued that there in manufacturing and assembly industries who lost was a large-scale transfer of low skill and jobs. low-wage jobs from the US and Canada to Mexico. This was because the Mexican The Gulf Corporation Council (GCC); established on economy featured a relatively cheaper 25th of May 1981 consists of six Gulf States, the workforce. This transfer of jobs was United Arab Emirates, Saudi Arabia, Qatar, Oman blamed for the rising unemployment in and Bahrain (26). The GGC was created primarily to various low-skill and low-wage industries improve regional security for its members against a throughout the US and Canada. Some militant and aggressive stance adopted by Iran. In critics also point out that NAFTA has failed economic terms, one significant agreement to protect the rights of workers due to its between members of the GGC was the unified weak labour union and labour protection economic agreement, which was signed in laws. Thus, they claim that it has failed to November 1981. It sought to bring about a gradual achieve one of its key social objectives. In reduction in common custom tariffs over a five- fact, many critics claim that Mexico, year period, the adoption of a common economic, considered the worst affected member social and defense policies and a common concerning labour, has seen real wages currency.73 The main source of strength for the actually fall since the creation of NAFTA. economies of the GGC is oil and gas. Accordingly, they account for some 15% of oil production and72 John Cavanagh, Sarah Anderson, Jaime Serra and J. Enrique 73Espinosa, et al (2002) Debate: Happily Ever NAFTA? . Kechichian, Joseph A (1985) The Gulf Cooperation Council:Washingtonpost.Newsweek Interactive, LLC Search for Security, Taylor & Francis, LtdInsaf Research Wing 42
  • 43. Committee on Economics Economic Research: Pakistanpossess over 40% of the worlds known oil reserves.The GGC also has approximately 5%-6% of thepetrochemical market and a similar share of worldrefining capacity.The GGC has successfully created a number ofregional institutions such as the Gulf InvestmentCorporation, which has started operating severaljoint development projects including a refinery inOman. However, there are various obstacles forfurther economic and political integration of theGGC mainly due to the lack of political will anddifferences amongst the members. Like the WTO,the GGC is also committed to the removal ofinternal tariffs and the gradual liberalization of itsmember economies. However, due to the slowprogress in terms of economic integration andpolicy harmonization, the GGC has been relativelyless effective in many areas in comparison to othermore successful trading blocs.Insaf Research Wing 43
  • 44. Committee on Economics Economic Research: Pakistan countries not only recovered but went on toChapter# 5: become world’s largest and strongest economies. Yet Pakistan with sufficiently developedCurrent infrastructure and agricultural advantage failed not only to excel and become the Asian tiger it so hadPakistani hoped but steadily took a downhill stride and can now be compared to the countries of the subEconomic State Sahara Africa. The question as to what went wrong consists of a multitude of factors but are largely attributed to economic mismanagement, rampant corruption, military coups, deterioration in law &This chapter will look at the current state of the order, fiscally imprudent economic policies whichPakistani economy analysing key industries and caused a large increase in the countrys public debtsectors. Officially the economy of Pakistan is the and led to slower growth in the 1990s and wars26th largest economy in the world in terms of with India.purchasing power, and the 47th largest in absolute 74 Since the beginning of 2009, Pakistans economicdollar terms. Pakistans economy primarily outlook has not looked bleaker. Security concernsencompasses textiles, chemicals, food processing stemming from the nations role in the war onand agriculture. Pakistan’s military has terror have created great instability and led to aindependently developed a small arms industry decline in foreign direct investment (FDI)mainly targeting the African, gulf and Asian particularly from overseas Pakistanis. Concurrently,countries such as SriLanka. The Pakistani air force the insurgency has forced massive capital flightproduced its first home made fighter planes in from Pakistan to the Gulf. Combined with highconjunction with China. global commodity prices, the dual impact hasPakistan’s main export goods are: textile goods shocked Pakistans economy, with gaping trade(garments, bed linen, cotton cloths, and yarn), rice, deficits, high inflation and a crash in the value ofleather goods, sports goods, chemicals the Rupee, which has fallen from 60-1 USD to overmanufactures, carpets and rugs. Its main export 80-1 USD in a few months. The international creditmarkets: United States 22.4%, UAE 8.3%,UK 6%, agencies such as Standards & Poor’s (S&P) andChina 5.4%, Germany 4.7% (2006 est.). Its imports Moody’s investors lowered Pakistan’s foreignare: Petroleum, Petroleum products, Machinery, currency debt rating to CCC-plus from B, justPlastics, Transportation equipment, Edible oils, several notches above a level that would indicatePaper and paperboard, Iron and steel, Tea. Main default. The cost of protection against a default inimport partners are China 14.7%, Saudi Arabia Pakistan’s sovereign debt trades at 1,800 basis10.1%, UAE 8.7%, Japan 6.5%, United States 5.3%, points, according to its five year credit defaultGermany 5%, Kuwait 4.9% (2006 est.) swap, a level that indicates investors believe the country is already in or will soon be in default.75Pakistan was a poor and predominantly agriculturalcountry when it gained independence in 1947 from The report will now give a brief insight in to theBritish occupied India. However the Second World different industries of Pakistan. Its worth notingWar had just ended, European countries that the subjects discussed below ought to beparticularly Germany and France had been further researched in their own right. As theydevastated by both the human and material costs. provide researchers and party members a fertileOn the eastern front Japan had been nuclear ground to further expand upon.bombed by the USA virtually ruining the country forgenerations to come. Yet in all three cases, these74 75 www.wikiepdia.org - Pakistan www.businessweek.co.ukInsaf Research Wing 44
  • 45. Committee on Economics Economic Research: Pakistan5.1 Manufacturing Industry medium-scale producers. The industry, particularly its spinning and weaving sectors, has been under pressure since the mid-1990s, owing to increasedPakistan ranks forty-first in the world and fifty-fifth competition in the international market, financialworldwide in factory output. Pakistans industrial mismanagement within the industry, and risingsector accounts for about 24% of GDP. Cotton global demand for value-added textiles, as well astextile production and apparel manufacturing are the increase in production capacity in otherPakistans largest industries, accounting for about developing countries. Pakistans textile sector must66% of the merchandise exports and almost 40% of move to higher value-added production to meetthe employed labor force. Other major industries challenges and opportunities beyond 2005, wheninclude cement, fertilizer, edible oil, sugar, steel, quotas are removed and tariff barriers lowered, astobacco, chemicals, machinery, cocaine, and food mandated by the World Trade Organization (WTO).processing.76 This will expose Pakistans mills to intense competition from China, Asias largest textileBoth the Mushraaf regime and the current Zardari exporter.government’s economic policies aim to diversifythe countrys industrial base by privatizing large- Pakistan’s other major industry is food processing,scale assets. As a result the public sector accounts generating an estimated twenty seven percent offor a shrinking proportion of industrial output. value-added production and making up sixteen percent of the total employment in theBefore 1947 there was little manufacturing in the manufacturing sector. Major sub-sectors ofarea that makes up present-day Pakistan. Its Pakistans food industry are cooking oils andprimary role was as a supplier of raw materials, hydrogenated vegetable oils, sugar, flour, tea, dairyincluding cotton, to industrial hubs across British products, beverages, and canned foods. The fish,India, such as Bombay. In general, manufacturing meat, and fruit and vegetable sectors remainstill works with relatively basic technologies, underdeveloped, partly for lack of adequategenerates few value-added products, and has a infrastructure, including storage and transportationnarrow production base, i.e., it does not diversify facilities. A small quantity of processed foods isinto many different product groups. Textiles are imported to feed a few supermarkets catering toPakistans primary industry, and in 1999 accounted the countrys elite. The vast agricultural resourcesfor 8.5 percent of the gross domestic product, 31 and the countrys geographic location makepercent of total investment, 38 percent of industrial Pakistan an ideal country for investment in the foodemployment, and almost 60 percent of total sector. Several foreign firms have entered theexports. Pakistan is Asias eighth-biggest textiles market and established their own presence asexporter, with export revenues of US$5.7 billion in manufacturers, or established joint ventures withthe first half of 2000. Export growth has been local partners such as Nestle. The fastest growingdeclining since a recent peak of 6.1 percent in 1996. sectors are beverages—including carbonated softThe prime reason being unstable political situation drinks and juice and juice-flavoured drinks—and lack of large scale investments to modernise poultry, and edible oils.78plants. As a result progress is expected to fall shortof targets, notably to be among Asias top 5 Pakistan Steel, with an annual capacity of 1.1exporters with sales of US$14 billion.77 million tons, is Pakistans only integrated steel plant. Attempts to privatise this highly sought outAs a rule, large textile firms concentrate on asset by the Musharaf regime were thwarted byspinning and weaving, leaving garment the chief justice Chaudhry Muhammad. The plant ismanufacturing to highly fragmented small to located near Port Bin Qasim, 25 kilometers (15.576 www.worldbank.com – country search Pakistan77 78 www.nationsencyclopedia.com/economies/Asia- www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Pakistan and-the-Pacific/PakistanInsaf Research Wing 45
  • 46. Committee on Economics Economic Research: Pakistanmiles) east of Karachi. The steel mill was Moreover major reserves of copper and gold inconstructed with technical assistance from the Baluchistan’s Rekodiq area have been discovered informer Soviet Union, and currently employs about early 2006. The Rekodiq mining area has proven20,000 workers. Iron ore, manganese, and cocking estimated reserves of 2 billion tons of copper andcoal for the plant are all imported. 20 million ounces of gold. According to the current market price, the value of the deposits has beenLeather is one of the other major foreign exchange estimated at about $65 billion, which wouldearners for Pakistan. The leather and leather generate thousands of jobs. The discovery hasproducts industry is labour-intensive (directly ranked rekodiq among the worlds top sevenemploying more than 200,000 workers), and there copper reserves. The rekodiq project is estimatedare over 500 tanneries in Pakistan. This industry has to produce 200,000 tons of copper and 400,000shown huge potential in large part to its successful ounces of gold per year, at an estimated value ofprogression from the export of raw hides and skins $1.25 billion at current market prices. The copperand semi-processed leather towards high value- and gold are currently traded at about $5,000 peradded finished leathers and leather products ton and $600 per ounce respectively in the(including leather jackets, gloves, footwear, and international market.sporting goods). The tanning sector is concentratedin Punjab, where manufacturing units process North West Frontier Province accounts for at leastprimarily buffalo and cow hides; tanneries in Sindh seventy-eight percent of the marble production inprocess primarily goat and sheepskins. The local Pakistan. Pakistan is home to some of the finestmarket for leather is limited, and about eighty and purest grades of marble, granite and slatepercent of production is exported. More found in the world. Much of the grade A marblesophisticated machinery and productivity increases that is exported out of European countries like Italycan be expected to further boost exports. Pollution, actually have their origins in Pakistan whichespecially through tannic acid and dyes, is a serious previously lacked fine polishing and processingproblem for this industry. machinery. The Federal Bureau of Statistics provisionally valued this sector at Rs.211, 851Pakistan’s other hidden industry is the country’s million in 2005 thus registering over 99% growthimmense reserves of various minerals and natural since 2000. 79resources. Important minerals found in Pakistan aregypsum, limestone, chromites, iron ore, rock salt, In FY 2002-03, real growth in manufacturing wassilver, gold, precious stones, gems, marble, copper, 7.7%. The industry comprises 453 textile mills: 50coal, graphite, sulphur, fire clay, silica. The salt integrated units; and 403 spinning units, with 9.33range in Punjab province has the largest deposit of million spindles and 148,000 rotors, The capacitypure salt found anywhere in the world. Baluchistan utilization was 83% for spindles and 47% for rotorsprovince is a mineral rich area having substantial oil during 2003.and gas reserves which have not been exploited totheir full capacity or fully explored, although the Pakistan also has extensive energy resources,musharaf government and the Zardari regime have including the fourth-largest coal reserves in thebegun to develop this region of the country and to world and a large hydropower potential, althoughtap into the immense resources found there. The this is confined to the northern region of theprovince also has significant quantities of copper, country. Large deposits of coal were discovered atchromite and iron, and pockets of antimony and Thar over a decade ago by the Sindh arid zonezinc in the south and gold in the far west. Natural development authority. In 1991, enormous coalgas was discovered near Sui in 1952, and the deposits were conferred by the geological survey ofprovince has been gradually developing its oil and Pakistan and the United States agency forgas projects over the past fifty years. international development. 79 www.statpak.gov.pkInsaf Research Wing 46
  • 47. Committee on Economics Economic Research: PakistanPakistans Thar Desert contains the largest coalreserves discovered to date, covering an area of10,000 square kilometers. The Thar coalfield, 5.2 Services Industryshould it be developed, will yield over 200 billionton of coal used to produce electricity, it will yieldsufficient power to make Pakistan self-sufficient in Pakistans service sector accounts for 54% of GDP,electrical power. Pakistan has reserves of natural transport, storage, communications, finance, andgas, but these will start to diminish by 2010. insurance account for 24% of this sector, and wholesale and retail trade about 30%. Pakistan isSince the discovery of Thar coal in 1991 very little trying to promote the information industry anddevelopment work or study has been initiated. Thar other modern service industries through incentivescoal has low calorific value but is environmentally such as long-term tax holidays.friendly with a low Sulfur content. The Thar coaldeposits extend across the border and they are A government agency Pakistan Software Exportcurrently being mined for power generation in Board (PSEB) was set up to promote the IT, BPORajistan in India. India has no reservations about (business process outsourcing) and the call centrethe use of these coal deposits. Coal extraction from industries in Pakistan. The body’s responsibility is toThar will be a development requiring three to four administer programs in the areas of human capitalyears before coal is made available for use. The and company capability development, IT Parkideal situation would be that Government of development, international marketing, industrialPakistan uses the coal to reduce the country’s research, public policy and facilitation. Salaries independence on hydro projects; the only alternative Pakistan are lower by 30% than in neighbouringmethod is to develop the Thar coal via international India but the country suffers from a politicallyfinancing. This is possible only by inviting unstable and lawlessness image. Pakistan hasinternational power companies to invest in Pakistan similar characteristics that have made Indiaand provide the required funding for the successful as an outsourcing hub, such as its low-development of the Thar coalfield.80 cost, skilled, english-speaking staff but the IT industry in Pakistan is still in its early stages, andPakistan’s other hidden industry is that of precious companies have very little experience in theGems. Along with Afghanistan the country is business and lack the ability to scale theirbelieved to hold up to 30-40 percent of the worlds operations. The government body set up is unableemerald deposits with the precious stone fetching to help due to inept people and processes.up to $2,000 per carat depending on quality. Mostof the countrys gems, including emeralds, garnet, One of the largest IT services firms with operationspink topaz, spinel and tourmaline are located in Pakistan is NetSol Technologies NetSol is based inunderground in North West Frontier Province California but was founded in Pakistan in the mid-(NWFP). However due to spiralling insecurity in 1990s, and it has about 600 engineers in thePakistan since the September 11, 2001 attacks on country working on projects for global clients. Thethe United States. The nuclear-armed nation was Government of Pakistan has allowed 100% equitythrust in to the heart of the war on terror ownership and 100% repatriation of profits todrastically reducing profits from this industry as foreign investors. Major tax incentives, such as tax 81foreign investors stayed away. exemption for companies, have been allowed until 2016 but rampant corruption and ill-defined tax80 procedures hamper the development of IT industry.www.pakistaneconomist.com/issue2001/issue34/i&e1.htm Pakistans other major service industy is the81 comunications industry. Where by the Pakistanwww.pakistaneconomist.com/issue2001/issue34/i&e1.htmInsaf Research Wing 47
  • 48. Committee on Economics Economic Research: PakistanTelecommunication Company Ltd has emerged as a contributes a large share of foreign exchangesuccessful Forbes 2000 conglomerate with over US earnings. The main agricultural products are cotton,$1 billion in sales in 2005. Mobile telephone market wheat, rice, sugarcane, fruits, and vegetables, inhas exploded fourteen fold since 2000 to reach a addition to milk, beef, mutton, and eggs. Pakistansubscriber base of 91 million users in 2008, one of depends on one of the worlds largest irrigationthe highest mobile densities in the entire world. In systems to support production. There are 2addition, there are over 6 million landlines in the principal seasons. Cotton, rice, and sugarcane arecountry with 100% fibre-optic network and produced during the kharif season, which lasts fromcoverage via WLL in even the remotest areas. May to November. Wheat is the major rabi crop,Moreover not many people outside Pakistan know, which extends from November to April. The key tofor example, that the country has over 63 million a much-needed improvement of productivity lies inmobile phone subscribers for a population of about a more efficient use of resources, principally land164 million people. The percentage of Pakistans and water. However, change is dependent on thepopulation using mobile phones is more than that large landowners who own 40 percent of the arableof India, which is seen as a key Asian market for land and control most of the irrigation system,mobile-phone vendors.82 The contribution of which makes widespread reform difficult.telecom sector to the national exchequer was Rs Assessments by independent agencies, including110 billion in the year 2007-08 on account of the World Bank, show these large landholdings togeneral sales tax, activation charges and other be very unproductive. Pakistan is a net importer ofsteps as compared to Rs 100 billion in the year agricultural commodities. Annual imports total2006-07. The World Bank estimates that it takes about US$2 billion and include wheat, edible oils,about 50 days to get a phone connection in pulses, and consumer foods. 83Pakistan. Pakistan is one of the worlds largest producers ofIn Pakistan, following are the top mobile phone raw cotton. The size of the annual cotton crop—theoperators: bulk of it grown in Punjab province—is a crucial barometer of the health of the overall economy, as 1. Mobilink (Parent: Orascom, it determines the availability and cost of the main Pakistan/Egypt) raw material for the yarn-spinning industry, much 2. Ufone (Parent: PTCL, Pakistan/UAE) of which is concentrated around the southern port 3. Telenor (Parent: Telenor, Norway) city of Karachi. Official estimates put the 1999-2000 4. Warid (Parent: Abu Dhabi Group, UAE) harvest at some 11.2 million 170-kilogram bales,Zong (recently been acquired by China Mobile for compared with the 1998-99 outturns of 8.8 millionUS$ 450 million). bales and the record 12.8 million bales achieved in 1991-92. The government recently intervened in the market to boost prices and to encourage production. A major problem is that the cotton crop5.3 Agricultural Industry is highly susceptible to adverse weather and pest damage, which is reflected in crop figures. After peaking at 2.18 million tons in 1991-92, the lintAgriculture is a vital sector of Pakistans economy harvest has since fluctuated considerably, rangingand accounted for 26% of the GDP in 1999-2000, from a low of 1.37 million tons in 1993-94 to a highaccording to government estimates. The sector of 1.9 million tons in 1999-2000.directly supports three-quarters of the countrys The 2000-01 wheat crops was forecast at a recordpopulation, employs half the labour force, and 19.3 million tons, compared to 17.8 million tons produced during the previous year. This increase is82 http://pcworld.about.com/od/workplace/Troubled- due largely to favourable weather and a 25-percentPakistan-aims-for-a-l.htm83 www.worldbank.com/pakistan increase in the procurement price to about US$135Insaf Research Wing 48
  • 49. Committee on Economics Economic Research: Pakistanper ton. About 85 percent of the crop is irrigated. Pakistans fishing industry is relatively modest, butDespite the record production, Pakistan will has shown strong growth in recent years. Thecontinue to be a major wheat importer. The domestic market is quite small, with per capitagovernment has imported an average of US$2.4 annual consumption of approximately 2 kilograms.million annually over the past 5 years. The United About 80 percent of production comes from marineStates and Australia are the major suppliers. fisheries from 2 main areas, the Sindh coast eastDemand for wheat is increasing from Pakistans from Karachi to the Indian border, and the Makranrapidly growing population as well as from cross- coast of Baluchistan. Ninety percent of the totalborder trade with Afghanistan. marine catch is fish; the shrimp, which constitute the remainder are prized because of their greaterPakistan is also a major rice exporter and annually relative value and demand in foreign markets.exports about 2 million tons, or about 10 percent of During 1999-00, total fish production was 620,000world trade. About 25 percent of exports are tons, of which 440,000 tons consisted of sea fishPakistans famous fragrant Basmati rice. Rice is and the remainder were fresh-water species. AboutPakistans second leading source of export one-third of the catch is consumed fresh, 9% isearnings. Private traders handle all exports. frozen, 8% canned, and about 43% used as fishPakistans main competitors in rice trade are meal for animal food.Thailand, Vietnam and India. Livestock accounts for 40% of the agriculturalTobacco is grown mainly in the North-West Frontier sector and 9% of the total GDP. Principal productsProvince and Punjab and is an important cash crop. are milk, beef, mutton, poultry, and wool. DuringYields in Pakistan are about twice those for 1999, the livestock population increased to 120neighbouring countries largely due to the extension million head. That same year Pakistan generatedservices provided by the industry. Quality, however, 970,000 tons of beef, 640,000 tons of mutton, andis improving only slowly due to problems related to 190,000 tons of poultry. In an effort to enhanceclimate and soil. Farmers have started inter- milk and meat production, the Musharafcropping tobacco with vegetables and sugarcane to government launched a comprehensive livestockincrease returns. About half of the total production development project with Asian Development Bankis used for cigarette manufacturing and the assistance. Poultry production provides anremainder used in traditional ways of smoking (in increasingly popular low-cost source of protein.hand-rolled cigarettes called birris, in water pipes, Modern poultry production is constrained by highand as snuff). The share of imported tobacco is mortality, high incidence of disease, poor qualityincreasing gradually in response to an increased chicks, and poor quality feed, combined with andemand for high-quality cigarettes. inadequate marketing system. Frozen poultry have only recently been introduced.Minor crops account for only 5 percent of totalcultivated area; these include oilseeds (sunflower, Forests cover an area of 4.2 million hectares orsoybean), chillies, potatoes, and onions. Domestic about 5 percent of the total area of Pakistan. Theoilseed production accounts only for about 25% of principal forest products are timber, principally forPakistan total edible oil needs. As a result, Pakistan house construction, furniture, and firewood. Manyspends more than US$1 billion annually in scarce of the countrys wooded areas are severelyforeign exchange to import edible oils, while its depleted as a result of over-exploitation. Theoilseed processing industry operates at less than 25 government has restricted cutting to protectpercent of capacity due to an inadequate supply of remaining resources—though corruption oftenoilseeds. For 2000-01 total oilseed production was jeopardizes environmental efforts—and hasforecast to decrease 10% to 3.6 million tons. The lowered duties to encourage imports. Forestrygovernment has highlighted development of the production has since declined from 1.07 millionoilseed sector as a priority. cubic meters in 1990-91 to 475,000 cubic meters in 1998-99. Pakistan imports an estimated US$150Insaf Research Wing 49
  • 50. Committee on Economics Economic Research: Pakistanmillion of wood products annually to meet the one of the top 25 tourist destinations for its Worldrequirements of a growing population and rising Heritage sites. Ranging from mangroves in thedemand by wealthy elite.84 South, to the 5,000-year-old cities of the Indus Valley Civilization —Mohenjo-daro and Harappa.Politics play a very large part in the agricultural However like other industries lack of governmentindustry. For example in south of Punjab Vehari attention, environmental degradation anddistrict where cotton, wheat, rice and sugar cane complete disregard of the importance of theare main agricultural products. The area is tourism sector has meant the rapid deterioration ofdominated by few landlords such as "Khichi", this vital industry. The present and previous"Doltana", "Bhabha", "Mitru", "Jatt" and "Dogar" governments have consistently ignored the tourismfamilies. All involved in parliamentary politics and industry resulting in huge losses to the growth andhave total control over the local police and the development opportunities offered by the sector.judicial setup. There is no clear political divisionamong the landlords even in single family but PPPand PML-N are the largest parties. 5.5 Role of Foreign Aid5.4 Tourism Industry Pakistan has been a recipient of foreign aid since its existence. This aid has been in the form of grants, tied aid, project aid and huge inflows intended toPakistan offers vistors a diverse array of cultures, keep the foreign exchange reserves at a safe levelpeople and landscapes.The countrys attractions to cope with industrialization related liberal importrange from the ruins of ancient civilizations such as policy. Foreign aid has played very important role inMohenjo-daro, Harappa and Taxila, to the the economic development of Pakistan. In theHimalayan hill stations, which attract those beginning Pakistan received very little aid frominterested in field and winter sports. Pakistan is international monetary agencies like World Bankhome to several mountain peaks over 7000m, and IMF. Industrialization process began in Pakistanwhich attracts adventurers and mountaineers from after the late 50s and to fulfill the demand of 85around the world, especially K2. The northern intense development activity, increased reliance onparts of Pakistan have many old fortresses, towers 86 foreign resources became inevitable. In theand other architecture as well as the Hunza and economic history of Pakistan five-year planningChitral valleys, the latter being home to the small scenario is also responsible for foreign aid.pre-Islamic animist kalasha community who claim Government of Pakistan had to request for thedescent from the army of Alexander the Great. In foreign aid for the completion of the five yearsPunjab is the site of Alexanders battle on the targets and the volume of foreign aid increasedJhelum River and the historic city Lahore, Pakistans with the introduction of every five-year plan.cultural capital, with many examples of Mughalarchitecture such as the Badshahi Masjid, ShalimarGardens, Tomb of Jahangir and the Lahore Fort. Due to geo-political developments around its borders Pakistan received liberal assistanceIn 2009, The World Economic Forum’s Travel & packages during the decade of 60’s and 80’s. ThereTourism Competitiveness Report ranked Pakistan as was lavish foreign aid and military assistance to Pakistan due war in Afghanistan. The inflows of84 generous foreign aid reached its peak in the era ofhttp://www.nationsencyclopedia.com/economies/Asi General Zia. However the composition and terms ofa-and-the-Pacific/Pakistan-AGRICULTURE.html 86 Abbas. S.A. & Brecher, I. (1993). Foreign Aid & Industrial Development in Pakistan, Karachi,85 www.wikipedia.org – Tourism/Pakistan VanguardInsaf Research Wing 50
  • 51. Committee on Economics Economic Research: Pakistanforeign aid changed considerably from grants andgrant like assistance to hard term loans over the Unnecessary foreign aid is like a slow poison andyears. The share of grants and grant like assistance beggars have no choice but to live with indignity.in the total commitments was 80% during the first Ours is the age of economic salvation and anfive-year plan (1955-60). It was dropped to 46% institutionalized siege. The fate of a nation isduring the second five year plan (1960-65) and changed by the will of its people and politicalcontinued to decline thereafter, averaging 31% leaders not by the foreign masters. Economicduring the third five year plan (1965-70) and 10% in independency is the daunting goal but not thethe fourth five year plan (1970-75). 87 impassable gulf. There is the theft of 600 billions of different taxes in Pakistan and revenue of 143 billion is wasted through smuggling every year.The major sources of foreign economic assistance Furthermore corrupted elites of politicians andto Pakistan have been the consortium, non- bureaucrats have at least $ 50 billion in foreignconsortium, and Islamic countries. The foreign aid banks. All these looted money should be regained.to Pakistan consortium consists of 11 countries, Tax system along with the complete abolishment ofBelgium, Canada, France, Germany, Italy, Japan, smuggling should be institutionalized. MoreNetherlands, Norway, Sweden, UK and USA. emphasis should be made on agriculture sectorConsortium is the single largest source, which along with small business industries. Efforts shouldprovides 81% of total foreign aid. It consists of 47% be made to export high-tech products. Self-relianceon bilateral and 34% multilateral basis.88 and economic stability can be achieved by joint giant effort. Pakistan is blessed with immense human and natural resources - it is a pity that theForeign aid is granted to reduce the budget deficit, country is catastrophically been mismanaged by thetrade promotion, environmental spending, inept ruling class of military, bureaucrats andhumanitarian relief, peacekeeping and the politicians.promotion of political transitions to democracy.However foreign aid fails as a development policybecause it destroys the incentives of themarketplace and extends the power of the rulingelites. Because it leads the Third World away fromthe free market, it actually increases Third Worldpoverty. It must be emphasized that free tradealone will not solve all of the problems of ThirdWorld poverty. It will not eliminate the shackles ofgovernment regulation and intervention thatdominate the Third World economies. That task canonly be done by the people of the third worldthemselves. Yet, eliminating foreign aid andinstituting free trade will at least encourage ThirdWorld peoples to develop institutions such asindependent judiciary and media, private propertyrights and free markets which will lead to growthand prosperity.87 Alesiana A. and Dollar, D. (1998). Who givesforeign aid to whom and why? Cambridge, NationalBureau of Economic Research.88 Abbas. S.A. & Brecher, I. (1993). Foreign Aid &Industrial Development in Pakistan, Karachi,VanguardInsaf Research Wing 51
  • 52. Committee on Economics Economic Research: Pakistan however, there needs to be substantially increaseChapter# 6: budgetary spending for programmes and projects in the agricultural, rural development, irrigation,Recommendations horticulture, livestock, small and medium enterprises and trade promotion sectors. One of the major opportunities for Pakistani farmThroughout the report, the author analysed various produce lies in China, which is a significant importereconomic theories and economies of Asian, Latin of farm produce, with the rising demand beingAmerican and European countries and highlighted fuelled partly by the growth in population andboth the negative and positive aspects. Finally this partly by rising per capita income levels and highsection will collate all of the highlighted points and GDP growth. According to one estimate, Chinasaim to present guidelines for senior party annual import of farm produce has exceeded $10leadership and PTI members/worker to further billion a year. This rising trend in imports isresearch and develop. expected to continue, making China a big potential market for Pakistani farm produce. The two countries enjoy excellent relations and China is nowRecommendations looking to import large quantities of fruit and other farm produce from Pakistan. Chen Neiz Wge, a Chinese agricultural expert visited Pakistan in 2009,Like many other developing countries where 45 to and agreed to issue a quarantine certificate,80 % of the population derives its livelihood, allowing the import of Pakistani mangoes. Theagriculture is the key-determining sector in the Chinese Quarantine and Quality Control Bureaueconomy of Pakistan. Contribution of agriculture to declared Pakistani mangoes pest-free and of goodGDP in 2000-2001 was 24.6 % and in 2001-2002 it quality. Last year, for the first time, pears grown inhas declined to 24.1 %. Size of land holding in western China were transported overland toPakistan is very small and has decreased over time. Pakistan, using the KKH (Karakoram Highway). TheAccording to agricultural census, there are 5.1 same route can readily be used to transportmillion farms in the country and 93% of these are Pakistani mangoes and other fruit to westernsmall and marginal farms accounting for 60 % of China.the total cultivated area. The large farms are only 7% of the total farms accounting for 40 % of the total Fruit exports to China (not just mangoes but manycultivated area. The current economic direction of other varieties as well, including citrus fruit) couldthe country is headed towards disaster unless become an important source of foreign exchangeemergency measures are taken to rectify numerous earning for Pakistan, with volumes eventuallydistortions in virtually every industry. running into hundreds of millions of dollars a year.Manufacturing sector produced the output of 3.3 According to an interim report prepared by Ruralpercent in 2008-2009 recorded as the weakest in Partnerships Limited, in association with Enterplanhistory, which was expected to grow by 7.5 Limited and SEBCON (Pvt) Limited under the Asianpercent, caused by the continuing tension between Development Bank-financed Technical Assistancethe Zardari government against the Supreme Court. Project. The overall trends that are apparent for fruit production in Pakistan are those while thePakistan is a big producer of food crops and other total area of production has increased, the overallfarm produce and has the potential to cash in on production has decreased. The report highlightsthe rising trend of food prices by formulating and problems in Balochistan with the drought andimplementing strategies aimed at making the subsequent water shortage that has seriously cutcountry a major exporter of cash crops and value- the yields of apples, peaches, apricots and grapes.added agribusiness products. For that to happen, Exports of fruit products continue, but productionInsaf Research Wing 52
  • 53. Committee on Economics Economic Research: Pakistanfails to take account of this segment of the market, estimated losses are at Rs800 billion. With thesewhich has potentially high value, but stringent huge losses, the investment available for thequality requirements. Moreover cool chain agricultural sector shrinks. Lack of investmentdistribution and cold storage of fruit and vegetables lowers the average crop yields, which are one ofis another problem that needs to be urgently the lowest in the world. The agricultural economyaddressed. As accurate data on the current cold suffers from different shocks:store numbers and capacities throughout thecountry are not available. Also, much of the existing 1. The first shock is the lack of transparent and effective institutional support andinventory of cold store equipment is dominated by government intervention;old designs prior to the influence of thermal 2. The second is the loss of wastage.efficiency and energy conservation being fully 3. The third is lack of adequate investmentappreciated. and 4. The fourth is abysmally low national yields.Despite being the worlds fourth-largest cottonproducer, Pakistan needed to import around 1.6 This creates a vicious cycle and these issues need tomillion bales of high-grade cotton in fiscal 2003-04 be tackled.to meet the growing demand in local textile mills.For the first time in years, the mills imported at The existing agricultural marketing departments areleast 300,000 bales of cotton from India to bridge being handled by provinces through the directoratethe supply gap in the local market. The irony, of marketing, which works under the Directorhowever, is that while domestic prices of cotton in General Extension. In Punjab, PAMCO has beenPakistan soared to record highs last year, the price created with a limited mandate. In Sindh, they areof raw cotton in the international market has governed by the Agriculture Produce Market Act ofhovered at the 60 US cents per pound level in New 1939. Not different from any other public sectorYork since the 1980s. organisation, the marketing department is focusing for gaps in the latter that distorts the spirit of theNothing better illustrates the need for a big act. Marketing is one of the major problems ofagricultural producer like Pakistan to focus on agriculture, while organisations responsible for thevalue-addition in its effort to boost export earnings limited role of managing wet markets do not takeand promote higher levels of GDP growth. care of poor infrastructure and the rights ofAgribusiness value-addition strategies - not just in growers. The weakest link in agriculture is thethe cotton sector but right across the board of the extension services. There are others as well but onewhole agricultural sector - should therefore be one 89 can argue that what is important is that knowledgeof the key elements of PTI’s agricultural policy. is not being imparted to the farmers. Given theThere are a number of problems and challenges current poor food security systems, short-termfaced by the consumers and the growers. When options are needed.these two major players are given raw deals, thereis an automatic spill over of this on foreign Pakistan to date has taken dictation from the Worldexchange earnings and the cartels of hoarders and Bank on extension and the Training & Visitmiddlemen create a parallel economy. In addition programme borrowed from Israel to improve itsto this, it is estimated that approximately 35% of agricultural methods. The cost incurred by Pakistanagricultural production is wasted because of the has been immense. It is not possible to take alack of storage, pre-post harvest technology, programme from another source and make it worktemperature-controlled storages and in another cultural context. With limited chance oftransportation, know-how etc. On this count, the increasing land and water resources, future growth has to come largely from diversification in line with89 market demand and productivity increase, which www.pakissan.com/english/agri.overview/cashing.in.on.agriculture.expansion.shtml will require major changes in systems, policies, andInsaf Research Wing 53
  • 54. Committee on Economics Economic Research: Pakistaninstitutions for agriculture. And the most important should be the correction of distortions in landchange required is redefinition of the role of market. Lessons from President Chavez’s landgovernment in agriculture, which would be crucial reforms should be considered where thein making agriculture competitive in the global government sought to break the huge ownership ofmarket. land held by a few wealthy and powerful landlords. This approach should be carefully planned, as landThe appropriate role of government is to become reforms did not do well in the past. But somethe enabler of smoothly functioning markets important measures can be implementedthrough institutional and regulatory reforms that immediately. Foremost is providing security offacilitate private sector activities and market tenure to may farmers, especially tenants-at-will,efficiency. Where market failure is not an issue and thereby improving responsiveness to incentives andwhere intervention in the past led to marked creating better incentives for long-terminefficiency, the strategy to be adopted now is to investments. Property rights can be reinforced bybalance the governments role through policy improving and streamlining land registration byreforms and allowing limited market liberalisation. establishing a system of permanent title deeds andThis means that recognising the role of the private computerisation of land records. These recordssector is the first step toward rationalising public should be properly maintained, updated and easiersectors role in agriculture. This also means that to access. An independent body should be set upgovernment must reshape its investments and for settling land disputes and eliminating artificialpublic expenditure on agriculture. government incentives to large holders, such as low machinery prices and unequal access to credit.The Government has a role in the development ofinfrastructure, especially rural infrastructure for The following key points should be considered foragricultural growth. In this area, PTI’s agricultural further research and thought by senior PTIpolicy makers should focus on developing major leadership:programme of lining of watercourses to improvewater delivery, in addition to programmes for - Planning for land reforms should bebetter water management (through users sought out. Liaison with Venezuela’s Hugoassociation) and farm-to-village road construction, Chavez to understand how they carriedwhich would improve the distribution of inputs and out their land reforms.the marketability of outputs, especially high-value - Undertaking massive infrastructureagricultural products. programmes across the country similar to the one’s carried out by Britain, France,The key measure of success in agriculture is going Germany and Japan after the second worldto be influenced by efforts to reduce rural poverty. way, building roads, railways, subways,In a labour-abundant economy such as Pakistan, power plants, schools, hospitals etc.subsidies on capital (heavy machinery such as Financial and human resources would becombine harvesters) are inappropriate because sought from highly skilled but marginalisedthey distort factor markets and lead to labour overseas Pakistani and domestic populace.displacement. It is, therefore, important that PTI The country already has established publicpursues a policy of removing subsidies to sector and private companies but they aremechanisation that displace labour without mired in corruption and tax evasionincreasing output significantly, as the present practices.government has a role to undertake directeddevelopment spending toward the small farmers - Overhauling the current tax system. Theand rural poor. recent budget highlighted plans to raise in taxes about Rs1.5tr this year. PopulationOne of the key planks of PTI’s agricultural policy of Pakistan is about 170 million, whichInsaf Research Wing 54
  • 55. Committee on Economics Economic Research: Pakistan 90 comes to roughly Rs9, 000 each per year. million graduates for Rs15, 000 per month, Government of Pakistan also uses other and ensure that every single child in our sources to raise money, borrowing and country receives a decent education. By selling off state assets, and asking for aid raising taxes to the level of Sri Lanka, 15 % from anyone willing to give. But still, what of GDP, would generate additional we can raise ourselves in taxes accounts revenue equal to twice our official defence for most of what our government can budget. Match India at 17 %of GDP and spend. And the plan to instigate mass the additional money would equal a infrastructure and education programmes staggering 25 times Pakistan’s current can be fully costed for once reforming and education, health and housing budgets collection of taxes becomes a norm. Many combined. Hence the massive of Pakistan’s rich have tens of millions of infrastructure, educational, health, welfare dollars in assets. And the middle class programmes that are in PTI manifesto can numbers tens of millions of people. The be implemented with an accountable tax resources of the country are enormous. regime. There’s no doubt that much of The incompetent and morally bankrupt officialdom is corrupt. But so are we, the Zardari regimes have just made a citizens. Every time we accept a fake collective decision not to use them for the receipt, or fail to declare a bit of income, benefit of everyone but themselves. we are stealing from our country in Pakistani’s currently pay only about 10% of precisely the same way our politicians and GDP in taxes. (GDP is our total economy, bureaucrats are. Our thefts as taxpayers what all of us together earn in a year.) might be comparatively small, but that is Meanwhile, Sri Lankans pay 15% of their because taxes are so low in our country to GDP in taxes, Indians pay 17% Turks pay 24 begin with. At the moment, we feed off %, Americans pay 28 % and Swedes pay each other. As we citizens start to display the highest at 50 %.91 Moreover raising more probity in tax, we are likely to taxes does not depend on foreign policy, demand more probity in how our money is getting approval from the IMF, World Bank spent, and our strengthening courts and or Uncle Sam. It does not require a media are likely to help us get it. The tax breakthrough in technology or a year of revolution is not going to happen good rain. It’s under our control. overnight. It will take time. But there is good reason to hope PTI will start the - With a PTI government, if we reformed revolution that will lead the country to the and instigated clean and accountable taxes path of prosperity in line with the Quaid’s starting from the government like and Allama Iqbal’s vision. chairman Khan envisages. For example, when PTI comes in to power and the - Creation of a new body “Agricultural income from taxes is raised from 10 per Development Authority (ADA)” tasked to cent of GDP to 12 per cent. This would give carry out development and dissemination the treasury Rs300bn a year. This could be of new agricultural technology used to rent a million classrooms for Rs10, development, poverty alleviation, small 000 per month, give jobs as teachers to a farmer development, protection of environment, quality control and90 www.dawn.com/wps/wcm/connect/dawn-content- implementing international rules andlibrary/dawn/the-newspaper/editorial/Paying-for- regulations. This body will only focus onPakistan-750 rural development across the four91 provinces delegating substantial control to www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/the-newspaper/editorial/Paying-for- locally created bodies on the ground.Pakistan-750Insaf Research Wing 55
  • 56. Committee on Economics Economic Research: Pakistan - In 2007 President Chavez announced that Venezuela would be formally pulling out of the IMF and the World Bank, having paid off its debts of around $3 Billion five years ahead of schedule and so saving US $8 million. Chavez then announced the creation of a regional bank, the Bank of the South, and acted against the Washington consensus by supporting alternative models of economic development, and has advocated cooperation among the worlds poor nations. The party’s economic spokesperson should establish contact with the Chavez administration in gaining a thorough understanding of their programmes and then modifying them according to Pakistan’s needs.--------------------------------------------------------------------The author is a banker. He is a post graduate ofBrunel University (London, UK) in MScManagement.[E-mail: asad_muk@yahoo.co.uk]Insaf Research Wing 56
  • 57. Committee on Economics Economic Research: PakistanBibliography World Bank (1998). Assessing Aid: What Works, What Doesn’t, and Why. New York, Oxford University Press. Abbas. S.A. & Brecher, I. (1993). Foreign Aid & Industrial Development in Pakistan. Vanguard. Truett, Lila and Truett, Dale. Economics;. s.l. : Times Karachi. Mirror/Mosby College, 1987. Lipsay, Richard and Chrystal, Alex. Economics - 10th Alesiana A. and Dollar, D. (1998). Who gives edition. s.l. : Manzar Khan, Oxford University Press, foreign aid to whom and why?. National Bureau of Economic Research. Cambridge. 2004. The Foundations of Rapid Economic Growth: The Bandow, D. (1985). The U.S. Role in Promoting Case of the Four Tigers. Gulati, Umesh C. 2, s.l. : Third World Development. p. 6 The Heritage Foundation, Washington. American Journal of Economics and Sociology, Inc., 1992, Vol. 51. Chenery, H, B., and Strout, A.M. (1966). Foreign Assistance and Economic Development. THE NORDIC MODEL -Embracing globalization and American Economic Review, 56. pp.149-179. sharing risks. Torben M. Andersen, Bengt Holmström, Seppo Honkapohja,. Yliopistopaino, Griffin, K. (1991 October). Foreign Aid After the Helsinki : Taloustieto Oy, 2007. Cold War. Development and Change Center. Ersson, Jan Erik Lane and Svante. Comparative Gang, Ira N. and Haider Ali Khan, (1989). political Economy-. s.l. : Pinter Pub Ltd. Modelling Foreign Aid and Development Expenditures. Atlanta. Central Intelligence Agency. The World Factbook. s.l. : Directorate of Intelligence, 2009. Hassan, U, M. (2000, ). Role of Foreign Aid: A Critical Analysis. The Nation. Economic Liberalization, Political Instability and State Capacity in Venezeuela. John, Jonathan Di. Kardar, S. (1995). Political Economy of s.l. : Sage Publications, Ltd., 2005, Vol. 26. Pakistan. Ferozensons. Lahore The Chávez Phenomenon: Political Change in Kamath, S. S. (1995). The Failure of Foreign Aid. Venezuela. Danopoulos, Ronald D. Sylvia and The Hong Kong Center for Economic Constantine P. s.l. : Taylor & Francis, Ltd., 2003, Vol. 24. Research School of Economics and Finance The University of Hong Kong. The Chávez Administration at 10 Years: The Economy and Social Indicators. Mark Weisbrot, Nasir, S. M. & Hyder. K. S. Economics of Rebecca Ray and Luis Sandoval. Washington, D.C. : Pakistan. p-143-144) Centre For Economic Policy Research, 2009. Qureshi, A. I. (1997). The economy of Pakistan. The Economist. Venezuelas devaluation. The Ferozesons. Lahore Economist . [Online] The Economist News Paper Ltd., 4 January 2010. Daniel, Frank Jack. FACTBOX: VenezuelasRose, L. & Husain, A.N(1997). Relations with Major nationalizations under Hugo Chavez. s.l. : Reuters,Powers. Vanguard. Karachi. 2009.Developing Economies. Journal of Pakistan Enterprise Surveys. Featured snapshot report -Economic and Social Review. Vol. 11. pp. 378-82. Venezuela, R.B. Enterprise Surveys. [Online] 2006.Insaf Research Wing 57
  • 58. Committee on Economics Economic Research: PakistanWorld Bank. Business Environment Snapshots - The Gulf Cooperation Council: Search for Security.Venezeuela. s.l. : World Bank, 2003-2009. Kechichian, Joseph A. 4, s.l. : Taylor & Francis, Ltd., 1985, Vol. 7.Patricia Owens, John Baylis, Steve Smith.Globalisation and World Politics. s.l. : OUP Oxford; 3 Whither the World Bank and the IMF? Krueger,edition (9 Dec 2004). ISBN-10: 0199271186. Anne O. 4, s.l. : American Economic Association, 1998, Vol. 36.World Trade Organization. WTO Annual Report2009. s.l. : World Trade Organization, 2009. IMF. IMF statistical data. s.l. : IMF, 2009.The WTO and the poorest countries: the stark Online Resourcesreality. Mattoo, Aaditya and Subramanian, Arvind.WP/04/81, s.l. : International Monetary Fund- www.foreignaffairs.com/articles/53579/steven-Research Dept, 2004. radelet-and-jeffrey-sachs/asias-reemergenceChris Brown, Kirsten Ainley. Understanding www.wilsoncenter.org/index.cfm?fuseaction=eventInternatinal Relations. s.l. : Palgrave Macmillan; 4th s.event_summary&event_id=365872Edition edition, 2009. www.wilsoncenter.org/topics/pubs/Asia_TenYearsThe IMFs Role in Structural Adjustment. Collier, After_rpt.pdfPaul and Gunning, Jan Willem. 459, s.l. : BlackwellPublishing for the Royal Economic Society, 1999, www.brookings.edu/~/media/Files/rc/papers/2005Vol. 109. /06development_ang/200506_bdpie168.pdfThe IMF Strikes Back. Rogoff, Kenneth. 134, s.l. : www.brookings.edu/opinions/2008/0310_malaysiaWashingtonpost.Newsweek Interactive, LLC, 2003. _woo.aspxThe Paris Club. Juan Carlos, Matthew Martin. 3,London : Debt Relief International Ltd, 2001. ISBN www.imf.org/external/country/MYS/index.htm1-903971-05-05. www.pakistaneconomist.com/issue2001/issue34/iAsian Development Bank. Haas, Michael. 2, 1974, &e1.htm)Vol. 28. www.enterprisesurveys.org/ExploreEconomies/?ecAsian Development Bank. www.adb.org/About/. onomyid=201&year=2006www.adb.org. [Online] 2010. [Cited: 15 01 2010.]http://www.adb.org/About/. www.economist.com/countries/Pakistan/profile.cf m?folder=Profile-Economic%20DataBigg, David, Fisher, Stanely and Dornbusch, Rudiger.Economics. s.l. : Mcgraw Hill Companies, 2007. ISBN www.worldbank.org0-07-7096150. www.wikipedia.org – Pakistan, Islamic BankingWenger, Andreas and Zimmermann, Doran.International Relations - From the cold war to the www.dawn.com/wps/wcm/connect/dawn-content-Globalized World. s.l. : Lynne Rienner library/dawn/the-newspaper/editorial/Paying-for-Publishers,Inc, 2006. Pakistan-750Debate: Happily Ever NAFTA? John Cavanagh, SarahAnderson, Jaime Serra and J. Enrique Espinosa, etal. 132, s.l. : Washingtonpost.NewsweekInteractive, LLC, 2002.Insaf Research Wing 58
  • 59. Committee on Economics Economic Research: PakistanAppendix Humayun Aziz Livestock and Dairy 16 Kurd Development Mr. Justice ( Retd)List of 38 official ministries of Pakistan. Local Government and 17 Abdul Razzaq A. Rural Development Thahim Makhdoom Amin 1 Commerce Fahim 18 Shahbaz Bhatti Minorities Dr. Arbab Alamgir Dr. Zaheeruddin Communications 19 Parliamentary Affairs 2 kham Babar Awan Ch. Ahmed Makhdoom 3 Defence 20 Planning and Development Mukhtar Shahabuddin Abdul Qayyum Dr. Firdous Ashiq 4 Defence Production 21 Population Welfare Khan Jatoi Awan Mir Hazar Khan Mir Israrullah 5 Education 22 Postal Services Bijarani Zehri Hameed ullah Jan Syed Naveed 6 Environment 23 Privatization Afridi Qamar Makhdoom Shah Haji Ghulam 7 Mehmood Foreign Affairs 24 Railways Ahmed Bilour Qureshi Syed Hamid Saeed Mir Aijaz Hussain 25 Religious Affairs 8 Health Kazmi Jakhrani Ms. Samina Khalid Social Welfare and Special Rehamatullah 26 9 Housing and works Ghurki Education Kakar Pir Aftab Shah Nazar muhammad 27 Sports 10 food and Agriculture Jilani Gondal 28 Najamuddin Khan State and Frontier Regions Syed Mumtaz 11 Human Rights Alam Gilani Lal Muhammad 29 Special Initiatives Khan Mian Manzoor 12 Industries & Production Ahmed Wattoo Rana Muhammad 30 Farooq Saeed Textile and Industry Waqar Ahmed Khan 13 Investment Khan Raja Pervaiz Information & 31 Water & Power Mr. Qamar Zaman Ashraf 14 Broadcasting / Kashmir Kaira Affairs and Northern Areas Shahid Hussain 31 Youth Affairs Bhutoo 15 Rehman A. Malik InteriorInsaf Research Wing 59
  • 60. Committee on Economics Economic Research: Pakistan 32 Noor ul haq Qadri Zakat & ushr 14. Crescent Commercial Bank, Karachi. Saudi based Samba financial group Acquired 33 Dr. Farooq Sattar Overseas Pakistanis Crescent Commercial Bank and now it is renamed as Samba Bank Ltd 34 Babar Ghuri Ports & Shipping 15. Faysal Bank, Karachi www.faysalbank.com 16. Habib Bank, Karachi 35 Azam Khan Swati Science & Technology 17. Habib Metropolitan Bank, Karachi 18. JS Bank Mulana Att ur 19. KASB Bank, Karachi 36 Tourism 20. MCB Bank Limited (formerly Muslim rehman Commercial Bank), Islamabad Syed Khursheed 21. Mybank Limited, Karachi 37 Labour & Manpower 22. NIB Bank, Karachi Ahmed Shah 23. PICIC Commercial Bank, Karachi NIB Bank Limited has acquired PICIC Group including Nawabzada Picic Commercial Bank Ltd. Khawaja 24. Saudi Pak Non-Commercial Bank, Karachi 38 Narcotics Control Muhammad Khan 25. Soneri Bank, Karachi Hoti 26. Union Bank, Karachi - Standard Chartered Bank has acquired Union Bank 27. United Bank, Karachi 28. Bank Of Punjab, LahoreLIST OF SCHEDULED LOCAL BANKS OPERATING IN 29. Citi bank,IslamabadPAKISTAN 30. Standard chartered Bank Ltd,Karachi 31. ABN Amro Bank Ltd,Karachi Now merged in RBS (Royal Bank of Scottland) CENTRAL BANK 32. HSBC Ltd,lahore  State Bank of Pakistan Development financial institutions Nationalized scheduled banks 33. Pak China Investment Company Limited, Islamabad 1. First Women Bank Limited 34. Pakistan Industrial Credit and Investment 2. National Bank of Pakistan Corp Limited, Karachi NIB Bank Limited Acquired PICIC Group, Including Picic Specialized banks Commercial Bank Limited 35. Pak Kuwait Investment Company Limited, Karachi 3. Industrial Development Bank 36. Pak Libya Holding Company Limited, 4. Punjab Provincial Cooperative Bank Karachi 5. SME Bank 37. Pak-Oman Investment Company Limited, 6. Zarai Taraqiati Bank Karachi 38. Saudi Pak Industrial and Agricultural Private scheduled banks Investment Company (Pvt) Limited, Islamabad 39. House Building Finance Corporation, 7. Allied Bank of Pakistan, Karachi Karachi 8. Arif Habib Bank Limited, Karachi - 40. Investment Corporation of Pakistan, (Formerly Arif Habib Rupali Bank) Karachi 9. Askari Bank, Rawalpindi 10. Atlas Bank, Karachi 11. Bank AL Habib, Karachi Investment banks 12. Bank Alfalah, Karachi 13. Barclays Bank,Karachi 41. Al-Towfeek Investment Bank Limited 42. Invest Capital Investment Bank LimitedInsaf Research Wing 60
  • 61. Committee on Economics Economic Research: Pakistan 43. Atlas Investment Bank Limited 77. "Meezan Bank" Premier Islamic Bank In 44. Crescent Investment Bank Limited pakistan 45. Escorts Investment Bank Limited 78. AlBaraka Islamic Bank 46. First Credit and Investment Bank 79. BankIslami Pakistan Limited Limited[1] 80. Emirates Global Islamic Bank 47. First International Investment Bank Limited 48. Fidelity Investment Bank Limited 49. Franklin Investment Bank Limited 50. Islamic Investment Bank Limited 51. Jahangir Siddiqui Investment Bank Limited 52. AMZ Securities 53. Orix Investment Bank (Pakistan) Limited 54. Prudential Investment Bank Limited 55. Trust Investment Bank Limited Discount and guarantee houses 56. First Credit & Discount Corp Limited 57. Prudential Discount & Guarantee House Limited 58. National Discounting Services Limited 59. Speedway Fordmetall (Pakistan) Limited (Source: www.prb.org) Housing finance companies 60. Asian Housing Finance Limited 61. Citibank Housing Finance Company Limited 62. House Building Finance Corporation 63. International Housing Finance Limited Venture capital companies 64. Pakistan Venture Capital Limited 65. Pakistan Emerging Ventures Limited 66. AMZ Ventures Micro finance banks 67. The First Micro Finance Bank Limited 68. Khushali Bank 69. Karakuram Bank 70. Network Micro Finance Bank 71. Pak Oman Micro Finance Bank 72. Rozgar Micro Finance Bank, Karachi 73. Tameer Microfinance Bank Limited 74. Kashf Foundation Limited Islamic banks 75. Dawood Islamic Bank Limited 76. Dubai Islamic Bank pakistan limitedInsaf Research Wing 61