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Political Economy of Pakistan: Past,Present and Future


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Part 6 of the series on the politica economy of Pakistan which examines the global and domestic environment at the time of General Zia's take over,the economic policies pursued by his team during the 1977-88 decade and how these policies affected the process of economic development of Pakistan

Published in: Economy & Finance
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Political Economy of Pakistan: Past,Present and Future

  1. 1. Shahid Hussain Raja Independent Consultant –Public Policy www.shahidhussainraja.cim
  2. 2.  Introduction  Global/National Environment  Economic Policies  Assessment  Conclusion
  3. 3.  Following the Martial Law tradition, General Zia took over the reins of the country by removing the same person, Zulfiqar Ali Bhutto who had hand picked him, out of turn, to serve as the chief of the armed forces of the country.  Thanks to benign internal and external environment, shrewd domestic and foreign policies and sheer luck helped him survive fore than a decade until God himself decided to take him back.  Actions taken along with the decision not made during his regime have changed the socioeconomic structure of the country  This presentation looks at his the economic policies of his government and assesses their impact on the political economy of the country taken
  4. 4.  Like General Ayub in 1950s, General Zia came into power at a time which was most suitable for army takeover  Some of the benign domestic and international factors which helped him to grab the power and survive for a decade are discussed in the next five slides
  5. 5.  Americans had been active in the soft belly of USSR namely Afghanistan to provoke its occupation of Afghanistan. For this they had been training Mujahedeen inside Pakistan with active connivance of Pakistan’s intelligence agency.  Bhutto’s reluctance to go too far in this policy irked the USA and Henry Kissinger had to issue a warning to Bhutto in this respect.  His removal and final execution should be seen in this context.  Soon after his execution Soviet Union fell into the trap laid for the bear and invaded Afghanistan.Pakistan became a front line state for the furtherance of American interests in the region in particular and at the global level in general.  With it came the usual perks-military aid, foreign assistance, advisory services and support for military ruthlessness
  6. 6.  Iranian revolution of 1979 and with it the exit of USA from Iran was a bolt from the blue for the Americans who now were looking for someone to protect their interests in this part of the world  It was another godsend opportunity for Pakistan’s military ruler to provide his services as a trusted ally of USA in place of exiled Shah of Iran.
  7. 7.  Although Middle East oil bonanza occurred a few years before Zia took over, it did help him in two ways. With greater oil revenues, Middle Eastern countries started a two decades long construction boom which absorbed hundreds and thousands of Pakistani labour, easing the domestic unemployment situation.  It also pumped in billions of remittances in the rural areas of the country sowing the seeds of the same time he was able to market his Islamic credentials to the Arab sheikhs.  Being a devout Muslim, he became much endeared to the ruling elites of the Middle East who bank rolled his programmes and provided him the necessary religious legitimacy among the public.
  8. 8. More than three decades of economic development had created a strong commercial middle class which was more interested in law and order and economic progress than the humdrum of democracy. They acquiesced to the curtailment of their civil liberties and fundamental human rights in return for political stability and economic opportunities. At the same time the mega projects Bhutto had started, came on ground increasing the rate of growth as well as relieving the country of importing fertilisers and other essential commodities. Similarly, labour exported during Bhutto period sent in billions of dollars in foreign remittances which eased the balance of payments position of the country.
  9. 9.  For General Zia, Islamisation of the economy, polity and society of the country was more important than the welfare of the people or socioeconomic development of the country.  Although he gave economic growth least priority, yet some of the measures taken during his regime are worth noting.
  10. 10. One of his landmark contributions towards Pakistan’s economy, Islamisaion of the economy was nothing more than changing the nomenclatures of all the economic practices and policies already in vogue without introducing any substantial changes in actual business dealings All lending and deposit rates were set on profit and loss sharing but the bank charged the same mark-up and advanced the loans on the same conditions as in normal banking system. In June 1980, the Zakat and Usher Ordinance was promulgated whereby 2.5% was deducted from the bank accounts of Sunni Muslims on every first day of holy month of Ramadan. Farmers were liable to pay 5 per cent of their produce as Usher in place of land tax The amount thus collected was distributed among the needy through the zakat committees headed /staffed by his loyalists in every village /town.
  11. 11. On the pressure of emergent commercial middle classes and less as a policy prescription, he started reversing the nationalisation process initiated by Bhutto and three steel mill industries were returned to its previous owners in the first phase. Reverting to pre-Bhutto policy of greater reliance on private enterprise to achieve economic goals, a demarcation of exclusive public ownership was made that excluded the private sector from only a few activities. There was a clear switch over to liberalization of economy with generous fiscal and non-fiscal incentives for the private sector. For adoption of market-based development strategy, government concluded three years extended fund facility (EEE) with IMF in 1980 for several structural reforms aiming at financial deregulation and greater economic liberalization. However, state continued to play a large economic role in the 1980s with public-sector enterprises accounting for a significant portion of large-scale manufacturing. Share of private sector investment grew from 33% in 1980 to 46% in 1989.
  12. 12. The investment climate for the private sector was improved by providing guarantees against future nationalization. The industrial zone was established in the late 1970’s to attract foreign investment, speed up flow of modern technology, provide more job opportunities, raise skill and management standards and provide exporters a base for production in an environment free from import duties By the policy of keeping domestic wheat, rice and cotton prices low, the government was able to benefit the urban consumers and the industrialists at the cost of the agricultural producer.
  13. 13. Although the corporate sector of Pakistan had been expanding in the country since long yet the corporatisation process was formally initiated with the promulgation of the Companies Ordinance in 1984 that legally allowed a variety of formations in the mixed economy of Pakistan. The effect of corporatization has been to convert state departments into public companies and interpose commercial boards of directors between the shareholding ministers and the management of the enterprises. This process was not only continued but was given great boost by his successors particularly Nawaz Sharif who gave free hand to private sector to expand the economic activities in the country. In 2004, in a programme initiated by Prime Minister Shauket Aziz, the corporate sector fairly matured and became a strong and sizeable sector in the financial hubs of the country.
  14. 14. Like Ayub’s period, in Zia’s regime agricultural programme did not favour farmers. However one thing for which he must be given full credit is the uplift of the rural areas, an off spin of his scheme to revive the local government institutions to create a constituency. These local body members and the handpicked members of rump assemblies were given huge amounts to spend in their respective constituencies. Resultantly a fair amount was spent on rural regeneration and construction of rural infrastructure. Later on, initiation of five point programme of his Prime Minister Junejo gave a further boost to this rural uplift. The increased demand for services in rural areas following rising incomes generated pressures for rapid rural electrification and rural roads, rural electrification spending was 52% higher than original allocations while spending on rural roads exceeded targets by 29%.
  15. 15. Generous incentives for manufactured exports in the form of rebates, pushed Pakistan’s manufactured exports fourfold from US $ 1.3 bill 1980 to US $5.6 bill in 1983 by growing at the rate of 7-8% per annum. This exports push which contributed in reducing the relative dependence on worker remittances was strengthened by three measures taken by the government;  The export subsidies ranging from 7.5% to 12.5% were extended to all  Expansion of raw cotton production which in turn made possible a major expansion of cotton textiles.  Introduction of a flexible exchange rate policy was also very instrumental in this exports expansion. In fact the nominal exchange rate was devalued almost twice as fast as warranted by the relative change in prices between Pakistan and major trading partners.
  16. 16.  The country experienced one of the highest growth rates in his 11 years of power, averaging more than 6.5% per annum. This phenomenal rate of growth can be explained in three words-aid, remittances and informal economy.  Generous assistance by USA during this period helped his regime to survive the internal pressures and external shocks  Remittances from the overseas workers totalling around $3.2 billion/year for most of the 1980s, accounted for 10 per cent of Pakistan’s GDP, 45 per cent of its current account receipts, and 40 per cent of her total foreign exchange earnings.  Afghan war brought money into the country which sustained his rule but it also resulted in exponential growth of informal economy which crossed the 50 per cent mark during his tenure.Leaving aside the harmful effects of this dubious source of growth, it adversely affected the accuracy of the statistics gathered by the state agencies regarding total effective demand. Consequently planning process suffered and still it is not possible to accurately calculate the mega data.
  17. 17.  There was impressive industrial growth under Zia with manufacturing sector growing at the rate of nearly 9% per annum during his 11 years of rule as compared to 3.7% in 1972-77.  This was in large part due to the massive public sector investments made by Bhutto in steel, cement, fertilizer and vehicle production.  However, high economic growth during the Zia period did not receive special policy support for employment creation as it was not accompanied by a rapid rise in investment.
  18. 18.  Substantial economic growth and relatively low inflation during the Zia period did translate into broad based income growth for most income group. Average per capita GNP grew at an annual average of 3.3% per annum or by 4.3% during 1977-88 though the growth was much higher in the earlier period.  Real wages which had increased during the Bhutto period, showed further increase during Zia’s rule. The annual earnings of two main wage groups of factory workers indicate an increase in nominal wage of around 150% over 1977-88.  The wages of unskilled labourers tended to rise faster than those of skilled. High growth rate of the economy, good agricultural growth, and labour immigration influenced real wage rate and incidence of poverty.
  19. 19. Total public spending on education did increase to 2.7% of GNP by 1987-8 from 2% of GNP in 1976-7. Progress in increasing access of the population to basic health services was slow. Only modest gains were made in reducing infant mortality and increasing life expectancy. Primary school enrolment during 1977-88 expanded at an annual rate of only 4% only moderately faster than the growth rate of the population. Nearly 75% of the real increase in public sector development programme between the Fifth and the Sixth plan period was pre-empted by increase allocations for energy.
  20. 20. While there were significant improvement during the Zia period in the industrial policy framework in terms of emphasis on the role of the private sector, greater import liberalization of industrial raw materials, and relatively strengthening of incentives for manufactured exports, not much was done to signal fundamental change in industrial policies which had hampered the structural change in manufacturing during the 1960’s and 1970’s. By the early 1980s, Easy Asian countries like China, Thailand, Malaysia, the Philippines and Indonesia were successfully following the lead of Korea, Taiwan, Hong Kong and Singapore to develop manufactured goods export aggressively. Inefficiency, industrial unrest, politicization and bureaucratization of industry resulted in adverse impact on productivity, investment climate and business confidence etc. By the policy of keeping domestic wheat, rice and cotton prices low, the government was able to benefit the urban consumers and the industrialists at the cost of the agricultural producer.Agriculture production reached peak in mid-1980’s thereafter starts falling mainly due to weak economic incentives, mechanization against smaller farmers, insufficient agriculture credit, low yielding seeds, salinity problems and weak input- output pricing signals.
  21. 21. The government expenditures grew phenomenally from 10-11% to 27% of GDP with defence expenditures increasing from 5.5 to 7% of GDP over the period for obvious reasons. Interest payments became the fastest growing element in government expenditures during 1977-88, rising from 1.9% of GDP in 1976-7 to 4.9% of GDP in 1987-8, reflecting both the enormous growth in internal debt and the high interest rates at which the borrowing was done. Domestic debt increased from 20.8% of GDP in mid-1981 to 42.2% of GDP in mid-1988. There was a much higher reliance on government borrowing from non-bank sources at relatively high interest rates of 14-15% per year. A greater reliance on these sources of financing meant that credit creation in the public sector and the overall rate of monetary expansion slowed down sharply in Zia period. However substantial additional taxation undertaken in 1979-80 and 1986-7 yielded some improvement in tax to GNP ratio which increased from nearly 12% in 1978-9 to 16% in 1987-8 although direct taxes continued to account for fraction of total revenue and, the dependence on foreign trade taxes became greater. On the other hand the generous use of tax holidays further weakened the elasticity of the tax system.
  22. 22. While Pakistan did witness high growth rate of 6.5% during Zia period , it was inadequate in relation to both current needs and future requirements. That’s why serious shortages of infrastructure, especially in the energy, transport, and urban development sectors are his legacies. Similarly, no prudent policy was initiated by the government to channelize workers’ remittances, most of the amount remitted by the expatriates was spent by their relatives in buying land, construction of houses, purchase of durables etc. The results from Export Processing Zone were disappointing as exports from the zone were relatively small These high growth rates were accompanied with large fiscal and trade deficits. In 1980’s, the former crossed 7% of GNP while the trade deficit never came down from 9% of GNP. Consequently it necessitated increase in money supply which hovered around 19%, fueling inflation which almost touched double digits.