A history of Pakistan's economy
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History, economic (1947-2008)
Choices before the people
By Kaiser Bengali
THE Feb 18 elections are uniquely significant in the sense that they are a referendum on the direction Pakistan, its economy in particular, will take. A review of the history of the country’s economic development process places this ‘crossroads’ situation in perspective.
Pakistan’s modern economic development process commenced with independence in 1947 and there have been two distinct phases, 1947-1977 and 1977-to date. During the first phase, 1947-1977, Pakistan was a ‘development state’; namely, socioeconomic development was a primary objective of state policy. Since 1977, Pakistan has become a ‘security state’; namely, national security is the primary objective of the state.
The state of development in Pakistan in 1947 can be gauged from the fact that the country started out with less than a dozen medium-sized factories. From the outset, therefore, policymakers were seized with the objective of promoting development. Considerable political capital was invested in development planning — the Colombo Plan, the First Five-Year Plan, etc.
By the end of the 1950s, government offices and residential housing had been put up in the capital cities, agricultural and industrial output had risen and many basic consumer products were being manufactured in the country.
The 1960s saw the development effort move into higher gear, with the formation of the Planning Commission under the chairmanship of the president and the launch of the ambitious Second Five-Year Plan. The decade of the 1960s saw a significant expansion of economic infrastructure. The construction of large dams commenced, new canals were dug, and millions of acres of land brought under cultivation. The industrial structure graduated from producing basic consumer goods to the manufacture of intermediate inputs for the agricultural and manufacturing sectors.
The 1970s represented a ‘big push’ towards the development of large-scale infrastructure and capital goods industries as the basis for accelerated future growth. With the state taking over from the private sector in leading the development process, millions of acres of additional land were brought under cultivation, new ports and highways were constructed, and several large industrial complexes were built. The steel mills, Port Qasim, the Indus Highway, Heavy Mechanical Complex, Heavy Electrical Complex, chemical plants, etc., constituted huge additions to the country’s economic infrastructure and output capacity.
Over the three-decade period encompassing the ‘development state’ phase — the period up to 1977 — per capita income rose 10-fold, food production was up three-fold, fibre production was up four-fold, manufacturing output increased 40-fold, electricity output increased 35-fold, telephone connections per 10,000 persons rose 10-fold, the primary enrolment rate rose five-fold, population per doctor declined 200-fold, and population per nurse declined 24-fold. Of course, the high growth rates are a function of the low base; however, the state effort in contributing to the absolute increases in output capacity and output and in taking the economy forward was critical.
The commitment of the state to socioeconomic development up to the end of the 1970s can be discerned from the fact that the rate of growth of budgetary allocations to development expenditure increased at an annual average of 21 per cent during 1972-77. This growth rate was nearly five times the GDP growth rate; indicating that the surpluses generated by the economy were reinvested in rebuilding and expansion of the economic base.
The year 1977 saw Pakistan shift from a development to a security state paradigm. The growth momentum continued into the 1980s, largely on account of the output generated by the large-scale, long-gestation capital projects initiated in the 1970s and which began to contribute to commercial production in the 1980s.
This shift can be discerned from the fact that the rate of growth of budgetary allocations to development expenditure declined from an annual average of 21 per cent during 1972-77 to 2.7 per cent during 1977-88. This growth rate was about half the GDP growth rate during the period. At the same time, the rate of growth of budgetary allocations to defence expenditure increased from less than two per cent during 1972-77 to nine per cent during 1977-88.
Notably, the rate of growth of defence expenditure was over two-thirds higher than the rate of growth of GDP during the decade. It appears that the surpluses generated by the economy were invested in the building and expansion of the military apparatus. The ‘security state’ was clearly in place.
During the 1990s, public investments in economic infrastructure continued to be low, as the servicing of the debts incurred in the 1980s did not provide governments with the necessary fiscal space to allocate resources for development expenditure in order to rehabilitate or build infrastructure. A notable exception, though, was the power-generation programme, which served the country well up to 2005.
Post-1999, fiscal space, public investment and GDP growth rates continued to be low until the financial bailout provided in the aftermath of the events of Sept 2001 in the US. From 2003 onwards, growth rates accelerated. However, the growth has been ‘credit-financed and consumer-driven’. The element of investment in economic infrastructure or manufacturing capacity has remained low.
Growth has been led by the services sectors, particularly financial sectors, rather than by commodity-producing sectors. This is indicated by the fact that, despite high growth rates in the last four years, the tax-GDP and export-GDP ratios have remained stagnant. It appears that the strategy has provided Pakistan with growth, but little in terms of development.
A highlight of economic activity in recent years has been the surge in luxury real estate projects initiated by the military’s commercial entities in collaboration with foreign investors. This is perhaps indicative of the need and the desire of the ‘security state’ to generate autonomous financing sources in order, partly, to free itself from the inbuilt accountability constraints of public funding. The economy of the country at large continues to suffer from neglect. A glaring illustration of this neglect is the fact that the government overlooked the need to provide for expansion of the power-generation capacity for over a decade.
The seriously deteriorating state of economic infrastructure can be inferred from the fact that a railway bridge near Hyderabad collapsed, suspending rail traffic between Karachi and the rest of the country for almost a month. More recently, two berths at Karachi port caved in into the sea. And even more recently, a newly built bridge in Karachi collapsed weeks after its inauguration.The former two incidents point towards the number of years the bridge and the berths must have been rusting to actually collapse and are indicative of the extent to which economic infrastructure has degenerated. The latter event denotes the extent to which the institutional infrastructure has decayed.
The state of affairs prevailing today cannot be said to be surprising. It is now three decades since the ‘development state’ ceased to exist. The people of Pakistan have a choice to make: sink into the status of a satellite economy of regional economic powers or stand shoulder to shoulder with the economic powers of the region. If the choice is the former, Pakistan can continue with the present situation. If the choice is the latter, it would be imperative to dismantle the ‘security state’ and to restore the ‘development state’.
There is a need to create a policy combination of the 1960s and the 1970s to rebuild the economic base and to resume the journey on the path of development. There will be politically difficult decisions; without which, however, the country cannot expect to rise from the low-level equilibrium it appears to have been caught in.