Economic System

Economic System of PakistanBy

Syed Hassan Raza

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Economic System

Economic SystemAn economic system is a mechanism which deals with the production, distribution and

consumption of goods and services in a particular society. The economic system is

composed of people, institutions and their relationships. It addresses the problems of

economics like the allocation and scarcity of the resources.

There are several basic and unfinished questions that must be answered in order to

resolve the problems of economics satisfactorily. The scarcity problem, for example,

requires answers to basic questions, such as: what to produce, how to produce it, and who

gets what is produced. An economic system is a way of answering these basic questions,

and different economic systems answer them differently.

But generally there we consider three basic types of economic system that are used all

over the world.

• Planed economy

• Market economy

• Mixed Economy

Planed Economy

A planned economy is also sometimes called a command economy. The most important

aspect of this type of economy is that all major decisions related to the production,

distribution, commodity and service prices, are all made by the government.

The planned economy is government directed, and market forces have very little say in

such an economy. This type of economy lacks the kind of flexibility that is present a

market economy, and because of this, the planned economy reacts slower to changes in

consumer needs and fluctuating patterns of supply and demand.

Planed economy became famous with Soviet Union choosing it for its attributes like

equal distribution of wealth and protection of interests of labor force. In these types of

economies government controls all major sector of economy and made decisions about

use of resources and distribution of wealth. Government decides what to produce and

direct all lower level enterprises to produce goods in accordance with national and social

objectives.

A planned economy may consist of state-owned enterprises, private enterprises directed

by the state, or a combination of both. A huge drawback of this system is that all the

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profits go to the government so this lead to decrease in investment. This type of system

might stifle innovation and invention. It may not be quickly responsive to public desired

for products and services and may even limit the freedom of the people. It is so realized

that economic development cannot be achieved at the desired rate of growth without any

active government help and guidance.

Market Economy

In a market economy, national and state governments play a minor role. Instead,

consumers and their buying decisions drive the economy. In this type of economic

system, the assumptions of the market play a major role in deciding the right path for a

country’s economic development.

Market economies aim to reduce or eliminate entirely subsidies for a particular industry,

the pre-determination of prices for different commodities, and the amount of regulation

controlling different industrial sectors. The absence of central planning is one of the

major features of this economic system. Market decisions are mainly dominated by

supply and demand. The role of the government in a market economy is to simply make

sure that the market is stable enough to carry out its economic activities properly.

In this type of economy prices of factors of production and everything are decided by

market forces of demand and supply. In this system companies work to maximum their

profit and thus produce goods which are demanded by public. A big drawback of this

system is that companies try to maximize their profit and in this effort they ignore rights

of labor force and pay those minimum wages possible, this lead to unequal distribution of

wealth. This system doesn’t guarantee of full employment and sometimes leads to water

and air pollution and problems like inflation too.

Mixed Economy

Both Planed economy and Market economy had some major flaws which can be

disastrous for the economy, so a new economic system which includes features from both

planed economy and market economy is used by most of the nations in the world. This

system is called Mixed Economy system.

In this system private companies are allowed most power over decisions regarding profits

and distribution of wealth while government collects taxes from them to work for the

benefit for the poor to help create equal distribution of wealth, government also regulates

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Economic System

companies with rules and regulations so they wont do anything that harm society and to

protect the interests of labor force. In some countries under this system some important

economic areas are like power and communication are closely monitored by government.

Economic System of PakistanPakistan had to face many economic challenges since its creation and with changes in

ruling parties and civilian and military governments economic polices had been changed

many times. Although Pakistan’s economic system had never been to any extreme end of

planed economy or market economy but at some points one system had influenced the

country more.

When Pakistan was created its economy was based on agriculture, so Pakistan’s first

economy system was agricultural economy system, in that system people were free to

make decisions regarding there wealth but government interference was heavy. This

system remained till 1960, that’s when Ayub Khan stated emphasizing on

industrialization and more of a capitalist market system. In this era country made rapid

development but at the end of 1965 due to war the development could not be sustained.

Under this system country’s industries made huge progress but this also led to a big

dilemma, most of the wealth of the country was divided between just 22 families, that

problem created a major gap between poor and rich people and poor become poorer and

rich become richer.

After war of 1971 when power was transferred to Zulfiqar Ali Bhutto’s Peoples Party

from Military Leadership, Pakistan’s economic system changed it direction into totally

different way. One target of Bhutto’s wrath was the families who gain benefits in Ayub

regime. Bhutto led to Pakistan toward more of a command based economy system, and

he used nationalization policy for this. Within 13 days of his taking president office he

nationalized 31 banks and large-scale enterprises. In engaging in this nationalization

program, Bhutto discouraged domestic investment and increased the government's role in

the economy. Each private unit nationalized became a public enterprise. By 1977 the

government controlled all domestic banking (90 percent of the finance sector), 90 percent

of the energy sector (electricity, gas, and oil), 11 percent of the industrial and

manufacturing sector, 50 percent of the transportation and communications sector (with

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Economic System

monopolies in air, rail, and shipping as well as telecommunications), and 70 percent of

the mining sector.

By 1980’s individual countries and the international assistance community (the World

Bank and the International Monetary Fund, in particular) started building pressure on

countries using planed economic system. In start Pakistan resisted the pressure because it

was frontline state in ongoing war in Afghanistan and European nations and America

didn’t wanted to pressure Pakistan. During that era Pakistan’s economic was based on

foreign aid mainly from America, but in 1991 U.S stopped aid for Pakistan saying

Pakistan is developing nuclear weapon. After that civilian governments of Pakistan chose

mixed economic system with government controlling almost all of the banks and fields

like railways, power and energy sector and communication. There were very strict laws

about entering any of these fields.

In 1999 Pervaiz Musharraf assumed command of the country, that time economy of the

country was very unstable. His government lifted bans from fields of transportation,

communications, banking and power and energy, and invited foreign investors to invest

in Pakistan in these fields. He used privatization policy with that he sold all but one

commercial banks owned by the government. In his regime country made huge economic

progress, domestic investments and small scale enterprises were encouraged. Thus

Musharraf government led the country towards a mixed economy system in which people

are free to enter any business according to rules and regulations defined by law.

Government overlooks and guide whole economy to protect interests of the whole nation.

In this system some time government regulates prices by setting price ceiling or price

floor but in most cases prices are determined by market forces of demand and supply.

This system is still used by current government of Pakistan. Some characteristics of

Pakistan’s current economic system fallows:

In the economy both public sector and the private sector function together. In one

part are those industries which are responsible for the development they are

owned and managed by the state. Other industries are left under the authority and

control of the private entrepreneurs. The private sector is free to develop them and

start new enterprises in this sector.

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Economic System

In public sectors all decisions are made by government or authorities appointed by

government but in private sector decisions are made by owners which base in

market situations although some times government set price ceiling or price floor

to protect consumers or producers.

The government adopts necessary measures to regulate and influence the private

sector, so that it may function in the interests of the nation rather than exclusively

in the interests of the private entrepreneurs.

Sometimes government ration the commodities available in short supply so that

they are equally distributed to all.

Government stops exploitation of labor by enforcing labor laws.

Monopolies are closely monitored by government to protect interests of public,

some time it sets price ceiling to keep prices under control.

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