Pakistan Policy Developments Since Independence

8/13/2019 Pakistan Policy Developments Since Independence

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Pakistan Policy Developments since Independencehttp://www.photius.com/countries/pakistan/economy/pakistan_economy_policy_developments_~10397.html

Sources: The Library of Congress Country Studies; CIA World Factbook


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government investments in the Indus irrigation system, agriculture wasleft largely alone, and output stagnated in the 1950s. The broad outlineof government policy in the 1950s and early 1960s involved squeezingthe peasants and workers to finance industrial development.

Much of the economy, and particularly industry, was eventuallydominated by a small group of people, themuhajirs(see Glossary), whowere largely traders who migrated to Pakistan's cities, especiallyKarachi, at partition. These refugees brought modest capital, which theyinitially used to start trading firms. Many of these firms moved intoindustry in the 1950s as a response to government policies. Largelyusing their own resources, they accounted for the major part ofinvestment and ownership in manufacturing during the first two decadesafter independence.

By the late 1960s, there was growing popular dissatisfaction witheconomic conditions and considerable debate about the inequitabledistribution of income, wealth, and economic power-- problems that hadalways plagued the country. Studies by economists in the 1960sindicated that the forty big industrial groups owned around 42 percent ofthe nation's industrial assets and more than 50 percent of privatedomestic assets. Eight of the nine major commercial banks were alsocontrolled by these same industrial groups. Concern over theconcentration of wealth was dramatically articulated in a 1968 speechby Mahbubul Haq, then chief economist of the Planning Commission.Haq claimed that Pakistan's economic growth had done little to improvethe standard of living of the common person and that the "trickle- downapproach to development" had only concentrated wealth in the hands of"twenty-two industrial families." He argued that the government neededto intervene in the economy to correct the natural tendency of freemarkets to concentrate wealth in the hands of those who alreadypossessed substantial assets.

Although Haq exaggerated the extent of the concentration of wealth, hisspeech struck a chord with public opinion. In response, the governmentenacted piecemeal measures between 1968 and 1971 to set minimumwages, promote collective bargaining for labor, reform the tax structuretoward greater equity, and rationalize salary structures. However,implementation was weak or nonexistent, and it was only when thegovernment of Zulfiqar Ali Bhutto (father of Benazir) came to power in1971 that there was a major shift in government policy.
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Bhutto promised a new development strategy more equitable thanprevious policies. Yet he downplayed economic analysis and planningand relied instead on ad hoc decisions that created manyinconsistencies. In May 1972, he promulgated a major act that devaluedthe rupee (for value of therupee--see Glossary) by 57 percent and

abolished the multiple-exchange-rate system. This act greatlystimulated exports and indicated that the removal of price distortionscould spur the economy. But devaluation also completely altered thecost and price structure for industry and affected the level andcomposition of industrial investment and the terms of trade between theindustrial and agricultural sectors. Devaluation helped agriculture,particularly larger farms that had marketable surpluses. Mechanizationincreased but had the adverse side effect of displacing farm laborersand tenants, many of whom migrated to cities seeking industrial jobs.

In 1972 Bhutto's government nationalized thirty-two large manufacturingplants in eight major industries. The industries affected included ironand steel, basic metals, heavy engineering, motor vehicle and tractorassembly and manufacture, chemicals, petrochemicals, cement, andpublic utilities. Subsequently, domestically owned life insurancecompanies, privately owned banks, domestic shipping companies, andfirms engaged in oil distribution, vegetable oil processing, grain milling,and cotton ginning were nationalized. The result was a drop of nearly 50percent in private investment in large-scale manufacturing between FY1970 and FY 1973. By FY 1978 such investments were little more thanone-third (in constant prices) of those in FY 1970. Private capital fledthe country or went into small-scale manufacturing and real estate.Between 1970 and 1977, industrial output slowed considerably.

The public sector expanded greatly under the Bhutto government. Inaddition to the nationalization of companies, plants were built by thegovernment and additional public companies were created for variousfunctions, such as the export of cotton and rice. Able managers andtechnicians were scarce, a situation that became worse after 1974,

when many persons left to seek higher salaries in Middle East oil-producing states. Labor legislation set high minimum wages and fringebenefits, which boosted payroll costs for both public and private firms.Efficiency and profits in public-sector enterprises fell. Public industrialinvestment rose, surpassing private industrial investment in FY 1976.

Many of the other economic measures undertaken by the Bhuttogovernment were largely ineffective because of the power of vested
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interests and the inefficiency of the civil administration. Ceilings on thesize of landholdings were lowered, tenants were given greater securityof tenure, and measures were enacted to tax farm income(seeAgriculture, this ch.). Bhutto also supported large, but inadequatelyplanned, long-term projects that tied up the country's development

resources for long periods. The largest projects were an integrated ironand steel plant, a major highway on the west bank of the Indus River,and a highway tunnel in the mountainous north.

After 1977 the government of Mohammad Zia ul-Haq (1977-88) began apolicy of greater reliance on private enterprise to achieve economicgoals, and successive governments continued this policy throughout thelate 1980s and early 1990s. Soon after Zia came to power, thegovernment instituted constitutional measures to assure privateinvestors that nationalization would occur only under limited andexceptional circumstances and with fair compensation. A demarcationof exclusive public ownership was made that excluded the private sectorfrom only a few activities. Yet government continued to play a largeeconomic role in the 1980s. Public-sector enterprises accounted for asignificant portion of large-scale manufacturing. In FY 1991, it wasestimated that these enterprises produced about 40 percent of industrialoutput.

Islamization of the economy was another policy innovation of the Ziagovernment. In 1977 Zia asked a group of Islamic scholars torecommend measures for an Islamic economic system. In June 1980,the Zakat and Ushr Ordinance was promulgated.Zakatis a traditionalannual levy, usually 2.5 percent, on wealth to help the needy(seeZakatas a Welfare System,ch. 2).Ushris a 5 percent tax on theproduce of land, allowing some deductions for the costs of production,to be paid in cash by the landowner or leaseholder.Ushrreplaced theformer land tax levied by the provinces. Self-assessment by farmers ischecked by local groups if a farmer fails to file or makes a very lowestimate. Proceeds ofushrgo tozakatcommittees to help local needy

people.

The government of Prime Minister Nawaz Sharif (1990-93) introduced aprogram of privatization, deregulation, and economic reform aimed atreducing structural impediments to sound economic development. Toppriority was given to denationalizing some 115 public industrialenterprises, abolishing the government's monopoly in the financialsector, and selling utilities to private interests. Despite resistance from
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officials and labor unions and criticism that the government was movingtoo quickly, by March 1992 control of twenty industrial units and twobanks had been sold to private investors, and plans were under way tobegin denationalizing several utilities. As of early 1994, proposals to endstate monopolies in insurance, telecommunications, shipping, port

operations, airlines, power generation, and road construction were alsoin various stages of implementation. Private investment no longerrequires government authorization, except in sensitive industries.Investment reforms eliminated government sanction requirements,eased restrictions on repatriable direct and portfolio investment fromabroad, enabled foreign firms to issue shares in enterprises in Pakistan,and authorized foreign banks to underwrite securities on the same basisas Pakistani banks.

Although the Nawaz Sharif government made considerable progress inliberalizing the economy, it failed to address the problem of a growingbudget deficit, which in turn led to a loss of confidence in thegovernment on the part of foreign aid donors. The caretakergovernment of July-October 1993 led by Moeen Qureshi, aformerWorld Bank(see Glossary) vice president, asserted that thenation was near insolvency and would require a number of measures toimpose fiscal discipline. The government thus included sharp increasesin utility prices, new taxes, stiffer enforcement of existing taxes, andreductions in government spending. In early 1994, the government ofBenazir Bhutto, elected in October 1993, announced its intention tocontinue the policies of both deregulation and liberalization carried outby Nawaz Sharif and the tighter fiscal policies put in place by Qureshi.The government also said it intended to devote a greater proportion ofthe nation's resources to health and education, especially for women(seeThe Status of Women and the Women's Movement, ch. 2;BenazirBhutto Returns, ch. 4).
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Pakistan Policy Developments Since Independence