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WEEKLY NEWSLETTER
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Pakistan
Index
Since 1947 Pakistani officials have sought a high rate
of
economic growth in an effort to lift the population out of
poverty. Rapid industrialization was viewed as a basic
necessity
and as a vehicle for economic growth. For more than two
decades,
economic expansion was substantial, and growth of
industrial
output was striking. In the 1960s, the country was
considered a
model for other developing countries. Rapid expansion of
the
economy, however, did not alleviate widespread poverty. In
the
1970s and 1980s, although a high rate of growth was
sought,
greater attention was given to income distribution. In the
early
1990s, a more equitable distribution of income remained an
important but elusive goal of government policy.
At partition in 1947, the new government lacked the
personnel, institutions, and resources to play a large
role in
developing the economy. Exclusive public ownership was
reserved
only for military armaments, generation of hydroelectric
power,
and manufacture and operation of railroad, telephone,
telegraph,
and wireless equipment--fields that were unattractive, at
least
in the early years of independence, to private investors.
The
rest of the economy was open to private-sector
development,
although the government used many direct and indirect
measures to
stimulate, guide, or retard private-sector activities.
The disruptions caused by partition, the cessation of
trade
with India, the strict control of imports, and the
overvalued
exchange rate necessitated the stimulation of private
industry.
Government policies afforded liberal incentives to
industrialization, while public development of the
infrastructure
complemented private investment. Some public manufacturing
plants
were established by government holding companies.
Manufacturing
proved highly profitable, attracting increasing private
investments and reinvestment of profits. Except for large
government investments in the Indus irrigation system,
agriculture was left largely alone, and output stagnated
in the
1950s. The broad outline of government policy in the 1950s
and
early 1960s involved squeezing the peasants and workers to
finance industrial development.
Much of the economy, and particularly industry, was
eventually dominated by a small group of people, the
muhajirs (see Glossary),
who were largely traders who
migrated to Pakistan's cities, especially Karachi, at
partition.
These refugees brought modest capital, which they
initially used
to start trading firms. Many of these firms moved into
industry
in the 1950s as a response to government policies. Largely
using
their own resources, they accounted for the major part of
investment and ownership in manufacturing during the first
two
decades after independence.
By the late 1960s, there was growing popular
dissatisfaction
with economic conditions and considerable debate about the
inequitable distribution of income, wealth, and economic
power--
problems that had always plagued the country. Studies by
economists in the 1960s indicated that the forty big
industrial
groups owned around 42 percent of the nation's industrial
assets
and more than 50 percent of private domestic assets. Eight
of the
nine major commercial banks were also controlled by these
same
industrial groups. Concern over the concentration of
wealth was
dramatically articulated in a 1968 speech by Mahbubul Haq,
then
chief economist of the Planning Commission. Haq claimed
that
Pakistan's economic growth had done little to improve the
standard of living of the common person and that the
"trickle-
down approach to development" had only concentrated wealth
in the
hands of "twenty-two industrial families." He argued that
the
government needed to intervene in the economy to correct
the
natural tendency of free markets to concentrate wealth in
the
hands of those who already possessed substantial assets.
Although Haq exaggerated the extent of the
concentration of
wealth, his speech struck a chord with public opinion. In
response, the government enacted piecemeal measures
between 1968
and 1971 to set minimum wages, promote collective
bargaining for
labor, reform the tax structure toward greater equity, and
rationalize salary structures. However, implementation was
weak
or nonexistent, and it was only when the government of
Zulfiqar
Ali Bhutto (father of Benazir) came to power in 1971 that
there
was a major shift in government policy.
Bhutto promised a new development strategy more
equitable
than previous policies. Yet he downplayed economic
analysis and
planning and relied instead on ad hoc decisions that
created many
inconsistencies. In May 1972, he promulgated a major act
that
devalued the rupee (for value of the
rupee--see Glossary)
by 57
percent and abolished the multiple-exchange-rate system.
This act
greatly stimulated exports and indicated that the removal
of
price distortions could spur the economy. But devaluation
also
completely altered the cost and price structure for
industry and
affected the level and composition of industrial
investment and
the terms of trade between the industrial and agricultural
sectors. Devaluation helped agriculture, particularly
larger
farms that had marketable surpluses. Mechanization
increased but
had the adverse side effect of displacing farm laborers
and
tenants, many of whom migrated to cities seeking
industrial jobs.
In 1972 Bhutto's government nationalized thirty-two
large
manufacturing plants in eight major industries. The
industries
affected included iron and steel, basic metals, heavy
engineering, motor vehicle and tractor assembly and
manufacture,
chemicals, petrochemicals, cement, and public utilities.
Subsequently, domestically owned life insurance companies,
privately owned banks, domestic shipping companies, and
firms
engaged in oil distribution, vegetable oil processing,
grain
milling, and cotton ginning were nationalized. The result
was a
drop of nearly 50 percent in private investment in
large-scale
manufacturing between FY 1970 and FY 1973. By FY 1978 such
investments were little more than one-third (in constant
prices)
of those in FY 1970. Private capital fled the 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. In addition to the nationalization of
companies,
plants were built by the government and additional public
companies were created for various functions, such as the
export
of cotton and rice. Able managers and technicians 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 fringe benefits,
which
boosted payroll costs for both public and private firms.
Efficiency and profits in public-sector enterprises fell.
Public
industrial investment rose, surpassing private industrial
investment in FY 1976.
Many of the other economic measures undertaken by the
Bhutto
government were largely ineffective because of the power
of
vested interests and the inefficiency of the civil
administration. Ceilings on the size of landholdings were
lowered, tenants were given greater security of tenure,
and
measures were enacted to tax farm income
(see Agriculture
, this
ch.). Bhutto also supported large, but inadequately
planned,
long-term projects that tied up the country's development
resources for long periods. The largest projects were an
integrated iron and 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 a policy of greater reliance on private enterprise
to
achieve economic goals, and successive governments
continued this
policy throughout the late 1980s and early 1990s. Soon
after Zia
came to power, the government instituted constitutional
measures
to assure private investors that nationalization would
occur only
under limited and exceptional circumstances and with fair
compensation. A demarcation of exclusive public ownership
was
made that excluded the private sector from only a few
activities.
Yet government continued to play a large economic role in
the
1980s. Public-sector enterprises accounted for a
significant
portion of large-scale manufacturing. In FY 1991, it was
estimated that these enterprises produced about 40 percent
of
industrial output.
Islamization of the economy was another policy
innovation of
the Zia government. In 1977 Zia asked a group of Islamic
scholars
to recommend measures for an Islamic economic system. In
June
1980, the Zakat and Ushr Ordinance was promulgated.
Zakat
is a traditional annual levy, usually 2.5 percent, on
wealth to
help the needy (see
Zakat as a Welfare System, ch. 2).
Ushr is a 5 percent tax on the produce of land,
allowing
some deductions for the costs of production, to be paid in
cash
by the landowner or leaseholder. Ushr replaced the
former
land tax levied by the provinces. Self-assessment by
farmers is
checked by local groups if a farmer fails to file or makes
a very
low estimate. Proceeds of ushr go to zakat
committees to help local needy people.
The government of Prime Minister Nawaz Sharif (1990-93)
introduced a program of privatization, deregulation, and
economic
reform aimed at reducing structural impediments to sound
economic
development. Top priority was given to denationalizing
some 115
public industrial enterprises, abolishing the government's
monopoly in the financial sector, and selling utilities to
private interests. Despite resistance from officials and
labor
unions and criticism that the government was moving too
quickly,
by March 1992 control of twenty industrial units and two
banks
had been sold to private investors, and plans were under
way to
begin denationalizing several utilities. As of early 1994,
proposals to end state monopolies in insurance,
telecommunications, shipping, port operations, airlines,
power
generation, and road construction were also in various
stages of
implementation. Private investment no longer requires
government
authorization, except in sensitive industries. Investment
reforms
eliminated government sanction requirements, eased
restrictions
on repatriable direct and portfolio investment from
abroad,
enabled foreign firms to issue shares in enterprises in
Pakistan,
and authorized foreign banks to underwrite securities on
the same
basis as Pakistani banks.
Although the Nawaz Sharif government made considerable
progress in liberalizing the economy, it failed to address
the
problem of a growing budget deficit, which in turn led to
a loss
of confidence in the government on the part of foreign aid
donors. The caretaker government of July-October 1993 led
by
Moeen Qureshi, a former
World Bank (see Glossary)
vice president,
asserted that the nation was near insolvency and would
require a
number of measures to impose fiscal discipline. The
government
thus included sharp increases in utility prices, new
taxes,
stiffer enforcement of existing taxes, and reductions in
government spending. In early 1994, the government of
Benazir Bhutto, elected in October 1993, announced its intention
to continue the policies of both deregulation and
liberalization
carried out by Nawaz Sharif and the tighter fiscal
policies put
in place by Qureshi. The government also said it intended
to
devote a greater proportion of the nation's resources to
health
and education, especially for women
(see The Status of Women and the Women's Movement
, ch. 2;
Benazir Bhutto Returns
, ch.
4).
Data as of April 1994
Quaid-i-Azam Karachi International Airport
Courtesy Embassy of Pakistan, Washington
Policy Developments since Independence
Since 1947 Pakistani officials have sought a high rate
of
economic growth in an effort to lift the population out of
poverty. Rapid industrialization was viewed as a basic
necessity
and as a vehicle for economic growth. For more than two
decades,
economic expansion was substantial, and growth of
industrial
output was striking. In the 1960s, the country was
considered a
model for other developing countries. Rapid expansion of
the
economy, however, did not alleviate widespread poverty. In
the
1970s and 1980s, although a high rate of growth was
sought,
greater attention was given to income distribution. In the
early
1990s, a more equitable distribution of income remained an
important but elusive goal of government policy.
At partition in 1947, the new government lacked the
personnel, institutions, and resources to play a large
role in
developing the economy. Exclusive public ownership was
reserved
only for military armaments, generation of hydroelectric
power,
and manufacture and operation of railroad, telephone,
telegraph,
and wireless equipment--fields that were unattractive, at
least
in the early years of independence, to private investors.
The
rest of the economy was open to private-sector
development,
although the government used many direct and indirect
measures to
stimulate, guide, or retard private-sector activities.
The disruptions caused by partition, the cessation of
trade
with India, the strict control of imports, and the
overvalued
exchange rate necessitated the stimulation of private
industry.
Government policies afforded liberal incentives to
industrialization, while public development of the
infrastructure
complemented private investment. Some public manufacturing
plants
were established by government holding companies.
Manufacturing
proved highly profitable, attracting increasing private
investments and reinvestment of profits. Except for large
government investments in the Indus irrigation system,
agriculture was left largely alone, and output stagnated
in the
1950s. The broad outline of government policy in the 1950s
and
early 1960s involved squeezing the peasants and workers to
finance industrial development.
Much of the economy, and particularly industry, was
eventually dominated by a small group of people, the
muhajirs (see Glossary),
who were largely traders who
migrated to Pakistan's cities, especially Karachi, at
partition.
These refugees brought modest capital, which they
initially used
to start trading firms. Many of these firms moved into
industry
in the 1950s as a response to government policies. Largely
using
their own resources, they accounted for the major part of
investment and ownership in manufacturing during the first
two
decades after independence.
By the late 1960s, there was growing popular
dissatisfaction
with economic conditions and considerable debate about the
inequitable distribution of income, wealth, and economic
power--
problems that had always plagued the country. Studies by
economists in the 1960s indicated that the forty big
industrial
groups owned around 42 percent of the nation's industrial
assets
and more than 50 percent of private domestic assets. Eight
of the
nine major commercial banks were also controlled by these
same
industrial groups. Concern over the concentration of
wealth was
dramatically articulated in a 1968 speech by Mahbubul Haq,
then
chief economist of the Planning Commission. Haq claimed
that
Pakistan's economic growth had done little to improve the
standard of living of the common person and that the
"trickle-
down approach to development" had only concentrated wealth
in the
hands of "twenty-two industrial families." He argued that
the
government needed to intervene in the economy to correct
the
natural tendency of free markets to concentrate wealth in
the
hands of those who already possessed substantial assets.
Although Haq exaggerated the extent of the
concentration of
wealth, his speech struck a chord with public opinion. In
response, the government enacted piecemeal measures
between 1968
and 1971 to set minimum wages, promote collective
bargaining for
labor, reform the tax structure toward greater equity, and
rationalize salary structures. However, implementation was
weak
or nonexistent, and it was only when the government of
Zulfiqar
Ali Bhutto (father of Benazir) came to power in 1971 that
there
was a major shift in government policy.
Bhutto promised a new development strategy more
equitable
than previous policies. Yet he downplayed economic
analysis and
planning and relied instead on ad hoc decisions that
created many
inconsistencies. In May 1972, he promulgated a major act
that
devalued the rupee (for value of the
rupee--see Glossary)
by 57
percent and abolished the multiple-exchange-rate system.
This act
greatly stimulated exports and indicated that the removal
of
price distortions could spur the economy. But devaluation
also
completely altered the cost and price structure for
industry and
affected the level and composition of industrial
investment and
the terms of trade between the industrial and agricultural
sectors. Devaluation helped agriculture, particularly
larger
farms that had marketable surpluses. Mechanization
increased but
had the adverse side effect of displacing farm laborers
and
tenants, many of whom migrated to cities seeking
industrial jobs.
In 1972 Bhutto's government nationalized thirty-two
large
manufacturing plants in eight major industries. The
industries
affected included iron and steel, basic metals, heavy
engineering, motor vehicle and tractor assembly and
manufacture,
chemicals, petrochemicals, cement, and public utilities.
Subsequently, domestically owned life insurance companies,
privately owned banks, domestic shipping companies, and
firms
engaged in oil distribution, vegetable oil processing,
grain
milling, and cotton ginning were nationalized. The result
was a
drop of nearly 50 percent in private investment in
large-scale
manufacturing between FY 1970 and FY 1973. By FY 1978 such
investments were little more than one-third (in constant
prices)
of those in FY 1970. Private capital fled the 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. In addition to the nationalization of
companies,
plants were built by the government and additional public
companies were created for various functions, such as the
export
of cotton and rice. Able managers and technicians 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 fringe benefits,
which
boosted payroll costs for both public and private firms.
Efficiency and profits in public-sector enterprises fell.
Public
industrial investment rose, surpassing private industrial
investment in FY 1976.
Many of the other economic measures undertaken by the
Bhutto
government were largely ineffective because of the power
of
vested interests and the inefficiency of the civil
administration. Ceilings on the size of landholdings were
lowered, tenants were given greater security of tenure,
and
measures were enacted to tax farm income
(see Agriculture
, this
ch.). Bhutto also supported large, but inadequately
planned,
long-term projects that tied up the country's development
resources for long periods. The largest projects were an
integrated iron and 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 a policy of greater reliance on private enterprise
to
achieve economic goals, and successive governments
continued this
policy throughout the late 1980s and early 1990s. Soon
after Zia
came to power, the government instituted constitutional
measures
to assure private investors that nationalization would
occur only
under limited and exceptional circumstances and with fair
compensation. A demarcation of exclusive public ownership
was
made that excluded the private sector from only a few
activities.
Yet government continued to play a large economic role in
the
1980s. Public-sector enterprises accounted for a
significant
portion of large-scale manufacturing. In FY 1991, it was
estimated that these enterprises produced about 40 percent
of
industrial output.
Islamization of the economy was another policy
innovation of
the Zia government. In 1977 Zia asked a group of Islamic
scholars
to recommend measures for an Islamic economic system. In
June
1980, the Zakat and Ushr Ordinance was promulgated.
Zakat
is a traditional annual levy, usually 2.5 percent, on
wealth to
help the needy (see
Zakat as a Welfare System, ch. 2).
Ushr is a 5 percent tax on the produce of land,
allowing
some deductions for the costs of production, to be paid in
cash
by the landowner or leaseholder. Ushr replaced the
former
land tax levied by the provinces. Self-assessment by
farmers is
checked by local groups if a farmer fails to file or makes
a very
low estimate. Proceeds of ushr go to zakat
committees to help local needy people.
The government of Prime Minister Nawaz Sharif (1990-93)
introduced a program of privatization, deregulation, and
economic
reform aimed at reducing structural impediments to sound
economic
development. Top priority was given to denationalizing
some 115
public industrial enterprises, abolishing the government's
monopoly in the financial sector, and selling utilities to
private interests. Despite resistance from officials and
labor
unions and criticism that the government was moving too
quickly,
by March 1992 control of twenty industrial units and two
banks
had been sold to private investors, and plans were under
way to
begin denationalizing several utilities. As of early 1994,
proposals to end state monopolies in insurance,
telecommunications, shipping, port operations, airlines,
power
generation, and road construction were also in various
stages of
implementation. Private investment no longer requires
government
authorization, except in sensitive industries. Investment
reforms
eliminated government sanction requirements, eased
restrictions
on repatriable direct and portfolio investment from
abroad,
enabled foreign firms to issue shares in enterprises in
Pakistan,
and authorized foreign banks to underwrite securities on
the same
basis as Pakistani banks.
Although the Nawaz Sharif government made considerable
progress in liberalizing the economy, it failed to address
the
problem of a growing budget deficit, which in turn led to
a loss
of confidence in the government on the part of foreign aid
donors. The caretaker government of July-October 1993 led
by
Moeen Qureshi, a former
World Bank (see Glossary)
vice president,
asserted that the nation was near insolvency and would
require a
number of measures to impose fiscal discipline. The
government
thus included sharp increases in utility prices, new
taxes,
stiffer enforcement of existing taxes, and reductions in
government spending. In early 1994, the government of
Benazir Bhutto, elected in October 1993, announced its intention
to continue the policies of both deregulation and
liberalization
carried out by Nawaz Sharif and the tighter fiscal
policies put
in place by Qureshi. The government also said it intended
to
devote a greater proportion of the nation's resources to
health
and education, especially for women
(see The Status of Women and the Women's Movement
, ch. 2;
Benazir Bhutto Returns
, ch.
4).
Data as of April 1994
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|