CREB Policy Paper No.

01-11

Pakistan and Lessons

from East Asia: Growth,
Equity, and Governance
Khalid Ikram

Centre for Research in Economics & Business

Lahore School of Economics
 Centre for Research in
Economics and Business (CREB)

Naved Hamid
Director CREB

CREB Advisory Board

Shahid Amjad Chaudhry

Rector
Lahore School of Economics

Sohail Zafar Azam Chaudhry Muneer Ahmed

Dean Dean Director
Faculty of Faculty of Economics Centre for Policy and
Business Administration Environmental Studies

Shahid Siddiqui Rana Wajid Iqbal M. Khan

Director Director Editor
Centre for Humanities Centre for Mathematics Lahore School
and Social Sciences and Statistical Sciences Case Study Journal

Lahore School of Economics

Intersection Main Boulevard Phase VI, DHA and Burki Road
Lahore 53200, Pakistan
Tel: 042-6561230; 042-6560936
Email: creb@[Link]
Contents

Preface ............................................................................................................ iii

Acknowledgments ............................................................................................v
Abbreviations ................................................................................................. vii
Abstract ........................................................................................................... ix

1 Introduction .............................................................................................. 1
1.1 The East Asian Model .................................................................................. 2
1.2 The East Asian Achievement ....................................................................... 3

2 GDP Growth and its Drivers ...................................................................... 6

2.1 Investment Rates ........................................................................................ 7
2.2 Factor Productivity ...................................................................................... 7
2.3 Industrial Policy ........................................................................................... 8
2.4 Export Policies ........................................................................................... 20
2.5 Financial System and Monetary Policy ..................................................... 30
2.6 External Assistance ................................................................................... 34

3 Poverty and Income Distribution............................................................ 38

3.1 Poverty Reduction and Income Distribution in Korea and Taiwan ........... 38
3.2 Land Reforms and Distributive Equity....................................................... 40
3.3 A Cautionary Note on the Concentration of Economic Power ................. 44

4 Economic Governance ............................................................................ 46

4.1 The Role of the State................................................................................. 46
4.2 Government Intervention in East Asia and Lessons for Pakistan.............. 49
4.3 A Broad Strategy for Pakistan in the Present International Environment 54

5 Some Further Comments ....................................................................... 57

5.1 Government Credibility ............................................................................. 57
5.2 Economic Growth and Income Distribution .............................................. 58
5.3 Trade and Industrial Policies ..................................................................... 59
5.4 State Intervention in Education ................................................................ 61
5.5 Domestic Resource Mobilization .............................................................. 63

6 Conclusion .............................................................................................. 65

References..................................................................................................... 66
Khalid Ikram iii

Preface

The Centre for Research in Economics and Business (CREB)

was established in 2007 to conduct policy-oriented research with a
rigorous academic perspective on key development issues facing
Pakistan. In addition, CREB (i) facilitates and coordinates research by
faculty at the Lahore School of Economics, (ii) hosts visiting
international scholars undertaking research on Pakistan, and (iii)
administers the Lahore School’s postgraduate program leading to the
MPhil and PhD.

An important goal of CREB is to promote public debate on

policy issues through conferences, seminars, and publications. In this
connection, CREB organizes the Lahore School’s Annual Conference
on the Management of the Pakistan Economy, the proceedings of
which are published in a special issue of the Lahore Journal of
Economics.

The CREB Working Paper Series was initiated in 2008 to bring

to a wider audience the research being carried out at the Centre. The
CREB Policy Paper Series was started in 2010 with a view to
separating empirical and policy research work. Rigorous, analytical,
and empirical research is published as part of the Working Paper
Series, while broader policy-oriented research is published as part of
the Policy Paper Series.

It is hoped that these papers will promote discussion on the

subject and contribute to a better understanding of economic and
business processes and development issues in Pakistan. Comments
and feedback on these papers are welcome.
Khalid Ikram v

Acknowledgments

This paper is dedicated to the memory of the late Dr

Moinuddin Baqai—mentor, colleague, friend, and one of the finest
applied economists produced by Pakistan. After visiting the Republic
of Korea, he was deeply impressed by the country’s development,
particularly as it had resulted from policy actions and not from the
accidental possession of some valuable resource, such as oil. Could
Pakistan do something similar? I was at the time responsible for the
World Bank’s economic program in Korea, and Dr Baqai urged me to
write a paper that would examine the policies that sparked and
sustained Korea’s growth, and that would suggest lessons for
Pakistan’s policymakers. In keeping with the spirit of Dr Baqai’s
suggestion, I have limited the bulk of the discussion to the period from
roughly about 1960 to the early 1990s; during these three decades, the
Korean economy took off and made rapid growth almost a routine
matter. Thereafter, the Korean economy had advanced so far ahead of
Pakistan’s that it would be difficult to draw meaningful lessons.

I should like to thank Danny M. Leipziger and David Dollar

for discussions and advice on an earlier draft. The interpretations and
errors are, of course, my responsibility.
Khalid Ikram vii

Abbreviations

GDP gross domestic product

GNP gross national product
HCI heavy and chemical industry
IMF International Monetary Fund
PRC People’s Republic of China
TFP total factor productivity
Khalid Ikram ix

Abstract

The sustained and spectacular success of a number of East

Asian economies compared with Pakistan’s patchy performance has
raised the questions of whether and how Pakistan could emulate the
East Asian achievements. The East Asian performance is all the more
remarkable because it did not arise from the fortuitous possession of
some valuable resource, but was based on a clear strategy supported
by effective policies.

In essence, the strategy followed by the East Asian economies

was to import raw materials and semifinished goods, add value by an
efficient labor force, and export the finished goods at a competitive
exchange rate. This paper describes the major policies through which
the strategy was implemented from the early 1960s to the mid-1990s
(i.e., before the structures of the East Asian and Pakistani economies
diverged too much to make comparisons meaningful) and contrasts
them with Pakistan’s actions in critical areas. It finds that the main
reasons for the East Asians’ success were:

• prioritizing economic development over virtually all other goals;

• enforcing economic competitiveness by adopting an export-driven
growth strategy;
• adjusting policies quickly to maintain a competitive exchange rate;
• emphasizing education and training in order to create an efficient
labor force;
• formulating realistic development plans and ensuring their timely
implementation;
• preserving a substantial degree of equity in the distribution of
income and wealth.
The paper finds that Pakistan did not give sufficient priority to
development, did not possess a coherent growth strategy, and that its
policy formulation and implementation were deficient in almost all
key areas.
x Pakistan and Lessons from East Asia: Growth, Equity, and Governance

JEL classifications: E61, O11, O24, F14, N15.

Keywords: Macroeconomic policy, determinants of development,

economic planning, economic growth, export drivers, exchange rate.
1 Introduction

Pakistan’s patchy economic performance—compared with the

spectacular success of a number of East Asian economies, such as
Hong Kong, Malaysia, the People’s Republic of China (PRC), the
Republic of Korea, 1 Singapore, and Taiwan—during the last four
decades has raised many crucial questions. How and why did the
growth experience of Pakistan diverge from that of the East Asian
“tigers”? What were the essentials of the East Asian model? How did
policies and performance in the key areas of investment, savings,
exports, industry, education, and so forth differ between Pakistan and
these East Asian economies? What was their approach to industrial
policy, productivity, and competitiveness? What policies propelled
the unremitting surge in their exports? How did these countries view
the role of external assistance? Did they sacrifice equity in the pursuit
of rapid gross domestic product (GDP) growth? How important was
economic planning? What was the contribution of governance? What
lessons could Pakistan learn from their experience (and what perhaps
would be better left unlearned)?

This paper attempts to address these questions by examining

the policies of several East Asian “tigers” (particularly Korea) in key
sectors of the economy. The analysis draws both on the extensive
literature and on discussions with key stakeholders—including
policymakers, academics, business leaders, members of think-tanks,
journalists, and civil society members—over the decade-long period
during which I was responsible for the World Bank’s economic
program in some of these countries.

Although Pakistan can learn from the experience of all the

high-performing East Asian economies—and this paper also
examines the Taiwanese experience in a number of areas—Korea
offers the most lessons. This is so on three grounds: (i) Korea has a
significant population (about 50 million in 2007) and thus falls

1 Subsequently referred to as “Korea” to distinguish it from the Democratic People’s

Republic of Korea (North Korea).

2 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

between the extremes of, say, the PRC (1.3 billion, and with a very
different political structure from that of Pakistan) and Singapore (5
million); (ii) Korea, like Pakistan, has had to devote a considerable
portion of its gross national product (GNP) (between 7 and 8 percent
on average during 1953–70) to defense; and (iii) Korea, like Pakistan,
has been ruled by military autocrats for substantial periods.

1.1 The East Asian Model

Although the fast-growing East Asian economies had

differences of history, geography, culture, and natural resources, they
had some key factors in common that contributed heavily to their
economic success.

What are the essentials of the East Asian development model?

Johnson (1987) has characterized it as having four elements: “(i) stable
rule by a political-bureaucratic elite not acceding to political demands
that would undermine economic growth; (ii) cooperation between
public and private sectors under the overall guidance of a pilot
planning agency; (iii) heavy and continuing investment in education
for everyone combined with policies to ensure the equitable
distribution of the wealth . . . ; and (iv) a government that
understands the need to use . . . methods of economic intervention
based on the price mechanism” (p. 145).

Virtually all the fast-growing East Asian economies shared

these characteristics to a greater or lesser degree. Perhaps what needs
to be emphasized is the extent to which they all gave economic growth
the highest priority. This provided a way of legitimizing regimes that
had not come to power through a democratic process. Thus, successive
Korean regimes could argue that, even if they had not been
democratically elected, they were still the best option for the country
because only a military regime could counter the threat from North
Korea and also make the tough decisions necessary to ensure that
inclusive economic growth took place. The argument was made more
convincing by the widespread perception that the benefits of economic
development under civilian regimes had accrued disproportionately to
rulers’ cronies. Taiwanese leaders could also argue along similar lines,
substituting the PRC for North Korea. Thus, faster economic growth
Khalid Ikram 3

and a wider dissemination of its benefits were important elements in

the legitimization of the Korean and Taiwanese regimes.

A complete discussion of the experience of the East Asian

“tigers” and a comparison with that of Pakistan would require a
substantial book. This paper concentrates on key areas and discusses
these under three rubrics: (i) the spectacular GDP growth rates and
the forces behind them; (ii) the measures that reduced poverty and
improved the distribution of income and wealth; and (iii) the
elements of economic governance that gave credibility to government
policies and glued together plans, policies, and implementation.

Of course, while these matters are discussed separately, they

are in reality quite intimately connected. Thus, for example, questions
of governance underlie the increases in investment and the measures
to reduce poverty, improve the distribution of income and wealth,
and make an export-oriented strategy work successfully. Similarly,
while one might discuss export promotion and industrial strategy
separately, the success of the export strategy hinged on the success of
industrial policies since the spectacular growth of exports was almost
entirely of manufactured items.

1.2 The East Asian Achievement

In 1950, Korea had a per capita income of USD146; compare this

with USD203 for Egypt, USD150 for Nigeria, and USD562 for Mexico.
By 1980, Korea’s per capita income had shot up to USD1,553 (an annual
growth rate of 8.2 percent), Egypt’s to USD480 (2.9 percent), Nigeria’s
to USD670 (5.1 percent), and Mexico’s to USD1,640 (3.6 percent). 2 Note
that the last three are important oil producers. During 1962–80, Korea’s
GNP grew at an annual rate of 8.5 percent in real terms (Johnson, 1987,
p. 136). In particular sectors, the growth was even more impressive:
between 1962 and 1980, value-added in manufacturing increased at an
average annual rate of 18 percent. The value of Korea’s exports grew
from USD55 million to USD22 billion, giving an annual growth rate of
nearly 40 percent; in 2007, exports reached USD372 billion (compared
with USD16 billion for Pakistan). The composition of exports changed:

2 All figures are expressed in 1974 US dollars.

4 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

manufactures accounted for less than 10 percent in 1962 but 90 percent

in 1980 (Johnson, 1981; World Bank, n.d.). This growth performance
has been achieved with an income distribution that is considered one
of the most equitable in the developing world.

Taiwan’s performance has been no less impressive. In

common with other developing countries, it concentrated first on a
policy of import substitution; this was initially successful, and the
annual growth rate of real per capita GNP reached 6.0 percent
between 1951 and 1955. However, as the domestic market became
increasingly saturated, this rate dropped to 3.7 percent during 1956–
60 (Wang, 1990, p. 25).

The government responded with a major change in direction

in February 1960, which was reinforced in 1966. The new policies
greatly strengthened export incentives by providing tax rebates and
low-cost loans to exporters, and by setting up export processing
zones. In July 1960, the exchange rate was devalued to the black
market level. The result was that “these reforms simply had made it
enormously profitable for suppliers of manufactured goods to sell
abroad rather than at home” (Myers, 1986, p. 28). Exports grew
rapidly in response to the incentives, shooting up from USD525
million in 1965 to over USD70 billion in 1989. In 2007, this country of
23 million (about one eighth the population of Pakistan) had exports
worth USD247 billion—about 15 times as much as Pakistan. Propelled
by the surging exports, Taiwan’s average annual growth of real GNP
per capita rose to 7.7 percent in 1960–73, dropped sharply during the
first oil price crisis (1973–75), and then recovered to an annual level of
7.2 percent in 1975–87 (Wang, 1990, pp. 24–26).

International comparisons of income can be beset with

uncertainties, but the contrasts between the performances of the East
Asian economies and Pakistan are so staggering that the story
remains unambiguous. It would help to put the Korean and
Taiwanese record in perspective for Pakistan by considering the
following. In 1960, Pakistan’s per capita income was about USD85,
while that of Korea was roughly USD130. In 1988, Pakistan’s per
capita income was estimated at USD340, compared with over
USD4,000 for Korea. In 2007, per capita incomes in Pakistan and
Khalid Ikram 5

Korea were USD790 and USD18,500, respectively (Government of

Pakistan, 1975; International Monetary Fund [IMF], 2011).

Pakistan’s exports in 1960 were valued at about USD220

million, compared with USD50 million for Korea. In 1988, Pakistan’s
exports were worth about USD3.5 billion, Korea’s USD60 billion. In
other words, starting 30 years ago from a per capita income that was
about two thirds that of Korea, and exports that were worth more
than four times than Korea’s, Pakistan in 1988 had a per capita
income less than one tenth that of Korea and exports that were worth
a little more than one twentieth of Korean (and Taiwanese) exports.
To make the picture even starker, consider that the value of Korea’s
(and Taiwan’s) exports was, even in 1988, about double Pakistan’s
entire GDP. By 2007, Pakistan’s exports were equivalent to about 4
percent of Korea’s and 6.5 percent of Taiwan’s (Government of
Pakistan, 1975; IMF, 2011).
6 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

2 GDP Growth and its Drivers

Comparisons of different countries’ national accounts over

long periods inevitably involve some degree of approximation.
Subject to this caveat, the broad story of GDP growth in Korea,
Taiwan, and Pakistan would be along the following lines.

Over the period 1960–2007, Taiwan’s GDP increased at an

annual average rate of about 8.5 percent in real terms; during the
same period, the real GDP growth rate in Korea was roughly 8.3
percent a year. Both these rates were substantially higher than that
achieved by Pakistan, where GDP growth from the 1960s to 2007 is
estimated at about 5.5 percent a year (Government of Pakistan, n.d.;
IMF, 2011). Moreover, since the population in these East Asian
countries increased at a significantly slower rate than in Pakistan, the
disparity in the growth of per capita incomes was far greater. 3

What were the drivers of this spectacular growth? Broadly

speaking, the growth impulses came from five main areas:

(i) high rates of investment,

(ii) substantial increases in factor productivity,
(iii) surging exports,
(iv) a favorable monetary system, and
(v) the judicious use of external assistance.
This section reviews the performance and policies of Korea
and Taiwan under each of these rubrics, contrasting them with
Pakistan’s experience.

3 The difference can be illustrated in the following way. During this 45-year period,
per capita income in Pakistan grew at a rate of about 2.5 percent a year, while in
Korea and Taiwan, it increased at a rate of nearly 6.5 percent a year. USD1 increasing
at a rate of 2.5 percent a year over 45 years would become USD3; USD1 growing at a
rate of 6.5 percent a year over the same period would become USD17.
Khalid Ikram 7

2.1 Investment Rates

The dramatic growth of GDP in Korea and Taiwan was driven

by very high rates of investment and savings, and by steady increases
in productivity. During the period 1970–2007, Korea invested about
32 percent of its GDP on average, and Taiwan about 30 percent, while
Pakistan invested only about 18 percent. 4

Both Korea and Taiwan provided substantial incentives for

investment, including (i) generous provisions for depreciation, (ii) low-
interest loans from the banking system, (iii) privileged access to foreign
exchange, and (iv) government assistance (especially in Korea’s case) to
acquire technology and expertise from abroad. Pakistan also provided
incentives—for some years in the 1960s, the combined depreciation
allowances added up to more than 100 percent of the cost of industrial
machinery—but the private sector rarely responded on the scale it did
in East Asia. The country always lacked a coherent industrial and
investment policy, and paid virtually no attention to the development
or acquisition of appropriate technology.

2.2 Factor Productivity

In the standard growth accounting model, the sources of GDP

growth are apportioned between the contribution of capital, labor,
and that of a residual factor that is frequently associated with
“technical progress” but is more neutrally referred to as total factor
productivity (TFP) (Solow, 1956). How much of the growth in Korea,
Taiwan, and Pakistan derived from factor inputs, and how much
resulted from increases in factor productivity?

Estimates of the contribution of these inputs differ among

various studies, but the broad conclusions appears to be that, for
Korea in the period 1960–2005, increases in physical capital accounted
for about 40 percent of GDP growth, increases in labor for about 30
percent, and increases in TFP for about 30 percent. Over roughly the
same period, the contribution of capital to the growth of output in

4I have given the figures for investment for the period 1970–2007 rather than from
1960, because the investment data for Pakistan before 1970 is particularly shaky.
8 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

Taiwan was about 46 percent; that of labor, about 18 percent; and that
of TFP, nearly 36 percent. For the high-performing East Asian
economies (Hong Kong, Indonesia, Malaysia, Singapore, and
Thailand, in addition to Korea and Taiwan) as a group, the average
growth rate of GDP between 1960 and 2003 was 6.5 percent a year. Of
this, capital contributed nearly 49 percent, labor 25 percent, and TFP
growth 26 percent. By way of comparison, Pakistan’s GDP is
estimated to have increased at an annual average rate of 5.3 percent
between 1960 and 2005; the growth of capital contributed 44 percent,
that of labor 36 percent, while TFP growth provided about 20 percent
(see K. S. Kim & Hong, 1997, p. 183, Table 8.5; Stiglitz & Yusuf, 2001,
p. 16, Tables 1.3 and 1.4; Thorbecke & Wan, 1999, pp. 3–20; World
Bank, 1993, pp. 60–70, 2006, p. 13, Tables 2.2 and 2.3).

In short, GDP growth in Pakistan was driven primarily by

increases in inputs, with a relatively small contribution from
productivity improvements. GDP growth in Korea and Taiwan, on
the other hand, owed substantially more to productivity increases. An
important lesson for Pakistan therefore is that, if it is to be
competitive in the world economy, its growth will have to depend
much more on increases in productivity than has been the case in the
past. This means that the investment rate will have to be increased
from the average 19 percent of GDP to around 30 percent, and much
more emphasis placed on education and training.

2.3 Industrial Policy

Leipziger (1988) has argued that, “if IPs [industrial policies] are
defined as interventions which alter the way resources are allocated in
the industrial sector, then Korea surely has had an active industrial
policy” (p. 121). Moreover, Korea’s industrial policy has remained
intimately linked with its trade policies. This strategy arose from the
requirement of a resource-poor country that had to export in order to
buy capital goods and intermediate products, as well as defense
matériel, from abroad. Since only about 20 percent of the country’s
land is suitable for cultivation, Korean policymakers had little choice
but to turn to manufacturing to provide goods for export. As a result of
intensive intervention—including tax concessions, export subsidies, a
favorable exchange rate, wage restraint imposed on trade unions,
outlawing of strikes, and, most importantly, preferential access to
Khalid Ikram 9

credit—the manufacturing sector increased its share from 12 percent of

GDP in 1960 to nearly 32 percent (of a far larger GDP) in 1987.

2.3.1 Korea’s Experience

The evolution of Korea’s industrial policies between the early

1950s and the mid-1990s can be divided into four broad phases: (i)
import substitution from the 1950s to the early 1960s, (ii)
liberalization from the early 1960s to 1973, (iii) an emphasis on heavy
and chemical industries (HCIs) from 1973 to 1979, and (iv) renewed
liberalization 1980 onward.

Phase I: Import Substitution

Between the 1950s and early 1960s, industrial incentives

focused typically on import substitution. High tariffs were imposed
on imports with close domestically produced substitutes; and low or
zero tariffs on unfinished goods, machinery for import-substituting
industries, intermediates, and food grains (much of the latter was
provided under the US’s Public Law 480, according to which
repayment—if made at all—was to be in local currency). The
exchange rate system was complex, leading to multiple rates, all of
which were overvalued. Quantitative restrictions, especially quotas,
were the principal mechanism used to control imports (Westphal &
Kim, 1982, p. 214; see also Frank, Kim, & Westphal, 1975, pp. 25–41).
The chief incentive given to exports was a provision for converting
export earnings into foreign exchange certificates, which entitled the
holder to import certain high-value items that were not otherwise
available (this was similar to Pakistan’s Export Bonus Scheme, which
ran from 1959 to 1972).

Phase II: Liberalization

The second, more liberal, phase started in 1961 when

President Chung Hee Park assumed office, 5 but really took stride
from 1964 until about 1973. This period was characterized by an

5 Korean names have been written out in Western style, i.e., the family name appears
last, not first, as is the Korean practice.
10 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

outward-looking strategy, principally an aggressive drive to boost

exports. The most important weapon in turning the economy toward
an export path was an active exchange rate policy. The exchange rate
was significantly devalued in 1961 and 1964; the latter devaluation
also introduced a sliding-peg system of continued adjustment so that
exchange rate competitiveness eroded by inflation (or for other
reasons) could quickly be compensated for.

Several other incentives were provided to exporters (Westphal

& Kim, 1982, p. 215):

(i) Income taxes on earnings from exports were reduced by 50

percent.
(ii) Exporters were exempted from indirect taxes on exports and
on inputs.
(iii) The preferential interest rate on export credits was lowered.
(iv) Tariff exemptions were provided on capital equipment used
not only in producing exports, but also “indirect exports” (that
is, intermediates used in the production of exports).
(v) Favored access was given to foreign exchange loans.
(vi) Depreciation allowances were made more generous.
(vii) The preferential rate on working capital loans to exporters was
reduced in steps from 14 percent a year in 1960 to 6 percent in
1967 (these rates were negative in real terms).
(viii) The amounts that exporters could borrow were increased.
During this period, Korea continued to protect its domestic
market from imports, but managed this with far greater sophistication
and attention to market considerations. For example, examining the
difference between incentives for export and domestic sales in the
exportables industries, the World Bank (1987a) showed that

protection of the domestic market was high in

industries in which Korea did not face strong export
prospects, and it was low in industries in which Korean
products were internationally competitive. Thus while
Korean policy did offer protection to the domestic
Khalid Ikram 11

markets of industries producing importables, it offered

little incentive for industries producing exportables to
keep their output at home (Volume 1, p. 35).

Phase III: Emphasis on HCIs

The third major stage (1973–79) of industrial policy involved

an important change in philosophy: instead of providing generalized
export incentives that were, by and large, open to all potential
exporters, the government consciously adopted a policy of favoring a
particular sector, i.e., the HCIs. Industries singled out for preferential
treatment were steel, nonferrous metals, chemicals (especially
naphtha cracking and ancillary activities), general machinery,
shipbuilding, electronics, and automobiles. In other words, the
government’s attitude changed from that of creating a favorable
environment for export and then letting the market bring out the
actual exporting industries. Instead, the government adopted a policy
of “picking winners” and then encouraging them to grow rapidly by
supporting them with special incentives. This obviously involved a
cost to many other sectors, in that resources devoted to the HCIs were
not available for deployment elsewhere. But, in fixing its attention on
the HCIs, did the government in fact consistently pick winners?

Instruments Used to Push the HCI Sector

The HCI drive was pushed forward by a wide range of policy

instruments, especially fiscal preferences, import protection, and (most
importantly) access to large amounts of subsidized credit. In the 1960s,
Korean interest rates had been high; in 1972, the government lowered
the ceilings. Because of the continuing inflation (around 15 percent a
year), bank interest rates were negative in real terms, creating an excess
demand for bank credit. The difference between bank rates and those
charged by other sources of similar credit (such as the informal market,
discussed above) represented a subsidy to those industries that were
fortunate enough to get credit from the government-controlled banks—
those industries that had joined the HCI drive. The share of credit
allocated to the HCI group almost doubled from approximately one
third of total bank loans in 1973/74 to about 60 percent in 1975–77 (J. H.
Kim, 1990, p. 20). This increase came at the expense of the light
12 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

industry sector, whose share of bank credit fell from about 65 percent
in 1973 to 40 percent in 1980. Moreover, this credit was provided at
even lower cost than normal commercial bank rates. At the height of
the HCI boom, the cost of borrowing for heavy industry averaged
approximately 25 percent lower than that for light industry (World
Bank, 1987a, Volume 2, Table 5.13).

The authorities also substantially widened fiscal incentives

between the targeted industries and others. Dollar (1990) has cited a
study by the Korean Development Institute that showed that, in the
late 1970s, the marginal tax rate was around 50 percent for industries
in the non-HCI group, but less than 20 percent for the HCI group (p.
23). This was brought about by a combination of tax exemptions,
reductions, investment tax credits, and provision for accelerated
depreciation to the designated “strategic” industries. The system of
trade protection was also adjusted to afford further protection to the
HCI group. Through changes in nominal tariff rates, import controls,
import duty drawbacks, and other measures, the effective rates of
protection were made to differ substantially between industries, with
high rates of protection for the HCI sectors (over 70 percent in 1978,
with particular subsectors, such as transportation, receiving as much
as 112 percent) (Kwack, 1986, pp. 116–118, Table 10) and, in some
cases, negative rates facing traditional light manufacturing sectors. It
is little wonder, as J. H. Kim (1990) concluded, that “it became more
important for private sectors to participate in the HCI program than
to be profitability efficient or to build export markets” (p. 2). As a
result of these incentives, investment in the HCI sector grew rapidly
and accounted for nearly 80 percent of all manufacturing investment
between 1977 and 1979. This massive redirection of resources meant
that, while nearly all the investment programmed by the Fourth Five-
Year Plan (1977–81) for heavy industry had been completed by 1979,
the investment projected for light industries fell short of the target.

Results of the HCI Push

Despite the number of analyses of industrial policy, there is no

single universally accepted criterion for judging its success or failure.
However, using different measuring rods, most analysts have
concluded that Korea’s HCI policy hurt the country considerably more
than it helped. Even at the start of the new strategy, some commentators
Khalid Ikram 13

expressed cautiously worded reservations about the feasibility and

desirability of the ambitious targets for heavy industry (P. Hasan, 1976,
pp. 91, 120–122). Several studies of the completed episode are now
available and, while there are one or two dissenters (see, for example,
Amsden, 1989, pp. 94, 99, 118), the overwhelming view is negative.

Balassa (1987) has argued that the HCI drive distorted

profitability signals and channeled resources away from activities in
which Korea had a comparative advantage, and that this was at least
partly responsible for slowing down export performance (pp. 8–10).
He has also shown that the incentive structure led to overinvestment
and excess capacity in the HCI sector. Norton (1987) has made similar
criticisms (pp. 29–54). Kwack (1986) has commented that the rapid
increase in investment in the HCI segment meant that firms did not
have sufficient time to absorb the new technology and that “excess
capacity, high production cost, and low product quality characterized
these firms” (p. 126). Leipziger (1987, 1988, pp. 124–126) has
documented the misallocation of resources, and several more
examples are given in the World Bank (1987a) study on restructuring
Korean industry. Dollar (1990) has concluded that performance in
several areas of HCI investment—such as machinery and many
chemicals—was “disastrous,” adding that the steel industry became
efficient and began to export, but that even in this activity the
financial returns to investment remained very poor (p. 23). Song
(2003) has maintained that the rapid increase of external debt in the
1970s, which became a major policy issue, was caused by insufficient
domestic resources to fund the HCI drive at the pace required by the
government (p. 137). Y.-C. Park (1986) has argued that the
concentration of investment in the HCI sector and its associated
infrastructure—which the government had to provide—drove away
labor and capital from the light manufacturing and nontradable
sectors. The gap between rapidly increasing domestic demand and
the limited and more slowly growing capacity of light industry was
the main cause of inflation in the 1970s.

Suh (1987) has derided the “surface” improvements of the

1970s, pointing out that inflation, the rapid rise in real wages in the
expanding heavy industries, and the overextension of government
investment and low-interest loans to the HCI group led to a loss of
14 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

international competitiveness and unbalanced regional growth,

consequently worsening income distribution (pp. 22–23). Rhee, Ross-
Larson, and Pursell (1984) have criticized the government’s policy of
promoting several heavy industries at the same time without
considering the resource requirements and the costs this would
impose on the economy. They have referred to the seriousness of
“duplicated investments, of excess capacity, and of the bankruptcies
[presumably of enterprises in light industry] induced by resource
constraints that prevented the completion of new plants” (pp. 68–69).
J. H. Kim (1990) has commented on the moral hazard aspect of the
government’s unremitting support of these industries, saying that it
“put the government in the position of an implicit risk partner and
created the expectation that the government would be responsible for
its promotion policies and would provide a soft-landing to individual
firms should the situation deteriorate” (p. 2).

Phase IV: Renewed Liberalization

The fourth phase in Korea’s industrial restructuring policy

dates from about 1980 and represents a cautious move toward
liberalization (until about the mid-1990s). The need to rethink policy
became urgent given mounting evidence of the financial losses and
distortions caused by the HCI drive. The growth of GDP had slowed
down and exports had begun to fall (in 1979, even the volume of
exports had dropped below that of the previous year). Additionally,
in 1979, Korea was hit by three exogenous shocks that quickly
focused the government’s attention on developing a policy response:
(i) the second oil price rise; (ii) the worst agricultural weather in the
country’s recent history, which led to a fall of nearly 20 percent in
agricultural production; and (iii) on 26 November, the assassination
of President Park. In 1980, Korea’s real GDP fell (by 5 percent) for the
first time in the country’s contemporary experience.

In response to the worsening situation, the authorities

implemented a major devaluation in 1980 and shifted credit allocation
policies; more importantly, they moved industrial policy toward
greater neutrality between sectors. A World Bank (1987a) study of
this subject listed the following major changes in policy (pp. 49–50):
Khalid Ikram 15

(i) Preferences were reversed toward large heavy industry by

reserving credit for small and medium firms.
(ii) The government’s role in specific credit allocation decisions
was reduced, and policies that awarded the HCI sector large-
scale preferences were abruptly terminated.
(iii) Interest rate subsidies for particular borrowers were
eliminated and the role of policy targeting in lending decisions
was scaled back.
(iv) Variations in effective protection were reduced.
(v) Real interest rates were increased, which reduced the gap
between rates in the formal market and the “curb” market.

Although the government continued to play an active role in

policy, there was a distinct move toward liberalization and many of
the interventions can be justified on grounds of market imperfections
(such as spreading knowledge about new technology and facilitating
its introduction).

The authorities also realized that the financial system needed

to be freed up to provide financing to those industries in which
market signals would direct investment. The government therefore
began a long-term program of financial liberalization. During 1983
and 1984, the government

(i) gradually relaxed interest rate ceilings;

(ii) divested itself of all nationwide commercial banks (although it
continued to exercise considerable influence in the
“privatized” institutions);
(iii) authorized banks to undertake new activities, such as the sale
of commercial paper and government securities;
(iv) permitted the establishment of two new nationwide banks as
joint ventures with foreign banks;
(v) encouraged the introduction of new financial instruments,
such as negotiable certificates of deposit;
(vi) eased restrictions on foreign banks; and
16 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

(vii) took measures to improve the allocation of credit (for

example, the share of loans directed by the government was
reduced from 16 percent of the total to 14 percent) (Aghevli,
Bijan, & Marquez-Ruarte, 1985, pp. 17–18).

2.3.2 Taiwan’s Experience

Several commentators have pointed out that Taiwan and

Korea adopted very different policies toward their manufacturing
sectors, yet the overall development of manufacturing—in terms of
productivity growth, structural change, and export success—was
remarkably similar in the two economies. The specific industries that
developed differed, largely as a result of the Korean HCI policy.
However, the similarity in productivity growth, structural change,
and export success in the aggregate suggests that industrial policy
was not the most important cause of industrialization in either of
these economies (see, for example, Dollar & Sokoloff, 1994, pp. 23–24).

Briefly stated, the clearest difference between the industrial

structures of Korea and Taiwan was that the former was dominated
by large enterprises grouped into conglomerates (the chaebol), while
the latter consisted overwhelmingly of far smaller enterprises. In
1980, the average Taiwanese firm had only about 35 employees
compared with about 70 in Korea. The very small firms, with less
than five employees, constituted 43 percent of all manufacturing
firms in Taiwan. A telling indication of the difference in the size of
firms is that, in 1981, Korea’s largest conglomerate (Hyundai) had
gross receipts that were three times as large as the gross receipts of
Taiwan’s 10 largest private firms combined (Scitovsky, 1986, p. 137).
Another measure of the size of Korean firms is that, in the 1980s, the
20 largest Korean chaebol were responsible for producing half the
value-added in manufacturing.

Apart from supporting and, indeed, encouraging the

difference in the size of the average firm in the two countries, there
was also a major difference in the two governments’ general approach
to industrial policy. At the risk of oversimplifying matters, one can
point to two broad approaches toward industrial policy. One type
aims to provide a level playing field for all industries through the use
Khalid Ikram 17

of general incentives, such as tax concessions or public investment in

education and training. Such measures are often referred to in the
literature as “functional” incentives. The second type of industrial
policy targets the growth of particular industries and is often referred
to as “picking winners.” For the most part, Taiwan’s strategy was to
provide functional incentives while Korea followed the approach of
picking winners, not only in terms of which industries to support but
also which firms to back.

This does not mean that Taiwan did not specifically target
some areas. It did, particularly in the 1970s, when it launched an
ambitious program of heavy industry called the Ten Major
Development Projects. These largely comprised petrochemicals, steel,
and shipbuilding, and were followed by a nuclear power plant and
automobile production. However, another major difference between
the two countries’ approaches became apparent—Korea created
incentives for the private sector to move into the targeted areas, while
Taiwan acted through public enterprises.

This difference was most marked in the development of heavy

industries, which are extremely capital-intensive; enterprises generally
need to be very large because they draw much of their efficiency from
economies of scale. The development of heavy industry in Korea was
carried out almost entirely by large private firms that were parts of the
chaebol. Since there were only a few very large private enterprises in
Taiwan, almost all the large-scale production units required by heavy
industry were located in the public sector.

Why did Korea have these large conglomerates that could

implement large-scale heavy industry projects while Taiwan did not?
The basic reason appears to be political. A joint study by the Chung-
hua Institution for Economic Research and the Harvard Institute for
International Development has expressed the issue very clearly:

The Korean chaebol were led by Koreans who had close

ties to government and over time came to be the major
supporters and financiers of the governing party and its
president. Private businessmen in Taiwan, in contrast,
were mainly Taiwanese, most of whom had only weak
18 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

ties to the mainlander-dominated Kuomintang

government. . . . Although there were mainlanders in
the private sector, the principal business of the
mainlanders was government. The expansion of the
public enterprise sector, in that context, was thus also an
extension of mainlander power over the economy and
polity (Hsueh, Hsu, & Perkins, 2001, p. 39).

For the most part, the Taiwanese authorities acted realistically

in pushing the heavy industry program. They had their share of
failures but showed a reasonable degree of flexibility in working out
where their competitive advantage lay.

This is evident perhaps most clearly in the development of the

automobile industry. The minimum scale of production required for
the different components of vehicle production varies considerably,
but large economies of scale are important for all major mechanical
components, especially engines and transmissions and all major
phases of production, including final assembly. The minimum
efficient scale for annual output has been estimated to range from
100,000 to 250,000 units in assembly, rising to 500,000 in engines, and
to 1,000,000 in stamping (Chu, 1994, p. 137). This scale of production
could not be met by the relatively small enterprises in Taiwan,
particularly as the domestic market remained small—annual
domestic sales averaged only 106,185 units during 1977–80. Chu
(1994) has pointed out that these figures are only about half the
production capacity of a typical General Motors assembly plant (p.
137). It is not surprising, therefore, that many of the joint ventures
between Taiwanese corporations (including public sector
corporations) and foreign companies were either abandoned or failed,
and the industry remained uncompetitive for long periods. Indeed,
Hsueh et al. (2001) have commented that “well into the 1980s there
wasn’t much to show for those [the government’s] efforts” (p. 44).

After 1985, government policies regarding automobile imports

and production became more liberal, and the industry began to become
competitive. The most competitive part of the industry, however, was
not the production of automobiles but the production of automobile
parts, which became a major export. There is a clear lesson here for
Khalid Ikram 19

Pakistan, which has fragmented its small domestic automobile market

between several assembly plants of which very few, if any, would be
able to survive without very extensive protection. The lesson is that
Pakistan should aim to find a niche market, such as in the production
and export of (to begin with) a limited range of automobile parts and
components rather than in the assembly of complete vehicles at plants
of an uneconomic size. Another solution would be to cut down on the
number of assembly plants so that the remaining ones have a better
chance of expanding to an economic size.

2.3.3 Pakistan’s Experience

Pakistan’s experience with industrial development could not

have been more different from that of Korea. In 1959/60,
manufacturing (both large- and small-scale) accounted for roughly 10
percent of Pakistan’s GDP; in Korea it accounted for about 14 percent.
In 2006/07, the share had risen to about 18 percent in Pakistan; in
Korea and Taiwan, it was about 35 percent. Manufacturing value-
added as a share of GDP had risen between these years by 80 percent;
in Korea it had increased by 150 percent, and that from a much higher
base. In value terms, manufacturing value-added (measured in terms
of 1995 US dollars) in Pakistan increased by a factor of seven between
1968 and 2003; that in Korea increased by a factor of 40. Not
surprisingly, a detailed study of industrial growth in Pakistan
concluded that “[Pakistan’s] industry is not the growth engine it is in
economies that have developed rapidly such as those in East Asia”
(Government of Pakistan, 2005, p. i).

The absence of an effective industrial policy, or even a

coherent attitude toward the development of industry in Pakistan,
has had some very unfortunate consequences. First, the industrial
sector’s contribution to the GDP has stagnated, and even, according
to some estimates, declined. This has led some economists to talk
about the “deindustrialization of Pakistan’s economy,” and to
describe the decline in the large-scale manufacturing sector as “not a
cyclical phenomena [sic] but a secular trend” (Wizarat, 2002, pp. 1,
82). Second, productivity in industry (whether measured by the rate
of growth of TFP or labor productivity) steadily declined between
1955/56 and 1990/91 (pp. 76–82, Tables 4.1–4.4). Third, the absence of
20 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

a coherent policy also meant that incentives for investment in

industry and the export of industrial products were given in an ad
hoc manner. The accumulation of these uncoordinated incentives
created significant distortions and enabled businesspersons to set up
industries that were profitable only because of the existence of
subsidies and monopoly rents. Indeed, a detailed study of some 750
firms found that export industries were the most inefficient in the
sample (Naqvi & Kemal, 1991, p. 3). 6 This is completely contrary to
the experience of Korea or Taiwan, where exporting firms
consistently ranked high in productivity.

2.4 Export Policies

The word “miracle” has become something of a cliché when

describing the growth of and structural changes in Korea’s exports.
As recently as 1962, the value of Korea’s exports was only USD55
million. With the export drive that followed, exports passed the
USD100 million-mark in 1964, USD500 million in 1968, USD1 billion
in 1970, USD10 billion in 1977, USD20 billion in 1981, USD30 billion in
1985, and USD60 billion in 1988. In 1960, Korea ranked 101st among
the world’s exporters; today, it is the 12th largest. The structural
change is no less impressive: in 1960, primary products accounted for
86 percent of Korea’s merchandise exports and manufactures for 14
percent. By 1980, the shares had been completely reversed—primary
products accounted for 10 percent and manufactured goods for 90
percent of exports (Balassa, 1984, pp. 145–146, Table 3.2). The export
surge enabled Korea to run large surpluses on its current account
from 1986 and to retire much of its substantial external debt. In 1985,
Korea was the fourth most highly indebted developing country (after
Mexico, Brazil, and Argentina) with an external debt amounting to
USD47 billion; by 1988, that figure had dropped to USD31 billion (as
surpluses on the current account were used to retire debt).

The remarkable story of Korea’s export growth has been told

by numerous writers, and need not be repeated here (see, for

6 The distortions created by uncoordinated export incentives and the resulting

divergence between social and private profitability of a number of export items have
also been highlighted in Ikram (1973).
Khalid Ikram 21

example, the references cited in Frank et al., 1975; Westphal & Kim,
1982). In any case, for our present purpose, what is important is not a
rehearsal of the chronological ups and downs of the incentive
structure, but rather a broad view of the factors that propelled and
sustained Korea’s exports on this trajectory.

Three factors largely explain Korea’s export performance:

(i) the government’s decision-making and implementation

processes,
(ii) the set of export incentives, and
(iii) the international environment.

2.4.1 The Korean Government’s Commitment to Boosting Exports

The effectiveness of the government’s decision-making and

implementation procedures must begin with the government’s
commitment to the export drive. A thoroughgoing commitment to
boosting exports began with President Park, whose strategy called for
priority in economic development but with less economic reliance on the
US. The paucity of Korea’s own resource base meant that this
development had to be based on industrialization (which, in turn, would
have to be import-intensive), and the aim of reduced dependence on the
US meant that this import-intensive industrialization would have to be
financed through a higher volume of exports. It is not surprising,
therefore, that President Park’s favorite maxims were “nation building
through exports” and “exports first” (Song, 1990, p. 90).

In the year following President Park’s seizure of power, the

Ministry of Commerce and Industry began setting export targets
classified by commodity and destination. Exporters who reached their
stipulated targets would receive favorable access to credit and other
inducements; exporters who failed could swiftly suffer from
economic and other sanctions. The president himself also chaired a
monthly meeting of exporters during which export targets were
discussed “and bureaucratic impediments to achieving those targets
summarily removed” (Steinberg, 1989, p. 134). This also explains the
relatively small amount of corruption and interference shown by the
Korean bureaucracy: exporting was identified as the criterion of
22 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

resource allocation, and the performance of all actors—firms as well

as bureaucrats—was monitored against this target (World Bank,
1987a, Volume 1, pp. 36–37). Thus, “although it is too much to say
that government officials are not amenable to corruption, their
intervention rarely leads to a slowing down of production or a failure
to meet prescribed targets” (Mason, Kim, Perkins, Kim, & Cole, 1980,
p. 265).

The government’s measures of compulsion could be quite

draconian and continued to be enforced by the regimes that
succeeded President Park. In the 1990s, I was told by the president of
Kukje (a large conglomerate) that he had been forced to sell the
shoemaking component of his group because he had fallen foul of
government policies. He was particularly upset because this
enterprise was so profitable that it could comfortably cross-subsidize
the rest of his conglomerate.

The important point that emerges is the close relationship

between government and business. Jones and SaKong (1980)
described the resulting “Korea, Inc.” in some detail, making clear that
the government was the senior partner (pp. 66–69). However, the
communication went both ways: over 80 percent of the 113 firms
surveyed by Rhee et al. (1984) said that their annual export target was
their own estimate, which was sometimes adjusted by the
government (pp. 22–24). 7 The trade associations were regularly and
seriously consulted to ascertain what incentives were needed to attain
targets. In these discussions, much information was exchanged, and
“if sales in a region were not up to target, the Korean ambassadors
there were recalled to find out what the problems were and what
could be done to spur Korean sales” (p. 22). One could hardly ask for
a stronger government commitment to exporting. 8

7 They also point out that it is difficult for firms to set their targets too low or too high
because the trade association or Ministry of Commerce would reject a target that was
too low compared with past trends or the industry-wide figure, while ministers
would not accept too high a target for fear of not being able to meet it.
8 The government continued to use the carrot-and-stick approach toward recalcitrant

exporters until very recently. In the mid-1990s I was told by the president of Kukje (a large
Khalid Ikram 23

It could probably be said without too much exaggeration that

Korea has used one or other variant of almost any incentive scheme
available to promote exports—Johnson (1987, p. 147) has quoted
Youngil Lim as listing 38 different “export policy tools” used until
1976 (see also Frank et al., 1975, Chapters 3–6, 9–10; Westphal & Kim,
1982, pp. 214–220). The most important and most consistently used,
however, were the exchange rate, the tariff-free access to imported
inputs, and the provision of bank loans (often at subsidized interest
rates) for working capital.

Since the 1960s (except during the HCI drive), the Korean
government has generally maintained the real value of the won near
the level needed for current account balance (Petri, 1990, p. 56). This
has meant sharp devaluations from time to time, interspersed with
fine-tuning adjustments. The realistic exchange rate evidently provided
exporters with a substantial incentive. A World Bank (1987a) study
showed that export performance between 1960 and 1975 was keenly
responsive to changes in the exchange rate: in a seven-year period
when the real exchange rate was high (in 1965 purchasing power parity
terms), the average annual growth rate of exports was 43.5 percent; in
the seven-year period when it was low, the average growth rate was
16.0 percent (Volume 1, pp. 32–33, Table 2.1).

As some observers have noted, the effect of unrestricted, duty-

free access to imported inputs was to create a free-trade regime for
export activities (Rhee et al., 1984, p. 11; Petri, 1990, pp. 61–62).
Producers of exports could thus purchase their inputs at world prices,
and were not disadvantaged vis-à-vis their foreign competitors. This
was very important in the case of both Korea and Taiwan because, in
view of the countries’ limited resource base, exports had to have a
large import component (estimated at around 40 percent for much of
the last three decades for Korea and over 50 percent for Taiwan) (see
Frank et al., 1975, p. 82; Scitovsky, 1986, p. 150; Steinberg, 1989, p.
135). The preferential access to credit not only facilitated the purchase
of working inventories, but the subsidy also made exports more
profitable relative to domestic sales.

conglomerate) that he had been compelled by the government to sell the very profitable
shoemaking company from his group for having fallen foul of the government’s policies.
24 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

Finally, Korea astutely exploited some special factors in the

international environment (Petri, 1990, pp. 62–63, 74). Because of its
historical links with Japan, Korea maintained a strong trading
relationship with the country, which also served as the source of much
of Korea’s technology. In addition, Korea benefited from its relationship
with the US in terms of American business practices, market
requirements, and contracts for construction and transportation during
the Viet Nam war. By 1987, the US was Korea’s largest market,
accounting for about one third of its exports, and providing a bilateral
surplus of nearly USD10 billion. In a situation of generally increasing
world trade, Korea also began its export drive before other rapidly
growing countries in East and Southeast Asia had started to do so. Even
though Korean exports to developed country markets now appear to be
more “protection-prone” than those of other countries, contemporary
newcomers to the export drive are likely to hit protectionist barriers
sooner than did Korea (Petri, 1990, pp. 72–73, Table 4.4).

2.4.2 Lessons for Pakistan in Trade and Industrial Policies

Pakistan can learn much from Korea’s successes and failures

with trade and industrial policies. In analyzing these policies, one can
distinguish broadly between the impact that government
interventions have on three types of incentives: (i) the overall
incentive regime created by fiscal, financial, exchange rate, and trade
policies; (ii) functional incentives, that is, interventions to offset some
systematic pattern of market failure or distortion (such as
imperfections in the markets for technology and human capital, or
deficiencies in physical infrastructure); and (iii) selective incentives,
which seek to identify and support “sunrise” industries, and manage
the orderly elimination of “sunset” activities (World Bank, 1987a,
Volume 1, pp. 100–101).

However, the most important lesson is the acceptance of a

different philosophy concerning the external sector. The export
performance of Korea and Taiwan—and indeed of the other Asian
“tigers” such as Hong Kong, Singapore, and even Japan—can be
reduced to a few simple truths. All these countries are deficient in
natural resources and, hence, could not depend on exporting items
that were based on indigenous materials. Instead, their strategy
Khalid Ikram 25

consisted of importing raw materials and semifinished goods, adding

value efficiently through an educated labor force, and exporting the
final product at a competitive exchange rate. This process is the
essence of the East Asian export miracle. Exports, therefore, were
based mostly on imports.

The most important factor that translated these countries’

strategy into reality was the level at which the authorities provided
support to the export drive and the consistency with which they
pushed it. Song (2003) has given a flavor of how important the
authorities considered exports:

The basic philosophy of President Park Chung Hee

was “exports first” or “mission building through
export promotion.” In President Park’s eyes, setting
highly ambitious export targets and then exceeding
those targets was regarded as the height of
achievement for businessmen and public officials in
charge of export promotion. Under President Park’s
government, larger Korean firms were assigned annual
“Export Targets” by officials in the Ministry of Trade
and Industry which maintained an “export situation
room” to supervise export behavior of various firms.
The export targets were seen by firms as virtual
“orders” or signed “missions.” If they succeeded in
fulfilling their export goals, there [were] ordained
numerous benefits reserved for exporters, including
preferential credit and loans, administrative support,
and tax and other benefits. Thus, Korean exporters saw
the over-fulfillment of their “export targets”—usually
determined jointly with the government—as the
keystone of their business strategy (p. 97).

Starting in December 1962, the president instituted a monthly

export-promotion conference that he attended along with his chief
economic secretary, the minister of planning, the minister of trade
and industry, the director of the Korea Trade Promotion Corporation,
and the chairman of the Korea Traders Association. The president
himself checked the progress of exports and the performance of
26 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

exporting firms. The meetings served as a forum for revising and

extending administrative support to exporters and also as a medium
for exchanging information among policymakers, businesspersons,
and economic experts.

The Korean government also used the stick in addition to the

carrot. The former included withdrawal of financial support and legal
punishment to enforce policies. Firms that consistently failed to meet
their export targets would be threatened with tax investigations,
restricted access to bank credit, and other punitive sanctions—
measures that could lead to bankruptcy. Firms that met their export
targets, however, were favored with even further support. Some
writers on the Korean economy go so far as to say that, under the
Chung Hee Park government, the primacy of expanding exports was
so great that Korean businesspersons were expected to maximize
exports rather than profits (Song, 2003, p. 129).

An important technical factor in Korea’s export drive was the

establishment of an overall incentive regime that did not penalize
exports and, for manufactures, was modestly pro-export. As
discussed earlier, this largely involved maintaining a competitive
exchange rate, together with the ability of exporters to obtain their
necessary imports essentially tariff-free. The latter is extremely
important if a country’s exports are based largely on imports.

The East Asian countries used the following methods to

ensure that their businesses were not disadvantaged because of the
high import component in their exports.

One method, used especially by Korea, was to create an

institutional structure that swiftly rebated taxes paid on the imported
component of exports—this involved regularly monitoring the
performance of the administration of these rebates, and frequently
revising the tables of coefficients of the import component of exports.
Taiwan followed a more mixed route—it set up a number of export
processing zones in which imports were allowed duty-free, thereby
avoiding the administrative delays in first collecting and then returning
the duties. It also provided a wide range of fiscal incentives such as (i) a
five-year income tax holiday; (ii) tax deductions for exports (within
Khalid Ikram 27

certain limits, businesses could deduct 2 percent of annual export

proceeds from taxable income); and (iii) tax exemptions for
undistributed profit (under this provision, the amount reinvested for
productive purposes was deductible from taxable income, the idea
being to maintain a high rate of investment and thereby keep
upgrading technology in the exporting industries). The total cost of the
tax reductions and rebates was significant—for example, from 1965 to
1980, rebates of these taxes and customs duties on exports amounted to
15–30 percent of total tax revenues (Kuo, 1999, pp. 60–61, Table 3.7.1).

Other subsidies were also significant in making exporting

relatively more attractive for Korean firms than producing for the
domestic market. The most important of these was that exporters were
provided access to bank credit and did not have to borrow at the
usurious curb market rates; we have already seen that the latter were
generally three times the rate charged by banks. Moreover, as Rhee et
al. (1984) have stressed, the authorities took pains to create an
institutional structure that would ensure that the incentives legislated
were, as far as possible, automatically and immediately made available
to the exporter—an important lesson is that, in a private sector
economy, “an incentive delayed is an incentive denied” (pp. 11–14).

The role of functional incentives has been less intensively

documented, but in order to facilitate the export drive, the effects of
overcoming market imperfections and infrastructure deficiencies
could only have been helpful. The verdict on selective interventions is
largely negative, especially in the period of the HCI drive (1973–79).
The reason appears to be that, while governments might have an
advantage in gathering information needed for long-term decisions in
the earlier phases of industrialization, at later stages, entrepreneurs
and markets become keenly concerned with dynamic factors and are
more likely to show flexibility in moving into profitable markets and
out of losing ventures than do governments (World Bank, 1987a,
Volume 1, p. 102, Volume 2, pp. 85–92; see also the case studies on pp.
131–214). During the HCI drive, the Korean government continued to
support its chosen industries even when the costs—both the direct
financial costs and the opportunity costs in terms of what the country
was losing by depriving the more efficient smaller industries of bank
credit and other resources—had become clear.
28 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

However, for most of the period since the early 1960s, the
Korean government used international prices and export sales (i.e.,
competitiveness in the international market) as a set of performance
indicators. In Korea’s experience, the most efficient results with
industrial and trade policy were obtained when the authorities
provided, on average, almost equal incentives for domestic sale and for
export, and within manufacturing did not markedly discriminate
between different items of export. This “level playing field” left it to the
market to channel factors of production into areas of Korea’s greatest
comparative advantage. The market responded to the outward-looking
strategy by channeling resources into labor-intensive activities which,
as we have seen, rapidly increased exports and employment, and
improved the income distribution. 9 This factor, namely, that
government interventions generally worked to strengthen the
allocative actions of the market—and thus remained pro-efficiency—
distinguishes East Asian policy actions from those of eastern Europe,
and is perhaps one of the most useful lessons for Pakistan.

2.4.3 Pakistan’s Experience with Export Policies

Pakistan’s experience with export incentives has been very

mixed. For long periods, the country maintained an overvalued
exchange rate, which of course encouraged imports rather than
exports. In 1959, Pakistan introduced its first major measure explicitly
designed to boost exports—the Export Bonus Scheme. This scheme
provided exporters with a voucher that allowed them to purchase
foreign exchange equivalent to a percentage of their export earnings;
the percentage varied with the commodity exported. These vouchers
could be sold on the stock exchange to importers and, in view of the
extreme foreign exchange shortage, they commanded a premium. The
importers could use the foreign exchange bought with these vouchers

9 A detailed study by Westphal and Kim (1982) concluded that, over the 1960s,

“manufactured exports were more labor-intensive than manufactured imports, and

they became increasingly more labor-intensive over time even as shifts in the
composition of output caused manufacturing production for the domestic market to
become somewhat more capital-intensive. The aggregate labor-capital ratio in the
manufacturing sector actually increased between 1960 and 1973; at the same time,
total factor productivity about doubled” (p. 271).
Khalid Ikram 29

to purchase imports from a list of eligible items; many of these were

high-value consumption articles. The effect of this scheme was to
create a system of multiple effective exchange rates that depended on
the percentage of exports allowed as the bonus and the premium that
the voucher commanded on the stock exchange. The philosophy
behind the Export Bonus Scheme was that consumers of luxury
imports should effectively subsidize the country’s exports.

However, the effects of the actual workings of the scheme

diverged from this aim, and it failed to boost exports across the
board. For most of its life, the scheme did not cover exports of
primary commodities (thereby denying the incentive of a more
realistic effective exchange rate); there were frequent changes in the
eligibility of other items for export bonus (for example, cotton yarn
was originally included in the scheme, later excluded, subsequently
again included, and then excluded again from September 1965
onward); and there were also changes to the percentage of exports
permitted as a bonus. The frequent changes in coverage and bonus
rate increased uncertainty among exporters as to the effective
exchange rate that would apply to them—in three shipping periods,
i.e., July–December 1964, July–December 1966, and January–June
1968, eight bonus rates were applicable at the same time, giving eight
different effective export exchange rates, while six or seven rates were
common in other shipping periods (Ikram, 1971, p. 68; Islam, 1981,
pp. 76–111). The possibility of frequent changes also led exporters to
lobby for higher bonus rates for their own export items. The files of
the Ministry of Commerce of that period are replete with telegrams
and letters from numerous exporters’ associations urging that their
particular product be shifted to a higher bonus bracket (see, for
example, annexes to Government of Pakistan, 1970).

As mentioned earlier, the Export Bonus Scheme served as an

incentive to the export of manufactured items alone. A number of
other concessions and incentives (such as the Export Performance
Licensing Scheme) were also provided to manufactured exports, but
without taking into account the effect of the totality of these
measures. The result was that, in a number of cases, the social and
private profitabilities of exported items diverged. The plethora of
incentive schemes made it financially profitable for an exporter to
30 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

export a good even if, measured at international prices, the country

suffered an economic loss; of Pakistan’s major exports at the time,
sacking, hessian, cotton yarn and (marginally) cloth all showed higher
private profitabilities than social (Ikram, 1973).

2.5 Financial System and Monetary Policy

In the period under study (the early 1960s to mid-1990s), the

East Asian economies were more successful than Pakistan in
harnessing their financial systems to support GDP and export growth.

2.5.1 Pakistan’s Experience

Direct public involvement in productive activities in Pakistan

went well beyond that in the fast-growing Asian economies, and the
borrowing required to finance this public sector activity crowded out
the private sector. Through most of the period 1960–90, the share of
public investment in total domestic fixed capital formation in Korea
did not exceed 25 percent, while in Hong Kong it did not exceed 20
percent; in Pakistan it generally remained between 60 and 70 percent
(Mukerjee, 1986, p. 14, Table 2).

Much of the public sector activity in Pakistan was financed by

borrowing—budget deficits generally ran at between 4 and 8 percent of
GDP for much of the period. As a result, government debt, particularly
domestic debt, rose sharply. Total debt rose from 55 percent of GDP in
1980/81 to 78 percent in 1986/87, while domestic debt climbed from 20
percent of GDP in 1980/81 to about 37 percent in 1986/87. A
concomitant of this increasing public indebtedness was the continuing
rise in interest payments, which jumped from 15 percent of the
budget’s recurrent expenditures in 1980/81 to 21 percent in 1986/87
(World Bank, 1987b, Volume 1, pp. 2–3). Thus, the excessive expansion
of the public sector without a commensurate increase in resource
mobilization led the government into a situation in which it lacked any
significant room for budgetary maneuver: the relatively fixed big-ticket
items of expenditure (defense and civil administration) were joined by
a large and increasing contractual item (interest payments), and the
three virtually preempted the available resource, leaving only a
pittance to finance the development program.
Khalid Ikram 31

The public sector’s increased credit requirements also

“crowded out” the private sector. The government can invariably
outbid the private sector in vying for credit because it is always able
to pay a higher interest rate—it can always print the money. This can
lead to a less-than-optimal use of resources, because the government
is not necessarily the most efficient agent. This phenomenon of
crowding out seems to have increased in the 1980s. A World Bank
(1987b) study of Pakistan’s financial sector found that private
borrowers with collateral of 150–200 percent of their loans and sound
guarantees (e.g., real estate) were able to borrow, but the more
dynamic small and medium-size new entrepreneurs were being
crowded out because of the risk-averse behavior of banks and
preemption of credit by government and public enterprises (Volume
1, p. 4). The flows of credit to the larger enterprises also meant that
more capital-intensive methods of production were being
encouraged—between 1969 and 1981, the large-/medium-scale
manufacturing sector—the main beneficiary of the credit
allocations—had an incremental capital output ratio of 4.3, compared
with 1.3 for the small industries sector (Volume 1, p. 4).

During the 1970s, construction and manufacturing in Korea

received a larger-than-proportionate share of loans (than if the
criterion had been fixed capital to output ratio); mining, electricity,
and water and sanitation were moderately favored; transport,
storage, and communication were least favored. Ranked in terms of
capital/output ratios, construction was the lowest, followed by
manufacturing (Cole & Park, 1983, pp. 182–184, Table 38). Moreover,
both construction and manufacturing were privately owned and
enormous earners of foreign exchange. Thus, credit allocation in
Korea did not preempt the private sector, and was more in line with
the country’s comparative advantage.

In Pakistan, during the decades under study, the financial

sector presented a major weakness: it could neither effectively
mobilize savings nor efficiently allocate resources. Indeed, a very
comprehensive World Bank (1987b) report on Pakistan’s financial
sector concluded bluntly that “it does not seem very likely that the
present financial system can adequately support the formidable
challenges needed of it” (Volume 1, p. 6).
32 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

The sector’s chief structural weaknesses were identified as

follows (World Bank, 1987b, Volume 1, pp. 3–6):

(i) Segmented financial markets, with credit going chiefly to

large-scale enterprises (with high incremental capital output
ratios, as noted above).
(ii) A lack of transparency regarding who pays and who benefits
from the regulated flows of credit.
(iii) The “crowding out” of the private sector (discussed above).
(iv) Uncompetitive credit markets dominated by government-
owned institutions without managerial autonomy, and with a
declining quality of lending (25–30 percent of loans considered
nonperforming).
(v) A very high concentration of lending in very few accounts—in
1987, a mere 0.2 percent of the number of loans accounted for 50
percent of loan amounts. Government reports on the credit
situation show that this depressing picture had not changed
materially over the last three decades: in 1959, the Credit
Enquiry Commission reported that, on 31 March, only 0.5
percent of the number of accounts had been given 62.7 percent
of commercial banks’ advances (Government of Pakistan, 1959a,
p. 96, Table 14). Three years later, the Credit Committee
lamented that, on 31 March 1962, only 0.41 percent of the
number of accounts had taken up 56.6 percent of the amounts
advanced by commercial banks (Government of Pakistan, 1962,
p. 12, Table 3). Moreover, the number of persons receiving these
advances could very well have been smaller than the number of
accounts, because of the possibility of a single individual
holding multiple accounts. Thus, plus ça change, plus c’est la même
chose (the more things change, the more they remain the same).

For most of the period from the 1960s to the 1990s, Pakistan’s
financial intermediaries appeared unable to effectively perform their
role of equalizing the marginal costs of and returns to capital
employed in different activities with similar risks. However, in the
next decade, the banking sector underwent a considerable measure of
reform along the lines recommended earlier, and its contribution to
GDP growth markedly improved.
Khalid Ikram 33

2.5.2 Taiwan’s Experience

Insofar as reform of the financial sector was concerned up to the

1990s, Pakistan had perhaps more to learn from the experience of
Taiwan than from that of Korea. These two countries followed
completely different monetary policies because of radically different
industrial and financial structures. The industrial structure in Taiwan
was dominated by small firms: in the mid-1970s, the average
Taiwanese firm in manufacturing was less than half the size (in terms
of employees) of the average Korean enterprise (Scitovsky, 1986, p.
146); even by 1981, about four fifths were estimated to have fewer than
20 employees (“Taiwan and Korea,” 1990, p. 20). Moreover, these firms
were far less leveraged than their Korean counterparts. Korea, on the
other hand, was dominated by the huge conglomerates known as
chaebols. In 1984, the sales of the top ten chaebols equaled two thirds of
the country’s GNP (Amsden, 1989, p. 116, Table 5.1), and the sales of
the top four alone equaled nearly half the GNP in 1989 (“Taiwan and
Korea,” 1990, p. 20). Moreover, as pointed out above, these firms were
highly leveraged. Hence, increases in interest rates would have a much
greater impact on Korean firms than on the Taiwanese.

Taiwan’s policy was to let interest rates rise to market levels. As

early as 1950, the Bank of Taiwan introduced a special system of
savings deposits (the Preferential Interest Rate Deposits), which offered
the depositor a nominal rate of 7 percent a month, i.e., 125 percent a
year (Tsiang, 1986, p. 11). While interest rates did, of course, move up
and down during 1960–90, they generally remained positive in real
terms by a substantial margin. This policy had three main effects: (i) it
led to a rapid increase in household and aggregate savings (the ratio of
savings to GDP increased from 5.2 percent in 1952 to 13.2 percent in
1963, and from the 1980s remained in the range of 33–35 percent); (ii) it
contributed significantly to slowing down inflation; and (iii) it
encouraged labor-intensive production by making capital expensive
(the unemployment rate in Taiwan for most of the period since about
1965 was less than 2 percent of the labor force).

2.5.3 Korea’s Experience

Except during 1965–72, Korea kept interest rates low through

government fiat. The demand for credit at the officially mandated
34 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

interest rates therefore exceeded the supply by a considerable margin,

the available bank credit had to be rationed, and a substantial “curb
market” for credit developed. The artificial suppression of interest rates
gave rise to unregulated financial markets, colloquially known as the
“curb market,” which provided credit (according to some estimates) of
perhaps 40 percent of the banking sector’s outstanding domestic credit.
Interest rates in the curb market were generally two to three times
those charged by the commercial banks. During the 1960s and 1970s,
interest rates in the informal market were estimated to hover between
35 to over 60 percent per annum (compared with a rate on bank loans
of 15–25 percent). For the period 1950–94 as a whole, the rate in the
curb market averaged 40.8 percent per annum, compared with 13.7
percent on government-sanctioned loans from banks (see Chung, 2007,
pp. 166–167, Table 5.12; Cole & Park, 1983, pp. 110–133, Table 30).
Access to commercial bank loans (which, for much of the period, were
government-owned) thus provided a substantial subsidy.

The government used the allocation of credit as a tool to

encourage compliance with the regime’s objectives. This not only gave
the authorities more scope for “arm twisting,” but also increased the
possibilities of misdirecting credit flows. This in fact occurred during
the “heavy and chemical industry” period (1973–79), when the
government encouraged the setting up of these industries, regardless
of efficiency considerations, and the banking system was compelled to
provide the financing. This policy was responsible for the proliferation
of nonperforming loans in the portfolios of the commercial banks,
requiring special government concessions to deal with the problem.

2.6 External Assistance

An allied lesson that Pakistan could learn from the East Asian
experience of mobilizing domestic savings and boosting exports
relates to a country’s dependence on foreign aid. Korea and Taiwan
were major recipients of external assistance (especially from the US)
at the start of their development drive. However, from an early
period, these countries planned to reduce their dependence on
concessionary foreign savings and succeeded in doing so.
Khalid Ikram 35

2.6.1 Korea’s Experience

As bilateral aid from the US to Korea was phased down (and

virtually eliminated by 1974), the World Bank set up a consultative
group to mobilize and coordinate assistance from other donors; the
group’s first meeting was held in 1966. Korea received its first credit
from the International Development Association (IDA)—the World
Bank’s concessional lending affiliate—in 1962. By 1973 (i.e., after only
11 years), the country had graduated from the IDA.

After only 13 meetings, the consultative group for Korea was

terminated in 1984 because, as the official communiqué put it, “its role
as a forum for aid coordination and enhanced mobilization of external
capital for (South) Korea’s development is now being fulfilled by the
(South) Korean Government” (quoted in Ensor, 1984, p. 99).

2.6.2 Taiwan’s Experience

Foreign aid in Taiwan followed a largely similar pattern: it

received substantial US assistance in the early 1950s, which was
consciously phased out in the 1960s and ended in 1965. A Taiwanese
policymaker and analyst commented:

The lesson that can be learned from Taiwan is that—

with the exception of an emergency, such as a
destructive earthquake, flood, or drought—foreign aid
in the sense of an open-ended, long-range commitment
of resource transfer is not needed after a time. Such
commitments violate the sound principle of self-help,
which is, after all, a cardinal moral principle of the
market-oriented economy. Moreover, the habit of
dependence on hand-outs from foreigners violates the
principle of self-respect just as much as the habitual
dependence of manufacturers on protected markets
and government subsidies (Li, 1995, p. 231).

2.6.3 Pakistan’s Experience

Pakistan has not learnt the foregoing lesson. The first meeting
of the Pakistan Consortium, as the aid donors group was termed, was
36 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

held in Washington as long ago as 1960. The group has continued to

meet on average yearly since then, recently rebranding itself as the
“Pakistan Development Forum.” Indeed, far from phasing out the
Consortium, a further donors’ group—labeled the “Friends of
Pakistan”—was set up in 2008. As far as the terms of aid are
concerned, Pakistan continues to receive IDA funds, nearly 50 years
after it first became eligible for them. It is clear that Pakistan’s
policymakers have not taken the idea of self-reliance seriously, even
though it was identified as one of the country’s main aims as far back
as the Fourth Five-Year Plan (1970–75).

Perhaps this should not surprise anyone. There has frequently

been a disjunction between the professed aims of the government’s
strategy and its actual intent. 10 Thus, while the East Asian economies
viewed foreign aid as a necessary but temporary prop, the authorities
in Pakistan did not necessarily see it in the same light. To dispense
with foreign assistance, a country has to do something to replace
those resources—it must mobilize additional domestic savings,
generally by raising revenues, and it must acquire more foreign
exchange by increasing its exports. Pakistan has been loath to do the
former, in large part because this would require taxing the income
from sectors such as agriculture from which most of its ruling class
has sprung. Similarly, sustaining an export drive would require a
substantial change in the incentive system, which would change the
distribution of rewards away from the existing “winners” (the
importers). For most of Pakistan’s history, foreign exchange for
imports had been tightly licensed—the winners, almost by definition,
were those who had the political connections to obtain these licenses,
and would thus not easily be displaced. Under such a system of
economic governance, foreign aid became a necessity if the country
were to attain a level of investment and imports that would sustain a
respectable GDP growth rate.

10 The difference between the stated aims of the governments of united (pre-1971)

Pakistan—to eliminate disparities in per capita incomes between East and West
Pakistan—and their actions, as measured by resource allocations, offers another key
example of this gap.
Khalid Ikram 37

In fact, a prominent deputy chairman of the Planning

Commission (i.e., the minister of planning) wrote that “the original
‘strategy’ was to use plans to obtain aid. The plans were the
instrument by which persuasion was applied; they showed
preparedness and resolve [to donors]. . . . Through all the years of
planning the measure of the success of a plan has been the amount of
aid which it drew” (S. Hasan, 1971, p. 37). In later periods, the
rhetoric of self-reliance became more strident and a 20-year
Perspective Plan was even prepared (as part of the Third Five-Year
Plan, 1965–70) that projected phasing out foreign aid by 1985.
However, since this Plan and its subsequent incarnations did not
detail policies to mobilize additional domestic savings or raise
exports to the required levels, one is entitled to a certain skepticism
regarding the authorities’ commitment to the purported aim.
Governments in Pakistan have never seriously contemplated
reducing the country’s dependence on foreign aid.
38 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

3 Poverty and Income Distribution

It is impossible to uniquely define what constitutes poverty

because this condition has many facets. Poverty can be related to
income level, with the poor being defined as those who live below a
designated threshold of income—generally called a “poverty line.”
Poverty lines can be absolute, relative, or subjective. For this paper, I
have concentrated on the absolute poverty line because it is the most
widely used and because data for this measure is available for Pakistan.

Absolute poverty lines are anchored in a cost-of-basic-needs

concept. The usual approach is to define an absolute food poverty line
in terms of the estimated cost of a food bundle that (i) provides a
stipulated energy intake deemed essential or minimum by the
standards of a given society, and (ii) is based on the consumption
patterns of lower expenditure groups in that society. The food
poverty line is then augmented by an allowance for nonfood
consumption (see Fields, 2003, pp. 73–94).

Both the Korean and Taiwanese governments intervened to

eliminate poverty and influence the distribution of income and wealth.
They succeeded dramatically on both counts—absolute poverty was
reduced to less than 10 percent of the population by 1980, while in
terms of distributive equity (measured by Gini coefficients) both Korea
and Taiwan rank at the very top of developing countries. Both were
remarkable in successfully pursuing rapid GDP growth while
improving the distribution of income and wealth.

3.1 Poverty Reduction and Income Distribution in Korea and

Taiwan

The Korean government had always to be sensitive to

distributional questions. The existence of a communist state in the
northern part of the peninsula meant that South Korea’s citizens could
always compare the degree of equity in their country with that in
North Korea. A too-wide discrepancy in favor of the north might tempt
some in the south to believe that communism was a superior system.
Hence, it would have been politically imprudent to let the distribution
Khalid Ikram 39

of income and wealth in the south become too unequal. Similarly, the
Taiwanese authorities had to ensure that income distribution in their
country remained more equitable than that in mainland China lest the
lure of the communist system prove too strong.

Four factors explain the impressive results in Korea’s and

Taiwan’s income distribution: (i) the redistribution of assets after the
Japanese withdrawal (see, for example, the earlier discussion of the
Korean land reforms); (ii) an outward oriented development strategy
that, for the most part, emphasized the countries’ comparative
advantage in labor-intensive activities (and thus contributed to
employment); (iii) a very strong emphasis on education, so that
higher productivity (and higher paying) jobs became available to an
increasing number of people; and (iv) an industrial strategy that
provided incentives to invest in manufacturing and accelerated the
sector’s growth, so that jobs were rapidly created for the labor drawn
away from agriculture.

Korean analysts generally agree on the following: (i) there were

striking reductions in absolute poverty after 1965; 11 (ii) relative poverty
declined until about 1970, then increased slightly, and then improved
after 1979; 12 (iii) income inequalities were greater among nonfarm
households than among farm households, i.e., by 1990, equity in Korea
was essentially an urban problem (see especially Yoo, 1990, pp. 376–381).

Between 1965 and 1980, the number of households living in

absolute poverty dropped from 41 percent of the population to 10
percent. All parts of the population gained—absolutely poor rural
households fell from 36 to 9 percent, urban households from 55 to 10
percent. More aggregative measures, such as the Gini coefficient,
show an improvement until about 1970 and a slight deterioration (still
excellent results compared to other countries) thereafter; for most of
the period the coefficient remained around 0.35 (Suh, 1985, pp. 8–14;
see also Choo, 1980, pp. 277–335; Suh, 1980, pp. 336–372). The

11 The absolute poverty line was defined as KRW121,000 in 1981 prices per month for

a five-member household.
12 The relative poverty line is defined as one third of the average household income in

a given year.
40 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

movements in the Gini coefficient for Taiwan are broadly similar,

with the coefficient varying between 0.28 and 0.32 for most of the
period from 1965 to 2000 (Yu, 1999, p. 145, Table 6.2).

The poverty ratio (the proportion of the population living

below the poverty line) in Korea fell from 21.5 percent in 1975 to 9.4
percent in 2000, and to an estimated 8.8 percent in 2004. The course of
poverty in Pakistan has been more variable. It was estimated that 17.3
percent of the population fell below the poverty line in 1988; this
almost doubled in 2002 to 34.5 percent before falling sharply to 22.3
percent in 2006 (Government of Pakistan, 2009; World Bank, 2002).

A major achievement of Korea and Taiwan—and one that has

especial relevance for Pakistan—was the reduction in poverty and
improvement in equity in rural areas. It is worth looking at the most
important weapon they used—land reform (see Section 3.2).

3.2 Land Reforms and Distributive Equity

This section looks at how successfully Korea, Taiwan, and

Pakistan were able to implement land reforms in the attempt to
improve income distribution, especially in rural areas.

3.2.1 Land Reforms in Korea

Studies in several countries have shown that a major cause of

income inequalities in rural areas is the distribution of ownership of
rural assets, principally agricultural land. Korea was able to undertake
thoroughgoing land redistribution between 1945 and 1950 for rather
special reasons. During their occupation of Korea (1910–45), the
Japanese authorities confiscated much of the country’s arable land; by
the end of this period, they held about 40 percent of Korea’s
agricultural land. With the defeat of Japan in World War II and the end
of the occupation, this land became available for redistribution.
Moreover, “Korean landlords ... also carried the taint of collaboration
with the Japanese, at least in the eyes of most of their countrymen, and
these landlords, as a result, were not in a politically strong position”
(Mason, 1980, p. 237). Thus, there was little need to redistribute the
formerly Japanese-held land among existing Korean landowners.
Khalid Ikram 41

As importantly, the government was able to put through land

reforms in 1949 that limited holdings to approximately 3 ha, with
minimal compensation (effectively equal to only 1.5 times the average
annual product of the land) being paid to the original owners. While
these limits were probably evaded to some extent by illegally registering
land under the names of different family members, the reforms were an
overwhelming success. Tenancy, which had been 48.9 percent in 1945,
fell to 5.2 percent in 1964, while ownership jumped from 13.8 percent to
71.6 percent between the two years (Ban, Moon, & Perkins, 1980, pp.
283–287, Table 120). Steinberg (1982) has noted that, “if income is more
equally distributed today in Korea than in many developing societies,
the primary reason is to be found in these land reforms” (p. 15).

3.2.2 Land Reforms in Taiwan

Land reforms in Taiwan had a similar effect. Prior to the land

reforms, tenant farmers comprised about 70 percent of the total
farming population, and their rent payments varied between 50 and
70 percent of the annual crop. No allowance was made for crop
failures and the rent was usually collected before the harvest, thereby
increasing its real burden. If one considers that about 60 percent of
the total labor force was employed in agriculture, it is clear that the
distribution of income and wealth was very unequal.

The first agrarian reforms were introduced in 1949 and set a

ceiling on land rent of no more than 37.5 percent of the annual crop.
The reforms also provided more security for tenants—tenancy could
no longer be terminated at the landlord’s will, tenants were granted
written leases for a minimum of six years, and a lease had to be
renewed if the tenant had not violated it (Li, 1995, pp. 67–70).

A second set of agrarian reforms was introduced in 1951.

Under these measures, land confiscated from the Japanese was sold to
tenant farmers. A third wave of agrarian reforms followed in 1953, in
which holdings in excess of 7.5 acres were confiscated from landlords
and sold to tenant farmers. The sale price was fixed at 250 percent of
the value of the annual main crop, amortized over 10 years, with
payment in either rice or cash (depending on the crop produced).
Landowners received compensation in the form of land bonds (70
42 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

percent) and shares in public enterprises (30 percent). By the time the
three waves of agrarian reforms had been completed, farm tenancy
had halved. Li (1990, p. 70) estimated that the wealth transferred by
land reform was the equivalent of 13 percent of Taiwan’s 1952 GNP.

The successive waves of Taiwan’s agrarian reforms followed

each other quickly. A major reason for the speedy decisions was that
the central government and most key positions in the provincial
governments were held by officials from mainland China, who did
not have a stake in land ownership in Taiwan.

3.2.3 Land Reforms in Pakistan

To lay out the foregoing stories is to underscore the difficulty

of replicating them in Pakistan, where agricultural land was not
owned by a departing colonial ruler, and where the power structure
is heavily dominated by the landowning class. Consequently,
successive governments in Pakistan have not felt an irresistible
compulsion to translate their egalitarian pronouncements into
practice. Apart from the derisory effect of the land reforms that were
undertaken, the government has consistently tiptoed around other
methods of securing equity, for example, such as implementing a fair
tax on agricultural incomes (see, for example, Government of
Pakistan, 1964, 1967). Thus, while greater equity in rural income
distribution might remain a professed goal, the government will have
to look for a different set of tools with which to accomplish its aims.

Pakistan has enacted land reforms on three occasions: in 1959,

1972, and 1977. Each set of reforms was intended to lower the ceiling
on ownership. The 1959 reforms imposed a ceiling of 500 acres of
irrigated or 1,000 acres of unirrigated land, or 36,000 product index
units, whichever was more. In addition, it permitted the landowner to
retain up to 150 acres of orchards, made further allowances for stud
and livestock farms, and also permitted, under some conditions, the
transfer of certain amounts of land to the owner’s heirs. The reforms
of 1972 reduced the ceiling to 150 acres of irrigated or 12,000 product
index units, and abrogated virtually all the exemptions granted under
the 1959 reforms. The 1977 reforms continued to lower the ceiling to
100 irrigated or 200 unirrigated acres, or 8,000 product index units.
Khalid Ikram 43

Although a detailed study of the economic effects of land

reforms is not possible here (for a useful interim evaluation, see
Ahmed & Amjad, 1984, pp. 124–129), certain aspects of the impact are
striking. For example, the total amount of land reformed in Korea by
1952 (the land reform law was passed in 1949) amounted to about 3.6
million acres (Ban et al., 1980, p. 286, Table 119) out of about 5.7
million acres of cultivable land. The three sets of Pakistani reforms, on
the other hand, had accounted for a total of 4 million acres out of 49
million cultivated acres by 1980 (Ahmed & Amjad, 1984, pp. 124–125,
Tables 9.1–9.2). The Korean reforms also touched a much larger
segment of the agricultural population—by 1964, the number of
tenants had fallen to 5 percent of total farm households, from 49
percent in 1945 (Ban et al., 1980, Table 120). The Taiwanese reforms
had a similar significant effect, reducing the tenancy rate from about
65 percent of farm households in 1945 to 18 percent in 1953. In
Pakistan, the number of tenant farms declined only from 42 to 34
percent between 1960 and 1972 (Ahmed & Amjad, 1984, p. 127).

The Pakistani reforms were, moreover, riddled with

exemptions and loopholes, so that only about 10 percent of landlords
with holdings over 150 acres were actually affected, and the area
resumed was only about 30 percent of the reported area (the real area
was likely to be very different) owned by persons with holdings of
over 150 acres. This was less than 1 percent of the total area in the
Punjab and less than 3 percent of that in Sindh (Nabi, Hamid, &
Zahid, 1986, p. 59). The concentration of ownership was barely
affected. Additionally, the reforms were implemented very slowly—
compare the results after three years (1949–1952) in Korea or four
years in Taiwan (1949–1953) with those after 20 years (1959–1980) in
Pakistan (see Ahmed & Amjad, 1984; M. H. Khan, 1981, pp. 71–72).
On several counts, therefore, one may conclude that the East Asian
reforms were much more serious than the three combined reforms in
Pakistan, both in terms of transferring land ownership to the
cultivator and in diluting the power of established landowners.
44 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

3.3 A Cautionary Note on the Concentration of Economic Power

3.3.1 Korea’s Experience

Despite the success of the Korean measures discussed so far,

one must also be alive to the dangers of copying everything it did. An
important Korean practice of which to be wary is the government’s
encouragement to concentrate economic power. Korea now has one of
the most concentrated economies in the world. The share of the top 10
chaebols in GDP increased from 5 percent in 1973 to 11 percent in 1978;
in the latter year, the share of the largest 46 groups was over 17
percent of GDP. The share of the top 30 groups in shipments, which
Amsden (1989) has defined as a “close approximation of value-
added,” was nearly 41 percent in 1982 (p. 122). The concentration in
particular sectors could, of course, be much larger: for example, the
chaebol share in manufacturing value-added in 1978 was 43 percent
(Jones, 1987, pp. 98–101). A study of 2,260 commodities showed that,
in 1982, only 18 percent of them were produced under competitive
conditions (where the combined share of the top three producers was
less than 60 percent of the market). Moreover, in 1981, the average
share of the top three producers in Korean manufacturing industries
was 62 percent (higher than in Japan) (Amsden, 1989, pp. 120–121).
Through its ownership of banks and consequent ability to ration
credit, the government was able to control the actions of the chaebols.
However, with the political freeing up of Korea, the growth of the
financial sector, and the increasing availability of alternative
financing sources, this degree of economic power is increasingly
being translated into political muscle.

3.3.2 Pakistan’s Experience

It is, unfortunately, not possible to provide a direct

comparison with the situation in Pakistan, because the studies that I
am aware of are either not directly comparable in terms of concepts
(they are concerned with the share of business groups in
manufacturing assets rather than in manufacturing value-added, and
the data refers to enterprises of different sizes than in Korea) or
coverage (they refer to the pre-1971 Pakistan) (see Ahmed & Amjad,
1984, pp. 216–218; Papanek, 1967, p. 68; White, 1974, p. 64). They all,
Khalid Ikram 45

however, point to a very high degree of concentration. Jones (1987),

after making some rough and ready adjustments, concludes (very
gingerly) that “the top 43 groups in Korea would have sixty-three
percent of the assets of manufacturing firms employing more than
twenty workers, versus only forty-two percent in Pakistan” (p. 100).
Further concentrating economic power in the manufacturing sector
might simply mean that Pakistan had traded the influence of
agricultural barons for that of industrial barons.
46 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

4 Economic Governance

The findings on economic growth, investment, savings,

poverty reduction, and so forth represent only the end results of
deliberate policy actions. A common factor in the experience of the
fast-growing East Asian economies—and one that makes their
achievements even more impressive—is their dearth of natural
resources. Only 16 percent of Korea’s total land area is arable,
compared with 28 percent in Pakistan. The East Asian economies also
suffer from very high population densities: in 2007, the population
density in Taiwan was 1,840 per square mile, that in Korea 1,276,
while that in Pakistan was 575; Pakistan, therefore, has to contend
with far less pressure on the land. Moreover, the East Asian
economies possess very little in the way of minerals that might
compensate for the scarcity of arable land. 13 Under these constraints,
sustained economic growth must be largely policy-based. The crucial
questions for policy, in this context, relate to the roles of the
government and the market in the economic development of the East
Asian economies compared with Pakistan.

4.1 The Role of the State

The state’s role in economic development has never been far

from discussions of economic strategy. How far, and in what areas,
should the state intervene directly, and to what extent should the
questions of what to produce and how to allocate the items produced
be left to private markets? For many economists, the fall of
communism in eastern Europe appeared to provide a clear-cut
answer—economies developed most quickly when their functioning
was left to market forces. However, these questions have resurfaced
with a vengeance, triggered by the financial crisis of 2008 in which
several of the biggest financial houses and major industries of the US
and Europe ran to their governments, pleading to be rescued from the
consequences of their own improvidence.

13Contrast this with the abundant deposits of coal, natural gas, marble, and
gemstones in Pakistan.
Khalid Ikram 47

Keynes (1972) would assign the state a nuanced role:

The most important Agenda of the State relate not to

those activities which private individuals are already
fulfilling, but to those functions which fall outside the
sphere of the individual, to those decisions which are
made by no one if the State does not make them. The
important thing for Government is not to do things
which individuals are already doing, and to do it a
little better or a little worse, but to do those things
which at present are not being done at all (p. 291).

Economic theory provides some guidance, but rather more on

the nature of activities that the state could concentrate on than to
what extent it should pursue these activities (the classic statement is
that of Baumol, 1965). According to economic theory, there are two
closely connected justifications for state intervention in the
production and distribution of goods and services: (i) the existence of
“pure” public goods, and (ii) the existence of externalities in the
production/consumption of certain items. A public good is one
whose consumption is nonexclusive: when A has it, so does B.
National defense, the police force, and the judicial system are classic
examples of public goods, in that, if these items exist, they protect not
only individual A but also every other resident of the country. The
point is that the benefits from public goods are indivisibly spread
among the entire community; therefore, these goods and services
cannot be commercially marketed.

An externality arises if there are substantial benefits (or

detriments) to society other than those received directly by the
consumer, and are not reflected by market prices. Thus, the market
will not give out the proper signals, and the production/consumption
of the item in question will not proceed to the optimal point. A
frequently quoted example of a beneficial externality is primary
education. There is substantial evidence that universal primary
education provides general benefits to society, such as a reduction in
population or in the crime rate (see Cohn, 1979, p. 53, for a summary
of the findings of some of these studies), but if this education were to
be provided exclusively through the private sector (and hence only to
48 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

those who could afford to pay for it), it would stop short of the
socially optimal level.

Government actions in the real world do not, of course,

conform to this pristine view of things. All governments intervene in
numerous economic decisions and they intervene for myriad reasons,
many of which—such as to protect the interests of a particular group
or region—have nothing to do with economic efficiency. However,
even disregarding such intentions, most governments intervene in
economic decisions because they are suspicious of the efficacy or
timeliness of the “invisible hand.” As Jones and SaKong (1980) have
commented, “market failures being ubiquitous in the real world, a
rigorous presentation of the beauties of the invisible hand ultimately
provides a brief for the visible” (p. 8).

The questions for a policymaker in the real world therefore

become: what does “good” (i.e., successful) practice tell us about the
nature of government intervention, and to what extent can Pakistan
adopt these modalities and policies?

The East Asian economies’ dramatic success has, for many

observers in Pakistan, pointed to a possible third route. The lesson
that seems to emerge is that the command economy, with its micro-
management of all production and allocation decisions, has failed
disastrously and been abandoned even by most countries that profess
a communist ideology. In view of all the institutional constraints and
market imperfections that exist in any economy, and particularly in a
developing economy, reliance on untrammeled market forces is
hardly a realistic option for Pakistan. This lesson is further
underscored by the recent collapse of the developed world’s financial
and housing markets, and even its industrial structures. Given the
striking success of the East Asian economies, whose experience
combined a strong dose of state direction with an unremitting
pressure for market efficiency, the question raised is to what extent
their modalities and behavior could serve as a paradigm for Pakistan.

This study concludes that state intervention in the East Asian

economies succeeded because, for the most part, it concentrated on
creating positive externalities (such expanding primary education) or
encouraging an environment in which market signals could play the
Khalid Ikram 49

chief role in allocating resources (primarily by adopting an outward-

looking development strategy, in which export sales and the ability to
produce at international prices became the main performance
indicators). At the same time, the state strictly held the private sector
accountable for living up to the targets that were considered socially
crucial. These targets were few and carefully selected, generally
relating to export performance and the modernization of technology,
but were rigorously enforced through a combination of incentives
and punishments.

This paper also argues that, while Pakistan can learn many
practical lessons from the East Asian experience, it cannot and should
not blindly follow everything these economies did (see, for example,
Section 3.3). There are important differences between the institutional
and political setups in Pakistan and those in the East Asian economies,
as well as in the international environment. It will, therefore, be
necessary for Pakistan to develop or strengthen the required attributes
before it can successfully emulate the East Asian strategies.

4.2 Government Intervention in East Asia and Lessons for

Pakistan

The East Asian “tiger” economies, particularly during the

period in which they commenced their rapid growth, were
characterized by a political structure in which discretion and command
by the ruling authority played a strategic role—what Myrdal termed a
“hard” state (1968, p. 66; for the Korean case, see Cole & Lyman, 1971,
Chapters 3 and 5; Johnson, 1987, pp. 143–144; Jones & SaKong, 1981,
pp. 241–242; for the Taiwanese case, see Johnson, 1981, pp. 9–18). The
essence of this form of intervention is the use of compulsion, subtle or
overt, at the ruling authority’s discretion, and the discriminatory
targeting of this compulsion (positive and negative) toward particular
sectors, enterprises, associations (such as trade unions), or even
individuals (see, for example, Amsden, 1989, p. 15; Jones & SaKong,
1980, pp. 127–135, Appendix B).

The Korean government’s ability to employ these tools gave it

formidable power. Especially potent was its ability to instruct
commercial banks on whether and how much they could lend to
50 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

specific borrowers, particularly in the large-scale sector, where

enterprises had high ratios of debt to equity 14 and thus depended on
bank credit for their very survival (see Steinberg, 1989, p. 135). 15 One
assessment of this aspect of the government’s actions concluded:

Because the government had a complete monopoly on

all institutional credit, firms that failed to fulfill
government-set objectives could lose access to bank
credit, forcing them to seek credit on the curb, or
informal, market at double or more the interest rates
and, thus, making them uncompetitive. ... It could
force firms to fire or hire key executives, require
companies to merge or to move from family to public
ownership, and stress critical industries (Steinberg,
1989, pp. 134–135).

Mason et al. (1980) have commented:

If incentive procedures do not work, government

agencies show no hesitation in resorting to command
backed by compulsion. In general, it does not take a
Korean firm long to learn that it will “get along” best
by “going along” (p. 265).

Elsewhere, they have reiterated:

All Korean businessmen, including the most powerful,

have been aware of the need to stay on good terms with

14 For example, (a) Mason et al. (1980) put debt-equity ratios in manufacturing in the
range of three or four to one in the first half of the 1970s (pp. 267–268); (b) Scitovsky
(1986) notes that, from 1972 to 1981, the current plus fixed liabilities of Korean
manufacturing enterprises were 364 percent of their net worth—more than four times
as high as in the US. Moreover, almost two thirds of that debt was short-term (current
liabilities), making firms even more vulnerable to movements in interest rates and to
the continued availability of bank credit (p. 153); (c) E. H. Kim (1990) estimates that,
during 1977–86, the ratio of equity to total value (equity plus debt) for all nonfinancial
firms listed on the Korean stock exchange was about 16 percent, compared with around
45 percent for Japan and the US (p. 344).
15 The chaebol (large conglomerates) were in debt to government-sponsored or

approved institutions for more than four times the value of their equity assets.
Khalid Ikram 51

the government to assure continuing access to credit

and to avoid harassment from the tax officials (p. 337).

4.2.1 Institutional Considerations

Institutional, political, and international factors make it

impractical for Pakistan to follow the East Asian route in an undiluted
form

There are three reasons why Pakistan is likely to find it

impractical to follow the East Asian command route in its undiluted
form. First, the successful application of a policy in which the
government intervenes directly to identify “winners” and works
closely with such industries and enterprises to support them through
their presumed periods of “infancy,” requires strong government
institutions, considerable bureaucratic skills, and a firm commitment
to economic growth as a national objective. If some or all of these
conditions are absent, there is a serious danger that selective
interventions will be captured by the intended beneficiaries simply to
generate economic rents (i.e., unearned profits) for as long as possible.

It is thus essential that the government (including both

politicians and bureaucrats) make decisions that are based on an
assessment of the country’s long-term economic interests. This refers
back to the first of the characteristics of the East Asian model
described earlier (see Section 1.1). By and large, the Korean
government was able to make such decisions. I was told in 1989 by
the president of Kia Motors (the first Korean company licensed to
manufacture passenger cars) that, when the company wanted to start
producing light vans, it had to surrender its license to manufacture
passenger cars. The reasons given were that (i) the government did
not want any single firm to dominate the vehicle manufacturing
sector; and (ii) it did not want to split the passenger car sector among
too many firms, because the participants would not be able to reap
economies of scale and would lose in competitiveness. Permission for
the manufacture of passenger cars was then given to Hyundai and
Daewoo. It was only when the market for passenger cars was judged
to have expanded sufficiently that Kia was permitted to once again
manufacture these vehicles. Contrast this with the situation in
52 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

Pakistan, where a much smaller market has been fragmented between

at least half-a-dozen assembly plants, none of which could survive
without massive protection against imports.

Unfortunately, Pakistan’s experience suggests that most of the

necessary conditions are indeed absent—a national consensus on the
country’s economic goals does not exist; the civil bureaucracy has
been gravely weakened; and other key government institutions, such
as the justice system, are in disarray. The inability of successive
governments to impose economic discipline is evidenced by the
number of industries that, because of import controls and other
protective measures, have continued to amass economic rents, and
there is virtually no example of an infant industry growing up and
divesting itself of barriers against imports.

4.2.2 Political Considerations

The second reason is political. This has two major facets: (i)
the government’s commitment to development, and (ii) the methods
by which the government pursues this aim. Can Pakistan, as Korea
did, elevate economic development to the top of its agenda?

The pursuit of economic development requires critical

tradeoffs between the requirements of development and of other
policies. A key element is a resolution to refrain from wars and strife.
It is quite striking that there has been no “hot” war on the Korean
peninsula since the first Korean war which ended in 1955, nor has
there been a war between Taiwan and the PRC. Pakistan, on the other
hand, has been involved in outright wars with India in 1948, 1965,
and 1971, and in major skirmishes in the Rann of Kutch in 1965 and
Kargil in 1999, not to mention the recent attacks on the Indian
Parliament and in Mumbai by groups based in Pakistan, which nearly
brought the two countries to war. Such incidents, needless to say,
create uncertainty, disrupt economic policies, unsettle trade
arrangements, and divert resources away from development, and
have done nothing to resolve the underlying causes of tension
between the two nations.

The second important political element relates to how

economic development is pursued. The most dubious aspect of the
Khalid Ikram 53

East Asian, and particularly Korean, experience is the tradeoff

between political liberties and economic gain. In both Korea and
Taiwan, unrepresentative and authoritarian regimes were the rule
during the period of their most rapid economic growth. In both
countries, the regimes sought to legitimize their rule through the
provision of economic gains for their subjects. But surrendering
political rights for the possibility of economic benefits is a very
chancy proposition. The rulers might not put economic development
at the top of their agendas (witness any number of authoritarian
regimes in Africa), or even if they do, they might not succeed in
achieving it. Pakistan has had ample experience of periods in which
the loss of representative government did not bring any significant
economic gain for the population at large.

Moreover, Pakistan has only recently emerged from long

periods of authoritarianism into one of representative government.
After this long struggle, the electorate is unlikely to view with much
favor the widespread employment of tax inspectors for the purpose of
harassment, discriminatory directions to commercial banks,
discretionary interest rates, concessional effective foreign exchange
rates targeted toward particular enterprises, legal injunctions against
trade unions, the outlawing of strikes, or a generalized use of
“command backed by compulsion.” Nor would an attitude such as
that embodied President Park’s statements sit well with the
contemporary Pakistani voter:

In order to ensure efforts to improve the living

conditions of the people in Asia, even undemocratic
emergency measures may be necessary ... The gem
without luster called democracy is a meaningless route
for people suffering from starvation and despair (Hee,
1970, pp. 39–40, quoted in Mason et al., 1980, p. 251).

Ultimately, it is a question of choice—how much democratic

freedom is one prepared to give up to (possibly) gain some economic
growth? The Koreans were not given the choice. The average
Pakistani, who has seen that “undemocratic emergency measures” do
not necessarily bring economic affluence in their wake, might well
look askance at an invitation to accept such tradeoffs. This does not
54 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

mean that Pakistan is inevitably doomed to remain a “soft” state in

which “policies decided are often not enforced, if they are enacted at
all” (Myrdal, 1968, p. 66). But it does mean that the state will have to
exercise discipline by other means, and that perhaps some of the key
weapons utilized by Korea are unlikely to be available to the
Government of Pakistan.

4.2.3 International Considerations

The third reason is the change in the international environment

since the time the East Asian “tigers” began their charge. It was more
permissive in the 1960s than today, allowing the East Asian economies
to pursue an export-oriented strategy that could draw, initially at least,
on subsidies and special concessions for the exporting industries. The
founder of Hyundai, Ju-Yung Chung, once described to me how his
shipbuilding business had started. During the HCI period, the
government had given him access to subsidized bank loans, foreign
exchange on preferential terms, permission to hire engineers from
abroad, fiscal concessions, and so on, but what apparently made the
decisive difference to the Greek ship-owner who placed the first
contract with Hyundai was the Korean government’s guarantee to
indemnify him should the vessel not meet specifications. This induced
the ship-owner to award the contract to Hyundai, even though the
company did not have a shipyard at the time!

At present, however, the manifold requirements of the World

Trade Organization make it difficult to brazenly follow such a
strategy without attracting retaliation or various penalties.

4.3 A Broad Strategy for Pakistan in the Present International

Environment

Having established some of the constraints that inhibit

Pakistan from adopting the Korean (or indeed the East Asian model
generally) in its undiluted form, one must now ask: given the actual
economic and political situation in Pakistan, what should be the
broad lines of government intervention in the coming decade?
Achieving the results on which there would probably be a large
degree of consensus—namely, rapid economic growth and better
Khalid Ikram 55

income distribution, while preserving a liberal polity—would require

the government to concentrate its options for intervention selectively
in a few areas. Reasons of space compel me to limit the discussion to a
few broad points.

The first requirement is to obtain some sort of national

consensus on the country’s economic goals. The debate on this should
be widespread and candid about tradeoffs—not everything desirable
can be accomplished at the same time, and the authorities should be
clear about which desirable ends may have to be postponed or
perhaps even given up altogether in order to attain others that are
considered of greater primacy.

The second area to which attention should be directed is the

strengthening of institutions, particularly the working of the civil
administration and commercial judicial system. If the government is
even thinking of intervening selectively in some economic areas, it will
have to assemble a corpus of economic expertise in some ministry or
agency (for example, the Planning Commission). Such an institution
could analyze the likely effects of government intervention in some
activity, draw on the experience of “best practice” in other countries
dealing with the same or similar problem, and offer the government a
range of options from which to select those that would be politically
most feasible (see Ikram, 2009a, for detailed proposals for strengthening
the Planning Commission to function effectively in an economy that is
more privatized and globalized than in the 1960s and 1970s).

Third, it is most unlikely that the desirable GDP growth rate

can be attained and sustained without a major increase in the ratio of
investment to GDP. Pakistan’s historical investment rate of about 18
percent or so is simply not enough to generate a sustained rate of
growth of GDP of 7–8 percent a year—the rate required to absorb new
additions to the labor force and to cut into the backlog of
unemployment from previous years. 16 A further reason for raising the

16 This figure is based on studies for each of the provinces conducted jointly by the
World Bank, Asian Development Bank, UK Department for International
Development, and the provincial governments. A summary of the findings appears
in Ikram (2009b).
56 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

rate of investment is the acquisition of new technology, because this

generally comes embodied in machinery and equipment. The
investment rate will have to be raised to 30 percent or more. This, in
turn, raises questions about mobilizing a higher rate of savings—the
historical rate of around 16 percent will be insufficient to finance the
much higher rate of investment.

In order to provide the private sector with incentives to invest

much larger amounts, a major effort must be undertaken to reduce
the cost of doing business in Pakistan. In the present circumstances,
this means streamlining the functioning of the bureaucracy,
improving the working of the commercial judicial system,
considerably upgrading the infrastructure (especially electricity), and
expanding the system of education and aligning its output much
more closely to market requirements (see Section 5.4).

Stronger institutions, a higher rate of capital formation, the

greater access to technology that this brings, and improvements in the
system of education and training should all work to significantly
increase the productivity of Pakistan’s economy. Taken together,
these factors would make it possible to attain the economic goals that
have been settled on by national consensus.
Khalid Ikram 57

5 Some Further Comments

The preceding sections have elaborated on many lessons that

Pakistan could have learnt from the East Asian experience. This section
briefly highlights some further messages on which Pakistan could
profitably reflect, and elaborates some points that were made earlier.

5.1 Government Credibility

An implemented second-best plan is better than a best that sits

on the shelf, that is, a development strategy delivers benefits only to
the extent that it is actually put into effect. A vital lesson that Pakistan
could learn from Korea’s experience is the importance of establishing
the government’s credibility in implementing its announced policies.
That Korea’s success owed more to its capacity to implement policies
than to formulate plans has been reduced to a truism. Korea has never
lacked for plans. In fact, the Office of Planning was established under
President Syngman Rhee’s government as far back as 1948; this office
duly prepared a five-year plan (never implemented), and revised it
later (also not implemented). There were also numerous missions by
foreign experts to advise on policies and to prepare plans (for example,
the “Nathan Plan” submitted in 1953, but never adopted). A three-year
plan was prepared in 1960, but was first postponed for a year and then
came into effect only for a few months before the Rhee regime fell.
Chang Myon’s succeeding government also directed the preparation of
a five-year plan in 1960, but this was made irrelevant by the military
coup of 16 May 1961 by which President Chung Hee Park came to
power (see Mason et al., 1980, pp. 250–252).

The Park regime unambiguously gave economic development

top priority, with the president proclaiming that, “in human life,
economics precedes politics or culture” (Hee, 1963, p. 26). In addition
to strengthening the planning process, he laid great emphasis on
carrying out announced policies. Policies were implemented through a
rigorous structure of rewards and punishments, including compulsion
and administrative discretion. The result was a sharp increase in the
public’s perception that the government meant what it said. According
to a major study of businesspersons’ perceptions of government
58 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

resolve, only 3.2 percent of the respondents indicated that, under Rhee,
decisions were “always implemented,” and 17.2 percent believed that
they were “almost always implemented.” Contrast this with the Park
period: 78.2 percent of businesspersons responded that decisions were
“always implemented and that it was impossible to avoid complying,”
and 16.6 percent said that they were “almost always implemented”
(Jones & SaKong, 1980, pp. 136–137, Table 22). This shift in perception
made it easier for the government to implement its policies without
actually having to resort to extreme measures.

There does not appear to be a similar survey for Pakistan.

However, given the ordinary citizen’s experience of taxes being
evaded with impunity, of bribes being paid to successfully
circumvent regulations, of the manner in which land reforms were
carried out, of government budgets being presented and then
withdrawn, of laws being announced and then hastily modified out
of shape, it would not be surprising if the public was extremely
skeptical about the government’s ability, and indeed willingness, to
enforce measures that it had itself promulgated. An assessment of the
Pakistan government’s “performance profile” during the Ayub
period on the basis of six essential capabilities that a government
must possess—extractive (i.e., taxation), distributive, regulative,
responsive, symbolic, and international—came to a decidedly
unfavorable conclusion (Sayeed, 1973, pp. 115–135). Another study
concluded that “the overall evaluation of the [Zulfiqar] Bhutto period
on the factors of government commitment to development, quality of
economic management, and participation in decision-making is not
high” (Burki & Laporte, 1984, p. 367). It is clear that one of the first
requirements of imposing economic discipline is a change in the
public’s perception of the government’s commitment to equity and
economic development, and its resolve to carry out the policies it has
announced. It is also evident that this change in perception will occur
only if announced plans and policies are regularly implemented.

5.2 Economic Growth and Income Distribution

Pakistan could learn that rapid economic development is

compatible with a high degree of equity in income distribution.
Korean policymakers saw to it that the acceleration of GDP growth
Khalid Ikram 59

and improvements in distributional equity were not parts of a “zero-

sum” game—in which a gain in one element could only come at the
expense of the other. That Korea has been described as a “stunning
example of growth with equity” (United Nations Development
Programme, 1990, p. 42) is a measure of their success.

5.3 Trade and Industrial Policies

Trade and industrial policies have been discussed in some

detail earlier, but a few supplementary comments would not be out of
place here. Pakistan can learn much from Korea’s successes and
failures with trade and industrial policies, and how these were
carried out. In analyzing these policies, one can distinguish broadly
between the impact that government interventions have on three
types of incentives (World Bank, 1987a, Volume 1, pp. 100–101): (i)
the overall incentive regime, created by fiscal, financial, exchange
rate, and trade policies; (ii) functional incentives, i.e., interventions to
offset some systematic pattern of market failure or distortion (such as
imperfections in the markets for technology and human capital, or
deficiencies in physical infrastructure); and (iii) selective incentives,
which seek to identify and support “sunrise” industries, and manage
the orderly elimination of “sunset” activities.

Since the last of these incentives appears to have acquired an

inordinate importance in the minds of some Pakistani policymakers,
it might be useful to put it in perspective. The implementation of
selective incentives is only one of many strategic measures, and was
used within a framework of policies that emphasized economic
efficiency. A respected authority on the economic development of
East Asian countries has written:

Given that selective promotion [in East Asian

countries] has been successful, overall, it does not
follow that it has been the major element in superior
economic performance. One of the dangers of focusing
on a narrowly defined industrial strategy is that the
wider policy context gets left out of the calculation.
The experience of East Asia confirms that successful
industrialization is critically dependent on effective
60 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

macroeconomic management. . . . Low inflation rates

and the maintenance of a stable and realistic exchange
rate are essential in providing domestic industry with
competitive access to international markets as well as
ensuring an appropriate balance of incentives between
tradable goods and nontradables (Wade, 1987).

As mentioned earlier, the most important factor in Korea’s

export drive was the establishment of an overall incentive regime that
did not penalize exports and, for manufactures, was modestly pro-
export. This involved maintaining a competitive exchange rate,
together with the ability of exporters to obtain their necessary imports
basically tariff-free. Certain other subsidies (such as on bank credit)
were also significant in making exporting relatively more attractive
than producing for the domestic market. As Rhee et al. (1984) have
stressed, the authorities took pains to create an institutional structure
that would ensure that the incentives legislated were, as far as
possible, automatically and immediately made available to the
exporter—an important lesson is that, in a private sector economy,
“an incentive delayed is an incentive denied” (pp. 11–14). The role of
functional incentives, meanwhile, has been less intensively
documented, but to move the export drive forward, the effects of
overcoming market imperfections and infrastructure deficiencies
could only have been helpful.

The verdict on selective interventions is largely negative,

especially on those introduced during the HCI drive (1973–79). The
reason appears to be that, while governments might have an advantage
in gathering the information needed to make long-term decisions in the
earlier phases of industrialization, at later stages, entrepreneurs and
markets become keenly concerned with dynamic factors and are more
likely to show flexibility in moving into profitable markets and out of
losing ventures than do governments (World Bank, 1987a, Volume 1, p.
102, Volume 2, pp. 85–92; see also the case studies in Volume 2, pp.
131–214). During the HCI drive, the Korean government continued to
support its chosen industries even when the costs—both the direct
financial costs and opportunity costs (in terms of what the country was
losing by depriving the more efficient smaller industries of bank credit
and other resources)—had become clear.
Khalid Ikram 61

However, since the early 1960s, the Korean government has

largely used international prices and export sales (i.e.,
competitiveness in the international market) as performance
indicators. Korea’s experience was that the most efficient results in
industrial and trade policy were obtained when (i) the authorities
provided, on average, almost equal incentives for domestic sale and
for export, and (ii) within manufacturing, did not markedly
discriminate between different items of export. This “level playing
field” left it to the market to channel factors of production into areas
of Korea’s greatest comparative advantage. The market responded to
the outward-looking strategy by channeling resources into labor-
intensive activities, which, as we have seen, rapidly increased exports
and employment, and improved income distribution. 17 This factor,
namely, that government interventions generally worked to
strengthen the market’s allocative actions—and thus remained pro-
efficiency—distinguishes East Asian policy actions from those of
eastern Europe, and is perhaps the most useful lesson for Pakistan.

5.4 State Intervention in Education

Pakistan can learn much from Korea’s experience with human

development, particularly where education is concerned. In 1945, the
adult literacy rate in Korea was estimated at 22 percent; by 1970, this
had risen to 88 percent (McGinn, Snodgrass, Kim, Kim, & Kim, 1980,
p. 47; see also Y. B. Kim, 1980, pp. 234–275). Currently, it is nearly 100
percent. The earlier imbalance between male and female literacy has
also been eliminated: in 1970, male literacy was 95 percent compared
with 82 percent for females; by 1988, both sexes had essentially
attained the same (95+ percent) rate. School enrollments increased at
all levels: in 1953, less than 60 percent of the corresponding age group
was enrolled in primary schools, but by 1970 the figure had reached

17 A detailed study by Westphal and Kim (1982) concluded that, over the 1960s,

“manufactured exports were more labor-intensive than manufactured imports, and

they became increasingly more labor intensive over time even as shifts in the
composition of output caused manufacturing production for the domestic market to
become somewhat more capital intensive. The aggregate labor-capital ratio in the
manufacturing sector actually increased between 1960 and 1973; at the same time,
total factor productivity about doubled” (p. 271).
62 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

100 percent. The enrollment rate for middle schools rose from 21
percent in 1953 to over 90 percent (of the appropriate age group) in
1980, while that in high schools went up from 12 percent to around 50
percent. Literacy in Taiwan also followed a steep trajectory—rising
from about 55 percent of the population over six years of age in 1952,
to 95 percent in 1993. 18

The structure of the school system and how education in

Korea is financed show that government intervention has followed an
interesting direction. The government has concentrated on providing
basic and compulsory (i.e., primary) education, leaving a large
proportion of the higher levels to be supplied privately. Thus, by the
mid-1980s, practically all primary schools were public, but over 40
percent of middle and nearly 60 percent of high schools were private.
Families’ financial contributions mirrored this division: at the primary
level, the government provided almost 97 percent of schooling
expenses (all fees for tuition and textbooks were abolished in 1978); at
both the middle and high school levels, families provided over 75
percent of expenses. Overall, private households have paid about two
thirds of the direct costs of education (Bunge, 1982, p. 96; see also
Mason et al., 1980, p. 355). Government budgets reflect this: on one
hand, the share of education has generally been 16–20 percent of the
budget since 1964; on the other, about 70 percent of this spending has
been on primary education (McGinn et al., 1980, pp. 45–47). These
figures underline the importance of the private contribution to
spending on education: although the country devotes about 6–7
percent of its GNP to education, the government’s share is only about
2.5–3.0 percent, and targets chiefly primary education.

Several educationists have long advocated a similar strategy

for Pakistan. Indeed, 50 years ago the National Education
Commission eloquently made the point that “to argue that we are too

18 It should be borne in mind that attaining literacy in Taiwan and Korea takes much

more work than in other countries because of the large number of characters in their
scripts. The Korean language, Hangul, has a phonetic script, but about 2,000 Chinese
characters are still widely used and taught in schools. They must be learned in order
to be sufficiently literate to read newspapers, books, etc. Taiwan, of course, uses only
the Chinese script.
Khalid Ikram 63

poor to support education is to argue that we must always be poor”

(Government of Pakistan, 1959b, p. 332). Stating forthrightly that “the
concept of ‘free’ education is, in fact, a delusion,” it went on to
propose a structure of financing that would approximate the Korean
model. The Commission recommended that local communities
provide school buildings at the primary level, and that the recurring
costs be shared equally between the provincial governments and local
community; the sacrifice would therefore take the form of new taxes.
At the secondary level, the Commission recommended that 60
percent of the cost be borne by fees and 20 percent each by the
contributions of management and government. At higher levels of
education, the Commission expected that higher fees and a
corresponding sacrifice on the part of parents would be required (p.
333). The Commission concluded that “education is an . . .
indispensable component of permanent economic improvement and
greater financial sacrifice on the part of everyone is the only means
through which our educational requirements can be met” (p. 334).
What happened, or rather did not happen, to the Commission’s
recommendations is another example of the gulf between Pakistan’s
ability to articulate policies and its resolve to implement them. 19

5.5 Domestic Resource Mobilization

There is much to learn from Korea’s efforts to mobilize

domestic resources. Unfortunately, lack of space forbids an attempt at
anything resembling a reasonable examination of the government's
fiscal policies or the measures devised to encourage private savings.
However, even the bare bones of its performance are impressive. In
1960–62, gross domestic savings averaged only 3.0 percent of GDP; by
1967–69, they had risen to 15.7 percent; by 1974–76, they were 18.7
percent (Mason et al., 1980, p. 107); and by 1988, they had reached 35
percent. The composition has also undergone changes: after 1963, the
government changed from being a net dissaver to a net saver, and by
1975 was providing about a third of gross national savings. Business

19 Very little public sector educational investment is recovered, so that in effect nearly

all of it represents a subsidy. S. R. Khan, Mahmood, and Siddiqui (1986) recommend “a

restructuring of the educational subsidy towards an increased emphasis on school
education, particularly primary education” (p. 191).
64 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

firms were the most important savers, accounting for about 60

percent of gross national savings (particularly in the shape of
depreciation funds and retained profits), while households
contributed the remaining 5–10 percent (K. S. Kim & Roemer, 1979,
pp. 51–55). The government’s budget was brought into surplus
through a combination of increasing revenues—there were four
“comprehensive” tax reforms between 1961 and 1975 (Bahl, Kim, &
Park, 1986, p. 15)—and reductions in current expenditures. The
government viewed budgetary policy as a supporting rather than
initiating tool (these were industrial and trade policies, and incentives
for investment) in the development process, and kept the share of
public expenditures low to avoid crowding out the private sector (p.
217). Between 1953 and 1986, government spending never exceeded
23 percent of the GNP and generally remained below 20 percent (J.
Lee, 1990, pp. 265–268, Table 15.1). This again underlines the
argument that, while the government remained the senior partner in
“Korea, Inc.,” it retained this primacy through policy interventions
rather than a direct fiscal contribution.
Khalid Ikram 65

6 Conclusion

Perhaps the chief lesson that one should take away from an
examination of the East Asian experience is one of hope. If one is
critical of Pakistan’s performance, the regret is for opportunities
missed, not for a uniformly disastrous achievement. The population
of Pakistan in 2007 is more than five times that at the time of
independence. These 165 million persons are, on average, better fed,
clothed, housed, educated, and connected to the outside world than
their compatriots in 1947. The reproach is that the country could do
much better. If Korea and Taiwan, perched on the edge of Asia,
destitute of natural resources, and rent for long periods by war, (and,
in Korea’s case, with its capital city occupied twice by enemy forces)
could achieve so much so quickly, then it should not be impossible for
Pakistan, with its greater abundance of natural resources and a
strategic geographical location, to achieve something comparable.
However, this will not happen by itself; it will require a drastic
change in attitude and strategy. The first requirement for such a
change is to recognize that a change is necessary—as the Holy Qur’an
(viii, 53) says: “Allah never changes the favor He has bestowed on
any people until they first change that which is in their hearts.”
66 Pakistan and Lessons from East Asia: Growth, Equity, and Governance

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 Lahore School of Economics
Centre for Research in Economics & Business

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No. 01-10
A Strategy for Reversing Pakistan’s Dismal Export Performance
Hamna Ahmed, Mahreen Mahmud, Naved Hamid, Talal-Ur-Rahim,
CREB, Lahore School of Economics

These papers can be accessed at:

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The Lahore School of Economics (established in 1993) is one of
Pakistan's leading centres of learning for teaching and research
in economics, finance and business administration. The Lahore
School of Economics' objectives include: (i) to train young
Pakistanis as professional economists, finance managers,
accountants, financial analysts, bankers, and business
executives, and (ii) to undertake research in economics,
management, finance and banking to deepen understanding of
major facts, issues, and policies.

The Centre for Research in Economics and Business (CREB) is an

independent research centre at the Lahore School of
Economics. CREB’s mission is to conduct and facilitate
research, coordinate and manage the postgraduate program of
the Lahore School, and promote discussion on policy issues
facing Pakistan. The research focus at CREB is on management
of the Pakistan economy, income distribution and poverty, and
the role of the modern service sector in the area of economics,
and financial markets in the area of business management.

The Lahore School's publication program comprises The

Lahore Journal of Economics, Lahore Journal of Policy Studies, a
Text Book Series, the Lahore School Case Study Journal, the
CREB Working Paper Series and the CREB Policy Paper Series.
The program encourages both in-house and external
contributors.