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THIRD
EDITION
 ISSUES IN
PAKISTAN'S
I'
·ECONOMY
.A POLITICAL ECONOMY PERSPECTIVE

THIRD EDITION

S. AKBAR ZAIDI

OXFORD
, Mr. Book~ UNIVERSITY PRESS
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Super Market, Islamabad
P~: 051•2871383·287091 ~ .
 ~

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UNIVERSITY PRESS

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© Oxford University Press 1999
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First Edition published in 1999
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 Preface to the first edition

, Writing this book has been a challenging and often daunting being a difficult and stubborn person, prone to long bouts
task. The idea originated from the staff of Oxford University of brooding. Arif Hasan, in particular, deserves immense
Press, who suggested that there was a need for a book gratitude for taking the effort to read through the entire raw
on· Pakistan's economy, which could be understood by· manuscript and for his generous encouragement.
graduate students, researchers, scholars, academicians, and I acknowledge the persistence of the Oxford University
the general public at large, even without having a sound Press staff at Karachi, in making me accept and start this
grounding in economic theory. This has indeed been the focus project. In particular, Yasmin Qureshi and Nighat Gaya were
of the book, targeting a wide spectrum of readers, in simple instrumental in my taking on this assignment. Zohrain Zafar,
language, exploring processes, ideas, and trends. I hope that who later managed this project from OUP Karachi, is also
this book will provide new insight on numerous home truths acknowledged for directing my overly ambitious enthusiasm
and myths which abound in Pakistan, and allow the reader into concentrating on the task at. hand. It is due to Zohrain
to question what is perceived to be conventional wisdom. that I completed this project on time. Although this has
The most ambitious of the many aspirations of this book is been an enormous undertaking, one which I may not have
to stimulate the process of enquiry amongst readers. I do not willingly accepted on my own, I now feel the wiser for having
expect all readers to agree with me, but I hope they will see undertaken it.
and welcome the different interpretation that is presented After I submitted this manuscript to OUP Pakistan in
here. This, I hope, will generate debate, which is, after all, August 1997, it was sent on to OUP in Oxford for the final
the purpose of enquiry. Since there are no absolutes in social production phase. Moreover, while the manuscript was being
science, only interpretations and perspectives, let this book be managed and edited at Oxford, I too was at the University
a new, and one hopes fresh, perspective on the economy' and of Oxford as a Visiting Scholar on the South Asian Visiting
society in Pakistan. Scholars Programme. My presence in Oxford at a critical
This project started when I was an Associate Professor/ stage of the editing and management of the manuscript
Senior Research Economist at the Applied Economics allowed me to interact closely and frequently with the editor
Research Centre, University of Karachi, yVhere I worked of the manuscript and with the Oxford University Press staff
for almost fifteen years and taught a course· called 'Issues handling the book. I must acknowledge the great help and
in Pakistan's Economy'. All my professional life was spent understanding offered to me by Sally Rigg and Tony Dale
at the University, and I owe a debt of gratitude to the of the International Education Unit at Oxford University
institution, and my former colleagues and students, for Press in Oxford. The editor of the manuscript, Chris Bessant,
shaping my way of thinking. I was forced to leave the
Applied Economics Research Centre under rather. sad and
has quite remarkably transformed the manuscript into a
book; to Chris I acknowledge a huge debt for such a highly
.
unfortunate circumstances. My departure was only partially impressive achievement. I must also mention Aditya Nigam
voluntary, and was largely in disgust at the goings on at and Anandhi, two other scholars with me on the South Asian
the University and the Centre at that time. However, the Visiting Scholars Programme at the University of Oxford, for
work on this book continued at home, and the end result making me reconsider numerous biases which I held under
of this endeavour, which has taken four and a half years, the guise of convictions. Had I met Aditya and Anandhi a
shows that research and scholarly" pursuit are possible by few years earlier, this book would probably have taken on a
'independent' researchers not necessarily affiliated to any different form.
particular organization or institution. The special contribution made by Qaisar Anjum and by
Despite this 'independence', however, one cannot pursue Mukaram Farooqi, in typing and producing the manuscript,
intellectual and academic interests without interaction and is beyond praise. They have produced work of exceptional
exchange of ideas with other scholars and academics. A quality, under unrelenting pressure from me to meet a
number of friends have been a constant source of pleasure constantly shifting deadline. To them, my wholehearted and
and irritation, in the extended discussions that I have had sincere thanks.
with them over the years. Aly Ercelawn, Asad Sayeed, Anjum Although it is customary to thank one's family for their
Altaf, Arif Hasan, Jaffer Ahmed, Rathin Roy, Talat Aslam, inspiration and silent contribution, in my case things are a
and Shahzad Amjad have all spent hours and days over the little more complicated. Both my sons Paiz and Amar still
last few years, arguing with me over what I thought were wonder why their father does not go to work: I hope when
important issues. We remain friends despite our severe they are in a position to read this book, they will understand
disagreements. I often refused to accept their opinions, that one can 'go to work' sitting in the next room. Rabab,
thinking that I was the one who was always right. However, too, has often felt that I spend too much time doing academic
I am now more willing to accept my numerous faults, work and not making lots of money; to her, thanks are due
shortcomings, and mistakes and to give credit where it is for being patient, supportive, and understanding, and for not
due. To all these friends named above, who have inspired me complaining too much.
at different times for different reasons, I give my heartfelt S. Akbar Zaidi
thanks for bearing with someone who has the reputation of Karachi, August 1998
 Preface to the second edition
}

The feedback from students, teachers, and researchers, on Since 1997, I have lived a life largely of voluntary
the first edition of Issues in Pakistan's Economy, published in unemployment, which at times turns into self-employment
1999, is that it has done remarkably well. Very soon after it whenever work comes my way. I have chosen to continue
was first published, it became the standard text for students writing, doing research, lecturing at universities in Pakistan
and researchers on Pakistan's economy, both in Pakistan and and abroad, and publishing books and journal articles
at universities abroad. The book is being used for courses working from home. I have survived financially, although
on South Asia's development, economic history, and on its at some cost, by doing the few consulting assignments
political economy at the universities of London, Cambridge, that have come my way. Rather than become a full-time
and Oxford and at universities in the US. In Pakistan, Issues 'consultant', the new trend amongst economists and social
has become the main text for students studying the country's scientists, I have preferred to continue with my academic
economy at a postgraduate level in numerous colleges and and research interests. It has not been an easy existence,
universities, and has, in fact, even had specific courses but I feel that I have accomplished a huge amount in terms
designed around it. For researchers on Pakistan's economy, of research, output, and publications, and have received
this book has become their main text for reference. considerable recognition for my work. Given the demise of
I have been a little surprised by how well the book the academe and the absence of a community of scholars in
has done. Part of the reason for its success has been, not Pakistan, the feedback that one receives for such pursuits, at
because of Issues per se, but due to the lack of other quality times, compensates for the rather lonely intellectual life of a
publications on Pakistan's economy. It is rather sad and self-motivated independent social scientist.
disappointing, that even after so many generations of social A number of friends and other readers deserve thanks
scientists-particularly economists-having made their mark for encouraging me to continue my research and for their
as researchers and teachers, there are very few good academic responses to Issues when it was first published. Arif Hasan,
books available in the market, and even fewer books that are singularly, deserves thanks for his friendship, encouragement,
meant for serious students. In an era when economists are wisdom, and enthusiasm for what I do. Professor Mahmud
now exclusively consultants, or work for the private and NGO Hasan Khan has been another source of inspiration and
sectors, scholars and academics no longer have the desire- (or learning, and to him, my thanks too. Sadiqa Salahuddin was
need) to publish. Issues has done well because there are so few a great enthusiast when Issues was first published in 1999,
books available. and publicized the book endlessly; Amama Shabbir who
This second edition is a considerably expanded, updated, taught at Hamdard University and at the IBA in Karachi
and revised version of the earlier text. It contains a large also deserves thanks for using the book and for propagating
amount of new material, all tables and data have been it amongst students of business studies. Riaz Riazuddin
updated to the most recent available, and new chapters of the State Bank of Pakistan, asked me to add some new
and themes have been added on. While the second edition ideas, which have been incorporated. My thanks also go
of Issues in Pakistan's Economy is written and presented in out to Zahir Riaz, an old school friend and now an eminent
much the manner as the first, in a political economy context lawyer, simply because he bought the book, something that
and framework-with boxes, appendices, summaries of suggested to me, that perhaps there is an audience out there
chapters, and suggested further readings-contemporary, for whom one should continue to write.
new, and emerging issues have now also been discussed I no longer remember _why I wrote Issues in Pakistan's
and analysed. Along with substantial revision, significantly, Economy, except that it was Nighat Gaya then at OUP
three new chapters have been written and added on to this Karachi, who called me up one day in 1994, and said that a
second edition. Chapters on Poverty in Pakistan----one of book on these lines was needed; I ended up giving four-and-
Pakistan's most pressing problems----on the political economy a-half years of my life to writing the book. Yasmin Qureshi
of economic and trade relations between India and Pakistan, and Zohrain Zafar then marshalled me to its completion.
and on macroeconomic developments since 1998, are the Although I was told by many readers that the book required
three new additions. Along with this, there are substantial a new version-expanded, revised, updated-something
new additions on Globalization, WTO, Pakistan's new Local that I realised very well, for many reasons, I was reluctant
Government system-that of District Governments-and to start work on it again. However, OUP's Samuel Ray, in his
particularly on a re-evaluation of the Political Economy of reassuring and soothing tone, twisted my arm into doing so,
the Pakistani State. In fact, Chapter 22 on 'Class, State, Power something for which I am now very grateful. I believe that
and Transition' (which was Chapter 19 in the first edition) the one year that I have spent revising and expanding Issues,
has been completely reformulated. has made the second edition even better than the first.

S. Akbar Zaidi
Karachi, 6 January 2005
 Preface to the third edition

In critical ways this, the Third Edition of Issues in Pakistan's chapters, the Third Edition also includes many new chapters
Economy, is a very different book from the first two published and sections within chapters, adding more than three
in 1999 and 2005. Rather than merely revise and expand the hundred pages to the Second Edition. Six new chapters have
Second Edition, the Third Edition undertakes a considerable been added, on: Local Government and Decentralization;
r rethinking and refocusing of issues which constitute Pakistan's
economy. Importantly, as the new title also suggests, the focus
the new Fiscal Federalism and Eighteenth Amendment;
Regional and Income Inequalities; the relationship between
this time around, has shifted to a far sharper political economy Health and Poverty; a chapter on the economics and political
perspective. Since my training and interest is mainly in political economy of the War on Terror and aid to Pakistan; and, a
economy rather than just mainstream economics, both the fresh examination of Pakistan's changed Political Economy.
First and Second Editions were also heavily influenced by This book builds upon all my research and publications since
this perspective. Nevertheless, while both the earlier Editions the Second Edition in 2005, and I have made use of many of
focused more on economic history in telling Pakistan's story my published articles in the Third Edition.
of economic development and structural transformation, this The structure of the book remains largely the same as
Third Edition builds on the earlier Editions but concentrates the previous Editions, with boxes, appendices, summaries
far more on political economy. This is particularly so, since of chapters, and suggested further reading. The book also
while much of the story of Pakistan's economy has been more continues with its focus on an attempt to analyse and
of the same for some decades now, with all governments understand and explain what is, rather than suggest what
following neo-liberal economic policies and regardless of ought to be. It offers no advice or solutions on how to fix
supposedly differing 'ideology', all continuing to depend on things and concentrates more on how the economy and social
the IMF and other donors to bail them out, it is clear that and material relations of production and exchange actually
issues central to Pakistan's political economy-such as class, work in Pakistan. The book highlights problems, issues and
power, the state, transition-have all undergone considerable constraints in a political economy framework, and stays away
, change since the publication of the Second Edition in from the lucrative though unproductive industry of offering
2005. Hence this noticeable shift and reworking of issues advice. Much technocratic advice fails precisely because it is
in Pakistan's economy, with a far greater political economy . not located within a political economy context, where issues
perspective. of power and control are central.
As I wrote in the Preface to the Second Edition, I continue I would like to thank some individuals who have helped
to be surprised by how well this book has done and that it in completing this Third Edition. Asim Bashir Khan, in
has become the standard text for students and researchers particular, deserves many thanks for his extensive support
on Pakistan's economy, both in Pakistan and at universities in updating the data in Issues, and also for contributing
abroad. The book is being used for courses on South Asia's Chapter 13 on Fiscal Federalism. I am very grateful to Asim
development, economic history and on its political economy, for all the time he gave and hope he will build upon his
at the universities of London, Cambridge and Oxford and multiple analytical abilities and skills and join the economics
at numerous universities in the US. In Pakistan, Issues has profession. Aly Ercelawn, one of Pakistan's few radical
become the main_ text for students studying the country's economists for whom issues of social class and equality are
economy at a postgraduate level in numerous colleges and central, contributed Section 23.4 on Income Inequalities.
universities, and has, in fact, even had specific courses Ercelawn suggested to me that I ought to include a section on
designed around it. For researchers on Pakistan's economy, inequalities and immediately volunteered to contribute the
this book has become their main text for reference. Section when asked. Samuel Ray of OUP deserves thanks, as
Part of the reason for this success has been, not because of always, for seeing this project through so professionally.
Issues per se, but due to the lack of other quality publications Academic research is always a collaborative project and
on Pakistan's economy. It is rather sad and disappointing, sometimes through active discourse with scholars and
that even after so many generations of social scientists- friends, one learns a great deal; sometimes that learning
particularly economists-having made their mark as and understanding takes place through what one reads of
researchers and teachers, there are (still) very few gqod the work of writers and scholars whom one never meets. As
academic books available in the market, and even fewer the text and references of Issues clearly reveal, I owe many
books which are meant for serious students. In an era, when debts to such scholars, most of whose work I have learnt
economists are now exclusively consultants, or work for the from and continue to hold in high regard. The Bibliography
private and NGO sectors, scholars and academics no longer and other citations in each of the chapters indicate all such
have the desire (or need) to publish. I still maintain that Issues influences. There are many disappointments with numerous
has done well only because there are so few books available. scholars as well, many of whom wrote seminal dissertations
Apart from the sharper focus on political economy and a or made some exceptional contribution some years ago, but
considerable rewriting and updating of many of the earlier then opted to become consultants, not having produced any

t
 l
l
iv Preface to the third edition

work in the public domain or worth citing since. One feels a regarding social change and transformation in Pakistan, as
sense of collective intellectual loss which also helps explain did an older generation three decades ago.
the reasons for the dismal state of the social sciences in
Pakistan. Nevertheless, I have more hope and expectation
from a growing set of younger academics who proceed for, S. Akbar Zaidi
or have just completed, . their doctoral dissertations. This Karachi,
younger generation of social scientists, one hopes, will add 30 April 2014
their contribution to many of the debates which take place
 Contents

Preface to the third edition 3.1.4 Elite Farmer Strategy and 34

Capitalist Development
Preface to the second edition
3.1.5 Social and Political Effects 34
Preface to the first edition 3.2 Land Reforms 35
List offigures, graphs, and maps xiii. 3.2.1 The 1959 Land Reforms 37
3.2.2 The Bhutto Reforms of 1972 38
List of tables xiv 3.3 Summary and Further Reading 39
Introduction xix 3.3.1 Summary 39
3.3.2 Further Readi.ng 39
Chapter 1 Understanding Pakistan's Structural 1
Transformation: 1947-2014 Chapter 4 The Nature and Direction of 42
i 1.1 Structural Transformation 3 Agrarian Change
1.2 Decades and Epochs 4 4.1 Explaining the Numbers · 42
1.2.1 Laying the Foundations: 1947-58 6 4.1.1 Data from the Censuses 43
l.2.2 The Decade of Development: 6 4.1.2 Changes Over Time 45
1958-68 4.2 . W.hat Do the Numbers Mean? 46
l.2.3 The Bad Luck Years: 1971-77 7 4.3 Summary and Further Reading 57
l.2.4 The Second Military Government: 7 4.3.1 Summary 57
1977-88 4.3.2 Further Reading 57
l.2.5 Neo-liberalism, Structural 8
Adjustment, and Praetorian Politics Chapter 5 Agriculture: Critical Issues 62
1.2.6 Lifestyle Liberalism, Dictatorship, 8
War, and Subjugation: 1999-2007 5.1 An Overview and Major Trends 62
1.2.7 Another Democratic Transition? 9 5.2 Agricultural Pricing Policy 68
2007 Onwards 5.3 Rural Financial Markets and 72
1.3 Transformation and Development: 9 Agricultural Credit
The Balance Sheet 5.3.1 Informal Sources of Credit 78
1.4 Conclusions 11 5.3.2 Formal Sources of Credit 80
5.4 Mechanization 83
5.5 Agricultural Income Tax 86
Part 1: Agriculture 13
5.6 The Water Crisis 88
5.7 Land Ownership, Power, and Land Reforms 89
Chapter 2 Is Pakistan Feudal? A Historical 14
5.8 Summary and Further Reading 94
Account of the Development of
5.8.1 Summary 94
Agriculture in Pakistan
5.8.2 Furth~r Readi.ng · 95
2.1 The Development of Agriculture before 14
the Consolidation of British Rule Part 2: Industry and Trade 109
2.2 The Impact of British Colonialism 17
2.3 Feudal or Capitalist? 19 Chapter 6 The Process of Industrialization in 110
2.4 Popular Perceptions of Feudalism 21 Pakistan I: 1947-77
2.5 Summary and Further Reading 24
2.5.1 Summary 24 6.1 1947-58: Exchange Rates, _Trade Policies, 111
2.5.2 Further Reading 24 and Import Substituting Industrialization
6.1.1 The Impact of the Exchange Rate 112
31 6.1.2 The Trade Policy Regime 113
Chapter 3 The Green Revolution and
6.1.3 The Consequences of Exchange 114
Land Reforms
Rate and Trade Policy for
3.1 The Green Revolution 31 Industrialization
3.1.1 The Issue of the Tube wells 33 6.1.4 The End Result 115
3.1.2 Tractorization 33 6.2 1958-68: The Decade of Development 117
3.1.3 Regional and Income Disparities 33
viii Contents

6.2.1 Trade Policy Directing 118 9.2.5 Trade Liberalization Under 214
Industrialization Structural Adjustment: 1988
6.2.2 Foreign Aid, the Private Sector, 120 Onwards
and Inequalities 9.3.' The Debate Over Efficiency and the 216
6.3 1972-77: The Bhutto Years-Bad Luck or 124 Trade Regime
Bad Management? 9.4 The Exchange Rate 219
6.3.1 Economic Policies and 125 9.5 Dealing with Globalization and 222
Performance World Trade Organization (WTO)
6.3.2 The Bad Luck Factor 126 9.5.l Some Political Economy Issues 222
6.4 Summary and Further Reading 128 9.5.2 Globalization and WTO's Impact 224
6.4.l Summary 128 -on Pakistan
6.4.2 Further Reading 129 9.6 Summary and Further Reading 227
9.6.l Summary 227
Chapter 7 The Process of Industrialization in 131 9.6.2 Further Reading 231
Pakistan II: 1977-2013
7.1 The Zia Years: 1977-88 132 Part 3: Fiscal Policy 247
7.1.l The Nature and Extent of Growth 132
7.1.2 Industrial Policy 134 Chapter 10 Resource Mobilization and the 24_8
7.1.3 The Public/Private Sector Divide , 136 Structure of Taxation
7.1.4 Deregulation and Liberalization 137 10.l The Structure of Government and Taxation 248
7.1.5 Causes of High Growth and the 138 10.1.l Legislative Functions 248
Success of the Zia Regime 10.1.2 Inter-Governmental Fiscal 251
7.2 The Age of Structural Adjustment: 140 Relations Prior to 2010
1988 Onwards 10.2 The Structure of Taxation 255
7.2.l The Principles of the Programme 140 10.2.l Understanding Pakistan's 255
7.2.2 Assessing the Impact on the 142 Taxation Structure
Industrial Sector 10.3 Public Finance: The Basic Facts 261
7.3 Summary and Further Reading 146 10.4 Key Issues in Taxation 268
7.3.1 Summary 146 10.4.1 Federal Taxes 268
7.3.2 Further Reading 146 10.4.2 Resource Mobilization at the 276
Provincial Level
Chapter 8 Key Issues in Industry in Pakistan 150 10.4.3 Local Government Revenues 283
8.1 Numbers and Trends in Industry 150 10.5 Summary and Further Reading 285
8.2 The Small-Scale Manufacturing Sector 153 10.5.1 Summary 285
8.2.1 Numbers and Characteristics 153 10.5.2 Further Reading 285
8.2.2 Emergence and Growth 155 ,, ~

8.2.3 Issues Affecting the 160 Chapter 11 Debt and Deficits 298
Small-Scale Sector 11.l Does the Fiscal Deficit Matter? 298
8.3 The Textile Industry and its Crisis 163 11.1.l Should Budgets Always be 300
8.4 Has Public Sector Industry Been a Failure? 168 Balanced?
8.5 The Privatization Process 171 11.1.2 The Problem of Measuring Deficit 300
8.6 The Debate over Efficiency in the 176 11.1.3 Fiscal Deficits, Intertemporal 301
Industrial Structure Equity, and Distribution
8.7 The Energy Crisis 182 11.1.4 Macroeconomic Implications 302
8.7 Summary and Further Reading 190 11.2 Critical Concerns Regarding Pakistan's 302
8.7.1 Summary 190 Fiscal Deficit
8.7.2 Further Reading 190 11.2.1 The IMF/World Bank View of 309
Pakistan's Fiscal Deficit, 1980-97
Chapter 9 Balance of Payments and 199 11.2.2 Re-examining Critical Concerns 310
Trade Regimes 11.3 The Domestic and Foreign Debt Crises 310
9.1 Pakistan's Foreign Trade: Basic Facts 199 11.4 Summary and Further Reading 319
9.2 Trade Policy and Trade Regimes 205 11.4.1 Summary 319
9.2.1 The Early Years: 1947-58 205 11.4.2 Further Reading 319
9.2.2 Trade Policy and the Decade of 210
Development
9.2.3 A New Country: 1972-77 212
9.2.4 The Beginning of a Liberal 213
Trade Regime: 1977-88
 Contents ix

Part 4: Devolution and Fiscal Federalism 329 13.3 The National Finance Commission 373
Award 2010
Chapter 12 Local Government and the Political 330 13.3.1 Population Criteria 374
Economy of Decentralization 13.3.2 Poverty or Backwardness Criteria 377
13.3.3 Revenue Collection and 377
12.1 Local Government in Pakistan 331 Generation Criteria
12.1.1 The Basic Democracies of 331 13.3.4 Tax Collection and Distribution 378
the 1960s across Federating Units of
12.1.2 Local Government in the 1980s 334 Pakistan
(and 1990s): Urban Pakistan 13.3.5 Inverse Population Density 379
and the Middle Classes Criteria
12.l.3 Devolution in the New 338 13.4 Some Issues Relating to 381
Millennium Intergovernmental Fiscal Transfers and
12.2 Financing Local Government 340 the NFC 2010 Award
12.2.1 Financing Under the 1979 342 13.4.1 Vertical Fiscal Imbalances 381
Local Government System 13.4.2 Multiple criteria and the Way 381
12.2.2 Financing Under the 2001 343 forward
Local Government System 13.4.3 Sales Tax and Provinces 382
12.3 Three Military Rulers and Three Local 348 13.4.4 Substitution of Fiscal Effort by 382
Government Systems Sub-National Governments
12.4 Is Local Government the Answer? 350 13.4.5 Conditional versus 382
12.4.1 The Contribution of Municipal 350 Unconditional Grants
Government in Development 13.4.6 Fiscal Federalism and Poverty 383
12.4.2 Potential for Development by 350 Reduction
Local Governments 13.5 The Case of Fiscal Equalization 383
12.4.3 Is Local Government the Answer? 351 13.5.1 Fiscal Equalization Index (FEI) 383
12.5 Summary and Further Reading 351 13.5.2 Fiscal Equalization with 385
12.5.1 Summary 351 Dominance of Indirect Taxes
12.5.2 Further Reading 353 and Distribution of Resources
in Real Terms
Chapter 13 Fiscal Federalism in Pakistan: 362 13.6 The 18th Amendment: The Way Forward 386
Emerging Dynamics, Issues, and to Devolution?
Prospects 13.7 Summary and Further Reading 388
13.1 Pre-Independence Evolution and 362 13.7.1 Summary 388
Development 13.7.2 Further Readings 389
13.1.1 The Otto Niemeyer Award 1936 363
13.1.2 Post-Independence Evolution 363 Part 5: Monetary Policy and Financial and 391
and Developments-NFC Awards Capital Markets
in Retrospect
13.2 The National Finance Commission Award: 363 Chapter 14 Financial and Capital Markets 392
An Introduction
14.1 The Development of the Banking Sector 393
13.2.1 The Raisman Award 1951 365
14.1.1 The First Phase: 1947-74 393
13.2.2 The National Finance 365
14.1.2 The Relationship between 394
Commission 1961-62
Economic Growth and the
13.2.3 The National Finance 367
Development of Banking
Commission Award 1964
14.1.3 Nationalization in the 1970s 396
13.2.4 The National Finance 369
14.1.4 Islamic Banking 397
Committee 1970
14.1.5 Developments since 1988 398
13.2.5 The National Finance 370
14.1.6 Banking Trends: 1964-2012 399
Commission Award 1974
14.1.7 Development Finance 401
13.2.6 The National Finance 370
Institutions (DFis) and
Commission Awards, 1979
Non-Bank Financial Institutions
and 1985
(NBFis)
13.2.7 The National Finance 371
14.1.8 Some Salient Issues in the 402
Commission Award 1990
Banking Sector
13.2.8 The National Finance 371
14.1.9 Excluding the Majority: Limited 405
Commission Award 1997
Access to Finance in Pakistan
13.2.9 The National Finance 372
14.2 The Equities Market 407
Commission Award 2006
14.3 Summary and Further Reading 410
X Contents

14.3.l · Summary 410 17.6 The Political Economy of Structural 498

14.3.2 Further Reading 411 Adjustment Programmes in Pakistan
17.6.l Pakistan's Dependence on 500
Chapter 15 Monetary Policy, Savings, and Inflation 423 Washington, or are
Governments Autonomous?
15.l Monetary Policy and Monetary 423
17.6.2 Did Pakistan Need to Go to the 502
Management in Pakistan
IMF in the 1990s?
15.2 Money Supply and Monetary Expansion 432
17.6.3 Why Does Pakistan Accept 504
15.3 Inflation and its Causes 432
IMF Programmes?
15.4 The Low Savings Rate 439
17.7 Summary and Further Reading 509
15.5 Summary and Further Reading 444
17.7.1 Summary. 509
15.5.1 Summary 444
17.7.2 Further Reading 510
15.5.2 Further Reading 444
Chapter 18 M_acroeconomic Developments: 518
Part 6: Neo-liberalism, Stabilization, and 457
1998-2013
Macroeconomics: From ESAFs
to PRSPs to SBAs~ 1988 to 18.1 Before and After May 1998 518
the present 18.2 11 September 2001: The Day the World 522
Changed
Chapter.16 Structural Adjustment Programmes: 458 18.3 What Happened to the Debt Crisis? 524
Composition and Effects 18.4 The Growing Forex Reserves 528
18.5 Did the Economy Turnaround? 532
16.1 The Development and Export of 459 18.6 Musharraf and After: 2004-2008 535
Development Thinking 18.7 The Pakistan People's Party's Economic 538
16.2 From Structural Adjustment Loans to 460 Policies 2008-2013: Bad Luck or
Structural Adjustment Programmes Bad Management?
16.3 Structural Adjustment Programmes: 465 18.8 Smpmary and Further Reading 544
Composition 18.8.1 Summary 544
16.4 Structural Adjustment Programmes: 467 18.8.2 Further Reading 545
Implementation and Effects
16.5 Economic Liberalization and Openness: 469
Part 7: The Social Sectors: Institutions 555
Some Questionable Assertions
and Govern~nce
16.5.l The Contextuality of Policy 471
16.5.2 International Capital and the 473
Chapter 19 The Social Sectors I: International 556
Loss of National Autonomy
Comparisons, Educati'on, Population,
16.6 Summary and Further Reading 473
Urbanization, and Housing
16.6.l Summary 473
16.6.2 Further Reading 475 19.1 Some International and Regional 556
,s Comparisons
Chapter 17 The IMF and Structural Adjustment 483 19.2 The Impact of Economic Growth 2002-07 559
v Programmes in Pakistan 19.2.l Finally on Track? 560
19.3 Education 561
17.l History 483
19.3.1 Statistics 561
17.2 Implementation of the Structural 488
19.3.2, The Issues 563
Adjustment Programmes in Pakistan:
19.3.3 Summarizing the Issues in 566
An Examination of the 1988 Programme
Education
17.2.l Fiscal Policy 488
19.4 Population Welfare and Family Planning: 568
17.2.2 Trade 489
The Demographic Transition
17.2.3 Financial Sector 489
19.4.1 The Evolution of the Population 568
17.3 Was the 1988 Structural Adjustment 489
Welfare Programme
Programme a Success? Achievements
19.4.2 Knowledge and Usage 569
and Failures
19.4.3 Some Issues 570
17.3.1 Fiscal Policy 490
17.3.2 Trade and Balance of Payments 19.4.4 Pakistan's Demography: 571
490
17.3.3 Financial Sector Dividend or Disaster?
491
19.5 Urbanization and Housing 573
17.3.4 Liberalization and Privatization 491
17.3.5 Other Areas 19.5.1 The Extent of Urbanization 573
491
17.4 19.5.2 Rethinking Urban and Rural 575
The World Bank/IMF' s Overall 492
Evaluation of the 1988 Structural 19.5.3 Housing in Cities 579
Adjustment Programme 19.5.4 The Demand for Low Income 580
17.5 Housing in Pakistan
The 2008 Stand-By Agreement 494
~ Contents xi

19.7 Summary and Further Reading 582 21.10 Summary and Further Reading 646
19.7.1 Summary 582 21.10.l Summary 646
19.7.2 Further Reading 582 21.10.2 Further Reading 646

Chapter 20 The Social Sectors II: MDGs, Gender, 589 Part 8: Poverty and Inequality 649
Environment, NGOs, Institutions, and
Governance Chapter 22 Poverty: Trends, Causes, and Solutions 650
20.1 Millennium Development Goals (MDGs) 589 22.1 What Does Poverty Mean? 650
20.2 Gender Inequality and Women 591 22.2 Trends in Poverty 652
20.2.1 Statistics 591 22.3 Who Are the Poor and Where Do 656

I
20.2.2 Some Issues 595 They Live?
20.2.3 Finding Some Options 596 22.4 Explaining the Trends in Poverty 1960-88 658
20.3 The Environment 597 22.5 Poverty in Pakistan: _1988-2013 662
20.4 Institutional Issues in the Social Sector 604 22.6 Poverty Alleviation 665
20.5 Governance, Decentralization, and 606 22.7 Poverty and Bonded Labour 669
Local Level Delivery 22.8 Can Poverty be Elimi{!ated in Pakistan? 672
20.5.1 Government and Development 607 22.9 Summary and Further Reading 674
in Pakistan 22.9.1 Summary 674
20.6 NGOs and Community Participation 609 22.9.2 Further Reading 674
20.7 Summary and Further Reading 613
20.7.1 Summary 613 Chapter 23 Regional and Income Inequalities 687
20.7.2 Further Reading 613
23.1 Regional Inequalities: Districts and 687
Chapter 21 The Social Sectors Ill: The Health 624 Provinces
23.1.1 Methodology and Results 688
Sector and the Health-Poverty Nexus
23.1.2 The Issues 693
21.1 Health and Poverty 624 23.2 Regional Inequalities: Agro-Climatic Zones 699
21.2 Examining Health Data: Health Status, 625 23.3 The Case of Karachi: Economic, Social, 701
Health Spending, and the Poor and Demographic Aspects
21.2.1 Health Status 625 23.3.1 Economic and Social Aspects 703
21.2.2 Examining Health Data 626 23.3.2 Revenue Collection 705
21.2.3 Utilization of Health Facilities 629 23.3.3 An Economic Appraisal of 705
21.2.4 Health Spending and Health 630 Karachi
Expenditure 23.3.4 Implications for NFC Transfers 706
21.3 Health Outcomes and Non-Medical 631 23.3.5 Demographic Trends 707
Interventions 23.3.6 Karachi as a Province? 707
21.4 The Poor and the Socio-economic Impact 632 23.4 Income Inequalities 710
of Communicable Diseases 23.5 Conclusions 714
21.5 The Issues of Price, Cost, and Access to 633 23.6 Summary and Further Reading 714
Treatment 23.6.1 Summary 714
21.5.1 How Much Does it Cost to Cure 634 23.6.2 Further Reading 715
Tuberculosis?
21.6 The Impact of Public and Private 636 Part 9: Political Economics 721
Provision of Health Care on the Poor
21.7 The Role of Government in the Control 637 Chapter 24 The Political Economy of Neighbourly 722
of Communicable Diseases Relations
21.7.1 The National Health Policy 2001 638
21.7.2 The Extended Programme of 639 24.1 India and Pakistan: A Brief Comparison 724
Immunization 24.2 Theorizing Trade, War, and Peace 725
21.7.3 The National Tuberculosis 640 24.3 Trade with India 728
Control Programme 24.4 The Benefits and Constraints of Trading 734
21.7.4 The Lady Health Workers 640 with India
Programme 24.4.1 The Simple Benefits of Trade 734
21.8 Intervening in the Health-Poverty Nexus: 641 24.4.2 Complicating Simplicity: The 734
The World Health Organization Interests of the Military
Commission on Macroeconomics and 24.5 Constraints and Possibilities: A Matter 736
Health of Survival
21.9 Rethinking Intervention in the Health- 644 24.6 The Importance of Trade with India 736
Poverty Nexus: Health, or Poverty? 24.6 Summary and Further Reading 750
xii Contents

24.6.1 Summary 750 26.5 Elections Without Democracy: 1988-99 787

24.6.2 Further Reading 750 26.6 The Return of the Military: 1999 Onwards 788
26.7 Issues in Pakistan's Political Economy 789
Chapter 25 War, Destruction, and Aid 753 26.7.1 Pakistan's Middle Classes 789
26.7.2 · The Pakistani Military's 790
25.1 The Costs of the War on Terror 753
Economic Interests and Their
25.2 War and Aid: Who Benefits from US Aid 754
Consequences
to Pakistan?
26.7.3 Pakistan's Praetorian Democracy 791
25.2.l Fifty Years of Aid to Pakistan 754
and Technocrats as Apologists
1950-2002
26.7.4 . Pakistan's State and Society: 791
25.3 The Complicated Issues of US Aid 758
Groups, Fractions, and Influence
after 9/11
26.7.5 Urbanism as a Way of Life 795
25.3.1 The Purpose of Aid 758
26.7.6 Is Pakistan a Failed State? 797
25.3.2 Has the Purpose of Aid Been 758
26.8 Summary and Further Reading 798
Achieved?
26.8.1 Summary 798
25.3.3 Economic and Humanitarian 760
26.8.2 Further Reading 798
Aid and Assistance
25.4 The Consequences of Aid 761
Chapter 27 A New Political Economy? 803
25.5 The Nature of Recent US Aid to Pakistan 763
25.6 Who Benefits from US Aid to Pakistan? 768 27.1 Transitions 803
25.7 Summary and Further Reading 769 27.1.1 The View in Mid-2011: Was 803
25.7.1 Summary 769 Pakistan Near Collapse?
25.7.2 Further Reading 769 27.1.2. The Old and the New in Naya 807
Pakistan: Elections 2013
Chapter 26 Political Economics: Class, State, 782 27.2 The Changing Character of the , 810
Power, and Transition Pakistani State
27.2.1 Theorizing the Pakistani State 810
26.1 Civilian Bureaucracy and 783
27.3 A State Without Power? The 812
Industrialization: 1947-58
26.2 Fracturization of Power in Pakistan
Civil and Military Bureaucratic 784
27.4 Conclusions 816
Capitalism: 1958-71
26.3 A Shift in Emphasis: 1971-77 785 Selected Bibliography 821
26.4 A Military State and the Middle Classes: 785
1977-88
Index 828
 List of figures, graphs, and maps

Figures Figure 15. l Schematic Diagram Explaining Causes 438

of Inflation in Pakistan
Figure I.I Structural Change in Pakistan: I 947-2013 5
Figure 18.1 Growth Rates 1999-2009 535
Figure 2.1 The Land Tenure System in Pakistan 19
(c. 1947) Figure 19.1 How Urban? How Rural? 577

Figure 3.1 Growth Rates in Agriculture: 1949-69 32 Figure 20.I Land Capability by Classes 604

Figure 4.1 Agrarian Transition in Pakistan 47 Figure 23.l Poverty Headcount in Urban Pakistan: 696
1990-91 to 2005-06
Figure 5.1 The Agricultural Sector 63 Figure 23.2 ·Poverty Headcount in Rural Pakistan: 696
Figure 5.2 Land Utilization: 1959/60 and 2011/12 64 1990,--91 to 2005-06
Figure 5.3 Total Area Sown: 1960-1965 and 2011/12 66 Figure 23.3 Rural Economic Status by 703
Figure 5.4 Average Annual Growth in Agriculture: 68 Agro-Climatic Zone: 2005-06
1949-2012
Figure 5.5 Agricultural Credit Disbursed in Pakistan 80 Figure 24.1 Real per Capita GDPs for India and 724
by Formal Institutions: 1955-2010 Figure 24.2 India-Pakistan Bilateral Trade 732

Figure 6.1 Bhutto's Nationalization Programme: 125 Figure 25.1 History of US Assistance and 757
1972-77 Reimbursements to Pakistan
Figure 6.2 Bhutto: The Bad Luck Factor? 127 Figure 25.2 Official Development Assistance to 760
Pakistan by Bilateral Donor: 2009
Figure 8.1 A Chronology of Key Developments 169
in the Public Enterprise Sector Graphs

Figure 9.1 Economic Classification of Exports 205 Graph 10.1 Revenue Statistics of Federal Government 261
And Imports 1961/2-2010/11
Figure 9.2 Annual Depreciation of Rupee 227 Graph 10.2 Expenditure Statistics of Federal 262
Government l 961/2-2010/1 l
Figure 10.1 Legislative and Actual Allocation of 249 Graph 10.3 Expenditure Statistics of Federal 263
Functions among Different Levels of Government 1961/2-2010/11
'-, Government in Pakistan Prior to 2010 Graph 10.4 Fiscal Deficit and Debt Statistics of 263
l
Figure 10.2 Tax and Non-Tax Revenue: 1986-2013 266 Federal Government 1961/2-20 I 0/11?
Figure 10.3 Total Revenue Receipts and Expenditure: 269
1990/1, 200 l Graph 13.1 Weightage of Population in the NFC 2010 377
Figure 10.4 Percentage Share of Main Taxes in 271 Graph 13.2 Poverty and Backwardness 377
Total Tax: 1983/4, 2002/3 and 2009/10 Graph 13.3 Revenue Collection and Generation 378
Figure 10.5 Percentage Share of Direct and 272 Graph 13.4 Inverse Population Density 380
Indirect Taxes in Total Tax: 1983/4,
2002/3 and 2012/13 Graph 19.1 Comparing Urbanized and Urbanizing 577
to Unadjusted Urban in Census 1998
Figure 13.1 Lorenz Curve 384 Graph 19.2 Pakistan: How Urban? How Rural? 577
Figure 13.2 Legislative and Actual Functional 387 ~by Population 1988
Responsibilities Pre- and Post- 18th
Amendment Maps

Figure 14.l The System of Financial Intermediation 392 Map 19.1 Central Punjab: Mega-Region 578
in Pakistan Map 19.2 Pakistan: Where is Rural? Where is Urban? 578
Figure 14.2 Scheduled Banks' Advances by 396
Economic Group Map 23.1 Distribution of Agro-Climatic Zones 701
 List of Tables

Table 1.1 Pakistan: Basic Indicators, 1947-2014 4 Table 5.8 Sources of Loans by Asset Quintile 77
Table 1.2 Growth Rates in Pakistan 6 Table 5.9 Distribution of Institutional Loans as a 77
Table 1.3 Pakistan: Indicators of Failure 11 Percentage of All Loans by Categories
and Size of Farm: 1973 and 1985
Table 2.1 Structure of Land Ownership in the 19 Table 5.10 Agricultural Credit Disbursed in Pakistan 78
Punjab Province: 1924 and 1939 by Agencies: 1955-2012
Table 2.2 Distribution of Land Ownership in 22 Table 5.11 Number of Households under Debt 82
Pakistan and Provinces: 1950;_1955 by Tenure and by Type of Household:
Agriculture Census of Pakistan-2010
Table 3.1 Key Dates and Features of Land ·and 36 Table 5.12 Amount of Outstanding Debt from 83
Tenancy Reforms in Pakistan Institutional and Non-Institutional Source
Table 3.2 Numbers of Declarants and Resumed Area 38 by Tenure and by Type of Household
under the Land Reforms Regulation of 1959 Table 5.13 Farms Reporting Use of Important 84
Table 3.3 Progress of Implementation of Land 39 Agricultural Machinery
Reforms up to June 1994 Table 5.14 Number of Private Tractors 84
by Horsepower
. Table 4.1 Distribution of Land Ownership in 43
Pakistan and Provinces: 1950-55 Table 6.1 Annual Growth Rate 1950-58 at 112
Table 4.2 Distribution of the Operational Holdings 44 1959/60 Factor Cost
by Size and Tenure in Pakistan: i 960 Table 6.2 Domestic Terms of Trade for 112
Table 4.3 Distribution of the Operational Holdings 49 West Pakistan (Three-Year Moving
by Size and Tenure in Pakistan: 1972 Averages): 1951-64
Table 4.4 Distribution of the Operational Holdings 50 Table 6.3 Average Rate of Duty on Imported Goods 114
by Size and Tenure in Pakistan: 1980 by Types of Commodity: 1955-64
Table 4.5 Number, Area of the Farms by Size of 51 Table 6.4 Sources of Growth in Manufacturing 116
Farms, and Average Size of Farms: 1990, Value Added: 1951-64
2000, and 2010 Comparative Analysis Table 6.5 .Balance of Payments of Trade: 1949-58 117
Table 4.6 Tenure Classification of the Farms 53-4 Table 6.6 Annual Growth Rate 1958-70 at 1959/60 118
by Provinces Factor Cost
Table 4.7 Tenure Classification of the Farms' Area 54 Table 6.7 Rate of Growth of Manufacturing Output: 121
by Provinces 1960-70
Table 4.8 Tenure Classification of the Farms and 56 Table 6.8 Growth Rate of Total Factor Productivity: 121
Area by Provinces (Index 2000= 100) .1960-70
Table 4.9 Average Size of Operational Holding: 57 Table 6.9 Total Factor Productivity in Manufacturing:
1960-2010 122
Table 4.10 Summary Data on Number, Size, Area, 58 Selected Countries
and Operational Status of Farms by Tenure Table 6.10 Income Distribution in Pakistan: 1963/4 123
Based on Agricultural Census Data: 1960-80 and 1969/70
Table 6.11 Per Capita GDP in East and West Pakistan 123
Table5.l Land Utilization: 1947-2012 63 at 1959/60 Constant Prices
Table 5.2 Index of Agricultural Production: 65 Table 6.12 Index of Disparity in Per Capita Income 123
1959-2012 Table 6.13 Annual Growth Rate 197L-77 at 1959/60 124
Table 5.3 Area under Major Crops: 1950-2012 66 Factor Cost
Table 5.4 Production of Major Crops: 1950-2012 67 Table 6.14 Inflation Rates in Pakistan: 1970-80 125
Table 5.5 Yield of Major Agriculture Crops: 67 · Table 6.15 Trade Pattern: 1970-77 126
1950-2012 Table 6.16 Investment and Growth Rates in the 127
Table 5.6 Area Irrigated by Different Sources: 68 Large-Scale Manufacturing Sector
1950-2012 1969-80 at Constant Price Level of 1969/70
Table 5.7 Per Capita Availability of Main Food 68
Items: 1986-2011
 List of Tables xv

Table 6.17 Differential Growth Rates of Money 128 Table 8.19 Indices for Production of Yarn and Cloth: 164
Supply, GDP, and Commodity-Producing 1960-2012 (Provisional)
Sectors: 1969-80 Table 8.20 Overview of the Cotton Textile Industry: 165
Table 7.1 Growth Rates of Output, Labour, Capital 132 1988
Stock, and Total Factor Productivity: Table 8.21 Constant Market Share Analysis: Pakistan, 166
1978-88 South Korea, and Hong Kong: 1973-87
Table 7.2 Average Annual Growth Rates of Value 133 Table 8.22 Share of the Public Sector in Various 170
of Output: 1978-88 Activities: 1960-88
Table 7.3 Decomposition of Manufacturing Growth: 134 Table 8.23 Output, Employment, and Productivity 170
1978-88 Indices of Public Sector Industries and
Table 7.4 Growth and Structure of Manufacturing 135 the Manufacturing Sector: 1972-82
Employment: 1975-86 Table 8.24 Privatization of State-Owned Enterprises 174
:, Table 7.5 Share of Public Industrial Enterprise in 137 Table 8.25 Capital Utilization in Manufacturing 180
> Total Large-Scale Manufacturing: 1978-88 Industries of Pakistan
Table 7.6 Sectoral Contributions to GDP Growth: 141 Table 8.26 Impact of Trade Reform on Effective 181
1981-92 Protection and Profitability
Table 7.7 Key Indicators in the Industrial Sector: 144
1990-2012 Table 9.1 Balance of Payments, Selected Years 202
Table 9.2 Exports, Imports, and Trade Balance: 203
Table 8.1 Growth Rates iri Manufacturing: 150 1950-2012
1950-2012 Table 9.3 Balance of Payments Growth Rates: 203
Table 8.2 Gross Fixed Capital Formation in Private, 152 1970-2002
Public, and Gen. Govt. Sectors at Current Table 9.4 Components of Balance of Payments: 204
Market Prices: l 963-2012 (Provisional) l 980-2012 (Provisional)
Table 8.3 Production Index of Manufacturing: 153 Table 9.5 Economic Classification of Exports and 204
1965-2012 Imports
Table 8.4 Census of Manufacturing Industries (Rs. m) Table 9.6 Pakistan: Major Exports I 206
Table 8.5 CMI Value of Value-Added: 1987/8 and 154 Table 9.7 Pakistan: Major Imports II 206
1990/1 Table 9.8 Major Exports and Imports: 2002/3 and 207
Table 8.6 Growth of Selected Industrial Items: 156 2011/12
1950-2012 (Provisional) Table 9.9 Pakistan: Direction of Trade 207
Table 8.7 Average Daily Employment by Major 157 Table 9.10 Workers' Remittances: 1972-2012 208
Industry Sectors Table 9.11 Main Sources of Workers' Remittances 209
Table 8.8 Estimates of the Share of the Informal 157 Table 9.12 Rate of Duty on Imported Goods by 209
Sector in Urban Employment by Industry Type of Commodity: 1955-60
Table 8.9 Estimates of the Size of the Informal 157 Table 9.13 Change in Import Patterns from Licences 212
Sector in Urban Employment by Industry to Bonus Vouchers in the 1960s
Table 8.10 Formal and Informal Sector Employment i58 Table 9.14 Unweighted Average and Frequency 214
in Urban Sindh and the Punjab: 1984/5 Distribution of Nominal Tariffs in
Table 8.ll Characteristics of Formal and Informal 158 Pakistan: 1986/7
Manufacturing Sectors in Urban Pakistan: Table 9.15 Rate-Wise Value of Imports and Duties: 216
1983/4 l 991/2
Table 8.12 Annual Real Growth Rates in the Formal 158 Table 9.16 Effective Exchange Rates for Exports 219
and Informal Manufacturing Sectors in and Imports, and their Ratio
Urban Pakistan: 1976/7 and 1983/4 Table 9.17 Value and Depreciation of the Rupee 222
Table 8.13 Major Industries in Terms of Employment 159 since April 1972
in the Formal and Informal Manufacturing
Sectors in Urban Pakistan: 1983/4 Table 10.1 Direct and Indirect Taxes at Different 250
Table 8.14 Distribution of Employment within Major 159 Tiers of Government
Industries by Formal and Informal Table 10.2 Share of Provinces in Federal Revenue 252
Manufacturing Sectors: 1983/4 · Receipts
Table 8.15 Industrial Categorization: Formal, 159 Table 10.3 Revenue-Sharing Arrangements under 253
Informal; and Mixed various NFC Awards
Table 8.16 Employment Elasticities 160 Table 10.4 Summary of Revenue Receipts I 259
Table 8.17 Labour Productivity (OIL) and 161 Table 10.5 Summary of Revenue Receipts II 259
Capital-Output Ratio, Small-Scale and Table 10.6 Principal Sources of Revenue and 260
Large-Scale: 1983/4 and 1987/8, for Expenditure for United Pakistan
Selected Industries Table 10.7 Summary of Public Finances: 1987/8, 264
Table 8.18 Cotton Textile Statistics: 1955-2012 164 2002/3, and 20ll/12
xvi List of Tables

Table 10.8 Consolidated Federal and Provincial 265 Table 12.1 Local Tax and Non-Tax Sources under 344
Government Revenues: 1987/8, 2002/3, District Governments, 2002
and 2011/12 Table 12.2 Expenditure Responsibilities of Districts, 345
Table 10.9 Consolidated Federal and Provincial
Government Expenditure: 1987/8,
265
Table 12.3
Tehsils, and Union Councils, 2002
Comparison between the Basic 346
-~
2002/3, and 2011/12 Democracies System, LGO 1979, and
Table IO.IO Summary of Public Finance: 265 the Devolution Plan, 2001
Consolidated Federal and Provincial
Governments: 1978-2013 Table 13.1 Average Divisible Pool Transfers during 364
Table 10.11 Consolidated Federal and Provincial 266 Various NFC Awards
Government Expenditure: 1971-2011 Table 13.2 Average Straight Transfers during 365
Table 10.12 Composition of Government's Total 268 Various NFC Awards
Expenditure: 1971-2003 Table 13.3 Average Non-Development Grants 365
Table 10.13 Key Public Financial Ratios and 269 during Various NFC Awards
Selected Years Table 13.4 Average Development Grants during 365
Table 10.14 Share of Different Levels of Government 270 Various NFC Awards
in Revenues and Expenditures in Table 13.5 Horizontal ·Revenue Distribution- 366
Pakistan: 1979/80, 1990/1, and 2001 Raisman Award 1951
Table 10.15 Federal Tax Receipts (net): 1983-2012 270 Table 13.6 NFC Awards in Historical Perspective 366
Table 10.16 Taxes and their Distribution: 1983-2012 271 Table 13.7 Criteria for Horizontal Distribution of 367
Table 10.17 Distribution of Direct and Indirect Taxes: 271 Divisible Pool under National Finance
1983-2013 Commission NFC Pakistan
Table 10.18 Level and Composition of Tax Revenues 273 Table 13.8 Vertical Revenue Sharing Arrangements 368
in Developing Countries and In Pakistan between Federal and Provincial
Table 10.19 Tax/GDP Ratios of Individual Taxes in 273 Governments under Various NFC Awards
Pakistan Table 13.9 Average Vertical Fiscal Imbalance 369
Table 10.20 Elasticity and Buoyancy of Major Taxes 274 between Federal and Provincial
w.r.t. Income (GDP) Governments-NFC Award Period
Table 10.21 Decomposition of Buoyancy of 275 Table 13.10 Trends in Regional Distribution of 370
Major Taxes Population among Federating Units of
Table 10.22 Key Financial Ratios of the Provinces: 275 Pakistan
1990-1995 Table 13.11 Fixed Subvention to the Provinces: 372
Table 10.23 Share of Different Levels of Government 276 NFC 1990
in Expenditure on Social Sectors in Table 13.12 Net Effect of Multiple Criteria 2010 as 373
Pakistan: 1990/91 Compared to Population-based Criterion
Table 10.24 Annual Compound Growth Rate in Tax 276 Table 13.13 Horizontal Revenue Sharing: Provincial 374
Revenue by Province: 1990/1 to 1994/5 Share in NFC Awards 1971 to date
Table 10.25: Total Revenue and Taxes: 1961-2011 277 Table 13.14 Trends in Position of Federating Units of 374
Table 10.26 Taxation and Expenditure Proposals 278 Pakistan-Annual Intercensal Population
according to the Structural Adjustment Growth Rates
Programmes: 1988-1991 and 1993-1996 Table 13.15 Incidence of Poverty in Pakistan 377
Table 13.16 Predicted Poverty Incidence: 2010-11 378
Table 11.1 Domestic Debt Outstanding: 1980-2013 303 Table 13.17 Province-wise Percentage Revenue 379
Table 11.2 Domestic Debt Outstanding at End of 303 Collections: Trend Analysis
Period: 1980-2013 Table 13.18 Criteria for Horizontal Distribution of 380
Table 11.3 Debt Servicing: 1983-2012 304 Divisible Pool under the Indian Finance
Table 11.4 Sources of Financing the Fiscal Deficit: 305 Commission
1978-1995 Table 13.19 Population Density by Provinces/Regions: 380
Table 11.5 Summary Fiscal Policy Statistics: 306 1951-1998 Censuses Data
Table 11.6 Gross l)omestic Product, Inflation, 308 Table 13.20 Criteria of Horizontal Distribution among 381
Current Account Deficit, and Budget Deficit Sub-National Governments
Table 11.7 Profile of Domestic and External Debt: 312 Table 13.21 Federal Transfers to the Provinces 383
1993-2011 Table 13.22 Relative Per Capita Transfer by Province 383
Table 11.8 Costs of Borrowing and Interest Rates 313 Table 13.23 How Intergovernmental Fiscal Transfers 384
(Domestic Debt) have been Equalizing in Pakistan?
Table 11.9 Dynamics of the External Debt Burden 317 Table 13.24 Development Rankings of Provinces 384
Table 11.10 A Cross-Country Comparison of External 318 Table 13.25 Average Fiscal Equalization Indices 385
Debt Indicators during NFC Awards post-1971
 ~/

List of Tables xvii

Table 13.26 Average Fiscal Equalization Indices 385 Table 19.1 International Comparisons of the 557
during NFC Awards post-1971 Social Sectors
Table 13.27 Dynamics of Tax Mix 386 Table 19.2 Pakistan's Human Development Index: 559
Table 13.28 Composition of Tax Mix in Regional 386 1975-2004
Countries Table 19.3 Literacy Rates in Pakistan: 1951-2011/12 561
Table 19.4 Literacy Rates in Pakistan: 1972, 1981, 562
Table 14.1 Scheduled Banks' Advances by Economic 395 1998
Group: 1953, 1963, 1972, 1977, 2000, and Table 19.5 Enrolment and Dropout Rates 563
2010 Table 19.6 Number of Educational Institutions 564
Table 14.2 Branches and Deposits in Banks in 400 and Enrolment
Pakistan (including foreign banks): Table 19.7 Expenditure on Education: 1972-2003 564
1964-2010 Table 19.8 Distribution of Enrolment by School Type 565
Table 14.3 Scheduled Banks' Advances: June 1985, 401 Table 19.9 Trends in Demographic and Health 568
1991, 2001, and 2010 Indicators: 1965-2002
Table 19.10 Fertility Rates and Contraceptive 570
Table 15.1 Pakistan: Selected Financial Instruments: 433 Knowledge, Attitude, and Practice
Mid-1990s Table 19.11 Fertility by Background Characteristics 571
Table 15.2 Monetary Statistics: 1994-2012 434 Table 19.12 Urban Population by Province 573
Table 15.3 Causative Factors for Changes in 435 Table 19.13 Housing Accessibility to Municipality 579
Monetary Assets: 1993-2012 Services in Urban Areas of Pakistan by
Table 15.4 Money Supply (Ml, M2, M3 ), 1980-2012 436 Province: Selected Years
Table 15.5 Key indicators of Pakistan's Financial 437
Development Table 20.l Pakistan Millennium Development Goals 590
Table 15.6 Historical WPI, CPI, and Sectoral 437 Table 20.2 Official List of Millennium Development 592
Inflation Rates (Panel a and b) Goals Indicators
Table 15.7 Savings as a percentage of GDP: 439 Table 20.3 Key Indicators Showing Women's Status 595
1970s-2012 (Provisional) in Pakistan and South Asia
Table 15.8 Capital Accounts of the Public and 441 Table 20.4 Educating Women 595
Private Sectors Table 20.5 Resource Base and Degradation: 602
World and Pakistan: Late 1980s
Table 16.1 IMF Commitments 2012 464 Table 20.6 Changes in Selected Environmental 603
Table 16.2 The World Bank's Assessment of 467 Indicators: 1990 and 2000
Reforms in the Major Policy Areas Table 20.7 Land Capability Classifications 604
Affected by Adjustment Programmes:
1981-1988 Table 21.l International Comparisons of Health 625
Indicators
Table 17.1 Pakistan: Transactions with the Fund 484 Table 21.2 Main Causes of Death in Pakistan 626
from 01 May 1984 to 31 May 2012 Table 21.3 The Burden of Disease per cent of DALYs 627
Table 17.2 IMF Arrangements with Pakistan 486 Lost per Year
Table 17.3 Summary of Public Finance: 1988/9 490 Table 21.4 Distribution of Deaths by Communicable 627
to 1990/1 Diseases, by Gender and Location
Table 17.4 Changes in Trade Policy: 1987/8 to 1992/3: 491 Table 21.5 Leading Causes of Morbidity and 628
Non -Tariff Barriers Mortality in Pakistan
Table 17.5 Summary Key Indicators and Programme 492 Table 21.6: Incidence of Major Health Problems 628
Targets: I 987/8 to 1991/2 Reported under the NHMIS 2003
Table 17.'6 Growth Rates in Pakistan: 1980-2003 503 Table 21.7: Regional Differences in 628
Health-Related Data
Table 18.1 Key Economic Indicators: 1990-2010 520 Table 21.8: Type of Health Facility used by 630
Table 18.2 Pakistan's External Debt Outstanding 525 Economic Category
and Servicing Table 21.9: Health Expenditure in Pakistan: 630
Table 18.3a Selected External Debt and External 527 1997,2001
Liabilities Indicators Table 21.l 0: Percentage Household Health 631
Table 18.3b Trends in External Debt Sustainability 527 Expenditure as a Proportion of Total
Indicators FY 00-FY 08 Expenditure
Table 18.4 Amount of Debt Rescheduling in Pakistan 528 Table 21.ll: Access to Drinking Water and Sanitation 632
Table 18.5 Pakistan's External Debt and Liabilities 528 for the Poor and Non-Poor
Servicing Table 21.l2: Estimated Unit Costs of Outpatient 634
Table 18.6 Overall Reserves as per BOP 531 Health Care (in 1995-96 Rupees)
xviii List of Tables

Table 21.13: Public Health Facilities in Pakistan: 637 Table 23.7 Regional Poverty in Pakistan: 1990-91 696
1990,2004 to 2005-06
Table 21.14: Health Facilities in Rural Areas 637 Table 23.8 Classification of Districts into 702
by Province: 2001 Agro-Climatic Zones
Table 21.15: Type of Practitioner Consulted for 638 Table 23.9 Rural-Urban Poverty by Agro 0 Climatic 703
Diarrhoea Treatment Zone (2005-06)
Table 21.16: Trends in Immunization Coverage in 639 Table 23.10 Total Rural Income by Agro-Climatic Zone 704
Pakistan: 1980.:...2000 Table 23.11, Percentage of Households Receiving 705
Table 21.17: Immunization Coverage by Locality 639 Remittances
Table 21.18: Immunization Coverage 639 Table 23.12 Revenue Collection 2004--09 706
by Income Quintile Table 23.13 Sales Tax Collected 2004-09 706
Table 23.14 Karachi Population Growth 707
Table 22.1 Trends in Poverty Proportion of Poor 653 Table 23.15 Migrant Population in Urban Karachi 708
Table 22.2 Survey of Poverty Estimates 655
Table 22.3 Poverty Trends by .Province 656 Table 24.1 Comparison of India and 725
Table 22.4 Trends in the Gini Coefficient 657 Pakistan's. Economy
Table 22.5 Trends in Growth, Poverty, and 658 Table 24.2 Economic Structure and Trade 726
Income Distribution Dependence of India and Pakistan
Table 22.6 Decade Wise Growth Rates 659 Table 24.3 Growth of Sectoral GDP, Merchandise 726
Table 22.7 GDP Growth, Developments, Defence, 660 Exports, arid Gross Capital Formation i
\'
Debt, and Interest Payments 1961-2011 in India and Pakistan
Table 24.4 India Pakistan Trade: 1999-2000, 2012 730
Table 23.1 Comparative Ranking of Districts in 689 Table 24.5 Pakistan's Total Trade and Trade with 731
Pakistan-Panel A and B India: 1999-2010
Table 23.2 Changing Profile of Development by 691 Table 24.6 . Pakistan's Top Ten Imports from India 733
Province: Share of Provinces in Population Table 24.7 Pakistan's Top Ten Exports to India 733
Quartiles by Level of Development
Table 23.3 Percentage of Population within 691 Table 25.1 Cost of War Estimate in 2001/02 754
Provinces and Development Levels and 2010/11
Table 23.4 Literacy Rates in Pakistan: 1972, 692 Table 25.2 Direct Overt US Aid and Military 759
1981, 1998 Reimbursements to Pakistan: FY2002-l l
Table 23.5 Regional Differences in Human 692 Direct Overt US Aid Appropriations and
Development Indicators: 1991 Military Reimbursements to Pakistan:
Table 23.6 The Ten Least Deprived Districts 695 FY2002-FY2012
of Pakistan

I
, '
I
Introduction

Pakistan's economic performance since 1947 has been, at growth, and development. In the 1960s the single focus was
times, quite spectacular, and at others, nothing but dismal, growth, with little concern for distribution, equality, or any
It failed to maintain the high growth in agriculture and other consequence of growth, Growth was supposed to trickle
manufacturing which it experienced in the 1960s, after a down from the high-income and rich savers and investors to
difficult start in the first decade following independence, The the rest of the population. Now in the 21st century, growth
1970s, for a host of reasons, most beyond the control of the is still important, but is subservient to a development which
incumbent government, were not even a patch on the 1960s, needs to be participatory, distributive, just, sustainable, and
although surprisingly in the 1970s the economy performed environmentally friendly, A growth rate of 7 or 8 per cent,
better than it did in the 1950s, Towards the end of the 1970s, while welcome, must be seen in the light of these other
and for much of the 1980s, until at -least 1988, the high- important indicators of development)
growth pattern re-emerged, athough qualitatively different More important, the way growth is to take place now
from the growth performance of the 1960:JThe economy in differs substantially from the way economic growth was
the 1980s seemed to be on a higher plane than that of the supposed to take place prior to the mid-l 980s. Markets must
1960s. There were murmurs that perhaps Pakistan had once be efficient and must determine the demand and supply
again returned to the 'natural' growth rate path of 6 per of scarce resources. States and governments must stay out
cent plus, and would no~ continue where it had left off in· of the economy; and privatization, openness, liberalization,
1968-9, However, just as the ten-year period after 1958 had -end globalization, according to conventional wisdom, must
unravelled, resulting in an appreciable slowing down of the determine choices regarding how and where to invest and
economy, so too did the end of the ten or so years f!om about what to produce. Countries should get their prices right, and
1978-9 onwards, reduce subsidies and all other distortions in the economy.
With the praetorian electoral charade starting in 1988, Even in the social sectors, the role of the state is supposed to
the growth rates of the economy once again fell to levels be minimized, with private sector initiative leading the way,
reminiscent of the first democratic period of 1971-7, This One of the arguments made in this book is that since 1988,
trend gave rise to suggestions that, since growth rates in when a package of neo-liberal policy reforms was introduced,
Pakistan were highest under military regimes, and under !he economy has performed less well than it had in the past.
democracy the economy had performed particularly poorly, To a great extent, the Structural Adjustment Programme,
"/,
perhaps one way of achieving high growth rates for the launched in Pakistan in 1988 under the guidance and direction
economy would be to maintain military r'egimes. The of the International Monetary Fund (IMF) and the World
often-quoted examples of South Korea, Taiwan, Singapore, Bank, resulted in a visible slowing down in the economy,
Malaysia, Thailand, and Indonesia seemed to fit the pattern, increasing income inequality, poverty, and unemployment,
where authoritarian states had high-performing economies, and hastening the process of deindustrialization. Moreover,
This pattern was repeated again and the claims made in Pakistan's wider political economy; and the failure of its elite,
Pakistan, when the military-led government resulted in has made it dependent on multilateral and bilateral aid. ,
7 per cent growth rates between 2002-7, and when the Ironically, although the example of s·outh Korea in
democratically elected government between 2008-13, could particular, and that of other East Asian economies in general,
manage only 3 per cent growth. is repeatedly cited for Pakistan to emulate, the conditions and
Yet much of the analysis that examined the economic policies that were essential for the growth of the East Asian
miracle of East Asia and other countries, ignored specific economies _were quite the opposite of those that were propagated
factors, institutional arrangements, the nature of the state, post-1988 under the Structural Adjustment Programme. As
and issues of governance and administration. There are an illustration, we can dte just a handful of policies pursued
as many differences between the East Asian economies as by South Korea which are believed to be the critical cause of
there are similarities, and a more detailed study of each high growth.
country shows peculiarities which explain why and how they South Korea's was certainly what is called an 'authori-
developed. In fact, Pakistan's growth pattern, at least in the tarian industrialization pattern', where the existence of a
1960s, also offered some general and particular pointers on developmentalist bureaucracy and state, and an interventionist
how to 'do development'.', bureaucracy and state, were fundamental to the process of
The period after 1988 brought about an extraordinary sea growth that emerged. In Korea, landlordism was abolished
change in how the world thinks about economics, markets, and an extensive land reform undertaken. Cheap credit,
 xx Introduction
1
i.e. directed credit, was made available to the private sector The explanations of how state and society have evolved in
at subsidized rates, with certain sectors receiving priority Pakistan also emphasize the fractured nature of both, with
treatment. Prices were continuously projected as 'wrong' infomalization perhaps being a key category of analysis.
rather than right, with numerous government-imposed
controls and restrictions pushing the industrial pattern in a
preferred direction. Essentially, it was the state, a particular AeouT THE BooK
kind of state, that intervened in the process of economic
development, and not simply the market, which was responsible There is no denying the fact that this book has an ambitious
for the extraordinary rate of growth observed in South Korea agenda. We question some of the most repeated, incorrect
and much of East Asia. In contrast, just the opposite to statements perpetuated by students of Pakistan's economy
interventionist and statist policies were recommended for and society. While this is perhaps a key purpose of this
Pakistan in the post- I 988 structural adjustment period with book, we also provide new facts about, and interpretation
privatization and market-based policies being advocated as the of, areas of the economy and time periods that have not
state withdrew. One can make the case now, that in Pakistan, been evaluated by researchers or academicians. Hence, the
private sector-led development will be more vulnerable to purpose is two:fold: ( 1) to re-examine much of the perceived
the market than state-led economic development, resulting conventional wisdom about developments in Pakistan's
in more variable and unsteady outcomes. There is still much society and economy, myths which have now assumed
merit in the role of the state as developments after the global the scale of folklore; and (2) to provide facts, data, and
crisis of 2008 have re-emphasized. information about the economy, particular sectors and recent
While a comparison of the Ayub, Zia, and Musharraf years years, which are not to be found in other books on the topic.
shows that the decades of the military generals achieved Here an attempt is made to look at historical events and
high growth, it also suggests that at the end of the respective developments of the past, as well as more contemporary
decades, the growth performance unravelled ·because the issues. This book is meant to explain Pakistan's structural
existing political settlement that permitted high growth came transformation over six decades in a political economy
into conflict and contradiction with the very structures and. framework and explore how that change has taken place.
systems that it had created. The result was the emergence of In the first chapter, we try to assess whether Pakistan's six
popular movements and opposition to the military regimes, decades of development and growth along with its significant
and the foundation of a kind of democratic order. The legacies structural transformation, has been a success or failure.
of Zia thirty years later, and of Musharraf five years after his However, this is an impossible task, and in many ways,
dismissal, suggest that bad decisions can have permanent the issue itself is redundant. The parameters of success or
debilitating consequences. failure, the comparisons over space and time, the possibilities
This book, after developing a factual and interpretive of what might have been, etc. are so imponderable and
story about structural transformation and economic growth complex that it ·is best to leave such debate inconclusive.
and development of Pakistan since 1947, ends with the Pakistan has performed far better than, say, Afghanistan;
observation that a new economic and political order has however, it has fared far worse than South Korea or any of
emerged in the country. For want of descriptive terms, this the East Asian economies, which were at comparable levels
new order is called the 'middle-class consolidation', after of development forty or fifty years ago. And now, with most
1988. The reasons for it are to be found in the _twenty-seven South Asian countries, especially India, Sri Lanka, and even
chapters of this book. We argue that, while as an economic Bangladesh, overtaking Pakistan in terms of economic and
category the middle class emerged and consolidated itself, human development, perhaps one can suggest that Pakistan
first in the late 1960s, and then again in the 1.980s, it has has been left behind and is increasingly looking like a failed
only now begun to consolidate itself as a political entity and state. While we look at many of Pakistan's achievements and
force. Having said this, it is important to emphasize that failures since 1947, we leave it to readers to reach their own
nowhere do we glorify this class, if indeed it is one social conclusions based on the arguments presented in this chapter
class, for this is no pristine, revolutionary, and progressive and the rest of the book.
class. This is Pakistan, and Pakistan's corrupted, rent-seeking, The most popular myth still prevalent in Pakistan is that
inefficient, and pampered middle class which is socially Pakistan is a feudal country. In Part I of this book; which
conservative and fragmented, contradictory in nature and deals with agriculture, and especially in Chapters 2, 3, and
in its working, includes both highly traditional religious and 4, we show that this is certainly not the case-feudalism,
conservative sections within this social category, as well as as the dominant economic category, may have passed into
indigenous and modern groups. It does not see the essential history many decades ago. What we see now, and have seen
~t~-~.•_oi_h~°;!1:l.apit~l ~or.IE!t~on~ and infrastructure for many years, is a capitalist agriculture in Pakistan. Another
development, for progress, for itself, or for the nation in the often-quoted statement by students studying Pakistan's
years to come. Pakistan's middle class, like all other classes economy-through no fault of their own, for one finds these
present, has evolved in the particular and specific conditions statements in most textbooks on economics-is that Pakistan
that define what Pakistan is. To expect otherwise, that we is an agricultural country. Although 45 per cent of those
would necessarily have a modern, progressive, educated, gainfully employed are said to work in agriculture, people are
forward-looking middle class, as did Europe some centuries moving away from rural areas altogether, or are finding non-
ago, or Latin America some decades ago, is wishful thinking. agri~ultural, non-farm, rui-af employment. The four chapters

L
 Introduction xxi
I
I
in Part I examine the nature of transition in Pakistan's account deficit, crowding out, and low investment, we find

l agriculture over many decades, with Chapter 5 examining

the salient problems that afflict agriculture at present. The
current crisis in agriculture also, perhaps, bears witness to
our claim that Pakistan is no longer an agricultural country,
or at least, is moving away from agriculture.
In Part II, on industry and trade, the four chapters look at
the process of industrialization in Pakistan since 1947. Chapter
that the fiscal deficit in Pakistan has, until the I 990s, been
most benign. Moreover, the fact that government expenditure
in Pakistan often crowds out private sector investment is
conveniently ignored by mainstream economic evaluations
of Pakistan. We find that government expenditure has had
quite a positive role to play in development, if this money
is spent correctly and in the right areas. What is important
6 looks at the period 1947-77, evaluating and rejecting two when considering government revenue and expenditure is to
important assumptions made by observers in the past. The evaluate who is paying taxes and who is not, how much tax
first concerns the performance of the economy in Ayub is being collected and how much evasion exists, where and
Khan's Decade of Development. Unlike other interpretations, how much government is spending, and the quality of that
where the nature of growth has been criticized for being expenditure. Blanket statements like 'a budget must always
inequitable, we argue that this was an intrinsic and inherent be balanced' and 'government expenditure is always wasteful
consequence of the capitalist economic policy followed by the and inefficient' are, in fact, quite erroneous.
Ayub regime. Capitalist economic development manifests its Part IV focuses on two key aspects of Pakistan's federalism,
own contradictions and there is little controversy over this that of devolution and fiscal federalism following the 7th
form of development. This chapter also takes strong issue NationalFinanceCommissionAwardand the 18thAmendment
with the popular view that the Bhutto regime was a dismal in 2009 and 2010. Military governments have always had
failure on account of the policies it followed. This is found a preference for devolution-local government without
to be factually incorrect. The performance of the economy financial authority-and Chapter 12 provides an extensive
was understandably not as impressive as the phenomenal narrative of the evolution of Pakistan's local government
growth of the 1960s, but it was better than that of the 1950s. structure since 1959. Devolution, decentralization, and local
Moreover, it was not all the fault of Bhutto and his economic government seem to be emerging as the new liberal panacea
managers that the economy did not do as well as had been in development theory. We argue that, while they are well
hoped-a multitude of extrinsic and foreign factors that were meant, such concepts need to be placed in a context of power
, not in the control of the government affected the economy relations and there are numerous structural constraints, if
severely. It seems that political ideology and a dislike for not prerequisites, which must be addressed to make any of
Bhutto have perpetrated the myth of the disastrous 1970s. these ideas functional, productive, and successful. Chapter
Chapter 7 looks at developments in industry after 1977, with 13 deals with the impact of the seven NFC Awards and what
particular emphasis on the post-1988 structural adjustment this might mean for development after the 18th Amendment
neo-liberal period and its consequences for industry. Chapter when provinces have far greater autonomy and responsibility.
8 analyses the state of industry at present, and the main Part V, Chapters 14 and 15, which look at monetary policy,
problems that afflict it, with the energy crisis of the post- begin with a history of the banking sector in Pakistan,
2008 period being a particular cause. Chapter 9 examines showing its close imprint on economic development and
the development and changing nature of foreign trade in industrialization. Chapter 14 also looks at the equities market
Pakistan, and questions yet another key assertion about in Pakistan, and after examining the role that capital markets
Pakistan's economy: that the process of industrialization, have played in other countries, we argue that directed credit
under highly protected tariff walls, had been inefficient, and schemes, subsidized credit, and distorted credit markets
hence gave rise to an industry that was inefficient. However, may be better policy options than fostering and sustaining
a large number of studies that examine the impact of trade an equities market that resembles more a game of loaded
policy on industrialization have concluded that, while there dice than a mechanism to allocate and ration credit. Chapter
were problems in the pattern of industrialization in Pakistan, 15 on money, savings, and inflation, shows that inflation
the assertion that it had been inefficient was 'grossly in Pakistan, and probably elsewhere, is not 'always and
exaggerated'. everywhere a monetary phenomenon'. Inflation seems to
In Part III, we analyse fiscal policy, and its impact on and depend more on government-administered prices of key
consequences for economic development. In Chapter 10, we commodities and utilities, and on devaluation, than on an
examine in detail the nature of the taxation structure and increase in money supply, excessive or otherwise. The reasons
resource mobilization by different tiers of government in for high inflation and low savings in Pakistan also need to be
Pakistan prior to the changes brought about in 2010, and re-examined in the light of the facts rather than on the basis
look at the reasons why expenditure tended to be larger than of preconceived notions.
revenue. Chapter 11 looks at what has been, for many years, With Part VI we come to the three chapters that describe
considered to be Pakistan's biggest economic problem: that Pakistan's economic programme since 1988. This is the neo-
of the large debt burden and the fiscal deficit, considered by liberal Structural Adjustment Programme, imposed upon
many to be the single biggest cause of Pakistan's economic Pakistan by the IMF and World Bank, and so willingly
malaise. This latter assumption, however, is contested, and accepted .and endorsed by Pakistan's eljtes. After explaining
we show that blaming the fiscal deficit for all the economic in Chapter 16 what constitutes the Structural Adjustment
ills of the country distorts the facts. Rather than being Programme and the consequences it has for the countries
responsible for low growth, high inflation, a high current that have endorsed and implemented it, in Chapter I 7
 xxii Introduction

we turn to its impact on Pakistan. The history of IMF at institutional factors and constraints that have inhibited
and Government of Pakistan relations shows that the two social development. Often finances are not the sole problem
comprehensive programmes of 1988 and 1993-4 were both
negotiated and enforced by unelected caretaker governments
and had to be ratified by the incoming democratically elected
affecting a sector, but issues of management, administration,
and delivery are equally important. Issues like community
participation, the role of non-government organizations
j
governments-in both cases, interestingly, of Ms Benazir (NGOs ), governance, and decentralization are also evaluated
Bhutto. The chapter shows that, since the advent of the in the light of past experience and current propaganda. We
programme, the economy's performance has declined rather also question the belief that NGOs provide an efficient and
sharply, causing a significant loss in social welfare, especially productive development paradigm ..
for the poorer social classes. We emphasize the point, In Part VIII, Chapter 22 deals with Pakistan's most
that in 1988, when the first major Structural Adjustment pressing issue, that of poverty. Despite high rates of growth,
Programme was implemented, Pakistan did not really need such Pakistan continues to have a poverty rate with one-third of its
a programme, which is usually reserved for those countries population-60 million individuals-living below a meagre
that, according to the IMF, are in deep economic crisis and poverty line. With one-third of the country's population
stagnation. In 1988, Pakistan was actually booming and one living in abject. poverty, any assessment of high growth,
of the consequences of following the programme may have growing financial reserves and economic 'stability', will need
been to dampen the high growth performance of the 1980s. to be re-evaluated. Chapter 23 highlights the issue of regional
We suggest that, although restructuring of the economy is and income inequality in Pakistan in both a historical and
essential, it needs to be done on more friendly terms than contemporary context.
those enforced by the IMF and World Bank. The reasons The last four chapters of the book, in Part IX, look at the
why Pakistan's governments run to the IMF to borrow on impact of the economy on political formations, the state and
any pretext is that they, along with the ruling .elite, are classes, on war, aid and terror, and on the political economy
not willing to undertake the extensive reforms needed to of neighbourly relations. We argue that much of the evidence
restructure the economy, for those reforms will hurt the presented in this book suggests that Pakistan's middle
interests of this ruling elite. It is far safer to borrow, delay the classes are beginning to assert themselves collectively, not
inevitable, and pass on the debt burden to the unsuspecting just in economic terms, but also as a political class. While
general public. Chapter 18 looks at macroeconomic issues Pakistan has a long way to go to become a modern, dynamic,
since the mid- l 990s, particularly since the General Pervez educated, and vibrant society, we may see the beginning of
Musharraf takeover of October 1999 and at the consequences such developments. In the Political Economics sections of
to Pakistan's economy after 9/11. It also evaluates the dismal the book, we also examine issues related to South Asia more
performance of the PPP government of 2008, acknowledging generally, and trade and economic relations-or their lack
the claim that numerous deep-seated political and economic of-between India and Pakistan. We show that while there
issues were beyond the ability of the PPP government to are no real and substantive economic arguments which ought
address or reform, yet also holds the government accountable to restrict greater cooperation between India and Pakistan,
for mismanaging the economy. political and institutional interests override such economic
Chapters 19-21, which constitute Part VII of the book, concerns. Trade and economic arrangements are examined in
try to understand Pakistan's development paradox. With the light of larger political factors. An attempt is also made
impressive growth in different sectors of the economy, the in the end, to understand how the unravelling of Pakistan's
performance of the social sectors has been visibly poor. The state has occurred. Issues related to state collapse and the
development paradox has a dual meaning here, since not relationship between political classes and civil society on the
only has economic development not translated into social one hand, and the omnipresent military, on the other, form a
sector development, but the fact that impressive economic key part of this evaluation.
development has taken place without an adequate social and Part IX follows the narrative of the evolution of Pakistan's
human capital base is itself perplexing. Different subsectors social, economic, and even political dispensations over
in the social sector, such as health, education, housing, and many decades, highlighting key developments and events.
population, are analysed in Chapters 19 and 20. We question As has happened so many times in Pakistan's history, events
the assertion that population, just like the fiscal deficit, is one with unintended consequences have shaped Pakistan's
of Pakistan's major problems, and we find that this is not developments. Yet, social and economic change has also
necessarily the case. Moreover, the population rate seems to been somewhat anticipated and predictable, giving rise to
be falling now as economic austerity and hardships increase, somewhat more certain outcomes. The immense growth
and it is unaffordable to have large families. There is also a of urbanization, that of a middle class, a hugely buoyant
section on gender and women, where we argue that, while informal sector, and the breakdown of state authority and
cosmetic changes and positive discrimination may address of state-institutions, has been unfolding almost expectantly.
some of the issues facing women in Pakistan, the deep- The previous trend of the 'urbanization of everybody',
rooted structures that cause gender bias must be confronted seems to have morphed into an 'urbanization with
if economic, social, cultural and judicial emancipation of informalization', with the co-movements of urbanization
women is to take place. The third chapter in the part on and informal relations of production and exchange perhaps
the social sectors, Chapter 21 on institutional issues, looks dominating social and political interaction. What this

L
I"'

Introduction xxiii

means for subsequent developments remains uncertain Data on Pakistan are notoriously poor, of dubious quality,
and one can merely (hesitantly) speculate about alternative and often fabricated to suit the needs of the government in
scenarios. power. Moreover, as readers will see for themselves, different
The aim of this book is to provide, analyse, and interpret official sources contradict each other. While most of the
something called 'facts'. There is usually, amongst students, data originate from official sources, researchers do manage
a desire for prescriptions and definite answers. This book to get around the numbers. For example, the growth rate
does not provide them. What the book does, however, is of the small-scale manufacturing sector has been reported
to reinterpret accepted dogma, home truths, and myths by government to be a constant 8.4 per cent for more than
about the economy and about society. It is important a decade; as any observer of the Pakistani scene knows, the
to emphasize that this is one of many interpretations, and growth rate has at times been almost twice or even three
readers are invited to contest the claims by challenging times this rate.
preconceived notions. One of the features of this book is that it relies on, and
The emphasis in this book is on process. We examine facts uses, extensive quotations from numerous published articles
and issues and developments over time, placing them in and books. This, we feel, will represent the arguments made
their specific contexts. It is not possible to understand the by the authors themselves, rather than our understanding
present without recourse to the past. Pakistan's economy and interpretation of what the author is actually trying to
and development today-the word 'development' implies say. Moreover, one hopes that these quotations and the use
transition and a process-need to be traced back in time; of references will whet the appetite of the reader to go to
only then can we better understand the present and possibly the sources and read their works in the original. Also worth
attempt to look into the future. Nevertheless, the book also mentioning is the fact that the change in nomenclature of the
acknowledges that such transitions are incomplete, complex, former North West Frontier Province (NWFP) to the current
wayward, often built on unintended consequences, and Khyber Pakhtunkhwa province, has meant that both names
hence one avoids the popular Pakistani pastime of offering are used interchangeably, although an attempt is made to
advice and making predictions. If one has learnt one thing only use Khyber Pakhtunkhwa for references after 2010.
from Pakistan's recent political history, it is that there is too Other organizations and institutions have also been dealt
much that we do not know and there are too many 'unknown with in the same manner.
unknowns', to hold forth on probabilities. The purpose of this If this book can convince the reader that there are many
book is not to offer any solutions or prescriptions, but merely ways of looking at what constitutes conventional wisdom,
help in explaining Pakistan's considerable structural and and if it stimulates the process of enquiry and questioning, it
social transformation. will achieve what is probably its greatest ambition.
I.
!
 Understanding Pakistan's Structural
Transformation: 1947-2014

This book is about understanding Pakistan's structural any assessment of a country's development. In many cases,
transformation over six decades in a political economy one would argue that many countries are far better off over
framework, where the main purpose is to examine how and the last fifty or sixty years, countries such as Malaysia, South
where such transformations have taken place, in the economy, Korea, China, India, and even Bangladesh, all have evolved
in society, in class and gender relations, in manifestations of stable and prosperous economies, with most countries in the
consumerism and culture, and other dimensions of being in world having evolved as different forms of democracies. Can
the world, and to assess Pakistan's trajectory of economic and one make similar statements about Pakistan which has had
political development over this period. a roller-coaster economy, interspersed with extensive and
How does one begin to evaluate the performance of a oppressive military dictatorships and praetorian democracy?
country over a period of more than six-and-a-half decades? Even after the first democratic handover between two elected
Do we choose some key economic indicators of sixty-six governments in 2013, one is hesitant to predict certainty in
years ago and today, and simply make comparisons, or are Pakistan's democratic prospects at a time when the public
there other ways of looking at conditions and situations over discourse still revolves around the question of whether
more than six decades? Does comparing a snapshot of 1947 Pakistan is a failed state or a failing one.
with one of 2014, the near impossible task as that is, reveal The only suitable manner in which a country can be
anything of value, other than the obvious fact that over six evaluated is to examine its own particular history, and to
decades there has been extraordinary change? And, if it does, look at how certain features have evolved through certain
we must then ask the more important question: how has processes and the direction in which these developments
that change been brought about? What has been the process have taken place. Comparisons with other development
of development or growth or progress over the last sb{ty-six - processes in other countries are always helpful and welcome,
y~ars? Perhaps in any evaluation, the story itself, the process but perhaps a better understanding of one particular country
and mechanism of change, the directions, developments, is best told by its own development narrative, rather than some
I.
and dimensions of the process are the most interesting and general presumed generic laws of development or governance,
relevant factors. as has become the global fashion these days. The story of
Related to the issue of how one looks at change and development is more important than a mere comparison of the
development, is the critical issue of what one is looking at. numbers at the beginning with those at the end\However,
How can we make the claim that Pakistan today is far better numbers do provide some insight into the process its~lf. For
off, at least economically, than it was in 1947, if indeed that example, one can see in absolute and relative terms the extent
is the case, something which increasingly many economists of growth, development and progress that have taken place in
question? Does one use some set of statistics and show that the economy, as well as the structural transformation which
because they are higher/better, so is the country and its has taken place-in the economy, society, class structure,
people? A snapshot comparison of 194 7 with 2014 does not in politics-perhaps the single most important outcome
certainly confirm the assertion that Pakistan is very much showing change. For example, the three-fold increase in per_
better off in the second decade of the twenty-first century .capita income over more than six decades may suggest that,
than it was in 1947. Importantly, it matters also when one is at least according to one important indicator, the people of
comparing the past with a particular present. For example, an area or community are better off and their standard of
many in Pakistan during the 2003-07 false boom period felt living in economic and material terms has trebled and that
that Pakistan's economy had turned around, permanently, their way of living and being in the world has considerably
and that it was destined for a trajectory similar to India's or changed. If the literacy rate has also increased three-fold
even China's, laughable though it now sounds. Moreover, over the same period, this too shows that the country and its
does high economic growth, even if it comes about under people are better off than previously and now engage with
military dictatorships-as it so often has in Pakistan- the world differently having a significant impact on social,
symbolize a future for a country when democracy and economic, and cultural relations amongst and between each
participatory forms of government have become the choice of other.
people worldwide? Clearly, how one examines a before-and- It is, perhaps, more important to assess what the key
after situation, when one chooses to evaluate such time-lines, numbers and indicators could have become, i.e. the
·what one privileges over numerous indicators-economic, potential-fulfilled or unfulfilled-of the country. Whj!e 5
social, political, related to justice,pe;ce, etc.-all determine per cent of GNP growth per annum may sound impressive,
2 Issues in Pakistan's Economy

perhaps there were conditions which could have meant that did not come up to some acceptable growth criterion were
the country should have achieved 8 or 9 per cent growth considered poor achievers, or outright failures. In the 1970s,
and, hence, 5 per cent suggests unfulfilled potential and redistributioll' with growth and social sector performance
expectations. Thus, figures need to be looked at with respect became important criteria for success, and now, in the
to a potential or trend rate as well. Another relative crit~rion twenty-first century, 'modernization', openness, and indices
which could measure success or achievement for a country of involvement and participation of the private sector have
is some comparison with other countries. If a number of · emerged alongside growth as important indicators. There
countries were at a similar level of economic development, have also been important shifts in political ideology and in
say, three or four decades ago, and all of •them have now ways of achieving the targets set. When growth was the only
shown tremendous growth in absolute terms, it might be thing that mattered for economists, conventional wisdom
necessary to look at how relatively well these countries held that it did not matter how one achieved high growth,
have progressed. The comparison between South Korea and for it would eventually filter down to the people. These
Pakistan is a much cited case, where both were considered economic pundits went so far as to suggest that strong,
to be at a similar level of development and growth in the authoritarian states were necessary to oversee high growth
l 960s:while both have shown impressive economic growth rates and adequate economic performance. Perhaps many of
over the last five decades, today South Korea's GNP per the military dictatorships that emerged in the Third World
capita is eighteen times that of Pakistan. This is, indeed, an in the 1950s, I 960s, and 1970s found justification from this
extremely telling statistic. Even more telling for Pakistan, argument. The foreign policy and diplomatic manoeuvring of
is Bangladesh's continued prosperity, both economic and the two superpowers, the United States and the Soviet Union,
democratic: a country which was called a 'basket case' in in those decades reflected this thinking when both countries
1973, is today being seen as a possible 'next China'. Pakistan, propped up and supported highly dictatorial and oppressive
in comparison, has recently been compared with the likes of regimes.
Somalia, Sudan, and Afghanistan. Today, in the neo-liberal era of the new millennium, progress
While there are a number of important issues that one and development incorporate many more qualities than they
needs to be aware of when evaluating the record of economic may perhaps have ever done in the past. Today, economic
growth over more than sixty years, the story is incomplete, development must supposedly be sustainable, participatory,
if not inadequate, unless one examines the consequences and environmentally responsible, and distributive. The single-minded
results of economic growth. Does a country with high rates focus.on growth has been replaced by a very large number of
of economic growth measured by per capita income over other, equally important criteria, just as the way of bringing
six decades, with a largely illiterate, uneducated, unhealthy about this growth and development has done, although
population, reflect progress? And in contrast, does a poorer conventional wisdom still grants, probably incorrectly, that .
country with .low income growth, but with higher social growth matters most. Hence, when we evaluate an economy
and human capital, with a literate, healthy, and educated or country, looking back a few decades, our evaluation is
population, represent progress? Or are both measures equally tainted by the times in which we write and by the new
relevant? Pakistan's economic record has always been conventional wisdom that dominates this historical juncture.
contrasted with its dismal performance in the social sectors, No abstract, purely scientific, universal methodology can help
in absolute terms, and also relative to comparable countries. in evaluating a long-drawn historical process, and concepts
In contrast, countries like Cuba and Vietnam have economic and methods used are relative, contextual, and at times very
statistics that seem to be less impressive than those for subjective.
Pakistan, but both countries have eradicated illiteracy and The long preamble above has been made necessary by the
have statistics in the health sector that are comparable with need to guard against the pitfalls that afflict us when we
most developed countries. One must then ask the question: evaluate economies or societies, whether our own or someone
economic development how and for whom? If economic else's. In the case of Pakistan, it is very easy to adopt a before-
growth, development, and prosperity are manifest mainly in and-after approach, showing what was and what is. But an
buying arms, spending beyond one's means on defence, and evaluation cannot be even half complete until one studies the
propping up a large military establishment, all at the expense processes of economic development, of change, of transition,
of expenditure in the social sector and on the people; then and of structural transformation, in order to understand
no matter how dynamic the economic growth, it is surely where we were, where we are and where we may possibly
quite. meaningless .• Moreover, the question of equitable be heading. Two points in time do not provide that way of
distribution of resources is important, where growth in GNP looking at society.
per capita may not be reflected in who or how many benefit This book is about the process of economic development in
from that growth. Pakistan since at least 1947,ifnot~ little~rlier. This chapter
It is important to emphasize that the historical moment in p;isents a largely static picture of what was and what is.
which one discusses and evaluates issues that have evolved • The details of what happened during these sixty-six years
over time also matters. For example, iq.the 1950s and 1960s, are to be found in the chapters of this book. The numbers,
economic success was dependent almost exclusively upon the information and the analysis in this chapter, as in the
growth rates, regardless of their composition, distribution,· rest of the book, should be studied with caution, ·and all the
or impact. A high growth rate suggested success, while those arguments listed above, about the dangers of studying \ind
countries that had different parameters or priorities and evaluating societies and ec~nom'ies, must be kept in mind.
 Chapter 1 Understanding Pakistan's Structural Transformation: 1947-2014 3

While the rest of the book talks about the process of structural has has also changed dramatically. From 99.2 per cent of
transformation and economic development, about change, total exports in 1947, primary commodities now constitute
about history, and about how these processes unfolded in only around 15 per cent. However, one must emphasize
a dynamic manner, with each specific period or era having the fact that although 85 per cent of Pakistan's exports are
different manifestations, this chapter, often simplistically and riow manufactured goods, with textiles, garments, and yarn

I
summarily, presents arguments that are extensively detailed making up most of them, these figures are less impressive
in the rest of the book. The purpose of this chapter, then, is when we realize that most of Pakistan's exports still depend
""'Simply to highlight the extent of change, rather than the mariner critically on raw cotton. Another important change related
or nature of change in Pakistan over the last sixty-six years. The to the agricultural sector is the recent trend of the huge
other chapters of this book address the lat_ter issue. growth in non-farm or non-agricultural, rural, employment
and income sourcc:;s. The non-farm business sector and
remittances may have now become the most important
1.1 STRUCTURAL TRANSFORMATION economic activity and input into the so called 'rural' economy. 1
These economic changes in structure are also manifested
Probably the most striking feature that is manifested in in where people live. In 1951 when the first census in
a view of Pakistan in 2014 as compared to 1947, is that independent Pakistan was held, only 17 per cent of West
Pakistan today is less than half of the country it was in 1947. Pakistanis lived in areas designated as urban; today estimates
In 1949/50, 55 per cent of Pakistan's population lived in what suggest that at least 60 per cent live in cities and towns, with
was then ~ast Pakistan, making it the majority province in perhaps Punjab as much as 70 per cent urbanized, depending
terms of population. Despite this majority, the eastern wing on how we define 'urban'-see Chapters 26 and 27. 2 This
was economically discriminated against and exploited. A shift has major repercussions for the economy, society, and
section of the ruling elite of the ~estern wing of Pakistan the political process under way. In fact, in the context of
became the oppressors and exploiters of the East Pakistani Pakistan, perhaps the most important political factor over
people, leading to their eventual secession after a long and the last few decades has been the process and extent of
bloody war of lil2eration ending in 1971. urbanization and the emergence and consolidation of a
The contribution made by East Pakistan to Pakistan's middle class (see Part IX for further discussion on this issue).
· economy and society was huge, although never fully With more than 60 per cent of the country's population
recognized or appreciated by West Pakistanis. This point is living in cities and towns, the economic profile, in terms of
emphasized in the chapters of this book that look at economic consumption and production patterns, has also changed quite
development, industrialization, and trade in Pakistan during dramatically. Urbanization's impact on social and economic
the 1950s and 1960s. No matter how significant this loss, development is also very significant. Th·e extent and process
post-1971 Pakistan seems to have moved on from the history of urbanization used to be considered as an indicator of
of its first twenty-five years. However, the mid-point of progress and modernization. Although many modernizers
Pakistan's history seems to constitute a conspicuous break and developmentalists no longer hold that this assumption is
with the past, after which a new country came into existence. valid, one cannot overlook the significant structural change
In 1947, Pakistan had every right to be called an 'agricultural' that has been brought about by the process of urbanization
country. Unfortunately, most students of economics make in the last 66 years, from only 6 million inhabitants out of a
the serious mistake of still calling Pakistan an agricultural population of 33.8 million in 1947, to more than 110 million
country 66 years later, when there is no justification for doing who now reside in cities and towns. (The implications of this
so. 'At the time of independence, the major share of (West) change are discussed in Chapters 26 and 27.)
Pakistan's gross domestic product was from agriculture, Just as the cliche that 'Pakistan is an agricultural country'
which contributed around 53 per cent, compared to 7.8 per is repeated ad nauseam by students of Pakistan's economy,
cent from manufacturing and 11. 9 per cent from retail trade. another myth that prevails and is related to the earlier one is
More than 65 per cent of Pakistan's labour force worked in that 'Pakistan is a feudal country', sadly a myth perpetrated by
agriculture and almost all of Pakistan's exports consisted of foreign correspondents and academics on visits to Pakistan. 3
primary products, essentially agricultural commodities like No matter how one looks at the facts and observes the
jute and tea, which, not surprisingly, originated from East manner in which society has evolved, there is no justification
Pakistan (see Table 1.1 and Figure 1.1, and Chapters 6 and 9). for believing, let alone repeating, what is perhaps Pakistan's
By 2013 the extent of change in Pakistan's economic most popular myth. By any set of criteria, there is no evidence
structure can also be seen in Figure 1.1, and the cliche that td support this illusion. The Green Revolution of the 1960s,
Pakistan is basically an agricultural country is no longer true. with its extraordinary impact on the rural areas, agriculture,
Now, agriculture contributes a mere 21 per cent towards GDP, the economy, and the social relations of production, put
while manufacturing is as high as 21 per cent. The services an end once and for all to the myth that Pakistan was a
sector has replaced agriculture as the dominant sector -of the 'feudal' country. Chapters 2 to 5, on agriculture in Pakistan,
economy, contributing more than half of the total GDP. The re-emphasize this point using_ different criteria. Chapter 26
population employed in agriculture has aiso fallen, although re-examines the issue of feudalism, asserts once again that it
at around 45 per cent of the total labour force, agriculture . is no longer of any consequence, and then goes on to examine
is s,till the biggest sector in terms of the employed labour the implications of this understanding in Chapter 27. If
force. More importantly, the nature of exports from Pakistan in 1947 there were suggestions that Pakistan was a feudal
4 Issues in Pakistan's Economy

Table 1.1
Pakistan: Basic Indicators, 1947-2014

Pakistan is the world's sixth most populous nation, and has the 40th largest economy in terms of GDP. although in terms of purchasing power
parity, Pakistan's economy is the 24th largest in the world. However, it is number 164 out of 203 in terms of GNP per capita, and the 146th
worst performer out of 190 countries, in terms of a composite United Nations Human Development Index.

II
Population (millions)
Urban(%)

Contribution to gross domestic product,

33.78
17.8
(1951) 1 150
40.0
(2004) 185
60-70
(2014)
I
by sector (%) 1949/502 2002/3 3 2012/13
Agriculture 53.2 23.6 21.4
2 Manufacturing 7.8 25.7 20.9
3 Others (mostly services and trade) 39.0 50.7 57.7

Labour force, by sector (%) 1950/1 2 2003 3 2012/13

1 Agriculture 65.3 48.42 45.1
2 Manufacturing 9.5 18.03 13.7
3 Others (mostly services and trade) 25.2 33.55 41.2

Ill GNP per capita (US$) 170 (1976) 4 440 (2000) 4 1368 (2013) 6
Per capita income (Rs) constant 350 (1949/50) 5 915 (1992/3) 5
factor cost (1959/60)
PPP real GDP per capita (US$) 820 (1960) 4 1,928 (2000) 4 2891 (2012) 6

IV Composition of exports (%) 1951 /22 2002/3 3 2012/13

1 Primary commodities 99.2 11 15
2 Semi-manufactures 14 16
2 Manufactures 75 69

V Primary schools (number) 8,413 (1947/8) 1 164,200 (2002/3) 3 153,900

Literacy (%) 15 (1951) 1 42 (2002/3) 3 58 (2011/12) 7
Female literacy (%) 12 (1951) 1 29 (2002/3) 3 47 (2011/12) 7

VI Life expectancy (years) 43 (1960) 4 63 (2002/3) 3 65.7

Infant mortality rate 137 (1960) 4 83 (2002/3) 3 59
Access to safe water (%) 29 (1975) 4 88 (2000) 4 92
Access to sanitation(%) 14 (1980) 4 61 (2000) 4 48
Total registered doctors 1,014 (1948) 1 101,635 (2003) 3 160,289
Population per doctor 14,835 (1951) 1 1,466 (2002) 3 1,127

Sources: 1. Government of Pakistan, Twenty Five Years of Statistics in Pakistan, 1947-72, (Karachi, 1972); 2. Ahmed, Viqar and Rashid \
Amjad, The Management of Pakistan's Economy, 1947-82 (Karachi: Oxford University Press, 1984); 3. Government of Pakistan,
Pakistan Economic Survey 2002-3, (Islamabad, 2003); 4. Haq, Mahbub ul, Human Development in South Asia, 2002 (Karachi:
Oxford University Press, 2003); 5. Malik, Sohail et al. Pakistan's Economic Performance, 1947 to 1993: A Descriptive Analysis
(Lahore: Sure Publishers, 1994); 6. World Bank website. 7. For 2013, most of the data is from the Pakistan Economic Survey
2012-13 (Islamabad; 2013).

country, long before the Golden Jubilee Celebrations took policies and planning and management arrangements. The
place in 1997, all the evidence pointed to the contrary. While Jirst eleven years, between 1947 and I 958, are the years
feudalism in Pakistan died a very long time ago, modern- when the country and economy were trying to settle down,
day Pakistan has also seen the demise of agriculturists as but to no avail. This period was followed·by·wha-t·many still
a powerful economic, social .and political force. The huge call the golden era of .economic development (or at least
change in economic, social, and hence political power, from economic growth) in the Decade of Development under
the agriculturist, so-called feudal, lobby towards an urban ;\y..ub.Khan. The economy and the political scene had, indeed ~
and rural middle class, is probably one of the key indicators stabilized and settled down, with the result that growth·rates
highlighting the extraordinary structural transformation of ~ere ....unprecedented, and Pakistan was considered to be
Pakistan in over six decades. · one of the few countries at that time which would achieve
developed country status. With the war of liberation in East
Pakistan, the maj~rity wing left Pakistan to form Bangladesh
1.2 DECADES AND EPOCHS and two new countries, not one, were born.
Post-1971 Pakistan was a new country in every respect,
The sixty-six years since 194 7 can be distinguished by compared to the one that had existed between 1947 and
numerous epochs or eras, which represent different economic 1971. The third brief, albeit highly significant era in Pakistan's
 Chapter 1 Understanding Pakistan's Structural Transformation: 1947-2014 5

Iii Agriculture
D Manufacturing
D Others

Contribution to Contribution to Contribution to

GDP 1949/50 GDP 2002/3 GDP 2013

lfi Agriculture
D Manufacturing
D Others
Labour force, Labour force, Labour force,
by sector 1950/1 by sector 2002/3 by sector 2013

D Primary
m Semi-
e manufactures
D Manufactures
Composition of Composition of Composition of
exports 1951 /2 exports 2002/3 exports 2013
Figure 1.1: Structural Change in Pakistan: 1947-2013

history, was the¥five~and-a-half year period of Zulfikar Ali Yet another military coup in 1999, which brought General
Bhutto. His populism or Islamic Socialism, or just plain Pervez Musharraf to power, in some ways, ended the
rhetoric, made him the most popular, and at that time the complex political, civil, and military arrangement that had
only elected leader to emerge in what was left of Pakistan. His existed since 1988. The return of the military directly into
rule ended with the imposition of Pakistan's second martial politics after 1999 implied considerable change compared
law under General Zia ul-Haq in 1977, perhaps the most to the 1988-99 period. Moreover, after 9/11 with the world
brutal of all three, which changed Pakistan for the worse, econo_mic and political map redesigned, the world, our
perhaps irreversibly, with connotations and repercussions region, and domestic economic and political arrangements,
which continue well after three-and-a-half decades. There have all been markedly affected (see Chapter 18, and Part
were some similarities between the first and the second IX for these issues). Political and economic changes in 200?_.
martial laws ( discussed in detail in later chapters), but the and 2008 signalled hope and optimism in many ways, but
world was now a very different place compared with the aiso demonstrated abject failure and mismanagement duri~g
l 960s. The opening up of the Middle East, the first Afghan . --~h!e-2008-13 democratic transition. Elections in 2013, the
war (with its consequences of a drugs and arms culture in first without direct military involvement, signal possible
Pakistan), attempts at the Islamization of the economy and departures, although making predictions in Pakistan is an
society, and a praetorian democracy between 1985 and 1988, unwise, if highly popular, pastime.
were amongst the salient features of the Zia era. This section very briefly presents the main features,
The death of General Zia in many ways once agairi, brought achievements, and consequences of the many epochs in
about the end of the old Pakistan, and 1988 signalled the
0
the sixty-six years since Pakistan's independence. As will
third birth of the nation after l 947 and 1971 ( see Chapters become clear, especially with reference to the later eras,
26 and 27 for far greater details about the evolution of society 'independence' and 'sovereignty' are words that have little
after 1988). While political and social changes were fast to meaning in a country that celebrated its Golden Jubilee of
emerge, the post-1988 economic changes and programmes Independence some years ago.
also represented a departure from the past, with very
significant impacts on society, many of which were highly
deleterious.
6 Issues in Pakistan's Economy

1.2.1 Laying the Foundations: 1947-58

c..
C') (0 C') It) '<I" I'--
In 1947, Pakistan was, indeed, a predominantly agrarian,
0
(\J
(') (') (') (') (') undeveloped, newly independent nation, with little industry,
few services, and no infrastructure. In the first few years,
Pakistan's main
... concern was one . . . . . -=of survival,
~. - . - where adverse
· international conditions and a precarious domestic situation,
0
0 with millions of refugees, made the provision of very basic
(\J I'-- (\J C') ~
necessities the primary task of the government. Attempts to
6 <i (') r--: <i ui
0
0 restructure the economy and to ensure that it was on a strong
(\J
footing could be undertaken only after the initial political and
economic shocks had been dealt with.
(\J
,The first decade of economic policy and planning witnessed
0(\J co C')
It) co C') · · the attempts of a bureaucracy to keep Pakistan on its feet.)
I'-- '<I" (\J '<I"
cb
0
C\i C\i ci C\i (') The herculean task of building an economic base was left to
0
(\J the state sector as the private sector was still in an embryonic
state and did not have the capital to lead an industrial
co revolution in the country. It_xVaSo.the_windfg]Lg9ins-m~e
0
0
(\J C') en en en 0
by_ the mercantile class during and after the Korean War
I co 0 (0 en It)
in 1952 that paved the way for the foundation of industry,
C')
0
(0 <i oi ui (0
0
(\J
an industry which the state sector helped develop and then
:; handed over to the p,rivate_ sect~r.
(\J
0
0
(\J en en '<I" (\J It)
1.2.2 The Decade of Development:
(\J
'<l: co C') (\J
di
en
(') <i C\i <i 1958-68
en
If one examines Pakistan's economic growth_reco.n:I, the
1960s stands out as the decade with the best p~r_formance.
Table 1.2 gives a useful indication of the nature of the
en differences between the 1960s, 1970s, and 1980s. While the
0
en (0 '<I" co (0 (0
en <i <i <i <i <i r,i!_tes of growth for the 1960s and the 1980s seep~ !O be qui~
,j;- close in mq~!_f2 tegories, there are important conceptual and
Q)
::::J
en ideological differences in the modes of development under
.!!/
en the two military regimes.
::::J
en _Q. Curiously, the 1960s has been termed a 'controversial'
0 It) '<I" en It)
co
en
'<I"
(0
'<I"
ui
N
cxi
'<I"
(0
(0
(0 ~ decade for the type of economic policy pursued, and the
'O resulting economic and political effects. Dozens of economists
<1l

--ca
.fl.
.0
<1l
E
<1l
cii
and social scientists have written about Ayub Khan's era, and
they are generally agreed that considerable economic growth
and development did indeed take place. They argue '"that-- .,,
:l en '<I" I'-- 0 co (0
= significant leaps were made in industrial and agricultural
f
0
C: I'-- co C') It) co (\J
C: en <i C\i ui (') (0
production, where growth rates in excess of 20 per cent per
c( ::,
Cl)
Cl) annum were witnessed in the large-scale manufacturing
C) -~E:
f!· 0
sector. In the first five years of the Ayub rule, manufacturing
Cl)
C: grew by as much as 17 per cent, and in the second half of
~
0

0
en I'-- I'-- C') C') '<I" ~ Ayub Khan's rule, agricultural growth increased by 6 per
en
-
C: (0 I'-- 0 co I'-- C:
111 en (0 ui oi (0 (0 .l!l cent, while industry grew by 10 per cent. Table 1.2 shows that
Ill
:i ~ the economy in general, and the different individual sectors,
111 ~ grew by phenomenal rates, and Pakistan was considered to
a. c
<1l be a model capitalist economy in the 1960s.
.5 en
0 :52 . The controversy surrounds the eventual effects and results
-
Ill
Cl) u
Q)
<1l
Cl. of this phenomenal growth rate. Observers have pointed out
111 en
a: Ol 0 that this aggressive capitalist development caused serious
.s= C
·u c economic, social, and political tensions. They argue that
.
i0 Q)
::::J
'O E there was increased -disparity in incomes across different
·c
Ol e <ii
u0
C, 0.. regions which was manifest in the concentration of economic
.S >
0
~
<'...! Q) :i Q) 0 prosperity in both -the industrial and agricultural sectors in
Cl)
.a
:j
u
~
ti
0
E
en
Q)
u
Cl) central Punjab, and in industry in Karachi. Critics of Ayub
u ::::J ~
:a Cl.
0
.§, C
<1l
E
0
-~ ::::J Khan's model of development point out that these· two
~
Q) 0
0 <( ~ (.) Cf) Cf) regions were permitted to grow at the expense of the rest
 Chapter 1 Understanding Pakistan's Structural Transformation: 1947-2014 7

of the country, and the end result was the feeling in East to the private sector. The bureaucracy, in essence, gave birth
Pakistan of utter neglect and betrayal. Apart from the very to the private sector capitalist in Pakistan-indeed-a very
obvious phenomenon of regional disparities, a number of illiberal process according to the conventional wisdom.
scholars also took pains to show that there was a great deal
of economic concentration amongst individuals, and that 1.2.3 The Bad Luck Years: 1971-77
numerous business empires were created. This, they showed,
resulted in increasing income inequality. Ironically, while most intellectuals condemned Ayub Khan's
Of course, all this did happen. The~e was tremendous policies, it was these policies which gave rise to populism
growth, but there was also increasing disparity across cla;ses and the brand of policies particular to Zulfikar Ali Bhutto,
and regions. The social sectors were also neglected. There who was supported by the same intellectuals. Without Ayub,
was little or no increase in the level of real wages, and social Bhutto would not have been possible. Bhutto's economic
equity was of little concern. Functional inequality was the policies were more illiberal than those of his predecessor,
preferred philosophy of Mahbub ul Haq and Ayub Khan's and his nationalization was said to be the major cause for a
Harvard Advisory Group, and their focus was on the rich, huge downward trend in growth. However, Table 1.2 shows
l who were supposed to generate more savings, and thus were that in the 1970s GDP grew by close to 5 per cent, which
indicates the need, as in the case of Ayub, for a thorough
I to be the motors of capitalist growth and development.
re-examination of the economic programme of Bhutto.
It is surprising that economists and social scientists were
Bhutto's economic programme has been labelled a failure
fI so surprised and upset at what had happened during Ayub
by his critics, and even his supporters have, under the barrage
,I
Khan's rule. What would have been surprising was the
i lack of this 'controversial' and contradictory development. of propaganda and the changed world situation, at best been
Capitalist development, especially in the manner in which it apologetic and at worst have joined the maligning chorus. In
was implemented in Pakistan at the time, implied unequal many ways he.was an unlucky politician, and events beyond
development, and to have expected otherwise is nai:vete. his control affected his economic programme. The economic
There is a need now to examine the Decade of Development loss of East Pakistan was strongly felt-West Pakistan
afresh. The consequence of Ayub Khan's economic policies 'exported' 50 per cent of its goods to the eastern wing and
was that there was growth and development, the forces of acquired a large amount of foreign exchange from its raw
production did expand, a proletariat was born, and compared material exports. 1:he devaluation of the Pakistani rupee by
to the earlier periods, this was indeed a very progressive era 120 per cent in May 1972 brought significant dividends in
in the evolution of the economic and political process of terms of export growth-in one year ( 1972/3) despite the loss
Pakistan. The 'controversial' repercussions were inherent, of East Pakistan's exportable produce, West Pakistan doubled
inbuilt, and inevitable. its foreign exchange earnings. However, the. 1973 OPEC
However, what is most interesting about Ayub, Khan's price increases played havoc with Pakistan's import bill and
era is the fact that the economic package was thoroughly the balance of payments deteriorated. Also, the period after
illiberal, and was almost the opposite of what is being 1973 saw a serious worldwide recession affecting Pakistan's
termed economic liberalism today. It was capitalism, and exports. Recurrent domestic cotton crop failures and floods
the private sector did play a significant role, but it was the in 1973, I 974 (along with pest attacks), and 1976 affected
guided, bureaucratically-governed and directed capitalism, Pakistan's main exports. The large nationalized units taken
perhaps a benevolent state capitalism, of a developmentalist over by Bhutto were the most inefficient in the industrial
state. The bureaucracy played an active, influential, and sector and, despite nationalization, industry experienced a
constructive role in the establishment of private sector capital reasonable growth rate, with the nationalized sector doing
in Pakistan. The dozens of constraints on setting up industry, better than most believe.
red tape, and numerous hurdles in financial and industrial Bhutto's government also laid the foundations for future
policy did not stop the impressive growth in this period. The growth and development from which his successor benefitted.
nature of the economy was precisely what it should not have ~asicwi!ldustries were set up and a base for a c;apital_goods
been according to the doctrine of economic liberalism and industry was established. which .resulted in subsequent
liberalization. Trade was highly controlled and closed. The growth. The Middle East boom which Bhutto initiated, in
exchange rate was overvalued, and it distorted local markets. another ironic twist, helped keep Zia in power for some years.
Financial capital was rationed, and the stock market was The illiberal economic policies of Zulfikar Ali Bhutto were
a playground for a handful of people. The government's responsible for growth not only during his own tenure, but
presence was everywhere, directing and encouraging the also in the period after 1977.
private sector and the market. The agricultural sector was
consciously identified by the government as a vehicle for 1.2.4 The Second Military Government:
<1 growth, and numerous (governmental) decisions were taken
J
1977-88
which resulted in growth at times in excess of 11 per cent
per year. The transformation of the agricultural sector from General Zia ul-Haq's regime was more liberal in economic
a pre-capitalist to a capitalist stage was accelerated by terms-though certainly not politically-than any of his
active involvement and interference by the government. predecessors. While the civilian-military bureaucracy played
Even public sector projects commissioned by the Pakistan a prominent .role in acquiring capital and in assuming the
Industrial Development Corporation (PIDC)_ were gifted away role of entrepreneur and financier, numerous individual
8 Issues in Pakistan's Economy

capitalists emerged in the stable post-Bhutto era. High countries worldwide, with Pakistan and its governments
rates of industrial growth were led by the coming on amongst the most enthusiastic adherents to the Washington
stream of the earlier investment made by the public sector Consensus. Moreover, Pakistan's governments have taken
under Bhutto, especially in heavy industries, and also by a the art of subservience to new depths: an examination of
rapid expansion in domestic demand. While the trend to World Bank and IMF documents since 1988 reveals that
liberalize the economy was escalated consciously in the Zia almost every decision of any consequence taken by the
period, the Soviet invasion of Afghanistan and the excessive various governments that have been in power has been
involvement in Pakistan by the USA helped ensure that steps predetermined by the two Washington agencies, and that
were taken to increase growth. Remittances from the Middle Pakistan has merely followed diktat. This is evidenced also by
East and aid from abroad helped launch Pakistan's second the fact that in the 1990s, Pakistan seldom found the need to
economic revolution, where the middle class emerged as a appoint a full-time Finance Minister, as numerous advisers
formidable economic and political category. By becoming the on loan from the World Bank and .the IMF ensured that
capitalist world's 'front line' state against all things Soviet, implementation was thorough. While this blind adherence
and especially against Soviet expansionism in the region, to Washington has meant a loss of sovereignty for the
Pakistan's government gained in terms of financial aid and Pakistani state and its people, the outcome of these policies
resources. However, General Zia's martial rule inflicted deep- has had serious consequences for the economy overall, and
rooted damage to Pakistani society, creating intolerance and for individuals-see Part VI of this book for more on the
instituting violence, from which it still suffers. Structural Adjustment Programme in Pakistan. In 2008

1.2.5 Neo-liberalism, Structural

and 2013, both democratically elected governments, once
again, enthusiastically approached the IMF for large loans,
I
t
ostensibly on the basis of 'home-grown' programmes, with
Adjustment, and Praetorian Politics neo-liberalism now the official creed of all political parties
The period after the death of General Zia in 1988 resulted in Pakistan.
in the return of not democracy, but a manipulated (by the
military and its secret agencies) form of electoral politics to 1.2.6 Lifestyle Liberalism, Dictatorship,
Pakistan. ~etween August 1988 and August 1997, Pakistan
had four general elections, with both Benazir Bhutto and War, and Subjugation: 1999-2007
Nawaz Sharif b~ing returned to power twice, with active While Pakistan's economic programme has been supposedly
involvement by anti_-democratic forces determining political one of a 'liberal' economic tenor, with the state receding
outcomes. While in 1988 many academics and observers and markets apparently presumed to be free since 1988, its
felt that this may h(lve been the beginning of a post- politics was far from liberal in the 'lifestyle liberal' era during
military, democratic transition in Pakistan, they were very General Pervez Musharraf's military dictatorship embraced
wrong in their assessment about the nature of the control, by Pakistan's undemocratic liberals and elite. 4 Seizing the
power, manipulation, and intrusion of Pakistan's deep state, opportunity to support a lifestyle liberal General, many
revelations which were formally revealed to the public- as members of Pakistan's civil society and political class who
late as 2012 and 2013. None of the elected governments had struggled for democracy in Pakistan earlier, were quick
were able to complete their full term due to the persistent to become part of the team of the individual responsible for
involvement of the military and its junior partner, the Kargil in 1999 and who overthrew an elected Prime Minister.
bureaucracy. There were also more than a few 'caretaker' The choice being made in 1999 was falsely construed as one
governments, of which the last two in particular, headed by between an Islamicizing elected government, deviating even
Moeen Qureishi (a retired World Bank Vice President) and from basic electoral protocol, to an overtly socially liberal,
by Meraj Khalid were very controversial. However, while 'moderately enlightened', military general. Democracy was
the post-1988 period could, in 1988 (now incorrectly), be inconsequential in 1999 to Musharraf' s supporters, and for
termed the 'Period of the Return to Democracy', it was more them something packaged as 'liberalism' mattered far more.
the manipulation of political actors, and it could better be This was 1999.
~_lk!IJhe..'.Era,of.Neo;libe~ali~.ip. c!g~t!!1,,S!~~al A~justment'. In 2001, the world changed and Pakistan was caught up in
We argue later in this book that, rather than the electorar-·• the War Against Terrorism once again. Musharraf, who had
process, it ~a.,s_this~articular economic programme and become popular at home after ousting Nawaz Sharif in 1999,
prg_ce5-_s_J'.Yhich d!!~Jned the course of Pakistan froml 988...,.. was c;onsidered a pariah by the international leadership in his
..£!2;:Y~!:fls_..F.m;thermore, while the electora:i-irolidcaJfransitiotI"' first two years. The economy was doing badly, as it had under
was arrested in October 1999 yet again, the economic policies General Zia in 1977 until the Soviet invasion of Afghanistan
continued even more vigorously. The process ofliberalization, granted Zia a longevity he could not have imagined when he
openness, 'privatization, and market friendliness continued overthrew and murdered Zulfikar Ali Bhutto. General Pervez
unabated regardless of the visibly noticeable damage caused. Musharraf was rescued by the events following 9/11 and
Since 1988, Pakistan's economy has been under the another invasion of Afghanistan, in 2001, this time by the
tutelage of the international lending agencies, the IMF Americans. The economy boomed under a false cocktail of aid
and the World Bank. Economic policies, labelled 'economic from th<:; US, IMF, and other global economic support-see
liberalization, stabilization, and structural adjustment', Chapters 18 and 25-and Musharraf, backed to the hilt by
evolved in Washington have been imposed upon a hundred the US, particularly President George W Bush, was granted a
 Chapter 1 Understanding Pakistan's Structural Transformation: 1947-2014 9

longevity. The US support ensured, as it had in the I 960s and intervention in the past, had also learnt their lessons and
J 980s, that Pakistan would continue to be ruled by a military made commitments to furthering the cause of democracy in
general. Pakistan rather than exploiting weaknesses to push their own
Yet, it would be puerile to blame the US for everything agendas. Even the Supreme Judiciary, which had in years
that has gone wrong in Pakistan:, although blame is certainly past endorsed every authoritarian and dictatorial decision
warranted. Just as Pakistan's political elite has been responsible by every military dictator, refashioned itself as an activist
for allowing the IMF to run Pakistan's economic policy, and judiciary against military arbitrariness. Much had seemed
the IMF cannot be held responsible for Pakistan's leadership to have been learnt by the political class in many years in
running to it every few years for its reluctance to undertake exile and isolation, and democracy became an audible slogan
urgent reform, its political class has also, at least in the past, championed even by right wing Islamist parties.
been responsible for supporting military authoritarianism Yet, the 2008 democratic transition was weak, cautious,
and dictatorship. It was opposition parties who welcomed rapacious, and incomplete. The civilian government failed
Musharraf and who continued to support his lifestyle liberal, to mark its· imprint on the political process through fear and
praetorian election charade, and the US simply joined and incompetence, despite the fact that it had many opportunities
strengthened the chorus. Pakistan's political class and its civil to do so. The Osama bin Laden killing and Abbotabad
society were to blame equally for Musharraf's longevity-see raid, the attack on the Mehran Base in Karachi, and
Chapter 26. With the economy booming, and Pakistan a non- the military's many weaknesses which gave the civilian
Nato ally, Pakistan's elite was happy to support Musharraf's government ample opportunity to enforce its authority, were
electoral shenanigans without much active hostility. In fact, not exploited. Democrats did not know how to consolidate
as Chapter 26 reveals, the argument was also made here that democracy, although given the opportunities to do so;
perhaps Pakistan's elite did not want a messy democracy however, one must admit that just staying on in power for
and preferred a lifestyle liberal, military-dominated electoral five years for the People's Party government, given constant
process which allowed some symbolic representation. Clearly, intrigue and threats from the 'Establishment', was itself a
one was wrong, and numerous events in 2007 proved how major achievement. While democracy may not have been
brittle the boom in the economy was, and how unstable the substantially strengthened during the 2008-13 period, the
authoritarian order had become. fact that it persisted might be the main achievement of the
last decade which allowed a subsequent transition to take
1.2.7 Another Democratic Transition? place in 2013. ··

2007 Onwards
Numerous events in 2007, once again, changed the course of 1.3 TRANSFORMATION AND
Pakistan's political trajectory as the hold of the Musharraf
regime weakened and he made numerous decisions which DEVELOPMENT: THE BALANCE SHEET
led to his downfall. The reprimand of the Chief Justice of
This book is about the process of structural transformation
Pakistan, a military attack on the Lal Masjid in Islamabad, and
and economic development in Pakistan over the last sixty-six
subsequently a clampdown on the very active media leading
years, and is devoted to understanding how, why and under
to an Emergency in the country, all in 2007, undermined
what conditions that process has taken place. The summary
any sense of stability the regime may have displayed. In
presented in section 1.2 is an extremely brief condensation of
particular, it was the Lawyers' Movement of 2007, that led
a few of the ideas that constitute this book, and should not be
the main challenge to the Musharraf regime, as the term of
seen as an alternative to the more detailed story that follows.
his elected parliament came to an end and elections were
Having presented an introduction to the main epochs in the
, inevitable. Political deals cut between the military General
first six decades of Pakistan's existence, in this section we
and the likely prime ministerial candidate, Benazir Bhutto,
try to examine the issue of whether Pakistan's six decades of
suggested a more controlled electoral transition, with the
economic growth, development and transformation can be
former as President and she as his Prime Minister. However,
called a success or a failure, or whether, as is often the case,
2007 ended with the assassination of Ms Bhutto resulting
the answer lies somewhere in between.
in Pakistan's freest and fairest democratic elections since
For most of Pakistan's sixty-six years, the economy has
1970, with Ms Bhutto's party returned to power. Eventually,
shown healthy growth around a trend rate of nearly 5.2 per
Musharraf was forced out and handed power to Pakistan's
cent per annum, although the overall trend has been falling
first democratically elected civilian government in four
since 1988. There have been years where the rate rose to even
decades, although he still remained President of Pakistan. 5
more than the trend rate, and other years when it fell to less
While the Lawyers' Movement was one of the many forces
than even half: it was an abysmal 1.7 per cent in l 996/7,
which resulted in democracy returning to Pakistan, other
perhaps the lowest of all time at that juncture, and fell to
factors made an important contribution. The rise of a free
only 0.4 per cent in 2008/09. If an evaluation of Pakistan's
media which was aggressive, often brave, and surprisingly
economy had taken place in I 968, for the most part, based
even pro-democratic, played a key role in pushing Musharraf's
on economic growth criteria, one would have called it a
military dictatorship away, as they did in later years when
resounding success. Indeed, the government of Ayub Khan
democracy was threatened from the inside. 6 Opposition
called its era the 'Decade of Development'. An evaluation of
parties, particularly those which had supported military
Pakistan's first quarter-century, in August 1972, would have
10 Issues in Pakistan's Economy

looked at the country's history differently, Pakistan having success. However, the fact that the quality ought to have
lost its eastern wing and having suffered the consequences been far better and that the results of education, literacy,
and contradictions of the Decade of Development, which scientific skills, etc. far more extensively spread amongst the
were manifested in late 1968 just as the government" of the population, suggests thatit may be only a small measure of
day celebrated its pyrrhic victory. Success and failure are, success. While it is usual practice to show how numbers have
clearly, highly relative terms. increased over the years, one must look at such trends and
Even if the growth rate of Pakistan has shown impressive 'evidence' with great caution.
trends, what has been the consequence of that growth? Does Another measure of success is the extent of autonomy,
Pakistan produce most of its products, or is it now a highly sovereignty, or independence that a country acquires. After
import-dependent economy? Many countries of the world sixty-six years, such criteria should be of Jess importance
depend on trade and on imports. Is it of any consequence that than when a country has been newly created and is trying
Pakistan is a member of that group? The nature and quality of to find its feet. Section 1.2 shows, however, that after
output and the conditions under which it is produced are also 1988 any semblance of sovereignty and independence that
important. Moreover, can one grant a country any measure of Pakistan may once have had has been lost-although, it
success when it is chronically dependent on either bilateral or really hasn't had much earlier either. Today, Pakistan is a
multilateral aid? highly aid-dependent economy with multilateral institutions
One also needs to compare Pakistan's performance with and foreign governments playing a dominant role in both
that of other countries to see if Pakistan has done as well (or the political and economic affairs of the state, even after
as badly) as its own data show. Five per cent growth per year, six decades of political independence. While other countries
even in simple terms, sounds commendable. But countries have also made use of aid and loans, they have used
with similar initial conditions to Pakistan experienced growth that money for development purposes, unlike Pakistan,
rates that were higher, more consistent, and longer lasting where much of the assistance has been squandered, often
than Pakistan's 5 per cent. Many of those countries now rank in dubious circumstances and through illegal and illicit
among the newly industrializing countries (NI Cs), while channels. Moreover, events following 9/11 have revealed
Pakistan is currently the thirty-ninth poorest nation out of further weaknesses in Pakistan's political structure with
203 classified by the World Bank, using GNP per capita as regard to foreign domination.
the main criterion (see Chapter 19 for further discussion Six decades are a fairly long time for countries to change
of this issue). In terms of human and social capital, the and transform their economic and social systems. Given even
United Nations Development Programme (UNDP) ranked a semblance of sensibility in a nation, with an elite that has
Pakistan 120 in 1991 ahead of (better than) India, 123rd the desire to improve even only itself, in sixty-six years much
and Bangladesh, 136th. In 2003, Pakistan was ranked 144, can be expected to change. Pakistan has had much more
way behind India (127) and even Bangladesh (139). Within than just a bare minimum of endowments and resources,
two years (2001-03), Pakistan's ranking fell from the 138th and has achieved far more than a bare level of subsistence.
position to the 144th. Transparency International, a German Living standards have improved manifold over the last six
research institute that analyses society and politics around the decades, and more so during the latter half of this period.
globe, in 1996n ranked Pakistan as the second most corrupt Numerous factors have been responsible for this growth,
country in the world after Nigeria, a position which improved some fortuitous, most consciously sought after. In some
somewhat in 2013, but is still embarrassingly poor. Hence, by ways the growth/development/progress that has taken place
what measure does one compare or classify success? has been unremarkable, because it was almost inevitable,
One can list tables of numerous indicators showing their given initial conditions. Even without all the effort that was
trend over the last six decades. For example, in 194 7 there made to influence and direct policy, growth and development
were 8,413 primary schools in the country, of which 1,549 would have taken place. The only contentious issue is the
were for girls. By 2012 the number of primary schools had degree, extent, and form of that growth and development,
increased to 157,200, a rise of almost twenty-fold. Girls' and the extent to which it fulfilled prospects and potential.
schools had increased by a factor of forty-five in this period. There are also economic and social costs and consequences
On paper these statistics indicate major achievements, but of development and growth. Since growth has been the
has the quality of education improved at all? Can one say overriding aim of governments in the past, and as it
that the twenty-fold increase in education facilities reflects is probably the statistic that most impresses politicians,
at least a three or four-fold improvement in the quality of planners, and economists, any negative ramifications of
education? The answer is probably in the negative. Indeed, this single-mindedness have been ignored. Environmental
many people would feel that, despite the increase in quantity, degradation is now considered to be the most serious
the quality of public sector education has made a noticeable repercussion of this strategy, with pollution and the decay of
downward shift. However, the increase in the number of natural resources quite rampant. Urbanization, which has a
educational facilities has allowed a larger number of people to great many advantages, also brings with it greater demands
have access to whatever education is available. Quite possibly, on basic facilities and infrastructure, which cannot be
children of poorer families and those in the lower income provided to all. The result is squalor and poor and unhygienic
groups may have had their first opportunity ever to send their Jiving conditions for the large majority of people who Jive
children to school. This change in the social and economic in cities, not always out of choice. For urban residents in
profile of schoolchildren must count as some measure of Pakistan, rich and poor alike, the deteriorating law and
 Chapter 1 Understanding Pakistan's Structural Transformation: 1947-2014 11

order situation, offering no protection for life or property 1.4 CONCLUSIONS

with the state having virtually collapsed, is possibly the
most important and immediate negative consequence of Pakistan's economic development and social change over
inequitable growth. Many Pakistanis would question the its first sixty-six years is spectacular, yet commonplace, and
claim made by statisticians and others, on the basis of high in many ways tragic. Compared to what it was in 1947, the
growth figures, that Pakistan has made huge progress; for country seems like a modern, dynamic state-unlike, say,
these people, lower growth with more personal security and Afghanistan. Compared to other countries, such as the south-
freedom is probably a preferred alternative. east Asian countries of Malaysia, Thailand, and South Korea,
Pakistan's economic development has been a capitalist Pakistan's achievements look minuscule, and numerous
development, where the private sector has played a key role. In indicators of failure emphasize such distancing. Pakistan
the early days, the state played the critical role in establishing would necessarily have grown from whatever existed in
industry and assisted the private sector, but in more recent 1947, as the country had skilled labour and sufficient natural
years as the role of the state has diminished, private sector- endowments. lt could have grown much more, given its own
led growth has been the norm. However, Pakistan's capitalist potential and the performance of other comparable nations.
path of development has been unusual for reasons which are Although important directions can be given to the process
discussed at different times in this book, and especially in of history governing nations, and critical decisions can have
Chapters 26 and 27. Pakistan's has been a very crude, peculiar dramatic consequences, either positive or negative, there
capitalism, much influenced by the country's history and is a logic to history itself that governs and determines the
culture and the formation of social, economic, and political course of society and of nations. Comparisons with other
classes. The excessive amount of corruption, rent-seeking, countries to deduce 'what could have been done' or how to
and clientelism in Pakistani society is both responsible for and go about development, often ignore elements of specificity and
a product of the specific nature of Pakistan's development. contextuality on the one hand, and chance and randomness
On many other counts too, Pakistan has been an abject on the other. Many events in history, outside the control of
failure. The inability to evolve a state which can protect its those whom they affect, have altered the course of nations,
people, or a political and civil society class which believes in and we see that far more in the case of Pakistan than many
the strengthening of democratic norms and practices, or a other countries. Hence, comparisons and evaluations need to
society in which different views, especially religious views, are be considered in relevant contexts, given specific histories.
given tolerance and space continue to be absent or weak in Yet there are generalities as well. All nations belong to, and
Pakistan. Many countries undergoing economic development are part of, the global economy, and increasingly so. They
and structural transformation similar to Pakistan's, have cannot avoid the influences-both negative and positive-of
addressed and resolved such contradictions, but not yet this integration. Their destinies are often closely linked with
Pakistan. It is not possible to speculate about what would those of others, and by being part of the world order, they

r have happened if it had had less corruption and had been

more honest, for these are counterfactuals. Pakistan would
not be what it is today-for better and for worse-had it not
have the ability to learn much more from each other, and at
a greater pace. With the communications revolution, physical
integration is no longer essential, and influence and trends
evolved in the way it has, an evolution much determined by cross political borders, bringing markets and people together.
given material conditions, existing and past. Comparisons and attempts to emulate become easier.

Table 1.3: Pakistan: Indicators of Failure

% Latest Year Source

Illiterate adults 44 2009 Mahbub ul Haq Human Development Centre, Human
Development in South Asia 2012 (Lahore: Oxford University
Press, 2012).
Illiterate female adults 60 2009 Mahbub ul Haq Human Development Centre, Human
Development in South Asia 2010-2011 (Lahore: Oxford University
Press, 2011).
Population below national poverty line (%) 22.3 2011 Basic Statistics 2013 Asian Development Bank, (Manila, 2013)
Population below US$1.25 a day (PPP) (%) 21 2010 Basic Statistics 2013 Asian Development Bank, (Manila, 2013)
Without access to safe water 8 2010 Mahbub ul Haq Human Development Centre, Human
Development in South Asia 2012 (Lahore: Oxford University
Press, 2012).
Without access to sanitation 52 2010 Mahbub ul Haq Human Development Centre, Human
Development in South Asia 2012 (Lahore: Oxford University
Press, 2012).
Malnourished children (Under 5) 31 2009 Asia Pacific Human Development Report 2012 (UNDP, 2012).

J
12 Issues in Pakistan's Economy

This first chapter has tried to answer the difficult question military rule and civilian government in Pakistan, when we
of whether Pakistan-as a people and as a nation-is better know that the latter has been restricted and manipulated by
off today than in 1947. There is no definite answer to this the former, as Chapters 26 and 27 emphasize. Just because
question. In many ways Pakistanis are far better off than growth rates under military rule have been higher than under
they could have ever imagined; in other important areas, they civilian government, does not imply that military rule is
have not even begun to address the issues that a country at 'better' or preferable to democratically elected governments.
the level of Pakistan's economic, social, and political maturity As · the Economist recently reminded all those who have
should have resolved (see Table 1.3 for Pakistan's 'indicators a penchant for supporting the military in Pakistan-and
of failure'). Pakistan could have done far better than it has, sadly there are .too many who still continue to do sQ-'the
as has been shown by the performance of other comparable regular intervention of soldiers in Pakistani politics has
countries. That it has not implies a certain level of failure. But undermined civilian institutions, encouraged the growth
then again, given constraints and initial endowments and of terrorist organizations, distorted spending priorities, and
material conditions, and the interactions of different social poisoned relations with India'. 7 While civilian governments
and political classes and groups, perhaps thjs was unlikely. have numerous failures to. their credit, given the fact that
However, when we do compare Pakistan with countries it is far more powerful, one must hold the military far more
in the region-Bangladesh and India, for example-the responsible for destroying Pakistan's state, institutions, and
prospects for Pakistan increasingly look far worse than for society.
these two countries. Perhaps Pakistan has been left behind, We have presented here a 'before and after' picture without
in terms of economic development now by ~ndia, as it was giving the 'how, what, and where' of Pakistan's economic
in the l 960s, by South Korea. With_ greater globalization development. The rest of the book tries to complete picture,
where human capital and domestic conditions-democracy, and seeks to understand and explain Pakistan's particular
peace, law and order-increasingly play a critical role story. The answer to whether Pakistan after sixty-six years
in development, Pakistan's future prospects do not look has been a success or failure is to be found in the chapters
promising. Moreover, one must be more objective in our that follow.
analysis about making simplistic comparisons between

NOTES
1. Innovative Development Strategies (Pvt.), Profiling Pakistan's 3. Zaidi, S. Akbar, 'Contesting Notions of Pakistan', Economic
Rural Economy for Microfinance (Islamabad: Pakistan Micro- and Political Weekly, vol. 47, no. 45, 2012.
finance Network, 2009). 4. The term 'lifestyle liberals' was first coined by Faisal Siddiqi.
2. Reza Ali's seminal unpublished work shows that·perhaps 98 5. See, Zaidi, S. Akbar, Military, Civil Society and Democratization in
per cent of the Punjab lives within two hours of a city, and Pakistan (Lahore: Vanguard, 2012).
82 per cent about one hour away. His assessments based on 6. See Zaidi, S. Akbar, 'Resilience in Pakistan's Democracy?
the 1988 Census, of fifteen years ago and when so much The Tahir-ul-Qadri Episode', Economic and Political Weekly,
has changed, suggests that approximately 74 per cent of the vol. 48, no. 5, 2013.
Punjab was urban, Sindh 53 per cent, Khyber Pakhtunkhwa 7. 'The general in the dock', The Economist, 29 June 2013.
45 per cent, and Balochistan, mainly Quetta, 12 per cent.
Since 1998, urbanization has increased at a much faster
pace.
 Is Pakistan Feudal? A Historical
Account of the Development of
Agriculture in Pakistan

There is a general perception held by many within Pakistan from one major historical epoch (or mode of production),
that, even in the twenty-first century, Pakistan is a 'feudal' feudalism, to another, capitalism (see Boxes 2.1 and 2.2). This
country. This view is endorsed by political scientists, observers chapter will do precisely that.
and journalists, the electronic media, and lay people in
general. It assumes that in the economic, political, and social
arena, Pakistan and Pakistanis have 'feudal social relations' 2.1 THE DEVELOPMENT OF AGRICULTURE
and are 'feudal in attitude'. The label 'feudal' is pasted on to
anyone owning large tracts of agricultural land, and even on BEFORE THE CONSOLIDATION OF
rich urban dwellers who seem to have no known or apparent BRITISH RULE
source of income to support their ostentatious lifestyles.
Essentially, the popular image from film and television is Some social scientists believe that pre-colonial India was a
of a feudal as someone who lives in luxury, often, but not stagnant society with little progress taking place and rigid
necessarily, having an agricultural background. Politicians, economic and social structures, and that it was only British
especially, are considered to be from feudal backgrounds, and rule which awakened the Indian subcontinent from its
even the more sensible magazines and newspapers endorse slumber. They believe that, had it not been for the positive
the impression that the national and provincial assemblies in and modern impact of British colonialism, most of South
Pakistan are predominantly full of 'feudals'. Asia would still be backward and perhaps still stuck in
This chapter, the first of four on the agricultural sector, will the nineteenth century. On the other hand, there are other
try to assess the claim that Pakistani agriculture, and hence social scientists who believe just the opposite. For them, the
Pakistan, is feudal. We will recount the history of agricultural modernizing impact of British colonialism was debilitating
development in Pakistan from the pre-colonial Mughal times and cruel, and they feel that the underdevelopment that we
and examine the consequences of British rule for the social see in the South Asian subcontinent today is a result of that
and economic relations of production within agriculture. colonial impact. These are different ways of reading into,
This narrative will summarize the changes that have taken understanding, and interpreting history, and each individual
place over three centuries and culminate with a picture of the has the privilege to reach his or her own conclusions. Here,
agricultural sector at the time of independence in 1947. The we briefly present an outline of the nature of agricultural
next chapter will develop the story of agriculture in Pakistan, production before the conquest of India by the British.
explaining how the process of the development of agriculture India was a pre-capitalist social formation prior to the
continued after Pakistan came into existence. British conquest. There is some evidence of development
A recurrent underlying theme of this book is that one needs and change in a society that was essentially pre-capitalist,
to examine the present as well as the past. In other words, we and some writers have suggested that this movement was
need to see the present as a part of the historical process from towards capitalism. 1, 2
which it may have evolved, and to which it may be linked. During the pre-British period, under the Mughal Emperor,
To some readers it may seem a little irrelevant that in a book all land was OVl'ned by the king alone. There was no private
about economic issues in contemporary Pakistan we begin property in land, and permission for the use of land was
the first substantial chapter with a history that goes back four granted by the king. In 1647, the ruling class comprised the
centuries. We have argued in the Introduction why this is the Emperor and about 8,000 mansabdars or nobles who were
manner in which issues should be discussed, and that this is supposed to maintain large armies to serve the Emperor
the pattern adopted in this book. In addition, the question whenever he so required of them. These mansabdars were
of whether Pakistani agriculture is feudal or capitalist has either paid salaries in cash or, as was more common, were
important economic, social, and political ramifications. The given jagirs or large tracts of territory in which they were
nature of agriculture has important repercussions not only responsible for collecting revenue from the peasants and
for agriculture, but also for numerous related and distant then transferring it to the state. Such jagirdars, or revenue
sectors within the economy. This point will become clearer collectors, were transferred from one area assigned to them
as the narrative progresses, especially when we discuss the for the purposes of revenue collection to another, usually
social, political, and economic consequences of the Green after three or four years, so that they did not have the
Revolution. Suffice it to say that it is important to observe opportunity to build entrenched bases for themselves. While
how societies change, especially when they are transformed jagirdars were essentially officials rather than feudal lords,
 Part 1

Agriculture
Agriculture has been the mainstay of the Pakistan economy for many years, although
in recent years, its importance has somewhat declined: From a contribution to gross
domestic product of more than half in the 1940s, today it accounts for around only 21
per cent. The share of employment in agriculture has also fallen, from more than 65
per cent of the labour force in 1950 to about 45 per cent today. The two most common
perceptions held by students and observers of the Pakistan economy are that Pakistan
is mainly an agricultural country and that Pakistan's agriculture is 'feudal'. The four
chapters on the agricultural sector in Pakistan deal with these two commonly held
myths. In Chapter 2, an attempt is made to trace the history of the development of
agriculture in Pakistan, questioning the claim that the mode of agricultural production
in the country is still of a feudal nature, a perception which is repeated ad nauseum
by numerous commentators, both local and foreign. Large landowning patterns are
often confused with feudalism leading to misperceptions. Chapters 3 and 4 develop
the theme of the transition of the agricultural sector, arguing that a more capitalistic
and capital-intensive agriculture now dominates. Chapter 5 highlights the key issues
that currently exist in the agricultural sector and, given the diminishing contribution
of agriculture to the overall economy, suggests that perhaps Pakistan's economy
is no longer mainly agricultural nor 'feudal'. Moreover, as has been argued in the
Introduction and in Chapter 1, with the 'urban' set to define Pakistan more markedly,
along with the rise of a vocal middle class, issues related to the agricultural sector
will need to be redefined. Nevertheless, one cannot dismiss the agricultural sector
completely, especially since interventions by the government between 2008 and 2013
continue to have major consequences.
 Chapter 2 Is Pakistan Feudal? 15

Box 2.1 production and surplus extraction. In primitive communism

What are Modes of Production? the problem is less obvious. Through membership of the
community one has access to the means of production
Doug McEachern writes: and the production process. On that basis, means of
For our purposes, it is sufficient to recognize that the term survival are acquired. Under feudalism, the situation of
'mode of production' refers to those relations that exist at divided ownership, but with a dominant position (especially
the heart of a given society, identify the major classes of over the ownership of land) going to the non-producers,
that society and indicate the inherent logic of the relations production and surplus extraction is organized through rent
and conflicts between those classes. In all societies we and tax relations. (It is incorrect to see a division between
may identify means of production, direct producers and a the process of surplus extraction and the domination of the

t relevant class of non-producers that combine in a process

of social production. Production is also surplus production
means of production: The direct producers do not control
the production process and the surplus is not extracted

I
and surplus extraction; that is, the process of production by external, essentially non-economic relations). Under
also constitutes a process of class exploitation. The relations capitalism, the form of association is through wage-labour
generated in the production process assume a different and surplus is extracted through surplus value relations and
character in societies dominated by different modes of based on the separation of the direct producer -from the
production. The problem is to suggest the different character means of production. Further, each mode of production has
of these relevant direct producers and non-producers and a characteristic state form. Primitive communism is a society
the forms of the relationships between them. without classes and without a state as such, although state-
The modes of production identified by Marx can be codified like functions are performed by other means. In feudalism
as follows: Primitive Communism is a mode of production in the state and the process of surplus extraction are closely
which the means of production (low level methods of hunting interconnected; the state is involved both at a national level
and agriculture) are dominated by some form of communal and in the local process of production and accumulation.
institutions which organize production and distribute the Under capitalism, the state is formally separated from the
surplus. Feudalism is a mode of production in which there is economy, centralized, bureaucratic and concerned with
a partial separation of the direct producers from the means relating (mediating?) the relations between the economic
of production (largely the basis of agricultural production, and political spheres of society. Although different state
land and the means to work that land). Capitalism is a forms appear to coincide with different modes of production,
form of society in which the direct producers have been it is open to dispute whether the form of state is part of what
separated from the means of production. These now exist constitutes a mode of production.
as the private property of a class of non-producers. These
outlines do not indicate all the ingredients of the modes of
production. It is also necessary to show the way in which Source: McEachern, Doug, 'Capitalism and Colonial Production:
the various classes relate to each other through their An Introduction', in Alavi, Hamza et al. Capitalism and Colonial
relations to the means of production in the processes of Production (London: Croom Helm,.1982), 5--6.

another category of assignees, the zamindars, bore a closer Under the Mughals, as all land was owned by the king,
resemblance to the concept of feudal lord. Zamindars were there was no question of land being inherited by either the
also responsible for collecting revenue on behalf of the king, peasant's family or .the zamindar's. There were no occupancy
and were usually amongst the influential individuals from rights that could be alienated or mortgaged, although some
the villages. The Mughals had established a strong and transfer within villages or families did take place. While
elaborate revenue system under Akbar in the 1570s. Besides zamindars and jagirdars were in a position to assert authority
these two mechanisms for collecting revenue, there were also over assigned tracts of land, their position was dependent
khalisa lands, from which land reven\Je accrued to the state on the favour of the ruler. In many cases, the right to collect
directly. revenue after the death of a zamindar was passed on to his
The zamindar was the local lord and (feudal) master and sons, but this too depended on how much the Emperor
had an obligation to the state to collect revenue and turn it wished to retain the status quo.
over to the Emperor. Although he did not own the land, in Soon after the death of Aurangzeb in 1707, the Mughal
many ways he had the characteristics of a feudal lord (see empire began to decay and fall apart. As central authority
Box 2.2 ). He was the supreme lord at the village level, the weakened, there were contending claimants to power. The
'linchpin of the system'. He used coercive force and extra- zamindars and jagirdars who were the intermediaries in the
legal methods to extract revenue. He also presided over all Mughal system became more entrenched where they could,
social and judicial matters at the village level. Although and tried to strengthen their claims on the land and increase
he was appointed by the Emperor, he exercised complete their hold on the peasants.
authority at the village level. Here, there was a fusion of
economic and political power at the point of production.
 16 Issues in Pakistan's Economy

Box 2.2 not without supporting rising consumption levels of the

What is Feudalism? exploiting classes) and consequent expansion of the forces
of production and technological advance.
Most people, when they use the terms 'feudal' and 'feudalism',
do so rather loosely. They forget, or do not know, that Source: Alavi, Hamza, 'India: Transition to Colonial Capitalism',
'feudalism' is an economic concept and that, when we talk in Alavi, Hamza et al. Capitalism and Colonial Production
about feudal relations, we usually mean relations, whether (London: Croom Helm, 1982), 29.
social or economic, based on a number of economic
criteria. There has been continuous debate about what Two other explanations of feudalism are also given below:
exactly feudalism entails. A number of historians and scholars
have examined the conditions mainly in Europe before the a) D. N. Jha argues:
Industrial Revolution, and have identified certain economic
features that define feudalism. We present below a list of The word 'feudal' or 'feudalism', often traced to the teas
components or properties of the feudal mode of production occurring in Burgundian charters from about 881, came
which gives us some flavour of what the concept of feudalism into a general use during the Enlightenment and the French
entails. Feudalism is a concept that relates specifically to the Revolution when it stood for what appeared to be a body of
agricultural sector. Hamza Alavi has explained the five criteria irrelevant and obnoxious practices inherited from the ancien
that constitute feudalism as follows: regime. It was, again, during this period that there took place a
i) Unfree labour rendered not necessarily in the form of certain bifurcation in the meaning and uses of the word 'feudal'
labour services but taking a variety of possible forms. That or 'feudalism'-a bifurcation which has persisted to this day
would be contrasted with free labour in CMP [capitalist and has influenced historical writings and to which attention
mode of production], in a double sense (a) in that it has has been pointedly drawn by David Herlihy (The History of
been separated from (or 'freed') from possession of means Feudalism, New York, 1970, xiii-xxi). Some historians have thus
of production (land) and (b) that it is free from feudal viewed feudalism as an agglomeration of institutions connected
obligations to serve a lord; the direct producer is now free with the support and service of knights and as a system of law,
to sell his labour power or starve. government and of military organization, whose central feature
ii) Extra-economic coercion in the extraction of the surplus
would appear to be administrative decentralization. Indian
from the direct producer, as against economic coercion as historians have sometimes been influenced by this concept of
the basis of exploitation in CMP. feudalism and they have often used feudal terms to describe a
situation of parcelized sovereignty....
iii) A fusion of economic and political power at the point of
As against the concept of feudalism as a system of
production and a localized structure of power, as against
government, the school of Marxist historians has equated
separation of economic (class) power and political (state)
the feudal phenomenon with a mode of production based
power within the framework of a bourgeois state in CMP.
on 'feudal rent' which subsumes the existence of a class of
The power of the exploiting class, the bourgeoisie, over
landlords (landed intermediaries), a basic class of producers
the exploited class is then exercised indirectly, through the
(peasants) with a special connection with the land which,
state apparatus and subject to the rule of (bourgeois) law,
however, remains the property of the former, and of the
and not exercised arbitrarily and directly as in FMP [feudal
overwhelmingly self-sufficient agrarian economy with little
mode of production].
scope for the functioning of a market system. The study of
iv) Self-sufficient ('subsistence') economy of the village (or the feudalism within this frame of reference focuses attention on
manor), commodity production being secondary for the serfdom and various other forms of constraints on peasant
direct producer; subject to the condition that he produces freedom. In India these aspects of feudalism have attracted
also a surplus that is appropriated by the exploiting class of the attention of historians like D. D. Kosambi, R. S. Sharma
which a significant proportion may enter into circulation as and B. N. S. Yadava who, however, have not remained
commodities. That contrasts with generalized commodity uninfluenced by non-Marxist scholarship. Kosambi, for
production in CMP where (a) production is primarily of example, speaks of 'feudalism from above' as being the
commodities, i.e. to be sold for the value to be realized on first stage in the development of feudalism in India-a stage
the market and (b) labour power itself is a commodity. which corresponds to the orthodox view of the phenomenon
v) Simple reproduction where the surplus is largely consumed as a system of government. Sharma and Yadava emphasize
by the exploiting class which acquires it, instead of being serfdom and immobility, subjection, economic bondage and
accumulated, so that the economy and society merely unfreedom of the peasantry, and yet both devote considerable
reproduce themselves on the existing level of productive space to feudalism as a system of government.
resources and technology, whereas in CMP we have
expanded reproduction of capital, where the surplus is Source: Jha, D. N., The Feudal Order: State, Society, and
primarily deployed towards capital accumulation (although Ideology in Early Medievallndia (New Delhi: Manohar, 2000), 36.

L
 Chapter 2 Is Pakistan Feudal? 17

Box 2.2 (Continued)

What is Feudalism?
b) A Chinese historian shows what feudalism meant in wool provided the raw materials for household industries.
medieval China: This kind of local community was ordinarily a self-sufficient
The feudal system is founded upon agriculture and economic organizm and had little economic interchange with
handicrafts conducted within the boundaries of the local the outside world. The local lord nurtured within the community
community (difang gongtongt1). A single village or a number awe for his powers. The king was only an elevated lord and did
of villages constituted the local community which possessed not have the power to subject other lords to his will; hence the
in common forest and pasture land, water resources and feudal state had an extremely loose organization.
arable land. In this local community the common land and the
fields which were distributed among the peasant households
provided the necessities of life; for instance, the fields, hunting Source: Mukhia, Harbans, 'Was there Feudalism in Indian
and fishing, and domestic animals (provided the necessities History?', in Mukhia, Harbans, The Feudalism Debate (New
for consumption) while materials such as timber and sheep Delhi: Manohar, 1999), 155.

landlord over the peasant, was dissolved and was

2.2 THE IMPACT OF BRITISH
reconstituted in the form of bourgeois landed property,
COLONIALISM under the authority of the colonial state which marked
a separation of economic and political power. The
With the start of active colonial expansion in most important turning point in the evolution
South Asia in the middle of the eighteenth of new system of landownership brought about
century, the British established either direct by the colonial regime was the 'Permanent
or indirect control over the greater part of its Settlement' in Bengal (of land revenue
territory by the end of the century. Spreading the obligations) of 1793 which was instituted in
sphere of their political influence in the direction conjunction with fundamental changes in the
from the east (out of Bengal) towards south- rural social and economic structure. The peasant
west and north-west, they stopped in the case was dispossessed of the land which now became
of the latter direction at the lines that closely the 'property' of the zamindar. Concomitantly
fit the present-day frontier between India and the direct coercive powers of the zamindar (and
Pakistan. The north part of these lines coincided his private armies) were abolished. 5
with the confines of the Punjabi Kingdom, and
the south one with the boundary of Sindh with The multiple claims that had emerged following the
the authority of feudal rulers from a Baluchi clan decline of the Mughal empire were 'systematized and unified'
of Talpurs to be established there by that time. A under the British all over India. The Permanent Settlement
distinctive feature of the north-west regions was in Bengal in 1793 conferred property rights in land on the
predominance of Moslem population. 3 revenue collectors who were found as intermediaries between
the cultivator and ruler. With the decline of Mughal rule,
There is little disagreement among social scientists about the
zamindars took over de facto possession of land. 'The British
proposition that profound changes were brought about in the
in their first settlements then granted to this zamindar a
character of Indian society following the imposition of British
property right that in their judgement would be stable and
rule. For our immediate context, three institutional changes
ensure the collection of their revenue demand through him.' 6
introduced by the British had important consequences for
Essentially, then, we have the beginnings of the concept of
landholding and agricultural production. The institution of
private ownership of land and of private property, protected
private property, as the British understood it, was introduced
by a legal system that recognizes these property rights.
in India in the late eighteenth and early nineteenth centuries.
This imposition of the legal concept of private property and
At the same time, a legal system was established that was
ownership of land was a major step forward in transforming
closely related to the ownership of property. And thirdly, the
the indigenous society in the direction of a bourgeois,
British established an 'efficient government'. 4
capitalist society. The British introduced the institution of
Hamza Alavi analyses the impact of these changes and
the alienation of property in land by virtue of bourgeois civil
says: law proceedings. With this, the principles of inheritance,
guaranteed rights, and the privilege of succession were
The main impact of the change brought about
by the colonial dispensation was the elimination implemented.
of petty sovereignties of chieftains and zamindars Sindh was annexed to the British empire in 1843. The
who ruled the land, as much as they owned British 'made their first settlements on the basis that land was
it. Thus the fusion of economic and political power held directly from the state on a tenancy basis but its security
at the point of production', that we identified as a was guaranteed. Payment of land revenue was a condition for
structural condition of feudalism, the power of the the usufruct of land. The occupant was given heritable and
18 Issues in Pakistan's Economy

transferable rights of occupancy. The land system was called which ensured the compulsory alienation of land in the case
the ryotwari system in which the state yvas the landlord and of non-payment of debt. The 1870s saw the beginning of the
the occupant was its ryot or tenant.' 7 At the other end of the replacement of the initial land taxation code with a revised
spectrum, the British granted ownership rights on large tracts version under which only cultivated areas were subject to
of land to the Mirs asjagir lands. Other influentials were also taxation and there was no tax on fallow lands. However,
awarded similar grants, so long as they provided services of despite this change, in the mid-1890s over 42 per cent of
some sort to the new rulers of India. These owners of large usable land in Sindh either had been appropriated by, or
tracts of land became the landlords of Sindh .. was in the possession of, usurers under mortgages. 9 In the
Apart from these important changes in the relationship Punjab, the British went one step further. They were quite
between land and the intermediary or owner, the British were disturbed about the fact that, due to a debt market emerging
responsible for numerous other changes which resulted in and with landlords unable to pay their taxes and loans,
agriculture developing on capitalist lines. The introduction of agricultural land was going to non-agricultural users. They
the monetary tax, and the fact that it had to be paid regularly felt that this would undermine the position of the 'agrarian
and on strict terms, required producers to sell their crops in castes' on whom the British relied. Thus, they implemented
the market to pay the tax on land. A market for agricultural the 1900 Punjab Land Alienation Act, which prohibited
commodities emerged, and the previous self-sufficiency the passing of land from agricultural to non-agricultural
and remoteness of villages was shattered. A much greater castes and permitted land transfers only within the related
integration of the rural economy with that of the rest of the agricultural caste group in each district. 10
Indian subcontinent-and, subsequently, with the economy From 1885 onwards, the economy of the Punjab began
of imperial Britain-followed, with desolate and far-flung to be reshaped by the considerable extension in agricultural
places becoming part of the money and commodity exchange production which resulted from canal colonization after the
nexus. late 1870s. While the process of building canals took place
These interventions in the agricultural economy caused all over India, the coverage in the Punjab was particularly
the cropped area and the marketable agricultural produce to irnpressive.n In the early years of the twentieth century, a
grow. No cotton was grown in Sindh at the time of the British little over half of the entire irrigated area was watered from
conquest. However, in 1873-4, 4,000 tons were produced, canals. Within a period of two decades, canals watered about
while Punjab's production grew over seven-fold in less than 80 per cent of irrigated land. In the first half of the twentieth
ten years from the mid-1850s to the mid-1860s. 8 Thirty times century, the rate of expansion in the area of irrigated lands
more wheat was exported from the Punjab in the 1880s in the territory that now constitutes Pakistan outstripped
than in the 1860s. As the industrial revolution progressed the Indian region. The area irrigated from water from state-
in Great Britain, there was a dire need for raw materials. In owned canals in the Pakistani territory saw an almost seven-
the 1840s and 1850s a poor cotton crop in North America fold increase in the first half of the twentieth century. 12
produced a shortage of raw cotton for industry in England. The British needed to · expand the potential area
It was at this time that British industrial capital urged the of agricultural production in India so as to ensure the
imperial government to develop resources to extract further availability of raw materials for industry in Britain, and for
raw material from India. With increased production for the food crops in the Indian subcontinent, where the population
market, the local economy became more integrated with, and was increasing at an alarming rate and the threat of famine
dependent upon, the requirements of imperial Britain: loomed large. While early British policy had broken the
As the commercialization of agriculture continued and as century-old shackles of rural Indian life, capitalist agriculture
the tax burden began to be felt, many landowning peasants was only just emerging. Hence, to increase production,
were unable to pay the. taxes and had to seek loans. from rather than use intensive means, a more expansive form
money-lenders and merchants. Some were even forced to was necessary to bring more land under cultivation. The
sell or mortgage their lands. Zamindars and jagirdars were canal colonization programme was the result of this policy.
expected to pay taxes on fallow land as well as on cultivated The British did not want to settle rentiers on the newly
land. As some of them were unable to pay the tax, they were colonized lands, and instead were looking for small well-to-
forced to sell their lands. The land of the defaulters was do agriculturalists of the yeoman type, who would cultivate
bought up by usurers, tradesmen, and merchants, many of their own holdings .. Grants were given to peasants to
whom belonged to urban areas with little direct involvement cultivate land, the ownership of which the state had every
in agricultural production. intention of retaining. These peasant grantees were to remain
While these tax laws were strictly enforced, they began as occupancy tenants of the state and were not allowed
to have serious negative repercussions as far as the British proprietary rights. However, this policy was changed when
were concerned. The colonial authorities felt that the landed this landholding peasantry, essentially of the self-cultivator
aristocracy was the mainstay of their power in Sindh and type, was given proprietary rights in 1912.
the Punjab, and the erosion of their economic and, hence, According to some scholars, the principal change to
political power was undermining the political strategy of take place in the first half of the twentieth century in the
the British. Thus, in Sindh between 1870 and 1890, a series rural areas of Sindh and the Punjab, was the increase in
of acts and laws were passed to protect the rights of the landlordism, which occurred by increasing the number
zamindars. Earlier, from the mid-I860s in both the Punjab of landlords and the landlord ownership of land. 13 In the
and Sindh, courts of civil justice had come into existence Punjab, land ownership became increasingly concentrated,
 Chapter 2 Is Pakistan Feudal? 19

with large landowners controlling 38 per cent of arable land Table 2.1
by 1939 (see Table 2.1). In 1947 in the Punjab, the owner- Structure of Land Ownership in the Punjab Province:
cultivated arable land comprised about 42 per cent of the 1924 and 1939 (%)
total, while the remaining 58 per cent was leased. In Sindh,
80 per cent of the land belonged to big and middle owners of 1924 1939
Plots, acres
the more traditional landlord type, and was let out to lease. Owners Area owned Owners Area owned
In the Punjab, 51 per cent of the sown area was cultivated
on conditions of non-occupancy tenancy. This percentage Upto 5 58.3 11.2 63.7 12.2
was much higher in Sindh, where landlord ownership and 5-10 18.0 15.1 16.9 13.1
peasant land-use constituted the most typical pattern of the 10-15 8.6 12.5 7.3 9.1
region. 14 15-20 4.3 8.4 3.6 7.2
In Sindh and the Punjab, tillers of land were usually called 20-25 2.7 6.8 2.2 5.6
muzareen or haris, whose rights to cultivate land under the 25-50 4.8 20.4 3.9 14.8
British were not recognized in law or practice. In the Punjab, Over50 3.3 ·25.7 2.4 38.0
some tenants, maurusi muzareen (occupancy tenants), did
have the law on their side regarding a hereditary right to Source: Belokrenitsky, Vyacheslav, Capitalism in Pakistan: A
History of Socioeconomic Development (New Delhi:
cultivate land, but such rights were not always respected in
Patriot Publishers, 1991), 99.
practice. In Sindh, while the Mirs were granted jagirs, the
British had also recognized the rights of tenants who held
land owned by the state, and their security was guaranteed state as land revenue. He usually assigned to a hari each year
as long as land revenue was paid to the state. The occupants a different block of land to prevent the hari from establishing
of these state lands had heritable and transferable rights of any occupancy rights on a particular piece of land' .15
occupancy. This was the ryotwari system, where the tenant,
ryot, worked on the land of which the state was the landlord
(see Figure 2.1 ). 2.3 FEUDAL OR CAPITALIST?
The zamindar arid the jagirdar parcelled out land to the
haris and muzareen in lots of 10-15 acres. A manager or In the previous two sections, an attempt has been made to
kamdar used to oversee the work of the tenants. The hari delineate the main features of the agricultural sector from the
was a landless sharecropper 'who traded his family's labour period of the Mughals to about the time of the independence
for a share in output which in theory was fifty per cent of of Pakistan. The direction of the discussion has been towards
the gross produce. He also supplied seeds, implements, and examining the issue of whether Pakistan's agriculture is,
oxen. In addition to the batai share, a hari paid levies and or was, feudal or capitalist. To do this, we need to show
perquisites, and provided free labour to the landlord. The how the development of agriculture has matured from one
landlord paid about one-third of his net rental share to the historical form to another. If we reach the conclusion that

Non-revenue lands Revenue lands

I
(jagirs)

Landlords Small owners

(zamindars) (ryot)

I'
I Occupancy tenants
(mukhadims)
Lease holders

Tenants-at-will Tenants-at-will Tenants-at-will Occupancy Tenants-at-will Self-cultivators Tenants-at-will

(haris/muzareen) hereditary tenants (khud-kasht)
(maurusi haris/muzareen)

Figure 2.1
The Land Tenure System in Pakistan (circa 1947)
Source: Khan, Mahmood Hasan, Underdevelopment and Agrarian Structure in Pakistan (Boulder: Westview Press,
Colorado; 1981), 131.
20 Issues in Pakistan's Economy

until 1947 Pakistan's economy, particularly the dominant With the recognition of absentee landlordism,
agricultural economy, was still overwhelmingly pre-capitalist, and its protection by the British in the Indus
and that capitalist forms of agriculture had not established basin as in other parts of India, there emerged an
themselves, then Chapter 3, which examines the post- agrarian system which could not have led to economic
development. The fusion of the feudal rural society
independence era, will need to evaluate the nature of this
and British administration decisively eliminated
transition from one mode of production to another. On the the chances for positive change in India. The
other hand, ifwe conclude that the transition from feudalism ·economic surplus which peasants created was
to capitalism took place many decades ago, then we can take appropriated by those in the society who failed
up the theme of the development of capitalism in agriculture to invest in industrial growth. The relative
in Pakistan since at least the early years of the twentieth abundance ofland was fast disappearing and the
century. This discussion is important because there are still peasant population was rising at unprecedented
many observers and students of Pakistan's economy who feel rates, with their consequent adverse effects on
that Pakistan in general and its agriculture in particular are prospects of growth and on the condition of
'feudal'. Let us interpret the evidence. peasants. The problem of underdevelopment was
intensified further by the growing imbalance
There is a great debate over the claim that British
between land and population. The British
colonialism initiated capitalism in agriculture in the regions settlements gave birth to an economic and
that constitute Pakistan. Imran Ali, who examines the impact political system which could not get the Indian
of the British on the Punjab, especially with reference to society in general and peasantry in particular
the canal colonies of the province, writes that there was out of the morass of backwardness. This system
an absence of an agricultural revolution in the region. He reinforced feudal relations on land which, though
accepts the fact that there 'was great economic growth' in the asymmetrical, provided a measure of stability for
canal colonies, but 'agriculture did not experience any major the colonial power to rule India. 22
transition from traditional modes. Quantitative increase was
not accompanied by qualitative change.' 16 He argues that, if Let us now come to a different interpretation, where
we look at conventional growth indices such as cultivated scholars believe that the colonial influence actually generated
area, output, marketing, and trade, we see an 'impressive and speeded up the process of change in agriculture, from
process of growth'. He adds that the process of agricultural feudalism to capitalism. While there is some debate about the
colonization transformed the Punjab 'into one of the most existence of capitalism and capitalist tendencies before the
important areas of commercial farming in Asia', 17 with arrival of the British, many scholars believe that the impact
agricultural produce being exported all over the world. Imran of the British was both to destroy and to create. 23
Ali also discusses the impact of the extended communications A critical element that would differentiate capitalist from
network, especially railways, on increasing agricultural pre-capitalist forms is the pattern of ownership. We have
production, and how the monetization of the rural economy seen that in pre-colonial times land was owned by the
was responsible for the greater integration of the backward supreme ruler of India, and that after the collapse of the
areas with the rest of the world. However, ·he concludes that Mughals contending claims surfaced, with avvnership being
'capitalistic forms of agriculture ... did not emerge on any determined by land-grabbing tactics. The British instituted
significant scale', 18 and that 'agricultural expansion did not the capitalist and bourgeois concept of private ownership of
produce a social base conducive to rapid change;,indeed, the land, making it marketable and alienable, and introduced a
reinforcement of the existing class structure created, through legal system to protect owners and the market, guaranteeing
the very process of economic growth, a situation that was hostile the protection of bourgeois property and personal rights. We
to an economic transformation'. 19 would argue that this step was such a radical and progressive
So, for Imran Ali, the conclusion is clear: agriculture departure from past practice that it alone would be responsible
remained feudal or at least pre-capitalist under the British for the emergence and growth of capitalist, not feudal,
and, if anything, the old structures were strengthened and development. Furthermore, the emergence of a land market
reinforced by colonial intervention. This interpretation, which in the 1860s; the imposition of a land tax which was in cash
is difficult to accept, is drawn into question by much of what not in kind, as were other taxes; the establishment of official
Imran Ali himself describes. For example, he recognizes that sources of credit, even long-term credit; the hugely expanded
'the process of individualization [of property rights] created, quantity of crops grown, much of them being exported, with
probably for the first time, the prospect of alienation of cash crops taking an increasing share in production; the
land rights. With the increase in marketing of agricultural increasing polarization between landlords and the growing
produce, aided by the development of road and rail transport, landless, with wage labour emerging; greater interaction and
land came to have a monetary value', 20 and 'after 1880 there integration between town and country, breaking away from
was a considerable increase in land sales in the Punjab .. . the self-sufficiency and isolation of. the village community;
Agriculturalists entered more into the money economy ... '. 21 and the advent of small-scale manufacturing, set up near
Mahmood Hasan Khan, the great doyen of agricultural agricultural zones to produce implements that could improve
economists in Pakistan, shares views somewhat similar to and expand agricultural output-all point to a conclusive shift
Imran Ali's, writing as follows: from a pre-capitalist to a capitalist type of agriculture. Importantly,
too there was a marked shift away from the fusion of economic
and political power at the point of production, which was so
 Chapter 2 Is Pakistan Feudal? 21

central to feudal power relations, once bourgeois British that colonial domination and economic policy initiated the
law and political control over the Indian subcontinent was process of capitalist development in agriculture in India.
concretized. Hamza Alavi elaborates on these themes in great detail and
In fact, Vyacheslov Belokrenitsky identifies approximate is also clear in his conclusions, arguing that a particular type
dates for specific events, highlighting the point that the roots of capitalism, one tainted by colonial rule, was observed to
of capitalism had been laid during the time of the British. For be emerging all over India. Without question, pre-capitalist
example, he points out that a land market had emerged during forms of production were being replaced by capitalist forms
1860-70 (29); in the early 1860s, land tax was in cash rather under British colonialism. He argues that:
than in kind (42); in the mid-1860s, courts of civil justice
came into existence, overseeing the compulsory alienation of what we have in colonized India, therefore, is a
land in the case of non-payment of debt (44), and this could capitalist mode of production, but a capitalist mode
have happened only after private property in land had been of production that has a specifically colonial structure.
One thing is clear. The feudal mode of production
established; after the 1880s, in Punjab and other areas, the
was dissolved and there is no basis on which we
export specialization of agricultural commodities took place, can justify designation of relations of production
i.e. the agricultural economies joined the world and national in agriculture that resulted from the colonial
capitil,list markets, producing for exchange and profit (108); transformation, any more as feudal.3°
and the first half of the twentieth century saw an increase in
the number and share of landless agricultural labour in the We conclude our analysis that capitalism in agriculture
countryside, especially in the Punjab, and a key feature of the was observed to have emerged in the areas that constitute
capitalist form of economy in agriculture, the free worker, Pakistan as early as one hundred years ago. The seeds had
emerged and was a fact of life (105). 24 All these factors cast been planted by British colonization in the early nineteenth
doubt on the claim that feudalism continued to exist well century and bore fruit in the early twentieth century. Clearly,
after the establishment of British colonial rule. huge tracts of pre-capitalist or feudal landholdings, especially
A number of scholars recognize the fact that the British in Sindh, continued to exist. But the trend and process was
colonial influence affected the genesis of capitalism by one conclusively of moving away from feudalism and dissolving
creating a somewhat 'distinctive form of capitalism', and that pre-capitalist forms of production, replacing them with capitalist
the transformation of these non-capitalist societies took place forms. Hence, while feudal practices may have been extensive
by the domination of capitalism through a process of colonial at the time of independence, and, in fact, may have even
rule. 25 Belokrenitsky, for example, argues that when in the been dominant (see Table 2.2 and Appendix 2.1 ), capitalist
nineteenth century British rule was established in the regions agriculture has been the leading trend and it is not possible
that became Pakistan, it did not distort the evolution of to label Pakistan or Pakistani agriculture today as 'feudal'.
capitalist relations there, for the latter had not started taking As Appendix 2.2 shows, the myth of feudalism still prevails.
shape by that time. Capitalism that came into existence in However, our interpretation of the facts leads us to believe
that part of the world, under the direct and indirect impact that, once the transition began and became more entrenched,
of colonial conditions, was initially a kind of by-product of capitalism soon asserted itself, removing pre-capitalist forms
the policy pursued in India by colonial authorities, and of the of production, albeit some continue to remain. The next two
influence they produced in direct and indirect ways on the chapters develop this theme further.
local society. 26 ·
Moreover, Belokrenitsky argues that the 'development of
capitalism as such ( or rather of a western economic system 2.4 POPULAR PERCEPTIONS OF
familiar to the English) was not directly perceived as a goal of
the colonial rule ... although it was stressed that the coming FEUDALISM
into existence of components of these practices would be
In the 1980s, there used to be a t~levision serial which
desirable'. 27
In dealing with the sort of conclusions reached by Imran became immensely popular called Waris, which was based on
the life and times of a choudhry and his family in the Punjab.
Ali, discussed earlier, Doug McEachern argues that some
researchers have assumed that if the surplus was extracted The main character was a 'feudal' and the storyline followed
the changes that were taking place in his village, how
from the agrarian sector and not reinvested in technology
new, modern and urban values and culture were replacing
and improved production in agriculture, then the mode
the outmoded earlier values of 'feudalism'. The serial was
of production would not be capitalist. He argues that this
an excellent articulation of the contradiction which was
surplus can be accumulated in other spheres or even in
emerging then between the old world and the new. In the
other countries, as was the case in India, where surplus was
serial, the new world triumphed and the feudal lord was
transferred to Britain. 28 Moreover, he says that widespread
enveloped in flames which Jed to his death, and presumably,
commodity production and the sale of goods for the market
(a fact observed in India even by Imran Ali) are 'incompatible of the old order as well. 31
For many people in Pakistan even today, the popular
with the designation of feudal or unchanged class and
perception is that 'feudalism' in the guise of the choudhry and
production relations ... such an occurrence is only possible on
vadera, still exist, and that Pakistan continues to be 'feudal'.
the basis of a reorganization of production and the generation
While television serials have moved with the times-perhaps
of a new set of class relations'. 29 McEachern concludes
too far ahead of the times-in showing themes which are
22 Issues in Pakistan's Economy

Table 2.2
Distribution of Land Ownership in Pakistan and Provinces: 1950-1955

Pakistan Punjab Sindh

Farm size (acres)

Number of Area owned Number of Area owned Number of Area owned
owners (acres) owners (acres) owners (acres)

All sizes 5,068,376 48,642,530 3,555,457 28,309,744 337,665 10,285,021

(100.0) (100.0) (100.0) (100.0) (100.0) (100.0)
5 or less 3,266,137 7,425,614 2,358,119 4,438,517 100,601 365,817
(64.4) (15.3) (66.3) (15.7) (29.8) (3.6)
5-25 1,452,421 15,438,138 1,029,108 11,041,708 155,163 1,937,073
(28.7) (31.7) (28.9) (39.0) (46.0} (18.8)
25-100 286,470 10,616,308 146,893 6,198,128 54,792 2,390,358
(5.7) (21.8) (4.1) (21.9) (16.2) (23.2)
100-500 57,287 7,671,537 19,401 3,842,986 24,064 2,600,123
(1.1) (15.8) (0.6) (13.6) (7.1) (25.3)
500 and above 6,061 7,490,933 1,936 2,788,405 3,045 2,991,650
(0.1) (15.4) (0.1) (9.9) (0.9) (29.1)

Note: The data for the Punjab are for 1954/5; for Sindh for 1946/7. The data for Pakistan are the aggregate figures for all provinces.
The Punjab includes the former State of Bahawalpur, and Sindh includes the former State of Khairpur.
Source: Khan, Mahmood Hasan, Underdevelopment and Agrarian Structure in Pakistan (Boulder: Westview Press, Colorado; 1981), 68.

now predominantly urban and even global, the image of First of all, let us reiterate what feudalism is and what it
feudalism still persists. Because there is this popular perception is not. Feudalism is primarily an economic system (mode of
of feudalism, it becomes even more important to dispel this production, social formation), where the agricultural economy
myth and try to explain why this perception is wrong. dominates completely; where there is little urbanization;
Most people are not concerned with the economic where each unit (village, community) consumes much of what
arguments which show that feudalism does not exist in it produces, with little exchange between other settlements
Pakistan today, and they might even be convinced of these and areas. By this definition, Pakistan is clearly not a feudal
economic arguments if they spent some time understanding economy. Also, the size of land ownership does not determine
them. Many of those who even do agree with these economic feudalism: farmers, or now increasingly corporate firms, own
and structural arguments turn around and say that there tens of thousands of acres in numerous countries, but no one
is a feudal 'mindset' in Pakistan and people have feudal calls these owners 'feudals', for the farms are run on the most
'attitudes'. This mindset and these attitudes are manifest in sophisticated and advanced capitalist lines. So, first of all, the
the following ways: people argue that most Pakistanis are ownership size is not relevant to the feudalism argument.
disrespectful of rules, regulations, and laws and flaunt them Also, there is a clear distinction between land owners and land
openly; they misuse their positions of authority and misuse lords, the latter being closer to the feudal model.
power whenever they get the opportunity; public servants are Moreover, even if there .are vaderas and haris or sardars in
masters, rather than paid employees of the state, dependent some remote villages of Sindh and Balochistan, as indeed
on tax payers' money; women are mistreated, harassed, there are, and even if they are in an exploitative relationship
attacked, and not treated as equals to men; Pakistani society which fulfils some of the criteria of 'feudalism', this does
has a darbar culture, where ostentatiousness is the norm not mean that 'Pakistan is a feudal country' even though it
and privilege is misused and flaunted; patronage from may have some of these remnants or pockets of feudalism.
those in power is the norm; corruption, from the thana and For an economic system or a country to be 'feudal', the
kutchery level to the highest public office in the country, is a production relations which are specific to feudalism will need
standard and even accepted practice; there is a serious law to be dominant, pervasive, across most if not all, parts of the
and order problem at the local level caused by propertied country, and only then could one concede that the social and
and influential people who have their own private jails; there economic system could be called .'feudalism'. As we argue in
are large landholders and 'traditional' land owning families; Part I of this book, this is certainly not the case.
nepotism (or bribes), rather than merit, determine access to Many people who claim that there is feudalism in Pakistan,
the public sector employment market; people are supposed to argue that there is a lot of 'exploitation' of the poor largely
be irrational, and hold outmoded 'unscientific', beliefs; ... by landlords and landowners in the rural areas and that the
the list is endless. Without a doubt, every single one of these poor, often landless sharecroppers and labourers, are treated
practices is pervasive in Pakistan. Yet, the key question is: Are severely. There is no denying tpat this is the case in many
these manifestations of feudalism? parts of Pakistan, but exploitation, even brutal exploitation,
continues to exist in economies and societies which no
 Chapter 2 Is Pakistan Feudal? 23

one would consider feudal. The peasants in much of Latin The economic changes in structure are also manifested
America, for example, have had to suffer oppression for in where people live. In 1951 when the first census in
many decades by the military, by landowners, and even by independent Pakistan was held, only 17 per cent of West
multinational corporations. Exploitation exists in all societies Pakistanis lived in areas designated as urban; today estimates
and is not necessarily a trait of feudalism alone. The fact suggest that perhaps as many as 50-60 per cent live in cities
that in Pakistan the law and order and justice situation is and towns. 33 This shift has major repercussions which affect
so miserable, where the poor (and the not-so-poor as well), the economy, society, and the political process underway. In
whether rural or urban, have recourse neither to justice nor fact, in the context of Pakistan, perhaps the most important
to protection, cannot be reduced to feudalism, for these political factor over the last few decades, has been the process
are characteristics of numerous underdeveloped (as well as and extent of urbanization and the emergence, and perhaps
highly developed) capitalist societies having no history of consolidation, of a middle class.
anything akin to feudalism. These are manifestations of all Key indicators and trends suggest that Pakistan's
class societies with varying degrees of scale. agriculture has moved on to capitalist lines. For example, in
Although nepotism and the lack of merit and excessive the case of the share of marketable surplus produced by farms
corruption are serious issues in Pakistan, this too is not and agricultural units, a huge majority of farms produce
necessarily a manifestation of feudalism alone. All societies primarily for the market, not for self-consumption-in the
have their version of the Old Boys Club of Oxbridge or early 1950s around 12 per cent of produce was marketed, a
Harvard and Princeton, allowing special privileges, unequal figure which is now closer to 80 per cent; 34 there has been
access, and benefits which accrue on the basis not of merit a marked decline of sharecropping which is being replaced
alone. Of course these are more abundant in underdeveloped by wage Jabour; the size of holdings have fallen sharply
societies, where kin, tribe, biradari also matter, but are fairly forcing owners to run farms for profit through production
common in all societies, including the Japanese, American, for the market using modern technology; there has been a
and British. One allegation that people make in Pakistan is noticeable shift towards cash crops and fruits, and orchards
that families rule and dominate institutions, particularly in are now seen as viable economic units; and, commercial,
politics. This is common practice in most underdeveloped market-oriented farming dominates all forms of agricultural
countries, particularly in South Asia, where there has been a production. Feudalism is no longer an economically viable
family hold in the past, but even today, is still not uncommon and feasible project at the farm/landlord level, and many a
in the West: the Kennedys, now the Bush family, perhaps 'feudal lord' has had to become a capitalist farmer or has
in a few years Hilary Clinton as US President. While in the then turned to other sources of income. WhHe feudalism
developed societies merit matters far more than connections in Pakistan died its death a very long time ago, modern
and lineage, one cannot put everything down to merit alone; day Pakistan has seen the demise of agriculturists as a

r cronyism is not a characteristic of poor, underdeveloped,

feudal societies alone. The choices of Pakistani voters also
powerful economic, social, and political force. The old social
structures associated with feudals have also been replaced
show that they do not necessarily vote simply on biradari or by a market dominated form of existence-particularly, free
kinship lines and are far more astute than the credit given and mobile labour-something which also explains the rise
to them. Andrew Wilder, in a very interesting book, analysed in poverty in rural areas as discussed in Chapter 22. The
the way voters elected their candidates in the Punjab, and huge change in economic, social, and hence, political power,
found that they actually made sensible and rational, perhaps from the agriculturist, so-called feudal, lobby, towards an
opportunistic, choices, rather than simply vote for someone urban and rural middle class, is also one of the key indicators
on the basis of a relationship. 32 highlighting the extraordinary structural change in Pakistan
Often vested interests or lobbies or mafias or qabza groups, in six decades.
are misconceived as 'feudal' interests. There are lobbies What is being emphasized here is that while there are
and vested interest in all societies, in some cases they pockets of 'feudal-like' tendencies, feudalism as a dominating
are sophisticated, and in others rather crude and under and organizing form of social and economic structure is no
developed, like their societies. Musclemen or mafias or longer present. While Pakistan still has to develop a modern,
cartels exist in the most advanced of societies, but only in democratic and socially responsible middle class and culture,
Pakistan would they be seen as expressions of 'feudalism'. the absence of this social group does not imply the presence
In fact many of these interest groups are a response to of feudalism. With changes in landholding and the rise of the
modern politics and the way the state functions and fails arthi and transporter as key economic and political figures
to live up to its very modern aspirations. Perhaps they are in rural areas, and with inheritance laws breaking large
even an antithesis to feudalism. In the former Soviet Union landholdings, the old power structures based on land, have
post-socialism, with the breakdown or weakening of the changed conspicuously.
state, there has arisen a new society based on patronage and What we have tried to do in this section, is to look at some
personalism, and the state has become personalised, with of -the characteristics of Pakistani society and show that they
patron-client relations now the new social arrangement in are not necessarily either special to Pakistan or to feudalism,
much of the former socialist world. There has been a growth and are common, in varying degree, across cultures and
of mafia-like elites and powerful groups that determine social systems. The so called feudal mindset or attitudes, are
affairs, particularly at the local level. Yet, most people would found in different undeniably non-feudal societies. We also
not call these symptoms a sign of feudalism. want to state why this discussion here and in this Chapter
24 Issues in Pakistan's Economy I
on feudalism is necessary. The reason is that when people
believe that Pakistan is 'feudal' or that so-and-so is a feudal,
or that a particular attitude is feudal, they often reduce their
( London: Croom Helm, 1982); Belokrenitsky, Vyacheslav,
Capitalism in Pakistan: A History of Socioeconomic Development
(New Delhi: Patriot Publishers, 1991); Ali, Imran, The Punjab
l
understanding and explanation to everything being 'feudal'. Under Imperialism, 1885-1947, (New Delhi: Oxford University
They will then not think beyond this and by putting things Press, 1989); Vanguard Publishers, Studies in the Development of
in a feudal pigeon-hole, they will sit back and say that this Capitalism in India (Lahore: Vanguard, 1978); Hamid, Navaid,
happens on account of feudalism, implying that nothing can 'The Process of Agricultural Development: A Case Study of the
be done about this unless feudalism is done away with. But Punjab', unpublished PhD dissertation, Stanford University,
on the other hand, if we argue that there is no feudalism, California; and Illian, Mahmood Hasan, Underdevelopment and
we are forced to analyse institutions and behaviour in a Agrarian Structure in Pakistan (Boulder, Colorado: Westview
more serious manner and to examine the real causes of that
behaviour or action. Blaming everything on feudalism takes
the easy, and in this case, incorrect, path-see Appendix
2.2 on the numerous and different problems in theorizing
feudalism.
Press, 1981 ).
For investigating the issue of feudalism in the South Asian
context, the following books will be essential:
Jha, D. N., (ed.), The Feudal Order: State, Society and Ideology
in Early Medieval India (New Delhi: Manohar, 2000); Sharma,
I
R. S., Early Medieval Indian Society: A Study in Feudalisation
(Hyderabad, India: Orient Longman, 2001 ); and Mukhia,
2.5 SUMMARY AND FURTHER READING Harbans, (ed.), The Feudalism Debate (New Delhi: Manohar,
1999). The collection of essays in Mukhia's The Feudalism
2.5.1 Summary Debate is recommended. The recent publication by Panos
This chapter has discussed the issue of the mode of South Asia, particularly the contribution by Haris Gazdar,
production in agriculture in Pakistan. More specifically, it is also .recommended, not just for the discussion on the
has tried to show that feudalism, despite popular perception, nature of landownership and the mode of production, but
does not dominate production in the agricultural sector. A also discussions on agrarian reforms in Pakistan. See, Panos
major reason why people believe that feudalism is prevalent South Asia, Leveling the Playing Field: A Survey of Pakistan's Land
in Pakistan is that they equate large landholdings with Reforms (Kathmandu, Nepal: Panos South Asia, 2011 ).
feudalism. This chapter has used a common and general
definition of feudalism which has very specific characteristics,
not dependent primarily on size of landholding. We have
argued that, from the time of the British colonization of
India, certain structural conditions were established by
the imperial government which laid the foundations of
capitalist development in agriculture. The rights of private
property ownership and inheritance, defended by -British
civil law, brought forward this new form of production in
agriculture. Although 'feudal' enclaves existed at the time of
independence, their trend was on the decline, being replaced
by an altogether different and new order.

2.5.2 Further Reading

To understand the concept of feudalism, capitalist
development in agriculture and the process of transition, see:
Hindess, Barry and Paul Hirst, Pre-Capitalist Modes of
Production (London: Routledge and Kegan Paul, 1975 );

l
Hindess, Barry and Paul Hirst, Modes of Production and Social
Formation (London: Macmillan, 1977); Hilton, Rodney (ed.),
The Transition from Feudalism to Capitalism, (London: Verso
Books, 1976 ); Anderson, Perry, Passages from Antiquity to

I
Feudalism (London: New Left Books, 1975); Marx, Karl,
Capital, vol. 1, (London: Penguin, 1975 ); Marx, Karl, Grundrisse
(London: Penguin, 1973 ); and Lenin, V. I., The Develop,:nent of
Capitalism in Russia, Collected Works vol. 3 (Moscow: Progress
Publishers, 1977).
For material on Pakistan/South Asia, see:
Habib, Irfan, The Agrarian System of Mughal India (London:
Asia Publishing House, 1963); Habib, Irfan, Essays in Indian
History: Towards a Marxist Perspective (New Delhi: TU!ika,
1995 ); Hamza Alavi et al. Capitalism and Colonial Production
l

Chapter 2 Is Pakistan Feudal? 25

Appendix 2.1

I
The Land Systems of Pakistan in 1947 for these tenants were by no means easy to fulfil in practice,
reducing their status to that of tenants-at-will.
Mahmood Hasan Khan has given a graphic description of There were then two basic features of the landlord-tenant
agrarian economic and social relations of production in Pakistan relationship on land, namely (1) the batai system, and (2) the
at the time of lndependence. He writes: temporary tenure a tenant held at the pleasure of his landlord,

r There were essentially two land systems in the lndus

basin, with regional variations in tenurial arrangements, in
who at least in Sindh regulated the tenancy by a system of
shifting cultivation. The batai system had two parts. First,
there was the distribution of crop shares between landlord
layers of intermediaries on land and in the degree of land and tenant on a 50:50 or 40:60 basis. Second, a zamindar
concentration. The dominant among these two was the charged his tenant abwab or huboob, which ranged in number
landlord-tenant system. The other system was of peasant- from five to twenty. Their number depended on tradition in
proprietors or owner-cultivators. a particular area. Their total bite on a tenant's share varied
While precise estimates on owners, tenants, etc. are not from about 5 to 30 per cent. Many tenants-at-will were also
available for 1947, it is estimated that over 75 per cent required to provide begar to zamindar on demand. ln Sindh, a
of the agricultural population was of peasant-proprietors zamindar assigned to a tenant each year a different parcel of
and tenants in the Punjab and Sindh. lt is also estimated land, supposedly to rotate crops in a water-scarce agricultural
that most farms in Sindh were operated by haris and they system.
cultivated over 50 per cent of the cultivable area. ln the ln disputes arising from the batai system, no legal
Punjab, over 58 per cent of the cultivated area was farmed by protection existed for the landless tenants in any area. Even
muzaraeen. Landownership was highly concentrated in both in the case of occupancy tenants in the Punjab, where such
provinces. Owners of holdings of over 100 acres constituted legal protection did exist, the political influence of a zamindar
only 2 per cent and 9 per cent of all owners in the Punjab with revenue officials at the local level determined the
and Sindh, but they owned 41 per cent and 52 per cent of outcome of disputes. Like much else, the batai system was
area in the two provinces. The really large landowners, with maintained by the power of zamindars. More significantly,
holdings of over 500 acres, constituted 0.5 per cent and 1 this system of crop sharing militated against the development
per cent of all owners, but owned 25 and 30 per cent of the of agriculture as it was unjust to tenants in the extreme. There
area .... Peasant-proprietors, with holdings of 5 acres or less, existed no incentive for the tenant to expand production.
were evidently more numerous in the Punjab than in Sindh: By the same token, it did not create any pressure on the
67 per cent of all owners in the former and 30 per cent in landlord to undertake investment to make crop production
the latter. However, they owned only 30 and 4 per cent of more efficient. With the ownership of large landed estates
all area. Most of these peasant-proprietors were in the newly concentrated in the hands of these zamindars, it encouraged
settled and irrigated areas (canal colonies and central districts) absentee landlordism. The transfer of surplus from the tenant
of the Punjab. to the zamindar was ensured by the social and political power
ln the landlord-tenant system, the first group controlled enjoyed by landlords in the society, buttressed of course by
most of the land, although it was small in number. The the legal and administrative structure of the state.
second group, though numerous, owned no land and enjoyed Peasant-proprietors played an important role only in the
few if any permanent or recognized rights to its cultivation. newly settled areas of the Punjab. Many of these cultivators
The zamindars had rights of ownership which were heritable, had lost their lands to moneylenders. Those who survived
partible and alienable. Only some jagir lands were not faced a new menace resulting from increased fragmentation
heritable. Most zamindars parcelled their lands out to tenants of holdings. Fragmentation of holdings intensified because of
in small lots, usually of less than 15 acres. A zamindar used rising population on land and operation of the customary law
an ahalkar or a kamdar (supervisor) on tenants. He paid to of inheritance among Muslims. ln some areas, many of these
the state as land revenue about 50 per cent of his net rental small owners could not sustain their families entirely on their
share in the Punjab (and 33 per cent in Sindh) for each own holdings. They became progressively tenants as well. So
matured crop. their existence was only slightly less precarious than of the
The tenants were mainly landless sharecroppers, who traded landless tenants.
their labour and that of a pair of oxen for a return which in Differences though there were between the Punjab and
theory was about one-half of the crop output they produced Sindh provinces, the rural scene in the lndus basin was
on [the] zamindar's land. The tenants supplied seeds and dominated by two factors. Most power resided in the hands
implements and paid water charges, but they did not pay of those who were small in number but whose economic
land revenue to the state. The haris in Sindh enjoyed no legal contribution to agricultural output was that they owned and
rights on tenancy: their contract with zamindars was verbal controlled large tracts of land. Most peasants, on the other
and annual. Similar terms existed for the ordinary muzaraeen hand, were landless tenants and small owners. The tenure of
in the Punjab. For maurusi muzaraeen, their tenancy rights the landless tenant was tenuous and the existence of small
and contract with zamindars were to be regulated by the owner was only slightly better. The asymmetrical relations in
Punjab Tenancy Act of 1887. The conditions of occupancy this predominantly landlord-tenant system were maintained
r 26 Issues in Pakistan's Economy

and reinforced by the monopoly power of the absentee noted and incorporated into district-wise settlements. At least
landlords and supported by the state. The characterization three different types of mahalwari arrangements were used. A
of tenants, no matter which source one cares to select zamindari village was one where the entire village land was the
among many, dearly established them as cultivators who had revenue responsibility of just one landholding family. ln villages
low economic and social status and whose surpluses were where families had divided their holdings a pattidari arrangement

l
transferred to a dominant class of rulers, the zamindars. was in operation. There were yet, other villages where it was
argued that the entire 'body of the village' was the joint holder
Source: Khan, Mahmood Hasan, Underdevelopment and Agrarian of the village regardless of whether or not they claimed common
Structure in Pakistan (Boulder, Colorado: Westview Press, 1981 ), ancestry. Such villages were known as bhaichara villages.
130-4. ln fact, all three types of settlements were variants of landlord J
villages. The 'village body' was meant to include only those
families that claimed to be the possessors of land. The colonial
officials used terms such as 'land owners' but it is dear from the
records that the institutions of private property did not actually
Haris Gazdar provides a complementary analysis with specific exist. lt was the self-acknowledged task of the settlement officials
focus on the Punjab and Sindh under the British. to identify the true possessors of the land and to record them
as its 'owners' through their individual or joint ownership of the
mahal or the village. The mention of collective ownership in the
Punjab settlement records actually referred to joint possession among a
sub-set of all residents who claimed to be the landlords. lt was
ln Punjab (and settled NWFP), the colonial administrators decided taken as given that there will be other residents belonging to
to implement the mahalwari system of land revenue. This system subaltern castes and classes whose position would be subservient
was based on recognizing the village as the basic unit of land to that of the recognized village land holders. ln determining
administration. The mahalwari system was in place in the western rival and contested claims of village land holding, the revenue
parts of what is now Uttar Pradesh, and Punjab was seen as an officials paid explicit attention to political power, lineage, right
administrative extension of north-central lndia. The introduction of possession through conquest, and caste hierarchy.
of maha/wari in the later additions to the Bengal Presidency came Although the stated purpose of the settlement was to assign
after an acknowledgment on the part of the colonial government revenue tax liability, its effect was to confer private property
that the earliest land revenue systems (the zamindar-based rights in land to various classes of landholders. Before the
Permanent Settlement of Bengal) had failed to create incentives colonial land settlements, there was no dear notion of the
for agricultural improvement. alienability of land. This can be seen from the fact that while
Colonial officials surveying Punjab argued that the village discussing the provenance of any particular claim of land holding
already existed as a coherent and robust unit of land and social the key tests were actual possession (existing hierarchy of rights
administration. What remained to be done was to document within a village) and the right of possession through conquest
local variations and assign revenue liabilities and political (genealogical tracing of invaders), but not any record of sale or
responsibility to specific individuals, families, castes, and classes. purchase. lt is not altogether surprising that the alienability of
lt was acknowledged from the outset that in some parts of land-or accepting ownership rights of land holders-quickly led
Punjab-notably the south-western region which now constitutes to actual alienation of land. Within a few decades of the land
the southern part of Pakistani Punjab-the concept of the village settlements the colonial government in Punjab faced protests on
was less well-established than the central and northern regions. the part of the 'farming community' against the debt-induced
Here, the predominant social unit was the well, around which alienation of land to urban money-lenders. lts response was to
populations were settled. enact the Punjab Alienation Act of 1900, which classified rural
The village-based system of land settlement had three society into 'cultivator' and 'non-cultivator' castes and tribes,
important features. First, the village was the basic unit of land and restricted the transfer of land ownership from the former to
revenue liability, and hence the basic unit of land holding. the latter.
Villages could, of course, be shared between several landholders, lndividual private property rights, therefore, were introduced
in which case they shared the responsibility for land revenue, in the favour of the landholders, and then modified to protect
and were recorded as joint holders of the village. The land of a this same class. The land settlement in Punjab elevated the
village would include cropped area, residential land as. well as landholders but marginalized all other rural classes. Agricultural
uncultivated land in private or collective use. Second, the village tenants, labourers, and non-cultivating service castes of various
register was the record not only of land but of the entire village types that had traditionally enjoyed claims to the produce of
populace, including landholders, but also tenants, labourers, and land alongside the landholders were now dispossessed. ln the
people belonging to non-farm professions and trades. Third, the late 19th century the 'non-agricultural' castes made up around
village was treated as the basic unit of administration-not only half of the total population of Punjab. The majority among these
for the purposes of land revenue, but for all civil purposes. 'non-agriculturalists' comprised the so called 'vagrant and menial
Land settlement officers were always at pains to point out castes' that actually performed much of the hard labour within
that their primary task was to identify, record and formalize and outside the agrarian economy.
existing arrangements of land holding and revenue liability. Even among the half of the population that made up
Local variations in the general village model were scrupulously 'agricultural' castes, only a minority were landholders-others
 Chapter 2 Is Pakistan Feudal? 27

were tenants of various types. Thus, the landholders' advantage system also did not require the existence of village communities
over other classes which was previously tempered by a system or the state's detailed involvement in documenting the structure
of customary obligations was both magnified and qualitatively of rights and claims within villages. lnitially the leases were for
intensified when land was legally accepted as their property. specific periods of up to five years. Subsequent leases were for
The Punjab settlement was overtly guided by political longer periods. This system promised to be the closest to a market
considerations. The colonial government consciously sought in land. The ryotwari system was implemented all over the Madras
to create a class of loyal landowners consisting of the middle- Presidency and was also adopted in the Bombay Presidency. Parts
and large-income peasantry. By freezing the hierarchy actually of the Bengal Presidency too were brought under ryotwari. ...
observed at a given moment in time into a perpetual contract . . . The problem, of course, was not with the organization
through the creation of private property rights, the colonial of Sindh agriculture. lt was what it was, and had served the
settlement put in place considerable hurdles before the subaltern economic needs of the agrarian classes and the state to a lesser or
castes and classes. Whereas before the land system would have greater extent. The problem was with the lndo-centric approach
been subject to negotiation and change in response to changing of the British colonial settlement which demanded the agrarian
local economic and political conditions, now the administrative structure of a far-off corner of the imperial domain to obediently
machinery of the modern colonial state was geared towards submit itself to prior administrative categories. Since this was not
preserving the particular balance of political power that happened going to happen, and a decision needed to be taken, the colonial
to have prevailed in the mid-19th century Punjab. officials developed the thesis that the haari was 'but a serf of the
soil'. The Sindh zamindar was recognized as the landholder and
cultivator-that is, as the ryot with whom the ryotwari settlement
Sindh could be made. Private property in land had been introduced and
its principal beneficiary was the zamindar. At a stroke, the Sindhi
The ryotwari system appealed to the early 19th century sensibilities haari was actually turned into a serf of the zamindar.
of British colonial officers for its simplicity and efficiency. Unlike
the zamindar-based Permanent Settlement, this system did not Source: Gazdar, Haris, 'The Fourth Round, and Why They Fight
recognize or create a class of intermediaries. Revenue liability was On: the History of Land and Reform in Pakistan', in Leveling the
affixed to specific plots of land, and this created prefect incentives Playing Field: A Survey of Pakistan's Land Reforms (Nepal: Panos
for cultivators to maximize their output. Unlike mahalwari this South Asia, 2011 ), 16-18, and 20-22.

Appendix 2.2
landholdings to begin with. lf there are any today they must
The Myth of Feudalism be few in number. ln most districts of Punjab-a province
This colourful article, written by Ayaz Amir in Dawn, which was once the centre of a thriving feudal tradition-large
re-emphasizes the point that feudalism still causes a great deal estates are a thing of the past. More than the imperfect land
of concern to most people in Pakistan. Despite the considerable reforms of Ayub Khan and Zulfikar Ali Bhutto, what has been
evidence presented to the contrary, the myth of feudalism prevails. responsible for this development are the laws of inheritance
with what were once large estates becoming smaller holdings.
There can be little doubt that next to the great buzzwords of The result of this process is not hard to see. ln pockets
corruption, good governance and the environment, the most of Mianwali and Attack districts there are still a few large
overworked concept in Pakistan today is that of feudalism. landholdings. But in the districts of Rawalpindi, Chakwal,
Commentators who have never spent a night in a village or Jhelum, Mandi Bahauddin, Gujrat, Wazirabad, Gujranwala,
ever set eyes on a patwari, talk freely about waderas and Sheikhupura, Lahore, Kasur, Sialkot, Narowal, Faisalabad
feudal culture, ascribing all the country's political problems to and Toba Tek Singh (this by no means being an exhaustive
these twin phenomena. list) there are no big zamindars, the norm in these districts
There is a gross misconception at work here because while being of small peasant proprietors or farmers with middle-
there is nothing healthy about feudalism (except insofar as size landholdings. lt is true that citrus growers and mango
it led in Europe to the rise of the mercantile classes and in and cotton farmers of central and southern Punjab make fat
time to the establishment of democracy), feudalism proper, profits every year. But that is because of the cash crops they
with its vast landholdings and tenant farmers, is certainly not cultivate and not because all of them are sitting atop rolling
as widespread or potent a circumstance in Pakistan today as vistas of farmland. ln Tehsil Bhalwal of Sargodha district, for
it was, say, in the first two decades of the country's history example, even small farmers with citrus gardens of, say, 15 or
or as it continues to be in the feverish imaginations of our 20 acres are able to get a good yearly return. But that scarcely
deskbound political analysts. turns them into feudals.
About the only regions of Pakistan where we still find large Not that feudalism, as a form of land tenure, has
landholdings is the province of Sindh and the Seraiki or the disappeared completely from Punjab. But it is confined to
southern belt of Punjab. ln the Frontier there were few large small pockets-Dera Ghazi Khan (courtesy the Legharis and
28 Issues in Pakistan's Economy

Mazaris) and parts of Multan, Sargodha, Bahawalpur and The fact, however, remains that in Pakistan today, when
Rahim Yar Khan. political ideology has taken a back seat to the pursuit of
The urban misconception of course is that anyone who power for its own sake, a party ticket alone is not a sufficient
looks like a hick, dresses like one, has a rural surname, curls condition for election success. ln order to produce the desired
his moustache and rides a Pajero (or as is the case nowadays, results it must be matched with local influence. So the
a Turbo Cooler) is necessarily a feudal. The Punjab provincial question really is that if feudalism is a waning force, what are
assembly certainly looks like a rural assemblage. But that the other factors which make for rural influence in Pakistan
is because most of its members are from rural backgrounds today?
and represent rural constituencies and not because they are There is none more important in this respect than the
feudals. Just as every Memon, Gujrati or Chinioti is not a ability to interact with the local bureaucracy: the police, the
captain of industry, every Chattha and Warraich or Malik and magistracy and the revenue department. The administrative
Chaudry is not a feudal landlord. system in Pakistan is riddled with corruption and inefficiency.
The question raised in discussions about feudalism, lf it responds to anything it is to graft and influence-peddling.
however, is not about the size of landholdings but about the ln order to win the kind of influence which can later be
pernicious consequences of this phenomenon, with feudalism, translated into votes, a politico first has to be 'available' to his
in urban discourse, being considered almost synonymous with constituents, the days of absentee politics having long gone
political power. The argument advanced is that parliamentary in Pakistan. But availability is of use only when the politico
democracy has been unable to establish itself on a sound concerned is wise to the politics of thana, tehsil and katcheri.
footing because feudals with their retrogressive ways, have a At one time it was mostly the feudal who performed this role.
strangle-hold over the assemblies. This is a distorted view of Nowadays his place has been taken by other representatives of
Pakistani politics. Rural interests have a predominant influence the rural gentry: those who have disposable incomes because
in the assemblies simply because, reflecting the concentration of their cash crops or those who have made money in other
of population, there are more rural constituencies in the fields: transport, construction, light industry, the Gulf, etc.
country. So, if anything has to be reformed or changed it is not just the
Feudal influence in politics received a major blow in the remaining bastions of feudalism, but the administrative system
1970 elections when big-name feudals in Punjab tasted which still puts a premium on a feudal style of politics. As long
defeat at the hands of less well known candidates from the as the administrative system continues to function in its present
Pakistan People's Party. Later, it is true, Zulfikar Ali Bhutto groove the rural population will understand local power-brokers
tried to reverse the process he himself had set in motion by better than candidates who may otherwise be better qualified to
admitting some of the same feudals into the PPP at the time speak glibly on national and international issues.
of the 1977 elections. Even so, there was no going back to the This is not to say that with the breakdown of feudalism
politics of the forties and fifties when feudalism automatically Pakistani politics have become more egalitarian. That is far
meant political power. from being the case. lt is only in this that the nature of the
Today, in Pakistan few landholders, no matter how big, Pakistani oligarchy has changed. lt is no longer neatly divided
can make it into the assemblies if they are not supported by into the bureaucracy, the military and the landowning class
one or the other of the two major parties: the PPP and the as it was for the first decade of the country's history. Today
PML(N). This is true even of Sindh where a PPP ticket counts all these various segments (plus high finance and industry)
far more than being a wadera. Jatoi needs PPP support to have come closer to each other through inter-marriages and
win in Nawabshah. After several defeats, Mumtaz Bhutto (no a commonality of economic and political interests. Retired
small landowner) made it to the Sindh assembly with some generals and bureaucrats are landowners and captains of
difficulty during the 1993 elections. The Pir of Pagaro has industry. Former landowners are industrial barons. The old
been trounced several times by PPP candidates. Indeed, it is industrial houses have married into the old feudal aristocracy.
a measure of the change in Pakistani politics that with the A new moneyed breed· has entered politics. The old familiar
exception of the Bhuttos in Larkana, Nawaz Sharif in NA-95 societal distinctions, therefore, have lost much of their validity.
Lahore, the Legharis and Mazaris in D. G. Khan and Khar in lf the cause of egalitarianism has to be served then the
Muzaffargarh (and possibly Shaikh Rashid in Rawalpindi) few enemy is not just feudalism (which in any case, as l have
other politicos can claim to have safe constituencies. Even in tried to show, has lost much of its traditional power) but an
this list, it is only in D. G. Khan that feudal influence can be incestuous oligarchy which dominates sociaf, political and
seen as the decisive factor for electoral success. The Bhuttos economic life in the country. To keep the focus of public
win in Larkana not because they are. big landowners (there anger only on the Pajero-riding rural politico is to ignore the
being other big landowners in the district as well) but because evolutionary complexity of this elite whose depredations have
of their famous surname. Even Khar is not quite the big feudal brought the country to its present sorry pass.
that Tehmina Durrani has made him out to be. The clout that
he enjoys in his district is because of his political standing Source: Amir, Ayaz, 'The Myth of Feudalism', Dawn, 10 June
which is quite independent of his landowning status. 1996.
 Chapter 2 Is Pakistan Feudal? 29

Appendix 2.3
model of development. The result has been to enlarge the
The Complexities of Conceptualizing concept to encompass all pre-capitalist agrarian society ....
and Theorizing Feudalism . . . Problems of the Chinese conceptualization of
feudalism are not peculiar to Chinese historical discourse but
Do all societies follow a universal historical process, or path of
are universal problems of the discourse on feudalism. These
development, moving through stages of an ancient, primitive,
problems are products of what lsaiah Berlin has described as
slave, feudal, and capitalist trajectory? ls the European model of
the 'inflation' of concepts, the accretion of new meanings to a
history universal? The extracts presented here, all from eminent
concept as the concept is made to correspond to the different
historians who have contributed to the edited volume The
realities which it is used to represent. Feudalism certainly
Feudalism Debate, throw some light on feudalism and on method
has undergone such inflation as it has had to accommodate
in historical analysis.
widely different realities in its worldwide diffusion. These
problems exist no matter whether we speak of Chinese
1. Whenever we discuss the question of feudalism in any country
feudalism, Japanese feudalism, Latin American feudalism,
and in any period, medieval Western Europe inevitably
African feudalism, Russian feudalism or whatever. ln order
provides the point of reference for such a discussion, whatever
to describe these societies as feudal, it has been necessary
be our answer to this question. One can, of course, see the
on the one hand, to ignore significant structural differences
justice of comparing the history of other countries with that
among them, and, on the other hand, to inflate the meaning
of Western Europe in modern times for it was, after all, in
of feudalism to accommodate such structural differences.
Western Europe that capitalism arose which was later to
Feudalism has come to describe anything from a European
encompass the whole world; but it is difficult to see the logic
political-economic institution to all post-slave pre-complaint
of such a comparison in the ancient and medieval periods
agrarian economics.
when it might only persuade us to ask questions which have
so little relevance to our history.
Source: Dirlik, Arif, 'The Universalization of a Concept: "Feudalism
lt is possible, of course, to speak of regional variations
to 'Feudalism' in Chinese Marxist Historiography", in Mukhia,
of feudalism. One could thus argue in favour of an lndian
Harbans, op. cit., 169.
feudalism, a Chinese feudalism, a West Asian feudalism,
etc. apart from the West European and the Japanese one.
However, 1 visualize two reservations with respect to this
3. ln the case of Marxism, however, the assumption that history
argument. First, the use of a common denominator for the
must develop through a number of stages imposes more
whole range of regionally. and temporally variant socio-
serious restrictions on historical analysis. Since feudalism must
economic systems could hardly be justified unless one
precede capitalism as a stage, a society that exhibits 'capitalist'
could establish a fundamental similarity underlying these
·elements but cannot be categorized as capitalist must by
variations-a similarity that was precisely defined. Second,
definition be a feudal society. This lack of alternatives lies
quite apart from the fact that feudalism as a category achieves
at the root of the circular and contradictory arguments that
universality only through the looseness of its definition,
while China was a 'special' feudal society because it never
the very search for a universal category, equally applicable
made the transition to capitalism, it was a special feudal
to different medieval regions, is based on the assumption
society because it contained important capitalist elements.
that the medieval world was one world sharing a common
This is a general problem of the Marxist conception
socio-economic system. We thus attribute to the medieval
of history as a succession of internally related modes of
world characteristics which more appropriately belong to the
production culminating in capitalism and, ultimately, socialism.
nineteenth and twentieth centuries.
Whether or not Marx intended European development to be
universalized into a global model of development, which
Source: Mukhia, Harbans, 'Was there feudalism in lndian
is debatable, Marxist discourse has been guided by this
history?', in Mukhia, Harbans, The Feudalism Debate (New Delhi:
assumption. The only alternative to this unilinear scheme
Manohar, 1999), 81.
of development has been provided by the notion of Asiatic
society which, as Western and non-Western Marxists have
recognized, is the product less of theory than of a Europe-
2. Ra~her than work out the implications of their analysis, centred culturalism. Whether because of the imposition of a
Chmese historians, in their loyalty to a universal teleology, European model upon the rest of the world, or because of the
continue to introduce by the back door standards of culturalist exclusion of non-European societies from general
development derived from European history. This is most theoretical considerations, Marxist models of development
evident in the preoccupation with the 'sprouts of capitalism' have proven deficient outside of Europe.
which implies that even if China had its own 'special' laws of
development, Chinese development nevertheless anticipated
Source: Dirlik, Arif, op. cit., 176.
the universal goal of historical development: capitalism. ln
spite of its 'special' development, therefore, feudalism in China
is portrayed as the stage prior to capitalism in a universal
30 Issues in Pakistan's Economy

4. The most serious reservation 1 have on this approach of terms of, say the caste system, zamindari, etc? Surely, one will
comparative study of societies lies in its Eurocentricism. find family resemblances in European institutions of these
Why should Europe be accorded the privilege of providing purely lndian types?
yardsticks with which to compare non-European societies?
Why should one use such terms as 'seigniorial rights',
'serfdom', 'sub-infeudation', 'manorial', etc. as Sharma, for Source: Rudra, Ashok, 'Pre-capitalist modes of production in non-
example, does, in a way begging the question of similarities? European Societies', in Mukhia, Harbans, op. cit., 327.
Why should one not try to understand European society in

NOTES
l. See Habib, Irfan, The Agrarian System ofMug ha/ India (London: 20. Ibid. 4.
Asia Publishing House, 1963 ); Habib, Irfan, 'Potentialities of 21. Ibid. 4.
Capitalist Development in Mughal India', Journal of Economic 22. Khan, Mahmood Hasan, op. cit., 1981, 130, emphasis
History, vol. 29, no. 1, 1969; and Habib, Irfan, Essays in Indian added.
History: Towards a Marxist Perspective (New Delhi: Tulika, 23. See amongst many: Marx, Karl, On Colonialism (Moscow:
1995). Foreign Language Publishing House, 1960); Habib, Irfan,
2. The rest of this and the following section make liberal op. cit., 1963; Alavi, Hamza, op. cit., 1982; McEachern, Doug,
use of: Habib, Irfan, op. cit., 1963; Khan, Mahmood 'Capitalism and Colonial Production: An Introduction',
Hasan, Underdevelopment and Agrarian Structure in Pakistan in Hamza Alavi et al. op. cit., 1982; and Belokrenitsky,
(Boulder, Colorado: Westview Press, l 981 ); Hamza Alavi Vyacheslav, op. cit., 1991.
et al. Capitalism and Colonial Production (London: Croom 24. Belokrenitsky, Vyacheslav, op. cit., 1991.
Helm, 1982 ); and Belokrenitsky, Vyacheslav, Capitalism in 25. See Alavi, Hamza, op. cit., 1982; McEachern, Doug, op. cit.,
Pakistan: A History of Socioeconomic Development (New Delhi: 1982; and Belokrenitsky, Vyacheslav, op. cit., 1991.
Patriot Publishers, 1991 ). 26. Belokrenitsky, Vyacheslav, op. cit., 1991, 16.
3. Belokrenitsky, Vyacheslav, op. cit., 1991, 8. 27. Ibid. 29.
4. Alavi, Hamza, 'India: The Transition to Colonial Capitalism', 28. See Alavi, Hamza, op. cit., 1982; McEachern, Doug, op. cit.,
in Hamza Alavi et al. op. cit., l 982, 38. 1982.
5. Ibid. 38, emphasis added .. 29. McEachern, Doug, op. cit., 1982, 12.
6. Khan, Mahmood Hasan, op. cit., 1981, 126. 30. Alavi, Hamza, op. cit., 1982, 64, emphasis added.
7. Ibid. 143. 31. Another, equally interesting and persuasive description of
8. Belokrenitsky, Vyacheslav, op. cit., 1991, 37. this form of change has been brilliantly depicted by Zulfikar
9. Ibid. 42. Ghose in his novel The Murder ofAziz Khan, first published in
JO. Ali, Imran, The Punjab Under Imperialism, 1885-1947 (New 1967. See,"Ghose, Zulfikar, The Murder ofAziz Khan {Karachi:
Delhi: Oxford University Press, l 989), 49. Oxford University Press, 1998).
11. For detailed documentation and discussion, see Ali, Imran, 32. Wilder, Andrew, The Pakistani Voter: Electoral Politics an.d Voting
op. cit., 1989. Behaviour in the Punjab (Karachi: Oxford University Press,
12. Belokrenitsky, Vyacheslav, op. cit., 1991, 134. 1999).
13. Ibid. 89. 33. Some analysts suggest that Pakistan is now predominantly
14. Ibid. 93. urban, with so called 'rural' areas fully integrated into the
15. Khan, Mahmood Hasan, op. cit., 1981, 143. overall urban economy. See article by Reza Ali in Zaidi,
16. Ali, Imran, op. cit., 1989, 235. S. Akbar (ed.); Continuity and Change: Socio-Political and
17. Ibid.237. Institutional Dynamics in Pakistan (Karachi: City Press, 2003).
18. Ibid. 241. 34. I am grateful to Professor Mahmood Hasan Khan for
19. Ibid., 242, emphasis added. providing this information.
 The Green Revolution and
Land Reforms

It would be fair to say that one of the most important landless (see Box 3.1). There have been two sets ofland reforms
events in Pakistan's agricultural history, with extensive in Pakistan, both of which will be analysed in this chapter.
repercussions on other sectors, has been the process called The purpose of studying any sector or society is to see how
the Green Revolution, which occurred in the mid-1960s. it has changed over time and how it continues to evolve. In
The technology package associated with it generated major Chapter 2, we discussed the process of change in agriculture
changes in the economic, social, and political structure of from the times of the Mughals until independence. This
the country, transforming the agricultural and rural sectors chapter discusses some important events resulting in the
irreversibly. Much of what we see today, in terms of economic transformation of the agricultural sector, while the next chapter
and social groups and classes, political affiliation, and even examines the overall process of agrarian transition. The events
culture, has its roots in, and is a consequence of, the Green and issues discussed in the present chapter have an important
Revolution. It forms a watershed between the old and new bearing on how agrarian transition has taken place.
Pakistan. However, while the mid- l 960s are in many ways an
important juncture in our history, it is necessary to emphasize
that change is a continuous process and events like the 3.1 THE GREEN REVOLUTION
Green Revolution act only as an impetus to that change.
While present-day Pakistan may have its roots in the Green The annual growth rate in agriculture between 1949 and 1958
Revolution much more has happened since the mid-1960s to was a mere 1.43 per cent, less than half of the annual growth
make Pakistan what it is today. This chapter will examine the rate in population. Agriculture was allowed to stagnate in
nature and consequences of the major transformation that the 1950s because the ruling elite believed at that time that it
took place in the mid-l 960s. was essential to industrialize at all costs and at great speed.
Land reforms are an important mechanism for changing Government policies were heavily biased against agriculture,
ownership and wealth patterns, economic and social relations and it was only towards the end of the l 950s-when it
of production, political relations, and a host of other factors. became clear that growth in agriculture was necessary for
Land reforms usually imply a redistribution of land away the survival of the country-that the importance of the
from those who own large chunks of it to those who are often agricultural sector was recognized.

Box 3.1 tenure systems became more and more persistent both
Land Reforms: Need and Constraints on grounds of social justice as well as a pre-requisite for
economic development. ...
Viqar Ahmed and Rashid Amjad examine the principle behind ... A decision to undertake land reforms often meets
land reforms. They argue as follows: with strong resistance from landowners who constitute
In agrarian societies, land is the primary productive asset a powerful elite in agricultural societies. It is, therefore,
and the tangible expression of economic and political preceded by political controversies and national debate.
power. Therefore, the struggle for control of land and its Even after a land reforms proposal passes through the
fruits is a constant one. Throughout history, patterns of legislative process, its implementation is a complicated task
land ownership and tenure have played an important, and due to the lack of organization at the village level, a dearth
at times decisive, role in shaping the political and social of proper data, a faulty maintenance of land records, and
system. It has, in most cases, also helped to determine lengthy and complex legal procedures. These obstacles
the possibility and pace of economic change. It was thus can, of course, be overcome by a strong political will and
inevitable as economic development became a major the active support of the rural masses for the programme.
goal in these societies, and the principal concern of
governments, that large concentrations of land ownership
and the feudalistic pattern of social relationships came to Source: Ahmed, Viqar and Rashid Amjad, The Management
be regarded as prime obstacles to sustained growth and of Pakistan's Economy, 1947-82 (Karachi: Oxford University
development. Demands for radical changes in the land- Press, 1984), 117-18.
32 Issues in Pakistan's Economy

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Figure 3.1
Growth Rates in Agriculture: 1949-69

Figure 3.1 shows the growth rates in agriculture in the the farm area serviced by tube wells doubled.' In the second
1950s and 1960s, and indicates a marked change between half of the 1960s, two HYV seeds, one for wheat, developed
the two decades. Between 1959 and 1964, agriculture grew by the International Wheat and Maize Institute in Mexico,
at an overall rate of 3.7 per cent, but this impressive rate was and the other for rice, developed by the International Rice
overshadowed by the even greater 6.3 per cent between 1965 Research Institute in the Philippines, were introduced in
and 1970. Between 1966/7 and 1967/8, the years when the Pakistan. The Mexi-Pak wheat seed had been experimented
Green Revolution was at its peak, agricultural output grew upon in the early 1960s and, along with the IRRI rice seed,
by 11.7 per cent, and it maintained a high growth rate of 9.6 yielded higher output. These experimental results were soon
per cent in 1968/9 to 1969/70. How were these rates achieved? reproduced across large areas of agricultural fand. Since the
The phenomenal increase in growth took place in two HYV seeds required large sources of water, those areas that
phases. In the first, 1960 to 1964/5, the main cause of the had better irrigation facilities and those that had installed
growth was the increase in irrigation facilities, mainly tube tube wells were the first to adopt these seeds. Moreover,
wells. The second phase, between 1965/6 and 1969/70, farmers who wanted to use the new seeds were also seen
showed impressive growth when the expanded irrigation sinking tube wells and the number of tube wells in the
facilities were supplemented by the technology package of country increased from 34,000 to 79,000 between 1964/5
high yielding variety (HYV) seeds, chemical fertilizers, and and 1969/70. The area serviced by tube wells increased six-
pesticides. Essentially, then, it was the complete package of fold between 1959 and 1969. More than half of the irrigated
water, seed, fertilizer, and pesticides that caused the large area of the country ( 6 million acres) was cultivated with the
growth in agricultural output and production. improved seeds in 1969/70. Fertilizer consumption also saw a
Without any doubt, the most important ingredient in the dramatic increase of 150 per cent between 1965/6 and 1970/1
technology package was water, and water which was guaranteed and a rise of 235 per cent between 1965/6 and 1971/2. 3
and available as and when required. It was the key variable As Figure 3.1 shows, there were substantial increases in
that established the spread of Green Revolution technology, agricultural growth rates in each of the Green Revolution
since the new HYV seeds and the fertilizer package were years. Moreover, the output of major crops between 1960 and
critically dependent on the timely availability of a sufficient 1970 increased substantially: wheat production by 91 per cent
quantity of water. The increase in the availability of water, and rice by 141 per cent. Even other crops not directly related
either by tube wells or through canals, was estimated to be to the HYV seeds showed increases due to the extensive use
responsible for half of the total increase in output. 1 of other non-seed factors in the package. So it seems that the
In the first phase, where irrigation was the critical Green Revolution, at least as far as production, growth, and
component of agricultural production, privately owned tube output are concerned, was a resounding success. Nevertheless,
wells were the main factor responsible for the increase in we need to analyse the numerous issues and repercussions of
water availability. Between 1960/1 and 1964/5 about 25,000 this significant event in Pakistan's agriculturaJ history.
tube wells were installed, each costing Rs. 5,000-12,000, and
 Chapter 3 The Green Revolution and Land Reforms 33

3.1.1 The Issue of the Tube Wells the greatly increased profitability of agricultural
production, as the result of the availability of
While the growth in tube wells from a few hundred in 1960 HYV of foodgrains, subsidized fertilizer, cheap
to 75,000 in 1968 and 156,000 in 1975 was a key factor in electricity for tube well installation as well as
providing irrigation, and hence in permitting the adoption of improved provision of canal water following
the technology package, there are a number of issues around massive public surface water projects. 7
the apparently 'simple', and supposedly mere technical, issue
of sinking tube wells. Hence, due to the technology being used, tractors became
The first issue concerns the location of tube wells: they more useful on the farm.
were highly concentrated regionally, mainly in the rich, old, In 1959 there were 2,000 tractors in the country, which
settled districts and the canal colony districts of the Punjab; increased by over 8,000 per cent to 18,909 in 1968. Most of
indeed as many as 91 per cent of the 76,000 tube wells in these tractors were of the larger size, with 84 per cent above
1968 were in that province. Outside Punjab there was very 35 horse power. A World Bank Study of 1966 and the Giles
little tube well development. In the NWFP and Balochistan, Report in 1967 recommended the use of the larger tractors. 8
the shortage of accessible supplies of ground water, due to the Once these tractors were imported the pattern was set,
hard stony mountainous terrain, made the depth of drilling and large tractors still dominate today (see Chapter 5). Not
required for tube wells prohibitively expensive. In Sindh, the surprisingly, most tractors were owned by those with more
fact that ground water is saline meant that this water could than 100 acres of land.
not be used for agricultural purposes, and thus very few ln a study in the early 1970s, Carl Gotsch reported that over
tube wells were sunk. Thus, it was not the entire province 38 per cent of all tractors in the country were located in the
of the Punjab, but only a handful of districts in the Punjab Multan Division in Central Punjab, while 58 per cent were
that were able to sink tube wells and gain all the benefits of in the three divisions of Lahore, Multan, and Bahawalpur 9
the Green Revolution. This, some observers believe, caused There was also a very close link with tube well ownership,
interregional disparities to grow (see below). 4 where almost 75 per cent of privately owned tractors were on
Secondly, given their size and cost, tube wells were farms that had sunk tube wells. 10
mainly installed by landowners with over 25 acres of land. Clearly, tractorization took place in those areas which
Mahmood Hasan Khan writes that 'given the indivisible had 'complementary inputs, [was] carried out by the larger
and large capacity of diesel and electric tube wells, even the and more resourceful farmers and [was] associated with a
middle peasants cannot afford their fixed and variable costs. proximity to urban markets and services' 11 -similar to those
Therefore, there has been a high concentration of ownership found with tube wells.
of tube wells.' 5 Seventy per cent of tube wells were put in by
farmers owning over 25 acres, and only 4 per cent by farmers 3.1.3 Regional and Income Disparities
owning fewer than 13 acres. 6
If tube wells were the single most critical factor that was
Thirdly, inducement to invest in tube wells was given to
responsible for the Green Revolution, and if the sinking of
farmers through large public subsidies on fuel, installation
tube wells had a close correlation with tractorization, which
costs, and maintenance. Moreover, the Agricultural Develop-
in itself would have helped production further, a pattern
ment Bank of Pakistan (ADBP) followed a fairly liberal credit
emerges. Moreover, ifwe discovered another close correlation,
policy and made numerous loans to farmers so that they
that between large farms, in specific regions, and tractors and
could set up private tube wells.
tube wells, the impact on regional and income inequality
Essentially, then, the apparently 'neutral' effect of increasing
would be self-evident. Let us examine the evidence.
irrigation through tube wells seems to have had a number of
Hamza Alavi writes that 'because private tube well
important repercussions on interregional concerns, economic
development is closely relative to concentration of land in
status, and the ability to borrow money. The extensive
large farms, the "Green Revolution" has tended not only to
sinking of tube wells was far from scale neutral.
intensify already large disparities in income and wealth of the
different strata of rural population but, by the same token, it
3.1.2 Tractorization has also widened disparities between different regions' . 12 He
In Chapter 5, we discussed the critical issues in agriculture, adds that the incomes of the rural elite increased, while the
an important issue examined is tractorization and incomes of small farmers in the districts where the Green
mechanization. Tractors are now an important part of the Revolution was most successful, and in other poorer regions,
agricultural and the rural scene, but their contribution during 'have failed to improve or have not improved in the same
the Green Revolution had very important consequences. measure'. 13 These views are shared by most researchers on
Akmal Hussain writes: the Green Revolution. Moazam Mahmood argues that the
inputs, especially the installation of tube wells and access to
tractor imports were systematically encouraged credit, were inaccessible to poorer farmers and, hence, that
[after 1960] by the provision of cheap credit the latter did not share in the fruits of the Green Revolution,
through institutions such as the ADBP. At causing increases in relative poverty. 14
the same time the overvalued exchange rate Mahmood Hasan Khan says that, since the use of fertilizers
made tractors available in Pakistan at prices and new seeds was premised on the availability of adequate
considerably below world market prices. water supply, the lack of water caused 'serious interregional
Another factor stimulating tractorization was

l
34 Issues in Pakistan's Economy

and intra-farm disparities'. 15 The NWFP and the south- the political and rural control of the landed aristocracy' and
eastern parts of Sindh had inadequate access to water and emerged as the 'traditional profit maximizer'. 19
the HYV technology. The difference between the poor and rich This view has not been shared by the likes of Hamza
peasants also increased due to the unequal access to inputs. Alavi and Akmal Hussain, who believe that it was the
Carl Gotsch has argued that one should talk not of the large landlord and not the middle class which was at the
increase in agricultural growth in Pakistan, but rather of vanguard of this revolution. 20 They believe that farmers who
growth in a relatively few districts. These districts in the had land over 100 acres were dominant in the adoption of
Punjab-Lyalpur (Faisalabad), Montgomery· (Sahiwal), and the new technology and in reaping the fruits of the Green
Multan-grew at 8.9 per cent per annum between 1959/60 Revolution. Alavi feels that the new mechanized methods
and 1964/5, twice the 'national' rate. Thus, as Shahid Javed did not bring into existence a new class of capitalist farmers,
Burki has argued, it was the farmers who owned between but that it was 'mainly the big landowner who ... made the
50 and 100 acres, almost all of them in the Punjab, who greatest progress in the direction of farm mechanization'. 21
produced 'Pakistan's' Green Revolution. 16 Nevertheless, they all agree that the impact was one of
deepening capitalist relations.
3.1.4 Elite Farmer Strategy and Capitalist There was increased leasing-in of land as large farmers
were now willing to take back the land previously leased
Development to sharecroppers. Due to the large scale of tube wells and
Some observers have argued that the Green Revolution tractors, more and more land was resumed for production
was 'an elite farmer strategy because ... it rest[ed] on the under capitalist means. Not only that: owners of this
economic power of large landholders who (were] its principal technology began to lease-in their neighbours' land as well.
beneficiaries'. 17 For them, this rural elite constitutes less than These farmers began to evict tenants or send them to more
5 per cent of the rural population of Pakistan and was the marginal portions of the land, and began to hire wage labour
only real beneficiary of the Green Revolution. Akmal Hussain instead. Self-cultivation was on the increase in areas where
believes: this technology was used. There was greater income in the
hands of landowners, who began to purchase manufactured
The new technology made it possible to accelerate goods. As demand and consumption expanded, markets
agricultural growth substantially through an began to emerge around small towns. A number of attributes
'elite-farmer strategy' which concentrated the particular to capitalism ( see Chapter 2) began to dominate
new inputs on large farms. Now the crucial
determinant in yield differences became not the in the agricultural sector, probably ending once and for all
labour input per acre in which small farms had the debate on whether agriculture in Pakistan was feudal
been at an advantage, but the application of the or capitalist. Capitalism had entrenched itself forcefully and
seed-water-fertilizer package over which the permanently.
large farmers with their greater financial power
had superior access. Thus the technocrats felt 3.1.5 Social and Political Effects
that the Green Revolution had made it possible
to accelerate agricultural growth without having Although the economic effects of the Green Revolution
to bring about any real change in the rural power were easily observable, with growing overall output and
structure. 18 increasing incomes for some, the social and political effects
took a little longer to emerge. Amongst the economic factors
Despite (or possibly because of) these anomalies in the that had social and political impacts were: the displacement
benefits of the Green Revolution, one outcome upon which of labour, both at the low end of the spectrum in the form
all observers are agreed is that the Green Revolution resulted of sharecroppers, and at the higher end, where those with
in the development and entrenchment of capitalist farming land either sold it or rented it out to neighbours; increased
in the regions where the technology was adopted. However, rural-urban migration; an increase in consumerism; the
there are some differences of opinion over who were the emergence of small towns near agricultural areas that were
leaders of this change in the mode of production and in using capitalist techniques, and hence required new and
farming techniques. different services; and the awareness of disparities between
Shahid Javed Burki and others believe that the rapid farmers and regions.
agricultural growth was led by a new breed of dynamic · There was also a change of attitude towards education,
middle-class farmers who were capitalist to start with. These especially amongst the big farmers. Writing at that time,
farmers had been created by the shift in political power under Hamza Alavi argued that 'the revolution in mechanical
Ayub Khan, who, Burki argues, through his Basic Democracies technology and chemical technology which is now employed
scheme took away political power from the traditional big in agriculture is making new demands upon the capabilities
landlords and gave it to the middle-class landowners. It was of the farmers. They are. becoming increasingly aware of the
these middle-class farmers, owning between 50 and 100 values of education in terms of their own situation, namely for
acres of land in the Punjab, who 'produced' the revolution in better farming and coping with new technologies.' 22 However,
Pakistani agriculture. Ayub Khan's creation, the rural middle the emphasis upon the -social sectors was not particularly
class, was considered a 'new powerful and independent impressive in the 1960s and education was not considered
factor in the political system', which had been 'released from important by the Ayub Khan regime ( see Chapter 19).

J
 Chapter 3 The Green Revolution and Land Reforms 35

Before the Green Revolution there was a lot of talk about deeper, more entrenched, capitalist relations of production
the small farmer and how efficient he used to be. However, than those that had existed earlier in agriculture.
as the new technology spread, the size-efficiency relationship Development and growth, especially of capitalist relations,
was reversed: rich peasants and landlords made most and is a disharmonious process, often creating but also destroying,
best use of the lumpy investments in a technology that, and having negative consequences for some sections of
as we have seen, was not scale neutral and was biased in the population. However, one needs to examine the overall
favour of the large landlord. Mahmood Hasan Khan argues nature of development. Hamza Alavi, for example, argues
that 'the structure of technology and the direction of credit that 'the present course of the "Green Revolution" ... has
flows themselves reflect the influence of large landowners brought about a deterioration in the conditions of life of
and capitalist farmers on public policy'. 23 Moreover, it is a majority of the population and further progress of farm
important to emphasize the fact that, since Punjab and Sindh mechanization is creating a situation when a very large
are the backbone of Pakistan's agricultural economy, with number of the rural population is faced with the prospect of
more than 75 per cent of the country's population, and 80 having no viable means of livelihood'. 26 At a micro level this
per cent of its cultivated and cropped area, the impact of the scenario did happen, but this analysis ignores the impact of
Green Revolution was restricted to these provinces. Moreover, the greater dynamic of change (even progress) that resulted
because of the water and technology packages identified in the use of this technology. Moreover, Hamza Alavi's lament
above, the NWFP and Balochistan missed out on the Green ignores his own analysis where he recognizes that the Green
Revolution of the 1960s. (However, Chapter 5 reveals some Revolution was geared to the needs of large landowners, and
interesting recent trends regarding increases in output and was even made by the bureaucracy in tandem with their class
production in these two provinces.) allies, and hence that the outcome was inevitable. Any other
Nirmal Sanderatne has been particularly observant about outcome, given the nature of the state, class alliances and the
the political consequences of the Green Revolution and focus on large landowners, would have been unlikely.
relates them to the rise and subsequent victory of the Pakistan Akmal Hussain, too, falls into such a trap. He realizes that
People's Party in 1972. He argues that 'the overwhelming the new technology did accelerate growth in agriculture
electoral victory of the PPP amply justified its strategy [of substantially through an elite farmer strategy, and that the
making promises to the peasantry on agrarian reform] and 'growth of capitalist farming accelerated considerably in the
demonstrated the validity of the hypothesis advanced earlier late '60s as large landowners began to resume rented out
that the nature of agricultural development in the past, while land to operate their own farms with hired labour and capital
successful in terms of increasing aggregate production, had investment' .27 But, for Akmal Hussain, 'it was this process of
intensified existing economic disparities and dissatisfactions. the development of capitalist farming which has generated
In turn these had radicalized Pakistan's politics.' 24 The PPP new and potentially explosive contradictions in Pakistan's
won conclusively in the heartland of the Green Revolution rural society'. 28 Again, any other outcome would have- been
and some observers found a 'high correlation between the unlikely. Given the existing contradictions, class alliances,
voting for the PPP and the area under Mexi-Pak varieties of and the role of the state, the result was a natural consequence
wheat. The PPP won in all but one of the constituencies in of the policies followed.
which more than 56 per cent of the wheat area was under the
new varieties.' 25
The emergence of the Pakistan People's Party on the 3.2 LAND REFORMS 29

I
Pakistani political scene and its subsequent victory in the
1970 general election were the result of the policies of Ayub Pakistan has had a long and varied history of land reform.
Khan's decade. The election results from the rural areas Most attempts have been just that: attempts without any
were a direct consequence of the Green Revolution, and serious purpose. Table 3.1 gives details of many such attempts,
even urban areas were not spared the outcome of agrarian most of which failed. From 1945 onwards there was talk of
,I change as migrants from rural areas began to play some role reform in the nature of tenancy and in the structure of
l in industrial and urban areas as well. With hindsight, one landholding, but little came of it. The reasons for this are
: can say that the 1970 election, with the victory of the Awami
League in East Pakistan and the People's Party in West
fairly clear and not surprising. In the Central Council of the
Muslim League in 194 7 there was a large representation from
I
Pakistan, may have been the only election held in Pakistan the (very) large landlords of the provinces of the Punjab and
where economic conditions so directly influenced political Sindh-these comprised 50 per cent of councilmen from
outcomes. Perhaps it was the degree of turmoil and disparity Punjab and 60 per cent from Sindh. Furthermore, with quite
that emerged after the Green Revolution of the 1960s, as it exploitative conditions in rural areas in the 1940s, involving
usually does after any revolution, which made such politics complete domination and control by landlords, it was a little
possible. Since then, development in Pakistan has probably umealistic to assume that they themselves would be willing
been less disharmonious, and hence change has been more to put a dent in their source of power ( see Chapter 2, Table 2.2
gradual and less disruptive. The Green Revolution was the for landholding patterns in 1947). Landlords were the most
first big shock that disrupted gradual growth, especially in significant class in the Muslim League, comprising 163 of the
agriculture, but also more generally across Pakistan. There 503 Muslim League parliamentary members in 1942. From
is little doubt that it radically transformed the economic, the time of independence, all Chief Ministers of the Punjab,
political, and social direction of the country, establishing
36 Issues in Pakistan's Economy

Table 3.1
Key Dates and Features of Land and Tenancy Reforms in Pakistan

Year Reform Key features and recommendations

1945 Tenancy Laws Committee, Sindh Occupancy rights should be granted to haris who had personally cultivated at
least 4 acres of land annually for the same zamindar for 8 years.

1947 Hari Committee, Sindh Defended the landlords; famous Note of Dissent from one member who argued
for radical changes in the land tenure system.

1949 Muslim League Agrarian Abolition of jagirs; security of tenure for all tenants; share rents should replace
Committee Report rents-in-kind; ceiling on landholdings of 150 acres irrigated and 450 acres for
unirrigated; land distribution to tenants and compensation to landlords (report
shelved).

1950 Punjab Tenancy Act No charge by landlords from tenants other than 50 per cent crop share.

1950 Sindh Tenancy Act Permanent rights of tenancy to long-term tenants; eviction rights to landlords
under certain conditions.

1950 Punjab Protection and Restoration Eviction of tenants allowed only under specified conditions.
of Tenancy Rights Act

1952 Punjab Tenancy (Amendment) Act Abolition of occupancy tenancy; transfer of ownership rights to occupancy
tenants; share of landlord reduced from 50 per cent to 40 per cent.

1955 Executive Order Abolition of jagirs and other revenue-free grants; like other zamindars, now
jagirdars required to pay land revenue. Landlordism remained intact, for no limit
to ownership as long as all legal dues paid to the government.

1955 Challenge to the Executive Order Challenge upheld by Sindh High Court.

1959 Land and Tenancy Reforms - Ceiling on landholdings: 500 acres irrigated, 1,000 acres unirrigated additional
Martial Law Regulations 64, land allowed to bring landholding to equivalent 36,000 PIUs; resumed land to
64A and 64B be sold first to tenants and then to small farmers; abolition of jagirs; occupancy
tenants made owners; all tenants, haris and tenants-at-will given legal protection;
rents to be paid in kind and all charges other than crop share abolished.

1972 Land and Tenancy Reforms - Ceilings on landholdings: 150 acres irrigated, 300 acres unirrigated or equivalent
Martial Law Regulation 115 and of 12,000 PIUs + 2,000 PIUs for tractor and tube well owners; no compensation
amendments to landowners, land redistributed without charge to landless tenants cultivating
resumed land; untenanted resumed land redistributed without charge to
small owners/tenants with holdings below subsistence; share system remains
unchanged; land revenue, water rates, and seed costs borne by landlords and
cost of fertilizers and pesticides to be shared equally; tenant eviction decided by
revenue courts if tenant failed to pay rent, failed to cultivate land, sublet tenancy,
or rendered land unfit for cultivation.

1977 Land Reforms Act Landholdings: 100 acres irrigated, 200 acres unirrigated or 8,000 PIUs
equivalent; compensation to landowners on resumed land at Rs. 30 per PIU;
redistribution as in 1972.
This Act was completely ignored by the military government after July 1977.

Sources: For 1945 and 1947, Khan, Mahmood Hasan, Underdevelopment and Agrarian Structure in Pakistan (Boulder, Colorado: Westview
Press, 1981). For the rest of the chart, Nabi, ljaz et al. The Agrarian Economy of Pakistan: Issues and Policies (Karachi: Oxford
University Press, 1986), 60.
 Chapter 3 The Green Revolution and Land Reforms 37

Sindh and NWFP were big landlords. If the power of landlords I<han 34 argue that the Basic Democracies system maintained
prior to 1947 was substantial, the creation of Pakistan the hold of the landlord on the political system of Pakistan.
increased their power even further. Many of them were able Nirmal Sanderatne also argues that the 1959 land reforms
to acquire large tracts of land from the fleeing Hindus, while were an eyewash, where the power of the ruling coalition
others bought land from moneylenders at cheap rates in the of landowners, bureaucrats, and industrialists was left well
mayhem that ensued. Others, because of their influence in intact.
the area, were able to get the revenue officials to sign over
land to them, in excess of their due share. Hence, there was 3.2.1 The 1959 Land Reforms
little scope for serious reform in agriculture at the time of
partition. Table 3.1 presents the salient features of the Ayub I<han land
The 1949 Muslim League Agrarian Committee proposed reforms of 1959. The reforms were meant to put ceilings on
some measures that could have addressed the issues related landholdings and were supposed to be an attempt to change
to land, its distribution, and its use. The report was shelved tenancy regulations.
soon after being finalized. The hold of large landlords As we showed in the previous chapter (Table 2.2), before
on political power can be demonstrated by the provincial the land reforms of 1959 the distribution of land ownership
elections held in the Punjab in 1951, where they won 80 per was highly skewed in favour of a few large landlords who
cent of the seats, while in the provincial election in Sindh in controlled large tracts of land. Approximately 6,000 owners
1953 large landowners won 90 per cent of seats. 30 Mahmood owned more than the ceiling of 500 acres permitted in 1959.
Hasan I<han writes that in the 1950s, They constituted 0.1 per cent of the owners, but owned 7.5
million acres or 15.4 per cent of the total land. Table 3.2
the landed elite continued to exercise their shows that in all there were only 5,064 declarants, of which
traditional power without hindrance or only 15 per cent or 763 were affected by the ceilings on
opposition in the countryside. In this they individual holdings. The area of land owned by the affected
were supported by the civilian bureaucracy, declarants was 5.5 million acres, of which only 1.9 million (35
as was evidenced by the failure of tenancy per cent) was resumed. The main portion of their land was
reform measures legislated in the Punjab and retained by the landlords due to numerous provisions made
Sindh. More significantly, as new irrigation in the law, such as for the transfer of land to dependants
and settlement schemes in the Punjab and
and other members of their families, and exemptions for
Sindh were undertaken in the mid-fifties, civil
and military bureaucracies were clearly given numerous categories.
preferential treatment for irrigated land. 31 Not only was a small amount of land handed over, but of
that land, more than half (57 per cent) was uncultivated. Of
Thus, the nexus of political power between the civil and this, parts were hills or deserts-terrain which was not fit
military bureaucracy and the landlords ensured that the for cultivation-and some consisted of land that needed to
status quo would not be disturbed. As Mahmood Hasan I<han be developed in order to be made fit for cultivation. Since
argues, a central feature of the 1959 land reforms was that owners
were to be paid compensation for their lands, many benefited
it seems fair to conclude that the approach to by handing over poor-quality lands to the government. As
land reforms depended on the class character of Mahmood Hasan I<han argues, 'given the high proportion
the power elite. As long as landlords occupied a of uncultivated land surrendered in certain districts, it is
central place in the balance of power, and their clear that landowners received payments for land which was
position remained without threat in rural areas, producing nothing and most of it would require improvement
no land reforms could have been implemented.
after it was sold to new owners'. 35 Compensation was
The political system created new pressures which
the landed elite could not successfully resist. 32 paid at rates of Rs. 1-5 per Produce Index Unit (PIU) (see
Appendix 3.1) and in 'fifty half-yearly equated instalments in
The first land reforms in Pakistan were undertaken by transferable but non-negotiable bonds bearing 4 per cent per
a military regime that was perceived to be modern and annum interest on unpaid balance'. 36
progressive. The Ayub I<han regime did not owe its allegiance Another feature of the 1959 reforms was that resumed land
to, and nor was it dependent on, the influence of the agrarian was to be sold to landless tenants. By 1967, only 50 per cent
landed class, and thus it was in a position to undertake some of the resumed land had been sold, with only 20 per cent of
sort of reform. However, although the reforms set out to break the resumed land sold to landless tenants. The remainder
the power of the large landholding class and to make tenancy was auctioned to rich farmers and civil and military officials.
more humane, their impact was severely limited. What they According to one estimate, only 67,000 landless tenants and
did was to distribute power away from some landlords and small owners could have bought the resumed land sold to
include the civil and military elite in their strategy. While them. 37 The land was sold at the rate of Rs. 8 per PIU, payable
Shahid Javed Burki has implied that these land reforms in fifty half-yearly instalments with a 4 per cent annual
were the precursor to the dynamic middle-class farmer of the interest rate on the outstanding balance.
Green Revolution, who emerged as the main beneficiary of Due to the abolition ofjagirs in 1959, 0.9 million acres were
the Basic Democracies system, most other scholars disagree declared as jagir lands, of which one-third were resumed by
(see section 3.1). Hamza Alavi 33 and Mahmood Hasan the government. The purpose of the abolition of revenue-free
38 Issues in Pakistan's Economy

Table 3.2
Number of Declarants and Resumed Area under the Land Reforms Regulation of 1959

Area of
Number of declarants Area Area Area
affected
Province/division retained gifted resumed
declarants
All Unaffected Affected
(acres) (acres) (acres) (acres)

Punjab 2,152 1,844 308 3,637,648 2,306,657 288,715 1,044,276

Multan 838 720 118 2,838,325 1,934,664 225,411 672,250
Sargodha 606 504 102 412,213 165,033 28,701 218,479
Rawalpindi 249 227 22 148,827 53,019 9,947 85,861
Lahore 102 85 17 38,813 25,631 4,008 9,176
Bahawalpur 357 308 49 199,470 128,310 12,650 58,510
Sindh 2,388 1,993 395 1,487,253 655,384 169,803 662,066
Khairpur 1,006 870 136 637,029 368,154 67,903 200,972
Hyderabad 1,375 1,117 258 842,872 281,220 101,900 459,752
Karachi 7 6 7,352 6,010 1,342
Punjab and Sindh 4,540 3,837 703 5,124,901 2,962,041 456,518 1,706,342
Pakistan 5,064 4,301 763 5,478,945 3,077,738 497,419 1,903,788

Source: Khan, Mahmood Hasan, Underdevelopment and Agrarian Structure in Pakistan (Boulder, Colorado: Westview Press, 1981 ), 163.

lands (jagirs) was to transform them into revenue-paying were left unchanged, to be governed by the
tracts. In 1960, the government realized about Rs. 3 million tenancy acts passed in the early fifties and to be
from this provision. 38 supervised by the revenue service. 41
The land reforms allowed farmers to have their lands
valued in PIUs, up to a maximum of 36,000 PIUs. The PIU 3.2.2 The Bhutto Reforms of 1972
is 'estimated as a measure of the gross value per acre of
The 1972 reforms were different from those of 1959 in
land by type of soil and was, therefore, seen as a measure many respects. Firstly, the philosophy behind the Bhutto
of land productivity'. 39 However, the measurement of the
reforms was based on the social democratic leanings of
PIUs was based on pre-partition revenue settlements, which
the Pakistan People's Party. In March 1972, Bhutto gave
substantially under-reported the true value of i the land.
a speech in which he said that his land reforms would
Thus, even if we take the 1959 PIU as the correct measure
'effectively break up the iniquitous concentrations of landed
of productivity, the 36,000 limit was far greater than the
wealth, reduce income disparities, increase production,
allotted ceiling of 500 acres of irrigated land. For example, it
· reduce unemployment, streamline the administration of land
has been calculated that in the irrigated areas of Sindh the
revenue and agricultural taxation, and truly lay down the
PIU per acre would have been about 20. This meant that each
foundations of a relationship of honour and mutual benefit
individual could own at least 1,800 acres according to the Iaw
between the landowner and tenant'. 42 The Manifesto of the
which limited holding to 500 acres. 40 (For a note on PIUs, see
People's Party laid the premise for this action by stating
Appendix 3.1. ).
that 'the break up of the· large estates to destroy the feudal
Mahmood Hasan Khan sums up his evaluation of the
landowners is a national necessity that will have to be carried
reforms as follows:
through by practical measures'. 43
It is now evident that the land reforms of
The main features of the reforms are shown in Table 3.1. A
1959 could not have reduced the feudal power few features distinguished the 1972 reforms from the earlier
of landlords. For one thing, the generous ones. While ceilings had been further lowered in 1972 and a
ceiling on individual holdings, with transfers number of exemptions removed, possibly the most prominent
and exemptions, defined as they were in PIUs, feature of the reforms was that, unlike in 1959, land resumed
left the concentration of land in the hands of from landowners would not receive any compensation, and
landlords. If we accept that the average retained this land was to be distributed free to landless tenants. In
area by the so called affected landlords was the addition, all those peasants who had acquired land under
de facto ceiling, then its limit was 7,489 acres the 1959 reforms and had dues outstanding, had their
in the Punjab, 1,659 acres in Sindh, and the
dues written off and were not required to make any further
average for the country was 4,033 acres. Further,
almost three-quarters of resumed land, at least payments.
in the Punjab, was uncultivated and untenanted. Of the land declared to be above the ceiling by the
This meant that the amount of land available for landowners, after they had made generous use of the
redistribution (and remember by sale) was even possibilities for getting around the imposition, only 42 per
more limited. Further, landlord-tenant relations cent was resumed in the Punjab, while the figure in the
I' Chapter 3 The Green Revolution and Land Reforms 39

r
~ Sindh was 59 per cent. In all, 0.6 million acres were resumed,
far less than the 1959 figure and constituting only 0.001 per
3.3 SUMMARY AND FURTHER READING

I
cent of the total farm area in the country. 44 3.3.1 Summary
The problem of the evaluation of the Produce Index Units
It seems that the technological package that resulted in the
arose once again. The ceiling of the land was defined both
Green Revolution in the mid-1960s was focused on the more
in area and PIUs, and the landowner could retain the larger.
well-to-do farmers in the more prosperous regions. This

'I
However, Mahmood Hasan Khan writes that
is factually correct, but fails to highlight the externalities
the most serious problem of defining the ceiling and other repercussions of this important process. The
t in PIUs was that their values had remained demonstration effect of using the technological package
unchanged, while almost everything affecting was substantial, but more importantly, a supposedly simple
their value had changed drastically in most areas technological intervention let loose many economic and
of the Indus Basin. The produce value of. an social processes, resulting in migration, labour displacement,
area of land was being grossly underestimated the formation of small towns, skilled labour power, and a

I
in the Indus Basin, thanks to changes in prices, host of other political outcomes. Our evaluation of the 1959
cropping intensities and patterns, irrigation, and 1972 land reforms, however, shows that they failed to
etc.45
make substantial changes in the landowning structure of the
country. Shahid Javed Burki argues that the 1959 reforms

I
The result was that with 12,000 PIUs one could get away with
created the enterprising middle farmers-a view that is
400 acres in the Punjab and 480 in Sindh. Moreover, with
contested by Hamza Alavi, who argues that landlordism
other exemptions for tube wells and tractors, a family could
became more established and entrenched. Of course, given
have retained up to 932 irrigated acres in the Punjab and
the hold of the landowning class on government and its
1,120 in Sindh! 46 (See also Appendix 3.1.)
r institutions, this is not very surprising. The huge loopholes
Although a lot of propaganda was issued about the success
that existed in the 1959 reforms to make intra-family
of the 1972 reforms, as the resumed land was far less than in
and intra-household transfers meant that the landowning
1959, only 50,548 persons benefited from the redistribution of
structure remained largely unaltered. Hence, effective
308,390 acres during 1972-8. Only 1 per cent of the landless
land reform in Pakistan will continue to be a problem.
tenants and small owners benefited by these measures. Table
Nevertheless, we show in the next two chapters that, even
3.3 shows that of the land resumed in 1959, 6 per cent still
if formal land reforms are not undertaken in Pakistan, other
needed to be distributed even after 38 years, and 39 per cent
social and economic processes can achieve similar results.
of the area resumed under the 1972 reforms was still held Smaller landholdings and more capitalist lines of agricultural
by the government despite the presence of a large number of production have developed despite a lack of adequate land
landless cultivators. reform. Demographic and economic changes over the last
twenty years have resulted in evolving a different pattern
of ownership and production than in the past. While these
processes are not a substitute for land reform, it is important
to realize their contribution towards achieving somewhat
Table 3.3 similar ends. However, in Chapter 5 we do make the
. Progress of Implementation of Land Reforms up to June argument for land reforms.
1994 (in Hectares)
3.3.2 Further Reading
Area Area Persons
Province Balance Amongst the books on the two topics covered in this chapter,
resumed disposed of benefiting
the following are recommended:
1959 reforms I<han, Mahmood Hasan, The Economics of the Green Revolution
Punjab 511,244 505,082 6,162 109,889 in Pakistan (New York: Praeger, 1975); I<han, Mahmood
Sindh 346,307 300,091 46,216 46,131 Hasan, Underdevelopment and Agrarian Structure in Pakistan
NWFP 112,108 97,287 14,821 24,314 (Boulder, Colorado: Westview Press, 1981 ); Robert D Stevens
Balochistan 53,268 53,196 72 6,221 et al. (eds.), Rural Development in Bangladesh and Pakistan
Total 1,022,927 955,656 67,271 186,555 (Honolulu: University Press of Hawaii, 1976 ); Ali, Karamat
(ed.), Pakistan: The Political Economy of Rural _Development
1972 reforms (Lahore: Vanguard, 1986 ); Hussain, Akmal, Strategic Issues
Punjab 121,593 94,583 27,010 36,017 in Pakistan's Economic Policy (Lahore: Progressive Publishers,
Sindh 112,920 72,477 40,442 17,167 1988); Ahmed, Viqar and Rashid Amjad, The Management of
NWFP 57,415 55,122 2,293 12,811 Pakistan's Economy, 1947-82 (Karachi: Oxford University Press,
Balochistan 189,316 73,755 115,562 5,506 1984); and Ijaz Nabi et al. The Agrarian Economy of Pakistan:
Total 481,244 295,937 185,307 71,501 Issues and Policies (Karachi: Oxford University Press, 1986 ).

Source: Government of Pakistan, Agricultural Statistics, 1993-94

(Islamabad, 1995), 129.
40 Issues in Pakistan's Economy

Appendix 3.1
The agreed formula was adopted by both the governments
The measurement of Produce Index as a pressing need of the time with a view to settling the
Units and a case for their revision refugees without loss of time. lt is no denying the fact that
the objective i~ accepting the formula was to ti)' to allot land
M. Shafi Niaz documents the history of Produce lndex Units
holdings, as best as possible, of equal value to the immigrants
and how they are measured. He makes the strong case for their
so that they could quickly start to earn their livelihood for the
reappraisal as follows:
upkeep of their uprooted families.
This formula served the purpose of the day despite
Before the partition of the lndian sub-continent, there was
the inherent weakness it had. According to the available
an obligation on the part of the governments to periodically
information, the assessment of land was not carried out on
carry out revenue assessment of land holdings. This period
an extensive and comprehensive scale in provinces other than
generally varied between 15 to 20 years. The last assessment
the Punjab. So the exercise in the three provinces had to be
that had taken place before partition in the undivided Punjab
carried out in haste so that the rehabilitation process was not
was in the mid-thirties. The main idea of such assessments
held up and to let it go ahead without any undue hindrance.
was to revise the land revenue in accordance with the changed
A close reading of the methodology as quoted above, would
values of the land. For such valuation, each administrative
raise a number of questions about the validity of the produce
district was divided into assessment circles. ln each such circle,
index units and it would not serve a useful purpose to go into
land was categorized whether it was chahi (well-irrigated),
the details here. lt is, however, generally believed that in the
chahinehri (well-cum-canal irrigated), flood irrigated, or
NWFP and the Punjab, the PlUs were worked out, inter alia,
barani (rain-fed) and so on.
on the basis of 'total' production of land while in Sindh these
According to the information contained in the Report of
were worked out on the basis of the shares of the produce
the Land Reforms Commission for West Pakistan, 1958-59,
which the landlord got and these varied generally between
the produce value per acre of each class of soil in the various
50-60 per cent of the total produce. A disparity thereby
assessment circles was worked out on the basis of average
seemed to have developed at the time of the formulation of
'matured-acre-yields' and prices adopted by the Settlement
the PlUs which has its implications at the implementation
Officer at the time of the last settlement of each district. The
stage, whenever these were used as a basis for policy decision.
total produce value thus obtained for each class of soil in
The result has been that the farmers in the NWFP and the
each assessment circle was, therefore, divided by the average
Punjab were bound to bear the inequalities in the allotment
matured area in order to arrive at the average productive value
of land at the time of independence and in the future use of
for one matured acre of land.
PlUs, particularly when a ceiling on individual ownership of
The Land Reforms Commission Report further states that
land was determined as a result of land reforms in 1958-9,
for working out a reasonable formula, it was felt by both the
1972 and 1977. The situation in Balochistan was not much
governments that since the settlement operations were carried
different. The province-wise details are given below.
out at different times in different districts, 'suitable' multiples
For the Punjab, as mentioned above, the PlUs were worked
had to be applied to the produce values, as described above,
out more systematically. The assessment circles, totalling
for bringing them to uniform levels in both the Punjab and
265 were made the basis, and each assessment circle was
other agreed areas of lndia.
divided according to the status of the soil, irrigation facilities
For this purpose, a basic period of three years (excluding
and other identical factors. ln all, some 1363 areas were
unusually bad years) was selected for all the districts in both
categorized. Of these areas, about 600 (or 44 per cent) were
the Punjabs, and average value of the output per acre of sown
those where the PlUs were above 40. lf agricultural tax is to
area in the year in which actual prices corresponded, as far as
be le-;_,ied on lands having 40 PlUs or more, 40 per cent of the
possible, with the prices assumed by the Settlement Officer
areas would be liable to land tax.
were ascertained. This period was called the 'settlement
ln Sindh, PlUs were worked out by each Taluka (tehsil) and
period'. Then the average value of the output per sown acre in
the land in each Taluka (74 in all at that time) was, in general,
this base period was calculated and figures of produce given
categorized on the basis of the type of irrigation (flow, lift,
by the Settlement Officers were multiplied by the ratio which
combined) available for raising crops. The total number of
the average value of the produce per acre of the base period,
such categorized areas (as one would call them) amounted to
bore to that of the settlement period. This methodology
480. lt is very interesting to note that it was only in one out
can be explained, by an example of Tehsil Lahore for the
of the 480 areas where the PlUs were 42 and i:n all other areas
assessment circle 'Bet Chahi' having 'chaht (irrigated land)
these were much less than 40. So, if agricultural tax is to be
as the class of soil. ln this case, the total area involved was
levied on land having 40 PlUs or more, only one of 480 areas
10,117 acres having a gross produce value of Rs. 409,104.
would be liable to tax; other areas should get exemption.
The produce value for the 'matured' area comes to 40 (gross
The basis for working out PlUs in the NWFP province is
produce value divided by the total matured area). This is
similar to that of the Punjab. The total assessment circles
multiplied by 2.0, the worked out ratio for the Lahore district.
.were about 100. These circles were divided into about 480
The resultant figure of 80 is the produce index (or produce
areas depending mainly on the mode of irrigation facilities,
index unit) for the assessment circle referred to above.
 Chapter 3 The Green Revolution and Land Reforms 41
t
I type of crop grown, and so on. Of these 480 areas, about
200 or 40 per cent have PlUs more than 40. lf agricultural
as the basis for land tax. lf PlUs have to be used in future
for any useful purpose, these must be redetermined. And for
l tax is levied on land having 40 PlUs or more, about 40 per
cent of the areas would be liable to land tax. The PlUs in
this purpose, land assessment may have to be carried out as a
prerequisite. Time and effort for the exercise will be well spent
Balochistan province were prepared only for 4 tehsils divided and will bring dividends in the form of, amongst other things,
into 16 assessment circles in which PlUs for 44 types of land upward revision of the land revenue as the value of land must
were recorded. Only 17 out of these have PlUs above 40 which have gone up manifold since last assessment operations were
could be liable to agricultural tax if it is levied on areas having carried many decades ago. This would undoubtedly also help
40 PlUs or more. the provincial governments to improve their resource base and
The above facts and figures bring out not only the disparity all the provinces would get an equitable and uniform basis for
that exists in the methodology used in working out PlUs in future use of PlUs.
the various provinces but also show that these are by now
far out-dated and thus unrealistic and unequita ble for use
either in determining the ceiling on ownership or for using Source: Niaz, M. Shafi, Dawn, 7 October 1995.

NOTES
1. Alavi, Hamza, 'The Rural Elite and Agricultural Development 19. Burki, Shahid Javed, op. cit., 1976.
in Pakistan', in Ali, Karamat (ed.), Pakistan: The Political 20. Alavi, Hamza, op. cit., 1986; Hussain, Akmal, op. cit., 1986.
Economy of Rural Development (Lahore: Vanguard, 1986 ), 34. 21. Alavi, Hamza, op. cit., 1986, 44.
2. Sanderatne, Nirmal, 'Landowners and Land Reforms in 22. Ibid. 31.
Pakistan', in Ali, Karamat, op. cit., 1986, 306. 23. I<han, Mahmood Hasan, op. cit., 1981, 44.
3. Ibid. 317. 24. Sanderatne, Nirmal, op. cit., 309.
4. Khan, Mahmood Hasan, Underdevelopment and Agrarian 25. Ibid. 309.
Structure in Pakistan (Boulder, Colorado: Westview Press, 26. Alavi, Hamza, op. cit., 55.
1981 ); and Khan, Mahmood Hasan, 'Classes and Agrarian 27. Hussain, Akmal, op. cit., 187.
Transition in Pakistan', in Ali, Karamat, op. cit., 1986. 28. Ibid. 188.
5. Khan, Mahmood Hasan, op. cit., 1986, 446. 29. This section is drawn from I<han, Mahmood Hasan, op. cit.
6. Sanderatne, Nirmal, op. cit., 1986, 307. 1981; Sanderatne, Nirmal, op. cit.; and Ahmed, Viqar and
7. Hussain, Akmal, 'Technical Change and Social Polarization Rashid Amjad, The Management of Pakistan's Economy, 1947-82
in Rural Punjab', in Ali, Karamat, op. cit., 1986, 320. (Karachi: Oxford University Press, 1984).
8. Ibid. 322. 30. I<han, Mahmood Hasan, op. cit., 1981, 147.
9. Gotsch, Carl H., 'Tractor Mechanization and Rural 31. Ibid. 143.
Development in Pakistan', in Ali, Karamat, op. cit., 1986, 65. 32. Ibid. 150.
10. Ibid. 65. 33. Alavi, Hamza, op. cit.
1 L Ibid. 67. 34. Khan, Mahmood Hasan, op. cit.; 1981.
12. Alavi, Hamza, op. cit., 1986, 37. 35. I<han, Mahmood Hasan, op. cit., 1981, 164.
13. Ibid.53. 36. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 124.
14. Mahmood, Moazam, 'The Pattern of Adoption of Green 37. Khan, Mahmood Hasan, op. cit., 1981, 166. This figure
Revolution Technology and its Effect on Landholdings in the differs from that in Table 3.3 as it is much older and is
Punjab', in Ali, Karamat, op. cit., 1986, I 91. probably calculated differently.
15. Khan, Mahmood Hasan, op. cit., 1986, 447. 38. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 121.
16. Burki, Shahid Javed, 'The Development of Pakistan's 39. Hussain, Akmal, op. cit., 1988, 180.
Agriculture: An Interdisciplinary Explanation', in Stevens, 40. Khan, Mahmood Hasan, op. cit., 1981, 159.
Robert D et al. (eds.), Rural Development in Bangladesh and 41. Ibid. 166-7.
Pakistan (Honolulu: University Press of Hawaii, 1976), 308. 42. Sanderatne, Nirmal, op. cit., 1986, 309.
17. Alavi, Hamza, op. cit., 1986, 21. 43. Khan, Mahmood Hasan, op. cit., 1981, 171.
18. Hussain, Akmal, 'Land Reforms in Pakistan', in Hussain, 44. Hussain, Akmal, op. cit., 1988, 182.
Akmal, Strategic Issues in Pakistan's Economic Policy (Lahore: 45. Khan, Mahmood Hasan, op. cit., 198_1, 176.
Progressive Publishers, 1988 ), 178. 46. Ibid. 177.
 7

1
The Nature and Direction of
Agrarian Change
l
We have established the premise in the previous chapter that which class constitutes what share in the agricultural sector
capitalism in agriculture began to establish itself early in as landowners and as producers of Jabour power. The use
the twentieth century following a number of interventions of class helps us to observe important trends in the types
made by the British colonialists in the region that now of change taking place. For example, how is the process of
constitutes Pakistan. The feudal or pre-capitalist structures, capitalism being consolidated over time? Can one identify
while prevalent, were slowly being dismantled and dissolved. feudal remnants, and what has been their contribution over
Pre-capitalist forms have shown a resilience in many parts time? However, while we would like to use the concept of
of the world despite the development of capitalism. Notably, class to study agrarian transition, data of this nature are not
peasant forms of farming which should have been dissolved easily obtained. Despite its numerous shortcomings we must
under capitalism, where two classes of owners are supposed make use of what is published (see Appendix-4.1 ).
to emerge and coexist, have shown persistence against all What is published by the Government of Pakistan
odds. Nevertheless, in Pakistan it would be fair to say that regarding agricultural landholding patterns is usually based
once capitalism took root in agriculture, it began to eliminate on the nature of tenure: 'owners', 'owner-cum-tenants',
pre-capitalist and feudal modes. Once established, capitalism and 'tenants'. Moreover, size usually plays an important
became the dominant mode of production in agriculture and role in the classification, where either small/medium/large
throughout the entire economy, although pre-capitalist forms is used, or some distribution by the size of holding, i.e.
continue to be resilient and persist. acreage categories, is made available. However, Mahmood
These, in many ways, are the most important themes in Hasan Khan correctly points out that 'the concept of farm
relation to agriculture: to examine how and why Pakistan's size by its very nature is quite arbitrary and therefore not
agricultural sector has been developing in a particular universal. Secondly, division of farms into small and large
direction, and to assess what possible direction it will does not reveal anything about who controls and cultivates
take. Agrarian transition or change, by definition, implies these farms.' 1 Although there are problems with this sort of
movement from one place or type to another. How have classification, we use these criteria in the tables that follow-
economic and social relationships changed over time not only because of the absence of alternative data, but also
in agriculture? Have there been significant changes in because they still offer useful insights into the nature and
landholding and landownership patterns? What has been direction of change in Pakistani agriculture.
the trend of sharecropping-is it on the rise, or falling? These
are some of the questions that this chapter will discuss. We
will also see the different patterns in the four provinces, and 4.1 EXPLAINING THE NUMBERS
especially in the Punjab and Sindh, which form the backbone
of Pakistan's economy and politics. Our main focus in this In this section we attempt to highlight the main features
chapter will be on the change in agrarian structure· and of the tables provided. The explanations given here are
agrarian relations from the 1960s to the present. important in following the arguments in a later section.
The chapter contains numerous tables, which are extensive Those who can grasp the numbers and their meaning easily
and cumbersome. However, these numbers are essential, are advised to read the text and then explore further details
for we can base our analysis only on the observation and in the tables.
interpretation of data. While making the tables available for There have been six agricultural censuses in Pakistan,
those interested in examining the precise figures; we attempt in 1960, 1972, 1980, 1990, 2000, and 2010. Our method of
to describe and summarize their salient .features before presentation and explanation takes the following pattern.
discussing and interpreting them. _ _ For each of the census years, we will highlight, separately,
Things are further complicated by the problem of ~ow OI}.e the main features in the relevant table. We will try to
should classify and categorize the pattern of landownership standardize the format as far as possible so that the trends
and other phenomena that we want to observe. However, can be followed, although, this is easier said than done. After
we may not always be able to choose the categorization presenting a summary of each census, we present some tables
that we want, as data limitations-severe at times-may which compare the trends over time, describing the salient
force us to accept and use only what is already available. features. In the next section, we try to interpret these tables
For example, we may prefer to use the concept of classes and examine their implications.
to explain agricultural processes and change, and to show

L
 Chapter 4 The Nature and Direction of Agrarian Change 45

The 1972 Census (Table 4.3) category and they owned 11 per cent of the farm area, while
0.3 per cent own more than 150 acres with access to 10 per
1. By 1972, owner farms had replaced tenant farms as the cent of acreage.
largest category in terms of both number (42 per cent) Much of the trend we have seen since 1972, continues
and acreage (40 per cent) in Pakistan (Block A, columns unabated across the last four decades. In fact, one can see a
III and IV). In fact, the shift in both tenant farms and clear difference in many categories from Table 4.5, even over
owner farms in the period 1960 to 1972 is quite significant one decade, that of the 1990s. Some key features of the 2000
(compare Block A, columns VII and VIII in Tables 4.2 census reveal, that there is a more or less consistent fall in
and 4.3; also compare Block A, columns III and IV in the average size of farms, that a majority of farms in Pakistan,
the two tables). Owner-cum-tenant farms remained the especially in the Punjab and Khyber Pakhtunkhwa, are in the
smallest category. In Sindh, tenant farms now comprised under 5-acre category, although the average size of holding
63 per cent of farms with 51 per cent of the area (Block in this category has fallen to what it was in the past. On
A, columns VII and VIII). In the Punjab, owner farms the higher side as well on farms which are above 150 acres,
dominate in both number and area, and their proportion one sees from Table 4.5, that while the number of farms
in each category is almost identical to the 1960 situation has fallen, the average acreage has increased considerably.
(compare Block A, columns III and IV in Tables 4.2 and 4.3 In fact, as Table 4.5 shows, between 1990, 2000, and 2010,
for the Punjab). the average size of farm has fallen in almost every single
2. In the less than 5-acre category, Block B, now only 28 per category except for the largest category suggesting greater
cent of all of Pakistan's farms number can be observed consolidation of land holdings.
(column I) with 5 per cent of total cultivated area. In the
more than 150 acres category (Block G, columns I and II), 4.1.2 Changes Over Time
0.43 per cent of farms own 9.1 per cent of cultivated land.
Having looked at some of the main characteristics in each of
3. The proportion of owner farms in the less than 5-acre
the census years, we should now turn our attention to what
category (Block B) has fallen to 41 per cent (column III)
has happened over time and see how certain categories have
compared to 60 per cent in 1960, with a severe cut in the
shifted in importance. Let us turn to Tables 4.6 to 4.9.
tenant farms category (Block B, column VII), which fell
Table 4.6 shows the number offarms with tenure classification
from 46 per cent in 1960 to only 22 per cent in 1972.
across the four provinces. It shows how the shares of each
4. The owner-operated area in both provinces has increased tenure type have changed since 1960, and the share of farms
somewhat over the period 1960-72. in each province. Some highlights:
1. Owner farms increased from 41.1 per cent in 1960 to 68.8
The 1980 Census (Table 4.4)
per cent in 1990, to a further 81.8 per cent in 2010, for the
1. Owner farms now constitute a simple majority in both whole country. Today, they dominate in each of the four
number and area in Pakistan (55 and 52 per cent, provinces. Tenant farms fell in number from 41.7 per cent
respectively), and in the Punjab (54 and 50 per cent, of the total in 1960 to 18.7 in 1990, falling further to 11
respectively) (Block A, columns III and IV). In Sindh, per cent in 2010.
tenant farms are the largest in number (49 per cent of all 2. In 1960, 69.6 per cent of farms in Sindh were tenant
farms) (column VII), but owner farms have access to 47 farms; in 2010, they constituted less than half what
per cent of total cultivated area in the province (column they were, at 25.7 per cent. Owner farms have increased
IV). substantially in these four decades in the Punjab (from
2. Thirty-four per cent of the number of farms in Pakistan 42.8 to 69.5 per cent in 1990, rising further to 82.4 per cent
are in the less than 5-acre category, and own 7 per cent of in 2010), as well as in Sindh (21.6 per cent to 70.3 per cent
the land (Block B, columns I and II). Less than half a per in 2010).
cent, 0.34 per cent of the farms in Pakistan, own 8.5 per 3. Punjab had more than 68 per cent of all Pakistan's
cent of the land (Block G, columns I and II). farms in 1960, which fell to 58 per cent in 1990, but has
3. Forty-two per cent of owner farms in the Punjab are less increased its share to 63.5 per cent in 2010. The largest rise
than 5 acres (Block B, column III), while of all tenant has been in the NWFP's share, which was 13.9 per cent of
farms, almost half are in the 5-12.5-acre category (Block the number of farms in all of Pakistan in 1960, but rose
C, column VII). In Sindh, the largest number of faTms (50 to 21.1 per cent by 1990, to fall to 18.6 per cent in 2010,
per cent) are in the 5-12.5-acre range, as they are in the overtaking Sindh.
Punjab (39 per cent) (Block C, column I). 4. The share of tenant farms has seen a consistent downward
4. Owner-operated farms are the predominant form in both trend, just as owner farms have shown a consistent
provinces: 64 per cent in the Punjab, and 55 per cent in upward trend over the six decades. Owner-cum-tenant
Sindh (Block A, column IX). farms have always been the smallest category, but showed
a substantial rise during the 1960s, after which they have
shown a rapid downward trend.
The 1990, 2000, and 2010 Census (Table 4.5)
5. Since we are here looking at the change in the number of
The summary data available from the 1990 census shows that
farms across the four decades, we can return to Tables 4.2
47 per cent of farms in Pakistan were in the under 5-acre
46 Issues in Pakistan's Economy

to 4.5, and observe that the marginal (under 5 acr~s) and be 2000 = 100, and changes for each of the four provinces in
small (5-12.5 acres) farms continued to dominate in the the six censuses can easily be identified.
Punjab in 2010 as they had in 1960, and their share has 1. In the table, we see that in 1972 · the index for the total
risen from 79 per cent of all farms in 1960, to 90 per cent number of farms fell in the NWFP and the Punjab, rising
in 2010. Moreover, the pattern has been uneven; the share thereafter. The number of farms declined in the Punjab,
of 79 per cent in 1960 was followed by a sharp fall in 1972 but rose substantially in all provinces after I 980.
to only 65 per cent, rising to 71 per cent in I 980, falling
2. There has been a huge upward movement in owner farms
again to 68 per cent in I 990, rising once again. In Sindh,
and an equally impressive downward movement in the
the distribution was as follows: 45 per cent in I 960, 70 per
number of tenant farms although between 2000 and
cent in 1972, 75 per cent in I 980, 80 per cent in I 990, with
2010 there has been a 7 per cent rise of such farms in the
a slight rise in 2010. The patterns in the two provinces
Punjab. Owner-cum-tenant farms, after rising, have fallen
have followed a diametrically opposite trend, except in
again.
the 1972-80 period. The area of these groups, under 12.5
acres, as a proportion of total acreage in the Punjab in the 3. With respect to farm area, owner farms have shown large
six censuses has been 36, 30, 33, 40, 47, and most recently increases, as tenant farms have lost considerable area.
58 per cent. In Sindh the acreage owned by these small Owner-cum-tenant farms, after increasing their farm area
farms was 27 per cent in I 960, 38 per cent in 1972 and 42 in 1972, continued to lose area in 1980, 2000, and 2010.
per cent in both 1980 and I 990, 40 per cent in 2000, but
fell to 38 per cent in 2010. Table 4. 9 shows how the average farm area has changed
over time. We see that the area under 5 acres went up over
time in the Punjab, but has fallen between 1990 and 2010, It
Just as Table 4.6 showed the trend in the tenure and total
has also fallen in the 5-12.5-acre category in both Sindh and
number of farms, Table 4.7 shows the same tenure categories
the Punjab. In the larger categories, between 50-150 acres, it
with farm area. Some features:
fell a great deal in both the Punjab and Sindh between 1960
1. Like the number of farms, the area farmed fell consistently and 1990. In the extra-large category, after falling appreciably
and systematically for the tenant farmer between 1960 in 1972, presumably due to the land reforms of the Bhutto
and 1990, from 39.2 per cent to 16.I per cent, to fall government, it rose again and more or less stabilized, but fell
further to I I.I per cent in 2010. Not surprisingly, in a again in the 1990-2000 decade, although has risen sharply in
mirror-image process, the farmed area of owner farms has the Punjab since.
risen considerably, most notably in Khyber Pakhtunkhwa.
By 1990 owner farms dominated, by far, the total area
farmed in all the provinces. Owner farms used to farm 4.2 WHAT Do THE NUMBERS MEAN?
38.3 per cent of total farm area in 1960; by I 990, this had
risen to 64.9 per cent of total farm area rising. further, to The overall nature of transition in agriculture can best
73.3 per cent in 2000, and 74.5 per cent in 2010. be captured by Figure 4.1. While the three systems of
2. While owner-cum-tenant farms are fewer in number than
agriculture-peasant, capitalist and feudal-<:an and do
tenant farms, they have considerably more land to farm coexist, the trend has been for feudalism to give way to
than do tenant farms in the Punjab and NWFP. capitalism, which emerges and consolidates itself, while a
peasant system is able to survive its onslaught. Figure 4.1
3. Sindh, which used to have such a dominance of tenant shows these changes with particular referenc-e to Pakistan,
farms ( see Table 4.2) has seen a halving of the area where both the feudal and peasant systems are feeding the
farmed by tenants from 5.487 million acres in I 960, to capitalist system within and outside agriculture ( see also
2.466 million in I 990, down further to 1.838 million Appendix 4.2).
acres in 2000. In all the four provinces, the area of tenant Possibly the single most important feature of the transition
farms has fallen quite drastically. In Sindh, tenant farms in agriculture depicted by the tables in this chapter is the
constitute 26 per cent of all farms, but have access to only marked fall in tenancy. Tenant farms have fallen sharply
13.I per cent of the farm area. in both number and acreage across all sizes of holding in
4. Of the total farm area in the country, Punjab continues to Pakistan. At the same time, there has been an impressive
hold the majority, but Balochistan has made considerable increase in owner farms and the area that they farm. In
progress in increasing its farm area and in 2010 constituted addition, the owner-operated area has shown a substantial
15.4 per cent of the total farm area of the country. increase in the 5-50-acre groups.
5. The total farm area in Pakistan fell from a high in I 972, In the category of small farms that are less than 5 acres, we
in 1980 and 1990, but has increased marginally in 2000. see a large decrease in their number and area between 1960
Sindh and Balochistan have increased land on which and 1972, but a considerable rise in both during 1972-80
farming takes place. Punjab has lost as much as 4 million and 1980-2000. The fall in tenancy between 1960 and 1972
acres since 1972. is reflected in the large decrease in the number and area
farmed. The later rise in both is not reflected by an equivalent
Table 4.8 takes the data from Tables 4.6 and 4.7 and builds rise in tenancy. There has been a large rise in the number of
a series showing trends since I 960. The base year is taken to owners in the small category.
I
t
Chapter 4 The Nature and Direction of Agrarian Change

per cent in terms of acreage of the total area cultivated

43

4.1.1 Data from the Censuses

(column VIII). In the Punjab, owner farms had both the
largest number (43 per cent, column III) and the largest
The 1960 Census (Table 4.2)
area (38 per cent, column IV). We thus see a very different
Table 4.1, which appeared in Chapter 2 and is repeated here, pattern of ownership and tenure in the two provinces in

t presents some basic data about landholding in the 1950s, and

is a good starting point for our discussion.
The main feature of Table 4.1 is that ownership was highly
the I 960s, with more owner-operated farms in the Punjab,
and greater tenant or sharecropper farms in Sindh.
2. In Pakistan, 49 per cent of all farms were in the under
concentrated: 64.4 per cent of the owners owned 15.3 per 5-acre category (Block B, column I). However, these 49
cent of land, while the 6,061 owners (0.1 per cent) with very per cent had access to only 9 per cent of land~ At the other
large landholdings, owned more ( 15.4 per cent). In Sindh, extreme, those with more than ISO acres constituted only
land ownership was even more skewed, with 29.l per Cent of 0.29 per cent of owners, but owned 10 per cent of the total
land owned by a little over 3,000 people. In the Punjab, fewer land (Block G). More than half of the total acreage in
than 2,000 owners owned 2.78 million acres, or about IO per both Sindh and the Punjab is in the two categories which
cent of the total area. In Sindh, the 8 per cent of owners who constitute the 5-25 acre group (Blocks C and D), with 54
had holdings above I 00 acres owned 54 per cent of the total . per cent in the Punjab and SI per cent in Sindh between S
land in the province. Thus, it seems that while both provinces and 25 acres.
i had a highly differentiated structure of land ownership,
3. Of all the owner farms in the Punjab, 61 per cent lie in the

l
Sindh was far more inequitable than the Punjab.
under 5-acre category (Block B, column III), while in the
For the 1960s, we can make the following observations
· 'tenants' category, half the farms in the Punjab are less
from Table 4.2:
than S acres (column VII). In Sindh, since only 18 per cent
1. Block A shows that in Pakistan tenant farms were the of all farms are less than S acres (Block B, column I), the
largest in both number (column VII, 42 per cent) and three categories columns III to VIII constitute a very small

I
acreage (column VIII, 39 per cent). Owner-cum-tenant fraction of the under 5-acre category.
farms were the smallest of the three categories on both 4. The owner-operated area constitutes more than SO per
counts ( columns V and VI, only I 7 and 23 per cent, cent in the Punjab and only 37 per cent in Sindh (Block A,
respectively). In Sindh, almost half (49 per cent) of the column IX). Tenant farming was far greater in Sindh than
farms were tenant farms (column VII), which were 56 in the Punjab (Block A, columns VII and VIII).

Table 4.1
Distribution of Land Ownership in Pakistan and Provinces: 1950-55

Pakistan Punjab Sindh

Farm size (acres) Number of Area owned Number of Area owned Number of Area owned
owners (acres) owners (acres) owners (acres)

All sizes 5,068,376 48,642,530 3,555,457 28,309,744 337,665 10,285,021

(100.0) (100.0) (100.0) (100.0) (100.0) (100.0)

5 or less 3,266,137 7,425,614 2,358,119 4,438,517 100,601 365,817

(64.4) (15.3) (66.3) (15.7) (29.8) (3.6)

5-25 1,452,421 15,438,138 1,029,108 11,041,708 155,163 1,937,073

(28.7) (31.7) (28.9) (39.0) (46.0) (18.8)

25-100 286,470 10,616,308 146,893 6,198,128 54,792 2,390,358

(5.7) (21.8) (4.1) (21.9) (16.2) (23.2)

100-500 57,287 7,671,537 19,401 3,842,986 24,064 2,600,123

(1.1) (15.8) (0.6) (13.6) (7.1) (25.3)

500 and above 6,061 7,490,933 1,936 2,788,405 3,045 2,991,650

(0.1) (15.4) (0.1) (9.9) (0.9) (29.1)

Note: The data for the Punjab are for 1954/5; for Sindh for 1946/7. The data for Pakistan are the aggregate figures for all provinces.
The Punjab includes the former State of Bahawalpur, and Sindh includes the former State of Khairpur.
Source: Khan, Mahmood Hasan, Underdevelopment and Agrarian Structure in Pakistan (Boulder, Colorado: Westview Press, 1981 ), 68.
 .,::.
.,::.
Table 4.2
Distribution of the Operational Holdings by Size and Tenure in Pakistan: 1960 (in '000 farms and acres) iii
1/1
C
Owner-cum- (D
All farms Owner farms Tenant farms Owner- Tenant-operated area 1/1
tenant farms
Farm size operated :I
(acres) area Share Leased or
Number Acres Number Acres Number Acres Number Acres Total Others "'D
cropped rented II)
II Ill IV V VI VII VIII IX X XI XII XIII ~

A All sizes
Pakistan
4,860 (100%)
(100%)
3,326 (100%)
48,930 (100%)
(100%)
29,214 (100%)
1,998
(100%)
1,422
(41%) 18,723
(100%)
(43%) 11,169
(36%)

(38%)
834
(100%)
623
(17%)

(19%)
11,012
(100%)
7,180
(23%)

(25%)
2,028
(100%)
1,282
(42%)

(39%)
19,195
(100%)
10,665
(39%)

(37%)
24,595
(100%)
15,252
(50%)

(52%)
23,971
(100%)
13,961
21,271
(100%)
12,114
1,941
(100%)
1,319
759
(100%)
528
-
;·
II)
:I
1/1~
Punjab (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%)
979 (100%) 9,698 (100%) 137 (14%) 2,819 (29%) 60 (6%) 1,411 (15%) 483 (49%) 5,468 (56%) 3,559 (37%) 9,136 5,864 232 40
m
(')
Sindh (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%)
0
:I
B Under 5.0 2,404 (100%) 4,591 (100%) 1,203 (50%) 2,014 (44%) 276 (11%) 716 (16%) 925 (36%) 1,861 (41%) 2,406 (52%) 2,185 1,903 175 106
0
Pakistan (49%) (9%) (60%) (11%) (33%) (7%) (46%) (10%) (10%) (9%) (9%) (9%) (14%) 3
1,717 (100%) 3,129 (100%) 866 (50%) 1,452 (45%) 208 (12%) 547 (17%) 644 (38%) 1,193 (37%) 1,752 (55%) 1,440 1,266 114 60 '<
Punjab (52%) (11%) (61%) (13%) (33%) (8%) (50%) (11%) (11%) (10%) (10%) (9%)' (11%)
174 (100%) 529 (100%) 38 (22%) 106 (20%) 5 (3%) 18 (3%) 130 (75%) 405 (77%) 113 (21%) 414 402 10 2
Sindh (18%) (5%) (28%) (4%) (8%) (1%) (27%) (7%) (3%) (7%) (7%) (4%) (5%)

C 5.0-12.5
Pakistan
1,340 (100%) 10,903 (100%) 434 (32%) 3,468 (32%) 293 (22%) 2,414 (22%) 613 (46%) 5,020 (46%) 4,784 (44%) 6,119 5,383 571 165
(28%) (22%) (22%) (19%) (35%) (22%) (30%) (26%) (19%) (26%) (25%) (29%) (22%)
894 (100%) 7,281 (100%) 313 (35%) 2,505 (34%) 231 (26%) 1,903 (26%) 350 (39%) 2,873 (39%) 3,552 (49%) 3,729 3,199 419 110
Punjab (27%) (25%) (22%) (22%) (37%) (27%) (27%) (26%) (23%) (27%) (26%) (32%) (21%)
265 (100%) 2,180 (100%) 44 (17%) 360 (17%) 18 (7%) 157 (7%) 203 (77%) 1,663 (76%) 432 (20%) 1,747 1,696 42 9
Sindh (27%) (22%) (32%) (13%) (30%) (11%) (42%) (30%) (12%) (28%) (29%) (18%) (23%)

D 12.5-25.0 729 (100%) 12,533 (100%) 220 (30%) 3,747 (30%) 169 (23%) 2,922 (23%) 340 (47%) 5,864 (47%) 5,323 -(42%) 7,210 6,480 549 182
Pakistan (15%) (26%) (11%) (20%) (20%) (27%) (17%) (31%) (22%) (30%) (30%) (28%) (24%)
488 (100%) 8,326 (100%) 160 (33%) 2,686 (32%) 127 (26%) 2,176 (26%) 202 (41%) 3,464 (42%) 3,877 (47%) 4,448 3,908 403 137
Punjab_ (15%) (29%) (11%) (24%) (20%) (30%) (16%) (32%) (25%) (32%) (32%) (31%) (26%)
159 (100%) 2,776 (100%) 28 (18%) 505 (18%) 19 (12%) 336 (12%) 112 (70%) 1,935 (70%) 666 (24%) 2,111 2,041 58 12
Sindh (16%) (29%) (20%) (18%) (32%) (24%) (23%) (35%) (19%) (34%) (35%) (25%) (30%)

E 25.0-50.0 286 (100%) 9,468 (100%) 94 (33%) 3,114 (33%) 71 (25%) 2,382 (25%) 121 (42%) 3,972 (42%) 4,417 (47%) 5,051 4,570 345 136
Pakistan (6%) (19%) (5%) (17%)' ' (9%) (22%) (6%) (21%) (18%) (21%) (21%) (18%) (18%)
180 (100%) 5,903 (100%) 61 (34%) 1,990 (34%) 46 (26%) 1,529 (26%) 74 (41%) 2,384 (40%) 2,853 (48%) 3,049 2,695 255 100
Punjab (5%) (20%) (4%) (18%) (7%) (21%) (6%) (22%) (19%) (22%) (22%) (19%) (19%)
61 (100%) 2,044 (100%) 16 (26%) 548 (27%) 12 (20%) 407 (20%) 33 (54%) 1,089 (53%) 753 (37%) 1,291 1,233 50 9
Sindh (6%) (21%) (12%) (19%) (20%) (29%) (7%) (20%) (21%) (21%) (12%) (22%) (23%)

F 50.0-150.0
Pakistan
88 (100%) 6,539 (100%) 39 (44%) 3,009 (46%) 23 (26%) 1,693 (26%) 26 _(30%) 1,837 (28%) 4,007 (61%) 2,532 2,251 185 96
(2%) (13%) (2%) (16%) (3%) (15%) (1%) (10%) (16%) (11%) (11%) (10%) (13%)
42 (100%) 4,230 (100%) 19 (45%) 1,459 (34%) 11 (26%) 788 (19%) 12 (29%) 839 (20%) 1,961 (46%) 1,125 955 104 64
Punjab (1%) (14%) (1%) (13%) (2%) (11%) (0.9%) (8%) (13%) (8%) (8%) (8%) (12%)
18 (100%) 3,087 (100%) 9 (50%) 677 (22%) 5 (28%) 398 (13%) 4 (22%) 297 (10%) 904 (29%) 488 419 44 5
Sindh (2%) (32%) (7%) (24%) (8%) (28%) (0.8%) (5%) (25%) (8%) (7%) (19%) (13%)

G 150.0 and over

Pakistan
14 (100%) 4,896 (100%) 9 (64%) 3,372 (69%) 3 (21%) 884 (18%) 2 (14%) 640 (13%) 4,023 (82%) 874 684 115 75
(0.29%) (10%) (0.45%) (18%) (0.36%) (8.03%) (0.10%) (3%) (16%) (4%) (3.22%) (5.9%) (10%)
5 (100%) 1,426 (100%) 3 (60%) 1,078 (76%) 1 (20%) 237 (17%) 0 (8%) 111 (8%) 1,256 (86%) 170 91 25 54
Punjab (0.15%) (4.88%) (0.21%) (10%) (0.16%) (3.30%) (0.03%) (1%) (8%) (1%) (0.75%) (5.90%) (10%)
2 (100%) 797 (100%) 2 (100%) 623 (78%) 0 (20%) 95 (12%) 0 (15%) 79 (10%) 692 (87%) 105 72 29 4
Sindh (0.20%) (8.22%) (1.46%) (22%) (0.67%) (6.73%) (0.06%) (1%) (19%) (2%) (1.23%) (1.250%) (10%)

Source: Khan, Mahmood Hasan, Underdevelopment and Agrarian Structure in Pakistan (Boulder, Colorado: Westview Press, 1981).
r
Chapter 4 The Nature and Direction of Agrarian Change 47

Proletarianized labour Proletarianized labour

Outside
agriculture

Proletarianized labour Proletarianized labour

-- - - -- - - -- - -- - - -- - -- - - --
' '''
' :
'
'' '
'
Family labour Hired labour Family labour

Poor Middle Rich Landlord

peasant peasant Tenant/sharecropper
peasant

Peasant system - -----► Capitalist system ◄------ Feudal system

Poor Middle Rich Landlord Landlord

peasant peasant peasant

Land parcels owned Land owned + land leased Land owned

·------------------------------~
Land leased to Land leased to
Figure 4.1
Agrarian Transition in Pakistan
Source: Khan, Mahmood Hasan, Lectures on Agrarian Transformation in Pakistan (Islamabad: PIDE, 1985), 17.

The category of 5-12.5-acre farms shows a consistent, and in agricultural wage labour. It is unlikely that many of the
sometimes large, increase in all the inter-census periods. The tenants are in a position to become owners, so most of
growth of this category is probably the result of the fall in them will probably have been changed into agricultural or
the number and area farmed in both the 12.5-25 and 25-50- rural wage labourers or have migrated to urban areas and
acre groups during the period 1972-80. Both size categories, towns as they have been displaced by owner-cultivators.
medium and large, lost a number of farms and a large chunk The dramatic increase in the area farmed by owners over
of their area during the 1970s. Between 1980 and 1990, the the last four decades may indicate that tenants have been
small category grew in number, although there was a small displaced and land brought under self-cultivation, or that
drop in the area owned and farmed. There was a continuous many owners have bought land from other landowners. The
fall in the number of farms and area owned in both the tables show that the number of farms in the Punjab increased
medium and large categories in both Sindh and the Punjab by about the same proportion as the increase in farm area.
between 1980 and 1990. In Sindh, the number of owners increased much faster than
The category of very large 50-150-acre farms remained the increase in farm area between 1960 and 1990. However,
more or less the same in Sindh between 1980 and 1990, over this period there has not been a very sharp decline in
but continued to fall in the Punjab in this period, as it did agricultural employment: the proportion of those employed
in the 1972-80 period. In the category of extra-large farms, in agriculture fell from 60 per cent of the labour force to 45
150 acres and above, there was a sharp increase in both the per cent in 2012. It is likely that more sharecroppers and
number of farms and their area in Sindh between 1980 and tenants have become agricultural wage workers than have
1990 with a small decrease in the Punjab in the same period. migrated. This implies greater marginalization.
However, as Table 4. 9 shows average farm size has fallen The growth in small farms at the expense of the medium
again in both Sindh and the Punjab, although there has been and large farms may be due to greater fragmentation of
a marked increase in the average size of operational holding landholding caused by inheritance, where many heirs may
in the 150-and-over category in the Punjab. become owners of a single property which was .hitherto
The increase in owners and the decline in tenancy suggests of a larger size. Moreover, as we argue in other chapters,
that more and more landowners are acquiring land from urbanization has also had a significant impact on land use in
tenants and are going in for self-cultivation, probably hiring so called agricu]tural areas.
 l
48 Issues in Pakistan's Economy
I
In the Punjab, there was a fall in farm sizes 12.5-25 acres, rented out land but in Sindh they rented in from others.' 3
25-50 acres and 50-150 acres between 1980 and 1990, and a
rise in the number of farms in the 5-12.5-acre category, but
This, he argues, is due to the very different nature of
production in the two provinces: the middle-sized farmer in 1
with a small fall in area owned, causing the average size to the Punjab is of the capitalist type of family farmer, while
fall. In Sindh, there has been a fall in the categories 5-12.5, in Sindh this farmer employs sharecroppers. Furthermore,
12.5-25, and 25-50 acres, with more or less no change in he says that in the Punjab the middle and poor peasants
the 50-150-acre category. This seems to suggest that there is lease out increasing amounts of their land to others, while
some consolidation of holding taking place on the high side in Sindh sharecroppers rent in land from landlords. He
(above 50 acres) in Sindh, with the hold of the extra-large also has evidence which supports our contention above,
Pakistani landowner (over 150 acres) slipping. However, the that in Sindh there was 'a shift towards capitalist farming
most notable phenomenon is the consistent rise of the small through increased resumption of land by landlords from
farm. sharecroppers for cultivation by their own selves', 4 which is
The method we have been using to discuss the nature one reason why the size of farm has increased over the years
and direction of agrarian transition very clearly reveals in the extra-large category of over 150 acres. For Mahmood
how insufficient and handicapped it is. If we had access to Hasan Khan, capitalist farmers are increasing in the Punjab
data based on class, or more elaborate data as depicted in and Sindh 'at the expense of poor and even middle class
Appendix-4-.1, we might have been able to get a better handle peasants in the· former and against landlords and their
on the nature of change. Had we known about the relations sharecroppers in Sind'. 5 Elsewhere he argues that 'capitalist
of production, whether labour was hired or land rented in, we farming is ... facilitated by the increased size of operational
would have been in a position to elaborate on the nature of holding (farm)'. 6 ·

capitalist development and how capitalist relations have been Finally, Table 4.10 shows quite dramatically how a number
further developed. At the moment, we can see that more of important changes took place between 1960 and 1980. It
small farms are being created and many more owner-farms would have been even more interesting to see the changes
are emerging. However, we do not know how, and under from the 2010 census, but data are not available in this
what types of relations of production, these self-cultivators form. Nevertheless, the table only amplifies and endorses the
produce. It would be reasonable to assume that they are analysis presented above. It shows the following:
either family farmers or peasants who, in all likelihood, hire
in labour. At the other end of the spectrum, the increase in 1. The number of pure owner farms increased considerably,
the extra-large category suggests that these are capitalist as did their share of area, but not by as much.
farmers who have resumed their land from sharecroppers 2. Pure tenant farms were far fewer in 1980 than in 1960;
and probably hire in a large number of agricultural wage their area also fell markedly, although their average size
labourers. It is also possible that these large landholders have seems to have increased marginally.
bought land from the medium and large farmers of between 3. Sharecropping also saw a very marked decline in this
12.5 and 50 acres, who have found it less profitable to farm period, although some 'pure' tenant farms may have
as competition has increased further. become owner-cum-tenant farms.
Mahmood Hasan Khan, who has differentiated the data
4. Overall, the total number of farms fell and so did the total
based not only on size of holding, but also on the categories
farm area, but at a slower pace, resulting in an increase in
shown in Appendix 4.1, has been able to show us a clearer
the average farm size.
picture of the nature of the agrarian transition. 2 He looks at
data pertaining to land rented in and rented out by various Although data in· this form is not readily available, tables
sizes of farms in the 1970s and finds that 'farmers owning 4.6-4-.9, all suggest that many of these trends have been
5 acres or less were renting their area out but the area so considerably strengthened. The average farm size, however,
rented out also increased substantially in the seventies .... has fallen considerably since the 1980s since the number of
Owners of middle-sized farms 5-25 acres in the Punjab farms has, not surprisingly, also increased, due to bifurcation
and inheritance.
Table 4.3
Distribution of the Operational Holdings by Size and Tenure in Pakistan: 1972 (in '000 farms and acres)
All farms Owner farms Owner-cum- Tenant farms Tenant-operated area Area owner-cum- Area tenant farms
Owner-
Farm size tenant farms tenant farms
operated

(acres) Number Acres Number Acres Number Acres Number Acres area Total Share Leased Others Owner Share Leased Others Share Leased Others
cropped or rented operated cropped or rented cropped or rented
Ill IV V VI VII VIII IX X XI XII XIII XIV xv XVI XVII XVIII XIX xx

A All sizes
3,762 (100%) 49,061,(100%) 1,569 (42%) 19,400 (40%) 897 (24%) 15,160 (31%) 1,296(34%) 14,500 (30%) 26,388 (54%) 22,672 18,915 3,344 413 6,988 6,351 1,584 237 12,564 1,760 176
Pakistan
(100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%)
2,375 (100%) 31,030 (100%) 1,006 (42%) 11,951 (39%) 683 (29%) 11,050 (36%) 684(29%) 8,029 (26%) 16,957 (55%) 14,073 11,404 2,440 229 5,006 4,719 1,204 121 6,885 1,236 108
Punjab
(100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%)
748 (100%) 9,460 (100%) 178 (24%) 2,909 (31%) 97(13%) 1,760 (19%) 472(63%) 4,790 (51%) 3,700 (39%) 5,759 5,047 634 78 791 648 270 51 4,399 364 27
Sindh
(100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%)

8 Under 5.0
1,059 (100%) 2,563 (100%) 650 (61%) 1,423 (56%) 125(12%) 402 (16%) 284(27%) 731 (29%) 1,618 (63%) 947 789 126 32 186 171 36 9 618 90 23
Pakistan
(28%) (5%) (41%) (7%) (14%) (3%) (2%) (5%) (6%) (4%) (4%) (4%) (8%) (3%) (3%) (2%) (4%) (5%) (5%) (13%)
619 (100%) 1,503 (100%) 397 (64%) 896 (60%) 81 (13%) 270 (18%) 141 (23%) 336 (22%) 1,020 (68%) 482 387 77 18 124 119 23 4 268 54 14
Punjab
(26%) (5%) (39%) (7%) (12%) (2%) (21%) (4%) (6%) (3%) (3%) (3%) (8%) (2%) (3%) (2%) (3%) (4%) (4%) (13%)
138 (100%) 424 (100%) 49 (36%) 129 (30%) 9 (7%) 30 (7%) 84(61%) 264 (62%) 141 (33%) 262 272 272 1 12 17 1 0 255 8 1
Sindh
(18%) (4%) (26%) (4%) (9%) (2%) (18%) (6%) (4%) (5%) (5%) (5%) (15%) (2%) (3%) (0.37%) (0%) (6%) (2%) (4%)
0
:::y
C 5.0-12.5
1,501 (100%) 12,338 (100%) 449 (30%) 3,916 (32%) 381 (25%) 3,204 (26%) 621 (41%) 5,218 (42%) 5,288 (43%) '7,050 6,282 677 91 1,372 1,553 245 34 4,729 432 57
0)
-0
Pakistan
(40%) (25%) (29%) (20%) (42%) (21%) (48%) (36%) (20%) (31%) (33%) (20%) (22%) (20%) (24%) (15%) (14%) (38%) (25%) (32%) (D
Punjab
926 (100%) 7,619 (100%) 332 (36%) 2,604 (34%) 296(32%) 2,502 (33%) 298 (32%) 2,513 (33%) 3,667 (48%) 3,942 3,392 497 53 1,072 1,215 195 19 2,177 302 34 ""'
.j::,.
(39%) (25%) (33%) (22%) (43%) (23%) (44%) (31%) (22%) (28%) (30%) (20%) (23%) (21%) (26%) (16%) (16%) (33%) (24%) (31%)
387 (100%) 3,261 (100%) 65 (17%) 523 (16%) 44(11%) 376 (12%) 278 (72%) 2,361 (72%) 689 (21%) 2,591 2,495 84 12 146 210 18 2 2,285 66 10
Sindh
(52%) (34%) (37%) (18%) (45%) (21%) (59%) (49%) (18%) (45%) (49%) (13%) (15%) (18%) (32%) (7%) (4%) (52%) (18%) (37%) -t
::::,-
CD
D 12.5-25.0
4,269 (33%) 296 (37%) 4,708 (36%) 5,904 (45%) 7,158 6,218 1,819 2,013 391
z
-...
794 (100%) 13,061 (100%) 248 (31%) 4,065 (31%) 250 (31%) 857 83 45 4,205 466 37
Pakistan
(21%) (27%) (16%) (21%) (28%) (28%) (23%) (32%) (22%) (32%) (33%) (26%) (20%) (26%) (32%) (25%) (19%) (33%) (26%) (21%) QI
549 (100%) 8,942 (100%) 169 (31%) 2,732 (31%) 201 (37%) 3,427 (38%) 179 (33%) 3,782 (31%) 4,172 (47%) 4,769 4,031 684 54 1,440 1,626 331 30 2,405 353 24
Punjab C
(23%) (29%) (17%) (23%) (29%) (31%) (26%) (35%) (25%) (34%) (35%) (28%) (24%) (29%) (34%) (7%) (25%) (36%) (29%) (22%)
Sindh
i'65 (100%) 2,766 (100%) 39 (24%) 689 (25%) 29(18%) 505 (18%) 96(58%) 1,573 (57%) 904 (33%) 1,853 1,736 114 13 215 247 38 5 1,489 76 8 CD
(22%) (29%) (22%) (24%) (30%) (29%) (20%) (33%) (24%) (32%) (34%) (18%) (17%) (27%) (38%) (14%) (10%) (34%) (21%) (30%) QI
::,
E 25.0-50.0
79(27%) 2,399 (26%) 5,024 (55%) 374
a.
289 (100%) 9,215 (100%) 111 (38%) 3,516 (38%) 99 (34%) 3,300 (35%) 4,191 3,372 747 72 1,508 1,374 44 1,996 373 26
Pakistan
(8%) (19%) (7%) (18%) (11%) (22%) (6%) (17%) (19%) (18%) (18%) (22%) (17%) (5%) (22%) (24%) (19%) (16%) (21%) (16%) C
209 (100%) 5,606 (100%) 75 (36%) 2,349 (36%) 78 (37%) 2,571 (39%) 57(27%) 1,687 (26%) 3,505 (53%) 3,102 2,459 595 48 1,156 1,080 307 28 1,379 288 20
::;·

-s·
CD
Punjab
(9%) (21%) (7%) (20%) (11%) (23%) (8%) (21%) (21%) (22%) (22%) (25%) (21%) (23%) (23%) (25%) (23%) (21%) (23%) (19%) (')
39 (100%) 1,247 (100%) 16 (41%) 514 (41%) 10(26%) 346 (28%) 12(31%) 386 (31%) 680 (55%) 566 439 122 5 166 125 52 3 314 70 2
Sindh
(5%) (13%) (9%) (18%) (10%) (20%) (3%) (8%) (18%) (10%) (9%) (19%) (6%) (21%) (19%) (19%) (6%) (7%) (19%) (7%)
::,
F 50.0-150.0
Pakistan

Punjab
103 (100%)
(3%)
65 (100%)
(3%)
7,402 (100%)
(15%)
4,569 (100%)
(15%)
50 (49%)
(3%)
30 (46%)
(3%)
3,652 (49%)
(19%)
2,177 (48%)
(18%)
36(35%)
(4%)
25(38%)
(4%)
2,666 (35%)
(18%)
1,777 (39%)
(16%)
16(16%)
(1%)
10(15%)
(1%)
1,085 (15%)
(7%)
615 (13%)
(8%)
5,000 (68%)
(19%)
3,074 (67%)
(18%)
2,403
(11%)
1,495
(11%)
1,704
(9%)
1,022
(9%)
629
(19%)
483
(18%)
70
(17%)
40
(17%)
1,348
(19%)
897
(18%)
926
(15%)
605
(13%)
344
(22%)
346
(20%)
48
(20%)
29
(24%)
778
(6%)
417
(6%)
285
(15%)
187
(15%)
22
(13%)
11
(10%)
-
0
)>
...
cc
Sindh
13 (100%)
(2%)
1,013 (100%)
(11%)
8 (62%)
(4%)
605 (60%)
(21%)
4(31%)
(4%)
257 (26%)
(15%) (0.42%)
2(15%) 140 (14%)
(3%)
745 (74%)
(20%)
257
(5%)
166
(3%)
91
(14%)
10
(13%)
140
(18%)
40
(6%)
81
(30%)
6
(12%)
51
(1%)
85
(23%) (15%)
4 ...i»'
QI

::,
G 150.0 and over
16 (100%) 4,482 (100%) 10 (63%) 2,796 (62%) 5(31%) 1,324 (30%) 1 (6%) 359 (8%) 3,556 (79%) 925 549 310 66 758 314 195 57 235 115 9 0
Pakistan
(0.43%) (9.14%) (0.64%) (14.42%) (0.56%) (8.73%) (0.8%) (2.48%) (13.48%) (4.08%) (2.90%) (9.27%) (t6%) (11%) (5%) (12%) (24%) (2%) (7%) (5%) ::::,-
7 (100%) 1,789 (100%) 5 (71%) 1,192 (57%) 2(29%) 502 (28%) 0 (6%) 94 (5%) 1,508 (84%) 280 111 154 15 316 73 102 11 38 52 4 QI
Punjab
(0.06%)
::,
(0.29%)
3 (100%)
(5.77%)
748 (100%)
(0.50%)
2 (67%)
(9.97%)
448 (50%)
(0.29%)
1 (33%)
(4.54%)
235 (31%) 0(10%)
(1.17%)
66 (9%)
(8.89%)
516 (75%)
(99%)
188
(0.97%)
140
(6.31%)
12
(7%)
36
(8%)
113
(2%)
8
(8%)
80
(9%)
34
(1%)
4
(4%)
60
(4%)
2
cc
Sindh
(0.06%) (2.77%) (14%)
CD
(0.40%) (7.91%) (1.12%) (15.40%) (1.03%) (13.35%) (1.38%) (15.61%) (3.25%) (1.89%) (14%) (1.23%) (30%) (67%) (0.09%) (16%) (7%)

.i::i,
Source: Khan, Mahmood Hasan, Underdevelopment and Agrarian Structure in Pakistan (Boulder, Colorado: Westview Press, 1981). (0
Table 4.4 CJ1
0
Distribution of the Operational Holdings by Size and Tenure in Pakistan: 1980 (in '000 farms and acres)
All farms Owner farms Owner-cum- Tenant farms Tenant-operated area Area owner-cum- Area tenant farms t/1
Owner- t/1
Farm size tenant farms tenant farms C
operated
CD
(acres) Number Acres Number Acres Number Acres Number Acres area Total Share Leased Others Owner Share Leased Others Share Leased Others t/1
cropped or rented operated cropped or rented cropped or rented :l
Ill IV V VI VII VIII IX X XI XII XIII XIV xv XVI XVII XVIII XIX xx
"ti
I»
A ::,:-

-
All sizes
Pakistan 4,069 (100%) 47,095 (100%) 2,227 (55%) 24,533 (52%) 789(19%) 12,396 (26%) 1,054(26%) 10,165 (22%) 30,274 (64%) 16,821 13,589 2,900 332 5,741 5,078 1,584 157 8,511 1,479 175 cii"
(100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%)
Punjab 2,544 (100%) 29,898 (100%) 1,385 (54%) 14,883 (50%) 618(24%) 9,334 (31%) 542(21%) 5,681 (19%) 19,199 (64%) 10,749 2,083 4,266 3,912 1,204 93 4,544 1,020 117
I»
8,456 209
(100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%)
:l~
(100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%)
Sindh 795 (100%) 9,207 (100%) 323 (41%) 4,350 (47%) 85(11%) 1,528 (17%) 386(49%) 3,328 (36%) 5,091 (55%) 4,116 3,452 617 47 741 489 270 16 2,963 334 31
t/1
(100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) (100%) m
n
B Under 5.0 0
:l
Pakistan 1,386 (100%) 3,320 (100%) 920 (66%) 2,173 (65%) 124 (9%) 392 (12%) 283(20%) 755 (23%) 2,345 (71%) 974 826 134 14 173 181 36 9 645 96 11
(34%) (7%) (41%) (9%) (16%) (3%) (27%) (7%) (8%) (6%) (6%) (5%) (4%) (3%) (4%) (2%) (6%) (8%) (7%) (6%)
0
Punjab 804 (100%) 1,938 (100%) 586 (73%) 1,327 (68%) 88(11%) 289 (15%) 150(19%) 326 (17%) 193 (10%) 483 588 86 9 127 130 23 2 257 61 7 3
(32%) (6%) (42%) (9%) (14%) (3%) (28%) (6%) (1%) (4%) (7%) (4%) (4%) (3%) (3%) (2%) (2%) (6%) (6%) (6%) '<
Sindh 202 (100%) 527 (100%) 98 (49%) 259 (49%) 9 (4%) 31 (6%) 94(47%) 295 (56%) 272 (52%) 314 306 7 1 13 17 1 0 289 6 1
(25%) (6%) (30%) (6%) (11%) (2%) (24%) (9%) (5%) (8%) (9%) (1%) (2%) (2%) (3%) (0.37%) (0%) (10%) (2%) (3%)

C 5.0-12.5
Pakistan 1,604 (100%) 12,855 (100%) 724 (45%) 5,646 (44%) 352 (22%) 2,907 (23%) 528(33%) 4,301 (33%) 6,096 (54%) 5,947 5,231 662 54 1,261 1,401 245 14 3,829 431 41
(39%) (27%) (33%) (23%) (45%) (23%) (50%) (42%) (23%) (35%) (38%) (23%) (16%) (22%) (28%) (15%) (9%) (45%) (29o/o) (23%)
Punjab 996 (100%) 8,014 (100%) 463 (46%) 3,591 (45%) 285 (29%) 2,363 (29%) 249 (25%) 2,509 (26%) 8,014(100%) 3,399 2,857 504 37 1,024 1,131 195 10 1,729 306 27
(39%) (27%) (33%) (24%) (46%) (25%) (46%) (36%) (42%) (32%) (34%) (24%) (18%) (24%) (29%) (16%) (11%) (38%) (30%) (23%)
Sindh 401 (100%) 3,297 (100%) 126 (31%) 1,008 (31%) 39(10%) 325 (10%) 236 (59%) 1,902 (58%) 1,143 (35%) 2,093 2,000 80 12 135 175 18 1 1,824 68 11
(50%) (36%) (39%) (23%) (46%) (21%) (61%) (57%) (22%) (51%) (58%) (13%) (26%) (18%) (33%) (7%) (6%) (62%) (20%) (33%)

D 12.5-25.0
Pakistan 705 (100%)" 11,617 (100%) 323 (46%) 5,339 (4_6%) 198(28%) 3,358 (29%) 185(26%) 2,920 (25%) 6,824 (59%) 4,794 3,970 751 73 1,484 1,524 391 28 2,446 429 45
(17%) (25%) (15%) (22%) (25%) (27%) (18%) (29%) (23%) (29%) (29%) (26%) (22%) (26%) (30%) (25%) (18%) (29%) (29%) (26%)
Punjab 494 (100%) 7,981 (100%) 213 (43%) 3,427 (43%) 159(32%) 2,390 (30%) 122(25%) 1,864 (23%) 7,981(100%) 3,387 2,746 587 54 1,167 1,234 331 19 1,512 318 34
(19%) (27%) (15%) (23%) (26%) (26%) (23%). (33%) (35%) (701%) (32%) (28%) (26%) (27%) (32%) (27%) (20%) (33%) (31%) (29%)
Sindh 132 (100%) 2,258 (100%) 62 (47%) 1,083 (48%) 22 (17%) 385 (17%) 48(36%) 79 (35%) 1,266 (56%) 993 850 130 13 183 157 38 4 692 89 9
(17%) (25%) (19%) (25%) (26%) (25%) (12%) (24%) (25%) (24%) (25%) (21%) (28%) (25%) (32%) (14%) (25%) (23%) (27%) (29%)

E 25.0-50.0
Pakistan 264 (100%) 8,386 (100%) 131 (50%) 4,169 84(32%) 2,770 (33%) 48(18%) 1,448 (17%) 5,444 (65%) 2,942 2,232 636 75 1,275 1,107 374 35 1,125 284 39
(6%) (18%) (6%) (17%) (11%) (22%) (5%) (14%) (18%) (17%) (16%) (22%) (23%) (22%) (22%) (24%) (22%) (13%) (19%) (22%)
Punjab 184 (100%) 5,792 (100%) 84 (46%) 2,640 (46%) 64(35%) 2,118 (37%) 35(19%) 1,034 (18%) 5,792(100%) 2,199 1,673 469 57 953 871 307 27 802 201 31
(7%) (19%) (6%) (18%) (10%) (23%) (7%) (18%) (30%) (20%) (20%) (23%) (27%) (22%) (22%) (25%) (29%) (18%) (20%) (26%)
Sindh 43 (100%) 1,393 (100%) 25 (58%) 827 (59%) 11 (26%) 358 (26%) 7(16%) 209 (15%) 1,009 (72%) 384 224 150 10 182 95 52 4 129 73 6
(5%) (15%) (8%) (19%) (13%) (23%) (2%) (6%) (20%) (9%) (6%) (24%) (21%) (25%) (19%) (19%) (25%) (4%) (22%) (19%)

F 50.0-150.0
Pakistan 96 (100%) 6,913 (100%) 59 (61%) 4,267 (62%) 28 (29%) 2,052 (30%) 9 (9%) 593 (9%) 5,319 (77%) 1,594 1,057 462 74 1,052 689 344 45 389 175 29
(2%) (15%) (3%) (17%) (4%) (17%) (1%) (6%) (18%) (9%) (8%) (16%) (22%) (18%) (13%) (22%) (29%) (5%) (12%) (17%)
Punjab 59 (100%) 4,230 (100%) 34 (58%) 2,468 (58%) 20(34%) 1,417 (33%) 5 (9%) 345 (8%) 423 (10%) 1,034 682 310 42 729 459 246 27 223 106 16
(2%) (14%) (2%) (17%) (3%) (15%) (1%) (6%) (2%) (10%) (8%) (15%) (20%) (17%) (12%) (20%) (29%) (5%) (10%) (14%)
Sindh 15 (100%) 1,088 (100%) 10 (67%) 740 (68%) 3(20%) 256 (24%) 1 (7%) 92 (8%) 883 (81%) 206 62 140 4 143 37 81 2 26 65 6
(2%) (12%) (3%) (17%) (4%) (17%) (0.3%) (3%) (17%) (5%) (2%) (23%) (9%) (19%) (8%) (30%) (13%) (1%) (19%) (2%)

G 150,0 and Qver

Pakistan 14 (100%) 4,004 (100%) 10 (71%) 2,939 (73%) 3(21%) 917 (23%) 1 (7%) 148 (4%) 3,434 (86%) 570 273 255 42 469 196 106 32 77 62 10
(0.34%) (8.50%) (0.45%) (11.96%) (0.38%) (7.40%) (0.09%) (1.46%) (11.34%) (3.39%) (2.01%) (8.79%) (13%) (9%) (4%) (12%) (20%) (1%) (4%) (6%)
. Punjab 7 (100%) 1,943 (100%) 5 (71%) 1,430 (74%) 2(29%) 460 (24%) 0 (3%) 53 (3%) 194 (10%) 247 110 127 10 266 87 102 8 24 28 2
(0.28%) (6.50%) (0.36%) (9.61%) (0.32%) (4.93%) (0.04%) (0.931%) (1.01%) (2.30%) (1.30%) (6.10%) (5%) (6%) (2%) (8%) (9%) (1%) (3%) (2%)
Sindh 2 (100%) 644 (100%) 1 (50%) 433 (67%) 1 (50%) 173 (27%) 0(10%) 39 (6%) 518 (80%) 126 10 110 7 85 85 80 5 3 33 2
(0.25%) (6.99%) (0.31%) (9.95%) (1.18%) (11.32%) (0.05%) (1.17%) (10.17%) (3.06%) (0.29%) (7.83%) (15%) (11%) (11%) (30%) (31%) (0.10%) (10%) (6%)

Source: Khan, Mahmood Hasan, Underdevelopment and Agrarian Structure in Pakistan (Boulder, Colorado: Westview Press, 1981).
\
Table 4.5
Number, Area of the Farms by Size of Farms, and Average Size of Farms: 1990, 2000 and 2010 Comparative Analysis

Farm Size 1990 2000 2010 1990 2000 2010 1990 2000 2010

(000 acres) Number % Number % Number % 000Acres % 0O0Acres % 000 Acres % Average size of Farms (acres)

All sizes
Pakistan 5,071 100 6,620 100 8,265 100 47,319 100 50,425 100 52,910 100 9.3 7.6 6.4

Punjab 2,957 100 3,864 100 5,250 100 27,107 100 27,762 100 29,326 100 9.2 7.2 5.6

Sindh 802 100 1,070 100 1,115 100 8,604 100 10,687 100 9,869 100 10.7 10.0 8.8

KPK 1,069 100 1,356 100 1,540 100 5,828 100 5,589 100 5,570 100 5.5 4.1 3.6

Balochistan 243 100 330 100 360 100 5,780 100 6,387 100 8,145 100 23.8 19.4 22.7

Under5.0
7,822 15.51 19.25 2.2 2.1 1.9
0
Pakistan 2,404 47.41 3,815 57.63 5,351 64.75 5,314 11.23 10,184 ::,
OJ
Punjab 1,343 45.40 2,165 56.03 3,347 63.76 3,009 11.10 4,515 16.26 6,512 22.20 2.2 2.1 1.9 "O
co.....
Sindh 266 33.22 491 45.88 629 56.44 768 8.93 1,347 12.61 1,502 15.22 2.9 2.7 2.4 .j::,.

KPK 741 69.33 1,065 78.55 1,245 80.82 1,401 24.04 1,733 31.01 1,865 33.49 1.9 1.6 1.5
-I
:T
Balochistan 54 22.23 94 28.42 129 35.99 135 2.34 226 3.54 305 3.74 2.5 2.4 2.4 CD
z
5.0-12.5
Pakistan 1,700 33.53 1,858 28.06 2,049 24.79 13,072 27.63 14,092 27.95 15,242 28.81 7.7 7.6 7.4
-...
SI)
C
CD
SI)
:::s
Punjab 1,007 34.05 1,135 29.37 1,413 26.91 7,787 28.73 8,619 31.04 10,478 35.73 7.7 7.6 7.4 C.
Sindh 376 46.85 391 36.57 297 26.67 2,889 33.58 2,961 27.70 2,225 22.55 7.7 7.6 7.5
...2
-o·
CD
KPK 233 21.82 218 16.11 221 14.34 1,705 29.26 1,582 28.30 1,596 28.66 7.3 7.2 7.2 n
Balochistan 84 34.70 113 34.35 118 32.85 690 11.95 931 14.58 941 11.56 8.2 8.2 8.0
:::s

12.5-25.0
-...
0
)>
C0
Pakistan 622 12.27 580 8.76 561 6.79 10,213 21.58 9,614 19.07 9,361 17.69 16.4 16.6 16.7
...
SI)

iii'
Punjab 406 13.71 368 9.53 359 6.85 6,504 23.99 5,987 21.56 5,813 19.82 16.0 16.3 16.2 :::s
Sindh 108 13.52 102 9.57 98 8.76 1,860 21.61 1,758 16.45 1,785 18.08 17.2 17.2 18.3 0
:T
KPK 60 5.57 43 3.20 49 3.20 992 17.02 724 12.95 830 14.90 16.7 16.7 16.9 I»
:::s
C0
Balochistan 49 20.12 66 19.95 54 15.13 857 14.82 1,146 17.93 934 11.46 17.5 17.4 17.2 CD

....
(Tl
Table 4.5 (contd.) U1
I\)

Farm Size 1990 2000 2010 1990 2000 2010 1990 2000 2010
ui
(/1
(000 acres) Number % Number % Number % 000 Acres % 000 Acres % 000 Acres % Average size of Farms (acres) C
25.0-50 CD
(/1

Pakistan 238 4.68 261 3.94 211 2.55 7,489 15.83 8,210 16.28 6,726 12.71 31.5 31.5 31.9 :::s
Punjab 147 "tJ
4.98 149 3.85 97 1.84 4,559 16.82 4,588 16.53 3,000 10.23 31.0 30.8 31.1 I»
~
Sindh
KPK
34
25
4.21
2.34
58
19
5.43
1.44
64
18
5.74
1.18
1,097
810
12.75
13.90
1,889
619
17.68
11.08
2,088
572
21.16
10.27
32.5
32.4
32.5
31.8
32.6
31.5 -
c;;·
I»
:::s
(/1
Balochistan 32 13.01 34 10.34 32 8.93 1,024 17.71 1,113 17.43 1,065 13.08 32.4 32.6 33.2
m
(')
0
:::s
50.0-150 0
3
Pakistan 92 1.81 93 1.40 79 0.96 6,454 13.64 6,534 12.96 5,548 10.48 70.4 70.3 69.8 '<
Punjab 48 1.64 42 1.10 30 0.57 3,401 12.55 2,898 10.44 2,068 7.05 70.2 68.4 69.7
Sindh 15 1.82 24 2.20 24 2.18 1,054 12.26 1,692 15.84 1,_653 16.75 72.2 71.9 68.1
KPK 9 0.84 8 0.62 6 0.41 630 10.81 600 10.73 429 7.71 70.2 71.6 68.7
Balochistan 20 8.10 19 5.66 19 5.36 1,369 23.68 1,345 21.05 1,398 17.16 69.6 72.0 72.5

150.0 and above

Pakistan 15 0.30 14 0.21 13 0.16 4,776 10.09 4,153 8.24 5,850 11.06 311,8 296.1 435.3
Punjab 7 0.23 5 0.13 4 0.08 1,847 6.81 1,156 4.16 1,455 4.96 275.7 235.5 358.3
Sindh 3 0.39 4 0.34 2 0.21 936 10.88 1,039 9.72 615 6.23 302.9 282.2 257.0
,·
KPK 0.10 0.09 0.05 289 4.96 332 5.93 277 4.97 268.1 268.0 362.3
Balochistan 4 1.83 4 1.27 6 1.73 1,705 29.49 1,626 25.46 3,503 43.00 383.0 387.5 563.2

Source: Government of Pakistan, Agricultural Census of Pakistan (Islamabad: various editio_ns).

 Chapter 4 The Nature and Direction of Agrarian Change 53

Table 4.6
Tenure Classification of the Farms by Provinces

' Unit Total

I
Owner
II
Number of farms (m)
Owner-cum-tenant
Ill
Tenant
IV

' Census 1960

Pakistan

NWFP
4.859
(100%)

0.674
(13.9%)
1.998
(100%)

0.325
(16.3%)
(41.1%)

(48.2%)
0.835
(100%)

0.137
(16.4%)
(17.2%)

(20.3%)
2.026
(100%)

0.212
(10.5%)
(41.7%)

(31.5%)

Punjab 3.326 1.422 (42.8%) 0.623 (18.7%) 1.281 (38.5%)

(68.5%) (71.2%) (74.6%) (63.2%)

Sindh 0.694 0.15 (21.6%) 0.061 (8.8%) 0.483 (69.6%)

(14.3%) (7.5%) (7.3%) (23.8%)

Balochistan 0.165 0.101 (61.2%) 0.014 0.05 (30.3%)

(3.4%) (5.1%) (1.7%) (8.5%) (2.5%)

Census 1972
Pakistan 3.76 1.568 (41.7%) 0.896 (23.8%) 1.296 (34.5%)
(100%) (100%) (100%) (100%)

NWFP 0.466 0.256 (54.9%) 0.103 (22.1%) 0.107 (23%)

(12.4%) (16.3%) (11.5%) (8.3%)

Punjab 2.375 1.008 (42.4%) 0.683 (28.8%) 0.684 (28.8%)

(63.2%) (64.3%) (76.2%) (52.8%)

Sindh 0.747 0.178 (23.8%) 0.097 (13.0%) 0.472 (63.2%)

(19.9%) (11.4%) (10.8%) (36.4%)

Balochistan 0.172 0.126 (73.3%) 0.013 (7.6%) 0.033 (19.2%)

(4.6%) (8.0%) (1.5%) (2.5%)

Census 1980 1
Pakistan 4.07 2.227 (54.7%) 0.789 (19.4%) 1.054 (25.9%)
(100%) (100%) (100%) (100%)

NWFP 0.528 0.361 (68.4%) 0.072 (13.6%) 0.095 (18%)

(13.0%) (16.2%) (9.1%) (9.0%)

Punjab 2.545 1.385 (54.4%) 0.618 (24.3%) 0.542 (21.3%)

(62.5) (62.2%) (78.3%) (51.4%)

Sindh 0.795 0.323 (40.6%) 0.085 (10.7%) 0.387 (48.7%)

(19.5%) (14.5%) (10.8%) (36.7%)

Balochistan 0.202 0.158 (78.2%) 0.014 (6.9%) 0.03 (14.9%)

(5.0%) (7.1%) (1.8%) (2.8%)

Census 1990
Pakistan 5.071 3.491 (68.8%) 0.626 (12.3%) 0.954 (18.7%)
(100%) (100%) (100%) (100%)

NWFP 1.069 0.835 (78.1%) 0.0.89 (8.3%) 0.145

(21.1%) (23.9%) (14.2%) (15.3%) (13.6%)

Punjab 2.957 2.054 (69.5%) 0.464 (15.7%) 0.439

(58.3) (58.8%) (74.1%) (46.4%) (14.8%)

Sindh 0.802 0.406 (50.6%) 0.061 (7.6%) 0.335

(15.8%) (11.6%) (9.7%) (35.4%) (41.8%)

Balochistan 0.243 0.196 (80.7%) 0.012 (4.9%) 0.035

(4.8%) (5.6%) (1.9%) (3.7%) (14.4%)
54 Issues in Pakistan's Economy

Table 4.6 (contd.)

Number of farms (m)

Unit Total Owner Owner-cum-tenant Tenant
I II Ill IV

Census 2000
Pakistan 6.620 5.135 (77.6%) 0.559 (8.4%) 0.927 (14.0%)
(100%) (100%) (100%) (100%)
KPK 1.356 1.124 (82.9%) 0.084 (6.2%) 0.148 (10.9%)
(20.5%) (21.9%) (15.0%) (16.0%)
Punjab 3.864 3.037 (78.6%) 0.424 (11.0%) 0.403 (10.4%)
(58.4%) (59.2%) (75.8%) (43.5%)
Sindh 1.070 0.704 (65.8%) 0.043 (4.0%) 0.323 (30.2%)
(16.2%) (13.7%) (7.7%) (34.9%)
Balochistan 0.330 0.270 (81.8%) 0.009 (2.6%) 0.051 (15.6%)
(5.0%) (5.3%) (1.6%) (5.5%)

Census 2010
Pakistan 8.264 6.744 (81.6%) 0.604 (7.3%) 0.916 (11.1%)
(100%) (100%) (100%) (100%)
KPK 1.540 1.340 (87.0%) 0.093 (6.1%) 0.107 (6.9%)
(18.6%) (19.9%) (15.5%) (11.7%)
Punjab 5.250 4.325 (82.4%) 0.452 (8.6%) 0.473 (9.0%)
(63.5%) (64.1%) (74.8%) (51.6%)
Sindh 1.115 0.784 (70.3%) 0.045 (4.0%) 0.286 (25.7%)
(13.5%) (11.6%) (7.5%) (31.2%)
Balochistan 0.360 0.296 (82.2%) 0.014 (3.8%) 0.050 (14.0%)
(4.4%) (4.4%) (2.2%) (5.5%)

Source: Government of Pakistan, Census of Agriculture (Islamabad: various editions).

Table 4.7
Tenure Classification of Farms' Area by Provinces

Farms area (m acres)

Unit Total Owner Owner-cum-tenant Tenant
I II Ill IV

Census 1960
Pakistan 48.926 18.721 (38.3%) 11.011 (22.5%) 19.194 (39.2%)
(100%) (100%), (100%) (100%)
NWFP 5.463 1.187 (21.7%) 1.871 (34.2%) 1.722 (31.5%)
(11.2%) (6.3%) (17%) (9%)
Punjab 29.212 11.168 (38.2%) 7.18 (24.6%) 10.864 (37.2%)
(59.7%) (59.7%) (65.2%) (56.6%)
Sindh 10.19 3.229 (31.7%) 1.474 (14.5%) 5.487 (53.8%)
(20.8%) (17.2%) (13.4%) (28.6%)
Balochistan 4.061 2.454 (60.4%) 0.486 (12%) 1.121 (27.6%)
(8.3%) (13.1%) (4.4%) (5.8%)

Census 1972
Pakistan 49.058 19.398 (39.5%) 15.16 (30.9%) 14.5 (29.6%)
(100%) (100%) (100%) (100%)
NWFP 4.251 1.615 (38%) 1.713 (40.3%) 0.923 (21.7%)
(8.7%) (8.3%) (11.3%) (6.4%)
Punjab 31.029 11.95 (38.5%) 11.051 (35.6%) 8.028 (25.9%)
(63.2%) (61.6%) (72.9%) (55.4%)
Sindh 9.459 2.909 (30.8%) 1.759 (18.6%) 4.791 (50.7%)
(19.3%) (15%) (11.6%) (33%)
Balochistan 4.319 2.924 0.637 (14.7%) 0.758 (17.6%)
(8.8%) (15.1%) (67.7%) (4.2%) (5.2%)
 Chapter 4 The Nature and Direction of Agrarian Change 55

Table 4.7 (contd.)

Farms area (m acres)

Unit Total Owner Owner-cum-tenant Tenant
I II Ill IV

Census 1980
Pakistan 47.094 24.533 (52.1%) 12.396 (26.3%) 10.165 (21.6%)
(100%) (100%) (100%) (100%)

NWFP 4.099 2.388 (58.3%) 1.103 (26.9%) 0.608 (14.8%)

(8.7%) (9.7%) (8.9%) (6%)

Punjab 28.898 14.883 (51.5%) 9.334 (32.3%) 5.681 (19.7%)

(61.4%) (60.7%) (75.3%) (55.9%)

Sindh 9.206 4.35 (47.3%) 1.528 (16.6%) 3.328 (36.2%)

(19.5%) (17.7%) (12.3%) (32.7%)

Balochistan 3.891 2.912 (74.8%) 0.431 (11.1%) 0.584 (15%)

(8.3%) (11.9%) (3.5%) (5.7%)

Census 1990
Pakistan 47.319 30.723 (64.9%) 8.982 (19%) 7.614 (16.1%)
(100%) (100%) (100%) (100%)

NWFP 5.828 4.251 (72.9%) 0.902 (15.5%) 0.675 (11.6%)

(12.3%) (13.8%) (10%) (8.9%)

Punjab 27.107 16.656 (61.4%) 6.604 (24.4%) 3.847 (14.2%)

(57.3%) (54.2%) (73.5%) (50.5%)

Sindh 8.604 5.098 (59.3%) 1.04 (12.1%) 2.466 (28.7%)

(18.2%) (16.6%) (11.6%) (32.4%)

Balochistan 5.78 4.718 (81.6%) 0.436 (7.5%) 0.626 (10.8%)

(12.2%) (15.4%) (4.6%) (8.2%)

Census 2000
Pakistan 50.425 36.969 (73.3%) 7.323 (14.5%) 6.133 (12.2%)
(100%) (100%) (100%) (100%)

KPK 5.589 4.243 (75.9%) 0.805 (14.4%) 0.541 (9.7%)

(11.1%) (11.5%) (11.0%) (8.8%)

Punjab 27.762 19.249 (69.3%) 5.401 (19.5%) 3.113 (11.2%)

(55.1%) (52.1%) (73.8%) (50.8%)

I
Sindh 10.687 8.113 (75.9%) 0.736 (6.9%) 1.838 (17.2%)
(21.2%) (21.9%) (10.1%) (30.0%)

Balochistan 6.387 5.365 (84.0%) 0.381 (6.0%) 0.642 (10.0%)

(12.7%) (14.5%) (5.2%) (10.5%)

Census 2010
Pakistan 52.910 39.432 (74.5%) 7.584 (14.3%) 5.894 (11.1%)
(100%) (100%) (100%) (100%)

KPK 5.570 4.348 (78.1%) 0.797 (14.3%) 0.424 (7.6%)

(10.5%) (11.0%) (10.5%) (7.2%)

Punjab 29.326 20.602 (70.3%) 5.368 (18.3%) 3.356 (11.4%)

(55.4%) (52.2%) (70.8%) (56.9%)

Sindh 9.869 7.830 (79.3%) 0.746 (7.6%) 1.294 (13.1%)

(18.7%) (19.9%) (9.8%) (21.9%)

Balochistan 8.145 6.652 (81.7%) 0.673 (8.3%) 0.821 (10.1%)

(15.4%) (16.9%) (8.9%) (13.9%)

Source: Government of Pakistan, Census of Agriculture (Islamabad: various editions).

56 Issues in Pakistan's Economy

Table 4.8
Tenure Classification of the Farms and Area by Provinces (Index 2000=100)

Number of farms (m) Farm's area (m acres)

Unit Owner Cum Owner Cum
Total Owner Tenant Total Owner Tenant
Tenant Tenant

Census 1960
Pakistan 73.40 38.91 149.38 218.66 97.03 50.64 150.37 312.95
KPK 49.70 28.91 163.60 142.79 97.74 27.98 232.32 318.30
Punjab 86.07 46.82 147.10 317.52 105.22 58.02 132.95 349.01
Sindh 64.87 21.32 141.81 149.38 95.35 39.80 200.24 298.55
Balochistan 50.02 37.43 160.44 97.45 63.58 45.74 127.72 174.74

Census 1972
Pakistan 56.80 30.54 160.29 139.87 97.29 52.47 207.03 236.42
KPK 34.36 22.78 123.00 72.07 76.06 38.06 212.71 170.61
Punjab 61.46 33.19 161.27 169.54 111.77 62.08 204.62 257.90
Sindh 69.82 25.30 225.50 145.97 88.51 35.86 238.95 260.68
Balochistan 52.14 46.70 148.98 64.32 67.62 54.50 167.40 118.16

Census 1980
Pakistan 61.48 43.37 141.15 113.75 91.41 66.36 169.28 166.32
KPK 38.93 32.12 85.98 63.99 73.34 56.28 136.96 112.38
Punjab 65.86 45.60 145.92 134.35 104.09 77.32 172.83 182.50
Sindh 74.31 45.91 197.61 119.69 86.15 53.62 207.57 181.08
Balochistan 61.24 58.56 160.44 58.47 60.92 54.27 113.27 91.03

Census 1990
Pakistan 76.60 67.99 111.99 102.96 93.84 83.10 122.66 124.14
KPK 78.82 74.29 106.28 97.66 104.27 100.19 112.00 124.77
Punjab 76.53 67.63 109.56 108.81 97.64 86.53 122.28 123.59
Sindh 74.96 57.71 141.81 103.60 80.51 62.84 141.28 134.18
Balochistan 73.67 72.64 137.52 68.21 90.49 87.93 114.58 97.58

Census 2000
Pakistan 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
KPK 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Punjab
Sindh
Balochistan

Census 2010
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00 I
Pakistan 162.98 193.18 96.54 96.03 111.82 128.35 84.44 77.41
KPK 144.04 160.43 105.04 73.64 95.57 102.28 88.40 62.89
Punjab 177.54 210.55 97.48 107.69 108.19 123.69 81.29 87.23
Sindh 139.06 193.13 73.87 85.41 114.70 153.58 71.68 52.46
Balochistan 147.97 150.81 112.63 144.17 140.93 140.99 154.31 131.09

Tenure classification of the farms and area by provinces (Index 2000 = 100)
Note: Base Year for National Income Accounts and Monetary Statistics is year 2000
Source: This table is prepared from Tables 4.6 and 47.
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Chapter 4 Tt:ie Nature and Direction of Agrarian Ch ange 57

Table 4.9 ' 4.3 SUMMARY AND F URTHER READING

Average Size of Operational Holding: 1960-201 O

i Farm size
(acres)
1960 1972 1980 1990 2000 2010
4.3.1 Summary
This h,1s not been an easy chapter to deal with . It ha s been
made cun1bersome by the hu~e array or number's prese111ed
here, which are no doubt off-putting · fo r m.1nr reatlers .
All sizes
Pakistan 10.07 13.04 11 .57 9.38 7.6 6.4 Nevertheless, we copld not avoid the refer nee to these
Punjab 8.78 13.07 11 .75 9.20 7.2 5.6 ,·cry useful and esse- numbe rs. They brin g toget her very
Sindh 9.91 12.65 11.58 10.76 10.0 8.8 import,lllt data from the 1950s IO the present, ai1d allow
the intm:stcd readt'r to exp,md on th"' simplified and brief
Under 5.0 analysis pr.:sented here.
Pakistan 1.91 2.42 2.40 2.98 2.1 1.9
2.96 2.1 1.9 The essential purpose or the d:na prcst'nted is to t'nable
Punjab 1.86 2.43 2.41
3.07 2.61 2.88 2.7 2.4 the observation a.nd study or the pattern or agricultural
Sindh 3.04
transition . We observe that tena ncy an d sharecropping,
5.0-12.5 essential cornerstones of feudalism, have fallen drastically.
Pakistan 8.14 8.22 8.01 7.69 7.6 7.4 both in the number of farms and in the area farmed . Tenancy
Punjab 8.14 8.23 8.05 7.73 7.6 7.4 farms and sharecroppers have been replaced by owner-
Sindh 8.23 8.43 8.22 7.69 7.6 7.5
operated farms . This is a· major change in the pattern of
12,5-25.0 agriculturnl produc:tion in Pakistan and shows the direc tion
Pakistan 17.19 16.45 16.48 16.40 16.6 16.7 for the future. This chJptcr ho:1s al so tried to show how
Punjab 17.06 16.29 16.16 16.02 16.3 16.2 different cl,1sses In agricul ture coexist and the nature of their
Sindh 17.46 16.76 17.11 17.15 17.2 18.3-- r relationship with each other.
25.0-50.0
·i .::\
Pakistan 33.10 31 .89 31 .77 31 .50 31 .5 31 .9 4.3.2 Further Reading
Punjab 32.79 31.62 31.48 30.94 30.8 31.1
Although a number of books and papers have contributed
Sindh 33,51 31.97 32.40 32.48 32.5 32.6
on the agricultural sector in Pakis tan, most have presen ted
50.0-150.0 , a static analysis and have not been concerned wi th cha nge
Pakistan 74.31 71 .86 72.01 70.33 70.3 69.8 or transition over a period or time. The process itself has nor
Punjab 100.70 70.29 71.69 70.11 68.4 69'. 7 been observed, and analysis has often been restricted to one
Sindh 171.50 77.92 72.53 72.22 71 .9 68.1 point in time. This is a major shortcoming of such work. for it
150.0 and over does not show how the present si tuation and structure hav-e
Pakistan 349.70 280.10 286.00 311 .44 296.1 435 .3 evolved. One major exception has been the work by Professor
Punjab 285.20 255.6!) 277.60 275.09 235.5 358:3 Mahmood Hasan Khan of Simon Fraser University, Canada.
Sindh 398.50 249.30 322.00 302.74 282.2 251!0 whose Umlerd(Ve/1Jpti1ent and Agrarian Scruccurl in Pakistan
( Boulder, Colorndo: Westview Press, 1981 ), .ind l.t:et11res on
Source: Government of Pakistan, Census of Agriculture A9r,1ri,m Trm1sf,mm11iv11 i1,r Pakisian ( Islamabad: PID-E, 1985 ),
(Islamabad: various years) . present a historical analysis an<l the process.of developmm1.
Some oJ the refere nces Listed in Chapter 3, dealing wirh the
, Green Revolution, which wa~ an importiln t impetus to 1he
nJture and direction of rl1e change discussed in this chapter,
would also be useful for the reade r.
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58 Issues in Pakistan's Economy I
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Table 4.10 l
Summary Data on Number, Size, Area and Operational Status of Farmt by Tenure Baaed on Agricultural Census
Data: 1960-80
r
,

!
Pure Owner-cum-tenar t farms Pure All
Priva te rarrns owner tenant private
farms Owner Tenant Total
farms farms
j:

Numbers (m)
1960 1.998 n.a. n.a. 0.834 2.028 4.86
1972 1.569 n.a. n.a. 0.897 1.296 3.762
!
1980 2.227 n.a. n.a. 0.789 1.054 4.07

Ave. farm size (m acres)

1960 10.06 n.a. n.a. 13.20 9.46 10.07
1972 13.04 n.a. n.a. 16.90 11.19 13.04
1980 11 .57 n.a. n.a. • 15.71 9.65 11.57

Farm area (rh' acres)

1960 18.723 6.235 6.107 12.342 17.864 48.929
1972 19.399 6.988 8.172 15.16 14.5 49.059

Area operated by (m acres):

Own er
1980

1960
24.533

18.723
5.741

6.235
6.655 12.396

6.235
10.166 47.095

24.958
!
1972 19.399 6.988 6.988 26.387
1980 24.533 5.741 5.741 30.274
fI
I:
Sharecropper 1960 7.776 4.776 16.495 21.271

) 1972 6.351 6.351 12.564 18.915

1980 5.078 5.078 8.511 13.589

Lease holder 1960 0.979 0.979 0.962 2.941

1972 1.584 1.584 1.76 3.344
1980 1.421 1.421 1.479 · 2.9
II

I
Other 1960 0.352 0.352 0,407 0.759
1972 0.237 0.237 0.176 0.413
1980 0.156 0.156 0.175 0.322

,.· ' ·~
n.a. = not available. I ,• .
I
Note: (1) 1 ha= 2.47 acres. l
(2) The 1960 Census, based on an extractive survey of the land revenue ecords, may not be comparable to the 1972 and 1980 I
Censuses. based on population surveys. I
Source: Government of Pakistan, Pakistan Economic SuNey 1994-95 (Islamabad, 1995).

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Chapter 4 The Nature and Direction of Agrarian Change 59

Appendix 4.1

production, supervise fret labour, and innovate. Profit and

Classes in_ Agriculture wag.es appear as ba$iC economic categories for lhe first time
Mahmood Hasan_Khan in Lectures on Agrarian Transforma tion in the distribution of output, al tho ugh ren l may still remain as
-writes: an importan t comp.onent of income. Rent does not di ap pear.
Thirdly, there is the class of family farmers who could be
~ere are at present five distinct classes in the agricultural ca-lied middle peasants.' This clas~nsists of farmers who
of
sector Pakistan. . may own, rent or lease part of the land they cultivate. They
First, there are landlords who own large areas of land.and may even rent, or lease out part of their la nd to others.
rent almost all of it in small parcels to landless sharecroppers. However, these landowners depend almost entirely on family
Landlords do not rent or lea·se land from others. Labour is or household labour for production. They usually do not
entirely provided by the sharecropper households. Landlords work for others, nor do they hire others to work on their
. neither work for themselves nor provide ·their labour-power farms. These farms are probably nearest to the classic peasant
to others. Their overlordship on land is exercised mainly farm of Chayanov, the famous Russian economist who gave
through their agents (kamdars). In Sindh, for instance, this idea and developed a theory of peasantry. Chayanovian
sharecroppers play no role in production decisions. .Profits peasants have shown great resilience in the face of capitalistic
. and wages as economic r~wards do not exist here; only rent development of agriculture in history in Russia and other
.. exists. Primordial and traditional factors, and ,not economic countries.
· considerations, play a central role in determining the nexus of Fourthly, there is the class of ~ha recroppers, or hods as
landlords and tenants, including their shares in output. they are called° in Sindh. Landless sharecroppers rent all the
Secondly, there are farmers. Contrary to the popular land they cultivate and share the output with 1-andlords
perception in Pakistan that there are 'farmers' with complete on some traditionally-determined basis. often in "ki nd. This
homogeneity of interests, I emphasize heterogeneity. The class may include some poor peasants, whom I call marginal
capitalist farmers, who cart also be called rich peasants, may landowners and who must supplement their meager income
own most or some of the land they cultivate and rent or lease by sharecropping on small farms of land rented from the
from others part of it. They do not normally rent or lease l_a-ndlord or othm. Sharecroppers -do not hire lab.our and
their lands to others. Others' labour is the basis of production depend almost entirely on their household labour. They may
and source of surplus value . for capitalist farmers. Landless sell their labour-power to landowners to supplement their
workers or the so called free labour are hired for wages. Rich meager income. They are the linchpin in the -feud al system
peasants do not sell their labour-power to others: they work which exists in parts of Pakistan even today.
on their land as entrepreneurs par excellence. They organize · The fifth and final class is that ofwage -workm. This class
consists of what 1 call unattached (landless) workers, who must
earn income by selling their labour-power. They work rnaii1ly
Table 1 for rich peasants or capitalist farmers. Their wage is p·artly
Agrarian class dl-fferentiatlon In Pakistan in cash and partly in kind. They may work on a perm.anent
uind Labou-r basis but most ·of them find only seasonal work. They may
Class
supplement their incomes by working outside agriculture.
Landlords LO > 0 SE 0 These workers constitute the burgeoning proletaria t for
LR 0 > 0 Hlj > 0 agriculture and industry.
LRi = 0 Hlo 0 1 want to clarify here three points in [Table 4]. First, hiring
2 Capitalist farmers LO > 0 SE > 0 of- labour by landlords implies use of share-croppers, i.e.
(rich peasants) LR0 0 Hlj > 0 the labour power of others. It is a reference lo the attached
LR1 > D H'-o = 0 labour. Secondly, family fanners may work for others either
3 Family farmers LO > 0 SE > 0 in or outside agriculture. This, of course, depends on the
(middle or poor LRo > 0 Hl.j = 0 requirement of the family farm and the level of income of
peasants) LRi > 0 Hlo > 0 the hous~hold to reproduce its labour power. Thirdly, share-
croppers may also work for others outside the landlord-tenant
4 Sharecroppers LO = 0 SE > 0
nexus, either in or outside agriculture. Finally, leasing of land
LRo 0 Hlj 0
by capitalist farmers or rich peasants could be either from
LRi > 0 HLo ~ 0
landlords to ·whom they pay the ground rent or from the
LO SE 0

--
5 Wage workers = 0 middle to poor peasants on lixed payments.
LRo 0 Hl.j > 0
LR1 0 H'-o ~ 0 Our typology cuts across the simplbtlc- tenure categories
Note: LO = land owned; LR 0 = land rented out; LRi = land of iessors and lessees. It also does not maintain a direct
rented in; SE = employment; Hlj = hiring in labour; rela.tj~nship to large and small holdings. Lessors could be
Hlo = hiring out labour. landlords or even middle or poor peasants owning but not
Source: Khan, Mahmood Hasan, Lectures on Agrarian Trans- using land. Therefore, yo u may be lumping together in this
formation in Pakistan Oslamabad: PIDE, 1985), 10-13.

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 60 Issues in Pakistan's_Economy

cn tegmy different sorts of people such as landlords and small These groupings do not even assist in analysing the problems
owners. Lessees could be ca pitalist farmers or sharecroppers of Farm organization in relation lo the issues of efficiency and
and poor peasants supplcmcntir1g their own holdings. So, equity in Pakistan. Finally, and more importantly from the
you arc pulli11g toucther apples and oranges in one box. I point of view of rural poverty, they do not reveal the impact of
am saying: gel out of this box which is empty, nonsensical. A extraction of agricultural surplus for capitalist accumulation
classification based on the arbitrary size and tenure categories on each of the classes. ·
does not reveal the true relations of production. TI1ey mystify Source: Khan, Mahmood Hasan, lectures on Agrarian
the creation and appropriation of social surplus in agriculture. Transformation in Pakistan (Islamabad: PIDE, 1985), 10-13.

Appendix 4.2

Transition in Pakistan's Agrarian Agriculture Census Reports. Generally speaking, Sind h has had
the least concentration of farms due mainly to the widespread
Structure sharecrop tenancy; NWFP has been at the other end because
The aorarian strucltfre has undergone several changes since the of the preponderance of self-cultivation of small holdings as
early 1950s. Some changes renecl the effects of various tenancy evident from Table 2. Note that land concentration has declined
and land reform acts, but most have been brought about by mildly in all provinces since 1960, but with some interesting
rapid populnlion growth, laws of Inheritance, new technologies changes during the period of 1960 to 1990, Apparently, land
anrl the for.ces or markets, rural to urban migration :md now of concentration fell significantly in the 1960s, but rose marginally·
re11\il lances. ~ml government policies of support prices, inputs in the Punjab and Sindh in the 1970s and substantially In all
sub~idies, and rarm credit. Landownership, as shown by individual three provinces in the 1980s. These changes reflect a clear
rernrds, is still quite concentrated, although the concentration tendency towards reduced sharecropping tenancy and increased
seems to have declined in every province. incidence of self-cultivation on all farm sizes.
The numher of owners and the area of small landholdings The average farm size has declined. from 5.J hectares to 3.8
(less than 5 hectares) has increased somewhat ; the proportion hectares, but the average size of large farms has increased. The
of l.irnc landowners (more than 20 hectares) has gone down number' of Farms has increased from about J.75 million in the·
rro111 2.7 to 2.0 J}Cr cent and their share in the total area has early 1970s to just over !i million In the early 1990s. The share
declined from 26 tci 23 per cent. ln Pakistan, about 96 per .cent of small farms has increased slightly (from 67 to 71 per centl
of the landowners have holdings of less than 10 hectares, but in number but declined in area from 52 to 39 per cent. TI1ese
they own 64 per cent of the area. The highest concentration of d1a11ges rr.nect the large relative increase in the number and
landownership is in Sindh. Small landowners (with less than 2 area of very small farms. While the share of large farms has
hecta res) are preponderant in the NWFP (96 per cent) and the fallen in number (from 11 to 7 per cent) their share In the area
Punjab (00 per cent), but they own only 55 and 36 per cent of fell only slightly from 43 to 40 per cent. Tenutial arrangements
the area in the two provinces. They comprise 40 per cent of all seem to have changed significantly in the last thirty years. ·The
. la ndow ners in Sindh and own less than 10 per cent of the area. proportion or owner-operated farms has increased signitlcantly
The laf!Je landowners (with more than 20 hectares) own 38 per both in number and area. In fact, the owner-operated area·
cent of land in Sindh, 20 and 14 per cent in the Punjab and has increased from just over one-half to three-quarters of the
total farm area. Most of the owner-operated fa rms are small
NWl7P, respectively. ·
and located in t~e Punjab and NWFP. Sharecropping is still the
Three major rhanges in landownership seem lo have occurred
major form of tenancy, especially in Sindh and some areas of
since the late I9GOs. First, the ownership and area under very
the Punjab and NWFP. Sharecropped farms are in tlie range of
small landholclings have increased mainly due to the subdivision
J lo 5 hectares, but they have declined sharply in -both number
of holdings by the law of inheritance and rapid population
(J4 to 19 per cent) and area (from JO to 16 per rentJ. A similar
_growth, though some of it may be the result of distribution of
reduction has bi:en observed in the case of 'owner-cum-tenant'
land lo the landless following the land reforms of 1972. Second, farms, but large farms have been Increasing. The tendency away
there has been a significant fall in the number and area of very from sharecropping is clearly renected in the reduction of tenant-
larue _lanc.lholdinys due to the: intra-Family land transfers in operated area from 46 to 26 per cent of all farm area. lt seems
anticipation of and in response to the Land Reform Acts of 1959 that" large landholdings dependent on tenants have also reduced
and 1972. Finally the medium-size holdings (10 to 40 hectaresl
their tenant-operated area.
have gained, especially in Sindh, both in number and area. The transition from the quasi-feudal to the capitalist mode of
or course, nol all landowners cultivate their land, either their agrarian structure in Pakistan has made the land tenure system
own or ,myonr else·s, and not all cultivators own land. TI,ere are, ~ven morr. differentiated than it was before the 1960s. 11,e
therefore, several lcna.nl)' arrangements for cultivation purposes, capitalist farmers have emerged from the ranks of landlords and
of which the sharecropping tenancy and self-cultivation l>y · rich peasants. Labour is increasingly provided· by landless workers,
(mainly small) landowners are the major forms. The access to who could be From among the poor peasants (family farmers) and
land for cultivati on is rcnected in the distribution of 'operational displaced or evicted sharecroppers as the landlords fra~sform into
holdi ngs' or fa rms by size and tenure. The data o·n changes in capitalist farmers by extendrng their self-cultivated (khud kasht)
the rli,tribution of farms and farm area by size and tenancy area. However, not all of the landless labour is absorbed in the
h;1vc been pul>lished in the 1960, 1972, 1980, and i990
r
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Chapter 4 The Nature and Direction of Agr~rian Change 6l

Table 2 ,•
Changes in inequality in landownership and acc~-ss to land 1950/1990

Year Landowners and owned area Operational holdings and farm area

Pakistan Punjab Sindh NWFP Pakistan Punjab Sindh NWFP

1950 0.64 0.62 0.66 0.49

1960 0.62 0.59 0.51 ~
1971/72 ·o.s7 0.53 0.59 0.41 0.52 0.49 0.43 Q.64 I

1976 0.55 0.52 0.58 0.41

1980/81 0.53 0.49 0.55 0.38 0.53 0.51 0.47 0.57
1990 . 0.57 0.53 0.50 0.61

Source: The data for landownership by holding size are from the Federal/Land Commission based on individual land records. The data
for operational holdings (farms) and farm size are from the Agricultural Census Reports of 1960, 1972, 1980, _and 1990.
Note: The ratios are the Girii Coefficients for landownership and access to land use.

capitalist sector of agriculture. Increasing numbers of unat1ached from rich farmers, or even of joining the ranks of capita_list
workers are either engaged in non-farming activities in the rural farmers. The peasant system at the lower end has probably thus
area or migrate from the village to towns and cities. extended its life-span and remains a contending force to the
The gradual •djssolution of the quasi-feudal and peasant rapid development of capitalist agriculture in Pakistan.
systems has revealed several Interesting features. In the landlord- The growth of wage lab our is an indicator of changes in the
-tenant system, landlords have rt<it entirely been in favour ·of agrari an structure. Despite the decline in the proportion of labour
evicting the sharecroppers on a large· scale. This is partly to working in agriculture, from 60 per cenl in the ea-rly 1960s to
avoid legal problems which a large-scale tenant eviction could around 45 per cent in the mid- I990s, the absolute numbers are
cause. The more important reasons are perhaps economic. still risi ng. The level of demand for labour and the conditions
-Subsidized inputs, including tractors and other machines, since of employment are directly affected by the orga nization and
the late 1970s have raised private profits which the landlords are performance of the agriculture sector itsel f. Employment in
unwilling to share with their tenants. On the demand side, the agriculture is of two types: (i) self-employment as household
structure of production has been changing in terms of cropping ·
·Jabour on farms cultivated by small landow ners a·nd tenan ts,
.. patterns in response to the growth of .urban population, rising
and (ii) hiring out of labour by the households of landless non-
income levels and expanded export opportunities. Some landlords
have, therefore, adopted the policy of sharing the cost of all farming workers, tenants and small landowning peasants_. Seyeral
modem inputs with sharecropp~. including those which have significant changes ha ve occurred in the composition and. use
weakened the tenants' bargaining position by making the cost of labour in the last twenty-five years. The use of fami_ly la~our
of animal power high to maintain. Also, landlords have expanded on small farms has not declined by much, but its use· on l~rger ·
their self-cultivated area, mainly by reducing the size of parcel farms has certainly fallen. While permanent hi red labour was
they give to each sharecropper. These policies increase the pool · traditionally used mostly on large farms, fewe r farms are pow
of dependent . and relatively cheap labour wit~out increased reporting its use. A high proportion of farrners now hire casual
dependence on seasonal wage labour, the supply of which rnay labour: Its share in wage labour has Increased fro m JO ro _nearly
be uncertain and c_ostly. 55 per cent. Pakistani farmers no Jong·er depend entirely on
ln the peasant system, increasing involvement in non-farming fam ily workers and most or them engage outside workers, at least
. employment and .migration of part.-of . the household labour for some of the time during the crop s~ason'. lt is also a fact that
have become a necessity for the poor and even mid.die peasants an increasi ng proportion of the labour from farm households is
since they bring additional income for survival. Non-agricultural engaged in non -farmin g activities on a short- or long-term basis
incomes, particularly remittances from outside the rural area, have. because wage income from fa rming activi ties is insufficier1t to
also become a source for acquiring additional land which can be meet the growing needs of the fa mily in a cash economy.
leased or bought from the poor peasants (small landowners) who Source: Khan, Mahmood Hasan, 'Agriculturnl Developme,nt
cannot evidently survive on their incomes from the small plots and Changes in the Land Tenure and Land Revenue System in
they own. Addition to one·s landholding means increased chances -Pakistan', in Khan, Shahrukh Rafi (ed.), Fifty Yea rs of Pakistan 's
of survival in farming, with reduced vulnerability to competirfon Economy (Karachi: Oxford University Press, 1999), 12 1- 125.
C

NOTES
I. Khan, Mahmood Hasan. UnJirdrvdap111mr ,11r.f ,tgr,ll'i,111 4. .Ibid. 24_.
St111c/11re in Pakistan (Boulder, Colorndo: Wl.'.stl'iew Press, 5. Ibid. 2( .. ,
198 1). 2. 6. Khan, ·,'t\ahm1x1d Hasan, 'Classes and Ar,ra rian Transition
2. Khan, Mahmood Hasan, Lmurl'S oir Ajrari,m Tr,1nsfil/l1-1ariv11 in P,1ki~tan', i11 Ali, Karama1 (t"d .), P.:i.kist,111: Th~ PtJlitfo1{
in A1kistan ( Islamabad: PIDE, t 985 ). EcanL>111yvfRur.il Dt'vtdL1p111mt (Lahore: Vang ard, 1986),_'~46.
3. Ibid. 24.

I'
 I I

Agriculture: Critical Issues

In rhc previous rhrce chap1crs, ,, history of the development single fi.i;ure which shows the extent of the contribtllion of
of .1griru )111re in f'akisl,lll has been presented, where 1hr ,1gric11J111re lo Pakistan's gross domestic ·prodtKl (GDP); in
fonis h·,,s hccn un ·Lhc changes 1ha1 have taken place since J 949/50, agriculture was by far the largest sector, contributing
the t in1c or the Mughal Empire. So far, we have discussed more than 53 per cent to GDP; in 2012, this sha re was down
hbw Lhe process or change was iniliated and the n<11urc or to only 21. I per cent, i.e . less 1han even one-qua rter. This is
Lhat ch,mgc. We have see n how, rrom pre-capitalist or feudal despi1c all the progress, growth, and dcvel<,pmcnt that was
modes o r production in agriculture, capitalist forms emerged made in agriculture followin!I the Green Revolution, and other
· and hnw they then established themselves, becoming the salient milestones. While in 1949/50 agriculLure comrilni ted
· dominant form of prodoction. In ,1 II or this sto1y of agriculture, more than half of GDP. today I.he services sector colllributes
,IVl' lwvc seen how economic and social relations h.ivc changed hair, and Is more than twice as la rge as agricult ure. Another
· over time. Howcve1: while we have learnt a great deal about equally important statistic regarding agriculture is the fall in
this transformation in agricullllre, we have learnt nothing the share of thr labour forcr employed in agricul tu re, from 65
abou t what is grown, what actually constitutes agricultural , per cent in 1950/1 to 45 per cent today, ahhough agriculture
production. and so on. This chapter wm fill that gap. . is still the largest sector in terms of employmen t. However,
We will fir st inlroduce lhe nature of agricultural productim{ rural areas now also have a large economic component called
itse lf- crops grown. yields, area· under cultivation, etc. the 'non-farm' or 'non-agricultural' sector, which generates ·
The p1111mse will he to inform the reader about Pakislilni ;ilmost 60 per cent of total nm:il incomes, a significant
aµrk11l111 rc i11HI how It lliu changed since 1947. After a broad development in the rural and agricultural sector In l'akistan. 1
overview, salient contemporary issues related to agriculture . The· total geographic area of Pakistan is 79.6 1 million
will be introduced ,incl discussed before we close this part or · hectares (or 196.64 million acres), and the 'reported' area
the book on the agricultural sector. in 2012 was 73 per cent of the total area (Table 5. 1 ). (The
reported ,uca is that amoun1 of the total geogra phical 11rca
for which official records exist. II has risen to 73 per cent
5.1 AN OVERVIEW AND MAJOR TRENDS today from 58 per cent in 1947/8.) 2 The non-reported area
\' (27 per cent of Pakistan) for which records do not exist 'is
The agriculwral s_c ctor in Pakistan is classified as containing due 10 lar11e tracts of unsellled lands in most pa rts of ·1he
fi ve subsectors: ma jor crops, minor crops, livestock, fisheries, northern tribal territories in Khyber Pakhtunkhwa and in .the
an d forestry (sec Figure 5. 1 ). While the major crops make north-western and western parts of.Balochistan; sonie south-
the l<1rges1 .contribution to the GDP from the agricultural eastern and eastern desert areas in the Punjab and Sindh are
sector as Figure 5. 1 shows, their contribution has fallen also included'. 3 The fact that there has been an increase of 13
rn nsidcrably in the last 1hir1y years. In £act, the fall in the per cent in reported area since 1947 shows that larger areas
con tributio n frnm major crops has been made .up by an .ind tracts of the land have bcrnme 'officially' part of Pakistan
inc,ca se in lives tock farmini; and production, or the 'white and arc accountable for. This process is important fo r revenue
dairy rcvolurion', as it is being callccl, where livestock's r<:"cords, inheritance and other purposes.
nintribution has doubled in thirty years. For agrh.:ultural purposes (and our ;inaly~ls) the reported
I· The rabi (winter) and kharif (summer) seasons divide the area is the relevant area. As one would expect, however, not
/agricultural calendilr. In rabi, the main food crop ~rown is all of the reported area is cultivable-in fact, in 20 12 as much
-·· wheat, with toli,:icco tire largest cash crop. In khanf, collon as 41 per tent of this area was not available for cultivation
and sugar cane, both cash crops, arc cultivated along with rice (Table-5 . 1 and Figure 5.2) . In 1948 this proportion was 48 per
,1s 1hc main food crop. Interestingly, it is the kharif season that cent, while in 1980/1. oi1Iy 37 per cent of the reported area
provid es Pakistan with its most important exports, colton and was unrnltivabk. This interesting trend is like a U-shaped
rice, and hence lloods due m cxcc~sivc or prolonged monsoons curve, where th·e area not available for cultivation is very'high
ran pla1• havoc, not just with agrlcultural production, as they in 1948, almost half of reported area, then falls, implyin~
did in 2010 and 2011, but also with industry and exports. As that more land as a percentage can be cultivated u pon, and .
we show in subsequent chapters. this has been the case many then rises again in the late l 990s . There are .proJ:,ably two
· vcf')' important reasons for this trend. Firstly, as we have .
limes in Pakistan's past.
seen in earlier chapters, following the commercialization of
..
Tl1e extent of change in Pa kistan's overall economy and ,• ,

society ove r the t..1,1 65 years can best be summarized in a agriculture with Green Revolution technology, m ore land

,-:
t
k
 Chapter 5 'Agriculture: Critical Issues 63

Table 5.1
Land Utilization: 1947-2012 (in MIilions of Hectares, with a Total Area of 79.61 Million Hectares)

Not available Total Area sown Total

Reporte_d
Year for area more than cropped
area
cultivation cultivated once area

1947/8 46.70 20.82 14.69 0.95 11 .1;33

1960-1965 . 50.52 18.94 17:78 1.68 15.~
1965-1970 . 52.98 19.08 19.19 1.99 16.28

I 1970-1975
1975-1980
53.53
54.27
20.50
20.62
19.21
19.84
2.54
3.30
17.04
18.44

i 1980--1985
1985-1990
56.29
57.87
21.29
23.97
20.32
20.78
4.09
4.79
19.68
20.49

Il
1990-1995 58.04 24.49 21 .17 5.70 21 .86
1995-2000 59.12 24.51 21 .90 6.37 22.83
2002/3 59.45 24.36 22.13 6.71 22.15
2000-2005 59.43 24.31 22.17 6.78 22.35
2005-2010 57.13 23.20 21.67 7.66 23.66
2010-2012p 57.76 23.4 22.1 7.03 22.75

Note: P = Provisional
All figures are five years average except 2010-2012 (2 year average)
Sources: For 1947/8: Ahmed, Viqar and Rashmid Amjad, The Management of Pakistan 's· Economy, 1947-82 (Karachi: Oxford University
Press, 1984), 110.
For other years: Government of Pakistan, Pakistan Economic Survey (Islamabad : various years) .

II
Figure 5.1
The Agricultural Sector
Five subsectors: major crops, minor crops, livestock, fisheries, and forestry

Share in agriculture's contribution to GDP (%)

If 1949/50 1980/1 2002/3 2011 /12

-I Major crops
Minor crops
52.0
12.5
51.87
17.22
40.64 .
15.90
31.9
10.1
· Livestock 34.4 26.36 38.85 55.1 . .
Fisheries 0.7 3.53 3.48 1.8. 1980/81 Forestry
Forestry 0.5 1.02 1.13 1.1 1.02

AGRICULTURE'S CONTRIBVTION TO GDP (") Livestock

26.36
60 ~ - -- ------------------ Majo r crops

l 50
40
51.87

30
20

10
0
FYSO FY60 mo FY73• FY74• FYSO FY90 FY 00 FYrn· FY12P
2011/1.2 Forestry
-+-Agriculture -a-Major crops ...,_Minor crops 1.1
~Uvestock --Fishlns -C,....forestry

Rabi (winter) crops: wheal, barley, gram, tobacco, rapeseed, and mustard
Livestock
Kharif (summer) crops: cotton, rice, sugar cane. bajra, maize, and sesame ss:1
Food crops: wheat, rice, bajra, jawar, maize, barley, and gram

Cash crops: cotton, sugar cane, tobacco, rapeseed, ·mustard, and sesame
 64 Issues in Pakistan's Economy
I
i
f
w,1s brought into cullivation-1his explains the increase in Fi"gure 5.2
cultivable areil . The rail in later years could he due to the Land Utilization: 1959/60 and 2011 /12
l'aslcr increase in reported area compared 10 the colonization (% Use of Reported Area)
or new land. But since reported area has increased by only
20 per cent over the I.1st rive clec<1des, compared to the 30 per
crn1 increase iii 101al area cultivated, this cannot be the case. Forest area
-1959-60 ·
Tiu: other re.1sons n1uld be inncasing urbanization, where 3%
urb,111 land hns been creeping on 10 agricultural land for the
pmposcs or i11du s1ry ,ind residences, especially in the Punjab; Total area
or w.i1erlogging aml salinity, which is slowly eating away the cultivated
land that was on ce cultivable. In the last decade, since 2000. 34% Not available
for cultivation
ii seems tha1 1hcre h.is been a far sharper rise in the pron;ss
42%
nr trans rorn\ing agri cullural l.ii1d into urban and semi-urban
hnus ing. resulling in further and growing urbani-zation.
Totill cultivated are a in Pakistan was 36.3 million acres in
19471 nml 54.59 11\illion acres in 2012. ll was 32 per cent or
rcporlcd area in 1947 and now constitutes 38 per cent. Table
5.1 provides basic data about land utilization in Pakistan.
From the table we sec that, as irrigation has expanded, so Forest area
has multiple cropping (area sown more than once). ln the 7¾
period 1960-5 only 9 per cent of the total area cultivated was
used for multiple cropping. while by 2012, this had risen to
32 pe r CC III. Not available
}If we exa111i11c the dat,i in Tables 5.2 to 5.7 rq:arding for cultivation
/ ' ~ r i cu l1 urn I Olll put and prod uclion, ii number of interesting 41%
' features ilre observed.
I. T.:ib le 5.2 shows 1hat in terms or agriculturnl production, Total area
not ~urp risingly, <1 11 agricttltural products_have increased. cullivated
With newer 1cc hnology, _more land available, increased 38%
dem a nd bu1 h du mes tic and foreign, Pakistan's agricultural
production has increased manifold. Iii Table 5.2 two sets
or se ries with 11il'ir base years in 1959-60 and 1999- Nole: P "" Provisional
Source: Government ol Pakistan, Pakistan Economic Survey
201 2 show that production more than . tripled in many
(Islamabad: various years).
r.11c~orics hy th e mi<l-1980s, and then compared to
1999/00 has increased by about 25 per cent in food and
'other' crops. Nevertheless, while there is much \'ariation 20 IO for wheat and sugar cane. while rice produc tion also
from year to year, iL seems that in the last decade there has rose after 2005. In the decade 1980- 90, the average annual
bccn an upw.ird trend. growth of major crops was 3.34 per cent, which fell to
2. In T,1ble 5.3 we sec that the total area under food crops around 2.4 per cent in the 1990s. Both total prod uction -
hil s increased by more than 50 per cent since 1959/60. nf wheat nnd rice fell slrnrj,ly In the three years fotlowlnM
Whc..i 1 Is the large st sown crop and today constitutes 66 1999/00, as did production of' c1II food grains. While lower
pn cent or the' iotal area of rood grains, up from 60 per rates of increases in outptll arc a clisLurbing factor, so 100 is
cent in 1959/60. For the four 111<1jor crops of Pakistan, the the instability and variability in output from year to year,
JTCJ under whc<1t in thi s period is up 11 I per cent, rice 160 4. While increases in total area sown and total qu antity
pe r ce nl, co tton I Ic, per cent, and sugar cane 313 per cent. pro<.luc.ed ~re important in their own right, yield per unit
111 th e 1960-5 period, the four nwjor crops covered about of land (per acre or hectare). is a better indica1or o f how _
53 per ce nt of w 1al cropped area, whereas by 1995/6 thi.s · agriculture is progressing. Table 5.5 shows the average
had im:rca~ed subslantially to 64 per cent, ,rnd in 2011/12 . yields for major crops. Comparing the period 20 12 with -
io (,6 per Cl'n!. (sec Figure 5.3 for changes· ln 1hc rel111lvc the early I 950s, wheal's yield is up from 776 kg/hectare
posi1ions of crops) . to 2,774; rice is up from 878 to 2,218, ah hough much
3; 1,11 ,,I production shows that between 1950-5 and 2012 or this improvement came in the early years; sugar cane
(Table 5.4) for all major as well as minor crops, there has is up rrom 29,180 to 55,000; and cotton is up from 212
l.Jcen a very subst,:mtial increase-almost scven-fold----:-in to 770. This table, perhaps, best exemplifies the huge
1n1a l output over the last sixty-two years. Although overall impact l>r the Green Revolution, where due to the high
oulput' for major crops has increased, what is discerning yielding variety seeds for wheat and rice there was ·a
i~ th,1t the ,·atr tf i11c1-case, the ;1vcra1tc annual growth rate marked increase in output. For example, between I 960/5
nr rnal or crops since 1980, had fallen, but has made a very a nd 1974/5, the yield for wheat Increased by 59 pe r cent,
mark~d incrciJs·c over I he last few years, particularly after and [or rice by 55 per cent. Betwecn 1974/5 and 2012, the
 Ch.apter 5 Agriculture: Critic al Issues 65

Table 5.2 yield fo r rice increa sed by 43 per cenr, J l1ho11gh th.:- yield s
Index of Agricultural Production: 1959-2012 for wheat concinued to show large increases, by as much
as 12 l per cent. However, ir now touk rwo decades . to
Food Fibre Other"
Years All crops achieve whac was achieved earl ier in only one decadt'. Jusc
crops . crops crops
as output has varied and been instable, so has yield ·per
1959/60 100 100 .. 100 100 hectare. In che pt'riod I 990-200 I, w hea l's yield was up in
1960/1 -100 98 103 103 only five of chese eleven years, falling below thi;: previous
1961/2 109 105 111 122
·128 151
year's in six r:ears; rice did only margi n.ill y bi~ and
1962/3 119 108
118 - 108 144 124 improved on yield ompur. 1n seve n of these eleven years.
1963/4
1964/5 128 120 130 162 5. Table 5.6 shows how rhe sources of irrigation in Pakistan
1965/6 127 107 1.42 1_81
·1 35 114 156 189
have changed over the last rony yea rs. In 1950/ l canals
1966/7
1967/8 157 · 150 171 170 provided 81 per cenc or all irrigat ion, while in 1011/12 they
1968/9 168 160 180 184 prov ided 60 per cent. Tube well s, which were almosc n·on-
1969/70 186 177 185 214 ~xistem in the 1950s, now prov ide as much as ·37 pa cent
1970/1 174 1-64 188 195 of irrigacion.
1971/2 183 170 · 245 169
1972/3 188 181 243 163 6. Given the rise in output a-nd production over rhe lase few
1973/4 196 1l)O 228 188 years, one might assume thJt the· people of Pakisran are
1974/5 187 183 220 171 belier fed now than they used to be. However, the high
1975/6 199 207 176 193
1976/7 203 212 149 224 growth in population might indic.:ite thJt on a per capita
1977/8 209 208 197 223 basis they are not any better off. TJ ble 5. 7 shows that, in
1978/9 219 238 162 212 fact, since 1986n the per capirn ava1labi li cy of the most
1979/80 239 245 250 210 imporranc foods has varied a grea c dea l. Wheat ava ilability
1980/1 249 254 245 236
257 247 261 is below the 1986/7 level and considera bly lower for rice.
1981/2 258
1982/3 270 277 283 235 However, meat and milk prod uccion, indicative of the
1983/4 237 253 170 248 growth in the livescock sector. have increased considerably
1984/5 275 265 346 239 over. the last 25 years. The rise in milk availability is
1985/6 298 290 418 212 indicacive of _the 'white - revol ution' which has taken
New Series place in the dairy seccor in Pakis ran over ihe last decade.
1980/81 100 100 100 100 Hovve\'er, this table should be taken as indicacive dnly, for
1986/7 124 115 185 92 it .docs not show either dist ribu tion or rhe amount acrually
· ·1987/8 127 109 206 100 consumed. Availability may sugges t prod uction, but it does
1988/9 134 118 200 112
119 204 108 noc take account of ex ports, los ·es, or acrnal consurn pcion.
1989/90 134
1990/1 142 · 122 230 110 Moreover, with high and rising food in fla tion since .2008,
1991/2 161 126 306 120 the ability to buy rhese food items becomes ouc of reach
1992/3 141 124 216 118 for numerous potential consume rs who may shift to .
1993/4 142 127 192 134 cheaper s-ubstilu res.
1994/5 152 138 208 140
1995/6 167 147 253 140 7. Figure 5.4 shows t ht' ov.:-ra ll a11nual grow th rates in
1996/7 158 145 224 130 agriculture since 1949/50. We can see 1hat gro_w th in
1997/8 170 157 219 160
double figures took place in only rhree years, wit h
1998/9 171 159 210 166
1999/2000 191 180 268 143 negative growth in six. T h highes t growc h achkved in
2000/1 174 160 256 132 an y one year was l 3.6 per cent in l 953/4- 1954/5, wit h
2001/2 172 153 253 146 the lowest being - 9. I per rt:nt, in Chi:! ve ry early years. The
2002/3 180 169 244 154 trend seems to be more unse ttled in che first fiftee n-years
J.
New Series after 1949, and settles cluwn in the mid · J 960s. In the lase
1999/00 100 100 100 100 three di:cades, there has IJeen substautiJI year-on-year
2000/01 93 91 95 94 fluctuation in the growth ra tes of the agricultural seccor,
. 2001/02 97 85 94 104 also having an impact on the economy ove ra ll .
2002/03 104 92 91 112
2003/04 107 95 89 · 115 . While agriculture was the dominant sector of the economr
2004/05 104 106 127 102 in 1947, having a substanti al share of employment and being
2005/06 . 101 107 116 96 . the main .contriburor to GDP unril about 1958, agricultural
2006/07 117 115 114 118 output ,rnd production stagnated, with the_ growth rate
2007/08 126 108 104 138
2008/09 114 124 105 108 between 1949 and 1958 being only 1.4.3 per cent, which was
2009/10 111 119 115 106 less chan half che growch rate in population. Th is mean c
2010/11 119 120 102 119 that e~·en the per CJpi\a consumpcion of food grain declined
2011/12p 123 120 121 125 in this period. Food l)·a.d to be imported and there was a
I
I heavy dependence oil:.- foreign aid and other hand-outs,
l Note: P = Provisional
m,rny of which came with stro ng po litical overtones and
Source: Government of Pakistan, Pakistan Economic Survey
consequences. It was possibly rhe rea lization of the need ro
(Islamabad: varjous years) .

,l
i4
I
 66 Issues in Pakistan's Economy

,.,.:tble 5.3 ·
- Area under Major Crops: 1950-2012 (in '000 Hectares)

Percentage of
Year Wheat Rice Sugar cane Cotton
total cropped area

1950- 1955 4,154.0 947.d 245.6 1,275.8

1955- 1960 4.736.6 1,078.8 365.4 1,393.2
1960- 1965 4,896.2 1,214.2 447.6 1,375.4 52.59
1965- 1970 5,591 .8 1,426.6 559.0 1,635.6 56.58
1970- 1975
1975- 1980
6;017.4
6,272.0
1,514.6
1,797.6
597.6
747.0
1,860.2
1,916.4
58.62
58.20 ....
1900- 1985 7,174.4 1,984.2 859.8 2,177.7 61.96
1985- 1990 7,418.2 1,986.6 833,0 2,459,6 I 62.26
1990- 1995 8,058.6 2,099.0 , 927.4 2,758.0 63.32
1995- 2000 8,306.6 2,333.8 1 1,029.8 3,002,4 I 66.21
2002/3 8,069.0 2,226.0 1,086.0 2,796.0 · 64.51
2000- 2005 8,169.40 2,339.40 · 1,020.20 3,003.80 65.04
, 2005- 2010 8,750.80 2,712.60 1,029.80 3,031 .60 65.61
2010-2012p 8,783.50 2,468.00 1,017.00 2,762.00 66.07

Note: P = Provisfonal
All figures are five years average except 2010-2012 (2 years average)
Source: Government of Pakistan, Pakistan Economic SuNey (Islamabad: various years) .

hcrn111c somewhat less dcpcndcnl o n foreign . money, and Ill

111.ikc agricu lt urc more prol'ilablc, which lcc.J 10 a number of
,·cry important intcrvcnlions in Lhe agricullui·al scclor in lhc
1°%0s. · Figure 5.3
Total Area Sown:. 1960-1965, and 2011/12P (%)
Th.c lan d rdorms of 1959 may have been a failure in
lcr111s of .land rl'distribution (sec Chapter 4), but they
1.',lllsccl ., ~lg111fic:,111t sh ock 10 11 111orlbu11c.l system. The Green 1960-65
lkv<)llllion technolo!W was a critical factor in the Impressive (average)
grO\~· th nnes in agriculture ac hieved in the 1960s. Viqar 32%
Ah med and Rashid Amj a d w ri1 c: All others
(major+ minor)
Grow lh rates in the .igricullural sector were 48%
significa ntly hi gh in both lhc first and second •.•· \, .' Rice
lrnlf of 1hc sixties. During 1he first half, the ,; 8%
years of high agricultural growth were between
1960- 1 aml 1%2-3 aml then between 1963-4 Cotton Sugarcane
and 1964-5. There was a marked slowing dnwn 9% 3%
uu1ing 1965-6 and in 1966-7. There was a very
slow rcrnvcry in foml crops in 1966-7 altho11gl1
over.i ll agricultural growlh was positive from
,1 ,Try low base of I he previous year. The 2011/12p
fi rsl sif!nifica nt yea r of 1hc so called 'Green
Revoli_11io11' is between 19.66- 7 aml 1967- 8 when
il!?rirnlt11ral growL h increased by 1 I .7 per cent
,,l'tcr whk h there were slJ?niflcant increases in
Wheat
th e ne xt two years e~pccl,11ly bc1wcen 1968-9 Cotton 48%
and 1969-70. 5 15% '

The ea rly I 970s also saw a second set of land reforms,

which were much stricter in application, but did not produce Allot
(major+ mi
the same resl1lts as the 1960s. Agriculture grew by a minimal
17%
2.3 per cent between 1972 and 1977-well below the growth
rale in popu lati o n . W h ile political uncertainty in the country
m ay have caused overall production lo be below historical Note: All other major + minor crops include: Bajra, Jowar, Maize,
trend s, th ree o f th e rive years of the Bhutto government Barley, Gram, Rapeseed , Mustard, Sesamum, and Tobacco
had Onods and pest ;itt;icks in which crops were severely P = Provisional

'\

L-~
 Chapter 5 Agriculture: _Critica.l Issues 67
'-
-t .
.j;
Table 5.4 8dorc we turn to specific iss ues, il is 1~'0fth looking at
t Production of Major Crops: 1950-2012 (in _'000 Tonnes) one theory which exarnint:s how ou cput a nd produc rivity
in agriculture arc affect ed over rime. Rashid Faruqee of the
Sugar Cotton World Bank, used anal yses deve loped by Derek Byerlee,
Year" Wheat Rice
. cane (000 bales) who d ivided ·th\' growth in ompu t due ro tec h nical cha nge
. 3,235.8 837.2 · 7,192.6 in co~mtries like Pa ki sta n into fo u r s tages. Rashid Filruqee
1950-1955
10,318.6 described these stages as follows: ·
1955-1960 3,677.6 909.6
4,016.4 1,107.8 14,247.8 1,995.8
\
1960--1965
1965-1970 5,175.6 1,512.6 20,718.0 2,625.0
(I) the pre-Gree n Revo lu ti on p has e:, when "-'
growth is driven by (irrigated) area expa nsion,
1970-1975 7,145.6 1,929.2 17,402.8 3,705.0 and productivity growch is mode sc, (2 ) chc:
1975-1980 8,765.0 2,778.2 26,743.0 · 3,094.0 · Green Revolutio n phase, when grow th is
1980-1985 11,330.6 3,292.8 32,651.6 4,926.6 dri~·cn by high }'idding varieties with increased
1985-1990 12,947.2 3,232.2 31,973.4 7,632.6 respon ·iveness 10 inputs, ( 3 ) the first post-Green
1990-1995 15,724.0 ·3,412.0 40,901 :6 9,648.4 . Revolution phase, wh.:n growt h is driven by
1995-2000 18,238.0 4,487.0 48,371 .0 9,837.0 ·. incensilication of in put use, especially ch emical
2002/3 19,235.0 4,478.0 52,049.0 10,211 .0 fertilizer and irri g, cion water (which fa ci-li1_a tes
19,509 4,607 48,873 11 ,174 multiple cropping), and (4) the second post-
2000-2005
Green Revolution ph ase, when input use begi ns
2005-201_0 22,575 6,077 52,549 12,453
10 plateau, and the source of growth becomes
2010-2012p 24,366 5,492 56,674 12,528
increases in input eflk iency, coupled wtth the
ongoing rekase of new varkti es. According to
Note: P = Provisional
this framework, the Gret' n Revolu tion shi tkd
All figures are five years average except 2010-2012 (2 years
the production fun ction u pward, a nd raised ihe
average)
marginal responsiveness to input s. Farmers did
Source: Government of Pakistan, Pakistan Economic.SurveY.
not operate initially on the production fronti er.
(Islamabad: various years).
In the first post -Grt'en Revolution phase, use
of compkmencary inputs rose an d farmer s
improved allocati ve efficiency ( equ a liz ing
damaged, resulting in low output. The government wanted marginal products and prices) . In th\' second · 1
.to follow a pro-agricultural policy by devaluing the ru pee, pos1-Green Revolution phase, farmers
so as · to increase agricullural exports, and by Increas ing i:ncoumcred diminishing re lurn s 10 in puts,
and moved towards the production frontier by
. .. the suppo·n prices of agricultural commodities. Hovycver,
raising tlieir efficiency. Resource deg rad at ion is a . '
· inclement weather ensured poor output. The late 1970s and form of lt:chnka l n:gri::ss which wuulu shift the
1980s witnessed a return to an overall heJ!thy growth rare in prod uction function downward .6
agriculture despite a few noticeably bad yea rs . .,

Table 5.5
Yield of ·Major Agriculture Crops: 1950-2012 (Kg/Hectare)

Years Wheat Rice Sugar cane Maize Gram Cotto!)

·ij
,,. ---- ·· 1950- 1955 776.6 · 878.4 29,180.0 212.0
1955-1960 782.2 846.8 28,240.0 212.0
·i 1960-1965 831 .8 929.6 33,580.0 254 .6
1965-1970 977.0 1,507.6 37,840.0 289.4
1971-1975 1,251.0 . 1,549.0 35,508.0 1,160.0 544.0 346.0
t 1975-1980 1,454.0 1,569.0 37,038.0 1,249.0 486.0 284.0
1980-Hl85 1,596.0 1,684.0 37,460.0 1,267.0 476.0 343.0
1
.,. 1985-1990
1990-1995
1,773.0
1,950.0
1,600.0
1,623.0
39.574.0
44,000.0
1,339.0
1,407.0
51 4.0
452.0
544 ,0
594.0
!' 1995-2000 2,194.0 1,919.0 46,887.0 1,657.0 614.0 557,0
~ ' . 2002/3 2,384.0 2,012.0 47,927.0 1,812.0 615.0 621.0
2000-2005 2,384' 1,967 47,877 2,043 589 631
2005-2010 2,579 2,234 50,989 3,270 581 699
2010-2012p 2,774 2,218 55,734 3,875 374 770

Note: P = Provisional
All figures are five years average except 2010-2012 (2 years average)
Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various years).

I
!•
' J',
 68 Issues in Pakistan's Economy

Table 5.6 Table 5.7

Area Irrigated by Different Sources: 1950-2012 .Per Capita Availability of Main Food _Items: 1986-2011
(in Millions of Hectares) · (Kgs/Annum)

Year• .Canals Tube wells Others Total .Year Wheel Rice Meal MIik

1950-HISS 7.77 0.03 1.81 9.42 1986/87 112.11 20;22 12.15 56.86
1955-1 960 8.64 0.09 1.51 10.25 100 100 100 100
1960- 1965 9.03 0.39 1.63 11.05 1990/91 115.18 16.36 13.90 60.93
1965- 1970 8.92 1.02 2.31 12.25 103 81 114 107
1970--1975 9.24 2.27 1.22 12.72 1994/95 122.46 10.55 16.51 66.07
1975- 1980 10.29 109 , 52 136 116
2.82 1.08 14.18
1999/00 131.45 20.78 14.23 82.40
1980- 198::i 11 .42 3.07 0.96 15.53
117 103 117 145
1985- 1990 11.48 3.88 0 .82 16.18 2000/01 113.79 15.91 14.42 82.92
1990- 1993 12.05 4.29 0 .56 16.90 101 79 119 146 .
2qo112 14.05 3.48 0.51 18.04 2001/02 118.51 13.97 14.45 83.14
1995--2000 7.69 2.98 0.19 10.85 106 69 119 146
2000- 2005 7.01 3.42 0.21 10.64 2004/05 113.42 12.77 14.84 85.49
2005-20 10 6.89 3.79 0.29 10.97 101 63 122 150
2010- 2012P 6 .40 3.92 0.18 10.50 2009/10 125.89 13.34 17.27 117.15
112 66 142 206
Note: =
P Provisional 2010/1 lp 109.98 12.13 16.76 118.6
All figures are five years average e_xcept 2010-2012 (2 years 98 60 138 209
averag e)
Source: Government ol Pakistan, Pakistan Economic Survey Note: P= .Provisional
(Islamabad: various years) . Source: Figures 2000/01 and 200.4/05: Government of Pakistan,
Agricultural Statistics of Pakistan 2004-05, 2006.
Figures 2009/10 and 2010/11 P(ss) Government of Pakist,m,
Agricult11ral Statistics of Pakistan 2010--11, 2012.

Th b scrn.irio ~('ems to fin'c1kis1a11, which is 110w, acconling Rashid Fantquee. 'future growlh must rely almost entirely
1n H,1shitl raruqcc, in ii second post-Green Revolution phas~. on e fficiency gilins, lhc potential for which is considerable'.'
whl'n: input cfflcil'11clcs are seen to be the main sources For the World Bilnk, lhese efficiency gains arise through,
nf, growth now 1ha1 high yielding variety seeds have been amongst other m,e chanisms. output prices that arc 'market
l'Xt l' ns ive l)' disse minated and the use of irrigation and determined', where the gove·rnmcnt docs not 'distort prices',
rcrtili zc r is levelling off. While in the past. land expansion . end s all ro·rms of directed credit. and introduces ·a large
multiple cropping, libe ral availability of water, and a technical number of instilutional reforms. The significant increase in
package were responsible for high growth in agriculture, for support prices by the Pakistan People's Party govern r:n ent
W08-13, which resulted in farmer~ receiving far higher ·
prices for their produce-wheat's price was doubled from ··.
Figure 5.4 Rs. 425 in 2006/07 to Rs. 950 in 2008-09. while Basmati rice
J.erage Annual Growth in Agriculture: 1949-2012 msc from Rs. 460 In 2005/06 to Rs. 1,250 in 2009/10, with _-
IRRI rice abo doubled- vindicates the claim that for mers are
rational and respond to price incentives. The jump in food ,
_/ 20'.o
production--ils well as domestic food prices for consumers,
15.0 or ·c ourse- after 2009, despite the extensive floods in 20l0
and 2011, is indh.:.Jtive of these lnccn1lves. Set· Appendix 5.1
10.0 for the World Uank's view on J>akimm's agriculture. Some
other recornmemlations as part of the Structurnl Adjustment
5.0
Programme can be seen in Appendix 5.2 and Chapters 16 and .
0 .0 17. The next sections discuss some of these issues.

-5.0

'to.I)
5.2 AGRICULTURAL PRICING POLICY

-15.0
As · the lost para~ra-ph Indicates, and as we have seen ln
Pakistan over the last five years since 2008, government
Source: Slate Ban k of Pakistan, Hand book of Pakistan·s Economy
c.111 play _a critical role in determining what, and how much,
(Karachi: SBP. 2012) and Government ol Pakistan, to produce through its pricing policy. Along with the right
Pakistan Eco nomic Survey (Islamabad : various years). types or seeds, water, fertilizer, and other inputs, as well

'r
i\ 2;! \
 i·

Chapter 5 Agriculture: Critical Issues 69

as a package of technology and credit. the pricing policy of f) Proceeds from the agricultui·at" cxporrs were
agricultural inputs and ou tputs can determine the dircc1ion rnnverted at an ovcrvJlucd fi xed exchange
of agricultural productivity and produce. Agricultural pricing rate. The implicit exchange tax on agricultural
policies can also impact significa ntly on income distribution. exports from 1960 IO 1971 averaged 89 per rent.
.· , . with particular reference to the incomes of small farmers . In contrast, the indust rial ~ec tor ben.:fittcd from
the overvalued exchange rate which reduced rhe
The consumer boom noticeable in Pakistan's rural areas since
domestic cost of imported mJchinery and other
2008/09, is proof of the fact that higher· prices· for farm ers,
inpuls. When it ca me 10 the industrial expom ,
despite inegalitarian land holdings such as Pakistan's, cJn the exchange losses were offset by bonu ses and
have a positive impact on the overall rural economy, simply subsidies. This heavy protection oft he industrial
by giving the right price incentives: They can also have a sector ac the cost of 1he agricultural secro·r failed
· noticeable effect o_n industrial productivity, urban wage to produce an efficient and viable ind ustrial base
!l')OdS, exports, and the cost of living, determining the terms for the economy. le rather became the cause of
of trade between agriculture and ocher sectors. Higher prices . the dismal pcrformanc-e or the sector despite its
for agricultural commodities which might mean higher highly privileged position.
incomes for farmers, also trans-lates to higher prices for g) For nearly a · decade aft ~r independence
no systematic attempt for the development of ·
urban consumers, a fact also noticeable in Pakistan in recent
agriculture was made. The first agricultural
years. A good agricultural pricing policy can be defined development programme in the country was
as one where, ceteris paribus, price acts as an incentive to launched in 1955.
\ pro<tuce certain goods in required quantities {see Box 5. 1). h) Barter deals were a common feature of
This, however, has not always been the case in Pakistan, and Pakistan's international trade in which
agricultural prices have been used for various purposes by agricultural produce was exc hanged fo r industrial
different regimes. AppendLx 5.3 shows how support prices for machinery and inputs to the disadvani.ige or the
agricultural commodities were determined. agricultural producers.
The comprehensive report of the National Commission of i) Government freely accepted che agricultural
Agriculture ( NCA) in 1988 examined the issues around the comrtiodity imports at concessional prices which,
agricultural pricing policy of the first two decades followin g when converted at the overvalued exchange rate,
resuhed in depressing che domes tic prices. The
1947, and had this to say: . ·
adverse effect of the imported commodities was
further intensified by budgeted subsidies given
In the beginning, Government's main concern
by the Government on their local sale prices.s
In re11ul;11ing agricultural prices was to keep
the cast of food low for the urban lndumlal
• ··,:r: .. ,._ :- , , · workers and · provic!e cheap raw materials . It Is 1101 surpr~slnlJ !hill, due to the above pollcil.!S, .igri('tllturc
· · · ···· · ·· · for donic!sr'ic indus-tries. The objective was to suffered and was seen <1s ~ means to subsAdize lndusrrial
enhance international competitiveness of the production and urban consumers-part of lhe pro-indust·rial
infant industries by maximizing the so called strategy which was heavily biased against agriculture. As
'labo.ur' advantage. The main features of the the NCA Report argues, 'ihe implied objectives of the pricing
Government trade and pricing policies during policies during the period I 960-5 were to provide low cos t
the period up_t_o the mid-sixties were as follows: food to the urban consumers, to provide cheJp raw materials
a) Government lixed retail consumer prices·-of for the _domestic agriculture-based industries, to kel:!p wages
foodgralrts at low levels which had the effect of of industrial workers lbw by supplying cheap food, and to
depressing market prices for producers. Stud-ies fransfer resources from a1Jric.:ulture to the urban sector for
show that during this period the domestic-prices
investment in industries and other non-farming a rivities· _?
of foodgrains remained consistently below the
Clearly, these policies were not focused on improving and
-- -- ~· . _ i~te_~!_l_ati~!1~~ p<1~\t¥. •. P~i~.~ . calct!l_ated at the .
equilibrium rate of exchange. · expanding agricultural ourput.
b) Heavy expon ducies were levied on couon For some strange reason, it was assumed 1har farme rs
which had the effect of reducing domestic prices of would not be price sensitive and would produce at their most
conon for che benefit of the local textile industry. efficient and best output regardless of the prices received
c) Monopoly procurement of wheat and rice by them. Policymakers assumed that ' low prices resulting
was resorted to at fi:«:d prices which were from compulsory 11overnmenl procure111e11t or high export
deliberately kept low in order to minimize duties on agricultural products would not affect the output
subsidies to consumers. Producers often sold to level' .to However, the dismal conditions in agriculture prior
merchants at lower than the Government prices
to the Green Revolution forced the government to reconsider
in order to receive prompt cash payments. ·
d) Inter-district and inter-province restrictions its approach co the agricultural sector. and along with the
or movement were imposed with the result that technical package, new pricing policies were al so introduced:
producer· prices were depressed in 1he surplus so as to encourage agricultural output. Viqar Ahmed and
producing areas. Rashid Amjad argue that 'a recognition of 1he r~1le ,or
e) Prices of ve.get.1ble ghee were controlled at prices in agricultu ral developmem did provide much □.e~d ed
an artificially low level which had a depressing incentives to the growers. and may have parrly con trilrnted to
eHect on produ{:er prices of seed cotton and the high growth rates in the late six cies '. 11 ·
oilseeds like rapeseed and mustard.
70 Issues in Pakistan's Economy

I
;_. 1.-·:1•: ... ~ · \ . ,;,~,t, _":·,,-~ :.t.~·"t' , -~ i-: .. ~
Box 5.1 .of coi:np,~i)lo.n ..ri,e_la_rn.iers be!oog tq, hlg~ly dlff~r'intiate_d ., . . l
The Objectives of an Agrlcu!tural Pricing Policy struc_tpr! c,f 1~,f~!!.rt~,ln l~nd! r~nQl~g }r?!'1 •Sr.~!~PPP8f8 ~ . . 1
· . and ten~r,its 10 9-,rn,~r;pplllvato~J ~,l)d ~t!U: fljitt)~r to .~Pl_ta11sc; . 1
Tho study by the Nflllonal ~m',,;,~~i~n'·~, Agriculture ar.guu . farmers and . abe,ntee landlords.,.MQ.i .' /arrfi~i t,ave . little · ' · :
BS fol/ows: • ' contapt with thd market either because \heyir~
s"ubslsterice ' _,;
\ . '
Pricing of agricultural Inputs and_outputs would be a major
•. . a
owner-ct.ilt;;_,atoitwitf,out marl<etable'surp.u$:of:beeaiise~'.:,: '
. they are ' sharecroppers whose· surplus!1s :taken' away ·by a',( . ·.
element of the dynamic agricultural ·policies· necessary to
non-cultlvallng c1iiss(t 1 ,,, c· •e · '( ' ' ' .,, , »id •fi ·, k ,, .. , ';_ •· _'?/ i
achieve national largels of agricultural production. Th3
·: State ihterventlbli t ndePtnese.circumstances is,esseritlal / ,
Government should. pursue 'an active _p~c;~-support policy
In · order · ,to cteate~·a• 'mutually" -accommodating price~ (;· ,
seeking to consolidate the gains in four major commoditiss
. structure. ~Thiu couldi ,aUocate1land •·and , other -resoµrces / ,'.)
achieved in lt,e lasl few .years:' 'maki!'lg the . policy fully
Hffecllve tor minor crops lndJding ollseada and extending
·:. among., competlqg;,.cropanaod,,also,!r.ec~,iclle t. pclces i 01:t
._g[l~lturalr, 1>utpf ,.w1th ·,lhe~overall ,,ooat l,11.VU0t;1ma,.wlt~ln, :; i :,.
the policy to cover more products as
found neces"8ry. The
pricing ol inp\Jls and _outputs should b,.doselY, coordinated . .•. .· agricullure .. lotetJ,.ec;:toral.l~!ffl•,of. lt•d~ ~~~n.,gfi91,1l\ur~);- .:,:
keeping in v_ie'r lhe following obj~ctiv!3~: : ,. ; . ar,d other ,~o~~.lpp.,:ie~d to.qarnalnta!neq_aqeye/~:Y1hi9h;;;i1:;,
: .'. ~ould_ellm,lnat~ Cf,Yi~i-- a,f spcifiUr~lC?\1~, l.\~_fi!to/.1!_~~s in,:t,,;~
i) Carefully devised price signals "can promote a balanced
increase in production of agricultural products so as , .• It
. development prto~~·
I~.
quite1, o.~vj(>.~'. -that :in '
. -

to fulfil domestic ·consumption requirements; Increase :_: ; ~gricultur,1 'price imJicy will ,nave to be,fran;iecl"lll :s~.h-·a way.'\ j
_, . . · . ,
1«~:
f~r,~e~~le.. ~ tJ,re , ih~:::,·-•; '
·.. ·

. earnings of foreign exchange through · exports of , · so as to achieve OOnflict!ng objectives like Incentives for' the ·A- ··.
products like cotton, · rtce and horticultural products, >
i ti:mnsrs, stabUitfi br.,thi '6rtian' lit 1liilrig,- .itaay'domestic ,~:':.
end save foreign eKchange expenditure 'by . reducing . : . ' avallabilltytof,t&,d/ gtaln' ·and indusirtat'>taw i. matlirtals; and ,; '.t,!
co¥t
. dependence on 'imports of agricultural products, ·,. ;.. adequate exportal)le¼Jurplus.- In ·addltlonFsmall··c:ultlvatorsi ;;i·1.;;,, l
especially edible oils, milk; and.sugar. . -·' incllldlng, liabsl~tence11arrtiers, ·have td 'be'glven-·aocess tot:'! ·. .
ii) -Gradually rising but stable prices can
create a suitable : ;· . new,lnputs,and. techhology.·and ahi1ci10 ,the beneflts ,oMhe r.½:· ·.'·
economi~ -~ nd psychologlcai. framework for positive '. >
subsidy programrTMNVio-.that,th&lie.latge·;publlc1011t1ays do ::~::;1·
response from producers to prod\Jctlon incentives and not become the:~use of widening soclal.dlsparltle1,.~:"',,. - , .s:., ,
move to the desired cropplng 1patterns. · · · · . .. What Is required ln ·this situation la·to look beyond .·.
iii) The Price Policy should)Jelp _tci achieve .and maintain . subsidies ·. as:i,a.i policy dnstr-ument;., and. to· pay 1tserlous ..·
equit11blo terms of trade for aQriculture and support the attention to such ·mattar1, a.- lmpro)ling,, the overall;,supply , ,
Incomes oHarmera .. .. , . , . ,.. . . .;., . position of: the· lhputl}lpartlcularly such dlvlii!ble -.Inputs as ''.
iv) It should help maJritsln stable food prlce_ s for _consumers. seeds,l.fertlll~ers!iand pesticides; and t0>ilnaure-thelr timely · • .
v) It should keep :domestic prices of export:commoditles · availabllityt Atte'1tlbii1~hGIJld' alsb 1be' pali:1.,toithe:'&ldenslon ·•.,: ·
.and potential exports largely in' l_lne ·with the international of rural ·outlets t tl'Ktf 'eriCOuragement1 .'CJf : multlple•>-market .. • ·'.
prices to ·maintafn ,. competliiveness · ,of·.' agricultural channels, 'and•tf,ils;-lrttprovement ofs'-1helifarmets~f ability to '· •.
commodities·and minimize subsidies; . · ' : ..· .· . . make 1efflcient-!IJSG:i old he ·.lnputs:'i.~.M1be'•supplyJ posilion < :
vi) II should.1encourage lar~er: investment'in ·agriculture, improves; it woufdtieiea~ier.to.red~ce th&<~ab'sidyJlevel and · ·
especially ih prOduotion ·of the · products 'In :whi~li ,the to allow ·pnces tou ':,1~~i0~dually. lf\'1";f ~"':11a!1,,l~eas to ...- .
national targets call.tor moJ0rlncrea1ei•ln•l)rodue1lon;,, . lnst!t~J?~,-cr~ : *rftl!III (~bl~ ,to,t~,~••f~~i/19~ !~~~. an ;'
vii) It should encourage-Increase.In agrlcultural.productlvlty
and reductions In. productioni,costs •by: promotin~tha ·
· lncre~~,ln.~n~JJ.t
· Thar"' la.1~ -~ ·~o.,gr,!1-d~aJlyiJ,·
,_,!;."'f~
1not ~ h.l~lt:. · : · ~,~.them. :··
:-,f e:rl~ _so .,-.<.-
.· µse of better technQlogies 8fld .?th_ er,no_fl·P.rice measures. .that r~_gutF.e;I} • }t, .t~. ~qr.,!-!~~~,¥L!~. (J~~J,aaed .
for ptper PJJJ'PQS , , , .,r:flh09. .o~_ e ~~?.;,•~
~,!~er. the
Source: Governmen•i of ·Pakistan; . Ministry . qf Fooc;i_" 1111d farmer C!in. oonflqef;tlY~~~1R~~i~~ ~~~~ and
Ag riculture, The Report of the· ·Nations/' CorrJmission . oil can plan his lnvel!Vteqts_tpr ~ jc;,np~ ~o .,. :,, ; . 9ic,r.
Agriculture (Islamabad, 1988),"490-1'.·
• • • ' • I f
' ·. , · .,. "· · ' ·
~ ~: ·\ , •.. '. . -~ ~
·Y . . ; crop S8!1SQn,., It !l~~J?l¥~tri/ l~~tJ 8 JrJ.&n . I IO ..,:,', ~
.• .
• the fa~~!i:,g _co'T' y11tty,.,~_q Hltb, !l.lJ~~ ,~! ve a ; ,
. Vlqar Ahmed and R11shld :Amjad p,re,~nt _a, 11:19re,,holistlc ylew , · certain amqunt ~ :c5f>nijn_ lJlty;.'i-i:, t;::i,'; ' i'
·tfr
: Flnal[Y, -. i,n \'~grf~~l~ r" . P,t;lc~ -_~911 ,!N.ca~not c·, ··
of agricultural prices._,They:writ~:.~_..,·,-~,,_- y\;/ 1,,,1_, , : ., _·;: •'
necess1arjlyserv1t ·t,r , ;·9r~rd;~,, ! ~onal
· The determination of the prices _ofagricu·ltural -crops by the -·or, 1ecl)r,iqloglea! 1,C S~Pe•~l\f~. . $1,tlstand
government, along with ·othel" admlniatratiVe-'-and.' ec6nomlc Its succeu,.willyf!9P.-8Pq.i\!,lp9,~ ,r,-~ad by
controls·on their processing, distribution'and .exporti amount coordinat~ ef!p'i',6:'}llAlti~~':'!'~ l t\l!l~hten
to the suppression of the market mechanism. Butmai;kets in · the !3ff~iven.ess \PtsY~riP-1JM >lh , ~ policy .
Pakistan, as in other developing.countries,;~e _ bar,dly, perfect,. rather tf1am b99pt"lltf".·s~l/J?'3~1 ~~f-~ Or~s,
Imperfections in ,the 1form_of \,lnder~dpve~P.ed -~~nsport,-and ii cen f\,lnction .as Jfi_n,e.;1~1)8.~~ qj z1 . ~~!'love ,
communication J,;i9!1itl~p, __ a ~lgh_ degr~.:. of,,.~eteroga,\\$ity I • •" I '• f''rl, ~ ~• - --
, 1- -
!Jment
among both._ th e PHYe~. ancp~e ~~l~r~, l ll"~ ,tt,e ,~lv~I~
iverslty
of the market ,Into sma!! iso.lat_ ~d ;~-~1?:-rn,,r~~~• -.m~kipi:,E!
market syslem·in_capable_!?f. g~n,er;1tl,r'Q _a i;~t>~t~rlia/ ~!3(1ree .-1/ .
• ,.,, ,. : : --~ ·, , · ,,J r ,.1·. ·_~
, ~; • :', ,- ' •. • \ : • ~- . ·
-= ~:, :. t ).
. -"
 Chapter 5 Agriculture: Critical Issues 71

The first steps that the govemmenc took in this direction to followed a Structural Adjustme nt Programme ( SAP) after
encourage agricultural production was w begin to subsidize 1988 under agreements with both these organizations . While
inputs, and not to raise the -support or procurement price of . ·a n entire section of this book ( Part Vl) has been ·set aside
output. During the 1960s and l 970s, an extensive structure for disc_ussion of rnis rheme, in the pres.e nt chaprer we
of agricultural input subsidies was evolved which ·covered will examine some of the issues that relate the -Structural
fertilizers, seeds, plant protection, tube wells, and agricul titral .Adjustment Programme to agricultural issues, such as pricing
machinery. Vlqar Ahmed and Rashid Amjad believe that policy and taxation (sec Appendix 5.2 fo r a 1nore de tailed
outline or the Structural Adjustment Programme).
the objective or subsidizing inputs was 10 · ln its 1988 report, which became the precursor 10 the
provide greater production incentives and to actual Structural Adjustment Programme agreements (see
encourage the use of superior technology. It
Chapters 16 and 17), the World Bank' s opinions regarding
has been argued that while high output prices·
may or may not lead to greater investment in subsidies to the agricultural sector were ex pressed clearly.
better technology. and may be diverted to hi"gher The World Bank scared 1har, ' fertili zer su bsidies should be
consumption, subsidization of inputs, which eliminated in line with gov~rnrnenr plans, wheat subsid ies
comprises the new technology, would ensure its reduced further, and edible o11 and sugar subsidies kept from
rapid adoption. 1~ reappearing' 15 (see Box 5.2 for an analysis of th e problems
with the wheat and fertilizer subsidies). In its evaluation of
The main beneficiaries of the subsidized inputs were those the first major Structural Adjustmen1 Program me 1988-91,
who most used these inputs, i.e. large farmers . As we saw the World Bank report argued as follows:
in Chapter 3, the HYV technology and package were heavily
biased towards the larger farmers . Hence they were the main Over the adjustment period, Government has
beneficiaries, rather than the small and medium farmers made progress in reducing price distortions by
who, due to numerous constraints did not make much use adjusting administered prices and in some cases
of modern inputs as wen as water, credit, anct' agricultural liberalizing the markets in question. Output
. · prices or agricultural commodities have gt.>nerally
extension services. For these reasons, some observers felt a
been brought closer to farm/gate export/import
need to '_look beyond subsidies as a policy instrument, and o parity_levels, thus reducing the implicit tax on the
pay serious attention to such mat1ers as improving the overall agricultural sector. However, movement in 1his
supply position of the inputs ... such as seeds, fertilizers, a nd area has been limi1ed and the current situation
· pesticides and to ensure their timely availability•. D It was still induces a misallocat-io n of resources in the
as late as 1981, when the Agricultural Prices Commission agricullural seccor. For exam ple, funn prices for
was established, that there was greater realization of the rice remain below intema1ional pric..-s, crea1ing ,
. ·_:: ,:.:·. :.'.relevailce·o[ ,agricultural output prices. . . i . .' . . . : . . disi~centives fo grotv a ~rojj wltere ~akistan has a·
The government introduced the concept of a ·mlnJ.nium strong comparative ad vantage:. 'l'lic , ~me applli:s
price support programme, which shielded the farmers from to wheat where domestic" prices remain belo1v
_import parity. Moreover, the Goverrunent did not
.severe fluctuations in international prices and ensured a
adjust the issue price in FY92 [ I 99 1/2 J despite a
minimum return to producers. In the past, producers have sharp increase in the import price. As a result,
received market prices well above the support price. The the consumer price subsidy increased sharply.
, support price ·also acts as an incentive to produce more, as it reversing the progress achieved in earlier years.
is related to higher than average productivity. The National On the o_ther hand, Pakis1an has no comparat.ive
Commission on Agriculture (NCA) argued that 'the main advantage in sugar cane. An adjustment of sugar
role of the ~upport prices ls to protect the producers from cane; support prices woulll induce farmers to
a drop in the producer prices below the minimum levd at increase yields or to shift to cot mn, rice or wheat
·-···- · which production remains profitable for good produc_ers'. 14 production. With reg;ud 10 agricultural inputs,
However, serious problems and issues arise when there b.a subsidies on pesticides. seeds and agricultural
machinery have been eliminated . During the
negative impact on farmers on account of high support prices.
last three years, formal control over th e price
If world prices for food are rising, as they were after 2008, of nitrogenous fertilizer (urea) has been lified
it mak~s sense to also -increase the domestic: support price, and prices or phospha1ic and potash kniliiers
something tl:lat happened. But what does the government , ha\'e been .:idjus1ed upwilrd~ mas to brlng [hem
do if.international prices fall, as they did _in 2011 and 2012? closer 10 the (dee-l ining) in1ernational prices. 16
It makes sense to subsidize and protect domestic farmers
· under such conditions, but consumers end up paying more Hence, on the advice of the World Ban k and the Internacional
for food which could be imported at cheaper prices on the . Monetary Fund, u-nder the terms of the Scructural Adjustmenr
. international . market. Clearly, these are politically sensitive · ·Programme, many subsidies were .elimina ted and domestic
choices and decisions are made taking into consideration the prices were freed to come at par with international prices.
relative power of lobbies and ve.sted interests. This practice has continued since I 988, and while some
A theme that will recur in this book is the major changes that subs_idies to farmers have been removed, far gre~i:er opening
have taken place in Pakistan since 1988 when the ·go\·ernment . up of the domestic market for trad<! has take n plac.~.~nd prices
made the first of its major agreements with the lnternJtional have risen to encourage fa rmers. Procurement p·rices are set
Monetary Fund (IMF) and the World BJnk. PJk.istan actively by gm·ernment and are not 'free'. Moreover, numerous other

::,
 72 Issues in Pakistan's Economy I,

Box 5.2 stock, and allow the private sector to · P,erform the major
market functions/:! ' · ' . ,· , . . ,. ' ' ,.
How the Wheat and Fertilizer Subsid_ies Work .
Th~ fertilizer ~°Jbsidy has ~en ·an i,;.Jjortant
eleme~t the' in
The World Bank ,has been a strong and consistent supporter . Governrnent's policf.
to promote.agrioulluraf'prodUCtlon by :.
of the free market and opponent -of government inte,vention. providlng'the farm~fwith 'IOW-cost lmi,drts'. tl has fluctuated .' .
It has advocated the .removal of subsidies In almost all cases: between-Rs:1'.$ tjillion and Rsi 2.'s billlon:a year slnce 'FYB1 ;
About Pakistan .itiwrltes: , ,. ·, · , ·: · depending ·on ~h!l,~lume and pr\ces·;0f fertlllzer,;-!11Jports, .
The wheat s~bsldy In °Pakl~tan: wh.lch . dates back to domest,lc'. prod~~;·; and: th_e ·~ver~r;nent'a f,ert,1,llzer price · .
Independence ln ,1947," lncreased ·aharply In th~ 1980s. Al adjusttndrits, w~latt'.have usually fallen ihort of the Increases .
Its height (FY86) .' It reached Rs: _3.8_bllllon (4.2 per cent ·o1 In wor1d fertlllzet pqces..ln FY87, the detlln~' 1n world fertilizer
0

current revenue), compared lo just"over.R_s. '1 brllion (2.fper prlc~' an~ _- d~~~ul~toi;"' ofnitroge~o,i ls ;fertilize( 'prices -In
c·ent) in FY81 . Following charlges In ·the subsidy system In May .,~86 t,el~ reduce the subsidY. to Rs. 2 billion. The
April 1987, the FY88 bi.Jdgel:alloceted about Rs. 3 billion for FYBB:1estil'nate ls,1Rs; 1.~ ~illiOQ for ph~sphate· ~~ potash ..
it, although the·actual outcome may be higher, : fertilizer &\J_b sidl,s; whlc~ are almost en~rely Imported.
Under the current , 1y1tem . the- Government continues Th~ Government haa decided lo pha~e out ·the. current .
to procure wheat at a fi><ed pr1ce (presently Rs. 2.15 per fertilizer subsidies through equal annual reductions of the
kg) and stands ready . to sell al the same price, lo private current subsidy .r.at~.O'.-'.er a period of .four year!J for phospt,ate
mills and other intermediaries-.as •much as they _require. (the principal 1ype);and l!lghl years for potash: fertilizers. This .:
Tha distribution cost and other incidentals, which are met Is to ~ attain~ t!,lrough annual .prim~ adjustments in -line .·.
from the government budget, currently. result in a subsidy . with lnterrati.onalf price trel')ds; cost· reduction rnea~ures .
ol Rs. 0.60 per kg wheat .compared \o Rs. 0.80 per kg · in procurement; r\-uu:ketlng, and distribution; and p0$Sib!e . , .
prior to de-rationing; but ·could · increase depending on substitution of.l~~,ost _. potash · __fertl)jzer : lry,po~s: ·: This , , ~
the ·wheat harvest and the volume of·-procurement by ttie · program(lle; wlU ~~- s4pported by emphasizing : fant}-ievel . , · •
Government. The Bank · recommends· a phase out of this adaptive , research': and extension services to ' ·raise the .' '
gener~I subsidy within nve years,· and the substitution of , :· ,e_f ficlenofof fe~~l~erI \Jat. _ Thls1 p~as~J9~:-~fl_ch: th~ Bank'..:'-: :.. ·
a wheat subsidy llmile~ to the needy. The present system . · endorses, IS desirable for more than budgetary reasons. The . ·:·.
is available to rich and poor alike, and benefits the urban fertlllz.er)ubsldY,"hafl,ow served 'iter·objediv\, 'of'edut:atlng !' '.
population more than "the ·n.iral population. Identifying the the farmer· 'ir\ .Its luse 'and benefits.:' The · ~u6sldy' bai'lefits ;-.' ·'
eligible population .for a more targeted. subsidy requires ~artlcularty the l~uge farmers since they have greater access· ·" ·
more administrative work. It could be:\ictiieved through to the·complel'nentarj inputs. In addition; the:Govemment's·;
specifically tarqeted compe~s~lory _progr,u;ns .for the poor poHcy ·of dereg~l1¥ing agricultural output prices, ·combined .
and nutritionally yulner~ble grO!JP.li, ~uch a_ s, f90d stamp~; · . with the -sett!ng_' of :11oor procurement,.prlces at ,or, above ·': ·
food dlstrlbuliQn .via health : centers, clin'Ic:s, 1choo1s: and world • prices, ; sh~uld; · provlde,~approprlat~.'T lncentlvea to r•; ·
· agrlcultureiwilhqt.it the'rertillzer,su~sldy,t:;°; '·. i'. :- . )t, ·, ,;. , ,, . · ,, · ·
other ~elfare centers:' and .~o~~i?r~work~•~hemes. At the
· same time, Government inte!Ventjon . In the, wheat trade
• s :· \-. l~- :·: •' . -.~ .' '. I f'!,: ·. .. .,... ,.,_

would be reduced .. It would then regulal!J the market mainly · Source: World Bankii•Pak/stan:, Growth''.Throug~:Adjustment,•.1"•'.:
through periodic interventions, via. regulation of a strategic Report No. 7-118•P~K :(Washlngton OG:,World·Bank/ 1988)",· . ,,,

rn11 s1r;ii n1 s, such as having to sell mainly to the government. l\1kistan which e><aminc th e nature and sources or rural
Jl so act as a h in drance to farmers making higher prol"its . credit. The m.iin conclusions from · these surveys are . as
Sec 13ox 5.3 for why farmers prefer Lo sell at prices below follows:
th e support pr ice. Appendix 5.4, looks in more detail at the
i) although there is a signifjcant increase in the
relatio n between prices and the boom in wheal production
bm,owing from formal sources from 1985
and th e im plica tiom of this for farmers. Box 5.4 questions
unwards when mark-up free loans were made
the wh ole~ notion uf 'free' markets in Pakistan, given the available to fanncrs. these studies suggest that
niti c,11 role o f the <1r//,i nnrl. beopari. Do>< 5.5 questions the lhl' firinclpnl source or farm credit conti nm:d
logic or raisin g whcill suppnn prices, .:iskinA ir this l5 bad 111 t,c the lnfonnnl sm.1rccs, cspcclnll y for
econom ics. small farmers. A 1985 smvcy shows t hal
68 per cent of the credit to agricult ure
was provided by non-institutional sources
while the 1972-73 survey had shown that
5.3 RURAL FINANCIAL MARKETS AND
9ll per cent of borrowing by farm households
AGRICULTURAL CREDIT17 was from non-inslilutiunal sources. I Another
study] demonslrale(s) from the 1985 -cred it
There h ave been a number o f studies and surveys conducted survey that 85 per celll of the small farmers
by dil ft:rcn l re5c;irc h insti tutes and by the Slate Bank of obt.ain their loan from non-institut ional

__ / J

,-.,,_-~~li!l l l! l l l~ !!l!lll9!----------~-----------
 Chapter 5 Agriculture: Critical Issues 73

Box 5.3 stores. They can wait and see numerous large growers, who
The Logic of Selling below Support Prices can influence government inspectors, overtake them, and sell
their produce. This process can take a couple of days. In the
Ali Salman explains the apparently irrational step of rice meanwhile the lack of adequate storage is a constant threat
growers preferring to sell at below the government support to his produce.
price. This extends his trial to yet another, third condition. The
government inspector will inspect the quality of produce and is
Like some other sectors in our economy, agriculture authorised to reject the lot. Once this rejection is announced,
too is distorted by input subsidies and support prices. The the grower, who had painstakingly arranged the jute bag and
government's interference, on pretext of powerful lobbies, had waited for a good couple of days, has to go back. This
reigns supreme and open market operations are absent. In means that he will now bear an additional transportation and
· this article I will discuss implications of support price for the storage cost. If he is lucky on his way back, he finds a 'self-
rice crop which is currently being harvested. Instead of utilizing interested' middleman, who offers him cash and purchases
macroeconomic data let's take a look at a true story of a the produce, at a discount.
typical small grower in Punjab. In the event the farmer is lucky enough to sell to the
Like every year, the populist government has announced government, he won't get paid right away. The government
support price for rice growers. This year the erstwhile PASSCO stores do not carry cash! The farmers get a receipt and get
(Pakistan Agriculture Supply and Storage Corporation) has paid in a few weeks time.
offered Rs. 1,200 to Rs. 1,250 per 40 kg to rice growers. To find An intelligent, self-respecting, and business-savvy grower,
it out for myself, I made a special visit to my village in Central especially small grower, which is the case with 90 per
Punjab, where my family members, all of them small growers, cent of our farmers, will always compare the out of pocket
had not only harvested the crop, but also encashed it. Instead expense and the implied opportunity cost of resorting to
of selling to their benevolent government, they decided to the government support price. It is true that he is not literate
sell their crop to the open market through an 'exploitative' by our standards, but he is very well educated about the
middleman. Outrageously, the open market offered them economics of his livelihood. In fact, my typical farmer has
around 20 per cent less than what the government had already calculated an open market equivalent to support price.
announced, but using their free will, the growers still sold! If the government price is Rs. 1,200, then after considering all
The following story narrates in detail why many growers the hassles mentioned above, the grower would be happy to
decide to pick the low price of open market over high price of sell his crop for Rs. 1,000, on ex-farm basis, against hard cash.
the government. Thus the open market keeps the prices under control and
When the government announces support prices, it uses offers some respite to the struggling urban consumers.
discriminatory methods to qualify certain growers by putting There are several policy lessons from this true story. First,
some conditions. The first condition is that the growers have state intervention in commodity pricing, ostensibly done for
to obtain a jute bag, called bar-dana, that is available only welfare, is not only an economic but also political nonsense.
at government stores. In critical times however, as market A frustrated farmer in the presence of a support price is
fundamentals would predict, these bags vanish and are sold more belligerent than a struggling farmer in the absence of
on the black market. The second problem is that even if these a support price. Secondly, when you curtail open markets,
bags are available, they are not enough to cater to demand. black markets emerge. The condition of carrying the produce
Thus the growers either beg the inspectors to supply them in government provided jute bags should go. Thirdly, even
sufficient bags or resort to agents to actually pay a commission the illiterate farmers can make rational and well-informed
to get these bags, which otherwise are 'free'. They are 'free' economic decisions, only if the all-knowing, benevolent
only as much as we want them to believe, otherwise they are government gets aside and vanishes.
paid by some of other taxpayers.
The second condition is that once the lucky growers, who Salman, Ali, 'Support price for rice: Why many growers prefer
receive sufficient quantity of bags, are ready to sell their to sell for less', The Express Tribune, Karachi, 28 November
produce, they _will need to form a queue in front of government 2011
74 Issues in Pakistan's Economy

Box 5.4 under discussion or sold directly to large wholesalers who in

Free Markets for Agricultural Produce? The turn either export the produce or sell directly to large retailers.
Poultry is not being traded in these markets while local
Arthi and the Beopari governments (largely since the devolution in 2001) and private
entrepreneurs in complete contravention of the law (reflecting
The Panel of Economists set up by the Government of Pakistan
on its poor enforcement) have set up markets for livestock. 4
in 201 o examined numerous aspects of the economy. They
In other words, only fruits and vegetables (contributing 10---13
also looked at agriculture and agricultural pricing in Pakistan.
per cent of Sindh's crop produce, valuing around Rs. 30
billion at 2006/07 prices), but making up 40-45 per cent5 of
The Problem
the total production of these commodities, find their way into
the government controlled markets. If livestock is included
Agriculture Marketing Acts govern the regulation of the
as agricultural produce that has to be traded through these
purchase and sale of agricultural produce (including livestock
markets, then in the case of Sindh the provincial government
and poultry) through the institution of market committees. A
exercises control over the trade of almost Rs. 70 billion of
licence is required from the provincial government to establish
value added in agriculture. 6
a market within a notified area and once the notification of
There are too many intermediaries in the marketing chain (as
the market committee has been issued no other market
illustrated in Figure I below). As explained above the beopari/
can be established in that area without prior approval from
trader and the arthi provide the link between the farmer (and
government. The government nominates the members of
the commission agent in some instances) and the wholesaler.
the market's oversight committee and maintains significant
The wholesaler serves as the link between the mandi/market
control over the inflow of resources and assets owned by the
and the retailer. At each step the intermediary marks up the
market committee. This arrangement also results in the lack
price to factor in his profit/'cost of service' making the supply
of accountability of the committee to market users and key
chain inefficient. It is estimated that in Sindh the wholesaler
stakeholders.
marks up the auction price at which he bought the produce
Whereas a farmer can only sell his produce through a
by 10---15 per cent (depending upon the commodity and the
licensed commission agent or the arthi (in most markets
supply and demand situation) when he sells to the small
the arthi also acts as the commission agent), anyone can
wholesaler or retailer,7 who in turn, when selling l.o the final
participate in the auction as a buyer, i.e. buyers do not require
consumer, mark-up the produce by an overall 20---40 per cent
a license to operate in a market. The commission agent
depending upon the commodity and its quality to account for
gets a commission of 5 per cent (on fruits) to 8 per cent (on
spoilage, especially of perishable items and the consumer
vegetables) on the produce sold in the auction.
markets in which they are sold, the more up-market the locality
The Committees have monopolistic power and control over
the higher the mark-up for quality and the cost of operations.
the bulk/wholesale purchase and sale of farmer produce in
In other words, the intermediaries pocket two-thirds to three-
the area that is traded in these markets. This is detrimental
fourths of the price paid by the final consumer. The process
to the interests of growers, most of whom tend to be middle
of price discovery is opaque and places the grower at a
farmers-with the small landowner largely resigned to selling
disadvantage. The number of intermediaries also contributes
his entire produce to the 'beopari' (contractor/middlemen/
to overall wastage:-the spoilage in this lengthy chain can be
trader) who picks it up from the farm gate or to the arthi in the
as high as 40 per cent of the total supplies of the farmer. The
market. 1
farmer and the consumer pay for these inefficiencies.
Over the years, however, commodities like wheat, rice,
maize, cotton, sugar cane, and oil seeds are no longer
being traded in these markets and are being sold directly to
processors like ginners, rice husking mills, flour mills, and
sugar mills. 2 Similarly, fruits and vegetables grown are being
bought directly by middlemen/trader/contractor from the farms
of the small farmers 3 and brought for sale in the markets
4 However, there are no legal bars on the private sector setting
up slaughter houses. Local governments are empowered to
regulate the establishment and operations of these slaughter
A significant proportion of the input costs of a small farmer are houses-essentially to ensure compliance with environmental
financed by loans from the arthi/commission agent on the condition considerations.
that the entire crop would be sold through him in the market. 5 Sindh Government officials, however, challenge this claim. They
2 However, the market committees try and collect market fees from argue that the volume traded through these markets is larger-in
the ginners, rice and sugar mills for the produce that they buy their opinion sales of 60 to 70 per cent of fruits and vegetables are
directly transacted in these markets. Smaller quantities are being reported
3 It is widely believed that the small farmers have neither storage by market administrators simply to justify the total market fees of
facilities nor the financial resources to transport their produce to Rs. 70 million being accounted for officially-leakage being a major
the market. The arthi or the middleman/beopari is well positioned to issue.
exploit this weakness. Moreover, the price received by a farmer for 6 Assuming 25 per cent of the stock of buffaloes, cows, sheep and
his produce is influenced by prices for the crop in the government goats is slaughtered every year.
controlled markets which serves as a reference point for price 7 While 30 per cent of the produce is sold by the wholesaler on cash
formation. the balance is traded on a 10-15 day credit.
' Chapter 5 Agriculture: Critical Issues 75

Figure I Metro type organized retailers/wholesalers) directly sourcing

Rs. JOO/unit Rl!.300-400funit from the farmer, eliminating at least two intermediaries from

DDD among the arthi, commission agent, and the wholesaler, with

~~
the need for central storage and reliance on wholesalers also
Wholestiler Retailer Consumer
being eliminated in the process.
We estimate that the overall economies from the shortening
of the supply chain-with the reduction in the number of

D F,rme,
(oo,,,,,edod)
DDD
Wholesaler Retailer Consumer
intermediaries would be 20-25 per cent of the consumer
price in the case of farm produce. These economies would
be a mixed blessing with varying impact on the different
stakeholders, creating winners and losers. In case of farm
Figure Source: Khan, Mahmood Hasan, Agricultural Growth supplies the share of each would be a function of their relative
in Irrigated Punjab: Some Issues and Policies. Centre for power and the situation with respect to competition, the
Research in Economics and Business, Lahore School of greater the competition the higher the benefits that would
Economics, 2008 accrue to the farmer and the consumer. Farmers will get higher
prices and if warehouses and cold storages are constructed,
Solutions spoilage of farm produce would be reduced significantly and
provide an incentive to increase farm productivity through
There is no reason why trade in fruits and vegetables and improved technology. The wholesalers would no longer
livestock cannot be deregulated by allowing private parties have to buy from mandis/markets thereby lowering their

I
to set up and operate bulk/wholesale markets and manage purchase costs. The procurement costs of retailers would also
product-grading and standardization processes. There is, be lowered with margins depending upon the competition
therefore, a need for an enabling policy environment for between wholesalers and retailers. While some arthis and
trade in agricultural produce and market access by reducing commission agents would be driven out of business they could
I trade barriers through the creation of more competitive, harness their unique competency about market knowledge
non-monopolistic structures that will ensure better returns to and contacts to reorient their businesses by for example
farmers. becoming wholesalers.
Introduction of greater competition at the wholesale level Our estimates suggest that just for onions, chillies, bananas,

I
will not only reduce congestion in markets but also enable and mangoes, whose traded value in these markets at their
farmers to increase their earnings with declining opportunities June 2008 retail prices in Karachi was respectively Rs. 6
for extracting rent presently available to traders who have billion, Rs. 2.5 billion, Rs. 5 billion, and Rs. 1 billion the overall
captured these government regulated market committees that annual economic savings from the shortening of the supply
have the sole right to conduct wholesale trade in the area and chain (including reduced wastage/spoilage) could be Rs. 1.5
also only through government-appointed commission agents. to Rs. 2 billion at today's consumer price in Karachi.
Although the legislation governs the orderly flow of farm The reforms in the area of agriculture marketing should also
produce to the consumer with price discovery through the aim to strengthen market related information systems. There
auction process the farmer, especially the small landowner, is is a need to tackle information asymmetry on prices to enable
exploited by the arthi and the commission agent a) because of farmers to maximize their returns without being exploited
the monopoly they enjoy since the produce can only be sold by middlemen on this account. To this end, there is a need
in that particular market; 8 and b) through unfair grading and to improve the information providing network comprising
weighing of the produce. An amendment in the legislation or websites and electronic boards in markets to make data real
its repeal will open up opportunities for improving the farm time.
produce supply chain-permitting retailers to buy directly from
the farmer by-passing the markets and the intermediaries.
Such an arrangement will enable organized retailing (e.g. Source: Final Report of the Panel of Economists, Medium
Term Development Imperatives and Strategy for Pakistan
8. Since the function of the markets is price discovery and if farmers
only get a third of the retail price in government markets that sets (Islamabad: Planning Commission, Government of Pakistan,
the base for all transactions. April 2010), 62-64 and 66-67.
76 Issues in Pakistan's Economy

Box 5.5 operating in it. Here again, it is the government that should
Wheat Support Pricing or Bad Economics? take the blame.
Because of these factors, the cost of wheat production,
Ahmad Fraz Khan asks the question whether anyone really according to official estimates, has increased from Rs. 400 per
benefits from raising wheat prices or not. 40K in 2006-07to Rs. 932 per 40kg (133 per cent). The farmers'
bodies, however, put it at much higher figure. The government
The Economic Coordination Committee of the cabinet has has created a vicious circle for itself, where it increases prices
increased wheat support price yet again, third time over the of inputs to meet its own running expenditures. Then, it
last four years of the present government's rule. The last increases wheat prices to compensate farmers. On the third
plank, it procures wheat to stabilize market. Finally, it ends
week's increase has taken the price from Rs. 1,050 per 40kg
to Rs. 1,200 per 40kg-a jump of 14 per cent. up subsidizing flour for the urban population. One wonders,
l
I
Last year, the price was taken from Rs. 950 per 40kg to where this process would stop.
Rs. 1,050 per 40kg-an increase of almost 1o per cent. In 2008, The cumulative cost of these four stages is hundreds
when this government took over, it increased the price from of billions of rupees a year. By increasing wheat price, the
Rs. 625 per 40kg to Rs. 950 per 40kg-a leap of 46 per cent. government only correspondingly adds to these expenditures.
It is not only this government. The last one, when closing This is apart from regular reports of massive corruption at
in on elections in 2007, had also increased price from Rs. 425 these stages that have become fodder for the media.
per 40kg to Rs. 625 per 40kg. This makes a little less then 300 One indicator of this rising cost is administrative cost of
per cent increase in the last five years. And this is being done wheat procurement. In the last four years, Punjab, which is
to a crop that is a staple for the huge majority and dictates one of three organizations (along with Sindh Food Department
food security situation in the country. and Passco) involved in procurement, had paid Rs. 80 billion
Once the new wheat price takes hold of the market, the in interest payments to banks on its stocks. That makes it
20kg of flour, which used to cost Rs. 225 in 2007, would cost Rs .. 1.66 billion a month or Rs. 550 million a day.
well over Rs. 725-taking it out of financial reach of a few In 2009-10, the Punjab procured 5.78 million tons at the
million more. The social cost of political pandering of rural cost Rs. 143 billion and paid Rs. 19 billion in mark-up to banks.
voters thus becomes unbearable for the people. Next year, it borrowed Rs. 88 billion and paid Rs. 26 billion to
By increasing price of wheat every year, the ruling elite tries banks as carryover stock kept adding to the cost. In 2011-12,
to consolidate its rural vote bank, thinking that all rural people it borrowed Rs. 76 billion and interest payments were Rs. 23
would benefit. billion. This year, it still owes Rs. 73 billion and has so far paid
This is, however, a wrong assumption if Pakistan Agriculture Rs. 11 billion.
Census is to be believed. According to it, around 85 per cent In these four years, the Punjab alone had to borrow Rs. 381
farmers don't produce marketable surplus. Thus, they are not billion for wheat procurement and paid Rs. 79.53 billion
the beneficiaries of a regular increase. to service loans. The other two-Sindh and Passco-also
To make the assumption even skewed, around 40 per procure around the same quantity and cost can easily be
cent of rural population is landless labour that buys wheat for doubled if they are added to the tally. This is the cost of
survival. The increase thus benefits only a small part of the increasing wheat prices regularly and dealing with the fall out.
rural population that produces a marketable surplus and is The federal government needs to consider two options:
part of the ruling elite and decision-makers who raise wheat controlling input prices instead of increasing support and
prices for meeting its electoral expenditures. leaving price fixation to provinces. Instead of increasing
The stated logic behind increasing wheat support price support price and increasing administrative and corruption
is the escalating cost of production. This growing cost is a charges, the federal government should adopt fiscal and
reality but it constitutes one of the many variables that should taxation policies that bring input prices down.
determine the wheat price. Import and export parity, domestic This would benefit the small farmers in equal measure and
consumption, and projected requirement should also get add to their productivity. Secondly, the federation should now
equal weight in calculating price. But it has not been the case, leave the prices of agriculture commodities, wheat included, to
as electoral politics overrides everything else. provinces, which now own the sector.
Increasing cost of production is a reality, one created by It sounds strange that producers should be deprived of the
government policies. In the last four years, fertilizer (urea) right to fix price of their products. Punjab, to its credit, opposed
price has increased from Rs. 700 per bag to Rs. 1,700 per increase in wheat prices but the federation unilaterally did the
bag-a difference of a staggering 142 per cent. Electricity deed, creating a situation for provinces where they have no
prices have gone up by 163 per cent-from Rs. 3.28 per unit option but to follow the price or risk alienating voters. This is
to Rs. 8.63 per unit. In the same period, diesel cost grew from certainly bad economics.
Rs. 73 to Rs. 111 per litre-a growth of 53 per cent. All these
prices increased mainly due to government policies and it
is the major beneficiary of the increase. In fertilizer price, a Source: Khan, Ahmad Fraz, 'Wheat support pricing or bad
small role is played by weakening government writ and cartels economics?', Dawn, Karachi, 3 December 2012.
 Chapter 5 Agriculture: Critical Issues 77

sources compared to 40 per cent in the large or formal credit is meant for production and investment,
farmers category; while most (47 per cent) non-institutional credit is used
ii) a significant proportion of loans (over 30 per for consumption purposes.
cent) disbursed by institutional sources are 4. Not surprisingly, there is an inverse correlation between
either proxy loans or roll over funds. 18
wealth and access to sources of credit. Richer households
in the rural areas have better access to institutional
A 1995 World Bank study examining the extent and
sources, which are also cheaper, while poor households
degree of rural finance in Pakistan reached the following
depend primarily on more expensive, non-institutional
conclusions:
credit (see Table 5.8).
1. Credit does play an important role in agricultural
5. The access by poorer households to institutional sources
productivity and output.
of credit is constrained by complex procedures, and
2. Rural credit reaches few rural households, and institutional
informal sources are much simpler and more flexible,
sources provide credit to only a small proportion of rural
often requiring little collateral. As much as 76 per cent
households. Only 32 per cent of all rural households
of formal institutional credit was against the security of
take loans, and of these a mere 10 per cent borrow from
landed property and 21 per cent against personal surety.
institutional sources. The main sources of institutional
For informal sources of credit, as much as 96 per cent of
credit are: Agricultural Development Bank of Pakistan
loans were advanced on personal surety. This may help
(ADBP) which is now called the Zarai Taraqiati Bank
explain why there is differentiation between institutional/
Limited (ZTBL) 76 per cent, commercial banks 17 per
non-institutional credit based on size of farm, and by
cent, and co-operative societies 6 per cent. 90 per cent of
ownership pattern. One would expect smaller farmers
the households take loans from informal sources, mainly
to access informal sources of loans more easily and
friends and relatives ( 67 per cent) and landlords ( 11 per
frequently than larger farms, which would have better
cent). Not surprisingly, non-institutional or informal
access to institutional sources. Moreover, owners would
sources of credit dominate the rural sector.
take out greater loans than tenants from either source ( see
3. Both sources of credit tend to be short term, but serve
Table 5.9). 19
different needs. For example, 94 per cent of institutional

Table 5.8
Sources of Loans by Asset Quintile

Institutional Non-institutional

% credit
Asset % credit from other
quintiles Percentage No. of from friends No. of informal No. of
credit loans and relatives loans sources loans

Lowest 1.05 3 31.43 201 67.51 585

Second 4.83 13 49.53 249 45.63 396
Third 12.60 23 48.33 244 39.07 308
Fourth 29.62 52 35.44 174 34.95 285
Highest 58.36 116 20.10 139 21.54 263
All households 32.16 207 32.39 1,007 35.45 1,837

Source: World Bank, Pakistan: Rural Finance for Growth and Poverty Alleviation (Washington DC: World Bank, 1995), 9.

Table 5.9
Distribution of Institutional Loans as a Percentage of All Loans by Categories and Size of Farm: 1973 and 1985

Owner Owner-cum-tenant Tenant All cultivators

Size
(acres) 1973 1973 1985 1973 1985 1973 1985
1985

0-5 1.80 8.83 1.50 1.90 0.43 1.36 1.48 7.45

5-15 12.52 33.10 2.19 16.83 3.38 3.17 6.88 21.81
15-25 12.25 45.96 2.91 24.73 1.22 5.76 6.40 33.63
25-50 20.62 62.05 6.99 49.83 0.81 5.68 13.38 51.82
Over 50 31.15 65.18 24.92 57.20 21.02 16.24 29.00 61.31
All sizes 14.71 37.47 6.10 33.57 3.02 4.01 9.80 13.16

Source: World Bank, Pakistan: Rural Finance for Growth and Poverty Alleviation (Washington DC: World Bank, 1995), 61.
78 Issues in Pakistan's Economy

Recent studies have shown that little has changed some years 4. Since the formal sector is small and a large number of
on. In May 2009, a large survey and study was published by Pakistanis borrow, most, even in the rural sector, borrow
a number of institutions known as the 'Access to Finance from informal sources, such as family and friends and
Study' .20 While some of the findings and features of this Report shopkeepers. Also, as Box 5.4 shows, many farmers also
are presented in Chapter 14 on Banking, here we summarize borrow from the middlemen in the chain of delivery and
some of the findings related to rural financial markets. 21 market. Most of those who borrow in Pakistan, do so for
1. Only 14 per cent of all Pakistanis, rural and urban,
consumption smoothing purposes, such as household
use a financial product or service of a formal financial needs and marriages or funeral expenses. Nearly half of
institution, which includes savings, credit, insurance, the households borrowed from friends and family, with
and remittance services. However, around 50 per cent around half borrowing from shopkeepers. Not surprisingly,
of all Pakistanis have access to some sort of financial nearly 98 per cent of the rural population, has never taken
service, whether from the formal sector or from the a formal bank loan.
informal unorganized or informal organized sector. The The studies cited above confirm the view that irrespective
organized informal sector comprises of committeees/ of income levels, the rural population rarel'y uses formal
bisees, shopkeepers, moneylenders, hawala (informal financial services. Numerous reasons account for this, and
system of transfering money)/hundi (money remitted by include the absence .of formal financial services close by, the
a negotiable instrument) money transfers, and such like. paperwork, involved in setting up such accounts-it takes
The unorganized informal sector comprises of friends and twice as long in Pakistan to open an account as it does in the
relatives. Half of the population is excluded from any form rest of South Asia, and one presumes that in rural Pakistan,
of financial service, whether formal or informal. Compared this might be longer still.2 2
with only 14 per cent of Pakistanis who are part of the
formal financial sector, the figure for Bangladesh is 32 per
cent, and 48 per cent in India, and as high as 59 per cent in
Sri Lanka. Clearly, financial inclusion in the formal sector
is very low compared to other countries in South Asia.
2. Rural areas account for only 10 per cent of the total
bank deposits in Pakistan by value, and only 7 per cent of
5.3.1 Informal Sources of Crediit
A study in the Punjab has shown that only 15 per cent of the
small farmers had access to institutional credit, while a 1986
study in Sindh suggested that only 8 per cent of farmers had
this source of credit available. 23 There were also numerous
l
the total value of deposits and advances from banks. Only problems related to the availability of this meagre amount
15 per cent of farmers are reached by the financial system of credit. The need for credit at a particular time, like other
as a whole, including commercial banks, agricultural inputs, can have a critical influence on whether a crop will
banks, and other financial institutions. succeed or fail. Studies have found that a disproportionate
3. There is a very large imbalance in access to formal number of farmers (69 per cent in one study) 24 were given
finance which favours large farmers. The upper-income credit well after the deadlines had expired.
large farmers have access to ten times the access to formal Although Table 5.10 shows the quantum jumps made in the
finance compared to the lowest quintile of farmers. This amount of credit available to farmers through institutional
imbalance is also replicated in terms of informal sources sources, there is a very noticeable preference amongst users
of finance. for credit from non-institutional or informal sources. The

Table 5.10
Agricultural Credit Disbursed in Pakistan by Agencies: 1955-2012 (Rs. m)

Domestic Co- Commercial

Year ZTBL Taccavi Total
Private Banks Operatives Banks

1955--1960 7.4 12.3 32.0 51.6

1960-1965 40.3 15.9 72.1 128.3
1965--1970 89.6 11.9 59.1 160.7
1970-1975 230.4 21.8 72.5 297.7 503.5
1975-1980 546.0 13.9 241.8 1,192.7 1,994.3
1980-1985 2,446.8 8.5 1,332.4 2,981.2 6,768.7
1985--1990 7,422.5 17.5 2,221.9 4,899.2 14,566.1
1990-1995 8,375.4 2,788.1 3,827.1 15,023.2
1995--2000 19,795.0 4,710.0 6,426.0 30,933.0
2001/2 29,108.0 5,273.0 17,486.0 52,446.0
2000-2005 30,666 4,281 6,182 · 27,368 67,640
2005--2010 65,031 33,869 6,222 94,677 199,799
2010-2012p 51,603 43,763 6,587 123,976 230,192

Note: P = Provisional
All figures are five years average except 2010-2012 (2 years average)
Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various years).
 Chapter 5 Agriculture: Critical Issues 79

reasons given for this include easier access, absence of l 980s. 26 Box 5.6 contains the arguments for and against
cumbersome procedures, availability as and wheri required, informal loan markets.
the availability of credit even for consumption purposes There is a belief that moneylenders in the informal market
or emergency loans, unlike official sources which have charge 'usurious' rates of return, but it has been observed in
rather restricted uses of credit, the possibility of a deferred Pakistan that they are a disappearing breed; the main actors
repayment of debt if crops fail, and often the availability of in informal rural financial markets are now the commission
credit through informal sources without the need for any agents or arthis, and increasingly, shopkeepers, as consumer
collateral. goods expand into rural areas. One needs to examine how the
A major complaint heard from farmers pertains to the rate of return is determined in informal lending and to what
high transaction costs that borrowers are forced to pay in extent this rate differs from the formal sector. Amongst the
order to acquire a loan. Transaction costs are said to comprise mechanisms that determine this return is the
various components, including 'application fees, form-filling
fees, loan registration fees, borrower's travelling expenses, most obvious and visible mechanism [which]
costs of entertaining people who assist the farmer in getting is the statutorily fixed commission on 'the
the loan, and the opportunity cost of the borrower's time in marketed value of output. However, a large
component of the return may consist of less
negotiating the loan'. 25 In comparison, such non-mark-up
visible mechanisms like manipulation of output
costs are almost negligible when credit is borrowed from purchase and input supply prices, biases in
informal sources. Since many farmers feel that the difference weighing of output, charging of fictitious costs,
in the total cost of borrowing from both sources is almost payments in instalments, etc. The issue is the
negligible, farmers prefer to acquire credit from informal, extent to which reliance is placed on market
non-institutional sources. imperfections and extortionary mechanisms to
Official government figures in the 1970s revealed that as charge effectively high rates of return from
much as 80 per cent of rural credit was supplied by informal borrowers. 27
leaders, but with the huge increase in formal credit, the
expansion of bank services and greater monetization, there As Viqar Ahmed and Rashid Amjad argue, 'the very fact
was a fall in this proportion to about 55 per cent by the early that a large number of farmers prefer to borrow from informal

Box 5.6 failure has been the lack of mobilization of financial

Are Informal Financial Markets Always deposits because deposit facilities are inadequate,
unsafe, untrustworthy, or less remunerative.
Exploitative?
iii) The other sharply contrasting view of informal lenders was
Different views exist about the nature of informal financial first articulated by Michael Lipton. He argued that there
markets. Some are summarized here: should be greater reliance on informal sources which do
indeed get to poor farmers, albeit at high rates of return.
i) According to one view, informal lending is inherently As opposed to this, concessionary institutional finance
'exploitative' in character, with 'usurious' rates of return is largely siphoned off by large farmers. Also, informal
being charged from small farmers who find themselves lending has a number of inherent advantages. It is
in a state of perpetual indebtedness. In this view the potentially more efficient, decentralized, and accessible,
informal credit market is fragmented, imperfect, and loans can be obtained on time, and scope exists for
characterized by local monopolies. Consequently, rates receiving consumption loans for financing emergency
of return are high, ranging from 30 per cent to 50 per needs along with production loans. It has been shown
cent. Various mechanisms exist for extracting a high rate that the difference between costs of borrowing from
of return on loans which include lower prices for output formal and informal sources is greatly diminished if
marketed to the lender (commission agent), higher transaction costs are included. . . . In Bangladesh
prices for inputs, biased weighing of output, charging of effective costs [mark-up + borrower transaction costs]
fictitious costs, etc. Consistent with this view of informal of small loans from informal sources are, in fact, lower
lending is the policy prescription that institutional finance than those from financial institutions. If informal lending
is essential to get the small farmer out of the clutches of is seen as performing a useful function, especially for
these exploitative arrangements. small farmers, in a competitive environment then the
ii) Various authors have also highlighted the constraints of policy stance would have to change towards greater
informal lending which have inhibited its growth. They integration of the rural financial markets with more role
have indicated that resources and activities of informal being assigned to informal lending.
lenders are inadequate and ill-suited for modernization.
This is largely due to their inability to lend for long enough
periods for farmers to acquire productive assets. Hence, Source: State Bank of Pakistan, Rural Financial Markets Study:
the growth of informal lenders has been slow. Another Phase-1 (Karachi: 1994), 5.1-5.2.
80 Issues in Pakistan's Economy ·

sources in spite of the high cost shows that the demand for intermediation to disburse credit of the right kind at the right
agricultural credit is highly service elastic, a significant factor time, along with specialized and decentralized management
which is overlooked'. 28 Despite increasing modernization structures. The study found that 'supervised credit and
and monetization, and growing urbanization, as well as the development of access to inputs and marketing facilities have
closer proximity of farmers to markets, one will continue to been the major responses to tackle the problem of efficient
see the dominance of the informal sector in rural, as well targeting, disbursement and recovery of credit'. 30 In the
as urban, areas. The middleman, the arthi, the bisee, or the case of Pakistan it has been seen that the 'development of
family as a source of credit, is unlikely to be replaced for supervised credit operations by commercial banks has been
many years to come. constrained by the need to limit costs of lending'. 31 In the
study conducted by the Applied Economics Research Centre
5.3.2 Formal Sources of Credit based on field work in the different areas of Pakistan, four
major issues concerning formal rural financial institutions
Formal rural financial institutions are of different types were found to be critical. These were as follows:
and include government departments and corporations,
co-operatives, commercial banks, and specific agriculture- a) Targeting of Credit: A major problem with
related development banks (see Figure 5.5 for the changes in lending practices by branches is the substantial
sources of formal credit in agriculture). Specialized financial diversion of credit away from the intended
institutions in the rural areas, such as the Zarai Taraqiati Bank beneficiaries (small farmers). In particular, a
Limited (ZTBL) formerly the Agricultural Development Bank high proportion of proxy loaning exists in the
of Pakistan (ADBP), may be involved in the disbursement of case of personal sureties type of collateral. An
earlier study has also highlighted this problem.
medium- and long-term credit. The five commercial banks
Given this misallocation, there may be a stronger
in Pakistan have increasingly increased their proportion of
case for bringing rates of return on agricultural
agricultural credit and now dominate credit disbursement loans closer to market rates in order to remove
in the agricultural sector. However, formal sources of credit incentives for arbitrage by large landowners and
are still very limited all across Pakistan, and especially in the the resulting adverse consequences on equity.
rural areas. b) Problems of Regulatory Policies: The presence
In a study conducted by International Food Policy Research of mandatory targets for agricultural lending
Institute (IFPRI) 29 it was observed that, in the case of formal and the linkage between establishment of
sources, the success of a scheme requires proper financial urban and rural branches has greatly reduced
the emphasis on profitability of rural banking.
This has increased the orientation towards loan
disbursement and permitted suboptimal location
of branches. However, it appears that, in the face
Averages for 1955-60 of high default rates, commercial banks are
beginning to opt for a policy of paying penalties
Commercial banks
rather than achieve lending targets.
0%
c) Diversification of Lending Instruments: Most
banks have experimented with new types of
lending instruments, including Islamic modes of
financing like musharaka, mark-up, hire purchase,
Taccavi
buy back finance, etc. Mark-up free Joans have
loans
Co-operatives also been disbursed to small farmers. This has
24%
62% probably had a positive impact on the demand
for credit as varying preferences of borrowers
have been more effectively catered for. However,
the mark-up system may have created a greater
incentive for default, as the penalty in the event
of non-repayment of a loan is linked only to the
Averages for 2005-2010 amount of outstanding principal.
d) Lack of Decentralization: High rates of default
appear to have created a centralization tendency
in terms of loaning powers. Increasingly, branch
Commercial managers and mobile credit officers (MCO)
banks Taccavi of commercial banks are being required to
64% loans 0% refer loan applications, of even relatively small
amounts, to zonal offices for approval. This is
affecting the speedy and timely disbursement
of loans. In addition, growing risk aversion on
the part of RFis has Jed to institution of more
Figure 5.5 elaborate documentation requirements. This
Agricultural Credit Disbursed in Pakistan by Formal has increased borrower transaction costs and
Institutions: 1955-201 O (%) contributed to delays. 32
 Chapter 5 Agriculture: Critical Issues 81

The Extent of Debt households had only 8 per cent supplied from this source. 35
Clearly, access to agricultural credit from formal or informal
A study in the early 1960s found that 45 per cent of the sources was divided by type of household and by ownership
cultivators in Pakistan were in debt and received an average patterns, with smaller households (in area) and tenant farms
annual cash Joan of Rs. 598. The Joans were utilized mostly making greater use of informal sources, and large farms and
for household expenditure (45 per cent) and livestock (36 per owner-farms using formal institutional sources.
cent). More productive activities, such as land development According to the 2010 Census of Agriculture, 10 per cent
and storage facilities, received a very small share. 33 The 1972 of all households were in debt, with 13 per cent agricultural
Pakistan Census of Agriculture quoted a figure of 43 per cent households and 13 per cent of farm households in debt.
for the total proportion of agricultural households that were Perhaps it is not surprising, that the smallest farm households,
in debt. While the distribution of households in debt by size those who own less than one acre of land, are the least in debt
of holding showed little variation, the households with 150 (only 6 per cent of households in this segment), and a larger
acres or more were relatively more indebted: 50 per cent proportion of owners were in debt as landholdings increase.
of households in this category were in debt compared with Hence, 13 per cent of households in the 2.5-5 acre segment
around 43 per cent for all other households. Of the three were in debt, which rose to 21 per cent of households in the
categories, owner households, owner-cum-tenant households 12.5-25 acres segment, rising further to 27 per cent in both,
and tenant households, the last named were the most the 50-100 and 22 per cent 100-150 acre segments. Table
indebted, while owner households were the least indebted: 5.11 shows the extent of debt by the nature of holding, as
only 39 per cent of all owner households were in debt, while well by the time of arrangement of tenure, while Table 5.12,
49 per cent of tenant households were in debt. In all three shows the amount of debt incurred, from both, formal sector
categories, households above 150 acres were more indebted institutions as well as informal sector intermediaries.
than smaller households. 34
It is very interesting to observe that there was a major
change by the time of the 1980 Census of Agriculture. Only
Bank Credit to Agriculture
21 per cent of farm households (less than half the proportion ZTBL used to be the largest source of institutionalized credit
in 1972) were in debt. Nevertheless, the pattern regarding in the agricultural sector, on average providing more than 64
type of household and size of landholding was similar to that per cent of total credit between 1995 and 2000 (Table 5.10).
for 1972. An interesting figure provided in the 1980 Census Commercial banks did not make any loans to agriculture prior
concerned the distribution of debt in terms of institutional to 1972 when they were nationalized, and at best provided
and non-institutional (informal) sources, which stood at 32 loans for trade in agricultural products. In the 1995-2000
per cent and 68 per cent, respectively. For smaller households, period they constituted about 20 per cent of loans in the
not surprisingly, informal sources provided much more credit formal sector (Table 5.10). However, all that has changed,
than formal sources: 90 per cent of the credit for households and now the five commercial banks provide more than half
under 5 acres came from informal sources. Compared to this, of the loans from the formal financial institutions to the
60 per cent of the credit for households above 50 acres came agricultural sector, a figure which is much smaller than what
from institutional sources. Owner households had 38 per cent farmers, particularly small farmers, borrow from non-formal
of their credit supplied by institutional sources, while tenant sources-see Box 5.7 for different types of Joans.

Box 5.7 Long-term loans are needed for improvements of a more

Different Types of Loans lasting character like the sinking of wells and tube wells, the
purchase of additional land, or for repayment of old debts.
The distinction between different types of loans of variable Loans can also be categorized into productive loans
duration is important. Some salient features are as follows: and unproductive loans. According to the conventional
definition, a productive loan is a loan which is utilized in such
Rural credit is usually classified as short-term (up to one a way that it leads directly to an increase in the income of the
year), medium-term (one to five years), and long-term farmer and adds to his capacity to repay. These loans may
(exceeding five years). Short-term loans are needed for finance current production, i.e. meeting current cultivation
meeting annual production costs (for example, seeds, costs and future development, i.e. increasing future returns.
pesticides, fertilizers), and for the replacement of a portion Unproductive loans are those which do not directly increase
of the farmer's fixed capital (for example bullocks, sheds, the efficiency of cultivation or the farmers' income. But ...
implements, and the cost of consumption needs up to it is sometimes difficult to separate productive loans from
harvesting). Thus these loans can be treated as part unproductive loans.
of the working capital requirements. Medium-term loans
are needed for the purchase of livestock, implements, Source: Ahmed, Viqar and Rashid Amjad, The Management
the construction/improvement of water courses, and for of Pakistan's Economy, 1947-82 (Karachi: Oxford University
equipment not expected to last more than five years. Press, 1984), 159--60.
Table 5.11 Number of Households under Debt by Tenure and by Type of Household: Q)
I\)
Agriculture Census of Pakistan-2010
C/1
C/1
All Households Owner Households Owner-Cum-Tenant Households Tenant Households C
Cl)
C/1
Types of Households Under Debt Under Debt Under Debt Under Debt
:::I
Total Total Total Total
Number Per cent Number Per cent Number Per cent Number Per cent 'ti
Q)
~

PAKISTAN
2 3 4 5 6 7 8 9 10 11 12 13
-
;;·
Q)
:::I
(/1~

m
(')
All Households 24,094,908 NA NA NA NA NA NA NA NA NA NA NA 0
:::I
0
Non-Agricultural Households 11,760,679 NA NA NA NA NA NA NA NA NA NA NA
3
'<
Agricultural Households 12,334,229 1,565,130 13 NA NA NA NA NA NA NA NA NA

Livestock Holders 3,985,644 483,223 12 NA NA NA NA NA NA NA NA NA

Farm Households Total 8,348,585 1,081,907 13 6,811,120 829,691 12 613,027 98,536 16 924,454 153,693 17

UNDER 1.0 Acre 1,258,546 75,084 6 1,181,413 69,139 6 18,983 1,488 8 58,149 4,454 8

1.0 to under 2.5 acres 2,355,707 237,762 10 2,018,652 190,866 9 73,788 6,884 9 263,255 40,005 15

2.5 to under 5.0 acres 1,766,315 225,783 13 1,399,431 170,025 12 127,306 14,908 12 239,565 40,848 17

5.0 to under 7.5 acres 1,143,756 174,993 15 886,954 132,845 15 113,527 17,454 17 143,280 24,703 17

7.5 to under 12.5 acres 927,780 164,723 18 683,094 121,167 18. 124,500 21,127 120,169 22,418 19

12.5 to under 25.0 acres 574,547 119,656 21 408,605 85,172 21 95,585 20,724 22 70,345 13,760 20

25.0 to under 50.0 acres 219,596 58,050 26 158,199 41,565 26 39,040 10,630 27 22,358 5,843 26

50.0 to under 100.0 acres 71,943 19,536 27 53,106 14,789 28 13,387 3,465 26 5,454 1,268 23

100.0 to under 150.0 acres 14,361 3,185 22 10,327 1,987 19 3,169 996 31 868 203 23

150.0 acres· and above 16,076 3,154 20 11,358 2,120 19 3,724 840 23 997 193 19

Source: Government of Pakistan, Census of Agriculture-Pakistan (Lahore: 2010).

 Chapter 5 Agriculture: Critical Issues 83

Table 5.12 evaluates the attitude of the government in the early years
Amount of Outstanding Debt from Institutional and as follows:
Non-Institutional Source by Tenure and by Type of
Household (in Hundred Thousand Rupees) Mechanization in Pakistan had a late start and
slow initial progress because of the Government .
All Households policy of restricting mechanization based on
Types of Households the apprehension that it would displace farm
Total 1 . . Non-
nst1tut1onal Institutional labour and cause the problem of unemployment.
Even the international agencies like the FAQ
2 3 4 and the World Bank advocated caution and
PAKISTAN recommended that small farmers should not
All Households 1,701,705 857,857 843,848 be encouraged to purchase tractors. In retrospect,
it is now clear that it was a misguided concern.
Non-Agricultural Households NA NA NA
Mechanization, to the extent it has taken place,
Agricultural Households 1,701,705 857,857 843,848 has resulted in increased farm incomes and
Livestock Holders 499,752 149,294 350,458 manpower productivity and the employment
Farm Households Total 1,201,953 708,563 493,390 effect has, on the whole, been positive. Total
employment in agriculture increased from 9.8
million in 1965 to 14.6 million in 1986. The
UNDER 1.0 acre 78,138 24,544 53,594
value added per farm worker also went up from
1.0 to under 2.5 acres 258,129 112,229 145,900 Rs. 946 in 1960 to Rs. 1,357 in 1985 (constant
2.5 to under 5.0 acres 249,840 142,128 107,712 1959-60 prices). However, the most important
5.0 to under 7.5 acres 193,699 123,810 69,889 development was the generation of increased farm
7.5 to under 12.5 acres 185,174 123,946 61,228
related off-farm employment in manufacture, the
supply and servicing of agricultural machinery,
12.5 to under 25.0 acres 137,297 102,559 34,738 the supply of other inputs and the post harvest
25.0 to under 50.0 acres 68,332 53,261 15,071 handling of increased agricultural production. 36
50.0 to under 100.0 acres 23,477 19,656 3,821
100.0 to under 150.0 acres 3,932 3,323 609 Despite the early bias and recommendations against
150.0 acres and above 3,935 3,107 828 tractorization, there has been an astronomical increase in
the number of tractors available in the country. In 1960 there
Source: Government of Pakistan, Census of Agriculture-Pakistan were only 1,665 tractors on farms in Pakistan. In 1968 this
(Lahore: 2010).
went up to 16,583, and it had doubled again by 1975. The
number of tractors increased by 400 per cent between 1975
and 1984, and in 1986, there were reported to be 187,255
5.4 MECHANIZATION tractors on farms in Pakistan. 37 In the years since then, it
would be fair to speculate that the number for 1986 has
When we talk about mechanization in agriculture, it is increased further by large amounts. Thus, tractors have
essentially tractorization which comes to mind, and other become a major ingredient in agricultural production in
implements are often of a secondary nature. The reason for Pakistan. Unfortunately, even recently published government
this synonymity is the huge impact of tractorization on output, publications have rather old data. For example, Table 5.13
employment, the nature of social relations of production, and gives data for as long ago as 1994. However, we have recent
so on. In our analysis of the Green Revolution we saw how data which shows that annual tractor production in 2001/2
the HYV package was supplemented by tractorization and of 35,038, was twice what it was throughout the 1990-98
how these tractors had an impact on the agricultural process, period; in the late 1980s, the average annual production was
changing agricultural production for ever. In this section over 22,000, which supports the claim that mechanization
we will discuss the effects and issues around tractorization/ and tractorization has increased substantially.
mechanization, and add some discussion of the use of tube An important feature of the tractorization process in
wells and how this process of mechanization in the area Pakistan has been that most of the tractors available have
of irrigation has affected agriculture over the years. One been of the larger type. Table 5.14 shows that 80 per cent
must add, however, that the discussion on mechanization of tractors were in the 46-55 horsepower range, with 17 per
is much outdated now, for much of Pakistani agriculture is cent in the 56-65 horsepower range. ·Also, the ownership
already mechanized and debates around the consequences of tractors (Table 5.13) is concentrated, not surprisingly,
of mechanization no longer create controversy or take place. in the middle range of farm sizes. These are the dynamic
Much of the discussion in this section gives a view of the capitalist farmers who played an important role in the Green
historical debates around and against mechanization rather Revolution. One consequence of the policies regarding tractor
than regarding current issues. size and ownership, as pointed out by Mahmood Hasan
The importance of mechanization can be judged by the I<han, was that tractor ownership 'gradually increased the
attitude of the various governments of Pakistan in the early size of landholdings, through both an increase in the land
years. The Report of the National Commission on Agriculture leased from the poor and middle peasants and cultivation by
the landlords themselves at the expense of sharecroppers'. 38
84 Issues in Pakistan's Economy

Table 5.13
Farms Reporting Use of Important Agricultural Machinery
(by Size of Farms)

Farm Size Tractors Tube Wells/Pumps

All farms
(acres) Owned Rented Owned Rented

All sizes 4,449 285 3,288 479 1,422

100% 100% 100% 100% 100%
Under 5.0 2,097 31 1,617 113 745
47% 11% 49%, 24% 52%
5.0-12.5 1,521 82 1,151 181 485
34% 29% 35% 38% 34%
12.5-25.0 553 77 375 101 144
12% 27% 11% 21% 10%
25.0-50.0 198 57 112 54 38
4% 20% 3% 11% 3%
50.0-150.0 69 31 30 25 9
2% 11% 1% 5% 1%
150.0 and above 11 7 3 5
0.25% 2.46% 0.09% 1.04% 0.07%

This data is for 1994.

Source: Government of Pakistan, Agricultural Census of Pakistan, 2000-01 (Islamabad, 2003).

Just as there was a bias against tractorization in general, operations in construction of rural roads, by
there have also been official recommendations in the past using the tractor to operate stationary threshers,
against providing tractors to small and medium farmers. The chaff cutters, cane crushers, and other specialized
issue here was one of cost, since the government realized that equipment and, above all, by the tractor drawn
these farmers would not be able to buy the imported tractors trolley for haulage of goods from villages to
markets and agricultural inputs and non-farm
unless they were heavily subsidized. However, since the early
requisites from towns to villages. The use of
1980s, the small and medium farmers have bought tractors, tractor for haulage is perhaps the predominant
many of them using loans, but more recently, a large number feature of the utilization of tractors owned by
have probably financed their tractors from remittances from the small and the medium farmers. 39
the Middle East. Since the tractors available have been of
the larger variety, these small and medium farmers have had Despite the ownership of the tractors by small and medium
excess capacity on hand. They have made farm owners, as Table 5.13 shows, a much larger number
of farmers in this category rent in tractors. This is also
profitable use of the tractors by hiring out the supported by the evidence that farmers have given up
excess capacity to do custom work for other the more traditional bullocks at a rate higher than the
farmers, by participating in the earth moving
rate of acquisition of tractors, implying that these farmers

Table 5.14
Number of Private Tractors by Horsepower

Administrative Total Tractors by horsepower

Units Tractors Below 26 26-35 36-45 46-55 56-65 Above 65 Not reported

Pakistan 400,446 371 448 17,385 310,524 50,971 20,149 598

Punjab 331,273 85 405 16,442 255,158 40,215 18,434 534
Sindh 36,082 4 19 255 28,325 6,428 1,047 4
KPK 23,967 282 13 388 18,780 3,980 472 52
Balochistan 9,124 11 300 8,261 348 196 8

Source: Government of Pakistan, Agricultural Statistics of Pakistan 2010-11 (Islamabad, 2012). Compiled from Pakistan Agricultural
Machinery Census - 2004.
Note: The data is for 1994.
I Chapter 5 Agriculture: Critical Issues 85

I
I Box 5.8
Should there be Mechanization in Agriculture?
Arguments for and against farm mechanization are raised by
Viqar Ahmed and Rashid Amjad in their book The Management
For
1. Mechanization encourages multiple cropping and
greater intensity of cultivation and is thus land-saving.
2. It reduces the dependence upon draught animals
whose number is not increasing as fast as the
of Pakistan's Economy, 1947-82. availability of water. One reason why the cropped area
has not increased in proportion to the water supply is
Against the inadequacy of farm power. Mechanization will free

I
1. Farm mechanization is basically capital-intensive. This land from growing fodder for draught animals.
has so far thrived in developing countries on the basis 3. Mechanization will make dry-farming possible and will
of direct subsidies and subsidized credit since scarcity in this way counterbalance the regional bias of the
of capital is not reflected in its price. package of modern inputs in favour of irrigated areas.
2. Mechanization of farming will divert capital and foreign 4. The new package of modern inputs and greater water
exchange from non-agricultural sectors to agriculture supply can attain their highest potential yield only with
where labour-intensive alternatives are available.
t 3. The argument that mechanization increases the
productivity of land (except through multiple cropping)
the help of mechanization.
5. Mechanization lowers the cost of production by allowing
more efficient utilization of land, labour, irrigation, and

I has not been conclusively proved.

4. Mechanization not only displaces labour but also
induces landlords to cultivate land through hired hands,
other inputs.

I
hence the social cost in terms of tenants converting into
landless labourers.
5. Farm technology has a big-farmer bias and accentuates Source: Ahmed, Viqar and Rashid Amjad, The Management
social disparity particularly in the case of assets having of Pakistan's Economy, 1947-82 (Karachi: Oxford University
lumpy investments. Press, 1984), 159-60.

hire tractors from other owners. Unfortunately, the data Overall, it seems that tractorization does not directly result
available even in the latest Agricultural Statistics of Pakistan in displacement of labour on the scale suspected, and nor are
is completely outdated, and anecdotal and visual evidence yields impressively enhanced. However, Viqar Ahmed and
suggests that the process of mechanization has gathered Rashid Amjad cite a number of studies which showed that
considerable pace and grown exponentially. Moreover, in output did increase, quite dramatically. One study shows an
Chapter 1, the Introduction to this book, and many of the increase of 20 per cent, another shows that maize and wheat
later chapters have also argued, the process of modernization, increased by 30 per cent, and they quote yet another study
of which mechanization is a part, has continued actively and by the World Bank (although conducted in 1969) that there
aggressively over the last few decades, changing social and is an increase of between 140 and 200 per cent in cropping
economic relations irreversibly. intensity on irrigated farms due to mechanization in the
Punjab. 41 Nevertheless, the nature of labour changes as a
Box 5.8 summarizes the main arguments which used to be

I
result of tractorization. If farm labour, and especially tenants,
made in the past for and against tractor/mechanization use.
are displaced, they are often replaced by the short-term wage
One study undertaken in 1982 in Pakistan40 based on field
workers, which sometimes causes a problem of shortages
surveys came up with the following findings:
at peak times. Tractorization also implies the resumption of
1. Tractors were used mainly for land preparation. previously unused land, or land let out to subsistence farmers,
2. Income of farmers, measured as the gross value of output often displacing them. But the issue of tractorization, and
per acre, was not significantly different between tractor and non- especially mechanization, cannot be looked at in isolation.
tractor farms. Numerous externalities need to be considered.
3. The average yield levels of major crops were not different on Once tractorization and mechanization commence, they
tractor and non-tractor farms. give rise to numerous ancillary activities. A process of
4. Cropping intensity was significantly higher on tractor farms. small-town urbanization begins, and technicians and skilled
5. Labour productivity was higher on tractor farms. workers related to mechanization are created. Off-farm
6. There was considerable displacement of animal labour by activities increase, and other avenues away from agriculture
tractors. are opened up for employment purposes. Traditional methods,
7. While the use of labour falls on tractor farms, the outcome values and traditions are confronted by inventions of the new
is not as severe as often suspected. However, family labour age, and the slumber of old habits and times is broken. In
is higher on non-tractor farms and also falls as farm size essence, mechanization is a dynamic process that affects
increases. institutions and economic and social relations, and transforms
entire regions. These impacts must not be underestimated
86 Issues in Pakistan's Economy

for they can overwhelm societies. Many of these changes are skimmed off, the farms graduaJJy lose their
are irreversible: some presumed to be detrimental, others capacity to produce and the whole country
considered to be progressive. Nevertheless, the question is not suffers.
whether technology in agriculture and elsewhere ought to be . . . Although the incidence of direct taxes
on agriculture is smaJJ relative to other sectors,
used, but how, and to whose benefit.
the total proportion of income transfers out of
agriculture is quite high. There is no scope for further
taxation of the sector without adverse impact on the
5.5 AGRICULTURAL INCOME TAX sector's productive capacity In the face of this situation
the demand that agricultural incomes should be taxed
The debate over whether agriculture should be taxed is an as personal incomes in line with other income earners
important one, and many reasons are given for and against in the country must be rejected as counter productive.
imposing taxes on agriculture (see Box 5.9 and Appendix However there are certain inadequacies and
5.5 ). As much as taxation is an economic issue, where the inequities:in the present system which must be
government is concerned about increasing its revenue and ·removed•. 42
dealing with the budget deficit (see Chapters 10, 11, i6 and
17), it is also a political issue, where some political lobbies In an earlier official report, the National Taxation Reforms
have resisted, while others have demanded such· a tax. The Commission (NTRC) in 1986 evaluated the possibilities of
politics of taxation of the agricultural issue is reflected not imposing a tax on agriculture. Although there were some
only in parliament and government, but also in reports and disagreements about how, and if, further taxes should be
commissions set up to study the issues. The 1988 report of imposed, the members of the Commission on their analysis
the National Commission on Agriculture (NCA) is one such of the existing situation argued as follows:
example.
Although a vast majority of people engaged in
The report of the NCA is one of the better and more agriculture are Jiving below subsistence level, yet
comprehensive documents produced by the Government a number of persons in this sector are enjoying
of Pakistan. Indeed, the present chapter has drawn a great better incomes. This has been mainly due to
many of its arguments from this source. However, the true two reasons. A number of bigger landowners
colours of the Commission come through when it discusses managed to save their lands from the two
the issue of agricultural taxation. The following; somewhat land reforms by various devices and secondly,
lengthy, excerpt from the report shows how the Commission many agriculturists have set up orchards, fruit
floundered on an extremely important issue. gardens, vegetable and horticultural estates, etc.
on their lands which yield higher incomes. The
A section of the business and industrial Green Revolution and mechanized farming have
community has been pressing that there are also increased the income of a large number of
excessive agricultural incomes that must be agriculturists. There is now a class of landowners
taxed [sic]. Their contention regarding the who reside in urban centres and have made
sector as a whole is unfounded as most of the substantial investments in real estate in the
agricultural holdings are too smaJJ to generate cities. Since they pay no income tax at alJ, they
taxable surpluses of income. Even for the have created jealousies among the trading and
relatively large holdings there is rio assurance · industrial classes as welJ as the professional
of sustained incomes. Agriculture by nature and the salaried class who have to pay income
is a risky business and incomes can fluctuat~ tax. This is why demands for levy of income
from negative returns in some years to very tax on agricultural income keep constantly
good incomes in others. Extreme dependence pouring from various trade associations and
on natural factors creates a high degree of chambers of commerce and industry. Persons in
uncertainty for the final output which is not the professions have also voiced their protests
even insurable with insurance firms. A farmer in the press against exemption to agricultural
can, for instance, lose alJ or most of his harvest income. It has been stated that the existence
due to some natural catastrophe and he may of an exempted class among the taxpayers
lose not only that year's income but also some discourages tax compliance and provides strong
of his capital like the livestock. The farmer incentive for tax evasion amongst businessmen
acts as his own insurer in the absence of the and professional income tax payers.
commercial insurance facilities. In good years Many traders and industrialists have
he pays his accumulated debts and then, if purchased agricultural lands with the intent to
possible, generates some savings to supplement whiten untaxed black income from business
his capital stock to make up for losses in bad by showing it as agricultural income. Also
years, The replenishment and the building up many businessmen have entered into collusive
of farm capital is an essential condition for arrangements with land owners; they obtain
sustained growth in agricultural production. fictitious leases of lands. from which they show
Unlike industrial establishments 'with easy enormous amounts of. agricultural income
access to multiple sources of credit, the farmer· .which, in fact, is their business income and thus
has tQ finance capital replacement and additions escape income tax. 43 ·

largely from his own savings. If these .savings .

 Chapter 5 Agriculture: Critical Issues 87

Box5.9 commodities, and the mechanism of terms of trade

The Issue of Agricultural Taxation between industry and agriculture.
2. Increase in agricultural incomes has been offset by a
Should agriculture be taxed? There are a number of arguments rise in population and higher expenditure on agricultural
presented for and against a tax on agriculture, and Viqar inputs and equipment.
Ahmed and Rashid Amjad summarize some of the main 3. Higher taxation on agriculture will adversely affect the
issues. motivation for savings and investments at a time when
farmers must make larger investments in order to
Arguments against income tax on agriculture increase productivity.
1. It would be inconvenient to both the tax-collectors and 4. Agricultural income has increased not only due to higher
taxpayers since farming in Pakistan is generally of
income per acre but also due to the increase in area
the subsistence type and not of the commercial type. under cultivation. Higher taxation will discourage farmers
Farmers do not maintain standardized accounts of their from bringing new land under the plough.
costs and returns and, therefore, it is difficult to assess
their net incomes. Further capacity for agricultural taxation
2. The number of farmers is very large and they are scattered 1. Direct taxes on agriculture have risen at a slower pace
all over the country, many in remote inaccessible areas. than growth in agricultural incomes.
It would cause considerable loss of time and money to But the introduction of subsidies to agricultural
even contact the potential taxpayers. producers on inputs and to urban consumers on wheat,
3. Agricultural incomes being uncertain, depending upon edible oil, and sugar provides further complications.
the vagaries of nature, it is quite probable that a large Subsidy is a 'negative tax' and should be taken into
number of farmers may frequently move across the tax account while calculating relative tax burdens. Gotsch
exemption limit, thus making it difficult and laborious for and Brown have attempted the calculation of subsidy
tax authorities to keep tabs on them. transfers between the agricultural producers, the urban
Arguments in favour of income tax on agriculture consumers, and the government (which includes both
1. It is unfair and illogical to make a distinction between the federal and provincial governments).
agricultural and non-agricultural incomes for purposes The data supports the view that the rural sector has
of taxation. Just as incomes below a certain level are (a) received much less subsidy from the government
exempted from tax in case of non-agricultural incomes, than the urban sector, and (b) contributed a substantial
the same principle should be extended to agricultural share to the consumer subsidies. However, these figures
income. This would take care of the large majority do not show the full effect of the subsidy transfer due
of subsistence farmers who would be automatically to, apart from other reasons, the fact that Gotsch and
excluded. Brown did not include in their calculations such implicit
2. There is considerable evasion of income tax by those subsidies to agriculture as canal water, power supply,
having both agricultural and non-agricultural incomes. institutional credit, and the benefits of extension services.
Part of their non-agricultural income is shown by them 2. Any comparison of an aggregate tax burden on
as accruing from agriculture, thus evading the tax. agriculture with another sector will have little meaning
Extending income tax to agriculture would reduce tax in terms of equity unless a large number of variables are
evasion. considered and given due weightage. However, a simple
3. Agricultural income tax would be more income-elastic comparison between direct taxes on agricultural and
than land revenue. With a greater yield per acre, higher non-agricultural incomes will be instructive.
procurement prices and mechanization, the benefits of 3. The population argument is weak because the urban
which are mainly confined to large farmers, incomes in population has increased even faster than the rural
the agricultural sector have risen considerably but yield, population due to both natural factors and migration from
in terms of direct taxes from agriculture, has not risen the rural sector.
so fast. Between 1972-3 and 1978-9, the yield from 4. The major benefits of a rise in incomes due to higher
direct taxation on agriculture (land revenue and irrigation yield in agriculture went to larger farmers. This has
charges) increased by 78 per cent (from Rs. 472 million intensified inequities in income distribution in the rural
to Rs. 762 million) while value-added in agriculture at sector and would indicate additional taxable capacity.
current factor cost increased by 157 per cent (Rs. 21,907 5. The rise in incomes has not been accompanied by
million to Rs. 56,370 million). any corresponding increase in the level of domestic
savings which has remained low. The failure of the
Is agriculture already over-taxed? government to expropriate this surplus has resulted in
1. Agriculture is subject to a large number of direct, a considerable increase in consumption expenditure of
indirect, and hidden taxes. Indirect taxes constitute the rich farmers. According to Alavi, even when there are
over 85 per cent of the total revenues of the federal adverse changes in terms of trade (for agriculture) the
government. Since these taxes are paid by all, it can be rural elite enjoy considerably enhanced real incomes.
safely assumed that the agricultural population (being
about three-fourths of the total population) bears a
heavy burden. There are also hidden taxes in the form Source: Ahmed, Viqar and Rashid Amjad, The Management
of low procurement prices paid by the government for of Pakistan's Economy 1947-82 (Karachi: Oxford University
many agricultural products, export duties on agricultural Press, 1984), 158-7.
88 Issues in Pakistan's Economy

One argument that has been raised against imposing any increased availability of water was a key factor which led to
further taxes on agriculture is that the agricultural sector the Green Revolution. However, the irrigation system and
bears the heaviest burden of indirect taxes, which according network in Pakistan has deteriorated in recent decades and a
to the NTRC were 42 per cent of all indirect taxes at a time water 'crisis' has emerged.
when contribution by agriculture to GDP was only 26 per Due to poor maintenance, the canal irrigation system
cent. 44 The NTRC report also cited figures which showed that has had its capacity of carrying water reduced, primarily
as much as 20 per cent of the net income of the agricultural because the desilting of canals has not taken place regularly
sector would be transferred out in 1986/7 through taxes, and also due to the crumbling of canal banks. A 1994 World
subsidies, and price transfers-equivalent to Rs. 30 billion, Bank study revealed that delivery efficiency-from the canal
which in that year was more than three times the total head to the root zone of crops-was around 35-40 per cent,
collection of income tax. 45 implying that a substantial majority of water is being lost due
Anjum Nasim and Asya Akhlaque examined the need for to canal seepage, spillage, breaches, and watercourse losses.
an agricultural tax and say that it is justified on 'grounds of While this means that farmers do not get adequate water
horizontal equity (individuals in equal economic position for their crops, particularly those farmers who are towards
should be taxed equally)', and also due to the practical the tail-end of the watercourse, the loss of water also gives
compulsions that ensue. 46 Exempting agricultural income rise to waterlogging and salinity, of particular concern in the
usually has a disincentive effect on those who pay tax, and province of Sindh which is losing its fertile land due to this
raises the 'possibility of evasion and fraud by attributing problem.
incomes from non-agricultural sources as agricultural Five major issues are identified in what constitutes
incomes or by passing-off unexplained Joans as Joans from Pakistan's water crisis: (i) Pakistan does not have adequate
agriculturalists' .47 reservoir capacity in its irrigation system to store water at
Those who support the proposal of imposing agricultural peak flows where the country's rivers are highly seasonal
income tax show that while the amount of indirect taxes with 85 per cent of annual flows in summer. (ii) As we show
paid by the agricultural sector in 1986 was higher than other above, only about 40 per cent of water from the canal head
sectors, the bulk of this taxation was borne by the low-income reaches the root zone, causing waterlogging and salinity, with
groups and poorer farmers. 48 This view supports the claim a large proportion being wasted. (iii) Although a very large
that indirect taxes are highly regressive and inequitable. An infrastructure of irrigation exists in the country, it does not
argument that the anti-taxation lobby continues to propound have a drainage system commensurate with the size of the
is that the agricultural sector is in bad economic shape as a network. This leads to rising water tables and further salinity
whole, and thus should not have taxes imposed on it. The
pro-tax lobby argues that despite this poor shape, a number
and waterlogging. Without drainage facilities which can
remove excess water and salt from the soil, further land will
f
of individuals do earn very large incomes and there are no continue to be lost to this process. (iv) Inequality of power
grounds for allowing them to go scot-free. Taxes are imposed based on private property and privilege is a serious problem
on personal income and not on the sector as a whole. in Pakistan, particularly in the agricultural sector. Large
Moreover, other sectors of the economy are often also 'in bad landowners try to dominate the rural sector and are amongst
economic shape', but must be accountable to the exchequer the main culprits who steal water and misappropriate a
for any profit, or even production, that they undertake. Hence share which is larger than what they are entitled to. They use
the argument that agricultural income should be exempt pumps to get water from canals and are known to bribe local
from taxes does not hold on equity grounds, and given the irrigation department officials to get an inequitable share of
financial and budgetary shortfall and constraints faced by the water. Also, since water availability is limited, often those at
government, the need to tax agriculture gains greater urgency; the taH-end of the irrigation system fail to get their share.
the principle of a tax on income should be applied irrespective of the (v) There has been insufficient maintenance of Pakistan's
source of income (see Appendix 5.5 and Chapters 10 and 11). irrigation network and this has compounded the water crisis,
Moreover, as Box 5.10 shows, the loss to the economy on causing losses, not just in terms of water, but also land and
account of the absence of a proper agricultural income tax is financial resources as well.
quite substantial. Also see Chapter 10 on Taxation, for further These numerous factors have all resulted in a scarcity of
discussion on the agricultural income tax. water, its misuse, and their impact on output, yield, and
production. Waterlogging and salinity, which is said to affect
28 per cent of Pakistan's irrigated lands-50 per cent of
5.6 THE WATER CR1s1s49 Sindh's land-not only causes land to be lost to cultivation,
but its spread towards otherwise uncontaminated land, also
Of the total cropped area in Pakistan, which includes area threatens such pastures. Add to this the growing pollution
sown more than once, of 22.15 million hectares, 18.04 million of rivers and water sources, caused as a consequence of
hectares or 81 per cent is dependent on irrigation primarily urbanization, development, and the indiscriminate discharge
through canals and tube wells, showing the importance of a of sewage and municipal waste and effluents, all of which
good irrigation system to Pakistan's economy and agricultural has killed not only marine life in the rivers, but has also
sector. As we show in Chapters 3 and 4, the development of inade this water hazardous for human consumption and for
water resources was a major focus of public investment in agriculture.
the 1960s, along with the increase in private tube wells. The
 Chapter 5 Agriculture: Critical Issues 89

The drainage problem referred to above is considered to with regard to the water issue, irrigation, and the lack of

I
be a consequence of extending the modern irrigation system drainage is not unique to the agricultural sector, and is one
and assuming that nature would dispose of the additional which is found in almost every public sector initiative in
water, as little thought was given to how this water was to Pakistan (also see Box 5.11).
be drained. The built system provided more water than the
land was able to drain causing waterlogging and salinity on
a large scale. In addition, this excess water-ironical though 5. 7 LAND OWNERSHIP, POWER, AND
this is at a time when a lack of water has been an issue-
has caused the water table to rise in places, leading to the LAND REFORMS
degradation of land and the destruction of lakes. Although
Although we have argued in an earlier chapter that the
one can put forward the argument that better planning
social and economic structure of agricultural relations in
should have been undertaken when the irrigation system
Pakistan is not feudal, we have also said that there is a
was conceived and planned, the capacity of the infrastructure
need for land reforms. It is important to emphasize the
has been overtaken by 'development', economic growth, and
point that the desire and need for land and broader agrarian
urbanization. The core systemic problem that one sees here
reforms, is dependent on the size of landholdings and their

Box 5.10 1, 1998, agriculture income tax was to be assessed on the

Revenue Potential from an Agricultural Income Tax basis of 'rental value of land' for which valuation table in each
district was to be prepared. This phase was to last two years.
Masood H. Kizilbash writes about the potential economic and In the third and final stage, income tax was to be based
revenue impact of an agricultural income tax. on assessment of 'total income' including income potential of
land and income from other rural activities such as poultry, fish
Income from agricultural activity has remained outside farming, forestry, and livestock. In this phase a tax schedule
the federal income tax regime since the creation of Pakistan similar to one used for non-agricultural incomes was to be
in spite of the formation of several committees, task forces, developed for assessing tax on agricultural income.
and commissions in the past for the examination of the It was estimated in May 1996 that in the first year on the
issue. A ray of hope was rekindled recently when some of basis of 'presumptive land tax' the revenue will increase to Rs. 2
our parliamentarians vociferously pleaded for inclusion of the billion in 1996--97 and to Rs. 4.4 billion in 1997-98 as against
agricultural income in the budgetary proposals for 2010-11 land revenue yield of Rs. 1.3 billion in 1995--96. In the second
at the federal level. As usual, the demand was spurned on phase, with the 'rental value of land' as a basis of assessment
questionable reasoning of the proposal as unconstitutional. of tax, the revenues from AIT were to touch the level of Rs. 7.4
If the argument holds ground, one wonders why it was not billion in 1998-99. In the final phase starting 2000-01, when
made a part of the Eighteenth Amendment unanimously assessment was to be based on income from land, land
passed recently containing more than 100 amendments in the potential, and rural activities, total tax revenues were projected
constitution. between Rs. 40-50 billion or more than two per cent of GDP.
One had hoped that in view of large fiscal deficit The implementation of the reform package over a period
aggregating Rs. 680 billion and a pressing need for resources, of 5-6 years remained a nightmare. For, as outlined in the
the provinces might feel obligated for patriotic reasons to at package, what to speak of determining 'annual rental value' of
least raise the rates of presumptive land tax to a level that a land in each district and calculation of presumptive income tax
portion of growth in income from liberal upward revision in based on 'gross value of production minus cost of production',
support prices of principal crops such as rice, wheat, cotton, the provinces neither reduced exemption limits nor raised
and sugar cane could be siphoned off for raising revenues. the rates of tax on landholdings despite manifold growth in
With the announcement of the provincial budgets this hope income.
has also been dashed. The result is that the combined provincial revenues from
Agricultural income tax was introduced for the first time in the so called agricultural income tax will be around Rs. 2
1996--97 by provinces as a part of a 'Reform Package'. The billion in 2010-11. At this level it will be just three per cent of
package was to be implemented in three phases. In the first the total provincial tax revenues and just 0.015 per cent of the
phase beginning 1996--97, the provincial governments were GDP as compared with benchmark land revenue of Rs. 1.3
to impose agricultural income tax on presumptive basis per billion or 11 per cent of total tax revenue and 0.06 per cent
acre of farm holdings with variations in rates between barani of GDP in 1995-96. It explains that instead of AIT proceeds
and irrigated land and exemption limits of 25 and 12.5 acres going up over last 14 years of the reform package, they have
respectively. continuously declined.
During this phase a periodic downward revision of the
exemption limits coupled with an upward revision in the
presumptive tax rates was to be made so as to achieve a target Dawn, Economic and Business Review, Karachi, 28 June-
of 0.5 per cent of GDP. In the second phase starting from July 4 July 2010
90 Issues in Pakistan's Economy

numerous consequences, and not simply on the nature of and machines and to install tube wells. 'A substantial subsidy
land ownership. Thus, while we would insist on the need for implied in public loans for agricultural production has been
extensive land and agrarian reforms if there was feudalism transferred to a small number of large landowners, farmers,
in agriculture, we would continue to make the same, or at and entrepreneurs, mainly on the basis of their political
least similar, arguments in favour of wide ranging reforms in influence or contact'. 52
the agricultural sector, regardless of the mode of production, Mahmood Hasan Khan argues that there is a 'bias in favour
even when there was capitalist agriculture, as is the case now. of large landowners and well-connected farmers which is
The fact that there is a very large landowning class which, built into the credit system because of risk minimization
not surprisingly, is against any form of land reforms, only through the collateral requirement, low administrative cost
re-emphasizes the need to raise arguments which look at and convenience, and the influence of landlords and similar
this issue. urban-based groups .... Sharecroppers have no direct access
This rural elite, which we argue is not feudal, has to institutional credit'. 53 Given the high transaction costs and
nevertheless, a disproportionately large influence on the collateral requirements and numerous other constraints, the
'social, political, and administrative structure of Pakistan. The official disbursement of credit has been noticeably tilted in
effects are visible in different and disturbing forms throughout favour of large farmers, and the landless, the sharecroppers
the society. The process of agricultural transformation has and even small farmers, have had to borrow from non-official
been greatly distorted by the influence of the landed elite and sources, often at exorbitant usurious rates.
the wrong policies of successive governments ... : 50 The issue Much research that takes place in Pakistan and elsewhere,
of land reforms is intrinsically linked with the issue of power relies on data and statistics provided by the government on
and control of the ruling elite and the consequences of this the basis of which policy is made. Sometimes surveys are held
power and control. This point is of even greater importance- which help enlighten public policy. In a study conducted in
as we show in Chapter 22-where poverty has emerged as 2003, a very extensive survey was conducted in Pakistan, in '·
one of Pakistan's biggest problems where one-third of the all the four provinces, and in the Northern Areas where the
country's population-nearly 60 million inhabitants-live focus was on the very poor. The Pakistan Participatory Poverty
in poverty, most of them in rural areas. Whether it is access Assessment asked thousands of individuals living in abject
to the state bureaucracy-provincial or local--or to fertilizer, poverty about why they thought they were poor, about the
credit, and output markets, large landowners have far greater nature of their poverty and about what they feel is necessary
access than do small farmers. As Mahmood Hasan Khan to get them out of that poverty. The results from this survey
states, there is 'no dispute that land is the primary factor confirm what many people feel intuitively. 54
determining the access to other factors in agriculture.' 51 The poor felt that the single largest reason for their poverty
If we take the case of state credit availability and was lack of access to land, whether to own land (which
disbursement for example, we see that around 75 per cent most of them don't) or to work on land. The concentration
of loans from the Zarai Taraqiati Bank Limited (ZTBL) have of landholdings was a cause for the impoverishment of the
been towards farmers with holdings of more than 5 hectares, poor because they have limited assets to work v\.ith, but more
and much of this money has been used to purchase tractors importantly, because this opens up vast possibilities for their

Box 5.11 the groundwater. Added to these problems is the persistent

The Water Crisis shortfall in .the government's irrigation revenue to ·cover
the maintenance and operation costs of the canal system.
An expanded _water supply from the canal system has been As part of the structural adjustment support given by the
a major source of change in. the use of land. However, the International Monetary Fund (IMF) and the World Bank since
availability pf watE!r has _been constrained by .several factors; the mid-1980s, the canal irrigation system is expected to be
some at theJegional and others at the village level. Water transferred from the provincial irrigation departments to the so
acts<as a,m_ajor: constraint because its management at the called autonomous (private) irrigation authorities: White this
canal and farm levels is very .poor, caused by inadequate programme is consistent with the adjustment policies of the
physical infrastructure and the low level of water charges. two international agencies, it has generated much genuine
Its distribution generally discriminates against the tail-enders debate and controvery in the country with regard to its likely
and small farmers because of the_ unequal power of the small benefits and costs in the currentsocial . and operational
and large landowners in the village. In view of the chronic environment.
shortage of canal water in the country, the regions at the
tail-end of the system are handicapped in adopting new crop Source: Khan, Mahmood Hasan, 'Agricultural Development
varieties and adjusting the cropping patterns. Farmers in and Changes in the Land Tenure and Land Revenue Systems
Sindh, in particular, are adversely affected since they are at in Pakistan', in Khan, Shahrukh Rafi, Fifty Years of Pakistan's
the tail-end of the canal system and they cannot make use of Economy (Karachi: Oxford University Press, 1999), 110.

_ __J
 Chapter 5 Agriculture: Critical Issues 91

ultra-exploitation and abuse. The power which derives from Arabs which the Pakistan People's Party government of
inequitable landholdings is a cause and reinforcement for Yousuf Raza Gillani and Asif Zardari came up with-see Box
keeping people in poverty. Moreover, land is seen to be an 5.13, it might be more appropriate to think of mechanisms
important source of power and well-being across all the rural related to land and agrarian reform in Pakistan which help
sites where the survey was held-see Chapter 22 on poverty Pakistan's landless and poor peasants directly. The option of
in Pakistan for further discussion. land reforms ought to be always high on the agenda and an
There are numerous arguments which lead us to believe option worth stating.
that there is a need for an extensive land reforms programme Haris Gazdar highlights the important distinction between
marked by a supporting agrarian reforms initiative-see Box land reforms and agrarian reforms in Pakistan, reminding
5.12. While restricting the size of holdings of landowners us of the critical distinction between both, making the case
may eventually break their power on local administration that one needs to 'broaden the view' about such reforms. He
and on the poor, distributing land to the landless will bring argues:
many of the 60 million poor out of poverty. Not only will their
economic welfare improve, but so will their social position The conventional debate about land reform has
once they have access to and own land. Economic evidence been linked very closely with analysis of agrarian
also suggests that there is an inverse relationship between structures. The main-perhaps the exclusive-
focus was on land as an agricultural asset. Land
size and productivity: above a certain minimum threshold,
reforms were regarded as the means for effecting
smaller farms are more efficient and productive compared distributive and technological change within an
to larger farms. The fact that the earlier land reforms-see agricultural economy. Land reform, in fact, was
Chapter 3-have not been a resounding success because often thought to be synonymous with agrarian
there were problems in design and they were not properly reform, with primary interest being directed to
implemented and because they were not supported by a crop farming. Perhaps the declining salience
package of broader agrarian reforms, only means that this of land reforms from the policy and political
time round there is a need to build on those experiences agendas is to do with economic diversification. If
and learn from previous mistakes. A comprehensive land crop farming is but a small part of the national
reform programme backed up with easier terms and access to economy, employment in crop farming (for
landowners and the landless alike), represents
water, credit, marketing, extension, and advice could address
just one out of many sources of livelihood. It is
Pakistan's poverty question as well as remove the constraints not surprising that the scramble for public sector
that have emerged in the agricultural sector. Sadly however, jobs competes with mobilization for land reform
the General Musharraf government which took over power in as a consumer of political energies ....
1999 or the elected government following him in 2008, have ... The returns on land ownership, moreover,
repeatedly said, that they do not favour land reforms. This are not simply of a straightforward economic
means that the inequitable hold over land and power will nature. Control over land and its use is leveraged
continue in Pakistan's rural sector, and also that poverty is into advantage in broader spheres in the economy
unlikely to be reduced significantly. and politics. Despite the declining salience of
crop farming and agrarian reform from the
Just as an agricultural income tax is a must on income
policy and political agendas, the ownership and
earned from agriculture, simultaneously, reforms in the possession of land remains an arena of intense
agricultural sector, which favour the poor, the landless, contest ....
and the small farmer are also essential. It has become . . . Broadening the view means paying
unfashionable in the Pakistani context to talk about land attention not only to crop-farming but to issues
reforms, but the arguments are still valid. Whether it is in the ownership, access and use of land for
the distribution of state land to landless peasants or the a range of economic purposes. Even within a
more radical demand for the imposition of lower ceilings traditional agrarian economy usufruct rights to
on land holdings and redistributing land above that limit to uncultivated land were of immense economic
landless farmers, such demands need to be part of the public value to local residents. 55
discourse to warn against the sort of violence and injustice
Some economists have shown empirically that land reforms
which takes place on account of extremely inequitable
in rural areas may not lead to economic growth, and hence
landholdings in the presence of an effective state machinery
have argued that such reforms are not worth pursuing.
which is in the control of the landlord. Unequal land
Their empirical evidence may indeed show why this would
ownership in the context of Pakistan also leads to forceful
happen, for a number of reasons, although there is also a
and disproportionate acquisition of other public goods such
large body of evidence which contradicts such findings and
as water. The highly exploitative treatment of peasants,
shows the exact opposite. Such is the state of economics.
particularly women in rural areas, is one of the consequences
However, if economists simply see land reforms as a growth-
of the absence of justice and the presence of power derived
enhancing intervention, they miss much of the social and
from owning land. Many of the problems which exist in
political consequences of holding on to large tracts of land
rural Pakistan emanate from the pattern of landholding. The
in societies where there are far more small and landless
demands for land and agrarian reforms are just as pertinent
farmers. Inequality, especially on account of land holdings-
today as they were three or four decades ago. Rather than
as opposed to say, opportunity-does give rise to social
planning to sell or lease Pakistani agricultural land to the
92 Issues in Pakistan's Economy

Box 5.12 Fourthly, in Pakistan's 'labour surplus' economy, almost 44

The Benefits of Land Reforms per cent of the labour force is employed by the agriculture
sector. Due to the highly concentrated distribution of land,
Aadil Mansoor makes the case for land reforms in Pakistan. a large part of the labour force is landless and is hired
seasonally, while others work as sharecroppers or tenant
That land reforms lead to efficient utilization of land, families under a wide range of contract and tenancy regimes.
improved agricultural production, employment, and poverty However, as discussed above, the efficiency losses from
reduction is a well-established argument, supported by theory incomplete contracts and insecure tenancies can be overcome

I
and empirical evidence. China and several countries of East by means of land redistribution and private ownership, where
Asia have successfully used land reforms to reinvigorate land can be distributed to a part of this labour force thereby
agricultural growth, promote employment, and reduce creating incentives to invest in productivity enhancement and
economic and social inequalities. In the case of Pakistan, a conservation.
growing and vibrant agriculture sector in the 1960s marred And finally, land being the most valuable asset and a symbol !
the need for the much needed land reforms. While two formal of social status also serves as a source of monopolization of
attempts at land reform were made in 1959 and 1972, both political and social power. In Pakistan, unequal landholdings
failed to achieve their stated objectives as they were mainly have led to social polarization and exploitation of the landless
meant to contain social unrest and political chaos and to gain and small holders by the landed elite. In the rural arena, feudal
popular support in times of crises. capture of political institutions, public service delivery and
A closer look at the cultivable land ownership and use extension services, access to farm credit, sources of inputs,
statistics of Pakistan make the need for land reforms obvious. and means of marketing is hard to ignore. This has not only
First and foremost, research shows that in much of the affected agricultural productivity but also suppressed the
developing world, where agriculture is characterized by social, political, and economic progress in the country.
constraints to investment and mechanisation, small and One may ask that, given a total failure of previous land
medium-sized farms (12 acres) are more efficient than large- reform efforts, is land reform a mere idea in Pakistan's
sized farms (20 acres). Several empirical studies demonstrate context? Experts have extensively reviewed the land reforms
that, if the effect of capital, technology, and other factors is of 1959 and 1972 and have suggested that the failure of
held constant, the income per acre of land from small farms earlier land reforms was not a 'strategy failure'-i.e. land
can be up to double that of large farms. This becomes possible reforms as a strategy for improving factor allocative efficiency
because of a higher allocative efficiency of land in the case of and agricultural productivity and reducing unemployment,
medium and small-sized farms and the lower reservation price economic inequalities, and poverty. Various studies have
of labour for small farms in contrast with the larger farms that suggested that reforms failed due to a) lack of political
have to hire labour thus making it expensive for them. commitment, b) loopholes in legislation, e.g. provisions for
Secondly, the Pakistan Agricultural Census shows that exemptions and allowance of land transfer to heirs, c) the
nearly 40 per cent of the arable land (i.e. 4 million hectares) burdensome payments that the beneficiaries had to pay for the
is not cultivated in a given year. Almost 2/3 of this utilization allotted land, and d) centralized and inefficient bureaucratic
land is held by large landowners, who own 25 or more acres administration.
of land, pointing towards the unmanageability or inefficiencies Recent land reform experiences of China, East Asian
that are associated with large and concentrated landholdings. economies, and selected regions of South Asia provide
In contrast, most small farms cultivate over 90 per cent of the substantive evidence that land reforms are not only possible
arable land, deriving maximum benefit per acre of land. but also lead to positive economic and social outcomes.
The third important issue pertains to the weak land tenancy Depending upon the political, social, and economic context,
in the country, where nearly one-third of the cultivable area base conditions, and specific objectives, different countries
is under tenancy. Amidst an absence of tenancy regulation have applied different policy instruments, strategies, and
and social safety nets, tenants are more often than not wholly management models to land reform. The choices, trade-
dependent on and indebted to the landlords. Often tenancies offs, and balancing acts have involved setting the ceilings
are carried from one generation to the other and so are the for landownership, government engagement versus the use
debts and obligations, at times taking the form of bonded of market based approaches (e.g. incentives, penalties, and
labour. Tenancy contracts are mostly informal and hence not taxes), allocation and pricing of expropriated land, and time
enforced legally. Research has shown that incomplete tenancy frame for implementation. Pakistan can draw upon a wealth
contracts lead to 'investment holdups', where due to tenure of international experience and learning to develop its land
insecurity the tenants tend to under-invest in productivity, reform strategy.
thus leading to inefficient and suboptimal factor productivity Source: http://pakteahouse.net/201 0/04/09/food-for-future-
of land. pakistan-has-moved-from-being-an-exporter-to-an-i mporter-
of-food/, accessed on 25 June 2012.
 Chapter 5 Agriculture: Critical Issues 93

Box 5.13 threat of displacement of indigenous communities, or erosion

Selling Pakistan to the Arabs? of local food sovereignty. However, the environmental hazards
posed due to deforestation, land degradation, and increased
Myra MacDonald commented on the Pakistan People's water consumption also need to be taken into account before
Party government's decision to sell Pakistani agricultural land making such confident claims,' the editorial said.
to the Arabs. Dawn newspaper reported that the provincial government
in Balochistan was putting the brakes on plans to sell
Any student of history will tell you that a recurring feature farmland to Arab investors. However, the unnamed experts
of 20th century revolutions and civil wars was conflict over it quoted appeared to be divided between arguing that
land ownership, driven by the resentment of the rural poor farmland sales would bring much needed investment and
against the concentration of agricultural wealth in the hands modern management techniques to Pakistani agriculture
of the elite. (Cuba and Vietnam, where Fidel Castro and Ho and questioning the details of how the scheme would be
Chi Minh picked up support by championing farm reform, are implemented-rather than opposing the idea outright. So what
good places to start.) kind of farming would outside investors bring to Pakistan?
So Pakistan's plans to sell farmland to rich Gulf investors Modern, intensive farming methods are high on productivity
deserve serious attention, even if land ownership does not and low on labour-suggesting there would be few employ-
have the same ability to grab headlines as its nuclear weapons. ment opportunities for the rural poor other than to guard the
Waqar Ahmed Khan, the Federal Minister of Investment, said food that is to be shipped out of the country-unless the
last month Pakistan was offering one million acres of farmland scheme includes parallel investment in infrastructure and
for lease or sale to countries seeking to develop food supplies, agriculture-related business like food processing.
and was holding talks with Saudi Arabia, the United Arab Environmentalists also complain that intensive farming
Emirates, Bahrain, and other Arab states. He said all land up usually relies heavily on the use of fertilizers and pesticides,
for sale or lease was currently unused and promised to hire polluting the surrounding environment, and by clearing large
a security force of 100,000 men, funded by foreign aid, to tracts of land can contribute to soil erosion and, in some
protect their investments. places, desertification. So depending on how the scheme is
His comments prompted a column in U.S. website The implemented, Pakistani farmers could suffer, rather than gain,
National Interest, which argued that the farmland sales would from the expected influx of modern farming methods.
serve as a recruitment tool for lslamist militants who have And what about the demand on water?
already picked up support by championing the cause of Since the government says it plans to sell or lease farmland
Pakistan's rural poor against the feudal elite which dominates which is not currently being used, the demand on water is
the country. The devil, as usual, will be in the details, but the likely to increase. Yet Pakistan already faces water shortages,
following obvious questions spring to mind. What does it mean partly due to its rising population. Global warming, which is
for Pakistan's fractured society? slowly melting the Himalayan glaciers which feed the country's
http://blogs.reuters.com/pakistan/files/2009/05/wheat.jpg rivers, is likely to make water supplies more erratic, increasing
In an article in the Huffington Post, Eric Margolis became flooding and reducing further the availability of groundwater
the latest to argue that the battle against lslamist militants in for farming. And as discussed elsewhere, water scarcity is
Pakistan's north-west is in danger of morphing into a much likely to increase tensions with India about the use of water
wider conflict-'a national revolution in Pakistan against the from rivers they share in divided Kashmir.
western-backed feudal oligarchy that has ruled it since 1947.' It's too early yet to judge how the scheme would work. And
If correct, then any perception that the rich were benefitting in an article in Britain's Independent newspaper, David Hallam,
from farmland sales at the expense of the poor would only the deputy director of the trade and markets division at the
stoke this anger further. Food and Agriculture Organization, was quoted as cautioning
An editorial in the Daily Times says that 'despite the blatant against making over-hasty judgments about global farmland
forms of exploitation that keep occurring due to skewed sales as a whole. 'This could be a win-win situation or it could
landholding patterns in our rural areas, it was disappointing be a sort of neo-colonialism with disastrous consequences for
that major political parties did not squarely take up the issue some of the countries involved,' he said. 'I really do have an
of land reforms in their manifestoes prior to the 2008 general open mind to whether this new development is positive or not.'
elections. Conversely, instead of trying to take concrete steps What is clear, however, is that in a country like Pakistan that
to empower the rural poor, the current government is now has been turned into a tinderbox, every spark is potentially
trying to lease or sell large tracts of agricultural land to Arab explosive.
states, in lieu of attracting foreign investment to Pakistan.'
http://blogs.reuters.com/pakistan/files/2009/05/indus.jpg
'Government officials claim that the land being offered to Myra MacDonald, 'Pakistan's farmland sales: a fatal folly?',
the Arab nations is not under cultivation, therefore there is no Reuters, 6 May 2009.
94 Issues in Pakistan's Economy

inequities which have far greater repercussions than just today as they were three or four decades ago. They ought
growth. to be always high on the agenda of every political party, as
Arguments against land reforms in Pakistan and elsewhere an option worth implementing, particularly by those who
have become legitimized, mainly by economists, but also promise a break from the past.
by other categories of social scientists (and of course the
landowners themselves), on the basis of different types of
empirical evidence. While land reforms, which mainly imply 5.8 SUMMARY AND FURTHER READING
the redistribution of land from large landlords to small or
landless farmers or distributing state-owned land to landless 5.8.1 Summary
farmers, may not increase overall growth, in some cases, Having presented a history of agriculture in Pakistan in the
large, corporatized, highly capitalized landholdings have previous three chapters, in this chapter we have reviewed the
been shown to do so. According to this argument, rather agricultural sector as it is today. We have examined the main
than break farms down in size, it is better to consolidate and trends in output, production, irrigation, etc. over the last six
mechanize. decades and more, and seen how this sector has evolved.
Other reasons why land reforms are not supposed to From being the dominant contributor to GDP in the 1950s,
be on the political agenda is that due to inheritance laws the agricultural sector today contributes half than the services
in Pakistan, land has already, over the generations, been sector and even less than industry. Hence the often-repeated
fractured and made smaller, in all categories of landholding. claim that 'Pakistan is mainly an agricultural country' is
The average farm size in Pakistan has also fallen markedly questionable based on this evidence. While agricultural
over the decades, as one would expect, and will continue to production has increased over the last six decades, there has
do so over the next few decades. Moreover, arguments are been somewhat of a reversal in these trends in recent years,
also made that relations of production are also no longer which should be cause for concern. From peak production
feudal, and hence there is no need to undertake land reforms. years in the mid- l 980s, the index of agricultural production
They also argue that the process of urbanization is doing for all crops has varied quite dramatically. There is a growing
away with large landholdings, and that it is just a 'matter of belief that agriculture is in the throes of a serious crisis, and
time', when most of Pakistan will become urban, relegating that drastic measures need to be undertaken to enhance
the issue of rural land. output, arrest waterlogging and salinity, and bring forth
Sadly, for all these reasons, some political parties in another Green Revolution reminiscent of the agricultural
Pakistan have bought into this empiricist logic and do not changes in the mid-1960s.
consider even raising slogans about land reforms which, while A number of bad policies may have been responsible for
unlikely to be ever fulfilled, demonstrate an understanding creating this crisis. Economic incentives were not given to
of issues and explanations of social inequity and injustice. farmers, as they were expected to subsidize urban consumers
As a consequence, land reform has become a little passe on and continue to increase output despite a lack of adequate
Pakistan's political map. pricing policies. Mechanization was heavily biased against
One could, of course, wait another half century when the smaller farmers in favour of the large and very large
the process of inheritance would have fractured the size of producers. This was despite the fact that, as shown in
holdings even further and urbanization would have made Chapter 4, the structure of ownership and mode and means
much rural land redundant, giving rise to a Malik Riaz-type of production had undergone a radical transformation, with
phenomenon demonstrating the power of urban land. By smaller farms emerging at the expense of larger farms. Credit
then, possibly, there might even be a tax on agricultural to farmers continues to be a weak link in the input-output
incomes, and perhaps a little bit of education and some chain, where higher rates from the informal sector affect
understanding about justice and equality about women. But the small farmers. Moreover, overall credit to farmers is
left to a natural process, some of this might never happen. insufficient, and far less than can be justified. While direct
Intervening in what is the source of so many of Pakistan's production-relate<;l. issues like types of seeds and salinity
problems in rural areas will not only speed up the eventual may have affected agricultural output, some of the ancillary
outcomes, but will also provide some sense of just.ice to those inputs such as credit and guidelines such as pricing signals
who will benefit, three generations sooner. Moreover, there may also be a cause of poor performance. Finally, without
are also empirical studies which show that land reforms meaningful land and agrarian reforms, many of the problems
actually increase a country's economic growth, especially in Pakistan's agricultural sector will go unaddressed.
if agrarian reforms accompany land reforms. Studies have One must also recognize two new, interlinked, trends in the
shown that land reforms had a significant and positive rural/agricultural sector, which bear repeating. Firstly, that
impact on income growth and accumulation of human and the urban-rural divide is getting narrower and is diminishing,
physical capital. Land reforms have also been seen to have a and secondly, that all rural is not exclusively, or even primarily,
positive impact on equity. agricultural. Both these facts will have a crucial impact on
The power of land extends far beyond the horizons of the the future of agriculture and agrarian relations in Pakistan.
landed estate and externalities of large holdings are many. Today, the non-agricultural rural sector generates nearly 60
Despite the evolving changes which have taken place in per cent of total rural incomes. Moreover, remittances, both
Pakistan's agrarian economy and in landownership, the domestic and foreign, are also an important supplement to
demand for land and agrarian reforms are just as pertinent the income of those who live in areas designated as 'rural'.
 Chapter 5 Agriculture: Critical Issues 95

Issues of rural poverty and inequality-discussed at length Ahmed, Viqar and Rashid Amjad, The Management of
in Chapter 22-are not only linked with landownership and Pakistan's Economy, 1947-82 (Karachi: Oxford University Press,
agricultural production, but now have other causes as well 1984); Ijaz Nabi et al. The Agrarian Economy of Pakistan: Issues
which need to be understood and highlighted. A World Bank and Policies (Karachi: Oxford University Press, 1986) are two
study of 2007, concluded that, good references.
Two reports by the Government of Pakistan are also very
although agriculture is at the heart of the rural useful: Report of the National Commission on Agriculture, 1988
economy, the majority of Pakistan's rural poor and National Taxation Reforms Commission: Final Report, 1986.
are now neither tenant farmers nor farm owners. Some publications since 1999 are also very useful in this
Farmers (including both owners and tenants)
regard and should be consulted.
comprised only 43 per cent of households in
the bottom 40 per cent of the rural per capita Mahmood Hasan Khan's 'Agricultural Development and
expenditure distribution in 2004-05. Non-farm Changes in the Land Tenure and Land Revenue Systems in
households (excluding agricultural labourer Pakistan', in Khan, Shahrukh Rafi, Fifty ½?ars of Pakistan's
households) accounted for slightly more than Economy (Karachi: Oxford University Press, 1999 ), summarizes
half (52 per cent) of the poor. Overall agriculture many important issues. In addition, the Mahbtib ul Haq
(including both crop and livestock production) Human Development Centre's Report, Human Development
accounts for only about 40 per cent of rural in South Asia 2002 (Karachi: Oxford University Press, 2003 ),
household incomes; the poorest 40 per cent of focuses on agriculture and rural development in Pakistan and
rural households derive only about 30 per cent of the region, as does Akmal Hussain's Pakistan National Human
their total income from agriculture'. 56
Development Report 2003 (Karachi: UNDP/Oxford University
Press, 2003).
Agrarian policy and reforms, need to take cognizance of these
Innovative Development Strategies (Pvt), Profiling
trends and changes. Box 5.14 offers a response by the Panel of
Pakistan's Rural Economy for Microfinance (Islamabad: Pakistan
Economists set up by the Government of Pakistan to address
Microfinance Network, 2009), is recommended for examining
some problems in the agricultural sector. Also see Appendix
the rural financial market in Pakistan. PILDAT in Islamabad
5.6 for an earlier response to Pakistan's agricultural problems.
has produced a Briefing Paper: Taxing the Agriculture in
Pakistan, Briefing Paper No 42 (Islamabad: PILDAT, November
5.8.2 Further Reading 2011 ), which summarises many of the debates pertinent to
Many of the contemporary issues facing the agriculture taxation in agriculture. Professor Mahmood Hasan Khan
sector are discussed frequently in newspapers and magazines, two books which examine the role of rural development and
and these are an important source for more information community participation are: Community Organizations and
and understanding of the sector (see Appendix 5.5). With Rural Development: Experience in Pakistan (Lahore: Vanguard,
taxation taking on more importance lately, numerous articles, 2001 ); Participatory Rural Development in Pakistan: Experience of
almost all in favour of agricultural taxation, appear in the Rural Support Programmes (Karachi: Oxford University Press,
press regularly. Other than newspapers and magazines, a few 2009); Agriculture in Pakistan: Change and Progress 1947-2005
books and reports discuss the key issues facing agriculture in (Lahore: Vanguard, 2006 ), contain many of his seminal
the past and today. These are: articles over the years. See also Panos South Asia, Leveling the
Playing Field: A Survey of Pakistan's Land Reforms (Kathmandu,
Nepal: Panos South Asia, 2011 ).
96 Issues in Pakistan's Economy

Box 5.14 farmers. Since tenants lose half of any increase in output to the
Institutional Framework for a Small and Medium landlord, they lack the incentive to invest in technology which
could raise yields per acre. Because of their weak financial
Farmer: Agriculture Growth Strategy and social position they also lack the ability to make such
investments. Their ability to invest is further eroded by a nexus
The Panel of Experts set up by the Government of Pakistan
of social and economic dependence on the landlord which
in 201 0 came up with some suggestions of addressing the
deprives the tenant of much of his investible surplus.
problems in the agricultural sector.
This problem is further exacerbated by the absence of an
efficient land market where productive land can move to the
An important factor in the current economic crisis is the food
more efficient operator. Institutional changes are required
deficit and the underlying stagnation in yield per acre of major
to enable flexible and secure tenancy contracts, and a
crops. (In the year 2007-08 crop sector growth was negative.)
competitive land market which can allow efficient operation
It can be argued that if the yield potential of the small and
of farmland .•
medium farm sector (less than 25 acres) is achieved, food
The objective of raising yields in the small farm sector is
shortages can be converted into food surpluses. In the
inseparable from removing the constraints to growth arising
existing high prices of food grain in the international market,
out of the institutional structure of tenancy. A policy initiative
such a shift can enable Pakistan to convert its weakness into
that enables the tenant to acquire land is therefore an essential
its strength: The current crippling economic burden of food
first step in providing the small farmers with both the incentive
imports can be converted into a strength through food exports.
and the ability to raise their yields/acre.
To bring about this transformation a new policy framework is
required to shift from the earlier elite farmer strategy to a new
State Land for the Landless
small farmer growth strategy.
When the 'Green Revolution' technology became available An initial step in providing productive assets to the rural poor
in the late 1960s it was possible to substantially accelerate could be to allot the available 2.6 million acres of state-owned
agriculture growth through an elite farmer strategy which land to the landless. This cannot be seen as a substitute for
concentrated the new inputs on large farms. Now the crucial a land reform programme of 'land to the tiller'. According to
determinant in yield differences became not the labour the Census of Agriculture 2000, there are about 4.97 million
input per acre in which small family farms had been at an acres of private farm area under pure tenant cultivation in
advantage in earlier decades, but the application of the seed- farms below 25 acres. It is this acreage that would need to
water-fertilizer package to which the large landlords with their pass into peasant ownership for a genuine land reform to
greater financial power had superior access. Thus the 'Green occur. Nevertheless 2.6 million acres (assuming that all of
Revolution' had made it possible to accelerate agriculture it is cultivable) could make a significant contribution to the
growth without having to bring about any real change in reduction of rural poverty. For example if the 2.6 million acres
the rural power structure. Today, after almost four decades of state-owned land were to be transferred to landless farm
of the elite farmer strategy, the imperative of land reform is households in holdings of 5 acres each, then as many as
re-emerging, albeit in a more complex form than before. As 520,000 tenant farmers would become owner operators. This
the large farms approach the maximum yield per acre with means that out of the total number of tenant farmers (about
the available technology, further growth in agricultural output 897,000) in the less than 25 acre category, as many as about
increasingly depends on raising the yield per acre of small 58 per cent would become owner operators.
farms and reversing the trend of land degradation brought However, it is important to recognize that providing
about by improper agricultural practices. ownership of land to the landless is a necessary but not a
The small and medium farm sector whose yield potential sufficient condition for alleviating their poverty. Enabling the
remains to be fully utilized, constitutes a substantial part of the landless to make the transferred land cultivable, to actually
agrarian economy. Farms below 25 acres constitute about 94 settle on the new land and to achieve a sustainable increase
per cent of the total number of farms and about 60 per cent in their income, productivity, and savings are equally important
of the total farm area. From the viewpoint of raising the yield factors in making the scheme successful.
per acre of small and medium farms (i.e. farms of less than 25
acres) the critical consideration is that 15. 7 per cent of the total Source: Final Report of the Panel of Economists, Medium
farm area in the less than 25 acre farm category is operated by Term Development Imperatives and Strategy for Pakistan
landless tenants. Another 13.07 per cent of the farm acreage (Islamabad: Planning Commission, Government of Pakistan,
in less than 25 acre farms is operated by owner cum tenant April 2010), 90-91.
 Chapter 5 Agriculture: Critical Issues 97

Appendix 5.1
reduced by about two-thirds. Crop production of any kind
Problems in Pakistan's Agriculture is difficult on highly saline soils, the report has pointed out.
ln an article published in September 1996 in a local newspaper, Another instance of influential landlords laying their hands
Muhammad llyas presented the main arguments from a World on government funds is the subsidy on application of gypsum.
Bank report on Pakistan's agriculture. This appendix is an edited The government undertook a programme to popularize
version of Muhammad llyas's newspaper report. gypsum in order to combat the salinity that is caused by
low-quality tube well water. A similar programme was very
The World Bank in a recent report on the grave environmental
successful in the lndian Punjab, ·where the problem of salinity
situation in Pakistan has recommended enforcement of
has been drastically reduced through the use of subsidized
genuine land reforms as an essential measure to ensure
gypsum. There are, however, no data on the effects of the
sustainable exploitation of the natural resources including
Pakistani programme. Field experience indicates, however,
land and water. The report 'Pakistan: Economic Policies,
that in most instances, influential landlords were the main
lnstitutions and the Environment' prepared by Rashid Faruqee
beneficiaries of the subsidies. Moreover, the report observes,
and Jonathan Coleman, said that giving ownership to farmers
application of gypsum to fields has not always followed
would help protect the environment. Land redistribution
disbursement of subsidies, because of rent-seeking behaviour.
among cultivator farmers also eliminates chances of voter- ln other words, the subsidy money was misappropriated.
exploitation by landlords. However, as Faruqee and Coleman Waterlogging is also a function of a faulty water rate
have pointed out in the report, 'Because the laws in Pakistan
system which the conglomeration of big landlords and the
were lax and easy to circumvent, past land reforms did not
bureaucrats does not allow to be changed at all. As the report
bring about the desired change in land tenure and did not also remarks, underpricing of water and the complicated
have any effect on environmental protection.' 'Redistribution system of assessing water rate liability eliminates incentives
of income and wealth has an effect on the environment', they to use water efficiently and has aggravated waterlogging and
stress.
salinity.
Poverty and population growth have contributed to the The structure of water pricing provides no incentives for
degradation of the environment in Pakistan, where they have using canal water efficiently, and discourages investments in
caused soil degradation, deforestation, rangeland degradation, water conservation, such as drip or sprinkler irrigation systems.
marine and coastal zone damage, and many forms of urban Capital intensive agricultural practices are other characteristics
and industrial pollutions. 'Short time horizons are not innate of absentee landlordism. Facilitated by factor price distortions,
characteristics, however, but are the outcome of policy and these lead to the adoption of production methods that do not
institutional and social failures', the report points out. reflect factor endowments. Subsidies or targeted credit for
Poor farmers face very high production and financial risks tractors and threshers, to which again only the big landlords
that are often the result of misguided policy interventions in have access, have displaced labour, for example.
factor and product markets or insecure land tenure. Many The indiscriminate use of agricultural chemicals, such as
poor farmers with below subsistence holdings are unable to fertilizer and pesticides-which small farmers with 93 per
afford the mechanism available for coping with risks, such cent of farms but representing only about 41 per cent of the
as selling stored crops, credit and crop insurance, and have cultivated area cannot afford-has contaminated ground- and
limited access to extension and market information. ln many surface water. Their use in Pakistan's irrigated agriculture
cases, they have no choice but to over-exploit the available has expanded rapidly over the past twenty years. Excess
natural resources. nutrient loading as a result of fertilizer run-off can lead to
These misguided policies are at the roots of many serious uncontrolled algae growth.
environmental problems. Take salinity for example. Surveys The widespread use of often dangerous pesticides on
have shown that three-fourths of tube wells provide brackish the cotton crop is associated with several potential health
water that is unfit or only marginally fit for agriculture, hazards, including contamination of workers who apply it
resulting in salinity. Most of these tube wells are set up (three-quarters of producers use a back-pack sprayer and
with subsidies and have been running these on subsidized no protective clothing), harvesters (all of whom are women),
electricity and selling the water at rates much higher than soil and groundwater used for drinking, and consumers of
what is paid for canal water. agricultural products. Summarized evidence from blood tests
On the basis of farm-level data, it has been estimated that shows that as many as one third of cotton workers in Pakistan
yield losses in wheat as a result of sodic irrigation water were have been exposed to dangerous levels of pesticides, according
9 per cent and 20 per cent in two different locales in the to the report.
central Punjab. Experts have also estimated that crop yields
are reduced by about one-third for crops grown on slightly Source: llyas, Muhammad, 'lBRD Proposes Land Reforms', DAWN,
saline areas and that yields on moderately affected areas are 12 September 1996.
98 Issues in Pakistan's Economy

Appendix 5.2

Appendix 5.2
Summary and Time Frame for Structural and Policy Reforms in Agriculture
Proposed timing of initiating
Policy area Objectives Measures measures and expected
implementation period
Incentives Market-determined output *End subsidy on wheat imports 1994/5, short run
prices *Remove wheat and flour import restrictions 1994/5, short run
*End support prices for sugar cane 1994/5, short run
End support prices for all other crops 1995/6, medium to long run
ln'itiate study into alternative means of reducing 1994/ 5, short to medium run
volatility of agricultural prices
*Build up enabling environment for private 1995/6, medium run
sector entry into storage and distribution
Regulation of processing industry where
necessary
*Complete trade reform 1995/6, medium run
Trade policy reflecting Remove export taxes, import duties, and 1995/6, short to medium
comparative advantage quantitative restrictions
Extend income and wealth tax to agriculture 1994/5, short run
Efficient and equitable tax Eliminate all agricultural tax exemptions Update 1994/5, short run
system tax base in agriculture by review of Producer 1994/5, short run
Index Units
Installation of mechanism for periodic review of 1995/6, short to medium run
Producer Index Units
Input markets Private sector production *Privatize urea production and distribution 1994/5, short run
and distribution of
Divest National Fertilizer Corporation, including 1994/5, short to medium run
commercial inputs
plants operated by its subsidiaries
*Expedite privatization of phosphate imports 1994/5, short run
* Level playing field between public and private 1995/6, short run
sector in input markets
*Commercialize seed corporations 1994/5, short run
Privatize seed corporations 1995/6, medium run
Strengthen seed certification process 1994/5, medium run
Market-determined Remove subsidy on electricity 1995/6, medium run
input prices

Reform the irrigation *Decentralize irrigation system based on water 1995/6, medium
system user associations, public utilities, and market in
water rights
*Raise irrigation charges 1994/5, short run
Remove distortions in land Initiate a study of land reform 1994/5, short run
markets and reform credit
*Improvement and computerization of land 1994/5, medium run
provision
records
Clamp down on delinquent loans and end cheap 1994/5, short run
loans for machinery purchase
End directed credit 1994/5, short run
 Chapter 5 Agriculture: Critical Issues 99

Appendix 5.2 continued

Proposed timing of initiating
Policy area Objectives Measures measures and expected
implementation period
Government Reorient public expenditure Reduce burden of administrative expenses 1995/6, short run
expenditure towards changing needs on research and extension budget and increase
of agriculture and ehance operational funding
efficiency of expenditure
lntroduce new research priorities including 1994/5, short run
programme research on farming systems, growth-enhancing
public goods, and the environment
lnduce private sector to undertake privately 1994/5, short to medium run
profitable research
lntroduce patent protection for seed varieties 1994/5, short run
Reduce duplication and increase 1995/6, short to medium run
co-ordination of research institution to minimize
wastage of resources
*Reduce the number of front-line extension 1995/6, medium run
workers and replace them with fewer, better
trained workers, more responsive to the needs of
farming system and not just given corps
*Open consulting services by adaptive research 1994/5, medium run
institutes to better off farmers on a cost-sharing
basis
*Extensive use of mass media and other group 1994/5, medium run
approaches for basic messages about available
technology and better farming systems
lncrease investment in education, including
functional education of farmers 1995/6, medium to long run
Remove subsidies on capital
Target developmental expenditure towards poor 1994/5, short to medium run
and marginal farmers 1995/6, medium run
Poverty Rural poverty Develop participatory, community-based
alleviation organizations 1995/6, medium run
Ensure enforcement of tenancy protection
Price water at economic cost 1995/6, short to medium run
Environment Environmenta 1 Phase out sapling subsidy to encourage private 1995/6, short to medium run
protection and sector participation in sapling market 1994/ 5, short to medium run
sustainable
development Regulate pesticide use
Provide incentives to use lntegrated Pest 1994/5, short run
Management 1995/6, medium run
Create community institutions to manage local
resources and common property 1995/6, medium to long run
Encourage private and public sector investment in
soil and water conservation 1995/6, short to medium run

*Element of high priority

Note: For implementation periods, short run implies 1 to 2 years, medium run 3 to 5 years, and long run 5 to 7 years.

Source: Faruqee, Rashid, 'Pakistan's Agriculture Sector: ls 3 to 4 per cent Annual Growth Sustainable?', Policy Research Working Paper
no. 1407 (Washington DC: World Bank, 1995), iii-vi.
100 Issues in Pakistan's Economy

Appendix 5.3
the non-agricultural sectors. The 'parity price' is an output
The Determination of Support Prices price that will yield income which will buy the same quantity
for Agricultural Commodities of other products as it would in some specified based period.
Thus a balance can be maintained between the prices of
How should agricultural support prices be determined?
commodities sold by the farmers and the commodities which
Support prices for agricultural commodities can be determined they purchase. lt can be calculated through a comparative
either on the basis of the cost of production or by what is index of agricultural and non-agricultural prices. ln this
termed as the 'parity approach'. approach, the effects of inflation which keep upsetting the
The cost of production approach aims at guaranteeing a income and expenditure structure of the farm household are
fair return of a certain crop to the farmers and establishing accounted for. Although it is free from the usual objections
a balance between a number of competing crops so that of lack of scientific rigour and bias in favour of transfer of
an optimum cropping pattern is achieved. Subject to soil, resources to a particular category of landholding, the choice
climatic, and other agronomic conditions influencing crop of the base year for working out the parity ratio may introduce
substitution in certain areas, cropping patterns can be moulded some distortion in the income distribution pattern of different
to correspond to planned production targets. For instance, tenure and size farm categories.
wheat competes for area with both cotton and rice so a certain The choice between the two approaches depends upon the
balance between the prices of the three commodities can help relative importance of various objectives of the price support
in attaining their required production levels. programme. lf the major objective is providing production
However, there are certain problems in the cost of production incentives for particular crops or crop combinations, the cost
approach. Agricultural production requires a number of inputs of production approach may serve the purpose at least in the
which are not marketed and whose valuation will, therefore, short run. Parity prices, on the other hand, provide a range
present difficulties. Such inputs include labour, management,· within which prices may be located in order to reflect the
and land. Labour and management costs, which should be the influence of the forces of demand and supply as well as the
share of the entrepreneur, are difficult to assess. Similarly land long-run objective of equity between urban and rural sectors.
rent, which may be the single largest cost item, is difficult ln addition to the two approaches mentioned above, three
to determine in a country where there is no organized land other criteria are sometimes used for determining support
market. prices: (i) open market prices; (ii) inter-crop parity index; and
The regional variations in physical resource endowments (iii) world prices.
also have to be taken into account in the choice of samples An assessment of the open market price, as determined by
for calculating cost. Moreover, with rise in prices, the cost of the supply-demand interaction, is essential and should be kept
production has to be periodically adjusted. in mind while making decisions regarding the support price.
The cost of production is also related to technology. For It serves as a retraining factor since too much deviation from
purposes of price support the cost of production may either the open market price may make the price support programme
pertain to old traditional technologies, which means a higher unrealistic and ineffective. It is, however, difficult to make an
level of support price, or to the new technologies where costs accurate assessment of the open market price since the markets
may be low. A support price based on the new technology cost are highly imperfect, unstable, and dominated mostly by a few
structure will have adverse equity effects particularly if the buyers (arhtis/sugar mills). ln fact, an agricultural price policy
new inputs are subsidized or a large number of farmers have itself represents an attempt to escape from the uncertainties
no access to the new technology. Large holdings with lower and distortions of the so called 'open market'.
production costs may get higher net returns compared to The inter-crop parity index reflects the relative positions of
small holdings. Thus the higher the support price, the greater various agricultural products and the rates at which these are
the transfer of income to large holdings from the general exchanged. Their main utility lies in monitoring the use of
revenues. It is now believed that the support price programme scarce resources for competing crops and calculating optimal
in Pakistan has operated in contradiction to the original resource allocation.
intent of better income distribution among various segments World prices are relevant in the case of export commodities
of the rural farm sector since, mainly, the cost of production or those commodities which are partly supplied from abroad.
approach has been followed ·while determining the structure But world markets are not equally competitive for all
of support prices. commodities. Their use is further restricted by the fact that
ln addition to the problem of identifying the technology while a certain product and some of the inputs (for example,
and the cultivators using that technology, there is another pesticides and fertilizers) may have relevance to world market
question: which cost should be taken into consideration? conditions, major elements in the cost structure (for example,
Average or incremental? ln a production system as varied canal water and labour) may have no linkage.
as Pakistan's agriculture in technology as well as scale, both
types of unit costs are bound to create complications. Source: Ahmed, Viqar and Rashid Amjad, The Management of
The 'parity price' approach is used in order to correct Pakistan's Economy, 7947-82 (Karachi: Oxford University Press,
imbalances in terms of trade between the agricultural and 1984), 179-80.
I Chapter 5 Agriculture: Critical Issues 101

Appendix 5.4
farmers' response obviously has been overwhelming and they
A Bumper Wheat Crop! Shouldn't we promised a bumper crop.
Celebrate? The international market however has pulled the rug from
under the government. The wheat prices that rose hand in hand
Wheat harvesting is round the comer. lt has in fact already started
with petroleum have tumbled down. US wheat (FOB, Gult') was
in southern parts of the country. lt is likely to be a bumper crop.
quoted at $454 per ton in March 2008. lt now stands at $241
The production estimates show that country will cross the 24
and is expected to go down further as harvesting in South
million ton mark. lt may actually produce an unprecedented and
Asia starts. The government of Pakistan's announced price for
all time high 25 million ton. This will make us a self-sufficient
purchase of local wheat translates into over $300 per ton. This
country in this vitally important food crop. Shouldn't we
makes it a unique year for the local price is higher than the
celebrate this achievement? Policymakers are confused; traders
international price for the first time ever. So who will buy wheat
perplexed and farmers worried. This is how the agriculture is in
from Pakistani farmers at the government price?
this overly globalized world, where less means more opportunities
to earn and more can spell disaster.
Pakistan has almost always remained wheat-deficient. Both the
acreage and the per acre yield of wheat have never been enough
Why the private buyers will keep off?
to feed its burgeoning population. Yield hovered around 400 Private buyers will most likely keep out at least until it gets out
kg per acre till 1967-68. The so called green revolution pushed of the government hands and the price crashes. lt does not make
it up. lt now stands at 1160 kilogram, which is still less by the good business sense to buy at higher rates when it is available
international standards. The average yield in the neighboring at much lower price just across the Gulf. The much publicized
Indian Punjab is 1680 kg per acre. The area on which wheat is smuggling to Afghanistan will also stop automatically. ln fact
cultivated in Pakistan has also doubled over past 60 odd years, we could see reverse-smuggling if the international prices fall
yet we walk the tight rope. further; that is cheap international wheat bought for Afghanistan
Perhaps low yield is less a result of 'technological backwardness' may find its way to the silos of the government of Pakistan.
of our farmer than of lack of incentive for growing this crop. Businessmen however will be keenly watching the government
Wheat is a food security crop and farmers work against heavy procurement drive and will wait for their chances of breaking
odds to secure enough for the family. They cannot dare to co-opt deals at 'good rates'.
it. But they do not also see any incentive in going beyond this This leaves the government alone with the onerous task of
point in a big way. Wheat trade is dominated by the government fulfilling its promise of buying wheat at the announced price of
which is the biggest buyer of the home production and also Rs. 950 per 40kg. The government has exhibited the will to oblige
enjoys the authority to set its price. Farmers hardly ever find the but how much can it buy?
wheat Support Price attractive enough to invest more resources Punjab is not only the biggest producer of wheat in the
into this crop and produce the surplus required to feed the non- country, it is the only surplus producing province. 8 in every
grower population of the country. Overall production in recent 10 kilograms of wheat produced in the country come from this
years has swung between 17 and 23 million ton. The government province. Punjab Food Department is the biggest wheat buyer.
of Pakistan is a frequent visitor of wheat selling markets of the lt comes under the provincial government. Pakistan Agricultural
world. lt fills the supply gap through expensive imports and has Storage and Supplies Corporation (PASSCO) is the other big
been lamented tor offering far more to farmers of other countries buyer. This comes under the federal government.
than it does to its own. The two departments set procurement targets each year
Wheat price in Pakistan has traditionally been lower than and fail to achieve them many times as farmers prefer private
the international prices. lt is set on the basis of calculations buyers who offer premium over Support Price. But this time as
made by Agriculture Pricing Commission that claims it considers the private buyers will abstain, it will be an advantage to win a
input costs, inflation rate, etc. lt however always falls below the procurement promise from the government buyers. The favour is
expectations of farmers and has remained stagnant fqr years. lt likely to become the new currency of political patronage, Punjab
remained Rs. 240 per 40kg for three consecutive years, 1997 to is already divided into constituencies of the two main political
99, and then Rs. 300 for next four years. lt was in a way reflective parties, one ruling at the federal level and the other at the
of the political importance of wheat farmers in our economy. provincial and both refusing to come to terms with each other.
lntemational market on the other hand is more influenced Juxtaposition of political constituencies over the jurisdictions of
by the demand and supply perceptions and the 'expert' the two procurement authorities may level a new battleground
forecasts of future. Commodity prices, including wheat, peaked for the two political heavyweights.
to unprecedented high levels during last year alongside the Aside from the politics, the government departments do not
prices of petroleum products. This weighed heavily against our have the capacity to pick the entire tradable surplus of wheat. The
government's reliance on wheat imports to fill the demand- Punjab Food Department has set a 3.5 million ton procurement
supply gap. To spur home production it raised the wheat Support target, while media reports put the same for PASSCO at 1.5
Price by a hefty 52 per cent. lt moved from Rs. 425 per 40kg in million ton. Rs. 111 billion has been earmarked for Punjab Food
2006-07 to Rs. 625 in the next to Rs. 950 for the current. The Department and Rs. 40.5 billion for PASSCO, The amount is being
released by a consortium of banks.
102 Issues in Pakistan's Economy

The government planners consider only 30 per cent of total entire wheat. As they too save tor family and seed and pay
production as the tradable surplus. lt is a rule of thumb that for services in kind, their share in tradable surplus of Punjab
needs verification. Even at this percentage the current season's wheat stands at 45 per cent.
bumper crop will produce a surplus that will be much more than
the procurement targets of the government. 4. Big fanners
Who will buy this leftover? The private buyers will make They are around 50 thousand in number and their landholding
a heyday when a gasping government will be sitting over its size on average is 86 acres. lhcv cultivate wheat on less than
brimming silos. half (45 per cent) of it. They produce ten per cent of Punjab's
wheat and their share in tradable surplus, according to
estimates, is around 14 per cent of the total surplus.
Who will suffer most in a price crash?
The government experts calculate the overall tradable surplus
Wheat is grown by all farmers irrespective of the size of their of wheat as 10 per cent of total production. We have serious
farm. According to Agriculture Censuses 2000, 8 in every 10 reservations about it and our estimates put the surplus at much
farming families of the country dedicate a portion of land to higher level. Even if the official rule of thumb is accepted, a
wheat cultivation. ln Punjab, nine; NWFP, eight; Sindh, five; bumper crop of 25 million ton will produce a tradable surplus of
and in Balochistan, four in every 10 farmers grow wheat. ln Rabi 7.5 million ton. ln Punjab the collective procurement target of
season almost 6 in every 10 cultivated acres of the country come Punjab Food Department and PASSCO falls short of the expected
under wheat cultivation. All the three provinces except Punjab tradable surplus. The departments will leave at least million
are wheat deficient. ton with the farmers. The government can in fact achieve its
According to the last census around 69 per cent of Punjab procurement target by starting with buying the produce of big
families live in rural areas. Almost half of these (53 per cent) have farmers and ending with that of the medium ones. Who will buy
some access to land. They either own a farm or have rented one the surplus produced by the small farmers? The private parties
on different terms. The rest are landless laborers or are ·attached cannot be expected to pay at par with the government in the
t'o services and other sectors. present international sce,nario. These two million small farmers,
Access to land within these around 4 million owners and/or who have grown wheat on four acres each, risk humiliation at
tenants is highly skewed. Average access of more than half of the hands of private buyers. And we are fast running out of time.
these (56 per cent) is just 2.1 acres. From the point of view of They grow almost half of the province's total wheat and a big
wheat production, the Punjab farmers can be divided into four loss in this year is bound to negatively affect their contribution
broad categories. l-lere are the details: the next season. According to careful estimates of cash input
costs of current season, a Punjab farmer on an average has spent
1. Very small farmers Rs. 628 on the production of 40kg wheat. This does not include
Around a third of Punjab farmers own on an average just 1.2 land rent and self-labour.
acres of land. They are more than 1.3 million in number and
cover almost their entire area (1. 1 acres) with wheat in Rabi
season. Their share in total wheat production of the country is What can be done?
just 7.4 per cent. Their produce is hardly enough for the family
itself. ln fact, to ensure this, they have to harvest it themselves The political government had for the first time ever dared to
and avoid hiring labour for any other field job as well. This come face to face with the international market by pricing its
effectively means that they themselves consume their entire wheat at par. The same however has upset the cart. We believe
production and generate no surplus for trade. the government needs to tackle the issue on two fronts.
First and foremost it must act quickly to save its small
2. Small farmers farmers from destruction. The government departments are given
A little more than half of Punjab fanners own (and/or rent) purchase targets which are then distributed among several of
5.8 acres on average. These around 2 million fanners cultivate their purchase centers. Performance of each is judged by what
wheat on 4 acres of their land. Their share in Punjab's percentage of the target they have achieved. lf we have to save
total output is 47 per cent. After saving enough for family the small wheat farmer, we need to ensure that the departments
consumption and seed, they pay a considerable . amount give priority to small producers. As is evident from the data, the
to groups of harvesters in kind and also oblige the service smaller the farm size, the bigger is the share of wheat cultivation.
providers of the village called saipee. Since the small farmers Very small farmers, with an average farm size of 1.2 acres, sow
form the biggest farming group, they are able to contribute wheat on 88 per cent of the land available to them, while big
41 per cent in the province's entire tradable surplus of wheat. farmers, with an average access to ~6 acres, cultivate wheat on
less than half (45 per cent) of their .land. This implies that the big
3. Medium farmers and medium farmers grow other crops in the same season as well
These over five hundred thousand farmers of Punjab have and are more able to sustain pressures on wheat, while for the
on an average access to 20.5 acres of land and dedicate over small farmers this crop is a make or break matter. Moreover, small
half (11.8 acres) of this to wheat. The second half is occupied farmers with little clout are more vulnerable to maneuvering by
by other Rabi crops most of which are grown for cash, The private traders. Big farmers have storage facilities as well and they
medium farmers produce 35.5 per cent of the province's are not pushed to sell their produce then and there. They can wait
 Chapter 5 Agriculture: Critical Issues 103

for the market to tum in their favour. Many times 'hoarding' by goes. This in fact encourages the market to waiver wildly as the
big farmers has caused the government difficulties in achieving risks of the primary producers are already effectively covered by
its procurement targets. On the other hand cash-strapped small their governments.
farmers have to sell their produce immediately after harvesting to The governments need to effectively campaign against these
keep their limited cash flow cycle intact. The government must policies of exporting countries to develop a rational global
ensure that small farmers are preferred by its departments in their market. To discourage opportunistic traders from spoiling the
procurement drive. lt has to go beyond political rhetoric and announced procurement rate, the government shall levy duty
develop a foolproof system. A crisis will be a big disappointment on cheap wheat imports till at least the next harvesting season.
for farmers that will definitely reduce production in the coming lt should ensure that international wheat is not available in the
season. country cheaper than local wheat. This step will depriv~ the local
Secondly, the government needs to work with other traders the option of cheap imports and they might start buying
governments of developing countries to look into the matters of local wheat at the government announced price. The government
international trade. lts high volatility is a cause of big concern for will have to be vigilant about the smuggling of wheat into
our small farmers. The temperamental global commodity market Pakistan as well.
should not be taken as 'a natural phenomenon'. The governments
of countries producing surplus for export unduly shield their
farmers from the effects of market fluctuations. They ensure that Source: Punjab Lok Sujag, Wheat Economy Heading for Boom
their farmers get reasonable returns whatever way the market or Bust? (Lahore: Punjab Lok Sujag, Farmer Report, April 2009).

1200

Cl
~
0 1000
'SI"
<ii
a.
Cl)
Q)
800 International mark
Q)
a. US wheat,
2
.l<:
Cl!
600
a.
·'=
Q)
(.) 400
-~
Wheat Support price
ca
Q) by Government of Pakistan
.c 200
3:

April 99 00 01 02 03 04 05 06 ._07 08 09 10

Monthly international wheat price is for US No. 2 Red hard winter wheat FOB Gulf as quoted in UNCTAD database:
rupee equivalent has been calculated using exchange rate quoted by National Bank of Pakistan. Treasury
Management Division
 --,

104 Issues in Pakistan's Economy

Appendix 5.5
on personal income and wealth, irrespective of the sector
Truces on Land and Farm Income in which they are produced or created. The first issue has
Professor Mahmood Hasan Khan assesses the taxation and land been addressed gradually in that there has been substantial
revenue structure in Pakistan. reduction in the tax burden on agricultural producers. The
second issue of taxing agricultural income has, however,
The federal government has made no serious attempt so far to
remained unresolved because of the effective political power
improve the structure of direct taxes in agriculture, which at
of the large farmers and landlords. All kinds of excuses and
present are mainly in the form of land revenue· (tax) assessed
deceptive arguments have been used by this group or by
and collected by the provincial governments. The modest
others on its behalf.
yield from land revenue has no relation to the increase in
The case for increased reliance on direct taxes on actual
agricultural incomes and the general rise in tlie value of land
agricultural income, or on presumed agricultural income
since at least the mid- 1970s. Direct taxes contribute about 23
(based on land according to its productivity) is quite
per cent of the total tax revenue of the federal and provincial
persuasive on several grounds: indirect and hidden taxes on
governments. ln 1994-95, the land revenue of Rs. 1. 1 ?illion
agriculture adversely affect and hurt the wrong people and
was around 1.9 per cent of all direct taxes collected m the
send wrong signals on the question of efficient allocation of
country, falling from 4. 7 per cent in 1980-81.
resources; the government revenue from direct taxes is small
What is even more interesting is that the ratio ofland revenue
and has declined relative to other tax revenue and agricultural
to the value-added by crops has declined from 3 per cent in
income; interpersonal equity (fairness) in (direct) taxation is
the 1950s to 0.58 per cent in 1980-81 and 0.45 per cent in
1994-9 5. Put it differently and the direct tax (land revenue)
paid by farmers works out to Rs. 51 per hectare of cultivated
land in 1995. Using a conservative figure of Rs. 3,000 per
hectare for net crop income (after cultivation expenses), the
not well served by differentiating incomes for tax purposes
by sector or activity which produces income; and the tax base
has to be expanded and made more flexible in order to reduce
the fiscal deficit.
I
At present there are only two forms in which the government
average land tax is around 1.7 per cent of a farmer's income.
taxes landowners directly and includes the revenue in its
The contribution of land revenue to the provincial taxes and
budget: (i) wealth tax on agricultural land as immovable
provincial revenue has fallen significantly: land revenue used
property and (ii) land revenue as a tax on land that generates

lI
to contribute 30-55 per cent of the provincial taxes during the
income. The former is assessed and collected by the federal
first 25 years of Pakistan (1947-1972), but has contributed
government and the latter by the provincial governments. ln
8- 14 per cent in the last 2 5 years. likewise, its contribution
1982-83, the military government introduced the ushr levy on
to the provincial revenue has decreased from 13-16 per cent
· (Sunni Muslim) landowners in lieu of the land revenue, but
. to 6- 11 per cent in the two periods.
the paltry ushr revenue has not been part of the government's
The agriculture sector has been taxed heavily by the
budget. Land revenue is still almost the only direct tax revenue
government's pricing policies and taxes on exports of
collected from landowners.
agricultural products. These policies have (i) transferred

l
The tax on movable and immovable wealth was introduced
resources from agriculture to the rest of the economy; (ii)
in 1963, but agricultural land was exempted in 1970 from this
generated revenue for the governments; and (iii) distorted
tax for those landowners whose only source of income was
the allocation of resources. Price subsidies on agricultural
agriculture. The value of land for wealtl] tax was set at Rs. 10
inputs, though substantial over time, have not altoge~her
per Produce Index Unit (PlU), which was used as a relative
offset the burden of hidden taxes on producers. While there is
some doubt if these subsidies have contributed to increased
farm productivity, it is certain that most of them have been
appropriated by large and influential farmers (landlords).
lt is absolutely essential to maintain a favourable
measure of productivity of land parcels in different locations
to set the land claims of Muslim refugees from East Punjab in
the late 1940s and then in the implementation of the Land
Reform Acts of 19 59, 1972, and 1977.
l
The federal government has raised the assessment value of
macroeconomic environment for agricultural producers if
land from Rs. 10 to Rs. 250 per PlU since 1990, although the
we want additional resources for investment in- physical and
PML Taxation -Committee in 1990 was in favour of raising
social infrastructure to help improve the living standards of
it to Rs. 400 per PlU which is the basis for acquiring loans
those whose incomes and jobs· depend on agriculture. One
from the banking system. ln 1993, the second caretaker
should strongly oppose policies that penalize agricultural
government removed the wea 1th tax exemption of 1970
productivity, including perverse policies on output and input
for the landowners owing mainly to the pressure of donor
prices, exchange rate, regulation and control of internal and
agencies. However, following the recommendations of the
international trade, farm credit, and investment in physical
Prime Minister's Task Force on Agriculture in 1994, the PPP-
infrastructure, research and extension. ln the last five
led government introduced several generous. deductions to
years, the burden of implicit taxes on agriculture has fallen
dilute the effect of wealth tax on large landowners. Further,
substantially as a result of significant changes in prices and
the federal government has not accepted the suggestion by
structural reforms.
donors that the number of PlUs per hectare should be revised
We should here distinguish clearly between two issues:
as a measure of the value (productive capacity) of land for
(i) the tax burden on the agriculture sector and (ii) the tax
wealth tax purposes. lt is obvious that, without raising the
 Chapter 5 Agriculture: Critical Issues 105

assessment value of land to Rs. 400 per PlU and the upward A minor policy reform with respect to agricultural income
revision of PlUs per hectare, the wealth tax receipts from was introduced by the federal government in the Finance
agricultural land would remain inconsequential. Ordinance of 1988. lt amended the lncome Tax Ordinance of
The land revenue system in Pakistan has a very long history, 1979 to include agricultural income (if any) in the 'chargeable
but in its present form it was concretized by the British income' for determining the tax rate for non-agricultural
colonial government in the Punjab Land Revenue Act of 1887. incomes. This so called clubbing formula, introduced with
This system now has no redeeming feature: it is a relic of the the federal budget of 1988-89, has had no major impact on
past developed under the absolutist, authoritarian, feudal, and tax evasion and the income tax revenue. At the end of 1990,
colonial regimes and maintained by the political influence of the PML government appointed a taxation committee, which
landlords and rich farmers since 1947. was in favour of a tax on agricultural income, but it repeated
The land tax has no merit now because of the ad hoc the excuse earlier made by the three expert committees in
changes made in the rates and exemptions in the last 25 years 1986, 1988, and 1989. So the committee recommended
after the West Pakistan Land Revenue Act of 1967 which ' that the federal government should redefine the concept of
replaced the Punjab Land Revenue Act of 1887 was extended agricultural income by excluding the rental part received by
on a uniform basis to all parts of Pakistan. landowners and incomes earned from orchards, livestock, and
lt is no longer linked to the presumptive (income) capacity poultry farms. However, the PML government took no action
of the land one owns, hence it is highly inequitable between on this recommendation.
landowners and between those who earn their income from The persistently high fiscal deficit and the pressure of the
agriculture and others whose income is earned from other international donor community since the early 1990s have
activities. ln addition, the land revenue produces a very moved up the issue of reforming the land revenue system on
modest income for the provincial governments in spite of the the government's policy agenda in Pakistan. The caretaker
ad hoc increases in the rates in 1983/84. government after the dismissal of the PML government in
There is a long history of opposition to the idea of taxing July 1993 acted on two fronts in September-October 1993.
agricultural incomes, going back to the times of the British First, it removed the 1970 exemption for agricultural land
rule in lndia. With the passage of the lncome Tax Act of for wealth tax purposes. Second, it issued ordinances in all
1886 agriculture was to have only the land revenue system. provinces to introduce a flat tax rate of Rs. 2 per PlU on all
The lncome Tax Act of 1922 granted specific tax exemption landholdings above 4,000 PlUs to replace the existing land
to agricultural incomes, which is still available in Pakistan revenue. ln February 1994, the newly elected PPP government
under the lncome Tax Ordinance of 1979. ln the decade after enacted a somewhat watered-down version of the Wealth Tax
1947, successive governments were able to avoid the issue of (Amendment) Ordinance to justify the changes in the original
taxation on land and agricultural income. ln the next fifteen legislation.
years, in spite of the strong recommendations of the Taxation The elected provincial governments, however, did not follow
Enquiry Committee of 1959, Taxation and Tariffs Commission up on the provincial tax ordinances on presumed agricultural
of 1964 and Agricultural Enquiry Commission of 1972-74, income (based on PlUs) issued by the caretaker government
the federal government did not replace the land revenue in September-October 1993. The provincial assemblies of the
system by a system of tax on agricultural income. NWFP and Balochistan have enacted the land tax legislation,
A major breakthrough on the issue of taxation of agricultural introducing a graduated scale of tax on presumptive income
incomes was the enactment of the Finance (Supplementary) expressed in rupees per PlU. However, the two provincial
Act of 1977 by the PPP government. This act abolished the governments have apparently not started the implementation
land revenue and replaced it by a uniform and universal process. The provincial governments in the Punjab and Sindh
income tax in the country in January 1977. However, before have been dragging their feet and taken no concrete action
the PPP government could start the implementation of the to legislate and implement the new tax system on presumed
Finance Act of 1977, the military government which took over income based on even unrevised PlUs per hectare.
power in July 1977 first suspended and then cancelled the act. At least two major steps are required immediately: (i)
The former tax exemption on agricultural income was restored abolition of the current system of land revenue assessment and
in the lncome Tax Ordinance of 1979. (ii) revision of the number of PlUs per hectare in all provinces,
ln the 1980s, at least three 'expert' bodies-National based on the existing productive capacity of agricultural
Taxation Reform Commission in 1986, National Commission land. 1f the presumed income tax on land has to serve as a
on Agriculture in 1988 and the Committee of Experts on fair measure of taxation, a source of increased government
Taxation of Agricultural lncomes in 1989-examined the revenue to meet the development needs of the rural people,
question of changes in direct taxes on agriculture, including then the provincial governments must consider increasing and
land revenue, ushr, and income tax. The majority view was graduating the flat tax rate of Rs. 2 per PlU and reducing the
against introducing a tax on agricultural income mainly on basic exemption for the individual landholding in terms of
the ground that the federal government was not empowered the revised number of PlUs per hectare equivalent to no more
to legislate on matters falling in the provincial jurisdiction, than five hectares irrigated.
except in a State of Emergency under Article 232 of the
Constitution. They emphasized the need to improve the
assessment and collection of land revenue and ushr, but Source: Khan, Mahmood Hasan, 'Taxes on Land and Farm
without specifying the measures for implementation. lncome', DAWN, 8 June 1996.
106 Issues in Pakistan's Economy

Appendix 5.6
The idea of land reforms in Pakistan evokes little interest
Getting the Policies Right in Pakistan's and much hostility, although it is at the heart of the problem
Agriculture of control and access to agricultural land. Property rights in
land-or the responsibility to use it-need to be defined and
ln another article, Prof. Mahmood Hasan Khan examines the key
protected to increase efficiency and check unfairness. The
problems that face Pakistan's economy.
existing system of land titles is in a mess.
The economy's vulnerability to the performance of agriculture
One has simply to look at the land records and the massive
is based on its contribution to the supply of food and raw
volume of intra-family and inter-family litigation for rights
material, employment, and export earnings. These facts
in land. The landlord-tenant contracts are mme messy both
are well documented and need no further comment. What
in their written and verbal forms. ln practice, they depend
is, perhaps, less obvious is the (increasing?) burden on
mainly on the power of one of the parties. The government's
agricultural imports on the economy. The annual import bill
resources and efforts should focus on improving land titles
on account of wheat, edible oils, sugar, pulses, and milk and
and tenancy contracts with quick and fair dispensation of
its products is between $1.2 and $1.8 billion or around 15-18
justice in disputes. The land revenue machinery, including
per cent of the value of all imports. A high proportion of the
revenue courts, is bloated in numbers but grossly inadequate
food import bill is for edible oils ($800-900 million) and the
in its effectiveness.
rest for wheat and sugar.
Pakistan is importing this year probably 2.5 million metric Prices
tons or about 15 per cent of its expected wheat output. The access to water and its efficient use for agriculture is
Perhaps a more distressing aspect of food security is that no less important in Pakistan. The existing irrigation system
a sizable part of the supply of edible oil products, wheat, has almost no redeeming feature: rampant rent-seeking and
wheat-flour, and sugar find their way into the markets of neglect of the irrigation infrastructure are certainly its two
neighbouring countries, thanks largely to price differentials most costly manifestations. An apparent paradox is that canal
and the low cost of these transactions to participants. water is grossly underpriced from society's point of view and
lt is also well-known that much of the progress in grossly overpriced from the viewpoint of the water user. lt
agricultural production has come from the increased quantity is, however, quickly resolved by looking at the rent-seeking
of resources (inputs) and not from their increased efficiency system. On the surface, the case for an autonomous (private
(productivity). For instance, crop yields in Pakistan are among sector) irrigation authority is quite strong, but some of the
the lowest in the world, but mercifully have potential for underlying assumptions for its success seem dubious. The
significant increase. There is considerable evidence of waste experience of the Water Users Association (WUAs) so far has
of the key production resources, water and land, in most not been encouraging, hence the problems associated with the
agricultural areas. Experts tell us the deterioration in the On-Farm Water Management (OFWM) projects throughout
physical integrity of the irrigation and drainage system and the lndus Basin. The growth of genuine (participatory)
quality of soils has become perhaps the single most important organizations of farmers (water. users) requires a socio-
threat to the sustainability of agricultural growth in Pakistan. economic environment that the existing land system cannot
lnadequate public investment, high cost of maintenance, provide. The proposed (autonomous) water utilities may tum
and wrong-headed price policies have been rightly regarded out to be as serious a bottleneck to agricultural growth as
as the major contributors to this problem. the existing irrigation system has been. The water problem
A large part of the explanation for low productivity has to be resolved at the national level as well in terms of
and waste of resources has to do with the rights to land disputes between provinces on their 'fair' shares and 'leakages'
and water and the state policies affecting incentives for a experienced at critical times in each crop search.
profitable agriculture. Successive governments have done Prices are (or can be) very strong signals for allocation of
either too little in areas that could significantly enhance resources and profitability of the individual enterprise (farm).
agricultural production, or too much in others that have l am entirely in favour of price liberalization for both outputs
significantly debilitated the agriculture industry in Pakistan. and inputs, but policymakers have to take into account some
Numerous committees/task forces/commissions-at least four of the side-effects such as redistribution of welfare (income)
since 1988-have reported on the problems of agriculture and in the society. We are told almost ad nauseam that farmers
made policy recommendations. want and should get 'fair' prices for their outputs, which
Constraints on agriculture go beyond the issue of price the present price support system does not allow. The trade-
adjustments; they include structural and institutional problems. off is that they may have to accommodate greater seasonal
There are clearly four policy areas that have a direct impact variability in prices. Governments and financiial institutions
on the productivity and profitability of agriculture in Pakistan: can assist the private sector in developing storage systems that
(1) control of and access to (good) agricultural land; (2) access can stabilize prices.
to and (efficient) use of irrigation water; (3) market structures The existing price support and procurement system should
for and prices of inputs and outputs; and (4) availability be abolished and support · should be extended to private
of public goods, including physical infrastructure and the marketing channels for greater competition and investment in
support system of agricultural research and extension. the distribution network for commodities. Consumers can and
r

Chapter 5 Agriculture: Critical Issues 107

should be protected by targeted (price or income) subsidies. responds to the needs of people in different areas and (ii) has
Generalized consumer subsidies on wheat flour, sugar, and a reasonable cost recovery system. So far both of these aspects ·
edible oils are a major source of cross-frontier trade or have been grossly neglected. Public investment in agricultural
smuggling. ln this regard, one should also seriously question research and extension services can yield even higher returns.
the wisdom of maintaining the rent-seeking bureaucracy in However, the existing national and provincial systems must
the provincial food departments and a variety of parastatals at be restructured. The research system has to be brought closer
the federal and provincial levels. ls this really not a very costly to where the problems are and integrated with the delivery
way of providing subsidy to urban residents? system to reach the intended beneficiaries. The arrny of front-
line extension workers (field assistants and others) should be
Subsidies
replaced by localized adaptive research outfits (establishments)
The case for price subsidy on agricultural inputs has never to act as the meeting point for suppliers and recipients of
been too strong or persuasive since its co called incentive technologies. ln fact, a large part of the extension services can
effect is more than offset by (i) waste and (ii) unfair be done through these entities in collaboration with private
distribution of benefits. The experience of subsidized credit sector companies and farmers (village) organizations. The
is by far the best case to make this point. Targeted subsidies cost saving from a significantly reduced size of the extension
combined with greater access to credit for smaller farmers bureaucracy can be used to improve the research-based
and rural entrepreneurs are the answer. Public sector financial delivery system and rural education.
institutions have proved to be a disaster since their activities Governments are not being asked to do less but do things
have been dominated by political and not market forces. differently. Get your. hands out where they tend to stifle
Innovative credit arrangements between private financial economic activity and exacerbate income inequality and
institutions and small-scale borrowers have to be expanded, concentrate on policies-structural and institutional reforrns
particularly in those areas in which viable farrners (water users) included-and investment that contribute to economic growth
organizations can develop. ln some of the NGO-supported rural and alleviate rural poverty.
development programmes, this has already happened. Imported May l add that a vibrant and productive agriculture will also
inputs, particularly machinezy, should neither be taxed too (a) neutralize the oft-repeated arguments of the farm lobby
heavily nor subsidized. Reduced customs duties on exports against taxation of the incomes of the rich (large) farmers
and imports seem to be the most reasonable approach to take. and landlords and (b) yield substantial tax revenue for public
There is finally the role of the government in building and investment in the agriculture sector itself.
strengthening the physical infrastructure and agricultural
support services. Public investment in the irrigation, drainage, Source: Khan, Mahmood Hasan, 'Agriculture in Pakistan: Get
and road systems can have reasonably high rates of return the Policies Right', DAWN, Economic and Business Review, 31
provided the infrastructure (i) is based on good design and March-6 April 1997.
108 Issues in Pakistan's Economy
~l
NOTES l
1. This includes income from the sale of goods (retail and
wholesale), work done on raw material, repair and
maintenance, transportation, commissions and fees,
contractual work, the sale of food items, rent, services,
construction, and others; remittances and revenue from
livestock are also important for rural incomes. Source:
24.
25.
26.
27.
28.
29.
Ibid. 1.3.
Ibid. 2.1.
Ibid. 5.1.
Ibid. 5.4.
Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 162.
State Bank of Pakistan, op. cit., 1994, 6.1.
l
Innovative Development Strategies (Pvt.), Profiling Pakistan's 30. Ibid. 6.2.
Rural Economy for Microfinance (Islamabad: Pakistan 31. Ibid. 6.2.
Microfinance Network, 2009), 17, 53. 32. Ibid. 6.3-6.4.
2. Khan, Mahmood Hasan, Underdevelopment and Agrarian 33. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 160.
Structure in Pakistan (Boulder, Colorado: Westview Press, 34. Government of Pakistan, Agricultural Census Organization,
1981), 20. Pakis.tan Census of Agriculture, 1972 (Islamabad, 1976).
3. Ibid. 21. 35. Government of Pakistan, Agricultural-Census Organization,
4. Ibid. 21. Pakistan Census ofAgriculture, 1980, (Islamabad, 1983 ).
5. Ahmed, Viqar and Rashid Amjad, The Management of 36. Government of Pakistan, Report of the National Commission on
Pakistan's Economy, 1947-82 (Karachi: Oxford U_niversity Agriculture, op. cit., 225-6, emphasis added.
Press, 1982), 79. 37. Ibid. 226.
6. Faruqee, Rashid, 'Pakistan's Agricultural Sector: Is 3 to 4 per 38. Khan, Mahmood Hasan, Lectures on Agrarian Transformation
cent Annual Growth Sustainable?', Policy Research Working in Pakistan (Islamabad: PIDE, 1985), 48.
Paper 1407 (Washington DC: World Bank, 1995), 6. 39. Government of Pakistan, Report of the National Commission on
7. Ibid. 8. Agriculture, op. cit., 1988, 226.
8. Government of Pakistan, Ministry of Food and Agriculture, 40. Applied Economics Research Centre, Impact of Tractors on
Report of the National Commission on Agriculture (Islamabad, Agricultural Production in Pakistan, Research Report No. 20
1988), 486-7. (Karachi: AERC, 1982).
9. Ibid. 487. 41. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 176-7.
10. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 147. 42. Government of Pakistan, Report of the National Commission on
11. Ibid. 149. Agriculture, op. cit., 1988, 536, emphasis added.
12. Ibid. 151. 43. Government of Pakistan, National Taxation Reforms
13. Ibid. 155. Commission, Final Report (Islamabad, 1986), 134.
14. Government of Pakistan, Report of the National Commission on 44. Ibid. 137.
. Agriculture, op. cit., 1988, 489. 45. Ibid. 138.
15. World Bank, Pakistan: Growth Through Adjustment, Report No. 46. Nasim, Anjum and Asya Akhlaque, 'Agricultural Taxation
7118-PAK (Washington DC: World Bank, 1988), 37. and Subsidies', in Nasim, Anjum, Financing Pakistan's
16. World Bank, Pakistan: Country Economic Memorandum FY93I, Development in the 1990s (Karachi: Oxford University Press,
Report No. 11590-PAK (Washington DC: World Bank, 1993 ), 1992), 476.
7-8. 47. Ibid. 476.
17. A large part of the discussion in this section draws from the 48. Government of Pakistan, National Taxation Reforms
seven extensive Rural Financial Market Studies preliminary Commission, Final Report, op. cit., 1986, 155-6.
report prepared by the Applied Economics Research Centre, 49. This section is drawn largely from: Hussain, Akmal, Pakistan
University of Karachi, conducted for the State Bank of National Human Development Report 2003, (Karachi: UNDP/
Pakistan in 1994. The large surveys and analysis of the Oxford University Press, 2003 ), and Bengali, Kaiser, (ed.) The
studies were being undertaken at the time of writing this Politics of Managing Water ( Karachi: SD PI/Oxford University
book. Press, 2003).
18. State Bank of Pakistan, Rural Financial Market Studies: Phase 1 50. I<han, Mahmood Hasan, 'Agricultural Development and
(Karachi: SBP, 1994), 1-2. Changes in the Land Tenure and Land Revenue System in
19. World Bank, Pakistan: Rural Finance for Growth and Poverty Pakistan', in Khan, Shahrukh Rafi, Fifty Years of Pakistan's
Alleviation (Washington DC: World Bank, August 1995). Economy (Karachi: Oxford University Press, 1999), 97.
20. The full title of the study is: Tatiana Nenova and Cecile 51. Ibid. 111.
Thioro Niang with Anjum Ahmad, Bringing Finance to 52. Ibid. 114.
Pakistan's Poor: A Study on Access to Finance for the Underserved 53. Ibid. 115.
and Small Enterprises (World Bank DC: World Bank, May 54. Government of Pakistan, Planning Commission, Pakistan
2009). Participatory Poverty Assessment (Islamabad, 2004).
21. All the data here are drawn from the above mentioned 55. Gazdar, Haris, 'The Fourth Round, and Why They Fight On:
study. the History of Land and Reform in Pakistan', in Panos South
22. Also see the excellent study by Innovative Development Asia, Levelling the Playing Field: A Survey of Pakistan's Land
Strategies (Pvt.), Profiling Pakistan's Rural Economy for Reforms (Kathmandu, 2011 ), 9-10.
Microjinance (Islamabad: Pakistan Microfinance Network, 56. Quoted in Innovative Development Strategies (Pvt.),
2009). Profiling Pakistan's Rural Economy for Microfinance, Pakistan
23. State Bank of Pakistan, op. cit., 1-2. Microfinance Network (Islamabad, 2009), 16.

(
 Part2

There is a general belief amongst economists, policymakers, and the general public that
industrialization implies economic growth and development. Unless countries industrialize,
the assumption goes, they will continue to remain un- or underdeveloped. The progress of
countries like South Korea, Taiwan, and other East and South-East Asian countries, which used
to be called the Newly Industrialized Countries (NICs), only endorses that view. The first three
chapters of this part of the book examine the process of development in industry in Pakistan,
from the early days when very little existed. The extraordinary growth in industry in the 1950s
and 1960s suggested that Pakistan might be one of the very few countries at that time which
would join the developed world. However, much of the growth that had taken place in the first
two decades soon unravelled, with growing income and regional inequalities, resulting in the
separation of East Pakistan.
Pakistan after 1971 was a new country in many respects, not least because of the industrial
and economic policies followed between 1972 and 1977. The role of the public sector was
increased substantially and the economy, for numerous reasons, did not do as well as it had
in the first two decades. However, as the discussion shows, most claims that the early 1970s
were a disaster are factually incorrect. Just as much as there was a change in economic policy
in the early 1970s, in the 1980s, too, there was another shift, in many ways similar to that of
the earlier period, but also influenced by the new world order of globalization, privatization,
openness, and neo-liberal economic policies. The Structural Adjustment Programme sponsored
by the IMF and the World Bank determined much of what happened regarding industrial policy
in Pakistan.
Chapter 8 evaluates the key issues in the industrial sector in Pakistan, and questions most
of the myths that have been perpetuated over the last few decades. The claims that Pakistan's
industry has been severely inefficient are not supported by the evidence. Many of the accusations
made about the trade regime causing inefficient import substituting industrialization were also
found to be false. Moreover, the claim that the public sector, too, was wasteful and inefficient in
the past, is not borne out by the facts. These chapters offer a reinterpretation of the industrial
and trade process in Pakistan, arguing that although there are problems in the industrial and
trade sectors, many of the allegations made in the past, have been grossly exaggerated.
However, one must also add, that in 2013, Pakistan's industrial sector faced huge problems
and extraordinary difficulties. The power crisis over the last five years and the consequences of
the War on Terror, and other issues, have caused Pakistan's investment rate to collapse to its
lowest level in many decades. Some of these issues are discussed in Chapter 8.
 The Process of Industrialization in
Pakistan I: 1947-77

For a region that was considered to be the Indian (about 20 per cent of the entire population) was itself a
subcontinent's economic backwater at the time of partition, massive responsibility and task. Add to that the fear of
Pakistan's industrial and economic growth performance, at being taken over by India, and the lack of an industrial
least up to the late I 960s, was phenomenal. Pakistan was base or a skilled labour force, and we do indeed have every
considered a model developing country in the I 960s and reason to believe the prophets of doom. However, Pakistan,
enjoyed growth rates of gross domestic product (GDP) of despite heavy odds, did manage growth rates of GDP of
over 6.7 per cent during the decade. This, in a country that more than 3 per cent per annum in the earlier years. In
was considered to be 'an economic wreck [with] serious the first main section of this chapter we examine how
social unrest rising'' as reported by the influential TIME commercial and foreign exchange policies helped guide
magazine in 1947. Gustav Papanek, a professor from Harvard the economy on its path. This phase was a classical, and
University, who played an important role as adviser to the fairly successful, implementation of import substituting
Pakistan Planning Commission between 1954 and 1960, industrialization (ISI) ..
summarized the perception most observers had of Pakistan: There was a continuation of these economic policies, at
least in general direction and principle, during the second
At independence, Pakistan-simultaneously period between 1958 and I 968, under the leadership of Ayub
created and disrupted by the partition of British ·Khan. Growth rates continued to impress, and a substantial
India~was widely considered an economic industrial and economic base was established. However,
monstrosity. The country was among the poorest
there were major differences between the two periods, not
in the world and had no industries to speak of,
almost no industrial raw materials, no significant least regarding political control and stability. In contrast
industrial or commercial groups. It was difficult to the confusion and frequent changes in government in
to see how Pakistan's economy could grow more the first decade, the second decade represented a period of
rapidly than its population. Economic chaos and political stability, authoritarianism, and bureaucratic control.
political disintegration seemed more likely. The The political situation under Ayub Khan was probably
1950s were a period of apparent stagnation and a key determinant of the economic performance of the
mounting economic problems, when early dire country, both positive and negative. When the Ayub Khan
predictions seemed to be fulfilled. 2 government was celebrating its ten years in office and calling
it the 'Decade of Development', unrest in both West and East
The metamorphosis over a few years confounded all the Pakistan was identifying the failure of the regime by the way
prophets of doom who had predicted total anarchy in, and it had contributed to income and regional disparities. Most
annihilation of, the country. By the mid- I 960s the tone of observers have claimed that the overall assessment of the
dismay had changed considerably, and the international ten years of Ayub Khan must be mostly negative, and that
media had this to say about Pakistan: 'Pakistan may be on this regime was more a failure than a success. Some have
its way toward an economic milestone that so far has been even called Ayub Khan's ten years the 'Controversial Sixties'.
reached by only one other populous country, the United Unlike most analysts, we will argue that the Ayub Khan era
States? and 'the survival and development of Pakistan is one was in fact highly progressive and dynamic, and that despite
of the most remarkable examples of state and nation building some negative consequences of its economic strategy, it was
in the post-war period'. 4 overall a resounding success.
This is the first of two chapters in which we examine .The Zulfikar Ali Bhutto regime, which largely emerged
Pakistan's industrial performance since 1947. The thirty-year out of the contradictions and conflicts under Ayub, was
period covered in this chapter consists of three very distinct, very different from the regimes of the past. Pakistan's
albeit interconnected, phases in industrial and economic circumstances were very different in December I 971 when
policy. The first phase is the period 1947-58, when the Bhutto took over than they had been in the previous twenty-
foundations for the future years were laid. This was a period four years. A very clear break with the past was represented
of huge change in the demographic make-up of the country, by the fact that the more populous eastern wing of the
as well as in the political sphere, where governments were country had emerged as an independent nation. Criticism of
changed frequently. the performance of the Bhutto regime has been particularly
The mere fact that the government had to deal with a harsh and there is a general impression that this period
refugee/migrant influx of about 7 million into West Pakistan was Pakistan's 'worst' period economically. However, here
 Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 111

as in the case of the Ayub Khan period, we re-examine On the basis of this assessment, the government felt that
the evidence and the issues, and reach somewhat different Pakistan would need to
conclusions. We argue that, while some of Bhutto's economic
policies may have had negative repercussions on the economy, seek, in the first place, to manufacture in its own
the five-and-a-half-year period probably also had Pakistan's territories, the products of its raw materials, in
worst share of luck. The 'bad luck' factor between 1972 and particular jute, cotton, hides, and skins, etc. for
which there is an assured market whether at
1977, when Zulfikar Ali Bhutto was in power, contributed
home or abroad. At the same time, to meet the
significantly to the poor performance of the economy. requirements of the home market, efforts will
The period since 1977, from the fall of Zulfikar Ali Bhutto be made to develop consumer-goods industries
until the present, once again has a continuous theme, which for which Pakistan is at present dependent on
is discussed separately in the next chapter. Just as a major outside sources. 7
break came about in the evolution and development of
Pakistan in 1971, so the period from about 1977 to the early The result of these objectives was that between 1949 and
1980s forms a different development pattern. 1958 the growth rate of industry in Pakistan was amongst the
In this chapter, we take a look at the performance most rapid for any country in the world. In united Pakistan,
of Pakistan's economy, with particular emphasis on the large-scale manufacturing grew at a phenomenal 23.6 per
industrial sector, in the period 1947-77. We examine data, cent between 1949 and 1954, and afterwards, by the still
look at events, and discuss policy issues that were important very impressive 9.3 per cent up to 1960. The investment rate
in determining the success and failure of that performance. more than doubled during the 1950s, even though there was
Although there is some discussion of the role of the state no increase in per capita income in that decade-in united
and of political and institutional factors in determining Pakistan, GNP per capita grew on average by only 0.2 per cent
economic strategy, policy, and outcomes, for the most part, between 1949 and 1954, and at zero per cent in the next five
we reserve our comments on the role of the state and political years. 8 •9 In West Pakistan the growth rates were even more
and institutional factors for a later chapter. In Chapter 19, impressive, with large-scale manufacturing growing at 19 .1 per
we synthesize the crucial link between these apparently cent between 1949 and 1958, and per capita income increasing
independent and unique factors-the state, institutions, by 6.97 per cent in the same period. 10 The main feature of
classes, strategy-and examine economic development in a the 1950s was the establishment and expansion of the large-
more realistic and holistic context, distant from the factual scale manufacturing sector, which ranged from a high annual
and largely empirical nature of this chapter. growth rate of 28.7 per cent in 1953/4 to a (still high) low of 4.9
per cent in 1957/8. Although starting from a non-existent base,
and against all odds, Pakistan achieved very impressive rates of
6.1 1947-58: EXCHANGE RATES, growth in its first decade (see Table 6.1 ).
With industry growing at high rates, there was a reverse
TRADE POLICIES, AND IMPORT picture in the agricultural sector, which only once in this
SUBSTITUTING INDUSTRIALIZATION 5 period achieved double-digit growth rates. This is also the
period when agriculture suffered negative growth rates in
Very soon after independence, the Pakistan government some years. Agriculture stagnated to the extent that its
acknowledged the precarious nature of the base of Pakistan's growth was not even enough to cope with the growth in
economy and identified areas and strategies that would population, resulting in a fall in per capita consumption
need to be given urgent consideration. In its Statement of of food grain and the need to import food as well. 11 In the
Industrial Policy of April 1948, it stated: mid-1950s, as much as 65 per cent of the civilian labour
force was employed in agriculture and more than 75 per cent
The most striking feature of Pakistan's present of the population lived in rural areas. Hence, a low growth
economy is the marked contrast between its rate in agriculture meant that the potential market for the
vast natural resources and its extreme industrial growing manufacturing sector was also stagnant, restricting
backwardness. A country producing nearly 75 further growth in the manufacturing sector. Gustav Papanek
per cent of the world's production of jute does
has argued that 'agriculture was the sick man of economic
not possess a single jute mill. There is an annual
production of over 15 lac [1.5 million] bales of development in Pakistan during the 1950s. A stagnant
good quality cotton, but very few textile mills agriculture in a predominantly agricultural economy meant a
to utilize it. There is an abundant production of slowly growing economy.' 12 As we will show, the policies that
hides and skins, wool, sugar cane, and tobacco- were adopted in this period had a marked anti-agricultural
to name a few of the important products-but bias and the terms of trade between agriculture and industry
Pakistan's considerable resources in minerals, were heavily biased against the former ( see Table 6.2). In
petroleum, and power remain as yet untapped. fact, Stephen R. Lewis argues that 'the major impact of
In laying down any policy of industrialization, economic policy in the 1950s was to transfer income away
note has to be taken of these deficiencies and from agriculture and from urban consumers, and to the new
handicaps, and a concerted effort made to
and rapidly growing manufacturing sector' .13 Let us now
overcome them. 6
turn to some of the tools and mechanisms which influenced
investment and economic development in the first decade.
112 Issues in Pakistan's Economy

Table 6.1
Annual Growth Rate 1950-58 at 1959/60 Factor Cost(% per annum)

Manufacturing Wholesale Banking Public

Yeara Agriculture and and administration Services GDP
Large scale Small scale retail trade insurance and defence

1950/1 2.6 23.5 2.3 6.1 9.1 2.5 4 3.9

1951/2 -9.1 18.7 2.4 0.5 10.0 4.0 4 -1.8
1952/3 0.2 23.6 2.2 0.6 7.6 -4.4 4 1.7
1953/4 13.6 28.7 2.3 6.3 8.5 -2.4 4 9.4
1954/5 -0.8 24.1 2.3 5.5 2.6 4.6 4 2.7
1955/6 2.1 17.5 2.3 2.3 21.5 1.6 4 3.4
1956/7 2.3 8.1 2.3 3.2 22.9 -2.6 4 3.0
1957/8 1.9 4.9 2.2 3.4 -1.7 -2.2 4 2.6
1950-1954 (ave.) 1.8 23.6 2.3 3.4 8.8 -0.1 4 3.3
1954-1958 (ave.) 1.4 13.6 2.3 3.6 11.3 0.4 4 2.9

8 The annual growth rate for 1950/1 means the rate for the period 1949/50 to 1950/1.

Source: Government of Pakistan, Pakistan Economic Survey 1984-85 (Islamabad, 1985).

Table 6.2 and Rashid Amjad argue that 'the reason why the Pakistan
Domestic Terms of Trade for West Pakistan government did not devalue its own currency at that moment
(Three-Year Moving Averages): 1951-64 is one of the most controversial questions of the period and
the genesis of the pro-industrial bias in government policy in
West Pakistan many ways can be traced back to this decision' .14 One reason
Year why this decision was taken was to announce to the world
Manufacturing Agricultural
sector sector
that Pakistan was an independent country and did not mimic
Indian economic policy. Other reasons were to continue to
1951-1954 108.62 97.39
sell raw jute to India (since Pakistan had no jute mills) at
1952-1955 112.22 91.14 a now higher price, and to be able to import machinery and
1953-1956 116.42 87.36 capital goods at a cheaper price. However, India punished
1954-1957 112.00 91.41 the newly-born Pakistan by suspending trade between the
1955-1958 107.77 96.03 two countries and refusing to accept Pakistan's independent
1956-1959 104.52 98.76 stand. The Pakistani government imposed some controls on
1957-1960 102.60 99.43 imports and exports in order to manage trade with countries
1958-1961 98.05 103.13 that had devalued, as their imports were now cheaper. By
1959-1962 95.32 106.39
not devaluing, the interests of Pakistan's exportable raw
1960-1963 94.75 108.28
materials remained protected.
1961-1964 96.06 107.84
Pakistan was a monopoly exporter of jute, mainly to India,
and hence gambled on the presumption that by not devaluing
Source: Lewis, Stephen, Economic Policy and Industrial Growth
in Pakistan (London: George Allen & Unwin Ltd,
it would reap additional profits from the higher price of jute.
1969), 60. In 1948/9, India imported 55.8 per cent of Pakistan's exports,
but all such exports were suspended in September 1949. The
consequences of the Indian retaliation could have been quite
6.1.1 The Impact of the Exchange Rate catastrophic for Pakistan's economy: either Pakistan would
Before the partition of the subcontinent, the area constituting have been forced to devalue, as was the motive for India's
Pakistan was the bread-basket of India. The areas that trade suspension, or Pakistan would need to hurriedly find
became Pakistan were net importers of industrial goods alternative markets for its exports. Neither decision was
from India and produced agricultural commodities, such easy. However, Pakistan's luck changed for the better, as it
as cotton, wheat, and jute. After independence, a customs has done on so many occasions, with positive effects for the
union between India and Pakistan existed through the use economy.
of a common currency, but this was broken up in 1949. The The Korean War broke out in June 1950, and· there was
same year also saw the Government of Pakistan taking one a fear that it might trigger off World War Three. Countries
of its most important decisions, which had a vital impact on began stockpiling and storing raw materials, and as demand
industrial development in the country. for them increa_sed, so did their price. Jute and cotton were
In September 1949, the pound sterling was devalued, as both in heavy demand, and Pakistan was able to make
were the currencies of numerous countries including that spectacular profits on its exports. Not only that, but demand
of India, Pakistan's main trading partner. Viqar Ahmed was worldwide-Pakistan's traditional markets, India and
l
Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 113

Britain, now no longer reigned supreme as Pakistan was able the decision not to devalue' .20 Moreover, Lewis argues that,
to diversify into new areas. Import controls that had been once the import licensing scheme was under way, here too
imposed only a few months before were again liberalized conscious decisions were taken about the direction that the
after the Korean War began. India also recognized Pakistan's process of industrialization should take (see following sections).
new exchange rate, and trade was resumed after a suspension
of eighteen months, but on a smaller scale than earlier. 15 The 6.1.2 The Trade Policy Regime 21
decision not to devalue had paid off.
The Korean boom lasted from 1950 to 1952, but by mid- Once the industrialization process had begun after merchant
1951 world prices of raw materials began to decline and capital moved into industry, and after the collapse of the
export earnings also saw a decrease. There were clear signs Korean boom in 1952, when falling export prices caused the
that the market was heading for a recession, but Pakistan balance of payments position to deteriorate, controls and
was too slow to react, and policies continued as if nothing restrictions were imposed on trade, having a substantial
had changed. Since Pakistan's exchange rate was still high impact on the ensuing industrialization process. As Lewis
compared to its trading partners which had devalued in argues, 'from 1953-64 virtually all imports into Pakistan
1949, after the Korean boom in 1952 there were expectations were regulated by some form of quantitative controls'. 22 The
of a devaluation. In 1952 jute and cotton prices fell, as did trade policy adopted by Pakistan 'had three major aspects:
export earnings, and Pakistan was facing a serious balance of (i) overvaluation of the rupee relative to other countries,
payments crisis and sharply falling reserves. As it did in 1949, (ii) use of quantitative controls on imports to regulate the
the government decided not to devalue and instead imposed level and composition of imported goods, and (iii) a highly
very strict exchange controls and a set of physical controls on differentiated structure of tariffs on imports, and export taxes
imports and exports. As Lewis shows, 'tariffs were maintained, on the two principal agricultural exports: jute arid cotton'. 23
but they were not the major determinant of prices of import The government began to favour tariff protection as a
composition. Export taxes on jute and cotton were raised means of promoting industrialization. It wanted a cascaded
during the Korean war, and were lowered somewhat following tariff structure, with lower tariffs on intermediate and capital
the fall in prices. Exporters of such commodities received low goods, tight controls over the import of luxuries, controls
rupee prices for their goods both because· the currency was on other consumer goods, and easier access to capital goods
devalued and because of the export taxes' .16 The probable and industrial raw materials. Table 6.3 shows the cascading
reason for not devaluing in 1952 despite a deterioration in the nature of tariffs imposed in the late 1950s. However, despite
balance of payments was that capital goods were now needed the high prevalence of tariffs, Lewis makes the point that
to start the process of industrialization and a devaluation 'while the tariff structure played some role in directing
would have raised their prices. Hence, the government resorted resources in Pakistan, that role was a relatively minor one . ...
to the imposition of controls instead. The principal determinant of the structure of imports and
The decision not to devalue may; with hindsight, have the set of domestic relative prices was the import licensing
been the critical decision that started Pakistan on the road system.' 24 Licensing was used explicitly as a protective or
to industrial and economic development. Since industry was exchange-saving device.
non-existent in the earlier years, international trade was the In assessing the role of tariffs, compared to that of
main sector where large profits could have been made. The quantitative measures, Lewis's conclusions are clear:
Korean War export boom resulted in traders and merchants
It is clear that tariffs and indirect taxes played
amassing considerable amounts of wealth. Trading was much relatively minor roles in directing resource
more profitable than industry during the Korean boom. Viqar allocation, even when compared with other
Ahmed and Rashid Amjad make the pertinent point that 'the policy variables. Direct quantitative controls
favourable conditions for the conversion of merchant capital were dominant in setting prices and incentives.
into industrial capital were the result of another important Through their substantial impact on relative
economic event related to the Korean war: the collapsed prices, these controls speeded the process
prices of raw materials after the end of the war'. 17 With of structural change both by imposing the
controls imposed on imports, especially on consumer goods, inducements to invest in various industries and
'the prices of these goods increased sharply in the domestic by transferring substantial amounts of income
to industrialists who reinvested them in the
market which changed the terms of trade in favour of industry profitable manufacturing sector. The directions
and against agriculture. This led to a sharp increase in the that industrial growth took were probably the
profitability of the industrial sector, and in comparison with same as those that would have been taken in
the other sectors including trading, industry now became the the absence of major policy decisions due to
most attractive sector.' 18 Hence, traders with their amassed market size and domestic resource availabilities.
wealth converted merchant capital into industrial capital and The policies adopted increased the speed with
so began the process of industrialization in Pakistan. Although which the transformation of industrial structure
one study has argued that it was 'practical exigencies rather occurred, both by increasing incentives and by
than conscious policy [that] provided the initial diversion of increasing incomes in the hands of the 'saving'
investible resources towards industry', 19 Stephen Lewis makes sector of the economy. 25
the essential point that 'government policy was not neutral,
however, but decidedly favoured industrialization, particularly
114 Issues in Pakistan's Economy

Table 6.3
Average Rate of Duty on Imported Goods by Types of Commodity: 1955-64

Description 1955/6 1956/7 1957/8 1958/9 1959/60 1960/1 1961/2 1962/3 1963/4

Consumption goods
Essentials 35 35 35 35 35 55 55 55 56
Semi-luxuries 54 99 99 99 99 111 111 111 116
Luxuries 99 99 99 99 99 140 140 140 142
Raw material for
consumption goods
Unprocessed 26 26 26 26 26 27 27 27 30
Processed 43 43 43 43 43 50 50 48 51
Raw material for
capital goods
Unprocessed 23 23 23 23 23 28 28 28 31
Processed 38 38 38 38 38 40 40 39 42
Capital goods
Consumer durables 71 71 71 71 81 85 85 85 89
Machinery and equipment 14 14 14 14 14 17 17 17 17

Source: Lewis, Stephen, Economic Policy and Industrial Growth in Pakistan (London: George Allen & Unwin Ltd, 1969), 72.

6.1.3 The Consequences of Exchange anything that can be reasonably produced domestically;
(ii) once production has started domestically; ban imports
Rate and Trade Policy for of competing goods so as to save foreign exchange'. 26 More
Industrialization specifically,
The consequences of the exchange rate and trade policies
If the average tariffs were any guide to the
adopted by Pakistan should be fairly clear. Box 6.1 describes
differential incentive structure during the early
how such policies lead to a particular type of import years of industrialization, the very high incentives
substituting industrialization. The type of protective policy for domestic production were given to those
pursued in Pakistan can be put simply as follows: '(i) produce items for which the domestic market was the

Box6.1 consumer goods only, and it does so both because there

How Import Substituting Industrialization (ISi) .is a relatively protected market for consumer goods and
Works. · '· there is a relatively cheap source of imported capital goods
and' raw materials on which to t3ase the production of the
The economic strategy that was in vogue in the 1950s and consumer goods. Industries are established which have
1960s .was .import substituting industrialization. Stephen R. heavy dependence on imported supplies, and there is.little
Lewis explains how it ~orked: · incentive to. develop local capital goods and intermediate
goods industries to serve them. In addition,' since this sort of
A country beginning with. virtually no productive capacity in policy is usually a concomitant of maintaining an overvalued
manufacturing, and facing present or potential balance of currency, '•tl1e export of the newly produced :consumer-
payments problems, wiU,beJempted to follow a policy of oriented goods '.is discouraged;' domestic :resou.rces · are
placing restrictions on the imports of non-essential goods, valued more highly in saving than in earning foreign
usually consumer goods,for two reasons. First, given the exchange. As a result, after the process has gone' on for
scarcity of:foreign,exqhange, it feels that essential needs some time, the country finds itself with productive capacity
of established industries; or potential industries, should heavily dependent on imported sources of supply and with
have priority.. Second,there is some appeal to the idea that no new means of earning foreign exchange.;. \ ·
restricting the flow of imported consumer goods will release
more resources for saving, since consumption would be
restricted· by lack of physical availability. The difficulty Source: Lewis, Stephen, Economic Policy and Industrial
with this approach, as has been rioted by numerous Growth in Pakistan (London: George Allen & Uriwin Ltd, 1969),
writers, is that it encourages the domestic production of 38-9.
 Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 115

smallest: luxury consumer goods and consumer of agricultural exports that were used as raw
durables. Imports of these goods were most materials by domestic industries. In the 1960s

I
heavily penalized, primarily as a measure to save the changes in the structure of production were
foreign exchange. Essential and semi-luxury somewhat smaller, and in different directions
(or semi-essential) consumer goods, which due to the increased flows of aid-financed
included most of the basic mass-consumption imports and the more rapid growth of such
items (food, cloth, kerosene, matches, soap, etc.) sectors as agriculture. 30
received more protection than raw materials for
production of such goods. Only since 1959/60, The significant increase in exports was from the newly
after the first rush of industrialization was over, established manufacturing industries, mainly jute and cotton
were the differential incentives given to broad- textiles, which replaced competing imports by the mid-
based consumption goods (particularly semi- l 950s. Towards the end of the 1950s, Pakistan was in a
luxuries) widened sharply. It is true throughout,
position to produce export surpluses as well. In many ways,
however, that producer durables had low tariffs,
and, if the classification system is right, the these results indicate the success of the first phase of the
duties on raw materials for producer durables import substituting industrialization policy of the 1950s,
exceeded the duties on the goods themselves. 27 where the emphasis was on consumer goods rather than on
intermediate or capital goods. This strategy also rested on
Import substitution progressed easily and very rapidly the government's preference for investment in those areas
in those industries that had the highest protection, i.e. where foreign exchange could be saved regardless of cost,
consumption goods, and those that had cheap and ready and its 'desire to produce domestically almost anything that
access to domestically produced, primarily agricultural, raw technologically could be produced there'. 31
materials, such as cotton, jute, and leather. Another reason Stephen R. Lewis estimates that the success of the import
why consumer goods grew is provided by Lewis. He argues substituting strategy can be gauged by the fact that almost
that 'the size of the domestic market at Partition and well all the growth that took place in manufacturing between
into the 1950s was decidedly larger for consumer goods than 1951 and 1955, and hence in overall growth, was due
for most intermediate and investment related goods'. 28 These to import substitution. The increase in domestic demand
were also those industries in which Indian imports made a was not a cause of growth up to 1954/5 and was only of
significant contribution to Pakistan's domestic market. consequence after 1960. The complete dominance of import
There is a tendency for some observers to suggest that substitution in the first half of the decade was reduced a little
much of what happened in the industrial and economic in the second half, but still accounted for over 20 per cent of
sphere in Pakistan in the 1950s was erratic and not thought growth of manufacturing output, with the newly established
through. However, as we have shown above, even the manufactured exports responsible for about 25 per cent. 32
decision not to devalue seems to have had a clear logic Moreover, the trend in the first phase of import substituting
behind it, although good luck did endorse that decision industrialization was also showing a shift, as consumer
further. Similarly, the import licensing scheme also seemed goods industries, which accounted for about 70 per cent of
to be a thought-out policy measure which affected relative manufacturing value added in 1954/5, contributed less than
prices and hence patterns of industrialization. The pattern of half of the growth after that period (Table 6.4).
investment and import substitution influenced the decisions While Pakistan's impressive growth rate in the 1950s was
of the licensing authorities about what sorts of imports and, due to the fact that the country started with a low base in
hence, what sort of industrial development should take place. the first place, the other important factor was that, due to
Lewis agrees that the 'licensing system was largely a mirror of the restrictive measures enforced on the economy, profit rates
the decisions to invest in different industries'. 29 in industry were very high. The government had very openly
encouraged private sector initiative in economic growth,
an encouragement to which the private sector responded
6.1.4 The End Result
enthusiastically. The annual returns on investment ranged
Since almost all capital goods and most non-agricultural from 50 to 100 per cent in the early 1950s, but dropped to
industrial goods were imported, the state played a major role between 20 and 50 per cent in the latter part of the decade.
in determining the nature and structure of industry through There were strong economic incentives to becoming an
the licensing system and tariff structure, and through the industrial entrepreneur, but Papanek notes that while 'high
incentives it provided. Stephen Lewis summarizes the impact profits were strongly conducive to industrial investment ...
of these measures on trade as follows: perhaps even more important were the strong disincentives
to alternative activities. With the end of the Korean boom,
The exceedingly rapid growth of modern international trade, and especially importing, suddenly
manufacturing during the 1950s, amid a
became unattractive', 33 and therefore industrial development
relatively stagnant economy, particularly in
agriculture, was reflected in the decline of became a natural choice. Thus it was the lure of extraordinary
imports of some manufactured goods, the rise profits and a lack of good alternatives that induced the
of those imports related to investment activity, process of industrialization.
the emergence of certain manufactured exports, The pattern of industrial development resulted 'inevitably',
the conversion from an export surplus to an as Papanek argues, in a high degree of concentration. Most
import surplus in food grains, and the decline of the nascent industrialists were traders who had made
116 Issues in Pakistan's Economy

Table 6.4
Sources of Growth in Manufacturing Value Added: 1951-64 (% Distribution in Three Periods)

Value Annual rate

Percentage of Domestic Export Import added Total of growth of
total growth due to: demand growth substitution coefficient change value added
(1) (2) (3) (4) (5) (6)

1951 /2-1954/5
Consumptions goods ---6.2 0.2 85.0 78.9 43.0
Intermediate goods 0.8 0.7 12.6 14.1 28.0
Investment and related goods 0.1 0.0 6.8 7.0 16.8

All industries -5.3 0.9 104.4 100.0 38.8

1954/5-1959/60
Consumptions goods 31.2 10.8 16.5 -5.8 52.6 15.6
Intermediate goods 8.7 15.3 2.2 0.5 26.7 27.0
Investment and related goods 12.5 0.2 5.6 2.4 20.7 28.0

All industries 52.4 26.3 24.3 -2.9 100.0 38.8

1959/60-1963/4
Consumptions goods 45.1 -1.1 3.4 47.4 12.8
Intermediate goods 10.8 6.1 6.0 -3.7 19.2 13.7
Investment and related goods 30.6 0.4 -2.7 5.2 33.5 26.0

All industries 86.5 6.5 2.2 4.9 100.1 38.8

Source: Lewis, Stephen, Economic Policy and Industrial Growth in Pakistan (London: George Allen & Unwin Ltd, 1969). 49.

money in the Korean boom and were already well established Although East Pakistan seceded from united Pakistan
and well-off. However, they had better possibilities for in 1971, the seeds for this process were sown long before.
making more money and amassing further wealth given the While Ayub Khan's decade is held responsible for fostering
high-profit, near-monopoly markets that were developing. the economic decay and underdevelopment of East Pakistan,
Papanek shows that in 1950 there were 3,000 individual firms leading to the formation of Bangladesh, this is only part of
in Pakistan, but the concentration of wealth was so high the picture. In fact, it would be very unfair to hold the policies
that only seven individuals, families, or foreign corporations of Ayub's regime solely responsible for Pakistan's break-up,
constituted 25 per cent of all private industrial assets in as many observers do. Even in the 1950s, strong biases in
united Pakistan. Twenty-four units constituted nearly 50 per economic development had emerged, which were blatantly
cent of all private industrial assets. 34 tilted against the eastern wing. For example, state institutions
While the development of the economy and of industry was in the 1950s, such as PICIC and PIFCO, concentrated on
private sector oriented, the institutions of the state did play an industries in West Pakistan, while in 1958 about 66 per
important role too. In the field of credit, the government was cent of the government's investment through PIDC was
particularly significant. The Pakistan Industrial Credit and based in West Pakistan, which also received 62 per cent of
Investment Corporation (PICIC) and the Pakistan Industrial foreign loans compared to the eastern wing's 38 per cent 38 .
Finance Corporation (PIFCO) provided funds to the larger, The cessation of trade between India and Pakistan in 1949
more established firms which had adequate security and also had greater negative consequences for East Pakistan, as
a high profit rate. PICIC provided nearly 'half of all its about 50 per cent of West Pakistan's trade and 80 per cent of
loans to a tiny group of leading industrialists'. 35 However, East Pakistan's was with India. Table 6.5 shows that, in fact,
the role of both institutions was more important after the West Pakistan had a continuous deficit in trade throughout
1960s, and the links they made with industry show how the the 1950s, while East Pakistan had a consistent surplus. The
network of industry and finance in the private and public overall trade figures for united Pakistan were in surplus due
sector interacted (these issues are discussed in Chapter 19). to East Pakistan's contribution, mainly by exporting jute.
The institution that played a more important role at this This evidence shows very clearly that East Pakistan was
time was the Pakistan Industrial Development Corporation instrumental in supporting the process of industrialization in
(PIDC), which 'pioneered in industries and areas which (West) Pakistan. West Pakistan's development was built on a
were neglected by private investors during the early period of transfer of resources from the eastern wing, which got very
industrialization' 36 and 'fulfilled an extremely useful function little in return, and this process was initiated as early as the
in supplementing private enterprise'. 37 late 1940s and early 1950s.
 Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 117

Table 6.5
Balance of Payments of Trade: 1949-58

Balance of 1949/50 1950/1 1951/2 1952/3 1953/4 1954/5 1955/6 1956/7

payments of to to to to to to to
trade (Rs. m) 1950/1 1951/2 1952/3 1953/4 1954/5 1955/6 1956/7 1957/8

East Pakistan
Exports 683 1,211 1,087 643 645 732 1,042 910
Imports 372 453 764 367 294 320 360 819
Balance of payments 311 758 323 276 351 412 682 91
West Pakistan
Exports 535 1,343 922 867 641 491 742 698
Imports 912 1,167 1,473 1,017 824 783 965 1,516
Balance of payments -377 176 -551 -150 -183 -292 -223 -818
Pakistan
Exports 1,218 2,554 2,009 1,510 1,286 1,223 1,784 1,608
Imports 1,284 1,620 2,237 1,384 1,118 1,103 1,325 2,335
Balance of payments -66 934 -228 126 168 120 459 -727

Source: Ahmed, Viqar and Rashid Amjad, The Management of Pakistan's Economy, 1947-82 (Karachi: Oxford University Press,
1984), 65.

Just as East Pakistan was neglected, so was the agricultural have very mildly termed the 'Controversial Sixties' .40 Viqar
sector: Table 6.2 shows how the terms of trade developed Ahmed and Rashid Amjad argue that
against agriculture and in favour of industry in the 1950s.
Viqar Ahmed and Rashid Amjad write that 'the initial this period of rapid economic growth, achieved
accumulation of industrial capital had taken place as a mainly as a result of the policies pursued,
generated a great deal of economic tensions ....
result of the large tribute paid by the agricultural sector
Increasing disparities in regional income between
to the industrial sector and by the urban consumers. The the provinces, a concentration of industrial
former had supplied agricultural raw materials at cheap economic power, the failure of real wages to
prices and had paid high prices for manufactured consumer increase significantly; and a general belief of
goods in retum'. 39 The devaluation in 1955 was meant to increasing income inequality; all contributed to
redress the balance against agricultural exports and occurred the rejection of the Ayubian growth philosophy
simultaneously with a shift in giving some priority to and strategy. 41
agriculture.
Despite some negative consequences of the economic policies We will examine the nature of these developments in the
pursued by the governments in Pakistan in the first decade, course of this section after looking at the facts regarding
it would be fair to say that they initiated an era of industrial growth rates, the policies pursued and the consequences of
growth and development which laid the foundation for the those policies.
Decade of Development between 1958 and 1968. On the basis The impressive performance of the main sectors of the
of the criteria that were considered important at that time-in economy can best be gauged from Table 6.6. The high
the 1950s, when import substituting industrialization was growth rates in large-scale manufacturing continued in the
the received wisdom-Pakistan did very well for itself. Much first few years of the Ayub regime with the average for the
of the criticism made of those policies -forty years later (see period 1960-5 rising to a phenomenal 16.9 per cent. Even
Chapter 8) is quite unwarranted. · after 1965, when there was a marked slowdown, growth
rates in manufacturing still remained above to 10 per cent.
In indus.try, it seems that the previous ·trends maintained
during the 1950s continued well into the 1960s. Agriculture
6.2 1958-68: THE DECADE OF presents a marked improvement in the 1960s compared with
DEVELOPMENT the dismal situation in the 1950s. The reasons for this growth
w~re the recognition in the late 1950s that the excessive
There is little disagreement over the fact that the growth rates pro-industrial bias was affecting agriculture very negatively
in agriculture, large-scale manufacturing and GDP showed and that a redress was necessary. Some steps were taken,
astonishing trends over the ten years between 1958 and 1968. but it was the Green Revolution (see Chapter 3) that was
The disagreements exist over the nature and consequences responsible for the very high growth rates of the late 1960s.
of those growth rates and over an interpretation of the For Papanek, 'the spurt in agricultural production was the
economic policies that formed what the government of the main d~fference between the Pakistan of the 1950s and of the
time called the 'Decade of Development' and what its critics 1960s, as well as between Pakistan and other countries'. 42
118 Issues in Pakistan's Economy

Table 6.6
Annual Growth Rate 1958-70 at 1959/60 Factor Cost(% per annum)

Manufacturing
Wholesale Banking Public
Year• Agriculture GDP
Larges Small and and administration Services
scale scale insurance insurance and defence

1958/9 4.0 5.6 2.3 2.5 12.9 9.8 4.0 5.5

1959/60 0.3 2.7 2.3 5.9 22.1 -2.7 3.8 0.9
1960/1 -0.2 20.3 2.9 6.9 10.0 1.3 4.7 4.9
1961/2 6.2 19.9 2.9 7.8 8.5 3.9 4.0 6.0
1962/3 5.2 15.7 2.9 9.8 11.5 2.8 4.2 7.2
1963/4 2.5 15.5 2.9 10.1 8.9 9.7 4.0 6.5
1964/5 5.2 13.0 2.9 7.9 37.9 17.8 7.0 9.4
1965/6 0.5 10.8 2.9 8.7 10.9 56.5 1.1 7:6
1966/7 5.5 6.7 2.9 5.3 12.7 -14.4 4.3 3.1
1967/8 11.7 7.6 2.9 3.7 11.8 -2.5 4.0 6.8
1968/9 4.5 10.6 2.9 7.1 8.5 5.0 3.9 6.5
1969/70 9.5 13.9 3.0 10.9 19.4 3.6 6.8 9.8
1958-1964 (ave.) 3.0 13.3 2.7 7.2 12.3 4.1 4.1 5.2
1965-1970 (ave.) 6.2 10.4 2.9 7.2 16.9 11.0 4.5 7.2

"The annual growth rate for 1958/9 means the rate for the period 1957/8 to 1958/9.
Source: Government of Pakistan, Pakistan Economic Survey 1984-85 (Islamabad, 1985).

In the first half of the 1960s, overall investment had risen during the Korean boom of 1950-2, was replaced in 1961 by
to over 18 per cent of the GNP, and savings had doubled the Open General Licence (OGL), which allowed newcomers
between 1949 and 1965. to enter the trading sector. A large amount of foreign
exchange was allocated to the OGL, and given the buoyant
6.2.1 Trade Policy Directing nature of trade and of the economy, the new traders made
substantial profits and gains from possessing import licences.
Industrialization The most 'market friendly' change was the introduction of
Although there was a great deal of continuity between the the 'Free List', which permitted the import of certain goods
1950s and 1960s, hence the similar levels of growth and without any licence. The Free List was extended over time
development, some critical steps were taken, especially in the from four items to fifty in 1964. The tariff structure continued
trade and exchange rate policies that were the prime movers to be used as a signalling device, as it had been in the 1950s,
of the 1950s. The new regime of Ayub Khan disbanded but as Table 6.3 shows, the differentials in the tariff rate
many of the controls that had been imposed following structure widened, with the rates for consumer goods rising
the post-Korean War recession in 1952. In 1959 there was much more than for other goods. The bias against producing
a fundamental reordering and change in the method of machinery and equipment locally continued, as the import
directing industrialization through trade policy, and a series duty on these items was still the lowest, thus making it easier
of liberal policies were introduced which remained in effect to import these goods rather than produce them at home.
till 1965. The rriain reason why the government could be so generous
The main emphasis of the new trade policy in 1959 shifted in its import policy in the first half of the 1960s was critically
away from direct controls and towards indirect controls on linked to the availability of foreign aid, which increased from
imports and on domestic prices of other goods. As Lewis 2.5 per cent of GNP in the mid-1950s to 7 per cent of GNP
shows, 'a number of measures were taken in import licensing in the mid-l 960s. 44 In fact, according to an important Asian
that made market forces more important in determining the Development Bank study, the 'import liberalization which
commodity composition of imports and the distribution of took place during the first half of the 1960s would have been
ownerships of import licences'. 43 It was the Export Bonus impossible without this large increase in aid' ,45 In 1965 the Free
Scheme (BBS) or the Bonus Voucher Scheme, launched List suffered serious setbacks as foreign aid was curtailed,
in 1959, that was considered to be the key to the import and due to the resulting foreign exchange squeeze, the import
liberalization process in Pakistan (see Box 6.2 for how· the liberalization policies were abandoned and many new import
scheme worked). The scheme allowed a free market in the controls were introduced. ( See section 6.2.2 for more on the
bonus vouchers for certain commodities. In addition, the contribution of foreign aid in the 1960s.) As long as foreign
earlier closed and selective import licensing scheme of the exchange resources were available, largely through aid, the
1950s, which was based on the importer's ability to import government was eager to follow a liberal import regime.
I Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 119

Box 6.2 Vouchers 150 per cent. The exporter receives Rs. 475 from
The Bonus Voucher Scheme the State Bank of Pakistan, as well as Bonus Vouchers with
One of the most controversial instruments adopted by a face value of Rs. 95. The exporter then sells the Bonus
Pakistan's managers of the economy was the Bonus Voucher Vouchers in the market for Rs. 142.50, which gives him total
or Export Bonus Scheme. Some writers have argued that this receipts for his exports of Rs. 617.50, or 30 per cent more
scheme was responsible for Pakistan going on the wrong than the official exchange rate. The rate of subsidy is easily
industrialization track, while others believe that the scheme computed on any item, since it is the rate at which Bonus
was largely responsible for Pakistan's high growth. This box Vouchers are awarded times the premium at which Bonus
explains how it worked. Vouchers are selling. For some items the extent of subsidy
has reached 60 per cent of the f.o.b. value of exports.
The Export Bonus Scheme which was introduced in 1959 Bonus Vouchers were awarded to almost all manufacturing
was a flexible and fascinating device which was used both industries and to some non-.traditional primary products
to subsidize exports and to allow a safety valve on imports, such as fine rice and fish.
while maintaining the basic structure of import controls on On the import side, Bonus Vouchers acted as import
the vast majority of imports and while maintaining at the licences, and at times when Bonus Vouchers sold at 150
same time the official exchange rate at its existing level. per cent of face value, the cost of foreign exchange to
Under the Export Bonus Scheme, an exporter received, importers was 150 per cent above, or two-and-a-half times,
in addition to the amount of rupees converted at the the official exchange rate. Tariffs and sales taxes on imports
official exchange rate, Bonus Vouchers equivalent to some were added to the cost to importers, but were computed at
percentage of his export earnings (the percentage varied the official exchange rate, not the Bonus Voucher exchange
from time to time and from commodity to commodity). The rate. The advantage of Bonus Vouchers from the point
Bonus Voucher could be used to import any item from a of view of importers was that it was possible to import
list of importables that changed from time to time. At some items immediately, and the waiting period until the next
times during the last decade, goods on the Bonus Voucher shipping period was announced in accordance with the
ll importable list overlapped with goods importable under regular licensing system could be by-passed through the
other types of licence, and sometimes there was no overlap. use of Bonus Vouchers. Thus, the Bonus Voucher system
The exporter could import items himself, or he could sell the provided an excellent safety valve for those firms who
Bonus Vouchers in an organized market, at which the Bonus might have run short of a critical spare part or raw material
Vouchers have sold at a consistent premium above their during a licensing period. A number of items of machinery
face value. In most years of the Scheme the premium on and transport equipment were also imported under Bonus
Bonus Vouchers has been stabilized at around 150 per cent Vouchers, so that the initial fears, which were that Bonus
of face value, the stabilization having been accomplished Vouchers would simply provide more luxury consumption
by additions to and subtractions from the list of importables goods, did not materialize to the extent that many people
and the list of exports eligible for Bonus Vouchers or the rate had expected at the time of the introduction of the scheme.
at which Bonus Vouchers were awarded for those exports.
An example may be helpful at this point. An exporter sells
$100 worth of Pakistani goods abroad, the Bonus rate on Source: Lewis, Stephen, Pakistan: Industrialization and Trade
the goods being 20 per cent, and the premium on Bonus Policies (London: George Allen and Unwin, 1970), 28-30.

The government's import licensing scheme was supposed feature of the foreign exchange regime in the 1960s was
to encourage the private sector to invest, just as the EBS was that, with an overvalued exchange rate, it became cheaper
a means for exporters to acquire additional foreign exchange to import industrial machinery, which resulted in low prices
by exporting more. The exchange rate had been overvalued for agricultural inputs, while the EBS transferred subsidies to
in the 1950s (and later as well), but the EBS compensated manufactured exports.
for that and boosted exports, especially of manufactured The impact of the EBS and the import licensing and
goods. The scheme transferred a subsidy to exports, and the liberalization strategy on industrial development was
exports of raw jute fell from 60 per cent of total exports in considered to be 'dramatic' by some observers. The
1958 to 20 per cent in 1968/9, while the exports of cotton and Asian Development Bank study shows that large-scale
jute textiles increased from 8.3 to 35 per cent in this period, manufacturing growth increased from 8 per cent per annum
and the exports of other manufactures increased ten~fold between 1955 and 1960, to 17 per cent between 1960 and
from 2 to 20 per cent. The EBS also had a positive impact on 1965 in the Second Five-Year Plan. The controls reimposed
imports, making raw materials and machinery imports easier following the foreign exchange and aid curtailment caused
and cheaper. The Export Bonus Scheme was considered to be this growth to fall to about 10 per cent in the second half of
an innovative device helping both import substituting and the l 960s. 48
export growth. 46 In 1965 Pakistan's manufactured exports An interesting outcome of these trade policies, as Stephen
were greater than the combined manufactured exports · of Lewis shows, is that in sharp contrast to the 1950s none
South Korea, Turkey, Thailand, and Indonesia. 47 The main of the growth in industry during the period of the Second
120 Issues in Pakistan's Economy

Five-Year Plan was due to import substitution-a remarkable

transformation, indeed. 49 Instead, domestic demand and
absorption were the dominant factors. As foreign aid had
Asad Sayeed goes beyond looking at growth rates of
industrial performance, as he feels these often hide the costs
incurred in the process. Instead, he argues that 'productivity
I
increased, so had imports, and even though manufacturing growth rates, especially total factor productivity growth
output grew at impressive rates due to the import policies (TFPG ), is one measure which reveals the efficiency of factor
and foreign resources, imports increased at a faster. pace. use' 53 (see Box 6.3 for how to calculate TFPG). The growth
Both industrial production and investment responded rates in total factor productivity shown in Tables 6.8 and 6.9
well to the liberalization of imports. The nature of import reveal that Pakistan's growth rate of 5.06 per cent was far
substituting industrialization had also changed over the higher than many comparable countries, indicating 'both
years, shifting away from almost wholly the consumer technological dynamism and dynamic allocative efficiency in
goods industry to intermediate and capital goods. Table 6.7 a comparative perspective'. 54 This evidence only underlines
shows the differences in the three sectors in the 1960s, and the fact that growth in manufacturing was higher than in
also shows that the growth rate was much higher in the most other countries in the 1960s, and was highly efficient,
first half of the decade than in the second half. The most as it came about due to improvements in the amount of
interesting observation that can be made from Table 6.7 is output per unit input (see Box 6.3).
that the growth in investment goods was by far the fastest
of all sectors during the early 1960s. The reason, according 6.2.2 Foreign Aid, the Private Sector, and
to the Asian Bank, was that since this sector was most
dependent on imported raw materials, it benefitted the most Inequalities
from import liberalization. 50 Another reason why import Gustav Papanek writes that 'foreign aid contributed
substitution slowed down was the EBS, which encouraged significantly to Pakistan's growth, from the late 1950s; without
the export of manufactured goods. The share of exports in it, the rapid increase in development in the 1960s could not have
total consumer goods output rose from 15 per cent in 1959/60 been possible'. 55 Keith Griffin felt that in the mid-1960s 'the
to 45 per cent in 1969/70. 51 Meekal Ahmad evaluates the entire social and economic system that had been built up,
impact of the EBS on exports and argues that it 'compensated was heavily supported by and sustained through foreign
for the overvaluation of the domestic currency by introducing assistance'. 56 Rashid Amjad argues that the 'explanation for
a series of multiple exchange rates depreciated in relation to the boom in private industrial investment in the first half of
the official exchange rate so that the profitability of exporting the sixties and its subsequent slowing down lies principally
was brought more in line with the incentives for sales in the in the change in foreign aid inflows to the industrial sector
domestic market'. 52

Box 6.3 GDP growth = growth in labour input + growth in capital

How can Productivity Growth be Measured? input + total factor productivity (TFP)
What is the Engine of Growth? Is it Education, Technological
Improvement or Hard Work? Some answers: The rationale behind this is simple. Economic growth
comes about either through the application of more inputs
Asia's growth performance has been so spectacular and so or through a rise in output per unit input, i.e. improvements
sustained that it has been dubbed the East Asian Miracle in TFP. The labour input variable captures all the influences
in a study by no less an authority than the World Bank. that increase either the quantity or quality of labour used
But as miracles have true believers, so too must they have in the production process. These include growth in
debunkers. To challenge the received wisdom that Asia has population, rising participation rates, growth in employment
a magic formula for success, we have Prof. Paul Krugman and improving levels of education and skills. The capital
of Stanford University, who states flatly that the miracle is input variable reflects changes in the stock of physical
based on 'perspiration rather than inspiration'. Krug man's capital used in production and is measured by spending on

I
argument, in which he relies heavily on empirical work by plant, machinery, equipment, roads, telecommunications,
Prof. Alwyn Young of MIT and others, is very simple. He and so on. What is left is TFP which is a pure measure of
says that Asian growth has been driven by growth in inputs efficiency, i.e. improvements in the amount of output per
like labour and capital rather than by gains in efficiency. In unit input. This comes from improvements in management
this sense, East Asia is no different from other economies at
similar stages in their development, like the Soviet Union in
the 1960s and 1970s. Hence, the miracle is no miracle at all.
and work organization and improvements and innovations
in technology. Since it is very difficult to measure TFP
directly, empirically it is derived as a residual in the growth
equation. TFP is what is left after the contributions of labour
l
Introducing 'Growth Accounting'
Krugman makes his case by using a basic equation
of 'growth accounting'. This is a technique which uses
regression analysis to isolate and quantify contributions to
and capital are determined and subtracted out.

Source: Jardine Fleming Securities Limited, 'Asian Economic

I
I
economic growth. The equation is as follows: Outlook', Hong Kong, 1996, 18.
I
 Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 121

Table 6.7 Table 6.8.

Rate of Growth of Manufacturing Output: 1960-70 Growth Rate of Total Factor Productivity: 1960-70
(% per annum)
Industries TFPG
Industries 1960-1965 1965-1970 1960-1970
Food processing 2.17
Total manufacturing 16.0 10.0 12.0 Tobacco manufacturing 8.19
Consumer goods 10.6 9.0 10.0 Textile manufacturing 5.27
Food 9.2 11.3 11.0
Footwear and wearing apparel 1.30
t Beverages
Tobacco
16.5
17.3
6.1
10.4
11.0
15.0 Paper and paper products -8.71

I
Textile 5.9 8.7 7.0 Printing arid publishing 5.68
Footwear 8.1 4.6 6.0 Leather and leather products 9.60
Woodwork 12.7 5.4 9.0 Rubber and rubber products 12.64
I Furniture 17.0 4.0 11.0 Chemicals and chemical products -2.31
Printing 9.4 8.1 9.0
Non-metallic minerals -2.83
Miscellaneous 19.3 7.0 13.0
Basic metal industries 8.13
Intermediate goods 12.0 8.0 9.0
Paper 8.0 Metal products 1.52
7.2 11.2
Leather 15.7 9.6 12.0 Non-electrical machinery 2.81
Rubber 17.2 8.5 13.0 Electrical machinery 5.65
Chemicals 20.3 15.9 18.0 Transport equipment 0.90
Petroleum 49.3 7.4 27.0 Miscellaneous 10.95
Investment goods 20.0 8.0 13.0
Total 5.06
Non-metals 11.5 8.0 9.0
Basic metals 12.0 9.8 10.0
Source: Sayeed, Asad, 'Political Alignments, the State and Industrial
Metal products 21.8 7.0 14.0
Policy in Pakistan: A Comparison of Performance in the 1960s
Machinery 23.4 7.0 15.0 and 1980s', unpublished PhD thesis, University of Cambridge,
Electrical machinery 24.8 5.7 16.0 1995, 56.
Transport equipment 26.9 7.5 19.0

Source: Ahmed, Meekal, in Sayeed, Asad, 'Political Alignments, the State

These extracts and the discussion in the earlier sections
and Industrial Policy in Pakistan: A Comparison of Performance
in the 1960s and 1980s', unpublished PhD thesis, University of
show that Pakistan's growth in the 1960s, and the policies
Cambridge, 1995, 54. pursued (import liberalization, for example), were contingent
upon the country receiving a substantial amount of foreign
aid. Once the aid stopped, so did growth in the economy. And

' in the sixties'. 57 In fact, he goes even further and says that
the entire economic system which operated in
Pakistan in the sixties was quite different from
while foreign inflows mattered, the (unwritten) conditions
to the aid made the role of the private sector paramount.
Papanek, a firm believer in the leading role of capitalism and
the private sector, argues that 'for ideological reasons, the
that suggested by earlier writers. It bore little United States, Germany, the World Bank, and others have
resemblance to classical nineteenth-century been strong advocates of private enterprise. A country that
capitalism (portrayed by writers like Papanek). caters to this preference is bound to profit.' 59 He considers
On the other hand, the system did not fail Pakistan's industrial experience from the 1950s to the mid-
because the capitalist class were no longer
1960s to be a success story of private enterprise, but the
prepared to 'play the game' or had lost the desire
to invest (as, for example, Nulty would make us incentives that foreign aid generated were critical. Rashid
believe). The system which operated in Pakistan Amjad argues that 'foreign aid played a crucial role in the
came very close to being what we can term a creation of ... favourable conditions and had a direct impact
'Foreign Aid Dependent Regime' in which the on the private sector'. 60 Thus, foreign aid in association with
mechanics of industrial growth were in one the private sector was the main instrument in Pakistan's
way or another made dependent on foreign aid economic growth in the 1960s. Interestingly enough, there
inflows. Once these aid flows slowed down, the was also an explanation nf the economic development
system, not being able to replace foreign aid model of the 1960s which not only rested its premise on the
with other forms of external finance like direct leading role of the private sector, but also justified increasing
foreign investment, and without the peculiar
inequalities. This was the Doctrine of Functional Inequality.
boost to profitability associated with the local
system for dispensing aid, found it difficult to Ali Cheema explains the concept of Functional Inequality
sustain the earlier growth it had generated. 58 rather eloquently. He says that•
122 Issues in Pakistan's Economy

Table 6.9 Rashid Amjad's excellent work on private industrial

Total Factor Productivity in Manufacturing: investment in Pakistan documents and highlights the extent
Selected Countries of that concentration. A dominant small group of monopoly
houses had begun to emerge in the 1950s in the industrial
Country Period TFPG sector, a trend which was accentuated in the 1960s. In 1970
there were 44 monopoly houses, which controlled about 77
Argentina 1960-1970 2.64 per cent of gross fixed assets of all manufacturing companies
Brazil 1960-1970 0.75 listed on the Karachi Stock Exchange. These firms controlled
Chile 1960-1970 0.33 about 35 per cent of all assets of the entire large-scale
Colombia 1960-1970 3.46 manufacturing sector and at the same time had close links
India 1959-1976 0.00 with the financial sector. Seven of the seventeen Pakistani
Korea 1960-1973 8.30 banks were under the direct control of the monopoly houses,
Mexico 1960-1970 3.01 accounting for 60 per cent of total deposits and 50 per cent
Thailand 1963-1977 1.50 of loans and advances. They had an extended network
Turkey 1963-1976 1.50 of interlocking directorates, where the board of directors
Venezuela 1960-1970 1.92 of one company sat on the board of directors of others.
Moreover, there were strong links between private industry
Source: Sayeed, Asad, 'Political Alignments, the State and and government financial institutions: between 1958 and
Industrial Policy in Pakistan: A Comparison of 1970, 65 per cent of total loans disbursed by PICIC went
Performance in the 1960s and 1980s', unpublished to thirty-seven monopoly houses, with the largest thirteen
PhD thesis, University of Cambridge, 1995, 56. of these accounting for about 70 per cent of these loans.
Dr Mahbub ul Haq, a key supporter and architect of the Ayub
this philosophy was part of Ayub Khan's government's Doctrine of Functional Inequality, revealed
Martial Law government's policy, and was figures, as the Ayub regime was falling, of even greater
the central pillar of the advice given to the concentration: he claimed that (the famous) twenty:two
Pakistan government by the Harvard Advisory families controlled 66 per cent of industrial assets, 70 per cent
Group. In simple terms the doctrine suggested of insurance, and 80 per cent of total banking assets. Rashid
that resources should be directed towards the Amjad argues that while this claim was never substantiated,
industrial sector which has a higher propensity it nevertheless had a great deal of truth in it, and his own
to save, and that agriculture and wages should research does show very high concentration. 62
bear the brunt of this transfer. The idea was that
While there was certainly economic concentration at one
profits in the industrial sector should be raised
giving the push towards growth which will end of the wealth spectrum, there was also a general belief
result in automatically positive distributional that income inequalities had increased during the 1960s
consequences as development proceeds. 61 and that there was no substantial increase in the level of
real wages.· The labour movement of 1968/9 was a major
Essentially this doctrine propagated the pursuit of. what factor in the fall of Ayub Khan's regime, as it was fuelled
Papanek calls 'the social utility of greed'. The outcome was by the perception that the fruits of growth had not trickled
the concentration of wealth and income in the industrial down to sections of society other than the industrialists. The
sector ( see Box 6.4). strategy of Functional Inequality also gave low priority to the

Box.6.4 and industrialists; but to maintain industrial growth after

• The Social Utility of Greed the first 5 to 10 years does not require the same high rate
Gustav Papanek argues thaV inequality leads to economic of profit and therefore does not imply the same inequities.
growth. He writes as.follows: ·· Greater' equality during the early period at the cost of
growth would probably have left the poorer groups .in a
· The problem of inequality exists, but its importance must worse position ''absolutely/though they ;,_,ould have been
· be put.in perspective. First of all, the inequalities in income better off 'relatively. This. ·argument holds true, however,
c_ontribute to· the/growth of the economy, -~hich makes only because inequalities iri income result substantially in
possible a real improvement for the Jower-inco111e groups. . inequalities i'ri savings, not in consumptio_n. High incomes
The.concentration of income in industry facilit?tes.tl"]e high are more acceptable, politically and morally, because they
savings which .. fin~nce .deY,el9pment.. All?wing · the. more are used chiefly for investment, rather than for conspicuous
enterprising and wealthy peasants to sink tube wells is a consumption. ·
major factor 'in expanding agricuitural ,ouip~t, In turn, growth
of the economy riiea~s cheape(.cloth, cheape'r food, and Source: Papanek, Gustav, Pakistan's Development: Social
more adequate supplies 'for the bulk o( the population. Goals and Private Incentives (Cambridge, Mass.:: Harvard
Great 'inequalities were necessary in order to create industry University Press, 1967), 242-3.
 Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 123

social sectors such as education and health. Viqar Ahmed Interestingly though, Table 6.10, which shows income
and Rashid Amjad argue that after the cut in foreign aid in inequality over the period, indicates that inequality actually
1965, with foreign exchange down and defence spending decreased in the 1960s.
up, the ensuing economic crisis between 1965 and 1967 was While there are differences of opinion about the extent
a key cause of Ayub Khan's downfall. The sugar crisis of of inequality as a result of the policies pursued under Ayub,
196 7/8 acted as a major trigger to a smouldering feeling of there is no denying the fact that interregional disparity
discontent. Prices had risen by 15 per cent in 1965/6 and 10 between West and East Pakistan did worsen. Even Gustav
per cent in 1966/7, adding fuel to the fire. Along with these Papanek accepted the presence of high inequality between the
factors, there was what Viqar Ahmed and Rashid Amjad call two provinces, although he was able to justify this through
a popular feeling that inequality had increased. They argue that an argument that endorsed the social use of inequality ( see
Box 6.4). Economists, especially in East Pakistan, were
a major factor responsible for this feeling was the great critics of this policy and argued that all the growth
considerable increase in the level of conspicuous or development that had taken place was in West Pakistan
consumption and wasteful expenditure on and that there had been a transfer of resources from East
extravagant and lavish housing and other
to West (Tables 6.11 and 6.12 give some indication of this
consumer durables by the richer classes in the
country. Also, even if the actual level of income phenomenon). 64 Stephen Lewis shows that the level of per
distribution had not worsened, the number capita income in West Pakistan was only 10 per cent higher
of people living in abject poverty was still than in East Pakistan in 1949/50. This disparity had risen to
very significant and the display of conspicuous over 30 per cent in 1964/5. The 'East Pakistanis complained
consumption in the face of this extreme poverty that not only were they less well off at the time of Partition,
stirred considerable tension and finally led to an but they also had been exploited by the West wing to provide
outbreak of unrest in the country. 63 resources for development in that richer province.' 65 (Further
discussion of regional inequality takes place in Chapter 18.)

Table 6.10 Table 6.11

Income Distribution in Pakistan: 1963/4 and 1969/70 Per Capita GDP in East and West Pakistan at 1959/60
Constant Prices
% of income
% of households West-East
1963/4 1969/70 Per capita Per capita Index of
Year disparity
GDP East GDP West disparity
ratio
0-10 2.3 3.2
10-20 4.1 4.8
20-30 5.0 5.6 1959/60 269 355 1.32 100
3Q-40 6.1 6.6 1964/5 293 426 1.45 141
1969/70 314 504 1.61 191
Lowest 40% 17.5 20.2
40-50 7.1 7.4 Source: Ahmed, Viqar and Rashid Amjad, The Management of
5Q-60 8.4 8.6 Pakistan's Economy, 1947-82, Oxford University Press,
60-70 9.8 10.0 Karachi, 1984, 89.
70-80 11.9 11.8
Middle 40% 37.2 38.0
80-90 15.1 14.7
90-100 30.2 27.1
Table 6.12
Highest 20% 45.3 41.8 Index of Disparity in Per Capita Income (West Minus
Gini coefficient East; Divided by West)
National 0.386 0.336
Rural 0.362 0.304 Year Index of disparity
Urban 0.433 0.367
1949/50 17.9
Note: Income shares according to each decile of household 1954/5 19.5
have been estimated by fitting a (Lorenz) curve to the 1959/60 24.5
cumulative share of various income groups in total 1964/5 31.1
households and income derived from the Household 1969/70 37.9
Income and Expenditure Survey for the respective
years. Source: Ahmed, Viqar and Rashid Amjad, The Management
Source: Government of Pakistan, Pakistan Economic Survey of Pakistan's Economy, 1947-82 (Karachi: Oxford
1984-85 (Islamabad, 1985). University Press, 1984), 89.
124 Issues in Pakistan's Economy

·1950s shows that the growth rates for GDP overall were higher
6.3 1972-77: THE BHUTTO YEARS-
in this period than in the 1950s, although in manufacturing
BAD LUCK OR BAD MANAGEMENT? the 1950s had higher rates, while in agriculture the two
periods were somewhat similar. For services, given the more
If there was any economic continuity between the first and developed economy in the 1970s, the growth rate was higher
second decades, it seems to have all but evaporated between then, despite the fact that industry and agriculture, which
the Ayub and Yahya regimes and that of Zulfikar Ali Bhutto. form a close link with services, were not growing at the rates
In many ways, there was a clear break from the past, as of the 1960s. Services grew by 5.7 per cent even when in
more than half of what was Pakistan from 1947 to 1971, 1974/5 growth rates in agriculture and manufacturing were
had seceded to become an independent country, Bangladesh. both negative. In fact, in each of the three years from 1972
Bhutto inherited a new Pakistan, defeated in war by India, to 1975, the annual growth rate in all services considered
and he came to power as Pakistan's first democratically together was actually above 10 per cent.
elected leader. These differences from the past were sharp Table 6.14 shows the rates of inflation over the Bhutto
enough, but not only was the political set-up different, period. By any standard, inflation was high in most years of
Bhutto's economic policies also made a sharp break from the Bhutto government, especially compared with the very
the pro-private sector strategies of the earlier years. Bhutto's low 3.83 _per cent average for the 1960s (however, see section
regime has come in for a lot of criticism for 'destroying' the 6.3.2 for an explanation) ..
economy. Critics have argued that his strange concept of Before we turn to an evaluation of the Bhutto government's
socialism was responsible for the dismal growth rates and for policies, a word about the data is of particular interest. The
the highest rates of inflation ever seen in Pakistan. They have Ayub Khan government fell in 1968 and Bhutto took over
argued that it was poor policies and bad economics which from General Yahya Khan in December 1971. However, some
caused the malaise. We examine these claims and also see studies, when examining the performance of the Bhutto
how factors not in the control of the government affected period, lump the post-Ayub three years with the Bhutto
economic performance. Our interpretation suggests that period, distorting the facts. One example is Nawab Haider
numerous 'bad luck' factors played a critical role in causing Naqvi and Khwaja Sarmad's study, which in its evaluation of
the economy to grow at below trend rates. Pakistan's economy in the 1970, considers 1969/70 to 1976/7
There is no doubt that the growth rates of the 1950s and as one homogenous period and produces average growth
1960s were particularly impressive. It is also unlikely that rates for the whole of it. 66 The Bhutto period was a distinct
those growth rates could have been sustained unless other period, so clubbing it with the Yahya period does not reveal
institutional factors were also changed. Thus, it was inevitable, the true nature of the Bhutto regime. The Pakistan Economic
and more so after the independence of East Pakistan, that the Survey of 1984/5 makes the same mistake and provides
rate of growth would decline. The performance of the Bhutto average growth rates for the period 1970-7, calling it the 'Non
regime must be seen in the context of the circumstances in Plan' period. 67 While there may have been no implementation
which it took over power and the problems that it inherited. of the Five-Year Plans produced between 1970 and 1977, to
Table 6.13 shows the annual growth rates for GDP and its evaluate the performance of the Bhutto regime the correct
constituents for 1971/2 to 1976/7. A comparison with the time-frame needs to be kept in mind.

Table 6.13
Annual Growth Rate 1971-77 at 1959/60 Factor Cost(% per annum)

Manufacturing
Wholesale Banking Public
Year8 Agriculture
Large Small and and administration Services GDP
scale scale retail trade insurance and defence
j
1971/2 3.5 -6.8 7.2 -0.5 0.8 6.8 5.1 1.2

l
1972/3 1.7 11.9 7.3 6.7 29.1 14.1 5.2 7.2
1973/4 4.2 7.5 7.3 14.9 6.4 14.8 5.4 7.7
1974/5 -2.1 -1.7 7.3 3.2 14.4 33.2 5.7 3.9
1975/6 4.5 -0.5 7.3 1.8 3.3 -3.0 5.7 3.3
1976/7 2.5 -0.2 7.3 -0.3 8.2 7.3 3.2 2.9
1971-1977 (ave.) 2.4 1.7 7.3 4.3 10.4 12.2 5.1 4.4 l
8 The annual growth rate for 1971 /2 means the rate for the period 1970/1 to 1971 /2.

Source: Government of Pakistan, Pakistan Economic Survey 1984-85 (Islamabad, 1985) ..

 Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 125

Table 6.14 Figure 6.1

Inflation Rates in Pakistan: 1970-80 (% per annum) Bhutto's Nationalization Programme: 1972-77

Annual rates of change 20 December 1971 Zulfikar Ali Bhutto takes over as President
Year of Pakistan.
in the general price level

January 1972 Public takeover of 31 large firms in 10

1970/1 5.71
basic industries: iron and steel, basic
1971/2 4.69 metals, heavy engineering, motor-vehicle
1972/3 9.7 assembly and manufacture, tractor
1973/4 29.98 assembly and manufacture, heavy and
1974/5 26.73 basic chemicals, petrochemicals, cement
1975/6 11.66 and public utilities
1976/7 9.24
1977/8 6.89 March 1972 Land reforms
1978/9 8.33
March 1972 Management and control of 32 life
1979/80 10.44
insurance companies
Growth rates for selected periods" (% per annum)
1969/70 to 1976/7 13.96 May 1972 Banking reforms; State Bank of Pakistan
1976/7 to 1979/80 8.55 extends controls over scheduled banks,
1969/70 to 1979/80 12.34 reorientating credit policy towards small
farmers and small industrial entrepreneurs
"Growth rates are trend values significant at the 95 per cent
May 1972 Devaluation of the rupee by 131 per cent
confidence level.
Source: Naqvi, S. N. H. and Khwaja Sarmad, Pakistan in the June 1972 Comprehensive labour reforms
Seventies (Islamabad: PIDE, 1993).
August 1972 Comprehensive public health programme

September 1972- Nationalization of educational

September 1974 institutions
6.3.1 Economic Policies and
Performance June 1973 Trade in cotton and rice nationalized
In its election manifesto, the Pakistan People's Party had
September 1973 Vegetable oil, petroleum marketing, and
promised the nationalization of all basic industries and
shipping nationalized
financial institutions. The manifesto had said that 'those
means of production that are the generators of industrial January 1974 Nationalization of all private and
advance or on which depend other industries must not domestically owned banks
be allowed to be vested in private hands; secondly, that
all enterprises that constitute the infrastructure of the August 1976 Cotton ginning, rice husking, and flour
national economy must be in public ownership; thirdly, milling nationalized
that institutions dealing with the medium of exchange,
that is banking and insurance, must be nationalized'. 68
The economic policies of the Bhutto government rested on
as to rural peasants and agricultural workers, were fulfilled
the premise that the control of the leading enterprises was
within six months of coming to power through the labour
to be in the hands of the state. Figure 6.1 highlights the
reforms and land reforms of 1972. The devaluation of the
salient features of the nationalization agenda of the Bhutto
Pakistani rupee by 131 per cent had important repercussions
government.
as we show below, and 'removed at one stroke the subsidy
The first phase of nationalization took place in the large-
"the industrialists had received in the earlier period because
scale manufacturing sector, essentially in the capital and
of the overvalued exchange rate. This reform, together with
intermediate goods industry. This produced a small share of
the increase in procurement prices of agricultural goods
the total value added of the sector (less than 20 per cent)
(which went up by about 100 per cent in this period), made
since much of the growth in this sector had taken place in the
a deliberate attempt to alter the pro-industry anti-agriculture
consumer goods industries. The nationalization programme
bias of the previous growth strategy.' 69 The Export Bonus
was later extended to the vegetable oil sector and then to
Scheme, a key feature of the l 960s, was also abandoned.
cotton ginning and rice milling. The nationalization of banks
The impact of the government's policies must be seen
and insurance companies was a critical assault on the close
in the context of what the government had inherited. The
link that had built up between industrial and financial capital
loss of East Pakistan, if for no other reason, was important
since the mid-1950s. This link had been one of the causes of
because 50 per cent of West Pakistan's products found their
the economic concentration that became a political issue in
way into East Pakistan in l 969no, and the loss of such a large
the late l 960s. The Party's promises to urban organized labour,
 126 Issues in Pakistan's Economy

market was cause for concern enough. Furthermore, 18 per government saw the trend substantially reversed with dismal
cent of the West's imports came from East ·Pakistan. Hence, growth rates. Viqar Ahmed and Rashid Amjad argue that
new markets had to be found immediately to compensate for those .last three years of the Bhutto regime also 'coincide
this loss of market. The success of the devaluation measure with the 'big-push' in public sector investments in long
was apparent soon after, when new markets were .found and gestation projects and show a dismal performance in both the
agricultural and manufacturing sector'. 74
the value of export to areas other than the One outcome of the nationalization measures was the
former East Pakistan rose by 41 per cent in complete reversal of public and private investment. The
the financial year 1972 and 39 per cent in the substantial contribution by the private sector in the 1960s
financial year 1973. This reflected both a sharp was cut down at a stroke. In 1974/5, the height of the
jump (about one-third) in the size of the cotton
crop in the exports of cotton and cotton textiles, Bhutto regime's nationalization programme, private sector
and the successful diversion of most of the flow investment was only 15 per cent of its l 969no level (see Table
of cotton, textiles, rice, and other goods with 6.16). Public sector investment, which was 5 per cent of the
which West Pakistan had previously reimbursed total in 1970/1, rose Jo 75 per cent at the end of the Bhutto
East Pakistan for its flow of jute and jute era. These figures may suggest that the Bhutto regime's
earnings to West Pakistan. 70 nationalization programme alone was responsible for this
trend, but it is important to realize that 'private investment
Exports in 1972/3 increased by 153 per cent over the previous had already started to climb down even before nationalization
year,7 1 and manufactured exports grew by 19 per cent in struck it down in 1972', 75 and that the decline in investment
1973/4, which, according to the Asian Development Bank, during the second half of the 1960s, which indicates that
'was due to favourable world demand conditions for cotton growth in large-scale manufacturing had slowed, was a trend
textiles, and the capacity available for production for exports which continued into the 1970s. However, there is no doubt
following the loss of the East Wing market in 1971 '. 72 The that the anti-industrialist policies and great uncertainty
growth in exports was a key factor in the growth in industrial of the 1972-7 period were also responsible for the lack of
output between 1972 and 1974 (see Table 6.15). Agricultural private sector investment. The private sector had lost all trust
output also rose, and this was attributed to 'the higher in the government, for Bhutto had broken his promises: 'his
support prices for wheat, rice, sugar, and timely and adequate assurance of no further nationalization [prior to nationalizing
supply of essential inputs'. 73 Availability of credit also played the vegetable oil industry in September 1973] until the
a vital role in the improved performance, for after May 1972 elections of 1977 no longer seemed meaningful and the
when the government had tightened its control over the little confidence that the businessmen had developed in the
banking system, more credit was available to the export regime was now completely gone' .76 Such promises were
sector and to small farmers. The export refinance scheme broken time and time again.
was started by the State Bank of Pakistan in 1973, and its
lending rate was lower than the nominal banking rate or the
kerb market rate.
6.3.2 The Bad Luck Factor
The economic boom of 1972/3 and 1973/4 seemed to The fact that the economy suffered after 1974 is clear. The
be fairly short-lived and was attributed to the rebound of reasons, for this, however, are open to some debate. Figure
domestic demand following the disruption in the economy 6.2 shows that a number of events that took place outside
in the early 1970s and to the worldwide commodity boom. the control of the government were largely responsible for
However, the world recession after 1974 considerably slowed the poor performance of the economy after 1974. There was
the demand for Pakistani exports. After about two and a half a very large increase in the prices of imports following the
years of impressive growth, the last three years of the Bhutto oil price rise in 1973, which resulted in inflation at close to

Table 6.15
Trade Pattern: 1970-77

Exports Imports Balance Exports Imports Balance

Year
(Rs. m) ($m)

1970/1 1,998 3,602 -1,604 420 757 -337

1971/2 3,371 3,495 -124 591 638 -47
1972/3 8,551 8,398 153 817 797 20
1973/4 10,161 13,479 -3,318 . 10,626 1,362 -336
1974/5 10,286 20,952 -10,666 1,039 2,114 -1,075
1975/6 11,253 20,465 -9,212 · 1,137 2,067 -930
1976/7 11,294 23,012 -:11,718 1,141 2,325 -1,184

Source: Government of Pakistan, Pakistan Economic SuNey 1995-96 (Islamabad, 1996).

L__
 Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 127

Table 6.16 Figure 6.2

Investment and Growth Rates in the Large-Scale Bhutto: The Bad Luck Factor?
Manufacturing Sector 1969-80 at Constant Price Level
of 1969/70 (Rs. m) 20 December 1971 Zulfikar Ali Bhutto takes over as President
of Pakistan.
Years Private Public Total Relative
sector sector share of May 1972 Devaluation of the Pakistani rupee; initial
public outcome highly positive with exports
investment
growing by more than 100 per cent
in total(%)
(1) (2) (3) (4) (5)
August 1973 Massive floods hit Pakistan; import of food
1969/70 1,208.2 177.1 1,385.3 12.8 grain.
1970/1 1,038.4 58.3 1,096.7 5.3
October 1973 Four-fold increase in international
1971/2 699.9 63.8 763.7 8.4
petroleum prices; imports cost much more;
1972/3 313.1 45.1 358.2 12.6
prices of fertilizers, essential inputs and oil
1973/4 230.8 113.7 344.5 33.0
jump; excessive inflation domestically
1974/5 182.8 276.8 459.6 60.2
1975/6 344.5 831.5 1,176.0 70.7 1974-77 World recession follows OPEC price rise;
1976/7 369.0 1,085.3 1,454.3 74.6 demand for Pakistani exports remains
1977/8 482.3 1,922.1 2,404.4 79.9 severely depressed and affects industrial
1978/9 459.7 1,944.9 2,404.6 80.9 output.
1979/80 544.6 1,644.0 2,188.6 75.1
1974-75 Huge failure of cotton crop by as much as
Growth rates for selected periodsa (% per annum)
25 per cent at a time when international
1969/70 to cotton prices had risen; affected industrial
1976/7 -45.1 -b -39.0 11.5 output
1976/7 to
1979/80 17.0 45.5 34.2 12.5 1976-77 Worst floods in Pakistan's history;
1969/70 to agricultural crops destroyed; further import
1979/80 _b 39.8 11.7c 11.9 of food crops; excessive expenditure
on public good measures, all affecting
aGrowth rates are trend values significant at the 95 per cent industrial output
confidence level.
blnsignificant trend.
"values significant at the 90 per cent confidence level.
Source: Naqvi, S. N. H. and Khwaja Sarmad, Pakistan in the
growth took place only in the first and last of his five and a
Seventies (Islamabad: PIDE, 1993).
half years. The increase in 1971/2 was primarily due to the
adjustments necessitated by the loss of East Pakistan and
30 per cent in 1973/4. The oil price rise had begun to affect to the increase in exports. Viqar Ahmed and Rashid Amjad
the gains from devaluation and exports, and in one go wiped write that the economy had been well managed in the early
out the positive balance of trade from 1972/3. While export years without excessive deficit financing despite the costs
growth still showed some positive signs, albeit at a much incurred due to the floods, and monetary expansion had been
slower pace, the import bill grew very significantly (see Table kept well in line with GNP growth, and was 'almost entirely
6.15). In one year alone, oil imports rose from US$60 million limited to the private sector. There had in fact been an
in 1972/3 to $225 million in 1973/4; fertilizers increased from overall contractionary effect in the government and foreign
$40 million to $150 million in the same period. 77 The result of sector'. 79 A very negative perception seems to have become
the huge rise in oil prices was an international recession that part of the literature on the Bhutto period, where, despite
was not in the control of the Bhutto government. the facts, a number of observers believe that the economy
Moreover, in the five years of the Bhutto government, under Bhutto was in a shambles. William McCleary, for
floods and pest attacks damaged crops severely, putting example, argues that there was 'generally poor performance
pressure on prices and affecting industrial production. 78 The and relative stagnation in the 1970s', and that a 'lack of fiscal
failure of the cotton crop in 1974/5 came at a time when there and monetary discipline led to high budget deficits, rapid
was a surge in international prices and hence Pakistan was monetary growth, and inflation'. 80
not able to exploit the situation to its advantage. The year Mohsin S. Khan of the IMF, however, has also made an
1976/7 saw Pakistan's worst floods, devastating large areas important intervention in the debate over Bhutto's economy,
of cultivated land. and particularly about the rate of inflation. He writes that
Excessive inflation was seen as Bhutto's biggest failure, but 'a good part of the increase in the earlier period [of the
a closer look at the management of the economy and of the Bhutto era] was a result of the oil price shock in 1973/74.
growth in monetary assets suggests that much of the inflation If these two years are dropped from the case, the average
was imported. Table 6.17 shows that excessive monetary annual rate of inflation in the 1970s falls to less than 10 per
128 Issues in Pakistan's Economy

Table 6.17
Differential Growth Rates of Money Supply, GDP, and Commodity-Producing Sectors: 1969-80 (% per annum)

Years Growth of Growth of Growth of Excess of Excess of

money supplya real GDP commodity col. (2) over col. (2) over
producing sectors col. (3) col. (4)
(1) (2) (3) (4) (5) (6)

1969/70 10.69 9.78 10.07 0.19 0.62

1970/1 10.80 0.30 -1.42 10.50 12.20
1971/2 42.66 1.17 1.35 41.49 41.31
1972/3 14.21 7.21 4.25 7.00 9.96
1973/4 11.06 7.74 5.24 3.32 5.82
1974/5 12.44 3.94 -1.26 8.50 13.70
1975/6 11.14 3.32 3.48 7.82 7.66
1976/7 24.30 2.53 1.98 21.77 22.32
1977/8 22.97 7.38 4.63 15.59 18.34
1978/9 20.20 4.90 3.90 15.30 13.30
1979/80 18.51 7.28 7.88 11.23 10.63

Growth rates for selected periodsb (% per annum)

1969/70 to 1976/7 15.72 4.22 2.21 11.50 13.51
1976/7 to 1979/80 18.66 6.16 5.17 12.50 13.49
1969/70 to 1979/80 16.50 4.59 2.84 11.91 13.66

aGrowth rate for 1969/70 means the rate for the period from 1968/9 to 1969/70.
bGrowth rates are trend values significant at the 95 per cent confidence level.
Source: Naqvi, S. N. H. and Khwaja Sarmad, Pakistan in the Seventies (Islamabad: PIDE, 1993).

cent. ... Certainly, it is not obvious from the numbers that the The implications and consequences of the Bhutto regime for
1970s were characterized 'by generally poor performance and the social and political evolution of Pakistan are addressed in
relative stagnation' or that the 1980s were so much better on Part VI of this book.
all fronts.' 81 Shahid Javed Burki, otherwise a critic of Bhutto's
politics, also maintains that 'Pakistan's performance during
the seventies appears unsatisfactory only when compared 6.4 SUMMARY AND FURTHER READING
to that of the sixties. The seventies produced a better overall
record compared to the fifties .. .' .82 6.4.1 Summary
The key causes of low growth in the mid- l 970s were This is ari important chapter because it examines the history
possibly an extremely adverse weather cycle along with of the industrialization process over the first three decades of
an international recession. Government policy did not Pakistan's existence, and examines specific policies pursued
help much either, where industrialists were eyed with by different regimes to further the goals of industrialization.
suspicion, and in response to government fears and threats In the first decade, the exchange rate and the trade regime
the industrialists created artificial crises. While organized played an important role in determining the direction of
labour felt that it had a greater right to the share of industrial development in Pakistan, laying the ground for later
industrial produce, industrialists feared more lock-outs or years. Starting from an almost non-existent industrial base,
outright nationalization. Entrepreneurs were· demoralized economic growth in the period 1947-58 was impressive. It
and unwilling to invest. Capital and capitalists had fled became even more astonishing in the Decade of Development
overseas and it was clear that the economy and industry were under Ayub Khan between 1958 and 1968.
faced with a severe crisis, no matter what the causes may Industrial development showed extraordinary growth rates
originally have been. The Bhutto era has been considered one under Ayub, and there was a perception that Pakistan would
of Pakistan's worst economically. Nawab Haider Naqvi and soon emerge as one of the few underdeveloped countries
Khwaja Sarmad have argued that this period was 'a period to join the ranks of the developed world. Moreover, while
of domestic and international economic turmoil, significant agriculture suffered severely during the 1950s, in the 1960s
external shocks and economic dislocation and disruption'. 83 the Green Revolution brought about an equally impressive
We have tried to show that ( 1) things were not as bad as transformation, complementing industrial growth. Overall
they seemed, given the conditions inherited and the odds economic development was quite phenomenal in this period.
against Bhutto, and (2) it was more bad luck than bad There was also a downside to this capitalist development, as is
management which resulted in poor economic growth rates. always the case. Inequalities between East and West Pakistan
 Chapter 6 The Process of Industrialization in Pakistan I: 1947-77 129

increased, as did those between different economic and social University Press, 1971 ); and Madison, A., Social Development
classes. However, despite these inherent contradictions in the in Pakistan, 1947-1970 (Cambridge, MA: Harvard University
mode of capitalist development under the Ayub regime, we Press, 1971 ).
argue that the economic programme and policies followed On the industrial policy of the Ayub I<han era, good
resulted in extremely impressive growth. Rather than being references are Rashid Amjad's Private Industrial Investment in
labelled as a failure, the Ayub regime was dynamic and a Pakistan, 1960-1970 (Cambridge: University Press, 1982) and
'success' by whatever criteria were available at that time to two PhD dissertations, one by Meekal Ahmed, 'Productivity,
measure success. Prices and Relative Income Shares in Pakistan's Large Scale
The Bhutto era represents a significant break with the Manufacturing Sector, 1958-70', University of Oxford, 1980,
past. With more than half the country now an independent and A. R. Kemal, 'An Analysis of Industrial Efficiency in
nation, Bhutto assumed leadership of a war-torn Pakistan Pakistan, 1959-60 to 1969-70', University of Manchester,
and inherited extremely difficult conditions. Despite this, 1978.
the first two years of his five-and-a-half year rule showed For the Bhutto period, see Shahid Javed Burki's State
exemplary growth by any standard. In the subsequent years, and Society in Pakistan, 1971-77 (London: Macmillan, 1980);
however, a large number of factors over which Bhutto had Adams, J. and Sabiha Iqbal, Exports, Politics and Economic
no control resulted in a slowing down of the growth rate and Development in Pakistan (Lahore: Vanguard, 1987); and two
of economic development, especially after the high-growth doctoral dissertations, Maleeha Lodhi's, 'Bhutto, the Pakistan
1960s. We argue that it was not bad management that caused People's Party and Political Development in Pakistan',
economic deterioration in the Bhutto period, but bad luck. London School of Economics and Political Science, 1980, and
This chapter makes an important contribution to the Zareen F. Naqvi's 'Distributional Impact of Public Enterprise
debate over economic growth and development during the Operational Policies in Pakistan', Boston University, 1994.
first three decades, by contesting and arguing against some of Some texts worth studying in greater detail which look
the more popular myths that have emerged about this period at all three of the periods covered in this chapter are: Viqar
in the literature. Ahmed and Rashid Amjad's The Management of Pakistan's
Firstly, we argue that the import substituting indus- Economy, 1947-82 (Karachi: Oxford University Press, 1984);
trialization policy pursued in the first decade was the Asad Sayeed's excellent 'Political Alignments, the State and
right policy for that time, and that a careful and selective Industrial Policy in Pakistan: A Comparison of Performance
manipulation of key economic variables resulted in an in the 1960s and 1980s', PhD dissertation, University of
industrial base being formed. Secondly, we argue that Ayub Cambridge, 1995; and Parvez Hasan' s Pakistan's Economy at the
Khan's Decade of Development was indeed that-not a Crossroads: Past Policies and Present Imperatives (Karachi: Oxford
failure of development, as some observers contend-and University Press, 1998 ).
that the contradictions that emerged were all inherent in the
policies pursued. This was, probably, Pakistan's Golden Age.
And lastly, we show that the Bhutto government suffered the
consequences of bad luck, both domestic and international.
Not only was Bhutto not wholly responsible for the poor
performance, but the extent of that poor performance has,
itself, been grossly exaggerated. Economic performance was
not half as bad as we have generally been led to believe.

6.4.2 Further Reading

Some of the best academic work on Pakistan looks at the
period 1960-70 and the growth model adopted in this period.
Since industry was a major component of growth, many of
the best works on Pakistan examine industrial performance
in the earlier years. The two books by Stephen R. Lewis,
Jr, Economic Policy and Industrial Growth in Pakistan (London:
George Allen and Unwin, 1969) and Pakistan: Industrialization
and Trade Policies (London: George Allen and Unwin, 1970)
are classics which examine in great detail the early period
following Pakistan's independence. Gustav Papanek's
Pakistan's Development: Social Goals and Private Incentives
(Cambridge, MA: Harvard University Press, 1967) also covers
the early period, and is a first-hand account by someone who
was involved in public policy. Other books on this period
include White, L. J., Industrial Concentration and Economic Power
in Pakistan(Princeton, NJ: PUP, 1974); MacEwan, Arthur,
Development Alternatives in Pakistan (Cambridge, MA: Harvard
130 Issues in Pakistan's Economy

NOTES
I. Quoted in Papanek, Gustav, Pakistan's Development: Social 45. Asian Development Bank, Strategies for Economic Growth and
Goals and Private Incentives (Cambridge: Harvard University Development: The Bank's Role in Pakistan (Manila, 1985), 359.
Press, 1967), 1. 46. Institute of Developing Economies, op. cit., 135-6.
2. Ibid. 1-2. 47. Ibid.
3. The New York Times, 18 January 1965, quoted in Papanek, 48. Asian Development Bank, op. cit., 359.
op. cit., 1967, 1. 49. Lewis, Stephen, op. cit., 1969, 46.
4. The Times, London, 26 February 1966, quoted in Papanek, 50. Asian Development Bank, op. cit., 366.
op. cit., 1967, 1. 51. Ibid. 366.
5. This section makes extensive use of Lewis, Stephen, Economic 52. Cited in Cheema, Ali, 'Pakistan's Textile Policy and Trade
Policy and Industrial Growth in Pakistan (London: George Allen Performance: 1972-1990', mimeo (Cambridge: Sidney
and Unwin, 1969); Lewis, Stephen, Pakistan: Industrialization Sussex College, 1995 ), 3. .
and Trade Policies (London: George Allen and Unwin, 1970); 53. Sayeed, Asad, 'Political Alignments, the State and Industrial
and Papanek, Gustav, op. cit., 1967. Policy in Pakistan: A Comparison of Performance in the
6. Lewis, Stephen, op. cit., 1969, 67--:68. 1960s and 1980s', unpublished PhD dissertation, University
7. Ibid. 68. of Cambridge, 1995, 55.
8. Ibid. 3. 54. Ibid. 56.
9. Unless otherwise stated, all figures in the text are for West 55. Papanek, Gustav, op. cit., 225, emphasis added.
Pakistan only. 56. In Amjad, Rashid, op. cit., 1982, 11.
10. Ahmed, Viqar and Rashid Amjad, The Management of 57. Ibid. 10.
Pakistan's Economy, 1947-82 (Karachi:Oxford University 58. Ibid. 166.
Press, 1984), 65. 59. Papanek, Gustav, op. cit., 221.
11. Ibid. 64. 60. Amjad, Rashid, op. cit., 1982, 12.
12. Papanek, Gustav, op. cit., 1967, 145. 61. Cheema, Ali, op. cit., 1995, 7.
13. Lewis, Stephen, op. cit., 1969, 157. 62. All figures are from Amjad, Rashid, op. cit., I 982.
14. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 68. 63. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 90.
15. Ibid. 243. 64. Ibid. 89.
16. Lewis, Stephen, op. cit., 1969, 7. 65. Lewis, Stephen, op. cit., 1969, 4.
17. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 66. 66. Naqvi, S. N. H. and Khwaja Sarmad, Pakistan's Economy
18. Ibid., 66; see also Papanek, Gustav, op. cit., 1967, on this Through the Seventies (Islamabad: PIDE, 1984), 12.
point. 67. Government of Pakistan, Pakistan Economic Survey 1984-85
19. Institute of Developing Economies, The Study on Japanese (Islamabad, 1985 ), 22.
Cooperation in Industrial Policy for Developing Economies: Pakistan 68. Institute of Developing Economies, op. cit., 161.
(Tokyo: IDE, 1994), 123. 69. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 3.
20. Lewis, Stephen, op. cit., 1969, 13. 70. Institute of Developing Economies, op. cit., 185.
21. This section makes liberal use of Lewis, Stephen, op. cit., 71. Government of Pakistan, op. cit., 1985, 195.
1969, and Lewis, Stephen, op. cit., 1970. 72. Asian Development Bank, op. cit., 380.
22. Lewis, Stephen, op. cit., 1969, 76. 73. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 94.
23. Ibid. 40. 74. Ibid. 95.
24. Ibid., 75, emphasis added. 75. Naqvi, S. N. H. and Khwaja Sarmad, op. cit., 1984, 38.
25. Ibid. 111. 76. Burki, Shahid Javed, State and Society in Pakistan 1971-77
26. Ibid. 70. (London: Macmillan, 1980), 118.
27. Ibid. 73. 77. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 94.
28. Ibid. 110. 78. Ibid. 92.
29. Ibid. 106. 79. Ibid. 94.
30. Ibid. 7-8. 80. McCleary, William, 'Pakistan: Structural Adjustment and
31. Ibid. 10. Economic Growth', in V Thomas et al. Restructuring Economies
32. Ibid. 46. in Distress (Oxford: Oxford University Press, 1991), 414.
33. Papanek, Gustav, op. cit., l 967, 34. 81. Khan, Mohsin S., 'Comments', in V. Thomas et al.
34. Ibid. 67. Restructuring Economies in Distress (Oxford: Oxford University
35. Ibid. 88. Press, 1991 ), 436.
36. Ibid. 92. 82. Burki, Shahid Javed, 'A Historical Perspective on
37. Ibid. 104. Development', in Burki, Shahid Javed and Robert Laporte,
38. Ibid. l OI. Pakistan's Development Priorities: Choices for the Future (Karachi:
39. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 67. Oxford University Press, 1984), 19.
40. Ibid. 77. 83. Naqvi, S. N. H. and Khwaja Sarmad, External Shocks and
41. Ibid. 77. Domestic Adjustment: Pakistan's Care 1970-1990, General
42. Papanek, Gustav, op. cit., 1967. Monograph Series No. 1 (Islamabad: University Grants
43. Lewis, Stephen, op. cit., 1969, 10. Commission, 1993 ), 92.
44. Amjad, Rashid, Private Industrial Investment in Pakistan, 1960-
1970 (Cambridge: Cambridge University Press, 1982), 5.
 The Process of Industrialization in
Pakistan 11: 1977-2013

After the fall of Zulfikar Ali Bhutto in July 1977, Pakistan can governments between 28 May 1988 and February 1997, and
easily be delineated by two specific eras or periods. From 1977 despite this high turnover, the military, which has always
to August 1988 General Zia ul-Haq ruled Pakistan, the longest been prone to interfere in national politics in Pakistan, let
rule ever by a single individual in Pakistan's sixty-six years of the political process take its course until 1999 although it
existence. Zia's military dictatorship varied from downright continued to manipulate, control, and dominate elected
ruthlessness to a more benign form of praetorian democracy governments until General Pervez Musharraf overthrew
after 1985. Nevertheless, General Zia's authoritarian and the democratically elected government of Nawaz Sharif in
dictatorial rule will always be remembered for the great October 1999 and took over power. 2 Interestingly, despite the
damage it did to Pakistan's society and its values. In many frequent changes in government, the economic programme
ways, sadly, it has been Zia's politics and policies which have of different governments in Pakistan has been more or less
defined Pakistan for the last three decades, although there the same, and one finds a great deal of continuity in policy,
is hope that this is changing. Despite attempts to introduce especially since September 1988.
participation, starting from the local bodies elections of 1979, Much of what has happened in the economic sector
General Zia never let go of the reins of power, a fact ably in Pakistan since 1988 has its genesis as part of a series
demonstrated in May 1988 when the elected government of comprehensive Structural Adjustment Programmes
of Mohammad I<han Juneja was summarily dismissed. Zia undertaken under the close supervision of the International
ul-Haq was killed in an air crash in August 1988 and we can Monetary Fund (IMF) and the World Bank. Although
only speculate about the nature of developments in Pakistan Pakistan's adherence to IMF and World Bank policies
had Zia not met his death in this fashion. Nevertheless, with began in earnest in 1980 when a large Extended Fund
the death of Zia, we saw much of his legacy still had a strong Facility programme was supported by the IMF, followed
bearing on political and economic developments in Pakistan by many structural adjustment and sectoral loans from
some decades on. the World Bank, it would be fair to say that since 1988
During the Zia era, Pakistan witnessed the return of high Pakistan's economic programme has totally capitulated to
growth rates and an increased role for the private sector, in the requirements of the IMF and the World Bank. Since
many ways reminiscent of the Decade of Development of the then, Pakistan's numerous and varied governments have
Ayub regime. But much had changed, in the form of class failed to come up with any independent economic or
structures, social and political alliances, and the nature of industrial development programme, and the very minutely
the development of society, and the comparison between detailed Policy Framework Papers of the IMF and World
the Ayub and Zia periods makes very interesting reading. 1 Bank have determined the nature and direction of policy.
This chapter will examine the policies of the Zia government The most recent People's Party government of 2008-13 also
with special emphasis on the process of industrialization. undertook a $11.3 billion IMF programme soon after it
A comparison between the Ayub and Zia regimes and an came into office, as did the Nawaz Sharif government after
analysis of social and economic outcomes under Zia are May 2013, having been granted an IMF loan in September
given in Chapter 26 and Chapter 27, as are the consequences 2013. Going to the IMF is now the default mode for every
brought about by the nine years of Pakistan's third military government in Pakistan regardless of any adherence to
ruler, General Pervez Musharraf. However, Appendix 7.1 perceived political ideology. Given the complete dominance
provides a flavour of the extent and result of differences of these two Washington organizations on the economic life
between the two regimes, regarding the type of entrepreneurs of the country, the whole of Part VI of this book deals with
that emerged. the consequences for Pakistan of adhering to these structural
Just as much as the 1977-88 period is distinct in its form adjustment policies. In this chapter, we try to limit ourselves
and manner, the post-Zia period opens up a very different to industrial policy and related issues. However, for a more
age in Pakistan's history, both politically and economically. comprehensive understanding of the industrial policy after
There had been a return to democracy-or electioneering, 1988, a concurrent reading of Part VI is recommended.
more correctly-between 1988-99, with elections being There are two broad sections to this chapter: we examine
held in Pakistan in 1988 after a lapse of eleven years, with first the process of industrialization in the Zia period, and
three general elections held subsequently. Pakistan saw ten second, th~ post-1988 era of structural adjustment.
132 Issues in Pakistan's Economy

Table 7.1 shows the annual growth rate in value of

7.1 THE ZIA YEARS: 1977-883 output, labour, and other indicators for a large number of
7.1.1 The Nature and Extent of Growth manufacturing industries in the period 1978-88. The total
average growth in this period was a very impressive 9.6 per
The phenomenal overall performance of the economy during
cent, with the first half of the Zia era showing an even higher
this period can best be gauged from the following observation
rate of 12.8 per cent. 7 In both the Fifth and Sixth Five-Year
by Akbar Noman:
Plans (1978-83 and 1983-8), actual growth rates exceeded
according to World Development Report 1990, during the targets of 12 per cent and 9 per cent, respectively, 8 a rare
1980-88 Pakistan's GDP growth rate of 6.5 per occurrence in Pakistan's economic record. Table 7.2 shows
cent was exceeded only by that of Korea, China how the high growth rates were disaggregated over the Fifth
and Hong Kong .... The growth of real wages and Sixth Five-Year Plans.
in Pakistani manufacturing during 1980-88 was Although the growth figures afe very impressive, Asad
just about the fastest in the world--:--at 6.2 per Sayeed writes that a significantly different, and much
cent a year surpassed only by Thailand (7.0%) less rosy, picture emerges with productivity growth figures
and equalled only by Singapore. 4 (fourth column in Table 7.1). Not only is the aggregate of
0.3 per cent per annum low compared to the 5 per cent
For the period 1978-86, S. N. H. Naqvi and Khwaja Sarmad
growth in the 1960s, but also the variation across sectors is
show that GDP growth averaged 7 per cent consistency
significant. 9 Furthermore, if we aggregate the total factor
per annum. 5 According to the World Bank, manufacturing
productivity (TFP) growth rates, we can see that consumer
GDP grew at an annual average rate of 9.5 per cent between
goods have negative TFP growth, with the exception of the
1977 and 1986, and investment in medium- and large-scale
wearing apparel industry. A fairly mixed picture is presented
industry grew at an average of 18.2 per cent per annum, while
by the intermediate goods industry. Table 7.3 highlights the
total private industrial investment expanded at 15.6 per cent
low contribution of TFP growth to overall growth during
per annum. 6 This is, indeed, a very impressive performance by
the decade. As much as 82.3 per cent of the overall growth
any standard, whether in comparison with the performance
was due to the growth in the capital stock, 14.5 per cent to
of the Ayub regime or with the newly industrialized countries
labour, and only 3.17 per cent to TFP growth, compare this
in the same period.

Table 7.1
Growth Rates of Output, Labour, Capital Stock, and Total Factor Productivity: 1978-88

Capital Total Factor Total Factor

Industry sector Output Labour
stock Productivity output Productivity
Food manufacturing 8.8 7.4 7.3 1.5 -1.1
Beverages industries 6.5 9.2 12.8 -5.9 -6.7
Tobacco 9.1 1.6 10.9 -1.4 -3.4
Textiles 8.6 1.5 9.4 3.0 3.1
Wearing apparel 21.0 21.9 10.4 7.9 4.5
Leather products 7.3 10.7 13.7 -6.0 -19.8
Footwear 8.2 10.0 7.8 -0.3 2.2
Ginning, pressing, and baling 5.1 2.3 3.1 2.1 -2.7
Wood and cork products 13.7 14.5 13.7 -0.1 -0.9
Furniture 13.3 11.8 23.6 -7.0 -11.8
Paper and paper products 10,7- 7.6 13.8 -1.2 -6.4
Printing and publishing 10.1 7.6 13.9 -1.3 -2.9
Drugs and pharmaceuticals 11.3 8.2 13.8 -1.4 -3.3
Industrial chemicals 11.2 7.1 8.5 3.0 3.2
Other chemicals 11.2 8.8 8.2 2.9 7.0
Rubber products 4.8 3.8 16.3 -5.0 -2.9
Plastic products 18.3 11.7 13.4 5.4 3.3
Glass products 14.1 8.7 16.1 0.8 -0.5
Other non-metallic minerals 11.7 9.8 14.5 -2.2 -3.1
Iron and steel 17.0 15.3 32.9 -11.0 -12.1
Non-ferrous metals -8.6 -0.6 4.3 -10.4 -2.7
Metal products -0.9 1.0 8.8 -6.0 -5.9
Non-electrical machinery 17.6 7.5 5.6 11.1 5.3
Electrical machinery 13.3 5.7 11.7 3.2 -0.6
Transport equipment 9.8 3.3 8.5 4.3 9.6
Total (weighted) 9.6 5.8 10.3 0.3 -0.9
Source: Sayeed, Asad, 'Political Alignments, the State and Industrial Policy in Pakistan: A Comparison of Performance in the 1960s and
1980s', unpublished PhD thesis, University of Cambridge, 1995, 109.
 Chapter 7 The Process of Industrialization in Pakistan II: 1977-2013 133

Table 7.2
Average Annual Growth Rates of Value of Output: 1978-88
(Constant Prices 1976/7)

Industries (PSIC 3-digit) 1978-1988 5th Plan 6th Plan

Food 9.7 13.7 5.76

Beverages 10.1 16.5 5.08
Tobacco 8.2 11.5 5.63
Textiles 8.8 11.0 7.16
Wearing apparel except footwear 33.9 35.2 32.7
Leather products except footwear 14.2 -1.2 26.4
Footwear 48.5 38.0 71.0
Ginning, pressing, and baling 9.8 8.5 10.7
Wood and cork 21.2 23.8 19.0
Furniture 30.6 38.1 24.5
Paper and paper products 16.9 18.8 15.5
Printing, publishing, and allied services 10.6 15.2 7.0
Drugs and pharmaceuticals 11.8 12.0 11.6
Industrial chemicals 14.7 19.7 10.65
Other chemicals 13.3 13.4 13.3
Petroleum refining 10.3 22.8 0.3
Miscellaneous petroleum and coal 15.7 34.1 1.0
Rubber products 5.5 10.1 1.8
Plastic products 20.4 30.7 12.1
Pottery, china, and earthenware 11.5 20.1 5.8
Glass and glass products 18.8 27.3 15.0
Other non-metallic minerals 18.2 22.5 14.8
Iron and steel basic 19.1 19.9 18.5
Non-ferrous metals 15.0 10.5 23.3
Fabricated metal except machinery 7.9 6.0 7.3
Machinery except electrical 15.3 15.0 20.3
Electrical machinery 13.2 10.6 14.5
Transport equipment 12.9 -3.8 25.6
Scientific equipment 16.0 10.1 16.4
Sports goods 22.1 22.6 18.6
Others 12.1 1.3 10.6

Average growth (total) 10.4 12.8 9.9

Source: Institute of Developing Economies, The Study on Japanese Cooperation in Industrial Policy for Developing Economies: Pakistan,
(Tokyo IDE, 1994), 257--8.

to the figures presented in the previous chapter in Table 6.8. the growth in manufacturing employment has
Asad Sayeed writes that in the case of Pakistan not only is remained insignificant. This partly represents
the contribution of TFP significantly lower than that of the more an increase in capital industry than labour
developing country average, but the contribution of capital is absorption during the period of accelerated
expansion. 11
also inordinately high. 10
Table 7.4 shows that there had been very little growth in
Pakistan's manufacturing sector became more capital
employment in almost all industries between 1975 and 1986,
intensive between 1975 and 1986 and the share of wages
and that the growth in labour productivity had also fallen in
and salaries in value added fell from 26.9 per cent in 1976 to
many industries. Interestingly, although the wearing apparel
20.3 per cent in 1986. 12 A report published by the Institute of
industry experienced the greatest increase in employment, it
Developing Economies in Japan found it 'ironic' that
also saw output fall by nearly 19 per cent. A UNIDO report
on the manufacturing sector gives the reasons for this low some of the public sector dominated industries,
employment generation and says that such as electrical machinery and chemicals,
show a high rate of growth in labour productivity.
an underlying feature of industrialization in Firstly, we would expect labour productivity to
Pakistan is the deteriorating performance of be higher in capital-intensive projects where
the manufacturing sector in generating new the labour-output ratio is high. And secondly;
employment opportunities. Although the decade as large firms attain a higher level of capacity
of the 1980s has been a period of relatively utilization, labour productivity will be expected
high growth in manufacturing value added, to increase.13
134 Issues in Pakistan's Economy

Table 7.3
Decomposition of Manufacturing Growth: 1978-88

Share Share Share

Industry sector a of of of
labour% capital% TFP%

Food manufacturing 0.13 0.87 11.20 71.92 16.88

Beverages industries 0.11 0.89 16.02 176.25 -92.27
Tobacco 0.40 0.96 0.63 115.37 -16.00
Textiles 0.49 0.51 8.30 55.75 35.96
Wearing apparel 0.24 0.76 24.75 37.73 37.53
Leather products 0.13 0.87 19.69 161.75 -81.44
Footwear 0.29 0.71 35.86 67.34 -3.20
Ginning, pressing, and baling 0.18 0.86 6.35 51.92 41.73
Wood and cork products 0.24 0.76 24.91 76.06 --0.97
Furniture 0.28 0.72 24.92 128.44 -53.36
Paper and paper products 0.30 0.70 21.50 89.81 -11.31
Printing and publishing 0.40 0.60 29.63 82.99 -12.62
Drugs and pharmaceuticals 0.20 0.80 14.59 97.61 -12.20
Industrial chemicals 0.23 0.77 14.26 58.59 27.16
Other chemicals 0.20 0.80 15.77 58.35 25.88
Rubber products 0.52 0.48 40.86 165.93 -106.80
Plastic products 0.34 0.66 21.75 48.36 29.89
Glass products 0.38 0.62 23.41 70.75 5.84
Other non-metallic minerals 0.13 0.87 10.63 108.69 -19.32
Iron and steel 0.28 0.72 25.66 138.61 -64.27
Non-ferrous metals 0.50 0.50 3.61 -25.20 121.59
Metal products 0.47 0.53 -56.54 -529.97 686.51
Non-electrical machinery 0.47 0.53 19.86 16.95 63.19
Electrical machinery 0.27 0.73 11.56 64.50 23.94
Transport equipment 0.58 0.42 19.71 36.12 44.17
Total (weighted) 0.24 0.76 14.50 82.33 3.17

Note: Alpha and beta refer to shares in values added for labour _and c~pit_al in t~e year and capital in the base year respectively.
Source: Sayeed, Asad, 'Political Alignments, the State and Industrial Policy 1n Pakistan: A Comparison of Performance in the 1960s and
1980s', unpublished PhD thesis, University of Cambridge, 1995, 111.

7.1.2 Industrial Policy Zia ul-Haq, like the military government of Field Marshal
Ayub Khan, made the decision that the private sector was to
For Asad Sayeed, the 1978-88 period 'is the only epoch in
play the leading role in the industrial sector.
the country's 48-year history when an industrial policy was
Amongst the earliest steps taken by the Zia government
formulated and executed for any length of time'. 14 S. N. H.
in September 1977, to appease the private sector, was the
Naqvi and Khwaja Sarmad see the Zia regime consisting of
denationalization of a number of agro-based industries-rice
two sub-periods, 1978-81 and 1982-6, 15 while for the Institute
husking, flour milling, and cotton ginning-which were run
of Developing Economies, Tokyo, there were three such
inefficiently and were heavily 'in the red', along with the
periods: 1977-81, which was the period of 'cautious attempts
denationalization of some small engineering units as well. 17
at dismantling existing government policies and restoring
In December 1977, a number of basic and heavy chemical
confidence in the private sector, while si:r;nultaneously
and cement industries were opened up to the private sector,
trying to gain political legitimacy'; 1982-5, 'a more forceful
which was also given further incentives, such as tax holidays
drive towards Islamization which followed the regime's
in March 1978, which were essentially aimed at encouraging
consolidation of power'; and 1985-8, the 'attempt to disengage
industrial activity in the less developed.regions of the country.
the government from direct control of the economy'. 16
Export rebates were also given priority, and in June 1978 the
One of the most important concerns of the new Zia regime
interest rate on fixed investment in agriculture and industry
in mid-1977 was the need to restore business confidence
was also reduced. Some attempts were also made by the
and, particularly, private sector confidence and motivation,
new military government to ease economic controls and
in order to revive investment in industry and agriculture, in
regulations, including the procedures for the sanctioning of
order to improve the economy's performance substantially
private sector i_nvestment. 18
compared to the less than impressive performance during
If the prominence given to the private sector brought back
the Bhutto period. The military government of General
memories of the Ayub Khan era, so did the return to planning
 Chapter 7 The Process of Industrialization in Pakistan II: 1977-2013 135

I Table 7.4
Growth and Structure of Manufacturing Employment: 1975-86

Growth of
employment
Structure
of
Labour growth
of Value-added
in manufacturing per employee
Industry sector
manufacturing employment (% at 1980 prices)

1975-86 1975 1986 1975-86

Food products 3.58 9.9 12.9 3.53

Beverages 5.07 0.7 1.0 11.32*
Tobacco 2.82 1.7 2.1 1.11
Textiles -1.64 50.6 41.1 -4.31
Wearing apparel, except footwear 14.75 0.2 0.9 -18.63**
Leather products 2.81 0.8 0.9 -1.88**
Footwear, except rubber or plastic -2.03 0.3 0.3 -3.55**
Wood products, except furniture 7.46 0.3 0.5 -4.11
Furniture, except metal 3.75 0.2 0.3 2.24**
Paper and paper products 0.03 1.9 1.6 12.28
Printing and publishing 4.52 1.4 2.1 5.79**
Industrial chemicals 3.33 2.5 3.1 6.91
Other chemicals 3.88 3.1 4.2 5.42
Petroleum refineries 1.63 0.5 0.6 1.41
Misc. petroleum and coal products 6.79 0.1 0.1 3.97**
Rubber products 0.11 2.2 2.0 1.75
Plastic products 11.26 0.3 0.6
Pottery, china, and earthenware 5.77 0.3 0.5 -6.39**
Glass products 3.37 0.5 0.8 -4.71 **
Other non-metallic mineral products 1.90 2.6 2.9 3.25
Iron and steel 9.64 4.1 7.5 1.16**
Non-ferrous metals -5.51 0.1 0.1 -5.19**
Fabricated metal products -3.17 2.7 1.9 3.12**
Machinery, except electrical 1.41 3.3 3.3 0.17
Machinery, electric 0.60 3.5 3.6 8.34
Transport equipment -1.04 4.7 3.9 6.3
Professional and scientific equipment -3.55 0.8 0.5 14.22
Other manufactured products -1.01 0.7 0.6 7.96**

* 1975-82, ** 1975-80, *** 1975-85.

Source: UNIDO, Pakistan: Towards Industrial Liberalization and Revitalization (Oxford: Basil Blackwell, 1990), 19 and 22.

in the guise of the Five-Year Plans. As an Asian Development private sector, the stress on the use of indigenous
Report stated: 'with a change in government in 1977 came a raw materials in industry was also seen as
change in industrial strategy. The new government reinstated important to revive the sluggish performance
the system of five-year plans, and the Fifth Five-Year Plan of the agricultural sector. . . . The economic
managers of the Zia regime were looking for
was launched in 1978/79.' 19 In fact, there had not been much
short and medium term gains to accrue from a
planning after the very successful second Five-Year Plan of boost in textile exports. 20
1960-5, when the third was curtailed and handicapped by the
cut in foreign aid and the political situation domestically. The Growth in large-scale manufacturing was projected at the
Third Five-Year Plan was made redundant after East Pakistan highly ambitious rate of 12 per cent per annum, a target
became independent Bangladesh, and the Fourth Five-Year which was, surprisingly, achieved.
Plan was lost somewhere in Zulfikar Ali Bhutto's rule of five The policy measure .that distinguishes the Zia regime
years, a period better known as the Non-Plan Period. from all others before and after General Zia was that of
The investment programme of the Fifth Five-Year Plan gave Islamization. In fact, it became General Zia's government's
1
very high priority and his own missionto purify Pakistani society from all the
ills and evils that had become ingrained. Islamic laws were
to producer and investment goods industries
enacted and Commissions formed, and even the economy was
with industry based on indigenous raw materials
next in line. Apart from bringing back the brought under the influence of Islamic laws and principles.
Writing in 1984, Viqar Ahmed and Rashid Amjad argue:
136 Issues in Pakistan's Economy

The major hallmark of the current phase is the time when Bhutto was deposed, the public sector dominated
initiation of the process of Islamization of the · industrial development and the private sector had been
country's economic structure. The cautious steps reduced to a much smaller role than under Ayub Khan. An
taken so far are few and the overall framework immediate reversal was anticipated, but other than the small
is yet to acquire an Islamic look. But this is a and insignificant measures mentioned above, very little
task of historic magnitude. Starting with a lag
denationalization took place. The major contribution by the
of many centuries during which little effort
could be made to apply Islamic principles to Zia government in the early years was to give a 'clear signal
the changing socio-economic conditions and to the private sector that the government expected future
institutional structure in Muslim countries, growth to come from its increased participation in industrial
considerable homework needs to be done and activity'. 24
this underlines the need for a slow but firm An Asian Development Bank report defends this action by
start. But, given the people's commitment to the Zia regime on the following grounds:
Islam and the Islamic principles of faith in God,
social justice and fair play, the process which has The military government made the decision that
been started is not likely to be reversed. 21 the private sector was to play the leading role in
the industrial sector. However, the existing public
They continue: industrial sector was quite large, employing
over 50,000 persons, and a massive investment
Currently most of the government's effort in programme of over Rs. 40 billion was underway.
long-term management is concentrated on the Thus it was not practical for the Government
process of Islamization which, in terms of the to undertake any large-scale denationalization.
long-run impact on the economy, may surpass Original owners were only prepared to take
the restructuring of the development strategy the units back if the losses accumulated since
and the Plan priorities. The process involves a l
nationalization in 1972 were written off and the
basic transformation of the entire society and
intra-social relationships in conformity with the
tenets of Islam. Social justice in every walk of life
by following the Islamic principles, especially in
surplus workers fired. The Government could not
do that because of political and administrative
reasons. Neither was it possible to abandon the
industrial sector investment programme because
I
I
the distribution of income and wealth in favour a large proportion of the funds had been either
of the poor, and the elimination of interest (sood) spent or committed in the form of international
charged by banks are viewed as key features of contracts. The Government therefore decided
the Islamization process. 22 on a more gradual process of reorientation I
toward private sector-led industrial growth. To
Although much was made of the Islamization programme
of the Zia regime at that time, most critics of the regime felt
that it was a ploy on the part of the military government
in order to legitimize and perpetuate its hold on power.
restore the confidence of the private sector, the
agricultural processing industries taken over
in 1976 were denationalized, and a number· of
industrial incentives similar to those existing
l
Anita Weiss argues that 'attempts by the state to develop an
Islamic economic system are not substantive departures from
capitalist industrial culture, but are instead substitutes for
during the 1960s were introduced. As for public
sector industries, a programme for improving
efficiency and profitability was initiated, and the
investment programme was restricted to ongoing
I
I
specific aspects of it'. 23 Islam became the veil behind which projects and to the balancing, modernization,
Zia and his coterie hid and perpetuated their authoritarian and replacement (BMR) of existing public sector
form of government. Although all the Islamic laws passed units. 25
by that government still form part of the law of the land, the
fanfare has died down and governments since Zia's have not However, the study by the Institute of Developing Economies
(as yet) used Islam for propaganda purposes. Interestingly, in Japan makes the rather more pertinent point that 'in
while Viqar Ahmed and Rashid Amjad, writing at the height contrast to its [the Zia regime's] rhetoric against the Bhutto
of the Islamization campaign and at the time of a strict government's economic agenda, the Zia government was
military authoritarianism, like most other authors, gave the hoping to reap the rewards from investments made by the
Islamization process extensive prominence, much of what previous regime' .26 This study continues that, even at the
has been written on the Zia period's economic programme time of the Sixth Five-Year Plan, there were no clear moves
after the death of the General does not give much importance towards privatization: 'In fact, public sector industry was
to what was considered to be his key programme. While seen as playing an instrumental role in industrialization in
Islamic codes and regulations do prevail, they seem to exist particular and development in general'. 27 Moreover, the study
mainly on paper (see Chapter 12 on banking). goes on to make the very astute point that

the political economy of the government's

7.1.3 The Public/Private Sector Divide decision not to go on· a large scale privatization
One would have thought that with the Zia government's drive was that it did not want to alienate those
penchant for the private sector the first step would have groups and classes which had benefitted from
been large-scale denationalization and the return of assets nationalization by seeking employment in the
seized and nationalized under the Bhutto regime. At the sector. This group also comprised the urban
 Chapter 7 The Process of Industrialization in Pakistan II: 1977-2013 137

lower middle class, which had been the most 7.1.4 Deregulation and Liberalization
potent political agitator in Pakistan's history. 28
The Sixth Five-Year Plan ( 1983-8) marks the beginning of the
While there was no immediate reversal, there certainly process of deregulation and liberalization, which was carried
was a marked slowing down. Table 7.5 shows that the public out with much greater force after 1988 when Pakistan's
sector's share in total industrial investment fell from as much economy became completely subservient to IMF and World
as 72 per cent in 1978-9 to less than 18 per cent ten years Bank directives. The Sixth Five-Year Plan is seen as a
later. Although there was some increase in employment, this departure from the government's earlier policies on industry,
was mainly due to the projects originated earlier. The bulk and 'it was for the first time that the emphasis moved from
of public sector investment during the first half of the Zia purely one of sectoral investment planning to one which
regime was going into ongoing projects. In the Fifth Five- also incorporated incentives and institutional reforms to
Year Plan ( 1978-83) only 23 per cent of total public industrial enhance the efficiency of the industrial sector'. 31 Export-
outlay was on new projects. 29 In the early years of the Zia led industrialization was mentioned for the first time as a
government, public sector output increased much more policy goal, and there was an emphasis on the broadening
rapidly than private sector large-scale manufacturing output, of manufactured exports towards higher value-added items.
but in the second half of the ten years, the growth of the Amongst the more important initiatives in pursuit of
private sector was faster. 30 The impetus of growth in the first deregulation and liberalization in this period were the
three years of the Fifth Plan was the public sector, as many following:
of the projects started earlier, especially in the fertilizer and
cement sectors, came online. An increase in the investment sanction
limit; drastic reduction in the list of specified
Essentially then, while the Zia government was very
industries (which require government sanction);
favourably inclined towards the private sector and blamed reduction of tariffs on a number of raw materials,
much of the ills of the economy on Bhutto's economic policies, intermediate and capital goods; introduction of a
including nationalization, the Zia regime took a far more three-year liberal trade policy; and upgrading
pragmatic and politically clever line by not denationalizing of an Industrial Incentives Reform Cell (IIRC)
in haste. It encouraged the private sector by giving it greater into a Tariff Commission in 1989 to make
incentives and removing controls, and by opening up sectors recommendations on fiscal anomalies and
and areas previously exclusive to the public sector. Once the effective protection.
government realized that ownership and control of the public A series of measures . . . introduced to
sector industries was an effective tool for granting political deregulate industrial operations in the cement,
oil-seeds and fertilizer industries. Private
patronage and favour, there seemed little recourse to gift such
investment ... permitted in cement production
a means away. The best example of this is the fact that the and State-owned enterprises . . . allowed to
all powerful and important financial sector was retained by vary their prices. Subsidies . . . substantially
the government, and no denationalization or privatization of reduced and cement imports permitted. A
banks took place when General Zia was in power. similar package of de-regulation and reform
was adopted for the oil-seeds sector and a major
divesture programme was initiated by the public
Table 7.5 ghee corporation. 32
Share of Public Industrial Enterprise in Total Large-
Scale Manufacturing: 1978-88 Along with these measures, important steps were taken to
liberalize and encourage foreign trade. Prior to 1983, imports
Public sector
were considered to be either 'free' or 'tied', and goods that
Employment Value share in total
Years were on neither of the two lists, were banned. In 1983 this
share(%) added(%) industrial
investment (%) system was changed and a negative list was introduced,
where everything not on that list was now importable.
There was also a replacement of quantitative restrictions
1978/9 14.47 7.12 72.74
(non-tariff barriers) by tariffs, which according to the Asian
1979/80 14.34 14.55 65.25
Development Bank was a 'significant development since in
1980/1 15.24 12.27 58.01
16.15 13.28 52.03
Pakistan quantitative restrictions have been a more important
1981/2
source of protection than tariffs'. 33 To encourage exports,
1982/3 14.82 13.90 48.29
manufactured exports were given rebates, and exporters were
1983/4 16.36 11.81 44.56
given in;iport facilities, income tax concessions, and finance
1984/5 31.38
at concessionary rates.
1985/6 30.68
All the majo"r works on the Zia period-Asad Sayeed,
1986/7 21.64
the Asian Development Bank, the Institute for Developing
1987/8 17.85
Economies and S. N. H. Naqvi and Khwaja Sarmad-are
Source: Sayeed, Asad, 'Political Alignments, the State and
agreed:
Industrial Policy in Pakistan: A Comparison of
Perhaps the most important and far reaching
Performance in the 1960s and 1980s', unpublished
economic decision taken by the government was
PhD thesis, University of Cambridge, 1995, 117.
 --1
!

138 Issues in Pakistan's Economy

to remove the fixed peg of the Rupee to the Dollar politicians as he kept promising. No one at that time could
by introducing a managed float of the currency have envisaged the fact that General Zia would emerge as
in 1982. As a result between 1982 and 1987-88 Pakistan's longest ruler. Moreover, the only way power was
the Rupee was devalued by 38.5%, with an transferred away from Zia to another head of state was
average devaluation of 7.7% per annum. While through his death in an air crash. The political reasons why
there were other macro considerations which
he managed to outlast and outwit the opposition have been
dictated the decision to move away from the
peg, its impact on industrial decisions to invest documented by, amongst others, Omar Noman, Jonathan
and produce was central. The biggest impact Addleton and Asad Sayeed 37 ( see also Chapter 22 of this
was expected to come in export performance. book). This chapter only highlights the reasons why the
Conventional wisdom has it that Pakistan's economy performed as well as it did and how a booming
export performance has been sluggish because economy helped neutralize all political opposition against the
of an overvalued exchange rate. The overvalued government. While there were many political and human
exchange rate, it is argued, discriminates against rights grounds for the protests against Zia which continued
exports not only in capturing larger world market all through his rule, there were few economic justifications
shares but [also in] the implicit protection it for opposition.
accords to manufactured goods at home which
Again, all the major authors cited in this chapter are agreed
inhibits the direction of resources into export
industries. Correcting for the exchange rate was about the causes of a high-growth economy under Zia. The
seen as the [most] important step in devising an Institute of Developing Economies study summarizes these
incentive structure geared towards exports. issues as follows:
Devaluation was also expected to perform
an important import substitutive function. On the whole the manufacturing sector in
Devaluation will enhance prices of imported Pakistan has recorded impressive growth
capital and intermediate goods and will thus rates during the 1977-88 period. As we have
induce backward linkages for producer goods attempted to show the principle reason for this
industries. Thus the decision was also consistent performance has been a result of two important
with the industrial policy priorities of the phenomena:
government as outlined above. 34
i) the coming on stream of the public sector
The World Bank, not surprisingly, was particularly happy provided the requisite diversity in the
with the results of the deregulation and liberalization policies manufacturing sector. This resulted in both
the once and for all gains that such large
of the Sixth Plan. It calculated that the 'private sector's
investments are expected to bring in and
share in total fixed investment increased from 38 per cent secondly in the linkage effects that it created.
in FY83 [ 1982/3] to 42 per cent in FY88 [ 1987/8] and in the ii) the revival of confidence in the private sector
manufacturing sector its share in investment rose from 51 per to invest in industry once again after the brief
cent to 83 per cent'. 35 In a report published earlier, in 1988, interlude of the Bhutto regime. The spheres
the World Bank argues as follows: for private industrial investment that were
charted out by the Bhutto regime, i.e. the
Industrial growth has been encouraged consumer goods sector and the picking up of
by an improvement in the industrial policy linkage effects that the public sector would
environment for private sector initiative, in accord create, reached fruition in the period under
with Sixth Plan objectives. The composition review.
of industrial investment has shifted heavily
toward the private sector. Private industrial The underlying reason for high rates of growth
investment expanded by almost 23% p.a. in real and investment for growth in output was
terms during the Plan period, as against a 7% buoyant demand in the economy as a whole.
annual increase in total industrial investment. Because of the remittances from the Gulf and
In total, over 72% of total industrial investment a growing agricultural and services sector
during FY84-87 was contributed by the private consumption demand increased. Investment
sector. The restriction that public manufacturing demand, on the other hand, was enhanced by
investment be limited to the completion of high resource inflows from the international
ongoing projects and to rehabilitation of existing community, particularly the US, because of
plants contributed to this outcome. 36 Pakistan's strategic role in the Afghan war. 38

7.1.5 Causes of High Growth and the Nawab Haider Naqvi and Khwaja Sarmad believe that
the high growth rate of GDP which averaged 7 per cent
Success of the Zia Regime per annum between 1978 and 1986 was due to a strong
The fact that General Zia ruled Pakistan for more than eleven expansion in manufacturing led by a booming domestic
years surprised almost all observers. In July 1977, when he market (due to remittances and the income from illegal
took over from Bhutto, Zia came across as an inexperienced, trade, which increased significantly following the Afghan
bumbling General who, it seemed, either would not be able crisis) and the utilization of excess capacity'. 39 Workers'
to hold on to power, or would willingly transfer power to remittances had peaked at $3 billion in 1982/3, and a steady
 Chapter 7 The Process of Industrialization in Pakistan II: 1977-2013 139

flow of official capital such as long-term loans and grants, to go beyond mere appearances and aggregated growth rates.
amounting to an 'annual average of more than one billion The Institute of Developing Economies in its study argues as
US dollars enabled the government to finance its way out follows:
of the difficult situation created by the deteriorating terms
of trade', 40 and helped maintain macroeconomic stability as The relevant question in the context of this
well as promoting a high growth rate of GDP. During the Fifth study is the extent to which the government's
Five-Year Plan ( 1978-83 ), according to Robert Laporte and industrial policy, as revealed in its Five-Year
Plans and the Industrial Policy Statement,
Muzaffar Ahmad, the 'yearly average of foreign aid committed
contributed to this growth. The evidence
to Pakistan was $1.45 billion, up from the yearly average of suggests that growth occurred, not because of
$871 million during the Non-Plan period 1970-78'. 41 This the specific incentives provided in the industrial
annual average of foreign aid committed to Pakistan during policy of the government but in spite of it. The
the Sixth Five-Year Plan ( 1983-8 ), rose to as much as $2.29 outline of industrial policy ... shows that the
billion. 42 cornerstone of government policy was to move
Asad Sayeed shows that while the contribution of foreign towards the higher stages of import substitution
resource inflows was an important source of assistance to (through giving priority to technology-intensive
the Zia regime and helped finance industrial investment, and non-consumer goods manufactures), export
interestingly, its share in total investment declined to almost enhancement (through increasing the value-
added in manufacturing exports and export-
half its share of 1965-70, and to one-sixth of the heyday of
led growth) and enhancing efficiency in the
the Ayub period ( 1960-5) when foreign assistance was a manufacturing sector. Given the evidence that
critical factor, resulting in very high rates of growth. 43 Foreign we have presented in this section, the goal
resource inflows are yet another similarity between the Zia of import substitution in the intermediate
and Ayub eras, where external sources helped fund Pakistan's and capital goods sector remained unfulfilled.
economic development programme. Under Ayub, it was US Although, growth in exports increased the
aid that played the most critical role, while under Zia both contribution of value-added exports and the
US aid, following the invasion of Afghanistan by the Soviet composition of manufactured exports remained
Union, and remittances by Pakistani workers contributed virtually unchanged through the decade. We
very significantly. In some ways, while the 'bad luck' factor also tentatively conclude that the productivity
performance was also below par.
may have contributed to the below-par performance of the
In that case the only achievement of the
Bhutto regime, a 'good luck' element, particularly the Soviet government was to lure the private sector back
invasion of Afghanistan and high Gulf remittances, helped into industrial activity Other than that, it was
General Zia's economy considerably, and helped prolong his fortuitous circumstances (the gestation of public
rule. sector projects and the international situation)
However, such a high dependence on external assistance which was responsible for the above average
and on extraneous sources meant that when foreign inflows performance of Pakistan's manufacturing
ceased, so would economic development. This was most sector. 45
noticeable under the Ayub regime, but also became a factor
in the later period of General Zia's rule. S. N. H. Naqvi and Asad Sayeed is less charitable in his criticism of the cloaked
Khwaja Sarmad write: inefficiencies, and concludes his evaluation of Zia's industrial
policy in the following manner:
The outstanding feature of this period [ 1978-81]
is the rise in remittances, which pushed up The 1978-88 period is unique in Pakistan's
the national saving rate. The average share of economic history for exhibiting high output
investment in the GDP rose to 20 per cent in growth without corresponding improvements in
1977, and was high by historical standards. The the efficiency of factor use in the manufacturing
growth in investment was due to an increase in sector. We saw that much of this growth in
public investment in the social and economic output was financed by foreign remittances
infrastructure. The investment in public and aid flows coming into the country. The
enterprise remained low, and so did private inefficient use of these resources meant that the
investment. Public investment increpsed to an country squandered the windfall gains that it received
average of 11.6 per cent of the GDP despite the as a result offavourable exogenous conditions.
relative decline in external capital to the public In general, the industrial policy structure of
sector. This, however, did not alter the- public the period was not much different from that
sector's position as the largest recipient of foreign pursued in countries which performed markedly
capital. The high level of public investment was better than Pakistan, or for that matter from that
financed mainly from household savings (net which prevailed in the high productivity period
resource). 44 of the 1960s. Yet, we also saw that in many cases
industrial policy was either not implemented,
While there seems to be agreement that the Zia regime · or the policy structure in some cases was not
·produced high growth, two of the studies cited above have amenable to productivity growth. The existence
of smuggling, the precipitous increase in the
argued that much of what we have seen 'cloaked' the
number of sick industries, irregularities with the
inefficiencies of the economic regime and that it is necessary licensing procedures, etc. pointed towards a failure
140 Issues in Pakistan's Economy

in the implementation of policy during this time. We In addition to the industry-specific recommendations, the
also saw that policies were not altered even when following prescriptions of the IMF's macroeconomic recipe
it was abundantly clear that they were harmful have a direct impact on industrial development in Pakistan.
for growth and productivity. In particular, the
existence of negative ERPs [effective rates of {)/an increase in the level of indirect taxation
protection] for certain industries, the regulatory (in the form of a generalized sales tax) by
regime of the period and the Jack of incentives July 1990;
for value addition in the textile sector were ii) withdrawal of subsidies on gas, electricity,
identified as important policy errors. 46 telephones, and fertilizers;
iii) an increase in producer prices of major
crops (wheat, cotton, sugar cane, rice, and
7.2 THE AGE OF STRUCTURAL oil seeds) and in the prices of petroleum
products;
ADJUSTMENT: 1988 ONWARDS iv), a 12.5 per cent reduction in the public
V sector development programme during the
7.2.1 The Principles of the Programme agreement period ( 1989-1991 ); and
The history and political and economic background of the v) restriction on government borrowing and
role that the IMF and World Bank began to play in Pakistan's credit allocation to the private sector. 47
economy after 1988 are discussed in Part VI of this book. The
The World Bank, in its review of the programme of 1988-91,
present section only examines the relevance of the Structural
felt that the economy 'responded well to these policy reforms.
Adjustment Programme ( SAP) to the industrial sector.
Progress in implementing structural reforms to promote
The Seventh Five-Year Plan ( 1988-93) was commissioned at
private sector activity has been exceptional during the last
the same time as the IMF/World Bank induced conditionality
four years, despite three changes in government during this
was accepted by the government in the guise of a Structural
period.' 48 The large-scale manufacturing sector managed
Adjustment Programme. The plan had set ambitious targets
an impressive 7.4 per cent in 1991/2 due essentially to the
for overall reforms in the industrial sector, and included
rapid expansion of cotton manufacture. The World Bank
further deregulation, privatization, tariff reform, and
considered Pakistan to have achieved an 'excellent growth
regulation of foreign investment. As far as the three-year
agreement ( 1988-91 ) with the IMF was concerned, the performance'.
industrial policy outlined in the letter of interest committed A major emphasis of the Structural Adjustment Programme
the Government of Pakistan to the following: was on the enhancement of growth by encouraging the
private sector, which was supposed to take a lead role.
i) limiting the list of specified industries; Amongst the investment and industrial policies followed
ii) deregulating business decisions; was a 'forceful' programme of liberalizing the economy from
iii) raising the investment sanctioning limit government control. Furthermore,
annually [it was to be raised from Rs. 700
million in 1988 to Rs. 1 billion in 1989]; not only was sanctioning of private investment
iv) phasing out industrial location policies and import licensing abolished, but also a
over a three-year period and provision of number of other regulatory restrictions
infrastructural services at prices that reflect (including registration of technical and foreign
economic costs; Joan agreements, procedures for employment
v) divesting the shares of public sector of foreign workers, etc.) were also removed.
companies to the private sector; Areas of investment previously reserved for the
vi) instituting a corporate rationalization public sector were opened to the private sector,
programme to enhance efficiency in including power generation, commercial and
the remaining, i.e. non-divested, public development banking, and air and sea transport.
enterprises; [Also], it initiated the privatization of some
vii) considering a realistic trade regime 105 manufacturing units and began to take
as a primary investment or structural steps to expand the privatization programme to
adjustment effort; the energy and telecommunications subsectors.
viii) enhancing export incentives; By November 1992, 67 · manufacturing units
ix) reducing the level of protection accorded to had been sold and important preparatory
different industries; steps to privatize the telecoms utility (PTC)
x) reducing the list of restricted import items and gas utilities were underway. Finally,
as well as those subject to quantitative the Government also provided investment
restrictions; incentives to the private sector. In particular, to
xi) achieving a tariff range of 0 to 100 per cent promote investment in rural areas, an incentive
by 1st July 1990; and package, including a five-year income tax
xii) phasing out all tariff exemptions by 1990/91 holiday, exemptions from customs duty, sales
except duty drawback for exporters, tax and import surcharges, be provided for all
exemptions for import of capital equipment industries established in rural areas between
in key industries and reasonable baggage 1 December 1990 and 30 June 1995. 49
allowances.
 Chapter 7 The Process of Industrialization in Pakistan II: 1977-2013 141

According to the World Bank, the consequences of following According to the World Bank's analysis, 'the cornerstone of
these policies were as follows (,see. also Table 7.6): the Government's adjustment programme is to increase the
level and efficiency of private investment and activity by
Industrial value added grew by 6.3% p.a. deregulating the economy and promoting competition' 51 ( see
during this period. Manufacturing, electricity, Box 7.1 for the new rules of credit allocation). There is a very
and water, which explain most (86%) of this
strong emphasis in most Structural Adjustment Programmes
favourable result, expanded by 5.9% and 11.3%
p.a. on average, respectively. Large investments on increasing foreign direct investment (FDI) and foreign
in the energy sector led to significant portfolio investment (see Box 7.2). The Government was
increases in all major energy sources during urged in 1993 to continue pursuing the private sector agenda
this period: crude oil grew by 5% p.a., gas by aggressively in the coming years, a demand that Pakistan's
6% p.a., and electricity by 9% p.a., although government was eager to pursue in the next three-year
power shortages continue to be a significant programme of 1993-6 (see Part VI).
problem. Construction activity was relatively While the World Bank and the IMF have concluded that
subdued perhaps reflecting the stagnation in
the three-year Structural Adjustment Programmes launched
public investment. In manufacturing, cotton
industries . . . once again dominated the in 1988 and 1993 went rather well-especially in the
subsector/However, the stropg_pJ:rfoi:_maDf:~_Qf_ industrial sector, where the private sector has been the main
small-sc~l~anufacturing__(_w.hicb...acGOunts~for proponent of the new policies-it is worth ending this section
about one-tfiJra-of total ma~nufaqgrt11g_yalue- with an evaluation by a neutral party. The Japanese Institute

--
addea )"and non-traditional large scale industries
is encou;aging.:£:::-• -- -- . -
of Developing Economies, comparing actual industrial
production with the targets between 1988 and 1992, draws
the following conclusions:

Table 7.6
Sectoral Contributions to GDP Growth: 1981-92 (%)

Sectoral contributions to GDP growtha

Sectors Average Prelim. Average

1988/90 1989/90 1990/1 1991 /2 1988-1992
1981/1988

Agriculture 1.07 1.77 0.79 1.31 1.64 1.38

of which:
Wheat 0.06 0.44 -0.04 0.10 0.01 0.13
Rice 0.00 0.02 0.02 0.05 -0.11 -0.01
Cotton 0.35 -0.06 0.04 0.52 1.23 0.41
Sugarcane 0.00 0.24 -0.10 0.04 -0.08 0.02
Livestock 0.41 0.44 0.46 0.38 0.45 0.44
Mining and quarrying 0.04 0.01 0.05 0.06 0.02 0.04
Manufacturing 1.44 0.67 1.00 1.11 1.36 1.03
Large-scale 1.09 0.29 0.60 0.70 0.94 0.63
Food and beverages 0.15 0.03 0.04 0.03 0.20 0.08
Cotton related 0.14 0.09 0.28 0.26 0.38 0.25
Fertilizers 0.09 0.02 0.03 -0.02 -0.04 -0.01
Petroleum products 0.04 -0.03 0.03 0.09 0.00 0.02
Cement 0.02 0.00 0.01 0.01 0.01 0.01
Pig-iron 0.05 -0.02 -0.01 0.03 0.01 0.00
Automobiles 0.05 0.03 0.04 0.00 0.03 0.02
Others 0.57 0.16 0.17 0.31 0.35 0.25
Small-scale 0.36 0.38 0.40 0.41 0.42 0.40
Construction 0.22 0.10 0.13 0.24 0.25 0.18
Electricity, gas, and water 0.21 0.37 0.44 0.34 0.24 0.35
Transport and communication 0.73 -0.41 0.61 0.52 0.66 0.35
Commerce 1.26 0.87 0.58 0.91 1.25 0.90
Financial institutions and insurance 0.21 0.08 0.09 0.08 0.04 0.07
Public administration and defence 0.40 0.57 0.20 0.24 0.13 0.28
Other services 0.69 0.77 0.78 0.78 0.79 0.78
GDP (at factor cost) 6.51 4.79 4.67 5.59 6.38 5.35

asectoral contributions to growth rate are computed by weighing the sectoral growth rates by the previous year's sectoral share (in GDP).
Source: World Bank, Pakistan: Country Economic Memorandum FY93: Progress Under the Adjustment Programme,
Report No. 11590-Pak (Washington DC: World Bank, 1993), 5.
142 Issues in Pakistan's Economy

Box 7.1 Opponents of the scheme point out that while access to
Credit Allocation for Industry and the New export financing has been increasing __substantially, it does
not seem to h~ve had a corresponding effec:t on the .level of
Rules of the Structural Adjustment Programmes exports, which is primarily determined by c.ompetitiveness,
Credit plays a critical role in investment, as the Institute of quality standards, tariff policy and exchange rate policy. They
Developing Economies study shows: point out that interest rate subsidies cannot compensate for
a lack of competitiveness, poor quality, a discriminatory tariff
The allocation and cost of credit to industrial sectors is regime, and an overvalued exchange rate: it merely creates
a key tool for implementing industrial policy. It has been further distortions.
used extensively in countries with active state intervention- Nevertheless, in an economy where until the recent
ist policies, to ensure that targeted industries are provided financial sector. reforms, credit was allocated in a• detailed
with adequate input of capital to meet their investment manner, through an annual crndit plan, access to credit is
and ,.working capital requirements. Multilateral financial a vital lifeline. Pakistani industry has always been highly
, institutions, under the. influence of neo-classical thinking, leveraged, relying on debt rather than equity financing for
have been opposed to the use of targeted and concessional capital investment. First,· because it·was relatively cheaper
financing, on the.grounds that it distorts capital allocation on a real post:tax basis, and secondly because· it avoided
and causes financial repression. Through their structural all the legal complic~tions associated with equity flotation.
adjustment loans, they have brought considerable Thus, the volume of credit made available to industrial
pressure to bear upon the. Pakistani planners to phase out sectors is a crucial determinant of its output growth.
concessional credit. The planners, however, are concerned
about the effect this would have on the local machinery
manufacturing industry and the export sector, which
rely heavily on concessional funding. However, to date, Source: Institute of Developing Economies, The Study on
no comprehensive analysis of the costs and benefits of Japanese Cooperation in Industrial Policy for Developing
concessional financial has been carried out. Economies: Pakistan (Tokyo: IDE, 1994), 340.

The first point revealed by an examination of the 7.2.2 Assessing the Impact on the
data is the extent of variation between targets
and achievements, and the number of products Industrial Sector
that were subject to them. We note, for example, Although some analysis takes place in Part VI of this book on
that the variations affect up to 30 products the overall impact of the Structural Adjustment Programme,
for which data were available and range from and while we analyse recent trends since the late 1990s to
a deficit of 75% to an excess of 1013%. The
the present in Chapter 18, it is worth our while focusing
corresponding growth rates also show large
primarily on the industrial sector since the 1990s in this
variations. The second fact that becomes
immediately apparent is the degree to which chapter. Table 7.7 shows how much lower the growth rate
variations match the difference between revised of manufacturing was in the 1990s compared to the 1980s,
and original targets for the plan. It appears that falling from a very impressive 8.21 per cent average annual
planning in Pakistan is really an ex-post exercise. In increase over the decade, to only 4.8 per cent for the average
other words, as the planners realize that their original of the 1990s. Moreover, in the last five years of the 1990s, the
targets are not being met, they revise the targets to more growth was only 3.22 per cent. In 1996/7 the growth for the
closely approximate likely outcomes. Thus, in 1992, industrial sector was minus 0.1 per cent, and was only 1.5 per
the planners readjusted their targets, in light cent in 1999/2000. Clearly, this was a worrying trend at that
of the data on actual production as of that year, time. However, in the period after 1999, for the average of
so that it could be said at the end of the plan the period of the decade of the 2000s (1999/2000-2009/10),
period that targets were accomplished. This is we see a huge shift in growth in the manufacturing sector, to
really an exercise in self-deception. No attempt,
a decade average of 7 per cent, clearly a phenomenal growth,
it appears, is made to find causes for variations,
the highest in manufacturing since the decade of the 1980s.
or solutions to overcome the problems identified.
Objectives are outlined, targets set, and then the In fact, there were some years when manufacturing growth
planners await, with bated breath, the ultimate in this decade grew by as much as 14 per cent (2003/04) and
outcome! The monitoring of plan outcomes is even higher, 15.5 per cent in the next year, 2004/05. The high
not done in a periodic and systematic manner. 52 average for the decade of the 2000s is even more striking,
because towards the end of that decade, towards the end of
For further analysis of policies and their consequences the Musharraf regime, in 2007/08, and in the years of the
under the Structural Adjustment Programme, see Part VI. People's Party government, the manufacturing growth rate,
as well as that of the overall economy, took a sharp nosedive.
In fact, in the ·first year after Musharraf's ouster, in 2008/09,
 Chapter 7 The Process of Industrialization in Pakistan II: 1977-2013 143

Box 7.2 unless they belong to industries included in the Specified

The Policy Initiative to Attract Foreign Direct List. Remittance of principal and dividends from FOi and
from portfolio investment made by foreign and non-resident
Investment (FDI)
Pakistani investors are allowed without prior permission
The World Bank documents Pakistan's attempts to attract FOi: or clearance from the State Bank of Pakistan (exceptions:
foreign airlines, foreign shipping companies, insurance
Since late 1990, the Government in Pakistan has initiated companies).
a number of policy and regulatory measures to improve Export incentives have been introduced or broadened.
the business environment in general and attract FOi in The highly cumbersome duty-drawback system is being
particular. The requirement for Government approval of replaced with a scheme whereby 80 per cent of the duty-
foreign investment has been removed and 100 per cent drawback is paid automatically within three days to the
ownership is permitted, with the exception of projects in firm, and the remaining 20 per cent is paid within one week
industries included in the Specified List, which are: (a) arms after inquiry. Moreover, import policy has been partially
and ammunition, (b) security printing, currency, and mint, liberalized: the average import duty on raw materials was
(c) high explosives, and (d) radioactive substances. Foreign lowered, a large number of quantitative restrictions and
investment remains prohibited in the areas of agricultural non-tariff barriers were removed, and the negative and
land, forestry, irrigation, real estate, insurance, health, prohibited lists of imports were reduced. Finally, the 55 per
and related services. In the petroleum subsector, the cent income tax rebate on export earnings was changed
Government enacted a new Petroleum Policy which is into a 75 per cent rebate for export of high value-added
significantly more conductive to foreign investment than products, and a 50 per cent rebate for all other products.
previous policy guidelines. Foreign firms can now also As in the case of investment incentives, these rebates may
engage in export trading activities. Previously, the Provincial not be cost-effective and generally lead to distortions in the
Governments had to issue a No Objection Certificate and incentive structure.
effectively controlled the physical location of the investment. The Government has also enacted an extensive set of
Now, these governments limit their a-priori approval only investment incentives including tax holidays for projects
to so called negative areas. Furthermore, the elaborate in rural and underdeveloped areas. Imported machinery
controls that used to be imposed on the transfer of not manufactured locally is fully or partially exempted
technology have been entirely removed. Technology buyers from import duties, depending on whether a project is
face no ceilings over the amount of royalties and technical located in a rural area, underdeveloped areas, or industrial
fees they are allowed to pay. estates. A variety of other fiscal and monetary incentives are
One of the most important measures taken recently offered for projects in selected industries like electronics,
by the Government affecting FOi was the liberalization tourism, pharmaceutical, dairy farming, mining, engineering,
of the foreign exchange regime. Residents and non- fertilizer, and cement. Experience in other countries generally
resident Pakistanis and foreigners are now allowed to indicates, however, that these kind of incentives are not cost
bring in, possess and take out foreign currency, and to effective.
open accounts and hold certificates in foreign currency.
Foreigners using foreign exchange have now access to the
capital market. For example, no permission is required to Source: World Bank, Pakistan: Growth Through Adjustment,
issue shares of Pakistani companies to foreign investors, Report No. 7118-Pak (Washington DC: World Bank, 1988), 40.

the growth rate for the manufacturing sector was minus 3.6 the consequences related to such a transition. Furthermore,
per cent! The manufacturing sector has struggled since then the consequences of the War on Terror brought home very
, and did so in all the years of the Pakistan People's Party violent repercussions for Pakistan's society and economy, and
regime from 2008 onwards. There are many reasons why the affected investment and growth. To add to Pakistan's specific
" manufacturing sector and the economy overall, witnessed problems, was also the global recession which began in 2008,
such a boom in some of the Musharraf years, and why they and the phenomenal rise in world oil and food prices. While
both collapsed after 2008 or so. the People's Party government of 2008-13 inherited difficult
Many of these reasons are explained in detail in Chapter global conditions which were not conducive to growth and
18 and in Chapter 25, but the main reasons why the also had to deal with serious political and terrorist-oriented
manufacturing sector and the economy grew in the decade conditions at home, one cannot deny the fact that its own
1 of the 2000s after the dismal performance of the 1990s poor performance and the lack of a vision and clarity, also
were as a consequence of the windfall gains on account played a significant role. Many of these issues are discussed
of 9/11 and especially, the rescheduling of Pakistan's debt further in Chapter 18.
following 9/11. The fall In manufacturing after 2008, came Other trends in the industrial sector in the 1990s and after,
about because of the change, not just from one government only reconfirmed the deteriorating condition of industry in
to another in Pakistan, but from a transition from a military the country. For example, fixed investment, as a percentage of
dictatorship to a democratically elected government and all GDP in 2002/3 was only 13.1 per cent, down from 19 per cent
144 Issues in Pakistan's Economy

;:::- i.,
0
C\l
~
a,
ci
~
.. ,

a,
C\i
a,
,-.:

(!)
co
0
0
in 1992/3, falling gradually and noticeably each year. With the
privatization programmes of all governments since 1988, it is
not surprising that public investment at 4.5 per cent in 2002/3
was half of what it was in 1988/9. What is more disturbing is
I
C\J that while all governments have been relying on the private
a:
C\J C\J CD sector to lead Pakistan to higher levels of development,
in ci en
private investment as a percentage of GDP, also fell from
:E
around 10 per cent in 1992/3 to around 8 per cent after
co r--. co (!) C') ~ 1998/9. Most startingly the Gross Fixed Capital Formation
CO C\i
0
~o
Ol
7 0
~o
Ol
l
0
(GCFC) in the private sector in the large scale-manufacturing
,-.
.::
0 CX)
co
«i-
.::
0 a:,
ll)
0
0
in 0 sector in 1980/1, in constant prices, fell continuously over the
C\J
~o ~ 0 C\J 1990s, by as much as 60 per cent between 1991/2 to 1998/9-
C') co a, (!) v
f
0 see Table 7.7.
cxi 0 ,-..
~ 0
0
C\J
in in
j After the 1990s, most of these investment and manu-
facturing indicators improved substantially. In the decade of
LO
0 CD
r--.
cxi
LO
0 CD
ll)
0
co
«i-
r--.
in
-"'C: the 2000s, both total investment and fixed investment grew
~o ~ 0 C\J !!!
~ by rates which were even higher than in the 1980s when a
~
~ great deal of investment and growth took place. However,
ll) ll) C')
in 0 Ln r--,'. «i-
~o
:;::
C:
0 what is interesting is that in the 1980s, public investment as
0 0
-le:
0 a percentage of GDP, was higher (9.2 per cent) than private
«i- «i-
:;::
al investment (7.8 per cent), showing the large scale public
"tl development made in that decade. The structure of the economy
a, 0
C:
cci «i- ~ had shifted markedly, when despite overall higher investment
C:
ct!
in the 2000s, it was private sector investment which was the
c!, co v iii main motor of investment in Pakistan, and was almost three
0"' Si Q N
~

ct) «i- cxi ~

0 0 cci ~o times as much as public investment ( 12.6 per cent compared
C\l 8:.
C\J - a, ll) st 0 to only 4.8 per cent). There has been a continuous drop in
C\J
C')
0
~o
T""" (Y) in co -"'
C: public investment since the 1970s where public investment
ct!
0 v
CD is now less than one-third of what it was on average in the
ll) gJ Q)
r--. 1970s (3.3 per cent in 2010/11 compared to 10.3 per cent for
in
cci cxi
"',-.:- ca
ci5 the 1970s ). Private investment in the 1970s was a mere 5.6 per
"'
0
co co a, a,
,-.: Sl ~ cent for reasons which were explained in the last Chapter. In
«i- 8l 8l cci
Ol
Ol
C') "'
,-.:- ct!
Q) the 2005-08 period, private investment was above 15 per cent.
>,

2 C\J (!) en This trend marks a very clear shift in the dynamics of investment
CX) 1'i in ai
::::i
0
Ol cxi
-~
in Pakistan. The private sector is now the lead sector in
co C\J co v investment, unlike for the first four decades of Pakistan's
8l Si cci cci ai al
.D
existence. This factor might also explain the very dismal
ct! performance of manufacturing and of the economy, more
C\J 0 0) E
cxi ai
co ct! generally, since the collapse of the Musharraf regime and
"'a, ~ with him, in the economy. Public investment has been
N
,... ~ a, C\J r--. ..,. ijj'cii falling steadily over the last few decades, down to around
0 8l gi cci cxi co 00
a,
~ 5
ol(.) :!ii> 3.3 per cent of GDP in 2010/11. As a consequence, it seems
~
a, C') (!) 0)
-~ ~
now that growth and investment is now to be lead by the
"' a,
r....: cxi ai <D
a,
,... O')
Ol
-.:t"
Ol a5 g II
private sector. If this is the case, then it seems that growth
;.: ~ 0.
and investment in Pakistan will depend on incentives to the
co
~
0 0
;g: private sector and on conditions in which the private sector
uG)
Ol
(\')
Ol
0) ai ci
~
C:
m . is willing to invest. Clearly, conditions in Pakistan since 2007,
en
iii -
co
ll)
,.._ co l~ on account of the War on Terror, will not be attractive to the
~:::, j 0)
~ Ol

o"
C\I

st
cxi

ll)
ai

ll)
0...

! Ee
0
.o
C: C\J
private sector, and only the public sector can provide new
investment. This dependence and reliance on only the private
'0 C)
C: Ol ~ ,-.: co co :i: sector, when privatization has taken place and the role of the
.E '§ ~ Ol ct! .....
c... state has diminished, will mean that manufacturing and new
-
G) "O

i
..... Q)
.s:: 0 C)
-C: C:
investment will tend to be much lower, and more incentive-
ct!
.5 C: Q) .r:. and condition-specific, and hence more wayward, than had
ct! E u
I!! E E ctS public sector lead growth and manufacturing.
i 0
Q)
~ ~ The numbers above reveal the stark reality, that the
,... .2
...: -g ~ c3 3l industrial sector has suffered since the neo-liberal Structural
.r:. ai .8 Adjustment Programme was initiated in 1988 and only
~
G) -
j5 ~ ~jg extraneous and fortuitous circumstances after 9/11, were able
0 0
ill!~ C!l en z
 Chapter 7 The Process of Industrialization in Pakistan II: 1977-2013 145

to reverse that trend. Moreover, once the benefits of those the same period. 54 The rate of interest in Pakistan was a
factors was lost due to another round of post-9/11 factors, we controlled and regulated rate which was kept low-around
are back at the same place before 9/11. Many scholars who 6 per cent-in the 1980s, was 'liberalized' (increased) and
have looked at this Programme in any detail and have tried supposedly made market determined as a consequence of
to link it with the performance of the economy overall, do not 'reforms' in the financial sector.
claim with complete certainty as proof that this slowing down Similarly, freeing up of the prices of utilities-let the
in the economy is a direct cause of adherence to the adjustment market decide-forced prices up for gas, electricity, and
programme-for there are many other reasons as well-but petroleum inputs, all having an impact on final products.
they do clearly and convincingly show association and a clear Electricity prices rose by 14.7 per cent per annum between
link, especially with regard to manufacturing and industry. 53 1991-2001, while gas rose by IO per cent and the price of
We can demonstrate this link and association by looking at petrol was above Rs. 100 in 2012, from Rs. 13 in August
numerous policy interventions on account of the Structural I 993. This 'rationalization' of the utility pricing structure
Adjustment Programme and their consequences on industrial has undeniably had an impact on industrial costs and
inputs and performance. For example, if we examine the cost competitiveness. Add to this that tariff rates have fallen
of borrowing-the rate of interest-to borrowers of capital, drastically from a maximum of 225 per cent in 1986n to 25
we will see how reforms in other sectors impact upon the per cent currently making imported goods cheaper, it is then
industrial sector. From an average of 12 per cent in I 990, the not surprising that more than 4,000 industrial units were
rate of interest for financing long term industrial investment declared 'sick' and overall industrial production has been
rose to an average of 20-23 per cent by I 997. The interest what it was in the 1990s, and has been after the Musharraf
rate on working capital also increased to 25-30 per cent in artificial a_nd unsustainable 'boom', which came to an end in
2007-see Box 7.3. ·

Box 7.3 refund to the textile exporters on time. To meet the shortfall in
IMF Conditions Derail Textile Vision 2005 tax revenue during the first half of this fiscal year, CBR withheld
refunds of more than Rs. 15 billion, creating a liquidity crisis for
This news item from Business Today, 3 June 2001, identifies the entire export industry in the country, which ultimately slowed
how the Government's Textile Vision 2005 strategy unveiled with down the growth of exports in the later months.
much fanfare in May 2000, came undone as a consequence of The banks are not in a position to provide adequate credit at
IMF conditionality. exceptionally low mark-up. The textile manufacturers are also
not willing to take huge loans at the market-based interest rate,
'While the government intends to provide soft-term loans says a source.
to the textile industry, under Textile Vision, the IMF wants After the approval of the Stand-By Arrangement (SBA) by the
elimination of all such credits in future. This will put an end to IMF, Pakistan has started phasing out subsidies to the export
an ambitious textile export promotion programme envisaged by industry and all the other sectors of the economy. Consequently,
the sitting government' officials said. Sources in the Ministry of the banks have enhanced the mark-up rate on the export
Commerce, say the government and the International Monetary refinance scheme, while by the end of June this year the banks
Fund have dissenting views on the provision of concessional would completely withdraw subsidy on the said scheme.
credit to the export-oriented textile manufacturers. To the utter dismay of Pakistani textile manufacturers, their
'With the advent of World Trade Organization (WTO) arch rivals India and China have already started extending
agreement and subsequent elimination of quota system by elaborate financial credit and incentives to their indigenous
the year 2005, Pakistan's textile manufacturers will be facing industry. Recently, a delegation of the Indian Textile Machinery
enormous challenges to market their products globally, without Exporters Association, that visited Pakistan, informed that their
the availability of soft-term loans both for running finance and government was giving a huge subsidy to the textile industry in
export refinancing,' sources said. Another key objective of the the form of credit and other fiscal benefits so that the industry
vision is to enable the industry to acquire modern technology could produce quality products at competitive prices.
for value-addition of textile products that can substantially help The Lahore-based exporters, maintained that the abolition of
indigenous textile manufacturers meet upcoming challenges of subsidies would serve no purpose but create difficulties for the
free-trade beyond the year 2005. indigenous industry.
The Ministry of Commerce has envisaged credit at exception- 'Instead of blindly pursuing the policies of the IMF, the
ally low mark-up, and other fiscal incentives, such as speedy Government should try to revive the local industry so that the
refunds of taxes, availability of export finance facility at subsidized economy could be put back on track,' said the two businessmen.
rates, and duty free import of textile-related machinery. But the The textile industry has fetched around $550 million additional
domestic banking sector has, on one hand, refused to lend to foreign exchange last fiscal, while during this fiscal, this sector
the textile industry at very low interest and on the other hand, is expected to attract even more through exports. 'The textile
has enhanced the rate of mark-up on the export refinance sector can double its exports within the next three to four years,
scheme, leaving the textile manufacturers high and dry. provided it is given adequate credit to implement its balancing,
Meanwhile, in a bid to meet the tough revenue target, the modernization, and replacement (BMR) plan,' a Commerce
Central Board of Revenue has neither provided any significant Ministry official said.
tax relief to the textile sector, nor has it paid billions of rupees in Source: Business Today, 3 June 2001.
146 Issues in Pakistan's Economy

These are just some of the 'reforms' undertaken since 1988 7.3.2 Further Reading
which have had an impact on Pakistan's economy and on the
industrial sector-also see Part VI. With the advent of WTO Probably the most outstanding work on the subject is: Asad
and with increasing competition and globalization, Pakistan's Sayeed, 'Political Alignments, the State and Industrial Policy
future prospects in the industrial sector seem challenging, if in Pakistan: A Comparison of Performance in the l 960s
not bleak-see Chapters 8 and 9 as well. We must also hold and 1980s', unpublished PhD dissertation, University of
the governments of General Musharraf and the one which Cambridge, 1995. Other useful texts include Omar Noman's
followed it, of the Pakistan People's Party, responsible for The Political Economy of Pakistan, 1947-85 (London: KPI, 1988);
creating an energy crisis, especially by the latter government, Nasim, Anjum, (ed.), Financing Pakistan's Development in the
which has led to a further collapse of the industrial and 1990s (Oxford: Oxford University Press, 1992); UNIDO:
manufacturing sector, an issue discussed further in Chapter Pakistan: Towards Industrial Liberalization and Revitalization
8 and Chapter 18. (Oxford: Blackwell, 1990); the Institute of Developing
Economies' Study on Japanese Cooperation in Industrial Policy
for Developing Economies: Pakistan (Tokyo: IDE, 1994); S. N. H.
7.3 SUMMARY AND FURTHER READING Naqvi and Khwaja Sarmad's manuscript, External Shocks and
Domestic Adjustment: Pakistan's Case, 1970-1990 (Islamabad:
7.3.1 Summary University Grants Commission, Monograph Series, 1994);
During 1977-88, industrial development regained the I<han, Shahrukh Rafi (ed.), Fifty Years of Pakistan (Karachi:
momentum that was lost between 1972 and 1977, and Oxford University Press, 1999 ), and his Do World Bank and IMF
growth rates of industry and of the economy returned to Policies Work? (London: Macmillan, 1999) are essential reading.
the historically high levels of the pre-Bhutto e;a. For this Parvez Hasan's, Pakistan's Economy at the Crossroads: Past Policies
reason, and also because both Ayub Khan and Zia ul-Haq and Present Imperatives (Karachi: Oxford University Press,
were military dictators, there are quite a few similarities in 1998), Asad Sayeed and Saba Gui Khattack (eds.), Women's
the process of development in the periods of their rule. The Work and Empowerment Issues in an Era of Economic Liberalization
private sector returned to Pakistan after the Bhutto years and (Karachi: PILER and SDPI, 2001) and Shahida Wizarat's
began to play a key role in industrialization. The Rise and Fall of Industrial Productivity in Pakistan (Karachi:
Zia reaped many rewards that resulted from the initiative Oxford University Press, 2002) are also worth reading. The
of his predecessor, and fortuitous circumstances, too, helped unpublished doctoral dissertation by Ali Cheema, 'Rent-
in establishing and maintaining an economy with very high seeking, Institutional Change and Industrial Performance:
growth. A number of public sector projects came online, and The Effect of State Regulation on the Productivity Growth
the Middle East boom in this period resulted in workers' Performance of Pakistan's Spinning Sector 1981-1994',
remittances of as much as $3 billion in one year easing any University of Cambridge, 1997, is also an excellent source for
strain on the economy. The Soviet invasion of Afghanistan looking at the industrial, and particularly textile, sector in a
resulted in Pakistan acquiring the (dubious) title of 'frontline political economy framework. Finally, three earlier reports
state', with military and financial aid, again reminiscent prepared by the World Bank on changes since 1988 should
of the Ayub era, flowing into Pakistan. Not only did large- also be consulted: Pakistan, Growth Through Adjustment, Report
scale production play an increased role as it did under Ayub, No. 7118-Pak (Washington DC, 1988); Pakistan: Medium-term
but the small-scale sector, due to Bhutto's policies, showed Economic Policy Adjustments, Report No. 7591-Pak (Washington
dynamic growth in the Zia period. DC, 1989); and Pakistan: Country Economic Memorandum FY93:
After General Zia's death, the democratic transition was Progress Under the Adjustment Program Report No. 11590-Pak
matched by a new economic order, and Pakistan entered the (Washington DC, 1993 ).
world of the Structural Adjustment Programme, under the See also two recent studies for a detailed perspective on
careful eye of the IMF and World Bank. The eleven years Pakistan's manufacturing and industrial sector. The Final
of high growth under Zia clearly unravelled, and the high Report of the Panel of Economists: Medium-term Development
expectations of the Structural Adjustment Programme were Imperatives and Strategy for Pakistan, commissioned and
not fulfilled in the 1988-99 period when electoral politics published by the Planning Commission, Government of
returned to Pakistan. It was only after 9/11, under Pakistan's Pakistan, April 2010, and the extensive study by Abid Burki
third military dictator, that growth rates in the industrial et al. Industrial Policy: Its Spatial Aspects and Cluster Development
sector, in investment, and of the economy picked up. As in Pakistan, Volume I, Analysis Report to the Industrial Policy 2010
we argue in Chapter 18, this was only on account of the (Lahore: LUMS, 18 October 2010).
windfall gain which accrued to the Musharraf regime after
9/11. The other, negative, repercussions of Musharraf's policy
after 9/11, were brought home as his regime was ·coming
undone, and growth rates, of the economy, investment,
and manufacturing, fell sharply. - Changed domestic and
international factors also affected Pakistan's economy, but so
did the policies of the People's Party government, particularly
its inability to deal with the energy crisis-also see Chapter 18.
 Chapter 7 The Process of Industrialization in Pakistan II: 1977-2013 147

Appendix 7.1
Another legacy of the Bhutto years-the labour laws-have
The Emergence of a New Breed of made the mode of operation of Pakistan's industrial sector
Entrepreneur under Zia in the 1980s different from that of their predecessors. The
introduction of the old-age benefit scheme, social security,

I'
This article by Asad Sayeed tries to compare the change in the
medical cover, and a limitation on the discretion of the
nature of entrepreneurs from the time of Ayub Khan to the end
employers to hire and fire, has increased the costs of the
of the Zia period.
employers by considerable proportions.
While the corporate generation of the 1960s could happily
lf the Habibs, the Saigols, the Valikas, lspahanis, and Fancys
amass fortunes without being saddled with such 'oppressive'
were considered role models for budding businessmen during
legislation, the new lot has dealt with these laws in quite
the 19 50s and 1960s, today's corporate kingpins like the
an ingenious manner. lnstead of hiring their labour force
Lakhanis, the Sharifs, and the Hashwanis have become the
on a permanent basis, the industria 1 sector of the 1980s has
idols of aspiring yuppies at the business schools of Karachi
resorted to the now popular practice of hiring it on a contract
and Lahore in the 1980s.
basis. By doing this, they manage to sidestep another major
The last decade has seen a significant transformation in
impediment in the way of accumulating huge profits.
the country's industrial elite, as a result of the separation of
However, boasting palatial houses or gleaming limousines
East Pakistan and the nationalization policy of Zulfikar Ali
these days is not just the hallmark of the business magnates
Bhutto's regime. This is not to say that all the big names from
aspiring to become socially indispensable, or of the powder-
the original '22' have literally gone under. ln fact, if one goes
kings with not enough places to spend their highly liquid
by the financial assets listed on the stock exchange some of
drug money. These are also some of the crasser symbols of
the industrial giants of the pre-nationalization phase-like the
bourgeois bounty flashed around by a whole new breed of
Habibs, the Dawoods, the Saigols, the Crescent group, and
export-led trade magnates. lndeed, it might even be true to
the Wazir Alis-continue to occupy prime positions on top of
say that the 1980s .has seen the proliferation of a new class of
Pakistan's corporate ladder. entrepreneurs who can match their big brothers in business in
But according to most observers of the country's corporate
terms of conspicuou_s consumption. These 'businessmen' are
scene, the list of industrial giants would have been quite
mostly exporters of value-added goods like garments, leather
different if some of the new groups-like the ubiquitous
products, rugs, and other items which have an exotic appeal
Sharifs of Lahore, the FECTO group, Captain Athar's Schon
in the western world and Japan.
group, and a horde of other textile empires-had all their These exporters-with leading names like llyas Malik,
companies listed on the exchange. 'l believe that if one was to
Mohammed Saeed, Mohammed Hussain, Khalid Javaid, S.
sum up all the net worth of say, the lttefaq group, they would
Mohammad Din, Aziz Brothers, and Haji Abdul Latif-
certainly be way up among the top 5 industrial giants of the
have grown and prospered partly as a result of changing
country; says a veteran observer of Pakistan's corporate scene.
governmental priorities, like the devaluation of the rupee.
He goes on to say that 'the big groups in Pakistan have always ln particular, they have been quick to reap profits from
held way above the majority of shareholdings required for concessions like the very liberal export policy with massive
controlling the management, and with liberal credit available rebates for value-added exports and, like their counterparts in
from DFls, it does not make any real difference to them if
big industries, they have also extorted huge profits by cutting
they do not seek equity from the stock market.' lt seems that down on labour costs. lnstead of relying on the traditional
the new industrialists have learnt from the tumultuous '70s factory-oriented method of production, many exporters have
when Zulfikar Ali Bhutto used the 'big 22' phenomenon as gone for sub-contracting their production to the small power
a major rallying point to come into power and subsequently and handlooms, tanneries, and weaving units in the informal
nationalized many of the big industries. sector.
However, there are some other important ways also in which While, on the one hand, this arrangement has made it
the new guard is dearly distinct from the old. For one thing, possible for these exporters to keep their overhead costs low,
almost all of the big entrepreneurs of the 'BOs have adopted on the other, it has effectively kept the workforce out of the
aggressive marketing and advertising strategies. But while this ambit of labour laws. Thus, with their fixed assets working out
high-profile corporate strategy may apply to their marketing as almost negligible on paper, they have been able to make
activities, as mentioned earlier, the opposite is true about an average profit, which ranges from 400 to 700 per cent per
their financial standing. While it was a matter of pride for the unit of exports.
older industrial giants to be listed on the exclusive club of the But despite these differences in the two different generations
'big 22', their lifestyles were conversely, far less ostentatious of corporate elites, it is not entirely wrong to say that they
than the conspicuous consumption pattern that has become have essentially made it big by riding on the back of the
characteristic of the more nouveau brand of financial tycoons country's bureaucracy.
today. Financial savvy now amounts to carefully protecting all Most observers of the first industrial boom assert that the
the particulars of one's financial worth, especially if some of infamous 22 families of the 1960s were more a product of state
the wealth has been fashionably fuelled through this decade's patronage, rather than that of any intrinsic entrepreneurial
business obsession of under and over-invoicing.
148 Issues in Pakistan's Economy

genius. Which leads one to wonder if the new business brass Crescent group is the first which has recently launched its own
has also made it big by accumulating a large share of their investment bank.
booty through the assiduous cultivation of the bureaucracy- ln terms of industries again, there seems to be little
who are notorious for not being averse to scratching others' difference in the product mix of the two eras. Like in the past,
backs if theirs are kept well groomed. Certainly, there can be most of the industries are essentially textile based. Some of
no denying that the role of the country's establishment in the new names have, however, distinguished themselves by
the concentration of industrial assets has remained almost venturing heavily into areas like hoteliering (Hashwanis), steel

I
as significant as it was during the industrial boom of the (Sharifs), auto assembly and light engineering (the Atlas and
1960s. lf at that point during the 'decade of development', Sony groups).
the nascent industrial class of the country was provided The picture that emerges out of the present set-up of
easy capital through state-owned financial houses like the corporate activity then, is that it continues to be essentially
PlDC, PlClC, and lCP, the new breed have not exactly been patronized by the state, which not only supports this group,
starved of liberal loan windows through nationalized banks but also turns a blind eye to its numerous illicit practices.
and the many DFls which have been created over the last 15 Since the onset of parliamentary democracy in 1985,
years (NDFC, BEL, etc.). Similarly, the famous bonus voucher however, many politicians have been going into industry in
scheme of the 1960s and the overvalued rupee-mechanisms a big way-with some leading names like the Saifullahs, Zarri
for easing the import of raw materials and export of finished Sarfaraz, and the late Mohsin Siddiqi. And if the present trend
products have taken on the guise of excise and export tax continues, one wouldn't be too far off the mark in conjecturing
rebates, and import of capital equipment at lower duties. if the '90s is going to see the new breed of politicians-turned-
Apart from obtaining these concessions which are general industrialists pushing out the present tycoons to gain a higher
to the industrial sector, big business has essentially thrived position near the top of the corporate ladder.
by maintaining a dose rapport with the top echelons of Certainly, if one is to go by the business community's
the bureaucracy-an arrangement which has occasionally recent protest marches and convention jamborees, which
been disturbed during the brief interludes of parliamentary embodied its threat to boycott government revenues and
democracy in the country. withdraw advertisements from the electronic media, it is
Another similarity between the elites of the two different becoming increasingly dear that they are not exactly going to
eras is that the big industrial conglomerates have backed their lie low while the feudal politicians sweep away the fruits of
industrial and personal assets by floating insurance companies their financial standing. There is little doubt in any business
and banks. After the nationalization of all banks and the observer's mind that, given the present aggressive posture
major insurance companies during the Bhutto era, it took of the business community, it seems that this time they will
some time for the new groups to commit so much capital pre-empt the traditional politicians' move to keep the reins
to venture in the financial market. But despite memories of of power in their hands by carving out a political niche for
the Bhutto squeeze, over the last 10 years almost all the big themselves.
groups-the Habibs, the Dawoods, the Adamjees from the old
lot, and Hashwani, Lakhani, Shirazi, and Firdous groups-have
managed to set up insurance companies or modarrabas. The Source: The ·Herald, June 1990.
 Chapter 7 The Process of Industrialization in Pakistan II: 1977-2013 149

NOTES
I. For one of the most outstanding works on Pakistan, a work 23. Weiss, Anita, Culture, Class and Development in Pakistan: The
that compares the political and economic similarities and Emergence of an Indigenous Bourgeoisie in Punjab (Lahore:
differences of the Ayub era with that General Zia ul-Haq's Vanguard, 1991), 156.
eleven years, see Sayeed, Asad, 'Political Alignments, the 24. Institute of Developing Economies, op. cit., 1994, 228.
State and Industrial Policy in Pakistan: A Comparison of 25. Asian Development Bank, op. cit., 1985.
Performance in the 1960s and 1980s', Unpublished PhD 26. Institute of Developing Economies, op. cit., 1994, 228.
dissertation, University of Cambridge, 1995. 27. Ibid. 223.
A work which throws new light on the Zia era, see Hasan, 28. Ibid. 229, footnote.
Pervez, Pakistan's Economy at the Crossroads: Past Policies and 29. Sayeed, Asad, op. cit., 1995, 116.
Present Imperatives, (Karachi: Oxford University Press, 1998). 30. Asian Development Bank, op. cit., 1985, 395.
2. However, the military has been an active player on the 31. Institute of Developing Economies, op. cit., 1994, 230.
political scene both at the national level and, more overtly, 32. UNIDO, op. cit., 1990, 73.
in Karachi. See Zaidi, S. Akbar, 'The Roots of the Crisis', The 33. Asian Development Bank, op. cit., 1985, 390.
Herald, Karachi, August 1992. Also see, the articles in, Zaidi, 34. Institute of Developing Economies, op. cit., 1994, 23 7-8.
S. Akbar (ed.), Continuity and Change: The Socio-political and 35. World Bank, Pakistan: Medium-term Economic Policy
Institutional Dynamics in Pakistan (Karachi: City Press, 2003 ). Adjustments, Report No. 7591-Pak (Washington DC: World
3. This section makes extensive use of Sayeed, Asad, op. cit., Bank 1989), (i).
1995. 36. World Bank, op. cit., 1988, 4.
4. Noman, Akbar, 'Industrialization in Pakistan: An Assessment 37. See Noman, Omar, The Political Economy of Pakistan, 1947-85,
and an Agenda', paper presented at the Seventh Annual (London: KPI, 1988); Addleton, Jonathan, Undermining
General Meeting of the Pakistan Society of Development the Centre: The Gulf Migration and Pakistan (Karachi: Oxford
Economics (Islamabad, 1991), 15-16. University Press, 1992); and Sayeed, Asad, op. cit., 1995.
5. Naqvi, S. N. H. and Khwaja Sarmad, External Shocks and 38. Institute of Developing Economies, op. cit., 1994, 270-1.
Domestic Adjustment: Pakistan's Case, 1970-1990, General 39. Naqvi, S. N. H. and Khwaja Samad, op. cit., 1994, 11.
Monograph Series No. 1 (Islamabad: University Grants 40. Ibid. 15.
Commission, 1993 ), 11. 41. Ahmad, Muzaffar and Robert Laporte, Public Enterprise in
6. World Bank, Pakistan: Growth Through Adjustment, Report No. Pakistan: The Hidden Crisis in Economic Development, (Boulder,
7118-Pak (Washington DC, 1988), 63. Colorado: Westview Press, 1989), 10.
7. Institute of Developing Economies, The Study on Japanese 42. Ibid.
Cooperation in Industrial Policy for Developing Economies: Pakistan 43. Sayeed, Asad, op. cit., 1995.
(Tokyo, 1994), 257-8. 44. Ibid. 45.
8. Ibid. 45. Institute of Developing Economies, op. cit.," 1994, 271-2,
9. Sayeed, Asad, op. cit., 1995, JJ0. emphasis added.
10. Ibid. 46. Sayeed, Asad, op. cit., 1995.
11. UNIDO, Pakistan: Towards Industrial Liberalization and 47. UNIDO, op. cit., 1990, 74-5.
Revitalization (Oxford: Blackwell, 1990), 20. 48. World Bank, Pakistan: Country Economy Memorandum FY93:
12. Ibid. 23. Progress Under the Adjustment Programme, Report No. JJ590-
13. Institute of Developing Economies, op. cit., 1994, 264. Pak, (Washington DC: World Bank, 1993 ), 3.
14. Sayeed, Asad, op. cit., 1995, 2. 49. Ibid. 3--4.
15. Naqvi, S. N. H. and Khwaja Samad, op. cit., 1994, 7. 50. Ibid. 4-5.
16. Institute of Developing Economies, op. cit., 1994, 53. 51. Ibid. 38.
17. Ahmed, Viqar and Rashid Amjad, The Management of 52. Institute of Developing Economies, op. cit., 1994, 336,
Pakistan's Economy, 1947-82 (Karachi: Oxford University emphasis added.
Press, 1984), JJ0. 53. See Part VI of this book, and Khan, Shahrukh Rafi, Do
18. Ibid. IMF and World Bank Policies Work? (London: Macmillan,
19. Asian Development Bank, Strategies for Economic Growth and 1999), and Wizarat, Shahida, The Rise and Pali of Industrial
Development: The Bank's Role in Pakistan, Asian Development Productivity in Pakistan (Karachi: Oxford University Press,
Bank (Manila, 1985), 391-2. 2002).
20. Institute of Developing Economies, op. cit., 1994, 228. 54. Cited in, Sayeed, Asad and Saba Gui Khattak, (eds.)
21. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 100. Women's Work and Empowerment Issues in an Era of Economic
22. Ibid. 102. Liberalization (Karachi: Pakistan Institute of Labour
Education and Research, and Sustainable Development
Policy Institute, 2001 ), 6.
 I

Key Issues in Industry in Pakistan

The previous two chapters have given a chronological account followed by a substantial reduction in the 1970s, the reasons
of developments in the industrial sector in Pakistan, showing for which were discussed in the previous chapters. The 1980s
how the differing perspectives of different regimes have once again saw a return to a very impressive annual average
influenced industrial and economic growth. This chapter growth in manufacturing of 8.21 per cent, a fact which
looks at contemporary issues in the industrial sector, including received much recognition by international agencies and
privatization, the textile sector and a host of others, especially independent analysts and scholars (see Chapter 7). The roller-
energy shortfalls and implications for the industrial sector. coaster, boom/bust, trend of industrial and manufacturing
Many of the issues in the industrial sector today have their growth, was witnessed again in the 1990s, when growth
roots in policies adopted many years ago, so much so, that fell after the 1980s, to be revived again after 9/11, and to
some analysts and experts blame the problems of today on fall again after 2007 for a host of reasons discussed in the
key decisions of yesteryear. previous chapter.
A trend which is striking for its monotony is that exhibited
by the small-scale sector. The first few years, 1950 to 1962, ··
8.1 NUMBERS AND TRENDS IN INDUSTRY show a consistent trend of 2.3 per cent annual growth,
followed by a growth rate of 2.9 per cent over the next eight
The phenomenal growth rate experienced in the industrial years, with the Bhutto period registering an annual growth
sector in Pakistan in the early 1950s took place, from an rate of 7.3 per cent. From 1977 until the 1990s, we witness
almost non-existent base, where the growth rate of the a consistent trend of 8.4 per cent; from the 1990s this trend
industrial sector was doubling itself every few years. The rate falls to another consistent 5.3 per cent, following which
extraordinary growth rates of over 20 per cent between after some variation, the growth rate of the· small-scale
1950 and 1955 in large-scale manufacturing were achieved sector stays at 7.5 per cent from 2000-12. This trend seems
primarily because very little existed to start with and, too consistent for it to be of any real substance. In fact, the
hence, any investment and production, no matter how little, growth rate for the small-scale sector is not calculated, as it is
would register impressive gains. Only in the early 1960s did for the large-scale sector, and is merely imputed or assumed.
large-scale manufacturing come close to the extraordinary Every few years, a readjustment in the annual growth rate is
period of the early and mid-l 950s. Nevertheless, overall made to reflect a more realistic trend. However, as discussed
manufacturing did manage to produce a growth rate of close in section 8.2 the small-scale and informal sector is much
to 10 per cent on average throughout the 1960s (Table 8.1), more dynamic and productive than the government's figures

Table 8.1
Growth Rates in Manufacturing: 1950-2012 (% Increase at Constant Factor Cost)

Sector 1950-1959 1960-1969 1970-1979 1980-1989 1990-1999 2000-2009 2010-2012p

Industrial Sector 8.9 9.7 6.6 8.2 4.7 5.3 -0.6

Mining & Quarrying 10.5 8.4 4.8 9.9 3.3 17.8 1.0
Manufacturing 8.3 9.0 5.6 8.7 4.3 7.0 3.9
Large-Scale 17.2 12.3 5.1 8.8 4.0 7.3 2.4
Small-Scale 2.3 2.8 7.1 8.4 5.2 7.5 7.5
Slaughtering 4.3 4.4
Construction 11.4 12.2 6.6 5.5 2.4 3.7 4.9
Electricity and Gas Distribution 10.8 14.6 23.7 9.9 9.4 0.1 -2.8

P = Provisional
Source: State Bank of Pakistan, Hand Book on Pakistan's Economy 2010.
Government of Pakistan, Pakistan Economic SuNey (Islamabad: various years).

_J
 Chapter 8 Key Issues in Industry in Pakistan 151
I
I show, and in fact, with the large-scale manufacturing sector
stalling or even failing, it might just be the backbone of
what constitutes manufacturing and industry in Pakistan.
Moreover, since this estimate for the small-scale industrial
sector is on the low side, this implies that so too would be
the role and contribution of the private sector in the economy
and in GFCF will grow at the expense of the public sector.
The lower panel of Table 8.2 shows the contribution of both
the public and private sectors to GFCF. The shift towards the
private sector in most fields is quite noticeable, mainly for the
J the figure for overall manufacturing, which is based on reasons listed above. Large-scale manufacturing now takes
both large- and small-scale industry. Furthermore, we argue place almost exclusively in the private sector as does small-

I
in the next section that not only is the small-scale sector scale manufacturing, and with pro-private sector policies and
more dynamic on its own, but many activities previously o.enationalization, the private sector is playing a much greater
undertaken in the large-scale sector have shifted to the role in construction and the electricity and gas sector.
small-scale sector-textiles in particular. The implications of Table 8.3 shows the index of production in manufacturing,

r this are that, unless a correct annual estimate of.the small-

scale sector is made, the growth rate reported for the overall
manufacturing sector will always be on the low side. In fact,
as the small-scale sector prospers, the extent of error in the
sum for overall manufacturing will increase unless proper
figures are made available.
while Table 8.4 shows the distribution of production by the
main sectors since the early 1970s. Textiles, not surprisingly,
dominate, with the food sector also contributing a fairly large
share. The pattern since 1969/70 shows that a number of
new industries have come online which did not exist in the
early and mid-1970s. Most notably, petroleum refining, the
Like manufacturing growth, which has seen .•some ginning, pressing and baling of fibre, transport equipment,
important fluctuations, the growth rates of the mining industrial chemicals, and a number of other products now
and quarrying, construction, and electricity and gas sectors contribute a great deal to production. Nevertheless, one-
have been equally volatile. Construction, in particular, has quarter of total industrial production as measured by value
experienced huge growth in one year, followed by negative addition-Table 8.5-is still textile production, and if we add
growth in the very next year. This fluctuation in construction other cotton-related activity, its share increases further.

I could be due to the commissioning of large projects in

one year followed by fewer or no projects the following
year. Dams, power plants, and other large public (and now
private) sector projects would show huge investments for
one or two years in a row, followed, not surprisingly, by
A similar picture emerges when we consider the value-
added by industry, as Table 8.5 shows that the contribution
of textiles increased from about 17 per cent in 1987/8 to 26
per cent of all value-added by industry in 1990/1 where it
has remained. The. data in Table 8.5, based on the Census of
lower or even negative growth rates. For example, in 1960/1 Manufacturing Industries, are available only up to 2005/06
the growth rate of construction over the previous year was when the last CMI census was held. It is difficult to say
an astronomical 43.3 per cent, followed by -2.6 per cent in what contribution textiles make currently, given the crisis
the subsequent year. From 1977 onwards, and especially which has engulfed them (see section 8.3 below). Table 8.6
since the mid- i 980s, the annual growth in construction was shows the annual growth for some industrial items, and the
positive, and the extent of fluctuation was small. In fact, most marked feature of the table is the phenomenal growth
for all the sectors, the extent of fluctuation decreased after of the 1950s. An equally interesting feature is the very high
about the mid-l 970s. However, fluctuations in the growth fluctuation in. these items since the 1990s well into the 2000s,
of the construction sector became particularly volatile in the where very impressive growth in one year is followed by
2000-12 period growing by 56 or 59 per cent in one year, to negative, or low, growth in the next. One important exception
register a negative growth of 26 per cent a year or so later. The .is output of cotton yarn, which, although it has fluctuated,

I construction sector saw a growth of more than 10 per cent

in 2005/06 and 2007/08, but -8.6 per cent in 2010/11, with
annual growth rates of -10.7 per cent in 2003/04 and -11.2
per cent in 2008/09.
Gross fixed capital formation (GFCF) is the value of capital
has shown impressive growth rates for most of the last
decade, although since 2007, like much in the economy and
industrial sector, has tumbled rather sharply.
Table 8.7 concludes this section on facts and figures
in industry with the average daily employment in major
stock at a particular time. In Table 8.2 (Panel a) the GFCF industrial sectors. The striking feature of this table is that,
is presented for a number of years in current prices, and so while the overall population of Pakistan almost doubled
is not strictly comparable. GFCF can double over a period of between 1969 and 1990, the number employed in industry
time, simply if inflation doubles. However, we can compare went up by less than half. The reason for this could be that
the distribution between the private, public, and government industry became more capital intensive. But this is unlikely,
sectors. The table shows, as has been argued in previous given the output and production trends shown in earlier
chapters, that the private sector led growth in industry and tables. Another reason could be that the figures listed in
the economy through much of the 1960s and again in the Table 8.7, which are for the formal sector only, do not show
1980s. The public sector dominated in the 1970s and the role the trend towards the small-scale/informal sector that took
of government also increased in the same period. However, place in the 1980s. Although there may not have been a
since the 1980s, the private sector has begun to dominate complete shift of industry from the large scale to the small,
GFCF and has increased its role to around three-fourths of larger growth in the small may have captured the increase
the total. It is probable that, with further privatization and in the labour force (see section 8.2). It is also possible that,
the involvement of the private sector in areas which were to circumvent labour legislation, employers have preferred
once the exclusive terrain of the public sector, in future years to hire part-!ime, non-unionized, contract workers, rather
Table 8.2 ....
01
Gross Fixed Capital Formation in Private, Public, and General Government Sectors at Current Market Prices: 1963-2012 (Provisional) I\)

Panela UI
UI
C
CD
1963/4 1971/2 1976/7 1980/1 1987/8 1994/5 2001/2 2005/6 2010/11 2011/12p UI
::::i
%of % of % of %of % of % of % of % of % of % of
Rs. m Rs. m Rs. m Rs. m Rs. m Rs. m Rs. m Rs. m Rs. m Rs. m "ti
total total total total total total total total total total I))

-
;Ill:"
iii"
Total 5,055 6,813 27,856 42,972 111;266 320,896 476,113 1,565,838 2,069,242 2,255,864 I ))
::::i
Ul-
Private 2,870 56.7 3,546 52.0 9,214 33.1 16,874 39.3 51,769 46.5 165,807 51.7 303,574 63.7 1,197,740 76.5 1,549,480 74.9 1,639,510 72.7

sector
m
C,
0
::::i
Public 1,523 30.1 2,350 34.5 12,637 45.4 17,131 39.9 34,886 31.4 96,556 30.0 102,152 21.5 162,022 10.3 148,798 7.2 176,661 7.8 0
sector
. 3
'<
General 662 13.2 917 13.5 6,004 21.5 8,967 20.8 24,611 22.1 58,553 18.3 70,387 14.8 206,076 13.2 370,964 17.9 439,693 19.5

government

P= Provisional
Source: State Bank of Pakistan, Hand Book on Pakistan's Economy 2010.

Panel b

Gross fixed capital formation in private, public, and general government in industry (1989-2002) Constant Price of 1980/81
(Rs. million)

1999-
1989/90 1990/1 1991 /2 1992/3 1993/4, 1994/5 .1995/6 1996/7 1997/8 1998/9 2000/1 2001/2 2005/6 2010/11 2011/12p
2000

Manufactuing 12, 184_ 13,090 17,859 17,685 18,114 12,071 14,076 14,551 13,110 15,106 14,937 13,997 15,644 326,797 349,418 403,122

Large Scale 9,904 10,544 15,292 14,917 15,133 9,163 10,621 10,847 9,132 10,459 10,347 9,068 10,349 261,023 188,124 177,052

Small Scale 2,280 2,546 2,567 2,768 2,981 2,908 3,449 3,704 3,978 4,647 4,590 4,929 5,295 65,774 161,294 226,070

Construction 1,550 2,714 2,621 1,939 2,323 2;176 2,541 2,154 1,998 1,229 1,200 1,270 1,029 26,106 22,370 29,076

Electricity & Gas . 14,176 12,458 14,036 14,266 14,919 23,006 22,638 16,758 17,360 10,523 12,641 17,866 13,825 69,795 131,806 79,885

Transport 9,283 9,864 11,140 14,265 10,816 9,624 12,897 18,270 15,603 14,212 17,473 15,925 12,044 392,651 224,628 204,190
& Communication

Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various issues).

P= Provisional
Source: State Bank of Pakistan, Hand Book on Pakistan's Economy 2010 (Islamabad: SBP, 2010).
 Chapter 8 Key Issues in Industry in Pakistan 153

Table 8.3 cent, the actual numbers of those employed have increased
Production Index of Manufacturing: 1965-2012 by more than 72 per cent, from 2.8 million in 1972 to 4.9
(1980/81 =100) million in 1985 (Table 8.9). This shows an annual increase of
4.3 per cent in employment over this period. During 1976-83,
Year Index
the peak growth of the small-scale sector (see below), the
1965/66 39.1 annual real growth rate in employment was as high as 10.3
1965-70 46.4 per cent compared with the negative 1.1 percent for the formal
1970-75 64.4 sector in the same period. All recent evidence seems to
1975-80 76.1 suggest that this trend has been further accentuated.
1980/81 100.0 A look at Table 8.8 reveals that the informal or

---- 1980-85
1985-90
1990-95
123.0
174.4
225.3
small-scale sector has dominated employment in the
construction, wholesale and retail trading, hotels, transport,
communications, and storage industries in urban Pakistan
1995-2000 258.9 since at least 1972. However, probably the most interesting
2000-02 303.0 feature of the table is the fact that in 1972/3 the formal

r 2000-2005
2005-2010
201Q-2012p
131.7
191.9
111.9
sector dominated urban employment in manufacturing,
but by 1984/5 the informal sector had begun to dominate
urban manufacturing in an unprecedented manner. Clearly,
given the scale of the small-scale and informal sector, it can
P = Provisional 'hardly be termed as marginal to the economy, provider of
Source: Government of Pakistan, Pakistan Economic Survey "employment of the last resort", or as a temporary sponge to
(Islamabad: various years).
absorb new migrants entering the urban labour market and
All figures are 5 years average except 201 o-2012P (2 years
average)
seeking formal sector employment'. 2 The small-scale sector is
New series: 1999-2000 = 100 and New series: 2005/2006 = 100) not only here to stay, but will continue to play an increasing
and critical role in a number of areas in the urban economy;
and as Chapter 5 showed us, the non-agricultural sector in
rural areas which plays such a large part in rural incomes, is
also comprised largely, of the small and informal sector.
than formal employees. Nevertheless, whatever the cause of In the urban manufacturing sector, which mainly concerns
the slow growth in employment, all the figures presented in us here, as many as 98 per cent of manufacturing units were small-
this section show somewhat alarming trends and are cause scale unregistered firms, and in terms of urban manufacturing
for serious concern and urgent redress. Unfortunately, more employment, 51.4 per cent worked in the informal/small-
recent data are not available. scale sector, while only 48.6 per cent worked in the formal
sector in the l 980s, a balance which must have shifted
further towards the small-scale sector since. In 2010, Abid
Burki and his colleagues estimated that the 'SMEs constitute
8.2 THE SMALL-SCALE 90 per cent of the economic establishments and contribute
MANUFACTURING SECTOR 30 per cent of GDP and 25 per cent of export earnings, and
employ 78 per cent of the non-agricultural labour force'. 3
Much of the discussion that has taken place in this book Tables 8.10 and 8.11 make other comparisons between the
with regard to the process of industrialization in Pakistan formal and small-scale sectors, from which it is clear that
(Chapters 6 and 7) has revolved almost exclusively around much of the capital stock and value-added took place in the
the large-scale manufacturing sector. For most people, the large-scale formal manufacturing sector. The annual growth
image of industry is one where there are large plants either rates over the period 1976-84 (Table 8.12) reveal that in many
run by machines, robots, or the computer, or employing important areas-employment generation, value-added and
hundreds, if not thousands, of workers. Thus, it comes as a growth in capital stock-the small-scale sector has performed
surprise to many people when they discover that it is not the far better than the formal, large-scale, manufacturing sector.
large-scale manufacturing sector that provides employment While the reasons for this growth are discussed below, these
to most workers in the industrial sector, but the small-scale same reasons would very strongly suggest that, by most
or informal sector 1 that dominates our lives. The small-scale criteria, the small-scale informal sector has outperformed the
sector is, by far, the more dynamic, exhibiting impressive formal sector in the last twenty years.
growth rates in employment, output, and contribution to With regard to the growth rates in the small-scale sector, it
value-added. is worth noting the arbitrariness reported by the government
in its annual Economic Survey. For example, in the 1996/7
8.2.1 Numbers and Characteristics survey; the growth rate for the small-scale manufacturing
sector for the period 1986/7 to 1996/7 is given as a fixed 8.4
Table 8.8 gives us a picture of the informal sector between per cent. In the 1999/2000 survey the growth rate is 8.4 per
1972 and 1986 in urban Pakistan. While there was little cent from 1990/1 to 1996/7, and then 5.31 from 1996/7 to
change over the fifteen years as a whole, and the share of the 1999/2000. However, in the Economic Survey of 2002/3, the
informal sector increased only slightly from 69.1 to 72.7 per
154 Issues in Pakistan's Economy

Table 8.4
Census of Manufacturing Industries (Rs. m) (Rs. m)
2005/06
at at at
Industry Sector 1969/70 1976/7 1980/1 1987/8 1990/1
producer mark.et factor
price price cost
All Industries 11,801 30,674 84,288 230,886 374,858 1,103,414 1,204,282 1,023,559
2,420 9,587 17,532 43,791 62,236
~·1
Food products & Beverages 192,426 216,200 184,498
55 419 994 2,379 3,092
Tobacco
Textiles
652
2,964
2,207
9,065
4,850
14,639
9,074
40,361
8,767
91,736
46,347
269,690
53,983
273,194
22,618
268,882
.,.,
Wearing apparel 182 608 4,152 7,019 47,216 47,614 48,389
Leather products 300 805 1,195 7,552 10,782 9,816 10,336 9,799
Ginning, pressing, and baling 797 8,678 12,095 19,838
Wood and wood products 26 61 200 662 792 5,905 6,015 5,871
Furniture and fixtures 18 23 85 305 562 5,670 5,926 5,837
Paper and products 172 461 1,109 2,952 5,576 27,409 30,843 26,052
Printing and publishing 123 332 555, 1,947 3,762 3,575 4,047 3,414
Drugs and pharmaceutical products 1,001 2,655 7,532 14,102
Chemicals and chemical Products 1,614 3,290 11,484 20,186 173,772 184,425 164,098
Other chemical products 937 904 1,995 5,875 8,425
Petroleum refining 12,505 19,852 30,367 55,699 72,874 48,087
Petroleum and coal products 654 862 481 1,420 2,431
75 608 789 2,040 3,036
Rubber products and plastic products 10,600 13,642 10,303
109 225 1,340 1,985
Non metallic mineral products 401 1,000 2,738 11,723 16,034 81,193 93,267 66,644
Iron and steel basic industries 385 1,719 3,309 16,112 21,868 44,687 49,303 40,512
Fabricated metal products 252 637 924 2,109 3,326 8,991 10,685 10,685
Non electrical goods 172 672 1,424 5,562 8,754 15 16 13
339 1,105 2,656 8,668 12,408
Electrical machinery & transport equipment 20,943 22,745 20,713
247 1,383 2,419 10,195 14,529
Measuring, photographic, and optical goods 4 57 706 1,056
Sports and athletic goods* 40 89 518 1,489
Others* 1,609 434 1,287 480 713
All other industries 3,043

Included in furniture
Source: Government of Pakistan, Pakistan Economic Survey 1995-96 (Islamabad, 1996), and Census of Manufacturing Industries 2005-
2006, (Islamabad: Pakistan Bureau of Statistics, 2006).

growth rate from 1992/3 to 2002/3, is a fixed 5.3 per cent. As in all the sectors, a fact which is of particular importance
we have indicated in the previous chapter, the growth rate for when the economy is not doing well and with poverty and
the small-scale sector for 2000-12, seems to have been fixed unemployment growing (see Table 8.16). Unfortunately, fresh
at 7.5 per cent. data does not exist which makes it difficult to examine more
Further characteristics of the formal (large) and informal recent trends. The Final Report of the Panel of Economists
(small-scale and household) sectors can be seen from Tables estimates, that
8.13 and 8.14. In the formal manufacturing sector in urban
areas, the largest number of employed workers are in textiles, Pakistan's economy has a large presence of small
as they are in the small-scale and household sector. Fabricated and medium sized establishments, estimated at
metals account for a substantial share in the small-scale 3.3 million which contribute 30% of the GDP ....
urban manufacturing sector and is ranked second, while food They are highly labour-intensive in comparison
with the large-scale manufacturing sector with
and tobacco are the next largest sector in the formal sector.
95% employing less than 5 workers. Presently,
Table 8.14 shows the distribution of employment within there are several SME manufacturing clusters in
major industries by sectors. The formal sector dominates in the country. For example, there is a sanitary-ware
the heavier, capital-intensive large-scale industry, while the cluster located in Gujranwala, a cotton ginning
informal sector dominates in wood and furniture products cluster in Rahim Yar Khan, an electrical fittings
and jewellery (see Table 8.15). Moreover, the employment cluster in Sargodha, a cluster of industries
elasticity in the smalJ-scale sector is amongst the highest manufacturing · light engineering products
 Chapter 8 Key Issues in Industry in Pakistan 155

Table 8.5 mechanization in agriculture in the 1961-65

CMI Value of Value-Added: 1987/8 and 1990/1 (Rs. m) period and the subsequent giant leap experienced
in the 1967-70 period with the introduction of
Industry sector 1987/8 1990/1 green revolution technologies. A survey carried
out in 1969 discovered specialized clusters of
small-scale industry that had mushroomed in
All industries 74,310 111,006 various large and small towns of the Punjab
Food 11,854 15,600 since the beginning of the 1960s. [Others] also
Beverages 1,333 1,568 report that in 1968 there were 20,000 power
Tobacco 7,488 7,050 looms producing cotton cloth in the non-mill
sector in the Punjab. 5
Textiles 12,895 29,251
Wearing apparel 1,167 1,512
Khalid Aftab and Eric Rahim, writing about the Punjab,
Leather and products 991 1,717
say that there was a sudden emergence of the small-scale
Ginning, pressing, and baling 1,091 1,292
sector, 'as if out of nowhere', in the early 1960s. Daska, a
Wood and products 254 296
small town in central Punjab, had at best a few machine
Furniture and fixtures 89 174
shops in 1961, but by 1965 more than 120 shops were
r Paper and products
Printing and publishing
Drugs and pharmaceutical products
828
707
2,802
1,745
2,513
5,140
engaged in diesel production. The small-scale agriculturally
related engineering industry producing small diesel engines
and water pumps, which 'hardly existed' in 1960, employed
Industrial chemicals 5,185 8,713
a Jabour force of 6,000 by 1965. They argue that 'this aspect
Other chemical products 2,598 2,838
of the development assumes even greater importance when
Petroleum refining 4,379 2,273
it is realized that regular manufacture of these products
Petroleum and coal products 550 1,028
was unknown in this region of the subcontinent before the
Rubber products 695 1,067
1950s'. 6 They add that 'the emergence of a completely new
Plastic products 344 607
small-scale sector without any direct government assistance,
Non-metallic mineral products 6,480 8,416
employing over 6,000 workers in a short period is not, to put
Iron and steel basic industries 4,827 6,146
it mildly, an everyday occurrence in less developed countries' 7
Fabricated metal products 770 956
( see also Appendix 8.1).
Non-electrical goods 1,319 2,801
Clearly, agricultural growth and the Green Revolution
Electrical machinery 2,428 4,561
played a critical role in the development of the small-scale
Transport equipment 2,706 2,875
industrial, especially agricultural engineering, sector in the
Measuring, photographic, and optical goods 202 262
Punjab in the 1960s ( see Chapters 3-5). In fact, the Green
Sports and athletic goods 141 421
Revolution and its consequences transformed the entire
Others 187 194
agricultural, industrial, social, and economic structure in
Source: Government of Pakistan, Pakistan Economic SuNey major ways ( see Chapter 26). One consequence of these
1995-96 (Islamabad, 1996). developments was the phenomenal growth in the small-scale
sector in that period.
Ijaz Nabi analyses the impact of the Green Revolution on
the industrial process as follows:
in Faisalabad, a wooden furniture cluster in
Gujarat, a sports goods and surgical instruments Demand for farm machinery resulted from the
cluster in Sialkot, and the auto parts, PVC pipes, impressive growth of Pakistan's agriculture after
and plastic products cluster in Lahore. 4 the introduction of new dwarf wheat and rice
varieties and chemical fertilizers in the 1960s.
The agricultural sector grew between 3% and
8.2.2 Emergence and Growth 6% per year, reaching a peak in the late 1960s,
and this growth generated considerable demand
The early development and emergence of the small-scale for agricultural machinery. The most important
manufacturing sector in Pakistan, especially in the Punjab, is demand was for tube well engines and water
summarized by Asad Sayeed as follows: pumps, which ensure timely supply of water
and thus facilitate the use of chemical fertilizers.
The tradition of small-scale manufacturing in During this period of rising farm incomes, other
the Punjab goes back to the middle of the 19th farm activities such as ploughing and threshing
century. But . . . governmental bias against also started to be mechanized. By the late 1970s
the small-scale sector, low levels of absolute farmers began to complain about shortages of
income, a stagnant agrarian economy through labour at peak periods of sowing and harvesting.
the 1950s, and lack of linkages from consumer As a result, there was a rapid increase in the
goods-based import substitution provided little use of tractors and tractor-driven threshers,
impetus to small-scale industry in the 1950s. which enabled early harvesting of the winter
The emergence of any significant growth in the crop (wheat) and timely sowing of the summer
sector can be traced back to the beginnings of crops (cotton and rice), and which contributed
156 Issues in Pakistan's Economy

Table 8.6
Growth of Selected Industrial Items: 1950-2012 (Provisional)

Cotton Cotton Jute Veg. Soda Caustic

Year Cigarettes Fertilizers Cement Sugar
Yarn Cloth Goods Ghee Ash Soda

1950s 32.89 27.96 n.a. 22.97 20.38 1.47 8.16 n.a. n.a. 20.68
1960s
1970s
5.63
3.37
3.05
-5.24
n.a.
3.38
16.88
13.80
10.73
4.86
27.49
13.19
10.68
2.52
12.00
2.62
24.35
5.04
34.26
2.24
1
1980s 9.96 -1.07 9.48 4.46 -0.36 10.69 8.56 6.89 6.64 14.36 l
1990s 6.34 4.15 -0.31 0.49 4.49 3.97 2.89 4.90 7.00 5.10
1990/1 14.22 -0.65 1.15 -3.95 -7.41 -2.66 3.66 -1.54 6.08 4.15
1991/2 12.44 5.13 4.13 -2.59 -0.72 -5.50 7.20 26.29 4.46 20.06
1992/3 4.12 5.67 -3.37 13.46 -0.92 14.63 2.76 0.16 0.71 3.23
1993/4 7.44 -3.22 -21.64 -7.45 19.86 20.96 -5.27 0.59 9.46 21.90
1994/5 4.59 2.19 -10.34 5.96 -8.77 -1.27 -2.31 -0.46 4.16 4.33
1995/6 9.16 1.62 3.07 3.09 38.96 8.89 20.90 12.80 17.58 -18.15
1996/7 1.72 1.99 -2.69 -2.59 1.31 -3.53 -0.32 11.66 8.44 -1.77
1997/8 6.76 2.04 38.86 0.70 4.54 -3.15 -1.80 -2.71 -2.12 49.18
1998/9 6.52 13.02 -10.38 7.95 6.98 6.67 2.30 -0.37 4.06 -0.48
1999/2000 8.41 13.73 -1.87 -9.65 -8.92 4.62 -3.33 2.63 17.36 -31.41
2000/1 3.06 12.12 4.56 19.59 24.02 9.21 3.87 -11.30 2.97 21.70
2001/2 5.09 20.09 -8.01 -4.50 -5.05 -0.38 2.70 -1.23 3.85 9.84
2002/3 5.90 2.40 16.90 -3.20 -10.40 2.50 9.20 30.30 9.30 13.50
2003/4 0.70 17.40 8.90 15.10 12.20 9.00 18.60 2.20 14.10 9.10
2004/5 18.20 35.30 0.80 18.00 10.30 7.50 27.10 3.80 10.20 -22.50
2005/6 11.70 -2.30 -0.30 9.90 5.00 4.30 13.50 7.20 6.10 -5.00
2006/7 11.70 8.20 13.00 2.50 2.90 -3.20 22.50 3.70 10.50 19.20
2007/8 2.40 4.00 9.30 -3.60 2.20 2.80 17.60 10.40 2.50 34.20
2008/9 0.00 0.10 6.50 -6.60 12.10 3.00 6.10 0.10 -1.20 -32.60
2009/10 -4.30 -0.70 -22.70 1.30 -13.60 4.10 9.80 12.10 -25.70 -1.80
2010/11 5.46 1.08 -12.30 0.60 0.17 -7.97 -8.33 -7.70 -5.62 32.62
2011/12p 1.13 0.67 5.51 1.53 -3.76 -0.92 2.86 -5.13 -0.04 15.25

Source: Government of Pakistan, Pakistan Economic SuNey, 2012 (Islamabad: 2012).

to an overall increase in cropping intensity. market rate for foreign exchange to import
Agronomists have called this phenomenon the these items, it was difficult for SSI to compete
Thresher Revolution, following the earlier Green with LSM in the production of consumer goods
Revolution. Demand was also created for haulage or engineering industry products. Devaluation
machinery such as trolleys for marketing the changed this by reducing LSM's cost advantage
increased agricultural produce. 8 vis-a-vis imported capital and raw materials.
Further, the increase in the effective exchange
For Asad Sayeed, the growth impetus for the small- rate for machinery and equipment was much
scale sector in the I 970s occurred as a 'consequence of the greater than that for raw materials required
convulsions suffered by the large scale sector' 9 under Bhutto. for their local manufacture. Thus SSI's
For him, the most important policy in this regard was the competitiveness vis-a-vis imports was also
improved. Finally, since SSI goods (e.g. carpets,
pro-labour legislation introduced in 1972. However, for the
garments, surgical instruments, sporting goods,
Asian Development Bank,
etc.) tend to be export-oriented and therefore
face price-elastic external demand curves, these
possibly the single most important factor in industries received a relatively larger boost from
the increase in the SSI [small-scale industrial] the devaluation than did the LSM industries
growth rate during the 1970s was the massive which had become more oriented toward the
devaluation of 1972 and the Government's protected domestic market. 10
abandoning the multiple exchange rate as
a part of the Export Bonus Scheme. Since
the Government allowed LSM [large-scale Asad Sayeed agrees with this analysis and argues that it
manufacturing] a subsidy on the import capital helped the small-scale, export-related industries such as cloth,
and raw materials via artificially cheapened surgical instruments, and sports goods. He also identifies the
foreign exchange while SSI had to pay the free impact of the Suzuki car and motorcycle assembly plants
t
I
Chapter 8 Key Issues in Industry in Pakistan 157

Table 8.7
Average Daily Employment by Major Industry Sectors (in '000)

Industry sector 1969/70 1976/7 1980/1 1987/8 1990/1

All industries 418 457 452 515 622

Food 34 48 52 67 84
Beverages 2 3 4 6 5
Tobacco 11 8 13 9 6
Textiles 198 220 187 171 238
Wearing apparel 2 4 12 20
Leather and products 5 4 5 12 15
Ginning, pressing, and baling 13 10 10 4
Wood and products 2 2 3 3
Furniture and fixtures 2 1 1 2 2
Paper and products 6 8 8 8 8
Printing and publishing 9 9 8 8 8
Drugs and pharmaceutical products 7 11 18 18
Industrial chemicals 13 13 18 18
Other chemical products 22 7 9 9 9
Petroleum refining 2 4 2 2
Petroleum and coal products 2 1 2 2
Rubber products 3 10 6 8 8
Plastic products 2 5 5
Non-metallic mineral products 17 14 12 28 28
Iron and steel basic industries 14 17 18 44 44
Fabricated metal products 12 12
Non-electrical goods 13 15 14 25 25
Electrical machinery 16 17 17 19 19
Transport equipment 17 20 23 19 19
Measuring, photographic, and optical goods 4 4
Sports and athletic goods 2 8 8
Others 21 11 15 2 2

Source: Government of Pakistan, Pakistan Economic Survey 1995-96 (Islamabad: 1996).

Table 8.8 Table 8.9

Estimates of the Share of the Informal Sector in Urban Estimates of the Size of the Informal Sector in Urban
Employment by Industry (%) Employment by Industry (in '000 persons)

Industry 1972/3 1984/5 1985/6 Industry 1972/3 1984/5 1985/6

(1) (2) (3) (1) (2) (3)

Agriculture 100.0 100.0 100.0 Agriculture 376.9 457.2 467.3

Manufacturing 34.6 70.9 71.1 Manufacturing 262.8 1,131.5 1,265.0
Construction 79.3 87.9 86.5 Construction 227.3 378.9 455.2
Wholesale and retail 98.9 98.8 98.8 Wholesale and retail 936.1 1,534.0 1,785.9
trade, hotels, etc. trade, hotels, etc.
Transport 61.5 74.1 68.0 Transport 212.4 463.9 380.8
Finance, insurance, 67.7 40.9 48.1 Finance, insurance, 65.3 65.4 97.1
and real estate and real estate
Community and social 55.4 50.5 34.7 Community and social 671.0 642.2 513.7
services services
All 69.1 75.9 72.7 All 2,878.3 4,741.1 4,970.0

Source: Nadvi, Khalid, Employment Creation in Urban Micro- Source: Nadvi, Khalid, Employment Creation in Urban Micro-
Enterprises in the Manufacturing Sector in Pakistan Enterprises in the Manufacturing Sector in Pakistan
(Bangkok: ILO/ARTEP, 1990), 36. (Bangkok: ILO/ARTEP, 1990), 37.
158 Issues in Pakistan's Economy

Table 8.10
Formal and Informal Sector Employment in Urban Sindh and the Punjab: 1984/5 (in '000 persons)

% distribution Sectoral
Industry Formal Informal employment
Formal Informal as% of total

Agriculture 0.0 457.2 0.0 100.0 7.3

Mining 13.0 0.0 100.0 0.0 0.2
Manufacturing 465.1 1,131.5 29.1 70.9 25.6
Electricity, gas, and water 69.4 21.1 75.0 25.0 1.5
Construction 52.0 378.9 12.1 87.9 6.9
Wholesale and retail trade and hotels 18.8 1,534.0 1.2 98.8 24.9
Transport, storage, and communication 162.2 463.9 25.9 74.1 10.0
Financing, insurance, real estate, and business services 94.4 65.4 59.1 40.9 2.6
Community, social, and personal services 630.6 642.2 49.5 50.5 20.4
Other activities 0.0 45.8 0.0 100.0 0.7
Total 1,505.2 4,741.1 24.1 75.9 100.0

Source: Nadvi, Khalid, Employment Creation in Urban Micro-Enterprises in the Manufacturing Sector in Pakistan (Bangkok: ILO/ARTEP,
1990), 3. .

on the small-scale engineering goods industry through boost to the small-scale sector following nationalization was
backward linkages from subcontracting. 11 that industrial capital from the large-scale manufacturing
The import liberalization that followed the 1970s and sector was diverted to trade and exports, possibly making
1980s is identified as a positive development for the small- it easier for the products of the small-scale sector to find
scale industrial sector compared with the l 960s, when this domestic and foreign markets.
sector was faced with raw material constraints. Also, Bhutto's John Adams and Sabiha Iqbal have made a number
nationalization was addressed towards private, large-scale of very important observations about the growth of the
manufacturing investment, which declined later for fear small-scale sector under Bhutto. They believe that there
of further reprisals, and it is possible that some of these was actually a 'considerable bias' towards the small-scale
investment funds were diverted towards the small-scale sector, government credit to which increased by 122 per cent
sectors. The Asian Development Bank study argues that 'this between 1972 and 1974, and was 'sharply higher' in 1976. 13
seems particularly likely in the textile industry where many The devaluation of the Rupee also helped, and the new
looms were uprooted from large mills and set up as small import policy of Bhutto allowed industrial plants costing less
independent production units by mill owners' .12 Another than Rs. 200,000 to be freely importable against cash. 14 Since

Table 8.11 Table 8.12

Characteristics of Formal and Informal Manufacturing Annual Real Growth Rates in the Formal and Informal
Sectors in Urban Pakistan: 1983/4 Manufacturing Sectors in Urban Pakistan:
1976/7 to 1983/4 (%)
Informal
Formal Informal
Small-scale Household Formal
Small-scale Household
No. of workers/unit 86.71 2.34 1.82
Capital stock/unit 8,261.23 24.14 7.66 Employment -1.1 10.3 5.0
(Rs. 000) Capital stock 15.2 19.6 28.6
Capital-labour ratio 95.28 10.30 4.20 Value-added 8.7 54.6 4.2
Employment cost/ 19.25 7.47 5.82 Capital-labour ratio 16.6 8.3 22.5
waged worker (Rs) Labour productivity 49.4 39.7 67.8
Proportion of workforce 0.30 60.65 87.01 Capital productivity '---6.0 -2.8 2.9
unwaged Real wages for waged 5.7 5.0 1.0
(family workers) workers

Source: Nadvi, Khalid, Employment Creation in Urban Micro- Source: Nadvi, Khalid, Employment Creation in Urban Micro-
Enterprises in the Manufacturing Sector in Pakistan Enterprises in the Manufacturing Sector in Pakistan
(Bangkok: ILO/ARTEP, 1990), 47. (Bangkok: ILO/ARTEP, 1990), 48.
 Chapter 8 Key Issues in Industry in Pakistan 159

Table 8.13 Table 8.14

Major Industries in Terms of Employment in the Formal Distribution of Employment within Major Industries
and Informal Manufacturing Sectors in Urban Pakistan: by Formal and Informal Manufacturing Sectors:
1983/4 (%) 1983/4 (%)

Informal Informal
Industry sector Formal Industry sector Formal
Small-scale Household Small-scale Household

Food, tobacco 16.1 15.5 30.0 Food, tobacco 45.2 36.3 15.5
Textiles, leather, clothing 41.9 30.6 41.7 Textiles, leather, clothing 54.6 33.4 12.0
Wood, furniture 0.9 15.7 8.7 Wood, furniture 5.4 82.5 12.1
Paper and publishing 3.7 1.7 1.9 Paper and publishing 66.4 25.7 7.8
Chemicals 10.4 1.7 2.7 Chemicals 83.5 11.7 4.8
Mineral products 4.7 2.0 4.6 Mineral products 63.7 22.7 13.6
Basic metals 7.6 0.6 0.2 Basic metals 93.3 6.3 0.4
Fabricated metals, 13.7 20.0 5.9 Fabricated metals, 43.1 52.8 4.1
machinery, and machinery, and
equipment equipment
Others 1.0 12.3 4.4 Others 8.3 83.9 7.8
Total 100.0 100.0 100.0

Source: Nadvi, Khalid, Employment Creation in Urban Micro- Source: Nadvi, Khalid, Employment Creation in Urban Micro-
Enterprises in the Manufacturing Sector in Pakistan Enterprises in the Manufacturing Sector in Pakistan
(Bangkok: ILO/ARTEP, 1990), 53. (Bangkok: ILO/ARTEP, 1990), 53.

the small-scale sector did not fear nationalization, it attracted construction boom of the 1980s, with increased demand for
more private investment, and labour laws were also not household items, was also an important catalyst, causing
strictly applied to that sector. John Adams and Sabiha Iqbal demand for local products to grow and having expansionary
argue that the small-scale sector expanded during the Bhutto effects on the small-scale sector.
era, not because his government treated the sector in 'any Since data regarding the actual size and trend rates
exaggeratedly special fashion and it was more the absence of related to the small-scale sector are particularly scarce,
favouritism towards the big units that helped them' .15 it is impossible to quantify its exact size. However, there
Ali Cheema identifies yet another cause of the growth of is every indication that its growth rate is far higher than
the small-scale sector in the 1970s, which was the Cottage reported. It caters to a growing middle class and is being
Industries Act of 1972. 16 The textile sector was the most led byincreased demand for goods consumed by this class.
affected by this, after which there was a major shift in textiles Hence, it would be interesting to know whether the sector
from the large-scale manufacturing sector to the small-scale is at all efficient compared to the formal large-scale sector,
and informal sector ( see section 8. 3 ). given the attitude of the government towards it in the past.
A very pertinent point regarding the shift in the nature and
composition of the small-scale sector is made by Asad Sayeed,
who says that, due to the causes identified above, we see the
'emergence of the small-scale sector in the engineering and Table 8.15
capital goods industry and textile sector also. The important Industrial Categorization: Formal, Informal, and Mixed
qualitative change that the above developments during the Bhutto
interregnum brought about was to move small-scale manufacturing Purely formal Purely informal Mixed
out of exclusively agrarian servicing activities to the terrain of broader
manufacturing in the larger urban agglomerations. ' 17 Basic metals Wood products/ Food/tobacco
From the late 1970s and especially in the 1980s, Pakistan furniture
became a remittance economy, with large sums of money Chemicals/rubber/ Others Gewellery) Textiles/clothing/
from the Gulf greasing the engines of industry and probably plastics leather
resulting in higher than average growth. 18 The large inflows Fabricated metals/
of remittances and the increased purchasing power created machinery/
a large demand for consumer goods, which was fulfilled equipment
by a small-scale sector eager to expand. This demand-
led expansion had a multiplier effect as many of the Source: Nadvi, Khalid, Employment Creation in Urban Micro-
locally produced goods had linkages with the capital goods Enterprises in the Manufacturing Sector in Pakistan
industry, increasing demand and their production too. The (Bangkok: ILO/ARTEP, 1990), 54.
160 Issues in Pakistan's Economy

Table 8.16 Employment Elasticities

Sector 1961 to 1971-72 1971-72 to 1977-78 1977-78 to 1986-87 1990s to 2000s

Overall Elasticity 0.45 0.64 0.36 0.41

Agriculture 0.48 0.91 0.41 0.37
Large scale manufacturing 0.28 1.10 0.21 0.02
Small scale manufacturing 0.85
Construction 0.47 0.81 0.61 0.87
Transport & communication 1.26 0.45 0.48 0.45
Trade 0.92 0.51 0.45 0.57
Electricity & gas 0.54
Other including Services 0.68

Source: Final Report of the Panel of Economists, Medium Term Development Imperatives and Strategy for Pakistan (Islamabad: Planning
Commission, Government of Pakistan, April 2010), 60.

8.2.3 Issues Affecting the Small-Scale norm. Nevertheless, the increase in the ratio K/O over time
shows an 'increasing relative efficiency in capital use' for the
Sector small-scale sector. Moreover, a rising O/L ratio over time for
Khalid Nadvi, in his comprehensive study of the small-scale/ the large-scale sector indicates increasing labour productivity
informal sector, summarizes the main features of the sector in that sector. Asad Sayeed concludes his analysis by saying
as follows: that 'the claim that higher labour intensity in the small-scale
sector leads to its higher capital efficiency is not borne out by
The informal sector consisting of small the data'. 21
enterprises and household units appears to be One opinion expressed, without exception, by all scholars
expanding more rapidly than the formal sector working on the small-scale sector is that the state or
and already provides employment to the majority
government has until very recently treated the sector usually
of those engaged in urban manufacturing in
Pakistan. Informal sector units are characterized with indifference, but often with contempt. As the previous
by extremely low levels of employment and a two chapters also reveal; almost without exception-the
high incidence of unwaged family workers. As exception possibly being the Bhutto regime-state policy
to capital intensity there appears to be a distinct has been very heavily biased in favour of the large-scale
technology hierarchy on the basis of which manufacturing sector.
household units are the most labour intensive Khalid Aftab and Eric Rahim, who have examined
and formal sector concerns the most capital the phenomenal growth of the small-scale agricultural-
intensive. Furthermore, capital intensity is in real engineering sector in the Punjab, argue that 'government
terms growing more rapidly in the formal sector policy in Pakistan during the period under consideration
leading to a net displacement of labour. As a
[the 1960s] did not assign any important developmental role
result labour productivity is substantially greater
in the formal sector while capital productivity is to small-scale enterprises. It was never thought that small-
inversely related to unit size. 19 scale producers were capable of exhibiting any dynamism.
Government policies explicitly aimed at large-scale industries
He also argues that 'a focus on the informal small-scale and large-scale enterprises received special privileges.' 22 All
units would appear to lead to the most socially efficient favourable policies were directed towards the large-scale
allocation of capital and thereby have the greatest potential sector and in fact, according to the Asian Development
for generating productive employment'. 20 Bank study, discriminated against the small-scale sector.
Large productivity differences exist between the two Asad Sayeed argues that, after the bias of the state towards
sectors, as can be seen in Table 8.17. The labour productivity the large-scale sector in the 1960s, in the I 970s and 1980s
(OIL) for the large-scale sector is expected to be higher due 'the only change in government attitude seems to be the
to the higher capital-labour ratio in the sector, a trend which, acknowledgement of the existence of the small-scale sector,
not surprisingly, can be seen amongst all industries in both though with no tangible policy thrust'. 23 While it is clear that
periods in the table. An outcome that is taken for granted the state played no real role in explicitly promoting the small-
in much of the literature on the small-scale sector is that scale sector, an interesting observation made by a scholar on
the small-scale sector is more efficient than the large-scale the sector is worth quoting here: 'the fact that this sector is
sector in the use of capital. However, the results provided by exempt from or evades any form of tax and generally free
Asad Sayeed in Table 8.17 show that the ratio K/O presents a rides on utilities such as electricity, gas, water, and sewerage,
'mixed picture', with some industries not subscribing to the means that it enjoys an implicit "hands off" policy' .24
 Chapter 8 Key Issues in Industry in Pakistan 161

Table 8.17
Labour Productivity (O/L) and Capital-Output Ratio, Small-Scale and Large-Scale: 1983/4 and 1987/8, for Selected
Industries (in Thousands of Rupees)

1983/4 1987/8
Industry sector Small-scale Large-scale Small-scale Large-scale
K/O O/L K/O O/L K/O O/L K/O O/L

Food 0.31 85.78 0.22 399.51 0.31 64.65 0.28 454.53

Textiles 0.23 41.11 0.40 105.98 0.44 19.86 0.45 170.49
Footwear 0.08 21.60 0.16 100.87 0.09 24.23 0.18 441.20
Wood and cork 1.04 11.35 1.24 141.21 0.88 17.34 0.94 147.41
Furniture 0.28 15.27 0.29 85.67 0.32 18.97 0.78 125.82
Non-metallic minerals 0.10 86.53 0.65 303.30 0.23 51.98 0.80 387.72
Metal and metal working 0.33 19.98 0.27 113.38 0.30 28.40 0.28 173.60
Non-electrical machinery 0.97 15.86 0.24 209.50 0.57 29.88 0.35 210.17
Others 0.23 26.62 0.36 103.16 0.39 25.45 0.26 123.58
Total 0.23 49.33 0.36 265.90 0.39 29.86 0.41 280.50

Notes: The total is weighted by the three-digit share in value-added for respective sectors for the respective periods. The above
numbers for the small-scale only include 'Small Manufacturing Establishments' to the exclusion of 'Household Units' which
include 1O or fewer workers. A combined estimate of the two resulted in even lower labour productivity without affecting the
capital-output ratio significantly.
Source: Sayeed, Asad, 'Political Alignments, the State and Industrial Policy in Pakistan: A Comparison of Performance in the 1960s and
1980s', unpublished PhD thesis, University of Cambridge, 1995, 40.

There is a clear consensus on the position that the state, and capital goods for the small scale. Thirdly,
given the formidable contribution and growth rates of the with large firms subcontracting to the small,
small-scale sector, must now explicitly address the issues productivity enhancement and technical
confronted by it and actively promote the small-scale sector. upgradation is further encouraged through
Khalid Nadvi argues that 'if manufacturing is increasingly user-producer interactions, quality standards,
specification requirements, etc.27
going to be dominated by small and informal units, a larger
and more comprehensive policy framework for this sector,
This link with the large-scale sector can at times be critical,
that goes further than employment generation issues, would
since the experience of countries where the small-scale
be required'. 25 In the late 1990s and more recently, there
sector has flourished shows that 'ultimately the fortunes of
has been a conscious attempt by government to promote
the small are intimately linked with those of the large'. 28
small and medium enterprises by offering them loans and
Hence, any strategy to improve the small-scale sector will
providing them some support.
also need to address the issue of developing an efficient large-
One of the more interesting findings of the work on the
scale intermediate and capital goods industry. Areas where
small-scale sector has been its close links with the large-scale
linkages between the small- and large-scale manufacturing
manufacturing sector. Khalid Aftab and Eric Rahim believe
sectors already exist will need to be further strengthened so
that one of the reasons for the success of the Punjab firms
that both benefit.
was the overall environment of economic expansion along
The single most important constraint faced by the small-
with the small firms' proximity to large enterprises. For the
scale sector has been the availability of credit-see Boxes 8.1
individual small producer, 'the external economies generated
and 8.2. All surveys consistently come up with this finding.
by the large were as important as those it obtained through
Khalid Nadvi, in his survey of 328 small-scale enterprises,
the evolution of vertical specialization within the small-scale
found that only two of them had been able to obtain credit
sector' .26 Asad Sayeed, examining the experience of the
from the formal banking sector and both the loans were of
successful small-scale sector in Japan and Taiwan, argues
very small amounts. The constraints to borrowing from the
that the
formal sector were many:
large-scale capital goods sector can create the
Formal credit from the banking sector had
appropriate linkages for the embodiment of
been obtained by only two of the sample of
technical change in equipment, which can then
328 enterprises, both cotton weaving units in
enhance the productivity of the small sector
Gujranwala. In both cases the volume of credit
accordingly. Secondly, because of economies
availed was low (Rs. 7,000 and Rs. 10,000) and
of scale, the large-scale sector can contribute
used towards purchases of plant and equipment.
towards reducing the cost of intermediate
162 Issues in Pakistan's Economy

Box 8.1 problem is aggravated by the low level of education of small

Finances for the Small-Scale Sector entrepreneurs. In a sample survey, 35 per cent were either
illiterate or educated to below the matriculation level and
Abid Burki and his colleagues at LUMS, in their extensive study unable to adequately articulate their case.
on industrialisation in Pakistan, examined the constraints and In order to mitigate the problem of asymmetric information
issues of financing the small-scale sector. and adverse selection, banks have adopted precautionary
measures such as requiring that financing be collateralized,
The financial market in Pakistan is shallow as firms rely with collateral often exceeding 100 per cent of the loan. In
on retained earnings to finance their working capital and the sample, the average value of the collateral was higher,
investment needs. Trade credit and banks plays a smaller the smaller the business. This, however, leads to other issues
role in working capital financing; Pakistan's firms rely more on as SMEs generally do not have many assets that can be
internal funds. The pattern of funding using retained earnings collateralized; for example, over 40 per cent of the SMEs in the
is robust; ranging from 88% in NWFP to 78% in Sindh. sample admitted to not receiving a bank loan because they
Credit rationing in the formal credit market is a major lacked the necessary collateral.
constraint faced primarily by small- and medium-sized firms Moreover, most commercial banks regard SMEs as riskier
that constitute a significant portion of the industry. A study than large firms due to many reasons. Firstly, SMEs face a
conducted by the Lahore University of Management Sciences more uncertain competitive environment compared to larger
(LUMS) in 2006 also highlighted that access to finance is the companies; they experience more variable rates of return and
most critical impediment to the growth of the SME sector. higher rates of failure. Secondly, SMEs are less equipped
A survey found that 57% of new investment by SMEs and in terms of both human and capital resources to withstand
67% of their working capital comes from retained earnings, economic adversities, particularly unanticipated economic
whereas according to studies conducted by international shocks. Thirdly, their inadequate accounting systems and
organizations, banks provide only 7-8% of the total funding lack of financial controls undermine the accessibility and
requirement of SMEs. This is due to constraints on both the reliability of information on profitability and repayment capacity.
demand and supply side. On the supply side these are: weak Finally, SMEs in Pakistan operate in a somewhat ambiguous
and poorly enforced creditor rights, high unit costs of SME environment regarding governance, which reduces the
lending, and the reputation of SMEs as riskier borrowers in security of transactions. Thus there is a greater risk that banks
the financial system. On the demand side the constraints will not get paid, or that assets such as property will not be
consist of loan disbursement procedures, high interest rates properly registered.
and collateral requirements that raise the cost of access to In view of all these difficulties, banks frequently refuse to
credi. As a result of these financial constraints it is difficult for lend at all or severely restrict the size of their loans to SMEs.
micro enterprises and SMEs to grow in size and scale. The It is, therefore, not surprising that 86 per cent of the SMEs
resultant diseconomies of scale and inaccessibility to efficient surveyed had not acquired a bank loan. Moreover, in the total
technology of production are the main factors behind their low private sector credit disbursement of PKR1,669.740 billion in
productivity, which inhibits their growth potential. FY2007, the share of the SME sector was a shocking 1.7%.
Information asymmetries and the fear of adverse selection
are factors that restrict commercial bank lending to SMEs. Burki, Abid et al. Industrial Policy, Its Spatial Aspects and
This is because the information that SMEs can provide to Cluster Development in Pakistan: Volume 1 Analysis Policy
banks in the form of financial accounts, business plans, Report 2010, Lahore University of Management Sciences,
feasibility studies, etc. often lack detail and rigour. This Lahore, 18 October 2010, 135-7.

All units were unregistered which technically had to be paid to ·bank officials in order to access
restricted them from qualifying for credit from formal bank loans, were prohibitively high for
the formal banking sector. In addition, collateral, unregulated small-scale units. 29
guarantees, lengthy procedures and detailed
paperwork (usually in English) necessary to The small-scale and informal sectors therefore have to find
obtain formal bank loans were major barriers credit for working and fixed capital from other sources. The
to those operating unregulated units. Even sources vary according to type of industry; in some, the most
if collateral was available, a large number of
important source of credit is through the linkages which
informal enterprise owners were either illiterate
or had extremely low levels of formal education exist in that sector with wholesalers, large intermediaries,
and were consciously alienated from the formal or capitalists. -For example, most of the loans in the carpet
procedures required by commercial banks. weaving, transport and fishing sectors are made in the
Alongside the daunting procedures, form of advances with very high rates of interest, and the
respondents stated that the banking bureaucracy borrowers are ·almost bonded to the person making the loan.
was actively unhelpful and discouraging to In other sectors, the nature of borrowing is less exploitative
small-scale informal units. Many respondents and n;latives and friends, as well as family savings, provide
felt that the level of bribes, which they alleged
I Chapter 8 Key Issues in Industry in ·Pakistan 163

Box8.2 short run losses in the uncertain expectation of long-run profits

Credit Availability to the Small-Scale Sector on the other. The above-mentioned externality then takes the
form of potentially low risk projects and efficient investments
Asad Sayeed discusses the problem of the availability of credit in small-scale industry being entirely excluded from access to
to the small-scale sector: institutional finance.
Proponents of the level playing field argue that once The question to ask is that given the above identified market
interest rates truly reflect the scarcity value of capital, it will failures in the credit market, how did the countries which have
remove the implicit bias against the small-scale producer. efficient and growing small-scale industrial sectors overcome
Given the prevalence of borrowing from the curb market in the problem of moral hazard? Particularly in the case ofTaiwan,
the small-scale sector, market-determined interest rates would real interest rates-though state controlled-were high, yet
increase the cost of capital for the large-scale sector and lower significantly lower than the curb market rates. Amsden reports
them for the latter. However, the moral hazard of lending to that small-scale firms in Taiwan were also discriminated by the
a large and diverse number of borrowers still remains. As state-controlled financial sector, with the share of large firm
Anderson argues, in a situation where interest rates are market borrowing being three times more than that of the small and
determined and the small-scale sector is the recipient of credit, even medium sized firms. The same study cites that start-up
interest rates will rise to the level of the curb market, increasing capital for small firms in Taiwan is either raised through family
the risk of default in the formal financial sector. Moreover, savings, the curb market or in many cases from windfall gains
because the interest rate is above the actual opportunity made through urban real estate. So far as working capital and
cost of capital (because it has to cover the losses incurred at times equipment is concerned, 'big business appears to
by those who have defaulted), entrepreneurs in both the be an important source of finance for small business'. Other
large- and small-scale sectors, facing interest rates above the differences between the success stories and the failures is that
opportunity cost of capital will be loath to borrow. Not only will small-scale is provided with adequate infrastructure, which
there be a disequilibrium created from the demand side, but lowers their overall cost structure, thereby increasing their
as Stiglitz and Weiss show, this will lead to adverse selection profitability to the extent that they can afford to borrow from the
on the part of borrowers. Once the lenders decide on a more usurious curb markets.
discriminatory lending policy, typically the axe will fall on the
small-scale borrower. Therefore, according to Anderson: Source: Sayeed, Asad, 'Political Alignments, the State and
The practical effect, therefore, of simply removing adminis- Industrial Policy in Pakistan: A Comparison of Performance
trative controls would be for institutions not to lend rather than in the 1960s and 1980s', unpublished PhD dissertation,
charge high interest rates, on the one hand, or face significant University of Cambridge, 1995.

loans for the sector. The committee system--or bisee-is also government ought to do and the bureaucratization of the
an important source of funds for enterprise. small-scale sector, may actually end up with too much control
Some recommendations have been made by various of the sector undermining its dynamism.
scholars on how to deal with this credit constraint. There is
the mainstream neoclassical argument of working through
the market and providing a 'level playing field', by removing 8.3 THE TEXTILE INDUSTRY AND ITS
the subsidy on the interest rate on capital, and by providing
a 'credit package' (see also Boxes 8.1 and 8.2). However, CRISIS
as the Asian Development Bank study argues, 'it must be
When we think of the manufacturing industry in Pakistan, it
kept in mind that SSI [small-scale industry] comprises
is the textile industry that immediately comes to mind, and
several hundred thousand units and any attempt to provide
for good reason too. The textile sector holds a very important
incentives directly to individual enterprises through
position in Pakistan's economy in terms of employment
bureaucratic channels would be futile'. 30 ·
and value-added, but especially in the contribution the
There is no denying the fact that the small-scale sector
industry makes to exports. It has the highest manufacturing
plays, and is going to play, an increasingly important role in
value-added for any industry in the manufacturing sector,
Pakistan's economy. Rashid Amjad, for example, argued that
contributing 26 per cent, with the food sector next in line,
as much as 25 per cent of Pakistan's total export earnings
contributing 18 per cent in 2005/06. Similarly, about one-
were generated from the small-scale industrial sector a figure,
third of the entire manufactured employment was in the
which we show, has increased. 31 Ironically, in many ways, the
textile sector, with food a distant second, having only -13
dynamic growth of this sector has taken place because the
per cent. In terms of exports, approximately 30 per cent of
state has kept away from it and let it function largely on its
Pakistan's total exports came from cotton textiles in 1990/1,
own. Government interference or even 'help' may actually
up from 20 per cent in 1982/3. 32 Cotton yarn's contribution
prove to cause a slowing down of this impressive growth.
to exports increased from 10 to 18 per cent between 1982
The recommendations from the Panel of Economists for this
and 1990. These figures are only for cotton textiles, and if we
sector-Appendix 8.2-which focus a great deal on what the
164 Issues in Pakistan's Economy
I
Table 8.18
Cotton Textile Statistics: 1955-2012

Spindles (000) Looms (000)

Number
Years
of mills Installed Working % working Installed Working % working

1955-1959 n.a. 1,537 1,434.2 93.3 25.1. 22.2 88.4

1959-1964 74 1,674 1,629.6 97.3 28.2 26.4 93.6
1964-1969 92 2,058 1,923.4 93.5 30.4 27.6 90.8
1969-1974 131 2,877 2,711.8 94.3 29.8 26.6 89.3
1974-1979 139 3,536 2,700.8 76.4 28.0 19.2 68.6
1979-1984 156 4,077 3,008.6 73.8 24.8 13.6 54.8
1984-1989 184 4,446 3,467.0 78.0 18.4 9.2 50.0
1989-1994 271 6,356 5,150.0 81.0 14.8 7.2 48.6
1994-2000 349 8,315 6,452.0 77.6 11.1 5.0 45.0
2000-2002 353 8,707 7,284.0 83.6 10.0 4.5 45.0
1994-1999 348 8,302 6,392.4 77.0 11.4 4.8 42.8
1999-2004 356 8,932 7,298.0 81.7 ·10.0 4.4 44.0
2004-2009 429 11,298 9,748.2 86.3 8.4 4.2 50.0
2009-2012p 436 11,402 10,783.3 94.6 7.0 4.7 66.7

P = Provisional
Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various years).
All figures are 5 years average except 2009-2012P (3 year average)

included synthetics they would be even higher. According to Pakistan's textile industry has lost its relatively more
UNIDO, textiles constituted 56 per cent of Pakistan's exports prominent position of the 1960s and l 970s, and today
in 1985. 33 Tables 8.18 and 8.19 give an overview of the cotton holds a little less than 2 per cent of the world market.
textile industry. In 2010 Abid Burki and his colleagues wrote Pakistan enjoyed a very dynamic performance in the 1960s,
that, 'Pakistan's economy was built around textiles and its and was among the leading underdeveloped countries that
current base is still concentrated in textiles. Cotton textile were emerging in the world cotton textile market. In fact,
production is the most important of Pakistan's industries, Pakistan's record was quite envious, as between 1962 and
accounting for about 19 per cent of large scale industrial 1970 it cornered over 11 per cent of the world market. By
employment and about 60 per cent of total exports', 34 but for 1972 Pakistan held about 3.5 per cent of the world market
which world demand is falling. in textiles, which fell to 1.5 per cent in just four years. It
rose again to 2.5 per cent in 1983 and has since stabilized at
somewhat less than 2 per cent. 35
Table 8.19 More interestingly; the share of Hong Kong and South
Indices for Production of Yarn and Cloth: 1960-2012 Korea as a proportion of the world market tells a revealing
(Provisional) story. In 1972 Hong Kong held less than Pakistan's share,
with under 3.5 per cent of world output, while Korea's output
Years Total Yarn Produced Total Cloth Produced constituted a mere 1.5 per cent. In 1988 Hong Kong held
2000-01 = 100 . mn Kgs mn Sq. mtr a little under 9 per cent, while Korea's share of the world
1960-1965 11.0 113.7 market had risen to 6.5 per cent. 36 Some of the reasons for the
1966-1970 13.8 118.9 relative fall in Pakistan's performance, and the rise in South
1971-1975 21.1 123.3 Korea's and Hong Kong's contribution to world output, are
1976-1980 19.6 81.7 discussed below.
1981-1985 25.6 62.7 Many fortunes were made in the 1960s by leading Pakistani
1986-1990 41.4 54.6 industrialists, almost all of whom had significant interests in
1991-1995 71.4 63.8 the textile sector. In 1959 the nine largest industrial houses
1996-2000 90.4 74.4 accounted for 50 per cent of total production, with the five
2001-2005 111.1 132.3 biggest contributing as much as 37.3 per cent. The Saigol
2006-2010 161.1 202.9 group alone controlled 15 per cent of the total production of
2011-2012 172.2 209.5 cotton textiles in Pakistan (West Pakistan). Of the thirteen
Note: All values are 5 years average except 2011 ~2012 (2 years largest industrial houses in (West) Pakistan, cotton textiles
average) accounted for as much as 71 per cent of total production;
Source: Government of Pakistan, Pakistan Economic Survey engineering came second with only 7.9 per cent. By 1970
(Islamabad: various years). the top four industrial houses controlled almost 28 per cent
 Chapter 8 Key Issues in Industry in Pakistan 165

of cotton textiles, being produced by a mere twenty-three finishing facilities. Weaving comprises of small
industrial houses. 37 What is clear from the above is that the and medium sized entities. The processing sector,
cotton textile industry was highly concentrated amongst a comprising dyeing, printing, and finishing
few houses and that it was located almost totally in the large- subsectors, only a part of this sector is operating
scale textile manufacturing sector. in an organized state, able to process large
quantities while the rest of the units operate
Table 8.18 presents a rather unflattering picture of
as small and medium sized units. The printing
Pakistan's prime industrial sector, cotton textiles. Although segment dominates the overalJ processing
the number of installed spindles has been growing steadily, industry followed by textile dyeing and fabric
and shows a substantial increase, the percentage of spindles bleaching. The garments manufacturing
actually working has been lower than during the 1950s and segment generates the highest employment
1960s. within the textile value chain. Over 75% of the
In 2010 or so, while 95 per cent of installed spindles were units comprise small sized units. The knitwear
working, one suspects that by 20ll and 2012 when the industry mostly consists of factories operating
electricity crisis was at its peak, the actual number of working as integrated units (knitting + processing +
spindles would probably have fallen. For both these years, making up facilities). The clothing sectors both
woven and knits are mainly clustering [sic.] in
there were ample newspaper reports about the collapse of the
Karachi, Lahore and Faisalabad where sufficient
textile industry, and industry overall, due to power shortages. ladies [sic.] labour is available. 38 ·
In the looms sector, the position has been far worse, with
only 66 per cent of installed capacity being utilized, and As Table 8.20, and sections 8.1 and 8.2 show, much of
again here, one has seen complete or partial closure since manufacturing in general, and of textile manufacturing in
2010. Moreover, the number of installed looms has been cut particular, now takes place in the small-scale manufacturing
by almost half and the number of working looms is currently sector. The dramatic shift that took place in the nature
less than one-fifth of that in the 1950s and 1960s. The main of manufacturing industry in Pakistan, for the reasons
industry of Pakistan does not seem to be doing well at all, explained in section 8.2, also affected the textile industry in a
a fact confirmed by Table 8.19. While yam production may major way. For example, cotton cloth production, which was
have increased fifteen-fold since 1955, cloth production, 625.3 million square metres in 1970/1, fell to 123.5 million
having touched a peak in the early 1970s, fell to well below square metres by 1988/9 largely on account of this shift
1960 rates. A study on the textile sector in Pakistan gave the from the large-scale to the small-scale sector. 39 The cottage
breakdown between small- and large-scale sectors as follows: and small-scale segment of the textile industry employs
more than double the number of workers in the large-scale
The industry consists of large-scale organized
textile sector (see Table 8.20). According to a study by the
sector and a highly fragmented cottage/small-
scale sector. The various sectors that are a part Institute of Developing Economies, the negative productivity
of the textile value chain are: Spinning, most of in the textile and garment sector is mainly the result of
the spinning industry operates in an organized fragmentation of the industry,. shifting from large-scale to
manner with in-house weaving, dyeing, and smaller-scale units.40

Table 8.20
Overview of the Cotton Textile Industry: 1988

Direct
Number of Equipment employment
units (estimates)

Large-scale mill sector

1 Spinning 186 4.72 million spindles including rotors 150,000
2 Composite mills 44 16,000 looms
3 Finishing 10 1,000
4 Garments 50 3,000 sewing machines 5,000
Total 156,000
Small-scale cottage sector
1 Power looms 15-20,000 100,000 looms 150,000
2 Finishing 150 6,000
3 Towels 160 2,500 looms 4,000
4 Garments 2,500 80,000 sewing machines 150,000
5 Hosiery 550 10,000 knitting machines 20,000
Total 330,000
Source: UNIDO, Pakistan: Towards Industrialization and Revitalization (Oxford: Blackwell, 1990), 54.
166 Issues in Pakistan's Economy

Ali Cheema states that and marketing performance rather than merely
relying on growth in the world market or product
under the Bhutto government the textile sector specialization at a given time. 44
lost the importance it held in the state policy
regime in the '60s. This is because the emphasis Further reasons given by Ali Cheema for this fall in world
of the state shifted towards the creation of output share relate to the fact that both Hong Kong and Korea
public sector intermediate and capital goods shifted into higher value-added subsectors like man-made
industry and was no longer on the promotion of cloth and bleached cotton cloth. He writes that 'Pakistani
growth through manufacturing exports. 41
entrepreneurs on the other hand ignored upgradation into
either downstream higher value-added processes and/or
Moreover, the Cottage Industries Act created a bias against
into higher value-added products within each subsector.' 45
large-scale production and according to Cheema, 'this act
Essentially Pakistan failed to diversify into other products and
changed the structure of the industry in the textile sector',
lines at a critical juncture when the world textile industry
resulting in the fragmentation of firm size. Both output and
was undergoing change. This conclusion is reinforced by
employment in the small-scale sector grew significantly after
the fact that despite the imposition of import quotas by the
the Act, with the number of power looms increasing from
advanced capitalist countries, Pakistan was even unable to
20,000 in 1968 to 32,000 in 1972 and to 53,000 in 1978. 42
meet the quotas. Moreover, both Hong Kong and Korea faced
Moreover, the nationalization programme of the Bhutto
a strict.er quota regime than that applicable to Pakistan.
government broke the hold of the large-scale manufacturing
While both these East Asian countries were able to beat the
sector generally, but most importantly, the power of this group
quota constraint by diversifying and upgrading into higher
was significantly depleted as the critical link between the
value-added and quality products, Pakistan was not able to
financial and industrial sectors was ruptured. John Adams
meet this challenge, and hence suffered.
and Sabiha Iqbal concur with this view, arguing that the
Asad Sayeed argues that the 'loss in world market shares
policies that Bhutto's Finance Minister 'put into place were
points to underlying inefficiencies in the textile sector, in
the single most important cause of the poor performance
spite of relatively high productivity growth in the sector', 46
of the textile industry,' 43 since the nationalization of major
and this is despite the fact, as pointed out by the World Bank,
industries, banks, and insurance companies, and the new
that 'the textile industry in Pakistan is the most efficient industry
labour laws enacted, were all against the interest of large
industry, where the textile sector was located.
within the manufacturing sector' 47 ( see Box 8.3). For UNIDO, the
factors that will have to be addressed in order to increase
Table 8.21 shows how Pakistan's textile industry performed
the textile performance include problems presently related
compared to Hong Kong's and South Korea's between 1973
to 'a narrow production base; outdated technology, limited
and 1987, and explains the reasons why Pakistan's share of the
product range, [and] increase in quality consciousness in
world market in textiles fell during this period and why those
importing countries'. 48 (Appendix 8.2 in the first edition of
of Hong Kong and Korea increased. Asad Sayeed argues that
Issues, tries to identify some political and institutional factors
both Hong Kong and Korea captured greater that have resulted in the deterioration of the textile industry
market shares as a result of a much larger in recent years).
component of their growth in exports coming Zubair Bandukda highlights many of the pressing issues
from the competitive effect. This means that which affect Pakistan's most important industry, that of
these countries were able to break into world textiles. He argues, that while Pakistan is the world's fourth
markets on the basis of more dynamic production largest cotton producer with an annual production of now
around 12-14 million bales and its cotton fibre is considered
one of the best in the world, due to poor picking, ginning,
Table 8.21 and elimination of contamination, it loses this advantage.
Constant Market Share Analysis: Pakistan, South Korea, Pakistan is also ranked fourth in terms of spindles and
and Hong Kong: 1973-87 twelfth in terms of rotors installed, and is the world's fourth
largest cotton yarn producer as well, after China, India, and
World Commodity Competitive-
the USA. 49
Country trade composition ness
effect effect residual
About 70 per cent of Pakistan's yarn production is coarse
cotton yarn and only 3 per cent accounts for fine and super
fine counts. Pakistan is one of the largest exporters of cotton
Pakistan 82.1 41.9 -24.1
yarn in the world, in terms of quantity, but in terms of value it
Hong Kong 41.1 9.5 49.4
captures only 5 per cent of the export market. This shows the
South Korea 24.6 5.9 69.5
low value-added nature of Pakistan's exports of yarn. ·
In terms of weaving as well, Pakistan is the world's
Sources: Compiled from: Cheema, Ali, 'Pakistan's Textile Policy
and Trade Performance, 1972-90,' mimeo (Cambridge:
fourth largest exporter of woven cloth, although much of
Sussex College, 1995), and Sayeed, Asad, 'Political , the woven fabric is of low value, which is attributed to the
Alignments, the State and Industrial Policy in Pakistan: low level of technology both in the weaving and processing
A Comparison of Performance in the 1960s and 1980s', sector, with processing the weakest link in the entire textile
unpublished PhD thesis, University of Cambridge, value chain. In the world's largest market of cotton fabrics,
1995, 115.
 Chapter 8 Key Issues in Industry in Pakistan 167

Box 8.3 economic return of 18 per cent. This picture is, however,
Efficiency in the Textile Sector highly misleading. Some 25 per cent of domestic resources
are employed in industries which are very efficient and are
The World Bank in its evaluation of the textile sector has negatively protected. These industries are all characterized
argued somewhat surprisingly as follows: by the use of man-made fibre (MMF) and are unable to pass-
The textile industry in Pakistan is the most efficient industry on an average 24 per cent distortion in input prices to their
(DRC = 0.92) [DRC: domestic resource cost] within the consumers because of competition from a close substitute-
manufacturing sector. Efficiency is, however, far from uniform, pure cotton textiles-which is generally priced domestically at
with DRC estimates at the product group level varying from or near the world price. Such a situation is hardly conducive
0.72 for cotton spinners to 2.20 for woollen products. In to the growth of the MMF section of the industry which is
general, the industry is more efficient in the spinning of necessary if Pakistan is to develop a more balanced profile
locally sourced fibre (cotton) and the use of the same in relative to international demand trends.
made-up items (towels, canvas, knitwear, and garments). It is The increased availability of imported fabric and garments
relatively less efficient in the conversion of spun short staple after implementing the trade reform would induce a restructuring
and filament yarn into cloth (both finished and grey) and is of parts of the textile industry. Such a restructuring will help
least efficient in the conversion of imported fibre (wool) into Pakistan's textile sector to make better use of its competitive
both yarn and cloth. Internationally, the textile industry is advantage in world markets. The trade reform would eliminate
characterized by large-scale integrated operations employing the bias against the use of man-made fibre. Cotton spinning
very sophisticated technology to produce an increasingly (including mixed-fibre) would become more profitable despite
more demanding product. Both the weaving and finishing the elimination of the export tax on raw cotton. In all other
industry and the woollen industry in Pakistan are characterized areas of the industry profits will suffer, unless the efficiency of
by small-scale, non-integrated units employing very simple, production is increased, in particular the weaving and finishing
relatively labour intensive technology to produce a product of and woollen yarn industries which are currently operating
questionable quality. under high protection with low levels of efficiency.
The industry as a whole operates within a largely neutral Source: World Bank, Pakistan: Country Economic Memo-
assistance regime (EPR=13%) [EPA: effective protection randum FY93: Progress Under the Adjustment Programme,
rate], earning average private financial returns of 17 per Report No.11590-Pak (Washington DC: World Bank, 1993),
cent which are approximately equal to the estimated public 48-9.

Pakistan's finished cloth share is extremely small, only 3 per 4 per cent, with both accounting for around $160 billion
cent of global trade. It is important to emphasize that while worldwide. Pakistan has at best I per cent of the global
Pakistan's main exports are textiles and garments, they apparel market, primarily because Pakistan exports have a
occupy a dominant position in the low cost and low quality low share of value-added goods, which continues to increase.
cotton fabrics market. This means that while Pakistan has a higher share in the low
The reason for this is that apart from a small number, the value-added segment of the market, its export earnings will
majority of processing units in Pakistan are not integrated remain low unless the textile industry diversifies and moves
but independent commercial dyeing, printing, and finishing into the high value-added, quality garments and made-ups
units. Most of these units have low dyeing technology sector.
catering to the processing requirements of the low-end In light of globalization and WTO agreements, Pakistan's
knitting and woven fabric manufacturers. Textile made-ups textile sector has entered a completely different realm of
(towels and bed-sheets) as well as the garment industry's competition and issues-see Chapter 9 Section 9.5. Musleh-
demand are also met by such units. ud-Din and Kalbe Abbas 50 have examined the impact of
Textile processing is a technology-oriented business which these changes and in light of these new conditions have
requires capital-intensive technology, but most of Pakistan's made some recommendation_s which are worth considering.
machinery in this sector is more than fifteen years old and They argue that in the past although the textile and clothing
requires a major overhaul to upgrade it to quality and modern industry has been protected under high tariffs, with
standards. The tendency is to invest in the printing side of the subsidies, concessionary finances, subsidized cotton prices,
industry even though the dyed fabric is a higher value product and numerous other incentives and breaks, it has not been
compared to printed fabric and fetches a higher price. This able to achieve high efficiency, and as we show above, has
trend is driven by the dominance of the power loom sector for not made an entry into the high end of the quality market.
the supply of woven fabrics. There is a need to invest in the In order to take advantages of these .changes, Pakistan
dyeing side of the industry rather than printing which will will have to in1prove its quality standards across the board,
result in the unit price of the fabric being exported. from raw cotton to finished products. More research and
In the textile sector, the biggest growth is taking place in development is required in types of cotton especially the
the share of clothing and apparel. Clothing trade since the superior long staple varieties of cotton. Musleh-ud-Din
1990s has grown at a rate of 82 per cent compared to textiles, and Kalbe Abbas also recommend that Pakistan move into
168 Issues in Pakistan's Economy

synthetic fibres as this sector has been growing in recent Prior to 1972 the main public sector industries were managed
years. Most importantly, Pakistan will have to move into by the Pakistan Industrial Development Corporation (PIDC),
higher value-addition products rather than depending on which was created in 1952 with the aim of accelerating the
low-end or intermediate products. This would require a rate of industrial development in the country. PIDC was 'to
strong and modern weaving and processing base. Moreover, invest in fields in which private investment would be weak
the problems which have affected Pakistan's overall industry due either to technological complexity or the lack of immediate
since 20 I 0, such as electricity and gas shortages, will also have profit potential. It was also to transfer its projects to private
an impact on Pakistan's textile sector. In addition, a global entrepreneurs once they became profitable in order to promote
recession also bodes ill for Pakistan's main exports. While and strengthen the private sector.' 51 It was also expected to
the value of textile exports from Pakistan may have grown in promote some sense of regional balance between East and
2011, this was largely a price effect, due to the international West Pakistan, developing industries in backward areas.
rise in cotton prices, not so much a quantity effect. Hence, PIDC played a very important and effective role in fulfilling
when cotton prices fe]], as they did in 2012, both the volume its mandate and initiated numerous projects in the jute,
and value of Pakistan's main exports also fell, and will fertilizer, heavy engineering, and cement industries, some of
continue to do so, unless some of the structural (internal to which were later sold to the private sector. More importantly,
the textile sector) changes as discussed are implemented. See however, it acted as an important 'catalyst in the subsequent
Appendix 9.3, in Chapter 9, on the repercussions of the post- development of these industries' 52 by training labour and
quota regime and Pakistan's textiles sector. creating important linkages with other sectors. In many
ways, the role of PIDC was one of a pioneer, leading the way
for the private sector in later years.
8.4 HAS PUBLIC SECTOR INDUSTRY In the period 1972-7 the role of the public sector was
considerably expanded, and by 1977 the government was
BEEN A FAILURE? 'heavily involved in finance and insurance, manufacture,
transportation and communication, and energy. It had also
The public sector and the role of the government in general
entered the construction, trade and commerce. mining, and
have been much maligned and discredited in recent years.
agricultural sectors.' 53 The Zia ul-Haq regime did not increase
There has been a wave of denationalization and privatization
the role of the government by establishing new public
of state-owned enterprises not only in underdeveloped
enterprises, and much of the public sector investment during
countries, but in advanced capitalist states such as the
the early years of the Zia period went into ongoing projects.
UK as well. Not only have publicly owned and managed
Although very little was privatized under the Zia government,
industrial and non-industrial units been handed over to
the role of the public sector began to diminish as the private
the private sector, but with the process of liberalization,
sector was unabashedly chosen as the leading vehicle to
deregulation, and so called market-friendly policies adopted
bring about economic and industrial development. After
by underdeveloped countries, usuaHy in the guise of a
1991 the contribution of public sector enterprises was further
Structural Adjustment Programme, the role of the state in
minimized with the launch of the privatization programme
the provision of basic social and infrastructural facilities has
( see Table 8.22 for the share of the public sector in various
also diminished markedly. Today, the conventional wisdom is
activities).
that, as far as intervention by the government is concerned,
Given the abhorrence of the regimes after Zulfikar Ali
'less is better'. So, in many ways, the existence of public
Bhutto towards the public sector enterprises and the desire
sector industries is itself in question, and with the increased
to get rid of these units by the different governments
pace of privatization taking place in most countries, including
since l 99 l, one might have the impression that the state
Pakistan, one wonders if in a few years any state-owned
was burdened by these loss-making, inefficient units and
enterprises will exist at all. One of the reasons why ·the
wanted to rid itself of them as soon as possible and at any
privatization process is proceeding at such a pace is that there
price. Interestingly, however, the evaluations undertaken of
is a strong belief that public sector enterprises are inefficient,
the public sector at different times since 1977 paint a very
costly to run, poor performers and a major drain on the
different picture.
exchequer. The argument goes that the state should no longer
It must be remembered that public sector enterprises have,
subsidize loss-making enterprises and they should be either
not merely to respond to pure market criteria, but also have
sold to the private sector to run and manage, or closed down
social and political responsibilities and motives. Hence the
altogether. This section will evaluate the role, conditions and
'inclusion of socio-political goals in the objective function of
performance of public sector enterprises in Pakistan.
the existence and operations of public industrial enterprises
Figure 8.1 gives a chronology of the main developments
can pull down productivity and profitability of these units'. 54
with respect to public sector enterprises in Pakistan. The
This means that the overall evaluation in financial or
main expansion of public enterprises took place under the
economic terms, as reported, will be less than the actual
government of Zulfikar Ali Butto following his nationalization
contribution and outcome of the public sector enterprises.
programme of 1972. The role of public sector industry in the
Nevertheless, despite this proviso, their contribution has been
1950s and 1960s was mainly to supplement and assist the
very impressive.
private sector, which was considered to be the leading vehicle
. Table 8.23 shows the important indices of the public
of industrial development. The 1972 nationalization process
sector industries compared to the overall manufacturing
reversed that trend, with the public sector taking the lead.
 Chapter 8 Key Issues in Industry ii:i Pakistan 169

Figure 8.1 A Chronology of Key Developments in the Public Enterprise Sector

Event Date
Establishment of the Karachi Port Trust as the first public enterprise in what is now Pakistan 1886
Establishment of the Karachi Electric Supply Corporation (it became a public enterprise in 1952) 1913
Establishment of the Pakistan Refugees Rehabilitation Finance Corporation as one of the first public enterprises in

r
1948
independent Pakistan
Establishment of the National Bank of Pakistan as the first public enterprise in the finance sector 1949
Establishment of Pakistan International Airline Corporation as a public enterprise and government monopoly in the air 1955
transport sector
Establishment of the Pakistan Industrial Credit and Investment Corporation as the first development finance institution 1957

I
Establishment of the Water and Power Development Authority as a public enterprise and the major electrical power producer, 1958
transmitter, and distributor
Establishment of four development finance institutions to .assist in the economic development of the country:
Industrial Development Bank of Pakistan 1961
Agricultural Development Bank of Pakistan 1961
National Investment (Unit) Trust 1962
Investment Corporation of Pakistan 1966
Establishment of the Oil and Gas Development Corporation as a public enterprise in the fossil fuels energy sector 1961
Establishment of the National Shipping Corporation as a public enterprise in the sea transport sector 1963
Establishment of the Pakistan Steel Mills Corporation as a public enterprise in the heavy industries sector 1968
Nationalization of 31 large firms in 10 'basic' industries. The private firms became public enterprises. 1972
Nationalization of the vegetable oil industry. The private firms became public enterprises. 1973
Nationalization of private, domestically-owned banks and insurance companies. The private firms became public enterprises. 1974
Nationalization of 2,000 rice, flour, and cotton ginning mills. The private firms became public enterprises. 1974
Denationalization of 2,000 rice, flour, and cotton ginning mills 1977
Efforts initiated in the Ministry of Production through its Experts Advisory Cell to improve the performance of 56 of its 1981
public enterprises
Establishment of the National Disinvestment Authority 1985
Juneja government agrees to permit the private sector to establish banks. 1986
Juneja government permits private sector firms to bid on construction contract for electrical power station. 1986
Benazir Bhutto pledges no more nationalization of industry in the election campaign of 1988. 1988

Source: Ahmad, M. B. and R. Laporte, Public Enterprise in Pakistan: The Hidden Crisis in Economic Development (Boulder, Colorado:
Westview Press, 1989), 173-5.

sector in the period 1972-82. There is little doubt that where apart from Pakistan Steel, 'the two sectors were
the public sector industries performed far better than the equally (in)efficient'. 55 Sayeed's analysis clearly questions
overall manufacturing sector, even under the Bhutto government the biases perpetrated by the World Bank, which has played
( 1972-7) when the nationalization and pro-public sector a central role in discrediting the contribution by the public
policies were severely criticized and considered to be a sector. With reference to the late 1980s, a World Bank study
failure. By no stretch of the imagination, based on Table argues that 'the private sector was confronted with pervasive
8.21, can one reach that conclusion. While public sector regulatory controls in manufacturing and burdened by large
industries did fairly well under the Bhutto government, public enterprises suffering from poor performance and inefficiency', 56
they performed even better under the more open and liberal which clearly seems to be untrue.
economic regime of Zia. There was a significant increase in A more detailed analysis has been conducted by Nawab
profits and productivity by the state-owned enterprises in Haider Naqvi and A. R. Kemal, who have extensively analysed
the early Zia period, possibly due to a pro-investment and the performance of public sector enterprises. The salient
growth-friendly, overall economic and political environment, conclusions from this analysis are as follows:
encouraging economic growth. Moreover, under the Zia
regime a number of new units, initiated earlier, came into 1. Of the eight corporations which run the public enterprises,
production. Asad Sayeed shows that the weighted average of five of them, accounting for 71 per cent of output
productivity growth in the public sector was higher than that of the originating in public enterprises, have been 'reasonably
private sector once the numbers for the Steel Mill are removed profitable even from a strictly commercial view'. 57
from the sample. This, he argues is a 'surprising result',

___ ___J
 1

I
170 Issues in Pakistan's Economy

Table 8.22
Share of the Public Sector in Various Activities: 1960-88 (%)

1960/1 1965/6 1970/1 1974/5 1984/5 1987/8

Agriculture
Forestry
Fishing
Mining
Manufacturing
Electricity and power
0.0
3.7
2.1
85.0
0.0
19.1
2.4
98.2
0.0
24.9
2.4
65.0
0.2
10.1
8.1
77.5
93.0
11.1
100.0
93.0
10.1
100.0
1
Construction 0.0 0.0 0.0 0.0 0.5 0.4

l
Trade 0.0 0.1 0.4 7.9 1.3 30.2
Transport and communication 62.3 44.1 34.2 33.9 30.1 30.3
Finance n.a. n.a. 14.6 67.5 95.2 95.2
Others 0:0 0.0 0.0 0.0 0.1 1.6
Share in GDP 4.9 4.8 4.2 7.7 10.6 11.6
Share in non-agricultural GDP 9.3 7.9 6.6 11.5 14.3 13.7

Source: Kemal, S. N. H. and A. R. Kemal, 'The Privatization of the Public Industrial Enterprise in Pakistan', Pakistan Development Review,
vol. 31, no. 2, 1991, 111.

Table 8.23
Output, Employment, and Productivity Indices of Public Sector Industries and the Manufacturing Sector: 1972-82

1972/3 1973/4 1974/5 1975/6 1976/7 1977/8 . 1978/9 1979/80 1980/1 1981/2 71

Public sector industries

Production value (constant
1972/3 prices) 100 131 160 167 162 117 126 166 169 192
Employment 100 119 136 14 158 100 102 109 121 126
Labour productivity 100 111 118 116 102 117 124 152 140 152
Productivity indexa 100 120 123 120 n.a.

Manufacturing sector in Pakistan

Production index
(includes SSI) 100 107 108 100 110 109 114 126 139 155
Employment index 100 103 115 120 128 105 115 114 119 122
Productivity index 100 104 94 92 86 104 103 111 117 127

Source: Federal Bureau of Statistics, Annual Report on Public Sector Industries, 1981-82, 1981-2, excepia productivity index, which is
from Ahmed, Viqar, and Rashid, Amjad, Management of Pakistan's Economy, 1947-82 (Karachi: Oxford University Press, 1984).

2. It is presumed that the effective rates of protection are The overall conclusions of Nawab Haider Naqvi and A. R.
usually higher for the public sector than for private Kemal regarding the public sector are forcefully articulated
enterprises, but their results show that these rates are as follows:
relatively lower in industries where public enterprises
dominate. The public sector's profitability is due not to the
higher level of protection that it enjoys (indeed,
3. The industries dominated by the public sector do not
the effective protection rates are lower for them)
suffer from a higher level of inefficiency than that nor due to any restrictions placed on the entry
observed in the private sector, hence 'efficiency levels across of new firms,:but to its better performance and
industries are independent of the locus of ownership' .58 superior productive efficiency; and the charge of
4. 'The incidence of the worst kinds of allocative inefficiency is in the the inherent inefficiency of the public industrial
private sector rather than in the public sector.' 59 enterprises is based neither on good theory nor
solid empirical evidence.
5. Of the sixty inefficient industries identified, only 9 were in The basic message that comes out clearly ...
the public sector. is that changing the locus of ownership of industries is
6. Capacity utilization is high in public enterprises, where by itself neither a necessary nor a sufficient condition
thirty-nine of the sixty enterprises had capacity utilization for an efficient operation of specific industrial
rates exceeding 75 per cent. enterprises. Indeed, ... both the private and public
 Chapter 8 Key Issues in Industry in Pakistan 171

sector firms have operated efficiently as well as enterprises to be privatized and to make recommendations on
inefficiently, depending on the type of industry how this process should take place. Earlier, the first Benazir
to which they belong. These results suggest Bhutto government also paid lip-service to the concept, and
very strongly that, in Pakistan, there is nothing said that it would privatize the state-owned sector, but no
inherently good or bad about the public sector; or even manufacturing industry was targeted for disinvestment and
about the private sector for that matter. 60
not much in the form of privatization actually took place.
Finally, for them, 'where industrial inefficiency is the problem, The reason that the government gave for the slow pace of
privatization was 'that it.wanted to conduct an exercise that
steps should be taken to improve the situation regardless of
was transparent, well-conceived, and broad-based'. 62 Most
the locus of ownership. The divestiture of public enterprises,
critics felt that the government was dragging its feet and
mainly on ideological grounds or to secure dubious gains, or
to satisfy the sensibilities of donors and creditors, is certainly lacked the commitment and political will to carry the policy
through.
not an optimal policy.' 61 These arguments, based on an
The Disinvestment and Deregulation Committee established
extensive evaluation of public sector enterprises, were made
· the principle that the government should completely retire
in the 1990s, and following a thorough analytical account,
from the production of industrial goods, and. identified 109
make very strong arguments which went against the then
industrial units that should be privatized at the earliest
emerging conventional wisdom. In the early 1990s when
opportunity, and four of the five nationalized commercial
the IMF and World Bank sponsored Structural Adjustment
banks, which had 88 per cent of total deposits with them
Programmes were underway. there were groups and interests
(see Table 8.24). The Committee was dissolved and replaced
who were actively trying to malign the public sector. Since
by a Privatization Commission in January 1991, which was
the 1990s, much has changed in the world, in Pakistan and
to supervise the privatization process. The mandate of the
in public policy as well. The movement to undermine the
Commission included the valuation of public enterprises that
state and government intervention, has won many victories
were to be privatized, based on the assessments made by
against those who would argue in defence of state-owned
independent consultants, the implementation of the bidding
enterprises. The ideological map of the world has shifted, to
process and the supervision of the transfer of the units to the
one of free enterprise and free markets, where the private
private sector. 63
sector is said to be the main instrument of economic growth
In the early phase of privatization, the programme was
and development. This is the new conventional wisdom,
unsuccessful with few bidders for the targeted firms. Since
and in Pakistan too, the dominant view in public policy
privatization was a cornerstone of the government's economic
circles, both independent and government, is that the public
policy. the government revised its strategy and accelerated the
sector is a major burden on the exchequer, that state-owned
process. It improved the legal and administrative procedures,
enterprises are always mismanaged, cesspools of corruption,
and while it had decided initially to adopt the policy of
inefficient and loss-making-see Box 8.4. And hence, they
offering only a few units for sale at a time, it reversed this
should be privatized.
policy in October 1991, and advertised all the 105 industrial
Given the actual performance of such enterprises, especially
units for immediate sale. Attempts were also made to make
in Pakistan, it does become difficult to make a case for the
the entire privatization procedure more 'transparent' and
defence of such institutions and organizations, especially
effective.
when public perception also supports such claims. However,
One of the reasons for privatization has been the need
it would be unfair to dismiss the public sector in one sweep
to raise revenue. However, this measure is fraught with
and make arguments for the privatization of all state activity.
problems, as an important report on Pakistan's industrial
A more careful analysis of the public sector is required to
sector identifies:
provide a more balanced view and not to be caught up in the
fashion of the times, such as privatization. Privatization is being undertaken partly to
offset declining budgetary revenue and partly
to compensate for government investment
8.5 THE PRIVATIZATION PROCESS shortfalls. It is hoped that liberalizing the economy
and opening it up to competitive pressures will
One of the most controversial and interesting aspects of the encourage private investment: An option open
Structural Adjustment Programme since 1988 has been the to. the government is to commercialize public
privatization programme begun in 1990. Six years later, in enterprises. The commercialization of some of the
1996, it was still provoking strong reactions by observers (see public enterprises has enhanced their financial
performance since 1983. While an improvement
Box 8.5). While governments may be pleased at privatizing in the performance of public enterprises may
a reported 65 per cent of the targeted industries, the way be a catalyst for further industrial progress,
the process had been managed and the consequences of this progressive expansion of the private sector will
programme have been subject to debate, controversy and depend on a number of far-reaching changes
mainly criticism (see Appendix 8.3 in the first edition of this in the industrial investment environment,
book). including an improvement in the law and order
A large-scale privatization effort was launched in November situation which has adversely affected industrial
1990 by the Nawaz Sharif government when the Disinvestment development in recent years. 64 ·
and Deregulation Committee was established to identify the
172 Issues in Pakistan's Economy

Box 8.4 Finance Commission-sponsored public-private partnership,

Why State-Owned Enterprises Fail which would apply corporate strategies and benchmarks to
the operational, financial and service standard performances
lhtasham ul Haque examines the role and working of state of the SOEs, with a view to making them economically viable.
owned enterprises in Pakistan and argues how these enter- Meanwhile, the call of experts to get rid of loss-making
prises malfunction, having a major cost on the budget. He public sector units by privatizing them has faded over time.
finds that poor governance and management are the main In its initial years-particularly in the early and mid-nineties-
reasons for their failure. the privatization process remained relatively successful. But
eventually, the allegations of selling SOEs at throw-away prices
In any country's economic mosaic, State Owned Enterprises started reverberating. Meanwhile, global economic conditions
(SOEs) are the mainstay of self reliant growth. They help create also deteriorated at a fast pace, forcing potential buyers to
infrastructure, absorb technology, encourage innovation, and desist from taking part in the disinvestment process. And the
generate employment while serving many social objectives. recession currently gripping Europe and the Americas mean
Sadly, this has not been the case in Pakistan. The country's that there are hardly any funds, which can be mobilised.
200-plus SOEs continue to haemorrhage, incurring over The ADB's flagship annual economic publication, the Asian
Rs. 400 billion in annual losses (an amount greater than what Development Outlook 2012, highlights public sector losses
the government spends on the development budget in the as one of the major factors impeding growth in the Pakistan.
whole year). And recurrent political interventions in almost The annual losses at the SOEs are attributed to a mix of
every conceivable area of decision-making concerned with the inappropriate governance, corruption, inefficiency, and flawed
working of these SOEs are only exacerbating matters. policy. For example, power sector losses amounting to Rs. 250
The losses of the SOEs have increased in recent years and billion have resulted in the creation of the gigantic Rs. 400
are now estimated to be worth 1.5 per cent to 2 per cent of billion circular debt. Other major loss-making SOEs include
GDP. This is mainly due to poor governance, mismanagement, PEPCO, PIAC, Pakistan Steel Mills, and Pakistan Railways.
mounting corruption, and inappropriate policies coupled with The biggest drain on the exchequer is that of the Pakistan
flawed internal structures. The government has expressed its Electric Power Company (PEPCO), which is incurring a loss
concern over the alarming health of SOEs on more than one of over Rs. 1 billion per day. This is despite the fact that the
occasion yet has failed to undertake any meaningful reform government has continuously increased electricity tariffs at
with a view to restructuring and revamping them along modern the rate of two per cent per month since 2011. While the
lines. government claims to have added 3,500 MW of electricity to
The challenge of improving efficiency and putting these SOEs the national grid over the last four years, global power statistics
on a viable commercial footing is a formidable task. "Reforms issued by British Petroleum reveal that power production in
are needed, including a separation of these enterprises from Pakistan has actually decreased by 10 per cent since 2008.
operational interference by government ministries,' states The losses of PEPCO power distribution companies are on
the Asian Development Bank (ADS) annual report for 2012. the rise while revenue collection of even the billed amounts
According to the bank, the economy continues to be affected is declining. The power losses of the Sukkur Electric Supply
by structural problems, including a domestic energy crisis, a Company, for example, exceed 40 per cent while collection
precipitous decline in investment, persistently high inflation, of the billed amount is only 59 per cent. Similar issues mar
and security issues. Meanwhile, budget deficits remain high, the productivity of other supply companies, which continue to
driven by substantial subsidies and losses at state-owned incur losses and fail to collect much-needed revenues.
enterprises, aggravated by minuscule tax revenues. The losses of SOEs peaked in 2011 when their performance
Concerned government officials largely agreed with the reached the lowest ebb in Pakistan's history, threatening
ADS and admit that financial guarantees outstanding against the economic viability of the state. Pakistan Railways, PIA,
the loss-making enterprises have crossed Rs. 600 billion. 'The Pakistan Steel Mills, Pakistan Agricultural Storage and Services
main hurdle in the restructuring process is the stiff opposition Corporation (PASSCO), and Utility Stores Corporation continue
by concerned ministries, including the bureaucrats, and the gobbling up additional funds, making no money of their own.
restructuring and revamping plans are heading for a flop,' says PIA has become a textbook case of poor governance and
a senior official at the Planning Commission. political intervention and suffers losses of Rs. 70 million daily.
Finance minister Hafeez Shaikh is blamed for not taking an (Its cumulative losses are estimated to be substantially more.)
interest in introducing effective reforms for these enterprises, The last three years have witnessed the recruitment of over
unlike his predecessor Shaukat Tarin. The finance minister has 2,300 people in PIA, who translate into a Rs. 100 b~lion loss.
vowed to introduce such changes but so far, no breakthrough Promises to rightsize PIA remain unfulfilled while the number
has been achieved. of operable aircrafts has dwindled to half. Instead of focusing
In one of her presentations, former State Bank of Pakistan on the cause of this efficiency, the government has offered
governor Dr Shamshad Akhtar said that SOEs contributed PIA long-term financing for working capital, guaranteed its
almost 1O per cent of GDP. She maintains that progress on borrowing, and continues to pay financial charges on selected
reforms within SOEs stalled because of the political and debt securities.
economic uncertainty and concerns regarding the valuation of Meanwhile, Pakistan Railways burns Rs. 50 million every
companies in their current state. Based on international best day of the year, after having incurred a loss of Rs. 35 billion in
practices, she had proposed the setting up of an International 2011-: 12. Since the current government took power in 2008,
 Chapter 8 Key Issues in Industry in. Pakistan 173

PR has retired 104 of its 204 trains. Even though PR has In a 1954 speech, former Indian premier Jawaharlal Nehru
almost come to a halt, the government has not laid off a single referred to SOEs as the 'temples of India' in view of their
employee. This is despite the fact that the PR management importance to the economy. But in Pakistan, the biggest
admits that of its 110,000-strong staff, only 40,000 are required. impediments to the revival of SOEs are the shoddy quality
In the meantime, PR gets Rs. 2.5 billion a month from the of their boards, the lack of ownership and accountability,
government for payment of salaries and pensions alone. as well as a flagrant disregard of merit in appointments.
Pakistan Steel, on the other hand, has been out of production The government must learn to look beyond the tip of its
for several months due to want of raw material. Even so, a total decidedly political nose and implement strict reforms. It must
of Rs. 30 billion has been doled to PSM to help cover the decide whether it is the business of the government to run
financial losses caused primarily by overstaffing on political business and, if so, what are its security-related or economic
grounds and rampant corruption and nepotism. reasons for doing so. And finally, it needs to manage these
While some SOEs such as the two ports, OGDCL, PSO, investments on a sound commercial basis, separated from the
SSGC, SNGPL, and the insurance sector are still showing government's function of policy making, market regulation or
some profits, the point to remember is that they still lose a social obligations.
significant amount which remairis hidden due to the inherent
Source: Haque, lhtasham ul, Bleeding to Death, Money
profitability of such entities.
Matters, The News, Karachi, 2 July 2012

Box 8.5 year [1995/6) is 6.9 per cent, and expectations suggest that
Privatization Controversy Reveals Some the performance this year will be better than earlier years,
particularly as the cotton crop may be as much as 1O million
Unsavoury Aspects bales or more.
For a number of reasons, not only former Prime Minister
A number of articles in the press criticized the government of
Nawaz Sharif and former Finance Minister Sartaj Aziz have
Benazir Bhutto for its policy and manner of privatizing state-
cautioned against hasty privatization of large public sector
owned enterprises. Sultan Ahmed writes:
units but President Farooq Leghari has also joined the chorus.
Addressing the two-day Asia-Pacific Privatization Conference
The controversy in respect of privatization of large public
in Islamabad he said: 'We cannot allow distress sale of our
sector units is getting heated again, and is acquiring an
national assets', and wanted the privatization to take place in
increasing number of disturbing facets.
the best possible financial and legal environment.
The disputes are over the timing of privatization of large
When it comes to the using of the sales proceeds of
public sector units, such as UBL, Bankers Equity, and
privatization there is a large national consensus that they
the selling of 26 per cent of the shares of the Pakistan
should be used for reduction of the overwhelming national
Telecommunications Corporation (PTC) to a strategic buyer,
debt, domestic as well as foreign. During the days of Moeen
over the specific use the large sale proceeds of what is often
Qureshi as caretaker Prime Minister, he set up the Debt
described as the family silver should be put, and about the
Reduction Fund to which the sale proceeds of privatization
methodology or transparency of the transactions which have
were to be credited. Dr Mahbub ul Haq is emphatic that the
not been found to be satisfactory.
funds should be used for reducing the costly debt.
The question of timing of the sale is very important. To begin
The government, however, has other ideas and it has talked
with, share prices in Pakistan are low, and the Karachi Stock
of setting up a 'Future Generations Fund' and utilizing that for
Exchange price index at 1,488 is about 44 per cent below the
promoting education, employment, etc. And it has already
peak of 2,661 achieved twenty months ago, and has been
used Rs. 11 billion for its Social Action Programme [SAP) and
in the doldrums for too long a time without a significant and
has budgeted for an outlay of Rs. 12 billion this year on the SAP.
sustained break. Worse still, the PTC shares sold abroad at
How much is the money received so far from privatization?
Rs. 55 per share have swung between Rs. 28 and Rs. 30
Various figures have been given, but not a clear well audited
making many foreign investors disinvest and move to greener
picture. We need a clear and complete picture now. Makhdoom
pastures.
Shahabuddin, Minister of State for Finance, said recently that
Foreign investors are usually ready to buy shares of bigger until June 1993 Rs. 5.467 billion was received from privatization
enterprises when the economy is booming, and not when it is
and since then Rs. 30 billion, making a total of Rs. 35.47 billion.
stagnating and when they see that an economic breakthrough
But then, through the sale of 6 million vouchers of PTC alone
is imminent. That is not the case in Pakistan as the economic
Rs. 30 billion was received. He also said the Privatization
growth has been too low during the last three years-2.3 per
Commission had so far used Rs. 13.98 billion for reducing
cent, 3.8 per cent and 4.7 per cent despite the high growth
domestic debt to the extent of Rs. 6.13 billion and the balance
targets set for each year. The growth target set for the current
for the SAP.
 i
174 Issues in Pakistan's Economy

I
j
1
Commenting on the issue, .President Leghari has said the same and some are proposing to move the courts for its
the cynicism about privatization must go, and it is for the cancellation. I
Prime Minister, the cabinet, and the Privatization Commission It is to prevent such controversies and deep suspicions

l
to ensure that the cynicism is replaced by enthusiasm that President Leghari called for the kind of privatization that
at the national level. 'It is time the government came up is clear .and transparent and done with full awareness that
with a categorical well-audited statement on the use of the the family silver was not thrown away. He said 'we gave hell
· privatization fund for debt reduction and gives complete details to .the IJI government when we were in the opposition for its
of the funds received, spent, and the balance.' non-transparent methodologies of privatization. Criticism of
The third controversy is over the methodology of the these methodologies still persists.' And .clean and transparent
privatization and the extent of . transparency. The latest privatization. was the answer to it.
controversy in this regard is around the sale of 266kanals of A long catalogue. of major enterprises awaits privatization,
land belonging to the Pakistan Engineering Company (former while the IMF is castigating the government for ,being slow
Batta Engineering) at Badami Bagh, Lahore for just Rs. 362 or dragging its feet. Among them are the .public sector banks
million which will reduce its overwhelming liability of Rs. 709 and DFls [Development Financial Institutions], power and gas
million only to some extent, and the government and the enterprises, mining and engineering projects, while the canal
company will be the loser for it. system is not to be privatized in the immediate future.
The buyer is the big gainer as after buying it he got the According to the .Chairman of .the Planning Commission,
stipulation, that the land should be used only for industrial the pace of privatization is purposely slow, so as to avoid
purposes, deleted. If this condition had been deleted before allegations of impropriety. But being slow alone is not enough,
the sale of the plot in the key market area with the Badami as the case of PECO has shown, as too many persons were
Auto-Market next door, the government might have got Rs. 900 interested in that precious land which was finally sold so
to Rs. 1,200 million, and the liabilities of the company would cheaply. The President's comprehensive advice. in respect to
have been wiped out altogether. It has also been argued that if privatization has to be taken seriously by the government and
instead of the 266-kanal plot being sold as a single piece it had the Privatization Commission, if the controversy is not to get
been split into three or four plots, even with the stipulation that overheated as more large projects are;put on sale..
it should have been used for industrial purposes only, it would
Source: DAWN, Economic and Business Review, Karachi,
have fetched about Rs. 100 million. Hence, the disappointed
2Q-6 January 1996. This is an edited version of the original
candidates for buying have appealed to the PM for cancelling
article.

Table 8.24
Privatization of State-Owned Enterprises

Value of units sold

Number of units
(Rs. m)
of which: Total Received
Management
Total For sale Sold
transferred

Commercial banks 5 4 2 2 5,122 2,135

Industrial units 124 105 67 47 8,219 3,896
Automobiles 15 10 8 5 1,043 583
Cement 15 15 11 8 4,658 2,253
Chemicals and ceramics 14. 12 5 5 1,030 · 431
Engineering 12 9 4 4 141 58
Fertilizer 7 5 2 1 457 183
Ghee and vegetable oil 23 23 15 9 626 250
Roti plants 17 17 13 11 99 60
Rice mills 8 8 7 4 165 78
Miscellaneous 13 6 2 0 0 0
Total 129 109 69 49 13,341 6,031

Source: World Bank, Pakistan: Country Economic Memorandum FY93: Progress Under the Adjustment Programme, Report No. 11590-
Pak (Washington DC: World Bank, 1993), 51.
 Chapter 8 Key Issues in Industry in Pakistan 175

What was true in the late 1990s, seems truer in 2012, and it years. The Institute of Developing Economies in Japan
seems that two decades later, many of the issues and themes identified the following criticism of the process: .
are almost identical. ( See the very interesting analysis in
Appendix 8.3 on the politics of the privatization process of The privatization process was severely criticized
electricity in Pakistan, analysis which finds that the severe by several quarters for the lack of transparency,
electricity shortfalls of 2008 onwards have their genesis in and the inadequate attention paid to the
antecedents of the new management·. It was
the deeply flawed privatization policies many years ago-also
suggested that the bid evaluation procedures
see Section 8.7 below.) were incorrect, and furthermore, inconsistently
The result following the renewed vigour to privatize in applied from case to case. It was also alleged that
October 1991 was that, by November 1992, 67 of the 109 the process suffered from favouritism, as some
units had been issued letters of interest to sell. Of these 67, bidders had privileged access to information and
the management of ·49 units had been transferred to the competing bids. In a number of cases, units were
private sector, and an amount of Rs. 6 billion (of the total transferred to management that had no previous
Rs. 13.3 billion for the 67 units) had been received by the record or experience of running an ill.dustrial
government. One reason why the privatization programme unit at all; in others the new management had
did not develop on the lines that the government hoped it defaulted on its loans from the banking system
even though the Commission had stipulated
would was that most of the companies put on the 'for-sale'
that previous loan defaults would invite an
list 'were already technically bankrupt' 65 and hence interest automatic disqualification. The government's
from buyers was low. response to these allegations, apart from a denial
The three most coveted sectors to be privatized were the of any deliberate wrong doing, was that speed
energy sector, telecommunications, and the four commercial was of the essence, in order to overcome the
banks. By late 1995, the telephone and telegraph sector inertia generated by vested interest groups. 68
had been partially privatized and of the banks, the Allied
Bank Limited was sold to its employees, and the Muslim In another equally critical appraisal of the privatization
Commercial Bank to a private business house. The balance process, Nawab Haider Naqvi and A. R. Kemal questioned the
sheets of the banks show that these 'newly privatized banks entire concept of privatization and showed how the process
have rapidly improved their performance'. 66 1\vo commercial resulted in serious negative consequences.
banks, the Habib Bank Limited and the United Bank Limited,
and two industrial banks, the National Development Finance We share the view that public and private
Corporation and the Industrial Development Bank of Pakistan, investments are essentially complementary in
nature; and that while private investment holds
were privatized by the Musharraf government after 1999, as
the greatest promise in areas where productive
were other important and large public utilities, such as KESC efficiency matters, its success depends on a well-
and Pakistan Telecommunication Company Ltd (PTCL), both thought out programme of public investment
to buyers from the Gulf states, who were the new owners of which first provides an efficient infrastructure.
United Bank Limited as well. However, a report by the World Furthermore, public sector investment in those
Bank made the following interesting observations about the productive-activities where the market 'fails' due
banking sector: to the externalities dominating there, or where
no markets exist, is essential to maximize_ social
It has been a problem for potential investors to output notwithstanding the contrary claims
gain access to sufficient information about the of the privatization enthusiasts who attribute
quality of the assets of banks. Whereas domestic every possible economic ill to the so called
investors seem to be able to overcome this, robust phenomenon of 'government failure'. Also,
foreign investors that require the information be recognizing that public sector investment-
presented according to internationally recognized even in the productive activities-is a fact of
standards are believed to be unsatisfied with economic life in Pakistan, it is essential that
quality and quantity of the data. This obstacle privatization should take place where it bas the
will be especially important for Habib Bank, most promise of adding to productive efficiency
which as the largest financial institution to be and economic growth. Indeed, efficiency (and
privatized probably cannot be sold exclusively growth) considerations must be seen as the
to domestic investors. However, the government only valid grounds for privatization. And in this
remains committed to privatize all state-owned context, there is enough empirical evidence in
banks (except the National Bank of Pakistan). 67 Pakistan to show that changing the locus of
ownership from public to private is neither a
Interestingly, towards the end of 1995 the United Bank Limited necessary nor a sufficient condition for achieving
was offered for sale and only foreign bidders remained in the any of the avowed· goals of privatization; even on
theoretfr:al grounds, other objectives for going
final stages of the process, a move which came in for criticism
private-e.g. mobilizing financial resources
from concerned economists. Nevertheless, in 2003 the bank for the government-had better be achieved
was eventually sold to businessmen from the Middle East. by other, more effective policy instruments.
All the evidence seems to suggest that the process of Indeed, the real-world experience suggests that across-
privatization came in for a great deal of criticism in earlier the-board privatization, taking place mostly on
176 Issues in Pakistan's Economy

ideological grounds, may prove not only self-defeating 8.6 THE DEBATE OVER EFFICIENCY IN
but positively counter-productive. Thus, profitable
companies can as well be given over to their THE INDUSTRIAL STRUCTURE
(not-too-worthy) competitors, exacerbating the
degree of concentration in the economy; and Following the end of the boom in industrial development in
the (apparently) defaulting enterprises may in the late 1960s, a number of books and papers were written
fact be given away to friends of the regime, thus on Pakistan's industrial performance, and the collective
increasing the element of 'crony capitalism'. 69 view was that the high growth had been achieved at very
considerable costs, and that the entire industrial structure
Given this extensive criticism, Aftab Ahmad Khan identifies
was severely inefficient. 71 For many years, perhaps even two
some reasons why there has been so much criticism of the
decades, the issue of efficiency in Pakistan's industrial sector,
privatization programme:
became one of the main academic and research questions for
An imperative for the success of privatization is Pakistani economists. The policy instruments that were held
the transparency of the process to avoid people's responsible for creating this inefficiency rested on the extent
suspicion and ensure their support. All aspects and degree of state intervention in distorting prices in the
of the privatization exercise must be out in domestic market, which was said to affect the manufacturing
the open and there should be no suspicion of sector adversely. As we saw in Chapter 6, much of Pakistan's
political patronage, corruption, favouritism, or early industrial and economic growth was predicated on an
cronyism in implementing it. Unfortunately, this import substituting industrialization policy, which was the
important dimension of privatization has not conventional wisdom of the times and was being followed
been given due attention in some privatization by most young developing countries. The main tools for
transactions and this has resulted in casting
such a policy consisted of protecting domestic industry by
doubts on the integrity of those responsible for
deciding the choice of parties in the cases. The building up trade barriers in the form of tariff and non-
privatization exercise in our country so far has tariff restrictions, using multiple exchange rates, and import
been suffering from a lack of proper planning. licensing.
There has been no systematic approach to timing, The main work that sparked off the debate over the
prioritization, sequencing, classification of units, inefficient na_ture of Pakistan's industrial structure was
valuation, and modes of privatization. If one undertaken by Ian Little, Tibor Scitovsky, and Maurice Scott, 72
of the purposes of privatization is to broadbase who challenged the then premises of import substitution,
share ownership and expand the equities market, protection, and the industrialization process. This study
then it is imperative that all sales are quickly
found that amongst the developing countries studied,
followed by successful flotations. A significant
Pakistan had the highest effective rates of protection (see
proportion of the privatized firms have yet to
float equity in the market. 70 Box 8.7) in manufacturing. Recalculating the manufacturing
sector's contribution to value-added, the authors found that
Despite these numerous hard-hitting cnt1C1sms of the the industrial value-added actually grew at a negative rate,
privatization process in Pakistan, and despite many prescient and not at 16 per cent as believed. The conclusions of the
warnings by many academics and observers, the privatization study were that too much emphasis had been given to the
process under General Musharraf's government, especially manufacturing sector and, hence, the agricultural sector and
in the mid-2000s, gathered a lot of steam, as well as manufactured exports had suffered. The policy tools that
an equal amount of controversy. Some of the comments caused these distortions did so in the following manner:
made in the excellent study of the Institute of Developing
Economies in Japan, in 1994, were proven true in 2005-07, The policy tools which were deemed to be
responsible for this distortion were the multiple
when numerous scandals around enterprises expected to
exchange rates, the tariff structure, and to
be privatized were unearthed. The biggest, of course, was some extent the system of import licensing. The
regarding the Pakistan Steel Mills, when it became clear that multiple exchange rates meant that exporters
many of General Musharraf's leading cronies, including the imported their inputs at a below par exchange
Prime Minister, Shaukat Aziz, may have been involved in rate and then.exported their goods at a higher
underhand dealings. The Chief Justice of Pakistan and the rate. Also the existence of an export tax, in
Supreme Court of Pakistan challenged the privatization of the certain industries such as leather and cotton,
Steel Mills, and exposed a number of issues which revealed meant that there was a disincentive for exports
corruption of sitting members of the government-see Box as compared to sale in the local market (where
8.6. This decision taken by the Chief Justice and the Supreme because of protection a preferential rate could
be commanded). As for imports, the overvalued
Court of Pakistan upset General Pervez Musharraf a great
exchange rate meant that whereas raw materials
deal and tarred his government with proof of corruption. It and machinery was imported at the official
was one of the reasons which led General Pervez Musharraf exchange rate it was sold in the market at its full
to dismiss the Chief Justice of Pakistan in March 2007, scarcity premium. 73
which eventually led to a process of bringing about General
Musharraf's downfall. Another study revealed that in 1964 about 75 per cent of
actual value-added was due to distortions· in the industrial
 Chapter 8 Key Issues in Industry in Pakistan 177

Box 8.6 The practice is that the successful bid is considered

Corruption, Fraud, and the Privatization of the by the Cabinet Committee on Privatization chaired by the
prime minister. The Privatization Commission issues letter of
Steel Mill approval only after the CCoP has considered all aspects of the
successful bid. It was not done in the case of Pakistan Steel.
Two articles from 2006, when the Pakistan Steel Mill was put
The Privatization Commission did not disclose the reserved or
up for sale, or privatization, reveal the deep involvement of the
reference price of Pakistan Steel. There is no report as to who
most important political leaders of that time.
was appointed as the financial consultant and who carried out
1. Sabihuddin Ghausi writes: the valuation of the assets.
Within 22 years after its full commercial operations in 1984, What makes the deal more intriguing is stone-laying of
Pakistan's only integrated steel mill in the public sector, which a 300-million-dollar billet plant of the Tuwairqi group on a
has been operating on optimum capacity for at least last 220-acre plot at the Port Qasim. This group is reported to
three years, was passed on to a consortium of foreign and have given $10 million donation for the renovation of Quaid-
local investors at a price that is being called "peanuts" and i-Azam mausoleum. After the Port Qasim billet plant comes
a "no price at all" by employees unions, stock brokers, and into production, with one million ton production line after two
independent economists. years or so, the Tuwairqi group will enjoy almost a monopoly
Only a day before the bidding for Pakistan Steel, market status on a industry that is called "mother industry". The steel
analysts were putting the price of 75 per cent shares at $1 industry is the basis of all other industries and if it comes
billion plus. The worth of real estate only (4,546 acres of land under the control of a group that is alien, it is fraught with all
on which various units of Pakistan Steel are constructed) consequences.
was estimated at Rs. 27 billion in March. One of the leading For long, Pakistan remained an importer of steel. The
real estate dealers of Pakistan and a top stock broker was powerful lobby of steel importers made it sure to torpedo every
approached by the Pakistan Steel authorities to advise them effort to set up a steel mills project in Pakistan during the 1950s
on privatization modalities and valuation of the assets. and 1960s. Steel Mill was called a "white elephant" when set
The developed land of steel mill was valuated at Rs. 5.5-6 up with the Soviet assistance at a total cost of Rs. 25 billion
million an acre and the undeveloped land at Rs. 3-3.5 million in the 1970s. There were many hurdles in the implementation
an acre. Way back in 1974, Pakistan Steel obtained 19,000 of the project, and it was an irony of the events that the
acres of land from the Sindh government at 74 paisa per late Bhutto had laid the foundation of this project in 1974
square yard. But the infrastructure developed on this land from and its commissioning was inaugurated in 1981 by the late
taxpayers' money has enhanced the market worth of land at General Zia.
present to Rs. 20 million an acre. This is because there is now From 1981 till this day, there were about 22 chairmen. In
110km metalled road, 70km railway track, a 165 megawatt 1990, as many as six chairmen came and went in Pakistan
electric power generation station, a water treatment plant, Steel in a single year. Pakistan Steel's annual procurement of
raw material and sale of steel products were worth more than
and a jetty.
But on 31 March, all these assets were given to an Rs. 30 billion and therefore, all the powerful actors of state-
investors' consortium for Rs. 21.68 billion ($362 million). Prior bright stars of civil service and those in uniform-claimed their
to this bidding, there were planted media reports on worn ounce of flesh from the project. Pakistan Steel is a classic
out machinery of the steel mills that now need replacement example of inefficiency and corruption of Pakistan's high and
and revamping. But all credit goes to the management and mighty but a model of hard work of engineers and workers.
employees who kept operating their mills at 100 per cent Source: Ghausi, Sabihuddin, 'Pakistan Steel sold at throwaway
capacity for the last three consecutive years with no major prices', Dawn, Karachi, 7 April 2006.
mishap. In 2003, President Pervez Musharraf had announced
a bonus for the staff in recognition of their hard work.
The Employees-Management Consortium is offering Rs. 24 2. Privatization of Pakistan Steel Termed Biggest Scam
billion and is demanding their first right of refusal in the
Representatives of more than 50 labour, political, social,
transaction. It is not being heeded either by the Privatization
and human rights organizations have expressed their strong
Commission or by the prime minister's office. A stock broker
reservations over the process of the privatization of the
on Thursday offered an immediate payment of Rs. 30 billion
Pakistan Steel, and described the sale of the national asset as
for Pakistan Steel. 'the biggest scam' in the country's history. They were speaking
The consortium that won the bidding includes a Saudi group
at a one-day consultative meeting held here on Sunday under
Tuwairqi, a Russian group M. Magnitogorsk Iron and Steel
the auspices of the Labour Education Foundation under the
Works, Arif Habib and Siddique Sons. This consortium offered
title: Steel Mill Privatization-A Fraud. The meeting was chaired
a bid of $362 million (Rs. 21.68 billion) at a rate of Rs. 16.80
by Mr Saleem Raza, Secretary of the LEF.
a share. Awais Leghari took the charge as Privatization
Speakers on the occasion pointed out that the Rs. 300
Minister recently after Dr Hafeez Sheikh quit. Pakistan Steel's
billion worth concern had been handed over to the private
privatization was his first assignment and contrary to past
sector parties at a throw-away price of Rs. 21.75 billion. They
practices he immediately issued the letter of acceptance to
claimed that under a pre-planned conspiracy, it had been
the successful bidder as he said that he was authorized by the
handed over to some favourite parties. The conspiracy, they
cabinet committee.
 -----!,

178 Issues in Pakistan's Economy

added, had been hatched over the past six years. They alleged that present value of the PS land, at the current rate of Rs. 20
that it had already been decided to hand over the PS to a million per acre, was around Rs. 92 billion whereas the mills'
consortium of Russia's Magnitogorsk Iron & Steel Works Open other assets had been estimated at more than Rs. 150 billion.
JSC, Saudi Arabia-based AI-Tuwairqi Group of Companies and Furthermore, they added, that the new owners had been given
a local firm Arif Habib Securities whereas the bidding process an inventory of Rs. 7 billion kept ready in stores, besides
was for its privatization on 31 March was just an eyewash. finished products worth more or less the same amount.
They wondered that the auction, which the Privatization They said that besides the precious land on the coastal belt
Commission had taken one whole year to prepare for, lasted near Port Qasim, the other assets of the mills include Steel
just 30 minutes. Ore Plant in Thatta district, water supply plant of 110-mgd,
They pointed out that it was only a day before the auction thermal power plant, oxygen power plant, 72-km railway line,
was held, that a $130 million steel factory, AI-Tuwairqi Steel 14 locomotives of 800 horsepower each and more than 100
Mills, was inaugurated and a piece of 220-acre land was railway wagons. They claimed that only these assets were
obtained on rent from the PS for the new concern. They added worth more than Rs. 150 billion.
that 45 million cubic feet gas and 180 megawatt electricity was They said the thermal power plant of the PS supplied
also sanctioned for the group. They quoted an ex-chairman electricity to the mills and its township while selling the
of mills, Haq Nawaz Akhtar, as saying that the PS would have surplus power to the KESC. Its oxygen plant supplied oxygen
fetched a higher price even if sold as scrape. to various industrial units and hospitals. The labour leaders
They said that only two days before the auction, the deplored that the PS had been sold for an amount which
AI-Tuwairqi Group had signed Head of Terms (HoT) with the made just two and half years' tax it paid annually. Quoting a
Sui Southern Gas Company for the supply of 45 million cubic statement of the PS finance director, they said the mills had a
feet natural gas for 10 years and the contract was extendable cash and bank balance of Rs. 12 billion. They revealed that
for another 1O years. They feared that with the PS in its just one month before of the privatization, as many as 80 brand
ownership, the group might establish its monopoly on the new vehicles were purchased for the mills.
whole steel industry in Pakistan which would ultimately result They said that the PS was maintaining a production
in a sharp increase in the prices of iron and steel products, capacity of 98 per cent and its profit was on the increase
dealing a blow to a large number of local industrial concerns. every year. They questioned the justification for the sale of the
The participants said that before the privatizing of the PS, all PS when the factory was functioning well, its workers making
bank loans outstanding against the mills had been paid off so no major demand and the mills paying over Rs. 9 billion per
that the new owners did not have any liability. In this regard, year tax. They criticised certain political, religious and ethnic
they added, the last instalment of Rs. 2.5 billion Habib Bank organization which had been keeping a discreet silence over
loan had been cleared by the government. They said that the privatization of the mills. The labour leaders lauded the
until 1999, the mill was burdened under Rs. 19 billion loans role of labour organizations for raising their voice against its
and its annual loss stood at Rs. 9.326 billion. Later, it was privatization from day one.
administratively handed over to retired military officers who They said that on 28 April 2006, the privatization commission
started sacking workers to curtail the losses. In 2000, the PS had announced a package of Rs. 16.6 billion for Pakistan
had a workforce of 20,533 which had shrunk to 13,080 now. Steel workers. Considering the package and the cash in
The speakers said that according to the PS finance director, hand amounting to Rs. 10 billion, it could be determined
the mills had generated Rs. 26.1 billion revenue in 2000 and its that the mills had actually been sold at a loss of Rs. 5 billion.
pre-tax profit stood at Rs. 4.85 billion. They recalled that on Oct Welcoming the status quo ordered by a full bench of the
25, 2005, PS chairman Gen. Abdul Qayoom addressed factory Supreme Court vis-a-vis the sale of the mills, they demanded
workers and announced that in the year 2004-05, the mills withdrawal of the decision to privatize the PS and institution of
had generated Rs. 31 billion revenues and its pre-tax profit a corruption case against those involved in the affair.
was Rs. 10 billion. He had quoted the tax amount paid to the
government at Rs. 8.9 billion. The labour leaders pointed out Source: Dawn, Karachi, 29 May 2006.

structure. Due to this protection, according to this study, would not have encouraged much development in technology
the manufacturing cost of value-added was increased by an because returns were already very high. 75
average of nearly 300 per cent compared to what the cost However, all the evidence presented in the earlier chapters,
would have been had there been no protection. 74 particularly Chapter 6, shows that none of the alleged
The analysis from the work on protection, distortion, and consequences followed. In fact, one sees the reverse, with
inefficiency in the industrial sector in the 1960s suggests that agriculture showing very high rates of growth throughout the
the following principal distortions were created: the neglect of 1960s at a time when there was supposed to be considerable
agriculture at the cost of industry; excessive emphasis on the anti-agricultural bias in policy. We also see that, despite the
manufacturing sector, resulting in poor export performance; import substituting strategy, there was actually no distortion
a distorted sectoral distribution in industry (i.e. between the of the sectoral distribution in industry, and although the
consumer, intermediate and capital goods industries); and a consumer goods sector showed high growth, as it should
disincentive for technical change, as the existing structure
 Chapter 8 Key Issues in Industry in Pakistan 179

Box 8.7 at 'world' prices is greater than value-added at 'domestic'

How Does One Measure Protection and prices, then this would indicate that the protection system
is discriminating against the output of that industry (for
Inefficiency?
example, tariffs on inputs exceed tariffs on output).
Viqar Ahmed and Rashid Amjad discuss the methodology Arshad Zaman also measures EPR as follows:
used in the calculation of effective rates of protection, and
show how we come up with such concepts as a 'negative' The concept of effective protection was designed to be a
value-added by industry. summary measure of the degree of incentive provided to
an industry, and is usually measured in terms of Effective
Basically, these exercises calculate the cost of inputs and Protection Rate (EPA), defined as the difference between
the value of outputs first at 'market' or 'domestic' prices, value-added at domestic prices (VAD) and that in world
which include protection and other subsidies, and compare prices (YAW), expressed as a ratio to the latter. Thus:
these with the costs of inputs and the value of outputs of VAD
similar (or nearly so) goods at what they would be in the
£PR = VAD - VAW - -1
'world' market or 'trading prices', i.e. if they were bought VAW VAW
and sold in the open world market. The rate of effective In practice, a number of assumptions are made in calculating
protection is then defined as the per cent of value-added EPRs which should be borne in mind. First, the calculations
due to protection. assume that domestic producers are taking full advantage
A simple version of this concept may be shown as of the protection offered by the tariffs. Where there is
follows: significant smuggling, this is clearly not the case, and the
Value-added in industry 'i' at 'market' or 'domestic' prices degree of protection is overestimated, perhaps by a wide
margin. Similarly, where prices are controlled, the producers
= w = sale value of output minus cost of inputs
are unable to exploit the potential advantages of protection.
Value-added in industry 'i' at 'world' or trading prices Second, suNey data on which EPA estimates are based
,; w = sale value of output minus cost of inputs typically exhibit under-reporting of production, imparting
again an upward bias to protection estimates. Third,
Effective rate of protection of = w Aw price comparisons based on reported CIF import prices
value-added due to protection w reflect underinvoicing of imports, and consequently lead
to overestimates of implicit EPRs. Finally, the substantial
Let us illustrate by taking three different cases. Suppose
variation in production coefficients across firms makes
value-added at 'domestic' prices is a hundred but at 'world'
precise policy formulation difficult. Due to these problems
prices is only ten. Then value-added due to protection or
of interpretation and estimation, the actual level of effective
the effective rate of protection is 90 per cent. In the second
protection should not be taken too seriously, the ranking by
case, suppose value-added at 'domestic' prices is again
industry is more relevant.
a hundred but at 'world' prices is negative, i.e. sale value
of output is less than the cost of inputs (say minus ten). In
this case then, as the rate of effective protection is > 100, Sources: Ahmed, Viqar and Rashid Amjad, The Management
it would imply negative value-added by that industry. What of Pakistan's Economy, 1947-82 (Karachi: Oxford University
this means is that rather than add value to the inputs it Press, 1984), 211; Zaman, Arshad, 'Effective Protection and
uses, it actually 'loses' value when we evaluate the inputs Performance of Public Enterprises in Pakistan', Public Enterprise,
and outputs at world prices. Finally, suppose value-added 1986, vol. 7, no. 1, 43.

have under these circumstances, the intermediate and capital for technological adaptation and innovational
goods sectors also showed very high rates of growth. assimilation, a result which is substantiated by
The evidence that total factor productivity. growth and the important role that technical progress and
growth in labour productivity were considerable also confirms increasing returns play in explaining the pattern
of labour productivity advance. Cost reductions
that there was substantial technological· dynamism in the
were, however, not adequately reflected in price
industrial sector. As Meekal Ahmed argues: reductions in oligopolistic markets. Hence the fact
that prices remain relatively stable in the more
There is little support for the arguments, dynamic sectors of production means that the
that the rise in the productivity of labour in potential for changing the patterri of production in
Pakistan is to be explained mainly in terms ·of a response to the unequal incidence of productivity
strong factor substitution effect combined with tends to operate much more weakly.76
insufficient innovations, or that high effective
rates of protection are symptomatic of high•
Asad Sayeed concludes that 'there seems to be no conclusive
costs. On the contrary, the present analysis
evidence on the existence of technological ossification or
shows that manufacturing industry in Pakistan
has, in general, demonstrated a high capacity other related inefficiencies in Pakistan's manufacturing
180 Issues in Pakistan's Economy

sector during the decade'. 77 The reasons why the work by the evidence put forward clearly showed the
Little, Scilovsky, and Scott and by others consistently came up basic 'inefficiency' of the industrial structure,
with the conclusion that Pakistan's industry was inefficient which had emerged by the mid-sixties, when
are discussed below. compared to 'world prices'. Although it can. be
argued that any country starting the process of
Another criticism launched against the industrial policy
industrialization behind tariff barriers would
of the I 960s in Pakistan relates to the hypothesis that show considerable 'inefficiency' in terms of
despite having scarce capital, the incentive structure was 'world prices', there is still no doubt that the
such that there was underutilization of capacity, and hence industrial structure in Pakistan was extremely
an expensive and scarce resource was being wasted. This inefficient even after fifteen years of industrialization.
argument ran as follows: The reason for this was the incentive structure,
created for the manufacturing sector, which
Little et al. argue that in an environment where put little or no pressure on the producers to
the relative cost of capital is artificially low, there cut down on costs especially capital costs of
will be a tendency towards over-capitalization. production. Also, little attention was given to
Also, other government controls, primarily in the the question of whether it was really beneficial
form of import licensing, further exacerbate the for the country to set up an industry which
problem of capacity utilization as the import of would never really ever become internationally
raw materials is linked to the acquisition of these
licences as well as the availability of foreign
exchange. Particularly in the case of Pakistan,
the argument goes, since import licences for
raw materials were linked to installed capacity,
competitive and whose value added would in
the extreme case continue to be negative even
after many years of production behind highly
protective barriers. 81
I
this created a tendency to install new plants in However, a number of leading scholars have critically
order to avoid raw material bottlenecks. To the evaluated the data and evidence, and have come up with
extent that this problem exists, as the evidence a re-evaluation of the state of inefficiency in the 1960s.
put forth by Hogan and Winston suggests,
Akbar Noman argues that 'the inefficiencies of Pakistan's
this is unfortunate as the primary problem of
development is deemed to be scarcity of capital industrialization during the 1950s and 1960s have been much
and here we have a situation where there is idle exaggerated. They were still considerable but not so great as
capital. 78 to rule out any justification of them as the price of rapid
growth, at that stage of Pakistan's industrial development'. 82
Asad Sayeed, examining this proposition with respect to He believes that 'the argument that high protection in the
Pakistan in the I 960s, concedes that while the rate of
utilization of capital was increasing over time, the absolute
level was still low (see Table 8.25). However, examining the Table 8.25
data, he concludes that it was structural constraints-such Capital Utilization in Manufacturing Industries of
as the inadequacy of demand, infrastructural bottlenecks Pakistan (%)
such as power and transport, scarcity of skilled labour and
1960/1 1965 1965/6 1967/8
problems of assimilating foreign technologies-which were
primarily responsible, rather than the constraints pertaining Rates of capital utilization
to the mis allocation of resources as the neoclassical orthodoxy 0-20 60.98 18.57 36 16.67
would have us believe.79 20-40 29.97 71.43 44 36.67
Akbar Noman has argued that the claims made by Little 40-60 4.88 2.86 8 23.33
et al. regarding inefficiency are 'highly misleading'. He argues 60-80 4.88 4.26 12 18.33
that these authors 'derive their estimate of value added 80-100 0 4.26 0 5
from the calculations of effective protection rates made for
Pakistan. These suffer from the familiar problems of data Average capital utilization
and interpretation, though quite possibly more acutely for Pakistan rates by end use
than most cases'. 80 In the case of Pakistan, the calculation used Consumer goods 47.87 62.61 57.80 68.13
to establish inefficiency employed figures for value added at Intermediate goods 21.60 66.45 62.07 54.42
world prices that were understated, and effective protection Capital goods 25.33 39.11 30.23 55.76
rates that were overstated. Akbar Noman also shows how Average level of capital
effectively and pervasively underreporting of output by firms
utilization
in Pakistan takes place by 'very considerable margins'. Simple average 21.82 32.04 31.44 41.33
Unfortunately, a number of important works on Pakistan Weighted by
have taken for granted the evidence and data provided by
capital stock 41.67 59.02 48.65 62.65
the numerous studies conducted after the I 960s, without
questioning the methodology or data sources used. This Source: Sayeed, Asad, 'Political Alignments, the State and
has helped perpetuate the myth that Pakistan's industrial Industrial Policy in Pakistan: A Comparison of
structure was very inefficient. Viqar Ahmed and Rashid Performance in the 1960s and 1980s', unpublished
Amjad also fall prey to this, arguing that PhD thesis, University of Cambridge, 1995, 63-4.
 Key Issues in Industry in Pakistan 181

I
Chapter 8

early years affected mainly the rate rather than the pattern of Most of the work on the industrial sector of the 1960s has
industrialization would appear to be correct'. 83 The work by tended to argue that the industrial policy was protectionist
A. R. Kemal and Meekal Ahmed also substantiated many of and distortionary, giving rise to deep-rooted inefficiencies
these findings, as did the excellent work by Asad Sayeed. 84 in the industrial structure, which later carried on into the
Asad Sayeed concludes his evaluation of the efficiency 1970s and caused the industrial crisis. Interestingly, a World
debate by the very important observation that 'the allocative Bank ( 1993) study on Pakistan has argued that the three
efficiency losses that might have occurred as a result of state industrial subsectors of chemicals, engineering, and textiles
intervention appear to have been compensated by dynamic face domestic resource costs that are 'close to international
efficiency gains that accrued'. 85 standards and are thus not operating particularly inefficiently'. 90
Another line of argument that emerged regarding the Table 8.26 shows the effective rates of protection and the
efficiency/inefficiency issue was related to industrial domestic resource costs (DRCs) of some industries-a DRC
concentration that was excessive, and which was considered coefficient above I indicates inefficient production conditions.
responsible for the inefficiency and deceleration in Pakistan's The DRCs show that the textile industry is the most efficient
growth in the late l 960s. 86 However, the report by the Institute industry within the manufacturing sector, and chemicals
of Developing Economies concludes that 'the argument and engineering are only slightly inefficient. The study also
of industrial concentration provides no economic reason argues that the 'current average effective protection levels
per se for either falling investments or inefficiency in the seem moderate, but conceal vast differences among product
manufacturing sector of Pakistan in the 1960s'. 87 A. R. groups'. 91 In the chemical subsector, industrial chemicals,
Kemal also believes that by the end of the 1960s much of fertilizers, and synthetic fibres are highly protected, while
Pakistan's manufacturing industry could 'survive without in engineering, basic metals, and mechanical products
protection. The protection has resulted in higher profits and enjoy high effective protection. The electrical and electronic
is not a result of inefficiency.' 88 The evidence on growth of products are negatively protected, and protection levels for
total factor productivity and labour productivity, as seen in cotton spinning and made-ups are low.
Chapter 6, shows that even though the industrial structure While much in terms of industrialization policy and
was concentrated, it was able to use resources efficiently. 89 strategy changed in the 1990s and after, compared with the

Table 8.26
Impact of Trade Reform on Effective Protection and Profitability

Pre-reform Post-reform
Private Private
DRC EPR EPR
returns returns

Chemical
Paper and paper products 0.86 -8 12 24 26
Basic industrial chemicals 1.69 70 9 1 -5
Fertilizers 1.08 23 14 3 9
MMF 1.30 29 9 0 3
Other chemical products 0.76 10 27 19 32
Rubber and plastics 1.03 19 13 32 18
Glass and ceramics 1.03 6 11 20 15
Subsector 1.04 20 14 13 12
Engineering
Basic metals 1.32 25 7 48 14
Metal products 1.10 19 12 11 10
Mechanical machinery 1.25 58 19 24 9
Electrical machinery 0.76 -13 14 30 31
Electronics 0.92 -31 2 16 16
Transport equipment 1.07 -1 7 24 13
Subsector 1.07 12 11 27 15
Textiles
Cotton spinning 0.72 -5 20 12 26
Weaving and finishing 1.22 45 16 22 10
Cotton made-ups 0.87 9 18 3 16
Woollen products 2.20 93 6 17 -5
Jute products 1.07 38 16 21 12
Subsector 0.92 13 17 12 16

Source: Pakistan Country Economic Memorandum FY93: Progress Under the Adjustment Program, Report No. 1590-Pak (Washington DC: World Bank, 1993), 48.
182 Issues in Pakistan's Economy

1960s, it is likely that, had the extreme extent of inefficiency Akmal Hussain very succinctly summarizes the main issues
identified by Little et al. actually existed, the more recent in the energy crisis in Pakistan in 2012. He writes:
picture presented by the World Bank would have been
less positive. Had Little et al. been correct, much. more The core of the power crisis lies in three facts:
(a) As much as 82 per cent of total electricity
inefficiency would have carried over into the 1980s and production is now oil-based when oil prices
1990s than actually did. While the data, calculations, and are astronomically rising. By contrast, a decade
methodology are fraught with numerous serious problems, ago, only 50 per cent of electricity output was
one may nevertheless conclude that the claims of the extent fuel-based with the remaining 50 per cent
of inefficiency in the industrial sector in Pakistan have been coming from much cheaper hydroelectric power.
grossly exaggerated (see Box 8.8 on Total Factor Productivity Consequently, the average cost of electricity has
in Pakistan, and Appendix 8.4 in the first edition of Issues). become so high that the government simply
does not have the· fiscal capacity to provide
the subsidy necessary to supply electricity at a
price which most consumers can afford. Indeed,
8.7 THE ENERGY CRISIS increasing oil-based electricity would involve
doubling the price of the additional supply. (b) A
Perhaps the one single factor which had an impact on the related problem is billions of rupees of unpaid
industrial sector in particular, as well as the economy overall, electricity ·bills by the provincial governments,
from 2008 onwards, was the energy crisis in Pakistan. semi-autonomous corporations, and federal
Estimates suggested that between 2-3 per cent of GDP was government departments. The recovery of this
lost each year on account of power shortages-See Box 8.9. shortfall prevents the government from paying
While electricity is now a major component in most economic its dues to the independent power producers
activities, and hence all economic activities have suffered, who are tl).en forced to cut back production. (c)
but in some sectors-such as textiles and the power looms Institutional weakness combined with obsolete
sector-the energy crisis has had a particularly severe effect. transmission technology results in theft and
transmission losses amounting to 30 per cent
Newspaper and television reports have been highlighting
of the total electricity generated. The long-term
the plight of the industrial sector, and for months on end solution is to invest in hydroelectric power. In
in 2012, there was mass rioting across much of Pakistan, the short-term, apart from improving recoveries,
particularly in the Punjab, where most of Pakistan's industry, an annual foreign aid of about five billion dollars
particularly its small-scale sector, resides. This section only may be required for the next five years to achieve
raises some key issues around the power crisis and is not full capacity.utilization and supply electricity at
a comprehensive analysis of the problems affecting energy an affordable price. This means shifting our policy
generation in Pakistan-see Box 8.10 on the politics of the of confrontation with the West to cooperation.94
energy sector, and Appendix 8.3 for a more comprehensive
The electricity shortfall in Pakistan was around 5000 MW a
analysis of issues in the power sector.
day in April 2012 at a time when the full load of summer had
In a report released in early April 2012, the Asian
noi set in, but had been even higher, at 7500 MW in October
Development Bank stated that the absence of energy was
2011. This shortfall meant that power outages varied from
the main constraint for economic growth, and suggested
between 6 hours a day in large cities to almost double that,
that better load-management was required to minimize
commercial losses. The ADB estimated that 'losses and have been close to 16-18 hours in rural areas. This has
arising from power and gas shortages held down GDP meant that not only have domestic users not had their needs
growth by 3-4 percentage points in FY201 l and FY2012. met, but importantly, the main commercial and industrial
Improved management of power resources could ameliorate users of electricity have been denied access, resulting in
predictability of load-shedding to allow the private sector to the loss of economic activity. While the large metropolises
better schedule work and minimize costs'. 92 Abid Burki and comprise of large domestic consumers, it is the textile
his colleagues in their assessment of the industrial sector in and power looms sector, and most businesses dependent
Pakistan, argued that, 'the ongoing energy crisis has ~ippled on crucial power supply, which have suffered most. Most
Pakistan's industry and economy. A conservative estimate of Pakistan's economic activity takes place in the largest
puts the loss to industry at 13 per cent of total manufacturing province of the Punjab where such industry is located. Apart
sales or nearly Rs. 130 billion per annum. The energy crisis is from Karachi, the largest city with 20 million inhabitants,
hitting the industry at multiple levels: energy tariff increases power riots have spread across the industrial towns of the
are forcing busine~ses with low margins and those businesses Punjab. Given Pakistan's political structure at that time
with low margins and those who are unable to generate 2011-the Punjab provincial government and Pakistan's
their own power (e.g. SMEs) to close down; unannounced federal government belonged to opposing political parties-
load-shedding and voltage fluctuations damage machinery the electricity shortfall had also been used to gain political
worth millions of dollars; unavailability of electricity harms mileage. According to the ADB, the cost of power generation
productivity of workforce'. 93 in the country has escalated by 'almost 40 per cent in the 2
fiscal years ending FY2011. Despite steep increases in tariff
and fi.iel price adjustments, customer tariffs remain below
cost recovery, requiring large governmt;nJ S\lbsidies to keep
the system operating'. 95 . .
 Chapter 8 Key Issues in Industry in Pakistan 183

Box 8.8 view that agricultural productivity growth is significantly lower

Productivity Growth in Pakistan: Significant but than manufacturing productivity growth. This has extremely
important policy implications: First, if agricultural productivity
not Sustained
is perceived to be perpetually lower than manufacturing
productivity, then policymakers will tend to bias policies
The Panel of Economists created by the Planning Commission
and incentive structures towards manufacturing (which has
of the Government of Pakistan in 201 0, in its overall evaluation
generally been the case in Pakistan). Second, if agricultural
of the economy, also looked at Total Factor Productivity (TFP)
productivity is perceived to be lower than manufacturing
in Pakistan. ·
productivity, then research resources and technology adoption
will be more heavily directed towards the manufacturing side.
One of the fundamental questions that arises across all
TFP growth over the period 1985 to 2005 average 2.48 per
economies is how much of economic growth is caused
cent per year in the manufacturing sector A detailed breakdown
by growth in physical and human capital and how much
of the growth in the manufacturing sector is provided in Tables
is caused by factors such as technology and institutional
IV.1 and IV.2. As Table IV.1 shows, the average growth rate of
change. Though there is little doubt about the positive impact
large scale manufacturing output is 7.8 per cent between 1985
of increased physical and human capital on growth, most
and 2005. During this same period, the capital stock grew at
economists feel that sustained high growth is dependent on
an average of 6.6 per cent a year, the labour force grew at 3.5
sustained technological and institutional growth. Based on
per cent per year and TFP grew at 2.4 per cent per year. Table
the assumptions of constant returns to scale and competitive
IV.2 presents an interesting breakdown of the components of
factor markets, one can calculate the growth rate implied by
manufacturing sector growth. 56 per cent of total large scale
the rates of change in physical and human capital and find
manufacturing sector growth was due to growth in capital
the deviations of the actual growth rate from this implied
stock, 15 per cent was due to growth in labour and 29 per
growth rate. These deviations are the result of technological
cent was due to growth in TFP. Thus, it can be clearly seen
and institutional change and are called growth in total factor
that manufacturing sector growth has been driven primarily by
productivity (TFP).
increases in capital and not increases in productivity.
This Box looks at the productivity growth rates for the
Figure Vl.1 shows the high correlation of manufacturing
Pakistani manufacturing sector, the Pakistani agricultural
sector growth with changes in productivity. As can be seen,
sector and the Pakistani economy as a whole. The reason
periods of high productivity are accompanied by high growth
why a disaggregated analysis is meaningful in the context of a
and periods of low productivity are accompanied by low
developing country like Pakistan is because of the prevailing
growth.

Table IV. 1: Average Growth Rates in the Pakistani Large Scale Table IV. 2: Components of Pakistani Large Scale Manufacturing
Manufacturing Sector, 1985-2005 (%) Sector Growth, 1985---2005 (%)

Large Scale Large Scale Large Scale Total Factor Growth on Growth in Growth in Total
Manufacturing Manufacturing Manufacturing Productivity Capital Stock Labour Factor Productivity
Output Capital Stock labour (TFP) 56% 15% 29%
7.6% 6.6% 3.53% 2.4%

Figure VI. 1: Pakistani Manufacturing Sector Output and Productivity Gro~h

40
35
30
25
-Growth in
20
Manufacturing Value
15 Added(%)
10
-TFPGrowth
5
0
-51 2 10

-10

Final R_ep_ort of the Panel of Economists, Medium Term Development Imperatives and Strategy for Pakistan (Islamabad: Planning
Comm1ss1on, Government of Pakistan, April 2010), 174-6.
184 Issues in Pakistan's Economy

Box 8.9 directly linked to the circular debt crisis owing large payments
Losses Due to the Power Crisis to the PEPCO and the fuel suppliers.
KESCL has, at times, not produced at peak capacity, to
Mushtaq Ghuman presents an analysis of the 2011 /12 power avoid purchasing expensive furnace oil, preferring instead
crisis and shows how this had an impact on the economy. to purchase cheaper electricity from the PEPCO and NTDC
system. This was clearly a downside of privatizing monopolies
The country is losing up to three per cent of its GDP because as fully integrated entities in an environment where the market
of power shortages which may increase if this trend persists, was not competitively structured. The dispute between the
a report compiled by the National Electric Power Regulatory management of the KESCL and its staff labour union has
Authority (Nepra) showed. further added to the problems.
In its annual reports 2011-12, the power sector regulator However, the new management of the KESCL has clamped
said that the energy crisis had its roots in a number of issues, down on the rampant culture of power theft in Karachi and
including lack of integrated energy planning and demand efforts to increase the older plants' capacity are beginning to
forecasting; imbalanced energy mix with a heavy reliance bear some fruit Besides circular debt, the other major issues
on oil and costly imports; non-utilization of vast indigenous hindering the overall operations of the PEPCO and the KESCL
resources such as coal and hydel; lack of effective project systems include gas depletion, load shedding, deteriorating
structuring, planning and implementation of viable projects. fuel mix, and losses.
According to the Pakistan Electric Power Company (Pepco), Gas Depletion: Historically, thermal power plants use two
the shortfall of power in Pakistan on an average is more types of fuels namely indigenous natural gas and imported
than 5000 megawatts. Many power plants were generating furnace oil. Initially, the power sector got the lion's share in the
electricity at half their capacity because of fuel-related issues. allocation of natural gas. However, the gas companies did not
The severity of power outages, it said, was persistent. sign long-term agreements with the public sector utilities and
Violent protests over power cuts have become a routine in later on, the allocation of gas to the public sector plants was
different parts of the country, besides affecting industries and allocated on an 'as and when available' basis. This pattern
businesses. Unpredictable outages, it said, had also affected continued for a considerable period up to the mid eighties.
industrial output because of which export of goods suffered, However, with the passage of time, natural gas became
subsequently resulting in job cuts for industrial workers. a scarce resource because of major use in the domestic,
According to the report, over the past five years, natural gas fertilizer, and transport sectors. Lately, the allocation of natural
allocation for the power sector was reduced and the use of gas for the power sector has declined to a dangerous level
furnace oil for power generation increased considerably. The which is hardly sufficient to produce electricity matching the
country spent billions of dollars every year on the import of installed generation capacity.
crude oil and deficit petroleum products. This has increased The severity of the issue can he gauged from the fact that
the cost of generation, raising circular debt, leading to higher under the Power Policy 2002, only four lPPs were set up and
power rates. Furthermore, the power system was afflicted by that too with an annual commitment of gas for nine months.
corruption and inefficiency. With the Gas Supply Agreements (GSAs) for these four IPPs
It said that the situation had aggravated to such an extent in expiring and the gas companies not willing to extend or
the PEPCO-the entity entrusted with the task of managing the renegotiate the same any more, it is very likely that these would
transition of Wapda's transition to a corporate, commercially- he operating on alternative fuel (i.e. HSD) which will further
viable and productive entity-that the survival of the deteriorate the thermal energy mix of the country.
Generation Companies (GENCOs), the National Transmission Over the years, the percentage of electricity generation
and Dispatch Company (NTDC) and the ex-Wapda Distribution using natural gas has declined. This trend requires a complete
Companies (DISCOS) is at stake. reversal In order to keep the tariff reasonable for end
On the one hand, there was shortage of power and on the consumers. Taking stock of the situation, the Government of
other, Oil Marketing Companies (OMCs) and Gas Supplying Pakistan was not only exploring the possibility of importing
Companies are not getting payments from NTDC and Discos, Gas from regional countries including Iran and Tajikistan but
making it difficult for OMCs to arrange fuel for power plants. also tapping other sources of Gas including LPG and LNG for
Again, Independent Power Producers (IPPs) minimized the the power sector. The government, through the Sui Southern
supply of electricity despite the available capacity on account Gas Company Limited (SSGC), was contemplating import of
of non-payment of their dues by the Pepco and the Water and LNG to find a suitable alternative fuel to replace natural gas.
Power Development Authority (Wapda). All these factors have Load Shedding-Every segment of society including
led to a situation where it is virtually impossible to attract new households, commercial, industrial, and agriculture is heavily
investment. dependent on the usage of electricity. Pakistan is facing an
Karachi Electric Supply Company Limited (KESCL), mainly acute electricity shortage with the public being forced to stay
composed of various thermal power plants, has not been able without electricity for more than 9-1 o hours in some cities and
to run its power plants at full capacity because of the declining around 16-18 hours in many rural areas. It is estimated that
supply of gas. The KESCL has not been able to arrange the the country was losing two to three per cent of its GDP due to
required quantity of fuel from the market to operate these power shortage, which may increase if the shortages persist.
plants on alternative fuel due to its weak liquidity position The deepening power crisis has forced many businesses to
close down.
 Chapter 8 Key Issues in Industry in Pakistan 185

In order for the price of electricity to be affordable, it is exchange reserves, but also making the overall tariff for the
imperative to have a proper energy mix. Over the years, end consumers more sensitive to price changes in the world
the generation mix, which was earlier in favour of cheap oil market.
hydel power, has deteriorated substantially. At one time, the The report further states that the twin issues of adding
contribution of hydel energy was around 65% in the overall power-generating capacity and stemming transmission and
energy mix of the country, which has now reduced to around distribution losses on account of pilferage is a daunting
only 29.15% totally disturbing the energy mix leading to an task for the Government saddled with losses running into
increase in the consumer end tariff. At present, the energy billions of rupees due to power theft during transmission and
mix is heavily skewed in favour of thermal generation, which distribution and billing inefficiencies. As agricultural power

'
is mostly based on imported furnace oil. This not only leads supply was unmetered, many utilities wrote off all losses from
to higher inflation but also jeopardises the competitiveness the transmission and distribution as agricultural consumption.
of our industry in the international market due to deteriorating Utilities faced losses due to unmetered and unaccounted for
natural gas allocation for the power sector, it is expected that sales.
the energy mix will deteriorate even more, further increasing
the tariff for the end consumer.
On account of depleting gas reserves, most of thermal Source: Ghuman, Mushtaq, 'Acute power shortages: three per
power plants being installed use imported furnace oil as the cent GDP being lost: Nepra', Business Recorder, Karachi, 21
primary fuel, causing not only huge burden on the foreign November 2012

Box 8.10 diverting it to the power sector. Hussain seems to have little
The Politics of the Energy Crisis in Pakistan idea of how to resolve the energy crisis and insists that without
a long-term plan, the problem of power outages cannot be
lhtasham ul Haque gives a detailed analysis of the energy resolved. Privately, he puts the blame of the energy sector mess
crisis in Pakistan, prevalent since 2008. on politicians. The government has displayed a total disregard
towards the appointment of professionals on specialized slots.
The government for the past four years has failed to come The handing over the energy portfolio to Hussain-a medical
up with any short-, mid-, or long-term strategy to deal with doctor and former physician of the president in 2008-seems
the energy crisis. Six power plants remain shut; HUBCO and a befitting case in point. Appointment of Khalid Saeed as
KAPCO are forced to generate half of their capacity, while up chairman NEPRA is another example. Some officials of the
to 15 grid stations are also not working. Officials concede that Ministry of Water & Power maintain that it is impossible to
the current month's 8500 MW electricity shortfall would hit an contain load-shedding until the 1600MW Neelum-Jehlum
alarming 10,000 MW early next month. The independent power hydro project gets completed in 2016.
plants (IPPs) produce 6,250 MW, but due to non-payment of Apart from the immediate issue of circular debt, lack of
their dues, a whopping circular debt of $4.0 billion has been maintenance of the government-owned power generation
created, resulting in lower power generation. plants, line losses due to staggering power thefts, an
Energy demand over the next five years is expected to grow inappropriate energy generation mix with less than 1.0 per
by more than 7.0 per cent per annum. Forecasting, carried out cent share of coal and system losses coupled with collection
by the Private Power and Infrastructure Board, up to year 2020 inefficiency remain the major causes of the energy shortfall.
reveals a future demand of approximately 45,000 MW against In this regard, Finance Minister Hafeez Sheikh and Law and
a meagre supply of 28,000 MW, showing a shortfall of around Justice Minister Farooq Naik are believed to be ardent critics
18,000 MW. of ministries of petroleum and water and power. They remain
Back ground discussions with concerned officials reveal adamant that these ministries should work out fresh plans
that the power sector, which unfortunately relies heavily on to accelerate recoveries from private consumers and the
thermal generation, desperately needs around Rs. 3.0 billion a government departments as well as from the provinces, FATA,
day to buy fuel, whereas collections from consumers amount and AJK. The concerned officials maintain that without the
to less than Rs. 1.0 billion. President Asif Ali Zardari ordered to recovery of Rs. 378 billion, the issue of load-shedding cannot
provide Rs. 8.0 billion to the IPPs when power riots triggered be resolved.
in Punjab a few months ago and similar instructions given to Power shortages continue to become overwhelmingly huge
the federal government for payments of another Rs. 8.0 billion as 70 per cent demand remains unmet. The power generation
has reportedly dropped to a mere 9,400 MW against the total

Ir
to these power producers.
The president had instructed Petroleum Minister Asim demand of 17,400 MW. Many blame it on the diversion of
680 MW to the KESC out of the total generation. The major
Hussain to immediately rectify the situation, but he only ended
up stopping some gas supplies to fertilizer companies and reliance currently remains on IPPs as the rental power plants
186 Issues in Pakistan's Economy

with a capacity of 2200 MW only forecast a generation of 1450 The other short term solution to the energy crisis is the
MW owing to corruption and irregularities, blatantly pointed removal of Rs. 400 billion circular debt and collection of
out by the Asian Development Bank (ADB), and eventually Rs. 378 billion outstanding dues from the public and private
spawned a paltry 67 MW fleecing the tax payer of Rs. 120 electricity consumers. In addition, Rs. 166 billion are payable
billion in the process. by the provinces and if the government could recover this
The 180 degree reversal of power generation mix of 70 per amount, it could be channelled to IPPs to increase their
cent hydel and 30 per cent thermal in the 1990s is a classic generation to 60/70 per cent of their installed capacity.
example of short-sighted vision of our rulers and emphasis Long-term solution lies in the early undertaking of bigger
on 'project-oriented' and 'quick-fix' solutions as opposed to hydro projects such as the 4500 MW Bhasha Dam, which
anything that could be called long-term or 'goal-oriented'. faces various issues including that of resettlements. Even
Another aspect of the intellectually bankrupt policies is the if commissioned today, the project would take five years to
politicisation of projects of national interest. Arshed Abbasi, an complete. The government has also been advised by experts
expert on water and power issues, alleges that abnormal and to convert expensive fuel-based plants into gas-fired, which
deliberate delay in the hydropower projects and wastage of would be less expensive despite importing gas. Existing
heavy foreign exchange on RPPs [Rental Power Projects] are thermal power plants should also be converted to coal on
the biggest crimes of the Water and Power Ministry. He says the fast track basis. An estimated $7-S billion can be saved
that hydel power generation is being discouraged due the annually if the thermal plants are converted to coal from
unprecedented influence that the thermal lobby exerts over furnace oil.
the government. Pakistan's long-term energy needs can only be met with
Arshad mentions that the Board of Investment lured a judicious planning with regards to harnessing all the available
:I
foreign investment of $800 million in 2008 for the installation of energy resources. The country has immense power generation
a 600 MW hydropower plant, which would have sold electricity potential with 180 billion tons of coal reserves in Thar. Besides
at Rs. 4.0 per unit. "But this was sabotaged by the advisor to that, production of clean nuclear energy is also a reality
the ministry of water and power." since Pakistan possesses enormous human resource and
The government has allocated Rs. 70 billion in the new expertise in this sector, which has more than 47 'safe' reactor
budget for the Benazir Income Support program (BISP) years of operational experience. The country's 89 per cent
which has room for a drastic curtailment to divert the much- hydro-power potential also remains untapped. Only 6,720
needed funds for the IPPs. But this is now impossible as MW out of approximate 60,000 is being utilized, according to
BISP is a political programme aimed at luring voters in the open book sources. Lying in the Sun Belt and having natural
next elections. Additionally, Rs. 27 billion allocated as part of wind corridors in Sindh, the potential for renewable energy
discretionary funds of the prime minister could also be diverted resources is also immense.
to the IPPs. Furthermore, Rs. 184 billion kept for the power
subsidy can also be augmented, while cutting down huge Source: Excerpted from Haque, lhtasham ul, 'Powerless
expenses of the president and prime minister houses. Pakistan', Money Matters, The News, Karachi, 25 June 2012.

Sources for Pakistan's electricity generation are primarily pay for electricity to the generation companies, who in
oil (around 38 per cent in 2010), hydel, and natural gas (both turn have to pay their oil and input suppliers, but since the
around 30 per cent). Domestic users constitute almost half DISCOs receive payments intermittently and not fully, they
of all consumption, the industrial sector (27 per cent), and resort to borrowing; due to the high interest costs and other
agriculture ( 13 per cent). The problem of the shortfall, at reasons, debt rises, and accumulates, the government steps
one level, seem as simple as a supply/demand gap, related to in when the crisis is aggravated, but the cycle breaks again.
issues of imported oil prices, and seasonal (and increasingly The circular debt, currently at Rs. 400 bn (USD 4.4 bn or
decreasing) water flows. However, given issues particular 2 per cent of GDP), has repercussions on the fiscal state of
to the production, distribution, and pricing of energy in the overall economy, as well, and given Pakistan's political
Pakistan, they are somewhat complicated. economy, numerous state departments and institutions-
Broadly, the reasons for Pakistan's recurrent energy crisis such as the Supreme Court, Pakistan Railways, the Rangers,
rests on the fact, that like much else of the infrastructure, the ISI-avoid or delay paying their electricity dues, adding
in recent years, supply has outstripped demand and new to the fiscal burden. The ADB in its report also stated that 'for
developments and planning have not been able to to bridge every unit of power sold, there is a loss to the sector reflected
the gap. Other complications arise as a consequence of energy in the form of subsidies. An outstanding accumulation of
losses in the power system, at the generation, transmission, Rs. 220 billion was carried into FY2012, and an additional
distribution, and consumption stages. Transmission and financing of 1-1.5 per cent of GDP is likely to be required
distribution losses and theft alone, account for more than 30 in FY2012'. In addition, corruption and policy failures with
per cent of the production of many of the larger distribution regard to management and transparency-in the previous
companies, (DISCOs) most of which are publica]ly owned, government's policy of importing 19 Rental Power Projects-
either fully or partially. A vicious 'cycle of circular debt'- have been identified by the Supreme Court, reversing some
see Box 8.11-has emerged, where these DISCOs have to policy initiatives in the past to address the power problem.
 Chapter 8 Key Issues in Industry in Pakistan 187

Box 8.11 frequent and common mistake when products are unbundled
The Power Sector: A Vicious Circle of Debt and markets are deregulated and/or privatized. But the price
hikes of the last few years seem to have taken care of that. We
are charging enough now.
J I. Faisal Bari looks at the issues around the circular debt which
has accumulated in the power sector and a theoretical insight Now it seems it is more a problem of electricity consumers
into what exactly constitutes circular debt when it comes to either not paying at all or not paying on time. This includes
electricity, and some practical simple ways to get out of it private consumers as well, though the total amount lost due
to private, especially small, consumers not paying at all or
The dynamics of circular debt are not difficult to understand. not paying on time does not seem to be huge. It is more the
When a good/service is sold/provided, the good/service government departments and public sector bodies and entities
moves from manufacturer or supplier to customer, and money, that seem to be more of an issue. There seem to be significant
the price for the good/service, goes from the customer to the lags in payments from larger departments.
supplier. At each stage of production, the seller needs to be Again there are two issues here. Either these departments
compensated as he needs to compensate those who supplied just do not have the budget to afford electricity. If this is the
him. case there is no shortcut to this than giving them the additional
The issue of debt comes in if a downstream customer is budget that they need. Or, it is the case that the departments
unable to pay an upstream supplier in time while the upstream have enough money but they just do not prioritise the payment
one has to pay his suppliers. The upstream customer might to their DISCOs enough.
have to resort to borrowing to ensure he has the cash flow In this case, it is a matter for the government to be strict with
to tide over the time while he is expecting payments from these entities to ensure timely payment, or for the DISCOs
downstream. This should be a simple matter as long as the to have the ability to disconnect delinquent customers, or if
downstream customer does pay. If the payment is too delayed neither of the above can be done, for the government to step
and the upstream supplier has to bear a large cost of interest in and cover the non-payment by these entities.
on arranging for an alternative financial source, or if the If the government cannot make public sector entities pay
payment does not come through or has a probability of not their bills on time, and if the DISCOs cannot disconnect
coming through, we have a bigger problem. those who do not pay or do not pay on time, or fine those
Here, the problem of circular debt can emerge when one of who do not pay on time, how can the problem of circular
the producers in the value chain starts borrowing to pay others debt be addressed unless there is an injection of money from
on the basis of receivables and then uses these receivables somewhere. And where can this money come from except
as a basis of further debt or borrows from those very people from the government? Why would anyone else want to get
who he is supposed to pay in a subsequent period. The debt involved in this problem?
cycle will become circular, and vicious, as interest payments The government can separate out the issue of 'stock'
will keep accruing on the producer who is not able to make problem-accumulated debt-and 'flow' issue-shortfall
payments in time. This is the situation our energy sector is in. being faced period to period. For the stock issue there is little
Simplifying the matter a little, the distribution companies that can be done except maybe for the government to just pay
(DISCOs) have to pay for electricity to the generation it off and cut the amount from any delinquent public sector
companies, who in turn have to pay their oil and input entities that have not paid in the past to recover whatever can
suppliers. But the payments that the DISCOs receive, from be recovered.
users of electricity, come in with delays, might not be enough, On the flow issue, the government has to give the power to
and so they have to resort to borrowing to pay generators. the DISCOs to deal with non-payments or late-payments as
And as mentioned, due to interest payments as well as other they should be. If an ordinary citizen does not pay the DISCOs
shortfalls the debt continues to rise to the point that it becomes she is taken to the cleaners and back. Why should the case
unsustainable and then we get the crisis and generators refuse be any different for public sector entities? Imagine the audacity
to produce till they are given arrears. The government steps in of these organizations: they take money from the citizens as
with some cash injection, the constraints are relaxed and the taxes and then do not spend the money where it should be
cycle starts again. spent and in the process cause further hardship to citizens in
But the ultimate outcome does not change. 1t is a matter terms of higher load-shedding. Talk about being irresponsible.
of time before we are in the same non-sustainable situation If this power is not allowed to the DISCOs and the culture of
again. paying regularly and timely is not imposed on public sector
How do we resolve the issue? It seems fairly simple. We entities, and those who do not pay, private or public, are not
have to pay for existing debt and have to make sure that the taken to task the problem of circular debt will continue. And it
DISCOs are getting enough to pay for the electricity they buy will get worse.
in a timely fashion. Simple enough. It is good that gas and other utilities do not have the type of
But if the issue is this simple, why has it become so supply chains that electricity has or we could have the same
convoluted? kind of issues there too.
Initially, the problem was that though we had done contracts Having said that, conceptually, the problem of circular debt
on electricity generation side on commercial basis, with the is easy to resolve: charge the right price that covers the cost
IPPs in particular, on the consumer side, we were not allowing of production to the consumer and make the consumer-
the prices to go up and reflect the cost of production. This is a public or private-pay for electricity on time. And, set the right
188 Issues in Pakistan's Economy

efficiency incentives for the DISCOs so that they do not hide unit). This comparison suggests that in order to minimize this
their inefficiency cost under the circular debt issue. But if the 'subsidy', the government would be better advised to have
government is not willing to do that, we will continue to have more power outages since every hour of additional generation
circular debt issues and the government will need to continue from imported oil raises the subsidy bill by a larger margin-
to dole out money. The issue could not be simpler. almost Rs. 9 per unit as against the present average of under
Rs. 4 per unit.
Source: Bari, Faisal, 'Viscious Cycle of Debt', The News on This first component of circular debt-the provision of
Sunday, Karachi, 8 April 2012. electricity to consumers at rates lower than the cost of
generation and distribution-is also a major factor contributing
to the growth in size of circular debt. By failing to foot this bill
for the subsidy, the government builds-up circular debt.
II. Shahid Kardar explains the mechanism of the
But there are three other critical components, which raise
Circular Debt.
costs and feed circular debt. First, there are the inefficiencies
of government-owned generation and distribution companies;
'Circular debt' in the power sector is widely understood as an cozy deals struck with providers of rental power plants;
issue whose solution has eluded policymakers over the last overstaffing; free provision of electricity to WAPDA employees
three years. This article attempts to explain the genesis of the (this costs other consumers Rs. 100 million a day); poor
problem and ways to resolve it. maintenance of plant equipment; the use of obsolete
Simply put, circular debt arises when one party, which doesn't technologies (which result in technical losses as well as
have adequate cash flows to discharge its obligations to its corruption. All of these simply add-through tariff increases-
suppliers, withholds payments. When it does so, the problem to the cost of electricity consumers are constrained to bear
is transmitted to other entities in the supply chain, each of with equanimity.
whom withholds payments, resulting in operational difficulties Second, there is the widespread issue of electricity theft; the
for all service providers in the sector. As a consequence, none cases of DISCOs in Hyderabad, Peshawar and Quetta are now
are able to function at full capacity, which, in turn, gives rise to well-known while no one in FATA pays for electricity.
unnecessary power outages. Finally, there's the issue of poor collection of electricity bills.
The circular debt numbers that get reported in the press Federally-managed agencies and provincial governments
tend to be the sum of the receivables of each organization, alone owe more than Rs. 150 billion. Powerful private individuals
a practice which ends up exaggerating the amount. This is and companies are also defaulters as are those who, in
because one party's payables are the other party's receivables; collusion with WAPDA employees, do not pay but continue
logically, these should cancel out when we subtract one from to enjoy uninterrupted supply. More than Rs. 220 billion are
the other. At the very worst, the net amount should be much due from private consumers although a large portion of these
smaller. In our case, however, even this net unadjusted amount alleged "receivables" are dues from fictitious consumers. This
is growing by Rs. 1.4 billion a day. category covers theft by consumers, in collusion with the staff
Let's refer to this outstanding amount as 'stock'. To be able of GENCOs, which is parked under convenient heads ranging
to understand what this stock represents and its daily build-up, from non-existing consumers to "unmetered connections" (a
let's look at a simplified and abridged version of the supply category allowed and supported by the staff at GENCOs to
chain which results in electricity being provided in our homes. facilitate this corruption and which includes agricultural tube
Refineries provide oil to oil marketing companies. Most of wells).
the crude oil is imported and suppliers abroad have to be paid Clearly, the basic issues are failures to a) revise electricity
to ensure supply and there can be no debt beyond the terms tariffs on a timely basis; b) prevent electricity theft; and c)
agreed for the supply of oil. These oil marketing companies ensure speedy collection of billing amounts and disconnect
sell oil to the IPPs or the WAPDA-owned electricity generation supply to defaulters. (The disconnections will actually also
plants (gencos), which produce the electricity and sell it to reduce the extent of outages.) In other words, the principle
the government-run distribution companies (DISCOs) such as issue is that of governance.
LESCO, PESCO, etc. which provide power to our homes and So what is the solution? The liabilities in the shape of the
factories and bill us for this service. remaining inherited 'stock' of Rs. 300-odd billion can be
The tariff (price) at which the gencos sell to the discos and cleared as a one-time effort even-dare I say it-through the
the tariff at which electricity is supplied to the consumers is printing of money (at the expense of a slightly higher rate of
determined by NEPRA, after governmental approval. inflation). However, such a step should be made contingent on
But the first problem arises when the tariff is unable to the taking of firm and clear initiatives that will prevent the build-
cover the costs of generating and distributing electricity, up of circular debt again. Such a proviso is critical because
which results in the receivables not cancelling out payables the prevailing incentive structures enable those operating the
(as argued above). For instance, if the price of oil goes up sector to live with the comfortable feeling of business as usual
internationally and tariffs are not revised upwards to account (with the same levels of incompetence and poor governance),
for this increase, the government ends up picking up the convinced that the government will simply step forward, yet
difference and thereby subsidizing electricity. Currently, the again, a few months down the road, to bail them out.
cost of generation at the margin (more than Rs. 18 per unit) It's fairly obvious by now that a key issue is poor governance,
is almost two times the average tariff-(less than Rs. 9.50 per reflected i.n the government's failure to weaken the control of
 Chapter 8 Key Issues in Industry in Pakistan 189

powerful lobbies who continue to ride this gravy train while the longer have to be borne by consumers hooked to the LESCO
rest of the population wrings its hands helplessly. and FESCO systems which have lower distribution losses.
The only solution to this issue is to either immediately Even if the provincial governments need to set up physical
privatize the management or ownership of DISCOs under an infrastructure such as grid stations to reduce the distribution
appropriate regulatory framework or to hand them over to losses stemming from technical reasons, this one-time
the provincial governments. The electricity can be supplied investment is a price worth paying in the short term. And the
at the provincial borders for the provincial governments to federal government would do well to finance this investment
purchase from the GENCOs, thereby relieving Islamabad's on behalf of the provinces, even if the money needs to be
overstretched budget from the burden of this seemingly never- provided upfront.
ending electricity subsidy.
The adoption of such an approach will also ensure fairness
and equity: the 'line losses' (read: theft, with the collusion of Source: Kardar, Shahid, 'Squaring the Circle', Money Matters,
staff) of DISCOs in Peshawar, Quetta, and Hyderabad will no Karachi, October 2012.

Dealing with the immediate problem are also a few private, coal power plants under construction
The third National Energy Conference was held in Lahore in which will increase the country's need for imports and, once
early April 2012 to take immediate measures to deal with the Karachi and Gwadar ports are expanded, larger vessels can be
problem. One decision of the Conference was to distribute berthed which will make importing more economical.
the load of the shortfall evenly across the four provinces, Other sources of untapped energy are said to be solar (2.4
reducing the heavier burden on the Punjab. Government mn MW estimated by the Alternative Energy Board) and wind
offices were to work five days a week, and all markets (350,000 MW). Clearly, these very exaggerated estimates are
throughout the country were to close at 8 pm, except on just that, and given that the target for producing 1500 MW
weekends. Other measures were also announced to save from wind energy by 2013 is highly ambitious given that
electricity, such as cutting power to billboards and replacing only 6 MW is produced from wind, all these numbers are
regular bulbs with energy savers. To ensure smooth supply of mere speculation. Besides, technology is still very costly. The
power, additional gas has to be provided to power companies. cheapest form of electricity in Pakistan is hydel, the total
The Prime Minister said that 700 MW of electricity would be installed capacity of which is 6500 MW currently, but some
saved by observing a five-day working week. Other measures experts believe that Pakistan could produce 50,000 MW from
taken focussed on enforcement and legal issues related to the this source. There are issues of water availability and disputes
prosecution of defaulters and electricity thieves. over water-sharing agreements between provinces and India.
Nevertheless, the Government of Pakistan has announced
Longer-term issues that it will build 7 dams producing about 13,000 MW, but the
The argument making most of the rounds in Pakistan for internal politics and financial arrangements of such projects
some years now, without much progress, is that Pakistan do not permit one to make projections about the completion
must turn to coal-both from its own large untapped reserves of such projects. Other sources of importing oil and gas
and from imports-to fuel power generation beyond the next from Iran or Turkmenistan or India, have major diplomatic
decade if it is to ease the energy crisis which has had clear and security issues, and although the government voices
consequences on economic growth. Some experts believe its concern about energy shortfall, there is more talk than
that Pakistan has one of the biggest, barely-touched, single solution. The government has added 1,604 MW to the system
coal reserves on the planet-the massive Thar coalfield in by commissioning six new independent power producers
the northern Sindh province with 175 billion tonnes of (1,264 MW) and a nuclear power plant (340 MW). A 49.5
extremely high water-content, low-energy coal, although it is MW wind power plant has recently obtained financing.
considered to be uneconomical to exploit. However, rising oil Many of the solutions proposed by the government, look
and gas prices; rising coal prices; and new technology to dry cosmetic and have been announced in the past as well.
out watery, gaseous coal, or leave it in the ground but extract Nevertheless, as in the past, short-term solutions, such as
the gas from it instead, have resulted in some projects being pumping some money into DISCOs to address the circular
initiated around the world. The Pakistan government this debt problem to ensure supply, will be found and the problem
year declared the Thar coal fields a Special Economic Zone, ameliorated. While this may aggravate the already weak
with tax breaks and incentives to lure investors to develop fiscal stance of the government, more serious initiatives will
coal gasification and mining as part of its strategy to fill the require more substantive measures. Better price incentives,
energy gulf. more fiscal resources to invest in power sector initiatives, a
Some large coal-fired power plants are under construction more stable political environment to attract FDI, and issues
and more are being converted from fuel oil. Imports of low- of management and control at the local level, are all required
grade coal are likely to be part of the near-term solution to address Pakistan's energy crisis.
with the development of Thar a long-term prospect. There
190 Issues in Pakistan's Economy

sector. However, as we have shown, there is now growing

8.7 SUMMARY AND FURTHER READING
awareness amongst a small group of academics that this has
8.7.1 Summary not been the case. The claim that industry is inefficient has
been overstated, and the evidence presented is misleading,
It would surprise most people to know that the small-scale
misunderstood, or distorted. Recent work shows that,
industrial sector of Pakistan has been the backbone of the
while numerous problems and hindrances have hampered
economic growth and development that has taken place,
industrialization in Pakistan, most are of a structural nature,
particularly in the 1980s, and it continues to remain stable,
and the causes and claims that are popularly believed
in Pakistan, despite severe crises at a time when the overall
are in fact incorrect. Nevertheless, one cannot ignore the
manufacturing sector and investment in it, are suffering. In
fact that between 2008-13, Pakistan's industrial production
the I 960s, large-scale manufacturing produced high growth
completely collapsed, with investment at its lowest levels.
rates, but after the intervention in the economy by Bhutto,
The government which assumes power after May 2013, will
the small-scale sector grew to prominence. This sector, which
have to address this serious crisis in Pakistan's industrial
has been consciously ignored and neglected by government-
sector and in its economy-See Appendix 8.4.
ironically, one possible reason for its success-is a major
source of employment in the urban areas of Pakistan, and
provides as much as 25 per cent of Pakistan's exports. In a 8.7.2 Further Reading
situation where overall trends in industry show alarmingly In addition to the texts mentioned in Chapters 6 and 7, which
worsening signs, the small-scale sector continues to thrive cover many of the general issues related to industrialization
and show dynamism. However, it must be emphasized that in Pakistan, including those covered in this chapter, other
the fortunes of the small-scale sector are closely tied to those important and interesting books and papers include:
of the rest of the economy: if growth falters, as has been the Nadvi, Khalid, Employment Creation in Urban Micro-Enterprises
trend in recent years, so too must the small-scale sectors. in the Manufacturing Sector in Pakistan (Bangkok: ILO/ARTEP,
However, it is very probable that rising remittances into 1990) which details work on the informal/small-scale sector;
Pakistan, a phenomenon from 2009, might spur up the small- Ijaz Nabi's Entrepreneurs and Markets in Early Industrialization: A
scale sector as well. Case Study from Pakistan ( San Francisco: International Center
The crisis affecting the textile industry has resulted from for Economic Growth, 1988) and Weiss, Anita, Culture, Class
political interference, poor policies, bad management, and the and Development in Pakistan: The Emergence of an Industrial
inability of the industry to adapt to changing world demands Bourgeoisie in Pakistan (Lahore: Vanguard, 1991). Ahmad, M. B.
and needs. Today, much of the industry is considered 'sick', and Robert Laporte's Public Enterprise in Pakistan: The Hidden
and thousands of industrial units remain closed. The severe Crisis in Economic Development (Boulder, Colorado: Westview
energy crisis since 2009, has made matters far worse. Press, 1989) gives a useful overview of the state-owned
This chapter, using numerous sources, has tried to show industries. The extensive and voluminous study undertaken
that the public sector has not been a complete failure, as is by the economists at the Lahore University of Management
conventionally believed, and that public sector enterprises Sciences in 2010, is essential reading for anyone interested in
have been efficient, productive, and even profitable. The learning about new issues in the industrial sector in Pakistan.
public sector has been much maligned, as is the trend these See Abid Burki et al. Industrial Policy, Its Spatial Aspects and
days, and so there have been growing moves to privatize Cluster Development in Pakistan: Volume 1, Analysis Report to the
all things owned by the state. However, privatization is no IndustrialPolicy 2010 (Lahore: LUMS, 18 October 2010).
panacea, as changing ownership need not automatically For more details on various aspects of industry, the
result in efficiency, or any of the other attributes assumed to references provided in the Notes should also be consulted.
be inherent to the private sector. Moreover, the privatization Newspapers, magazines, and various government publications
process in Pakistan has been seen as a means to offer that are published from time to time should also be reviewed
political patronage, and for this reason may prove to be to keep abreast of current issues. The government's Small
counterproductive. and Medium Enterprise Development Association (SMEDA),
There is a consensus amongst economists in Pakistan is a good source for information and data, and also publishes
that Pakistan's industry has been inefficient, due to high reports. See also on privatization: I<han, Akhtar Hasan, The
protection and warped incentives. This myth is repeated ad Impact of Privatization in Pakistan (Lahore: Ferozsons, 2012).
nauseam by scholars who have commented on the industrial
 Chapter 8 Key Issues in Industry in Pakistan 191

Appendix 8.1
volume of water delivered by the increasing number of tube
The History of the Emergence of the wells during the 1950s was small, in absolute terms this
Small-Scale Engineering Sector in the development was of considerable importance in spreading the
new water technology among farmers.
Punjab During the 1950s this expansion remained modest and it
The small-scale sector, particularly in the Punjab, has changed was confined to rich farmers in a small number of districts
the face of industry in the province. Khalid Aftab and Eric Rahim in the Punjab. The really spectacular expansion in demand
tell us how it emerged. for tube wells started from 1959-60 when the government
of Pakistan's policy towards agriculture, which had suffered
At the time of its establishment in 1947, Pakistan inherited neglect during the 1950s, changed radically. The new policy
one large engineering enterprise (BECO) under a management relaxed controls and provided significant incentives for
with considerable experience in metal working. Besides this increased production. As a result, the terms of trade between
enterprise, there were less than ten medium-sized metal agriculture and industry were improved from the point of
working and iron founding units (each employing about 20 view of the farmers who experienced a significant increase in
workers) in Lahore, Sialkot, Gujranwala, and Wazirabad. ln real income. At the same time the volume of loans available
addition, these towns were also centres of considerable small- to farmers for the purchase of tube wells and other inputs
scale activity in metal working. During the Second World War, (for example, chemical fertilizers) increased markedly. The
Sialkot achieved renown as a centre of manufacture of high farmer thus had the resources to invest in improved means
quality surgical instruments which were exported to various of water supply. He also had a strong incentive to invest
parts of the Empire. Much of this production of surgical because shortage of canal water, particularly at certain critical
instruments was carried out small scale with fairly extensive times in the year, presented a serious obstacle to increased
subcontracting arrangements. (Sialkot was also famous for production. After the shift in government policy towards
sports goods manufacture, again with a substantial small- agriculture the farmer's rate of return on investment in a tube
scale sector.) Wazirabad, a centre of medium and small-scale well was estimated by one researcher at 100 per cent. Another
cutlery manufacture, had the reputation of being West estimated that on a 50-acre farm in Gujranwala district the
Punjab's Sheffield. Gujranwala was also a well known centre cost of a diesel engine tube well was recovered in two years,
of medium and small-scale metal manufacturing. Finally, there and of an electric powered water pump in less than one year.
were numerous artisan workshops in various towns catering to Rural electrification in certain districts of the Punjab also
the farmer's needs for traditional agricultural implements and exerted a highly favourable influence on the extension of tube
producing simple metal products for domestic use. well installation. Thus, from 1959-60 there was an explosion
The indigenous labour force in the western Punjab was in demand for tube wells from private agriculture [from 750
augmented at the time of the partition of the subcontinent tube wells installed on average annually between 1948 and
by an influx from the eastern districts of workers with metal 1960, to nearly 16,000 each year between 1960 and 1970].
working experience. A majority of the united Punjab's This is also the period when small units in large numbers
blacksmiths was Muslim. A majority of the labour force in began to establish themselves in the industry.
general metal work was also Muslim. Thus, with the 1947 ... The small-scale sector-small production units, artisans,
cross-migration of Hindus and Sikhs and Muslims the Pakistan and the reservoir of labour with tradition in metal working-
Punjab inherited more than its share of the blacksmith did not initially (early and mid-1950s) have the technical and
population and metal working labour of the united Punjab. other resources to respond effectively to the challenge of the
The newcomers together with their indigenous counterparts expanding tube well market. However, expanding industrial
formed a large reservoir of labour with a metal-working activity during the period offered this sector opportunities
tradition going back many generations. Concentrated in a appropriate to its resources and skills. for instance, a variety
small number of towns they engaged in diverse metal-working of activities (for example, electric fan making) enabled
activities either as labourers or as small workshop owners. workshop owners not only to keep their skills alive but also
These resources formed a modest, but not negligible, base to upgrade them. Expanding operations of large and medium
upon which future metal working in the Punjab was to be sized enterprises in metal working provided opportunities
founded. for employment and acquisition of new skills. Diffusion
Demand from a variety of sources created markets for diesel of skills was also assisted by a number of technical and
engines, electric motors, pipes, and water pumps. The most vocational training centres set up by the central and provincial
important of these sources was irrigation in agriculture. The governments.
severe constraint imposed by water shortage on agricultural Slow-speed diesel engine and centrifugal water pump
expansion was widely noted in the early 1950s. Continuing · production was first established in the large-scale sector and
schemes launched before the partition to extend the use it was only gradually that the small-scale obtained the skills,
of tube wells, the Agriculture Department of the Punjab technical knowledge, and physical inputs required to effect
government, throughout the 1950s (and the 1960s), provided entry to the tube well industry. Diffusion of the technology for
installation and other facilities to farmers. Although the
192 Issues in Pakistan's Economy

production of tube wells proceeded simultaneously with the they were obliged by law to operate) trained a substantial
increasing use of tube wells in private agriculture .... number of workers in the production of diesel engines and
The initiative in producing slow-speed diesel engines and pumps and, in this way, knowledge of this technology was
centrifugal pumps on a regular basis was taken by BECO in more widely, disseminated. Many of the new small units
1949. lt obtained designs of slow-speed diesel engines from
a British firm and at the same time imported equipment for
that entered the industry from 1959-60 were set up by (or
in collaboration with) skilled workers who had obtained the
I
their production. ln 1952, it set up a joint company with KSB- necessary experience with one of the larger firms. Many
AG, a West German firm specializing in pumps and turbines. tube well components requiring advanced technology in
(This partnership ended in 1959 when BECO purchased KSB's their manufacture were' initially imported, later being locally
share in the joint company and KSB, in collaboration with a produced by the large firms. By the late 1950s small units
number of leading Pakistani business houses, set up a new had access to these and other inputs. Some of the medium-
company in the Punjab.) ln the second half of the 1950s, sized firms benefitted in a similar way from co-existence with
BECO established technical collaboration with overseas- the large firms, they also had access to labour trained, and
American (turbines), British (electric motors), and German components and equipment produced, by the large firms.
(high-speed diesel engines)-firms. Thus over the decade all or ln their turn, when markets began to expand rapidly in the
much of the technical know-how required for the production late 19 50s, the medium-size firms often found it necessary
of various types of diesel engines, water pumps, etc. was to give out part of their work to small workshops in the
imported into the Punjab through the medium of BECO. neighbourhood. ln this way know-how was passed on to
BECO and other large and medium-sized firms were able to many workshops who later set up their own production.
draw on the reservoir of labour with metal-working experience
for the manpower required for their expansion. The large and, Source: Aftab, Khalid and Eric Rahim, 'Emergence of a Small-
subsequently, the medium-sized enterprises (in the course of Scale Engineering Sector', Journal of Development Studies, 1986,
their normal production and under apprenticeship schemes vol. 23, no. 1, 61-6.

Appendix 8.2

Helping the Small-Scale Sector: Good substitution in the domestic market and for exports, Pakistan's
balance of payments pressures could be eased. n,e key strategic
Intentions or Stifling Dynamism? issue in accelerating the growth of SSEs is to enable them to shift
to the high value added, high growth end of the product market.
The Panel of Economists created by the Planning Commission
These SSE's include high value added units in light engineering,
of the Government of Pakistan in 2010, came up with a number
automotive parts, moulds, dyes, machine tools, and electronics
of solutions in order to capture the dynamism of the small-
and computer software ....
scale sector, the emphasis of which is government intervention.
A large number of small scale enterprises (SSEs) in the
However, as we have argued, the dynamism of the small-scale
Punjab and the North Western Frontier Province (NWFP) have
sector exists largely because the government does not, or cannot,
a considerable potential for growth and high value added
interfere in how the sector functions.
production such as components for engineering goods or
Inclusive growth through small scale enterprises: the components of high quality farm implements for the large
role, constraints, and institutional imperatives scale manufacturing sector. Yet they are in many cases
Since small scale industries have higher employment elasticities, producing low value .added items like steel shutters or car
smaller lncremental Capital Output Ratios (lCORs), and shorter exhaust pipes resulting in low profitability, low savings and
gestation periods, therefore, an increased share of investment slow growth.
in this sector could enable both a higher GDP growth for given Constraints to the rapid growth of SSEs
levels of investment as well as higher employment generation
Small .scale enterprises in small towns of Pakistan face the
for given levels of growth. At the same time if the institutional
following major constraints:
conditions could be created for enabling small scale industries
to move into high value added components for both import
 Chapter 8 Key Issues in Industry in Pakistan 193

(a) Inability of small units to get vending contracts for The CFCs could also be linked up with national research
the manufacture of components from the large-scale centres, such as the PCSlR and donor agencies for drawing
manufacturing sector (LSM), (bl Due to lack of expertise in upon technical expertise and financial resources of these
production management and the frequent inability to achieve agencies in the service of small scale industrial enterprises
quality control it becomes difficult to meet tight delivery (SSEs). ln this context it is advisable to establish institutional
schedules. (c) Lack of specific skills like advanced mill work, links between the research centres within Pakistan such as
metal fabrication, precision welding, all of which are needed the PCSJR and Pakistan's manufacturing sector in general
for producing quality products with low tolerances and and small industries in particular. lt is important to translate
precise dimensional control. ln other cases accounting and science research into products, processes and technological
management skills may be inadequate. (d) Difficulty faced by change that is market driven and required by the small scale
small units in getting good quality raw materials, which often in the small scale sector. Of particular relevance is the need to
can only be ordered in bulk (for which the small entrepreneurs re-orient the link between the PCSlR and industry to enable
do not have the working capital), and from distant large cities, certification of products and quality standards for exportables.
(el Lack of specialized equipment, (e) Absence of fabrication
Organizational features and functions of CFCs
facilities such as forging, heat treatment, and surface
treatment which are required for manufacture of high value The Common Facilities Centres could have the following
added products, but are too expensive for any one small unit functional dimensions:
to set up, (f) Lack of capital for investment and absence of (i) Marketing
credit facilities. Provision of orders from the large-sea le manufacturing sector
for components, and from farmers for farm implements. These
The institutional framework for overcoming the orders would then be subcontracted to the cluster of SSl units
constraints to the growth of SSEs that the CFC is supposed to serve. The individual order would
Overcoming the aforementioned constraints would involve be subcontracted to the SSl on the basis of the skills and
providing institutional support in terms of credit, quality control potential strengths of the unit concerned.
management, skill training, and marketing. This could be done by
facilitating the establishment of Common Facilities Centres (CFCs) (ii) Monitoring and Quality Control
located in the specified growth nodes in selected towns where the Having given the subcontract, the CFC would then monitor
entrepreneurial and technical potential as well as markets already the units closely and help pinpoint and overcome unit specific
exist. Such support institutions (CFCs) while being facilitated by bottlenecks to ensure timely delivery and quality control of the
the government and autonomous organizations such as SMEDA manufactured products. These bottlenecks may be specialized
can and should be in the private sector and market driven. skills, equipment, good quality raw material, or credit.
The institutional features of CFCs are identified in the ensuing
section. The specific technical facilities required for the CFCs, (iii) Skill Training and Product Development
the product groups they could serve and the geographic Skill training for technicians could be provided by the new
locations of enterprise clusters are given in the Appendix-VJ good quality vocational training institutes (VTls) established
of this Report. by the Vocational Training Council of Punjab. Similar VTls
could be established in other provinces. The CFC would
The specific institutional features of CFCs
provide specialized supplementary skill training on its premises
The concept of the Common Facilities Centers is based on to workers in the satellite SSl units when required. At the same
the fact that small-scale industrialists in Pakistan have already time, it would provide advice on jigs, fixtures, special tools,
demonstrated a high degree of entrepreneurship, innovation, and product development where required.
and efficient utilization of capital. The CFCs would provide an
opportunity for rapid growth to SSEs through local participation (iv) Forging and Heat Treatment Facilities
in extension services, prototype development, and diffusion of The CFCs would establish at their premises plants for forging,
improved technologies, equipment, and management procedures. heat treatment, and surface treatment. The SSl units could
Each of the CFCs would be designed to serve a cluster come to the CFC to get such fabrication done on the products
of products/process related enterprises. Each cluster of they are manufacturing on subcontract, and pay a mutually
enterprises could be aggregated into a corporate entity which agreed price for this job to the CFC.
would jointly own the CFC, with each enterprise contributing
equity to the CFC. (v) Credit
Each CFC would constitute a decentralized hub for the SSE The CFC would provide credit to the SSEs for purchase of new
cluster for ensuring continuous easy access to a comprehensive equipment and raw materials. ln cases where raw materials are
package of support services such as: (i) product development, available in bulk supply, the CFC could buy it from the source,
(ii) technical services, (iii) skill training, (iv) quality control stock it on its premises, and sell at a reasonable price to units
systems, (v) managerial advice, (vi) purchase of high quality as and when they need them.
raw materials, (vii) marketing, (viii) institutional link· up
with large scale enterprises to supply them with outsourced Final Report of the Panel of Economists, Medium Term
products and components (ix) The CFCs could also perform Development Imperatives and Strategy for Pakistan, (Islamabad:
the role of financial intermediation with the banking system Planning Commission, Government of Pakistan, April 2010),
and enable individual SSEs to access credit. 98-101.
 1
194 Issues in Pakistan's Economy

Appendix 8.3
Investors were to be provided a $-based internal rate of
Privatization and the Energy Crisis return of 150/o- 180/o over the 2 5-30 years period of the power
Kamal Munir and Salman Khalid traced the genesis of Pakistan's purchase agreement (however, in HUBCO's case 180/o was initially
severe energy crisis after the mid-2000s, and particularly after agreed) after covering for operational costs, backed by sovereign
2008, in the privatization policies two decades ago. guarantees of the Government of Pakistan. The IPPs could be
built using up to 80:20 debt-equity ratios, although most opted
In recent months, the Pakistan government has come under for a 75:25 debt-equity ratio.
tremendous pressure to fix the dire energy situation. Entire The IPPs were to be paid every month in two parts, i e.
cities plummet into darkness for up to 12 hours a day, capacity payment and energy payment. The capacity payment
and industry has come to a grinding halt. The government reimbursed the lPP for all fixed costs of the power plant including
responds with making false promises and holding "energy debt servicing (remember the 80:20 debt-equity ratio) and
summits" that invariably come to nothing. The blame is provided the investor's equity return on top. These payments
always put on the people who are deemed to have gotten used were to be made irrespective of whether the lPP was asked to
to "subsidies" and the non-bill-payers. What no one seems to produce electricity or not. Second, this stipulation made sure that
question is the policy shift that has led to a situation where the off-taker Water and Power Development Authority (WAPDA)/
people are deprived of energy despite excess capacity in the Pakistan Electric: Power Company (PEPCO)/Karac:hi Electric: Supply
system, and yet this is where the problem lies. This article Company (KESC) became contractually liable for repaying the
attempts to explain how this situation has arisen. debt (and its interest payments) taken to finance 800/o of the
project cost anyway.
Private power
The energy payment reimbursed the lPP for all variable costs
lt was in the midst of much hype that Pakistan launched the of production (e.g. fuel costs) regardless of the type of fuel
privatization of its power sector. The initiative was based on the employed and its market price. All payments were indexed (if
1994 private power policy, whose main contours were almost relevant) with US$/Pakistan Rs. exchange rate and inflation (local
entirely defined by the World Bank which had long been pushing or foreign) changes. Thus, if the fixed foreign Operational and
for opening the sector to private investment through generous Maintenance (OEtM) cost of $1 /kWh is to be paid in year 1 and
incentives. The policy and the deals that were struck under it $1 is equivalent to Rs. 60, then the lPP was paid Rs. 60/kWh for
were lauded universally by private financiers as well as by most that fixed foreign OEtM component in year 1. However, if in year
development institutions. The policy was even lauded by the then 2, the rupee devalued to Rs. 80 and US inflation was 20/o then the
United States Secretary of Energy, Hazel O'Leary, who described it lPP was paid Rs. 81.6/kWh ($1.02 multiplied by Rs. 80).
as 'the best energy policy in the whole world'. O'Leary's mission to Finally, private producers were given an exemption from
Pakistan was lauded in the US Congress in these terms: "Energy corporate income tax, customs duties, sales tax, and other
Secretary Hazel O'Leary has just returned from a highly successful surcharges on imported equipment. Among other incentives was
mission to Pakistan, which has opened new doors to American permission for power generation companies to issue corporate
business leaders and may represent as well an important turning bonds and shares at discounted prices.
point in our diplomatic: relationship with Pakistan". O'Leary was
accompanied by 80 American business executives, primarily from The gold rush
the energy sector. The O'Leary trip resulted in the signing of 16 Not surprisingly, investors rushed to invest in Pakistan's power
contracts worth nearly $4 billion. sector and overwhelmingly set up oil-based, inefficient, single
The 1994 power policy was essentially based on the structure cycle power plants. Twenty lPPs (including HUBCO) reached
evolved for the Hub Power Project (or HUBCO), a 1,292 MW, financial closure with a combined capacity of 4,500 MW (four
$1.6 billion project that was celebrated widely amongst global projects with a combined capacity of 435 MW were later
investors. Euro money Institutional Investor first hailed the deal as terminated) and brought in a total investment of $5.3 billion,
"Deal of the Year", ;nd later as "Deal of the Decade". The acclaim of which 250/o was financed by foreign equity. lt should be
that this deal received meant that Pakistan had unprecedented noted that the total predicted shortfall for which all this private
interest from investors and had before long contracted another investment was being brought in was only 1,500 MW! The World
19 independent power producers (lPPs) to contribute another Bank however claims that it had advised the Government of
3,400 MW. Pakistan was advertised by the World Bank and global Pakistan to contract only 2,000 MW. ln any case, WAPDA was
investors as the gold standard for privatization of the energy stuck with massive overcapacity for which it was contractually
sector. obligated to pay irrespective of whether it needed those lPPs to
produce electricity or not.
The deal
Many thought that it would be much cheaper to follow the
The policy separated generation of electricity from its transmission traditional approach of getting soft loans as a sovereign and
and distribution. Going forward, a vast majority of the new building the power plant with WAPDA's expertise as much of
generation capacity was to be the domain of private investors the country's power infrastructure had been built that way since
who were offered a bulk tariff of US cents 6.5/kWh for sale of 1947. However, sources dose to the HUBCO deal reveal that by
electricity to the still state-owned transmission and distribution the mid-1980s, the World Bank had indicated that soft loans
companies. would no longer be extended and the Bank would only support
[
I Chapter 8 Key Issues in Industry in Pakistan 195

international investment in Pakistan's power sector if private the total energy produced in the country actually decreased
investment was brought in through the lPP model. nearly 100/o between 2007 and 2010.
The keenness of the Bank to usher in privatization can also When the country started out on the road to privatization,
be gauged by the fact that it was involved in almost 880/o of the its electricity generation relied on a fuel mix heavily in favour
total lPP capacity contracted (3,400 MW) through equity, loans, of hydro as opposed to thermal. This has now changed
or other guarantees. dramatically over the following decade with the fuel mix
changing to 300/o hydro and almost 700/o thermal by the
When the lights came back on
end of 2010. Given that Pakistan imports all of its oil and
The privatization juggernaut rolled on through the 1990s. has scarce gas reserves, that the oil prices climbed to $140/
Capacity in the system increased to first meet whatever the barrel in this period, and combined with the fact that the
forecast shortfall had been (this kept moving upward), and kept much-lauded 1994 policy did not discriminate on the fuel
increasing. lt took a few years for the true extent of this policy's source being employed, the consequences for Pakistan's "fiscal
fallout to become apparent. When lights came back on, the position" are there for all to see.
power sector and everything else that depended on it lay in ruins.
All the promises of great service vanished. Since 1990, tariffs in Paying the cost
rupee terms have climbed up approximately 5300/o for the median The cost of this strategic policy level folly can be understood
domestic consumer (while doubling in dollar terms) as the energy with the following comparison. As per the National Power System
mix of the country shifted away from much cheaper hydro to Expansion Plan 2010-2030 of the National Transmission and
thermal (read oil) based power, exposing the average consumer to Dispatch Company (NTDC), as of 2010, WAPDA (employing hydro
the vagaries of the international oil price fluctuations. As a result, production) generated electricity at Rs. 1.03/kWh (1.2 cents/kWh)
the government and the consumers found it increasingly difficult, while public sector thermal power plants provided the same at
almost impossible, to pay for this electricity. By 2011, it became Rs. 8.5/kWh (10 cents/kWh). However, the lPPs (primarily thermal)
usual for large parts of the country to plunge into darkness on a provided the same at Rs. 9.58/kWh (11.2 cents/kWh). As a result,
daily basis-all this in the presence of substantial excess, unused the average blended cost of generation was Rs. 6.6/kWh (7.7
capacity! cents/kWh) in 2010 which further increased to Rs. 9.81 /kWh (11.5
cents/kWh) for the end consumer due to line losses and theft in
ln the lead up to privatization, the World Bank had provided the transmission and distribution systems.
at least three justifications for this move from public to private
provision of energy. First, it claimed that the current level Even after adjusting for debt repayment, power production
of service that was being provided to consumers was below through indigenous hydro resources comes out much better.
par. Line losses were high and disruptions were frequent. The estimated cost of energy from a majority of potential
Second, by subsidizing power production, governments were new hydro projects is expected to come under 4.5 cents/kWh
coming under increased financial strain. Facts and figures according to a recent NTDC report. Moreover, the country
were provided to show how current expenditure on health has so far completely failed to develop its coal reserves (only
and education were insufficient and how privatization of the 30 MW comes from coal) which are estimated at 175 billion
energy sector would improve the government's fiscal position tonnes (the second largest in the world). Engro Corporation,
and free up public funds for these important causes. Finally, which owns a block of coal in Thar, estimates a tariff of 10-12
it was suggested that the existing subsidies were not helping cents/kWh for Thar coal-based power production based on
the poor in any case since most of them were not connected the current policy. The world average for coal-based power
to the grids. Thus taking away the subsidies would actually production in the energy mix is 400/o while it is only 0.10/o in
hurt the rich more than the poor. Pakistan.
A decade later, none of those "savings" have been allocated lncredibly, most policymakers continue to blame non-
to healthcare and education as promised. ln fact, in those bill-payers, line losses (which are adjusted in the cost of
sectors too, privatization has been constantly encouraged. production!) and subsidies for this situation. The solution
As a result of power shortages, industry, commerce, and they propose is to switch off lights in a country which already
agriculture have been taking serious hits with the country's boasts one of the lowest per capita electricity consumption in
growth prospects dimming significantly. At the same time, the world. Similarly, they keep increasing prices to supposedly
residentia 1 consumers have had to endure over 8-12 hour meet the "true" cost of production, when the problem lies with
blackouts in major cities of the country with the situation the cost, not the price! Because of the 1994 and later 2002
even worse in rural Pakistan. power policy, the cost is several times higher than it would
As for improving the government's fiscal position and have been otherwise. By choosing to buy power at exorbitant
easing financial strain, the power policy led to a crippling of rates from lPPs the government is burdening the people, not
government finances through the "circular debt"-a debt that subsidizing them! As for foreign investment; because of this
accumulated in the system because of increasing oil prices policy, for the sake of the 250/o equity (say $25 million for a
(nearly 700/o of the total capacity was now based on oil-fuelled 100 MW plant) which the lPP investors typically bring in, the
thermal units generally of low efficiency), and the consequent government ends up spending approximately $83 million (in
inability of the government to continue compensating the equity returns and debt financing costs) more through the life
lPPs for fixed and variable contracted amounts. Meanwhile, of a 100 MW thermal lPP!
196 Issues in Pakistan's Economy

The blackout in Pakistan is a policy failure, a result of the first need to admit failure. Unfortunately, that possibility looks
disastrous privatization undertaken by the government at the remote for the time being.
behest of the World Bank. Blaming petty theft, line losses,
or subsidies is only going to create a bigger hole for the
government. The only way to reverse this dire situation, which Source: Munir, Kamal and Salman Khalid 'Pakistan's Power
is crippling industry and plunging homes into darkness, is to Politics', Economic & Political Weekly, 23 June 2012 vol xlvii no
reverse the 1994 policy. But for that to happen someone will 25, 24-27.

Appendix 8.4

Pakistan's Sagging Manufacturing Exports of manufactured goods have grown marginally in

dollar value to $4.98 billion during the first four months of the
Sector current year to October from $4.52 billion last year. Textile and
cotton exports have grown to $3.64 billion from $3.52 billion.
lt was not just 2010/ 11 or 2011 / 12 which were noticeably bad for
Exports of other manufactured goods increased to $1.34 billion
Pakistan's manufacturing industry due to the energy crisis. This
from just above $1 billion. But the manufacturers and exporters
article by Nasir Jamal as early as 2008, underlined the growing
warn that full impact of the energy shortages and other negative
malaise in Pakistan's industrial sector.
factors on the economy will be felt in the months to come. 'True,
there's a marginal rise in textile exports. But look at the industry's
Acute energy shortages, high costs of production, sluggish
potential. Energy problems and spiking cost of doing business are
domestic economy, and reduction in global demand are beginning
not letting us take advantage of our potential; argued Mr Abid.
to take their toll on the manufacturing sector. The country's
Energy shortages are affecting smaller manufacturers more
industrial output, says the Federal Bureau of Statistics, fell by 6.2
than large-scale industries. 'A number of small units have closed
per cent in the first quarter (July-September) of the current fiscal
down in recent months because they did not have and could not
year [2007 /8]. The numbers released for the first quarter of the
arrange alternative power supply due to financial costs,' a Small
year underscore that the large-scale manufacturing had under-
and Medium Enterprise Development Authority official, who
performed, dampening hopes of meeting the annual target of 6.1
asked not to be named because he wasn't authorized to speak
per cent growth in the large-scale industry.
publicly, said. 1--le said everyone-sanitaryware producers, fan
The industrial growth has been declining for three years now. lt
manufacturers, sports goods exporters, auto vendors, and so on,
dropped to just 5.4 per cent during the previous year from under
were facing serious problems due to power cuts.
20 per cent in 2004-05 due to capacity constraints and high
'Some have shut down their manufacturing and others laid
cost of doing business. The FBS figures show that the production
their workers off,' he said. But he did not have the exact number
of cotton yarn declined by 0.55 per cent, cotton cloth 0.88 per
of workers thrown out of job because there is no state or private
cent and powerlooms by 64.42 per cent. ln the electrical sector,
institution to maintain such record in the formal or informal
production of refrigerators declined by 1.6 per cent, deep-freezers
sectors. 'lf energy shortages are causing reduction in output, the
29.22 per cent, air-conditioners 22.55 per cent and TV sets 10.83
security situation is scaring foreign buyers away. The buyers are
per cent. lron and steel production declined by 1.5 per cent, pig
reluctant to visit us due to travel advisories. Our foreign buyers
iron 11 per cent, billets 39.26 per cent and 1--lR sheets 22 per
feel more comfortable in visiting and dealing with Indians,
cent. Production of vegetable ghee dropped by 12.49 per cent
Bangladeshis, and Vietnamese because of security concerns in
and cooking oil 8.55 per cent. Production of buses declined by
Pakistan,' M. l. Khurram, leading knitwear exporter, contended.
41.25 per cent, jeeps and cars 47.16 per cent, and motorcycles
On top of that, he argued, Pakistan had become unattractive
8.49 per cent.
for the buyers due to rising cost of business. 'Pakistan is not a
'The slowdown in the industrial output was inevitable because
preferred destination for the American or European retail chains.
of the cut in industrial productivity due to six to eight hours'
We get only spillover orders,' said Khurram. 'So the reduction
power shutdown a-day,' Abid Farooq, former chairman of the All
in industrial output should not surprise anyone in the given
Pakistan Textile Mills Association (APTMA), told Dawn last week.
circumstances,' he said. The productivity as well as exports of
1--lours before the Sui Northern Gas Pipeline Company, the
manufacturing sector would suffer in the months to come, he
state-owned utility, had cut off supply to 70 industrial units
added. The increasing prices of electricity and gas and spiking
on Lahore-Faisalabad Road owing to what its officials said
credit cost are blamed for the escalation in the cost of doing
the growing demand of domestic consumers, adding to their
business and making the industry unviable.
concerns about timely shipments of their export orders. 'Most
'The growth in the cost of doing business has eroded the
units deprived of gas supply are export-oriented textile mills. Now
positive impact of currency devaluation. We are losing in
we hear that the utility is going to suspend supply to cement and
the global markets despite the above 21 per cent currency
other plants also,' he said. 'This is happening when winter has just
depreciation,' he said. Former Lahore Chamber of Commerce and
set in. You can well imagine what treatment will be meted out
Industry president Pervaiz 1--lanif says the persisting economic and
to the industry in the next two months when winter will be at
exchange rate instability is keeping exporters from quoting prices
its peak,' he said.
 Chapter 8 Key Issues in Industry in Pakistan 197

for six-month orders. 'lt is a difficult situation. lf we undercut As most medium to large scale manufacturers somehow
prices offered by our regional competitor, energy problems, managed to absorb the recent hike in energy price and financial
exchange rate volatility, escalating inflation, etc. make the entire charges, they are finding it difficult to cope with power and gas
economic situation and exports quite untenable; he said. Mr cuts. 'lt is a double whammy for the industiy: on the one hand it
Khurram said the economic difficulties facing the manufacturing raises our cost of production and on the other it results in sharp
sector were exacerbated by the slowdown in the domestic and decline in our revenues; Mr Abid said. 'And this is happening for
global sectors. '1 fear massive job loss and drop in output in the no fault of ours.' ln the given situation, he said, it had become
next few months.' The cost of production in the industrial sector extremely difficult for entrepreneurs to service their debts.
has increased mainly because of the rising utility bills and interest 'The government must intervene to save manufacturers from
rates. defaulting on their loans by instructing them to delay recoveiy of
The escalating cost of credit has caused fresh investment their loans till the energy crisis is taken care of and the industiy
in industrial manufacturing to diy up in the last two years, is able to operate to its full capacity; he demanded.
increasing supply side constraints. There has been no significant
investment in the industrial sector in the last couple of years to
increase productivity; said Abid. 'People have invested only where
it was necessaiy to keep operations going. lt is not possible to set Source: Jamal, Nasir, Economic and Business Weekly, Dawn,
up new industiy at 22 per cent interest rate; he added. Karachi, 24 November 2008.

NOTES
1. There are definition problems in trying to identify the in the Pakistan Punjab', Journal of Development Studies,
informal sector and what sort of activity forms part of vol. 23, no. 1, 1986, 61.
it. The small-scale sector is also a badly defined term, 7. Ibid. 61.
especially in Pakistan, where it constitutes units 'not 8. Nabi, Ijaz, Entrepreneurs and Markets in Early Industrialization:
registered' under the Industries Act. Size is also a factor, A Case Study from Pakistan, International Centre for Economic
where the informal manufacturing sector consists of those Growth (San Francisco, 1988), 4-5.
unregistered manufacturing units that employ fewer than 9. Sayeed, Asad, op. cit., 1995, 138.
ten persons. Moreover, the informal sector and the small- 10. Asian Development Bank, Strategies for Economic Growth and
scale sector are not the same thing, although they are Development: The Bank's Role in Pakistan, Asian Development
used here interchangeably for our purposes. See Nadvi, Bank (Manila, 1985), 417.
Khalid, Employment Creation in Urban Micro-Enterprises in the 11. Sayeed, Asad, op. cit., 1995, 138.
Manufacturing Sector in Pakistan (Bangkok: ILO/ARTEP, 1990 ), 12. Asian Development Bank, op. cit., 1985, 419.
and Alvi, Imtiaz, The Informal Sector in Urban Economy: Low 13. Adams, John and Sabiha Iqbal, Exports, Politics and Economic
Income Housing in Lahore (Karachi: Oxford University Press, Development in Pakistan (Lahore: Vanguard, 1987), 26.
1997) for an extensive discussion of what the informal and 14. Ibid. 30.
small-scale sectors are. 15. Ibid. 84.
2. Nadvi, Khalid, op. cit., 1990, 17. 16. Cheema, Ali, 'Pakistan's Textile and Trade Performance:
3. Burki, Abid et al. Industrial Policy, Its Spatial Aspects and 1972-1990', mimeo (Cambridge: Sidney Sussex College,
Cluster Development in Pakistan: Volume 1 Analysis Report to the 1995).
Industrial Policy 2010, Lahore University of Management 17. Sayeed, Asad, op. cit., I 995, 138, emphasis added.
Sciences, Lahore, ( 18 October 2010), xxi. 18. See the outstanding work of Jonathan Addleton: Undermining
4. Final Report of the Panel of Economists, Medium Term the Centre: The Gulf Migration and Pakistan (Karachi: Oxford
Development Imperatives and Strategy for Pakistan, Planning University Press, 1992).
Commission, Government of Pakistan, Islamabad, (April 19. Nadvi, Khalid, op. cit., 1990, 58.
2010), 78. 20. Ibid. 58.
5. Sayeed, Asad, 'Political Alignments, the State and Industrial 21. Sayeed, Asad, op. cit., 1995, 141.
Policy in Pakistan: A Comparison of Performance in the 22. Aftab, Khalid and Eric Rahim, op. cit., 1986, 72.
1960s and 1980s unpublished PhD dissertation, University 23. Sayeed, Asad, op. cit., 1995, 143.
of Cambridge, 1995, 138. 24. Ibid. 144.
6. Ahab, Khalid and Eric Rahim, 'The Emergence of a Small 25. Nadvi, Khalid, op. cit., 1990, 182.
Scale Engineering Sector: The Case of Tube Well Production 26. Aftab, Khalid and Eric Rahim, op. cit., 1986, 73.
27. Sayeed, Asad, op. cit., 1995, 144-5.
198 Issues in Pakistan's Economy

28. Ibid. 145. 64. UNIDO, op. cit., 1990, 8.

29. Nadvi, Khalid, op. cit., 1990, 125. 65. Ibid. 51.
30. Asian Development Bank, op. cit., 1985, 420. 66. Ibid. 52.
31. Amjad, Rashid, 'The Employment Challenges for Pakistan 67. Ibid. 52.
in the 1990s', in Nasim, Anjum (ed.), Financing Pakistan's 68. Institute of Developing Economies, op. cit., I 994, 324.
Development in the 1990s (Karachi: Oxford University Press, 69. Naqvi, S. N. H. and A. R. Kemal, op. cit., 1991, 106-7,
1992),63. emphasis added.
32. Government of Pakistan, Pakistan Economic Survey 1995-96 70. The News, Karachi, 20 January 1996.
(Islamabad, 1995). 71. See, for example, Lewis, Stephen, Economic Policy and
33. UNIDO, Pakistan: Towards Industrial Liberalization and Industrial Growth in Pakistan (London, 1969); Lewis, Stephen,
Revitalization (Oxford: Blackwell, 1990), 53. Pakistan: Industrialization and Trade Policies (London, I 970);
34. Burki, Abid et al. Industrial Policy, Its Spatial Aspecis and Papanek, Gustav, Pakistan's Development: Social Goals ·and
Cluster Dr:velopment in Pakistan: Volume 1 Analysis Report to the Private Incentives (Cambridge, Mass.: Harvard University
Industrial Policy 2010, Lahore University of Management Press, I 967); Little, I., T. Scitorsky, and M. Scott, Industry
Sciences, Lahore, 18 October 2010, xvii. and Trade in Some Developing Economies (Oxford: Oxford
35. Cheema, Ali, op. cit., 1995. University Press, 1970); Ahmed, Viqar and Rashid Amjad,
36. Ibid. The Management of Pakistan's Economy, 1947--82 (Karachi:
37. Amjad, Rashid, 'Industrial Concentration and Economic Oxford University Press, 1984 ); Adams, John and Sabiha
Power in Pakistan', in Gardezi, H. and J. Rashid (eds.) Iqbal, op. cit., 1987.
Pakistan: The Unstable State (London: Zed Press, 1983 ), 232-3. 72. Little, I., T. Scitorsky, and M. Scott, op. cit., 1970.
38. Ahmed, Yasin, 'Textile Industry of Pakistan', Horizon Sr:venties 73. Sayeed, Asad, op. cit., 1995, 60.
(SMC-Pvt) Ltd, http://horizonpak.com/db/resorts/research. 74. Quoted in Ibid. 60.
pdf accessed on 30 June 20/2. 75. Sayeed, Asad, op. cit., 1995, 60.
39. UNIDO, op. cit., 1990, 53--4. 76. Ahmad, Meekal, cited in Noman, Akbar, 'Industrialization in
40. Institute of Developing Economies, The Study on Japanese Pakistan: An Assessment and an Agenda', paper presented
Cooperation in Industrial Policy for Developing Economies: Pakistan at the Seventh Annual General Meeting of the Pakistan
(Tokyo, 1994),260. Society of Development Economists (Islamabad, 1991 ), 25.
41. Cheema, Ali, op. cit., I 995, 2. 77. Sayeed, Asad, op. cit., 1995, 61.
42. Ibid. 13. 78. Ibid. 62.
43. Adams, John and Sabiha Iqbal, op. cit., 1987, 83. 79. Ibid. 64.
44. Sayeed, Asad, op. cit., 1995, 115. 80. Noman, Akbar, op. cit., 1991, 18, emphasis added.
45. Cheema, Ali, op. cit., 1995, 26. 81. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 212,
46. Sayeed, Asad, op. cit., 1995, 114. emphasis added.
47. World Bank, Pakistan: Country Economic Memorandum FY93: 82. Noman, Akbar, op. cit., 1991, 32, emphasis added.
Progress Under the Adjustment Program, Report No. 11590-Pak 83. Ibid. 23.
(Washington, 1993), 48. 84. Kemal, A. R., 'An Analysis of Industrial Efficiency in
48. UNIDO, op. cit., 1990, 55. Pakistan: 1959-60 to 1969-70', unpublished PhD
49. Bandukda, Zubair, 'Trade Globalization and Textiles: dissertation, University of Manchester, 1978, and Ahmed,
Surviving without a level field', Presentation on Pakistan's Meekal, 'Productivity, Prices and Relative Income Shares
Textile Sector, LEAD-Pakistan (Islamabad, June 2001 ). in Pakistan's Large Scale Manufacturing Sector, 1958-70',
50. Din, Musleh-ud and Kalbe Abbas, 'The Uruguay Round and unpublished DPhil dissertation, University of Oxford, 1980;
Agreement and Pakistan's Trade in Textiles and Clothing', Sayeed, Asad, op. cit., 1995.
Paper presented at the 15th Annual General Meeting and 85. Sayeed, Asad, op. cit., 1995, 71.
Conference, Pakistan Society of Development Economists 86. See, for example: White, L., Industrial Concentration and
(November 1999). Economic Power in Pakistan (Princeton: Princeton University
51. Asian Development Bank, op. cit., I 985, 422. Press, I 974); Amjad, Rashid, Industrial Concentration and
52. Ibid. Economic Power in Pakistan (Lahore: South Asian Institute,
53. Ahmad, M. B. and R. Laporte, Public Enterprise in Pakistan: Punjab University Press, 1974); Ahmed, Viqar and Rashid
The Hidden Crisis in Economic Development (Boulder, Colorado: Amjad, op. cit., 1984.
Westview Press, 1989), 12. 87. Institute of Developing Economies, op. cit., 1994, 151.
54. Sayeed, Asad, op. cit., 1995, I 16. 88. In Noman, Akbar, op. cit., I 991, 25.
55. Ibid. 120. 89. See Sayeed, Asad, op. cit., 1995.
56. World Bank, op. cit., I 993, 2, emphasis added. 90. World Bank, op. cit., I 993, 45, emphasis added.
57. Naqvi, S. N. H. and A. R. Kemal, 'The Privatization of the 91. Ibid., 45, emphasis added.
Public Industrial Enterprise in Pakistan', Pakistan Development 92. Quoted in Dawn, Karachi, 11 April 2012.
Review, vol. 30, no. 2, 1991, 108, emphasis in original. · 93. Burki, Abid et al. Industrial Policy, Its Spatial Aspects and
58. Ibid. Cluster Development in Pakistan: Volume 1 Analysis Report to the
59. Ibid. 117. Industrial Policy 2010, Lahore University of Management
60. Ibid. 131. Sciences, Lahore ( 18 October 2010), ii-iii.
61. Ibid. 132-3. 94. Hussain, Akmal, 'The Challenges Ahead', The Express Tn"bune,
62. Institute ofDeveloping Economies, op. cit., I 994, 303. Karachi, 24 June 2012.
63. World Bank, op. cit., 1993, 49. 95. Quoted in Dawn, Karachi, 11 April 2012.
 Balance of Payments and
Trade Regimes

I
I !he pr~vious three chapters on the industrialization process
m Pakistan and on the issues which have subsequently
emerged as a consequence show that perhaps the most
in this chapter then, address specific issues and debates
regarding trade and its impact on the economy.

I
critical factor to affect industrialization has been the trade
regime. The import substituting industrialization of the 9.1 PAKISTAN'S FOREIGN TRADE:
1950s and 1960s, the non-devaluation decision in 1948,
the export-led Korean War boom, the high tariffs and , BASIC FACTS
protection given to domestic industry in the 1960s, the
devaluation decision of the Bhutto government in 1972
!he_ pa~tern and nature of foreign trade gives a fairly good
md1cat1on of the pattern and nature of the economies
with its serious repercussions for the economy, the decision
that enter into trade relationships. Those countries with
by the Zia regime to delink the rupee from the dollar, and
comparative advantage in certain products are likely to
all other issues related to trade and the exchange rate
produce and export those commodities. Often, they will
have, historically, had numerous consequences for the rest
need to import raw materials for their exports, establishing a
of the economy, and especially for the industrialization
strong link between the two. Countries that are dependent on
process. The trade regime in Pakistan was held responsible
climatic conditions for their exportable agricultural products
for gross inefficiencies in the industrial structure towards
may have to contend with output being determined by
. the end of the 1960s, allegations which later helped to
the vagaries of the weather. Single commodity exporting
develop a new liberal orthodoxy with respect to trade policy.
countries must frequently contend with changes in world
The Structural Adjustment Programmes agreed to by the
demand, which can play havoc with any long-term strategy
Pakistan governments since 1988 include trade sector reform
to i~dustrialize or develop, based on foreign exchange
as a major plank in the strategy. The trade regime since then
earnmgs (see Box 9.1). Over time, the pattern of trade often
has seen drastic changes in its composition and will continue
changes, as countries move from exporting primary products
to affect the way industry develops.-Moreover, given the fact
to finished manufactured goods, and their imports change
that the taxes raised from imports used to constitute more
from consumer goods to machinery. Pakistan's foreign trade
than half of total government revenue, changes in the tariff
pattern follows such a sequence and this section examines
structure have had a significant effect on revenue generated
that change.
by the government. For all these reasons, the importance of
In 1948/9, 99 per cent of Pakistan's export earnings were
trade policy must be realized as it plays a critical role in the
made up of just five primary commodities: raw jute, raw
nature of developments within the country. And now, with
cotton, raw wool, hides, and tea. Pakistan fits the classical
globalization an unstoppable process and with the World
case of an unindustrialized and undeveloped country, in the
Trade Organization (WTO) laying down the rules for trade
early years producing and exporting only primary products
this new global trade and economic order will affect all
and mainly dependent on adequate climatic conditions. A
countries, including Pakistan, in fundamental ways.
change began to occur early in the pattern of exports, as
This chapter examines how trade policy and the changing
Pakistan's economic policies shifted. towards an emphasis
trade regimes over the years have influenced the course of
on industrialization (see Chapter 6). By 1951/2, the five
development, particularly industrialization, in Pakistan. It
main primary commodities contributed 93 per cent of
will also analyse how Pakistan's trade process and pattern
export earnings, which by 1958/9 had fallen to 75 per cent.
have evolved over the last sixty-six years, where, from
Pakistan's main imports in the first decade were consumer
producing and exporting agricultural primary commodities in
goods, cotton textiles, and cotton yarn. In these years, the
194 7, Pakistan today exports mainly manufactured and semi-
direction of trade also changed: in 1948/9 India's share in
manufactured goods. There have been many more changes in
exports was close to 56 per cent, but this had fallen to only
the direction of trade, the management of the exchange rate,
4.1 per cent a decade later. Dependence on India for imports
tariffs, etc. All these factors are discussed in the sections that
was also reduced in this period. The main trading partners
follow. The first section provides information about the basic
of Pakistan in the early years, not surprisingly, were the
structure and nature of different aspects of Pakistan's balance
developed. countries of the West, mainly the UK, the USA,
of payments and trade, as has been the practice in chapters
Germany, Belgium, Italy, and Japan. 1
which deal with large amounts of data. Subsequent sections
200 Issues in Pakistan's Economy

Box 9.1 gaps, and seek a certain degree of national self-

The Objectives and Tools of Commercial Policy sufficiency;
v) Ensuring adequate availability of imported goods for
Viqar Ahmed and Rashid Amjad show how commercial policy both development and other purposes;
and the management of foreign trade take place: vi) Keeping the internal and external values of the national
currency at desired levels.
Foreign trade management has a special significance for
policymakers in developing countries since it provides Governments usually have a wide range of instruments
opportunities to stimulate the growth process. Even if of commercial policy to achieve policy goals. The most
production relations are given, foreign trade offers the commonly used tool is the tariff structure consisting of import
policymakers choices between import and local production, and export duties. Import duties can be used to influence the
and export and domestic consumption, leading to a more relative profitability of importing various commodity groups
efficient allocation of resources. Foreign trade can also (for example, taxing development imports at lower rates than
transform the existing production relations by providing non-development imports), and to restrict the access of certain
opportunities to remove domestic shortages of scarce commodities to the domestic market in order to encourage
factors of production, to overcome the diseconomies of the savings and investment. Export duties may be used to limit
small size of the domestic market, and to exchange goods the export of commodities in short supply at home and also
with less growth potential (for example, raw materials} with sometimes to fill the gap between low domestic prices and
goods having more growth potential (for example, technical high world prices.
know-how and equipment}. Commercial policy is the art of
managing the exchange of goods and services between Non-tariff measures may be divided into direct and
countries. indirect trade restrictions. Direct measures comprise
In a typical developing country, particularly in the early embargoes on the import or export of certain commodities
stages of development, the bulk of exports consists of or quota restrictions which are often specific to certain
primary commodities and export earnings due to the relative commodities, destinations, or currencies. The imposition of
inelasticity of supply, and production levels of primary exchange control and the licensing of imports and exports,
goods are not only unpredictable but also vulnerable to a common in developing countries, also constitute direct
number of factors. The developing country also depends trade restrictions. Licences may be issued for the import
upon the advanced industrial countries for most of its of certain commodities without much formality and with no
developmental needs (technology, capital, and producer restrictions on quantity or source. In Pakistan this is known
goods} and consumption requirements. The developing as the Open General License (OGL) system. But for most
countries, therefore, find their external environment difficult imports, a proper licensing system is introduced which
as their terms of trade deteriorate, their access to the may restrict the importer to make purchases from a specific
markets of the advanced countries is limited by tariff and country or currency area.
non-tariff barriers, and the trade and payments gaps widen Indirect trade restrictions include various incentives and
with the passage of time. disincentives designed to influence the flow of foreign
The only short-term solution available to them is to seek trade or its composition, such as a) raising or lowering
extensive external assistance which, in due course, creates margin requirements for letters of credit to import certain
its own complications. commodities or categories, b} fiscal incentives for industries
Within the context of the compulsions of economic using domestic materials aimed at reducing the demand
development, commercial policy in developing countries for imported substitutes, and c) subsidies and credit
may pursue the following objectives: concessions or priorities of certain import-replacing goods
or exportable. A special tool, often used by developing
i) Maintaining equilibrium in the balance of payments countries but regarded unfavourably by international
and balance of trade, or at least limiting the extent of monetary and lending institutions, is the multiple exchange
disequilibrium; rate system. This seeks to maintain a high external value of
ii) Attaining favourable terms of trade so that, with the the national currency in order to export goods with greater
same quantity of exports, the country is able to import competitive advantage in the world market while importing
greater quantities of goods and services and thus high-priority commodities, and to main.lain a low external
achieve a net addition to real income; value to export goods with lesser advantage and to import
iii) Promoting exports to derive the full benefits of low-priority commodities.
comparative advantages and also to finance the
country's import requirements;
iv) Import substitution to protect domestic production, Source: Ahmed, Viqar and Rashid Amjad, The Management
accelerate the rate of capital formation, create of Pakistan's Economy, 1947-82 (Karachi: Oxford University
employment opportunities, narrow trade and payments Press, 1984), 241-2.
 Chapter 9 Balance of Payments and Trade Regimes 201

In the Decade of Development under Ayub I<han, as In Pakistan's case, the most important contribution to the
industry was further established and the nature of production balance of payments has been workers' remittances, mainly
changed, so did that of trade. In the first decade, most of from the Middle East. In fact, for many years Pakistan's

I
Pakistan's trade had been with the developed, industrialized trade and economy have been highly dependent on money
countries, since they produced commodities that Pakistan from the Gulf. The rest of Table 9.1 shows the contribution of
needed at that time. As more and more countries began foreign investment in Pakistan, and loans and aid made by
to develop and industrialize, their demands and needs for donors to the country.
foreign goods also changed. For Pakistan this meant the Table 9.2 is a more detailed table, showing Pakistan's
diversification of both export and import markets. Pakistan exports and imports from 1950 to the most recent statistics.
began to sell its exports outside the developed countries, Pakistan's trade (exports plus imports) has expanded from
while the developed countries now also had a choice to buy US$759 million in 1950/1 to $68 billion in 2011/12, an
goods from other sources. increase of about 90 times. However, this figure can be a little
The pattern of trade took on a different story after 1971, misleading due to inflationary trends. If we examine the
when Bangladesh was created, for the contribution of East constant prices for trade, the 1950/1 figure was Rs. 2. 9 billion,
Pakistan in Pakistan's trade and foreign exchange had been rising to Rs. 17.11 billion in 1994/5, a rise of less than six-
quite substantial (see Box 9.2). Tables 9.1 to 9.3 give the fold. Hence in real terms, the expansion in Pakistan's trade
basic features of the trade regime following 1971. Table 9.1 has been less than what current prices may suggest. One of
is a summary of the balance of payments, showing the main the most interesting statistics from Table 9.2 is that for the
categories of earnings and expenditure related to trade. balance of trade. Except for 1950/1 and 1972/3!_ the balance
The trade balance, which is the difference between exports of trade has beerr· negative, implying that Pakistan a-lways
and imports, has for the most part been in the negative, imports more than it exports.
implying that imports have been greater than exports. The The growth rates in key balance of payments components
current account deficit is an important statistic composed are shown in Table 9.3. One can see a fairly haphazard
of the balance of trade and the flow of income through pattern for exports and imports from this table. The current
invisibles, such as tourism, banking services, and insurance. account deficit has shown some huge fluctuations over the

Box 9.2 [Table ·11 shows that while East Pakistan was exporting
East Pakistan's Contribution to Trade goods worth more than West Pakistan, the western wing
of the country was using these proceeds to import goods
In 1948/9, 99 per cent of United Pakistan's foreign trade into West Pakistan, far in excess of its share in exports. As
comprised of five primary commodities: raw jute, raw cotton, the _table shows, East Pakistan usually had a surplus trade
,raw wool, hides and skins, and tea. 1 All the raw jute and tea balance, _while West Pakistan had a huge trade deficit in all
exported came from East Pakistan. In 1951/2, 51 per cent of 'the s_even years between 1960 and 1967. Hence this evidence
United Pakistan's exports were constituted by tea and raw jute suggests that West Pakistan was living off the exports of East
alone. In 1969/70, just raw. jute and jute~related manufactured Pakistan.
products originating· fr~m East Pakistan were providing more
than 47 per cent of
Pakistan's total exports. 2 In 1969/70,'East 1 Ahmed, Viqar and Rashid Amjad, The Management of Pakistan's
Pakistan w~s a ·1arge. market.for West Pakistan, absorbing 50 Economy, 1947-82, Oxford University Press, Karachi, 1984, 245.
per cent of th·e West's exports, while th_e East wing provided 18 2 Government of Pakistan, Twenty Five Years of Statistics of Pakistan,

per cent of (We'st(Pakistan's total inputs for that year. Islamabad, 1972, 407,408,442.
I

' ,Table 1: Visible trade ba.lance (merchandise) (Rs. m)

;,,t'

1960/1 1961/2 1962/3 1963/4 1964/5 1965/6 1966/7

.. ~1,389 -1,266 -1,572 '. -2:131 .. -2,966 -1,490 -2,186

·· ..::.224 ,..
'>;, ;'.2~4 427 230 -:434 186 101
-1,633 -1,,693 -1,90i -2,532 -1,676 -2,287

1,259 1,300 1,249 1,224 1,268 1,514 1,668f•·

.540 ,543., 998 1,075 1,140 1,204 1,338

-,'1,,,.,,EastfPa1<1stan•~'.-r . ,..,,. ., 1;015 873 1,019 1,448 1,702 1,328 1,567

'l'.il ::, :weiifJ;~kistii'~~:;,,:-i<:f .. "· . , . , ' •'.)?;173 2;236 2,800 2,982 3,672 2,880 3,625
;.'{_r,:/'-:-~-~:•:. ·"":~~?-~:·; ~,':'- :!·t;::··;;~\: :_ :-. ,.-~,;~- ~,- , :", ', ' ,:- :, . , ·. <· .. . . ··. ' . . ···..
•' :··.: ,.$,6urce:/::lristi~uie''of Oevelopirig Economies, The Study on Japanese Cooperation in Industrial Policy for Developing Economies:. .
; '• , ~'!1-, • ' '• ' ,_. ' .. --·· . ' ·,· ' , ..
..it' , t "1; .•. 1'.!Jkistan (fokyo: ID_E, 1994), 12.
 202 Issues in Pakistan's Economy

Table 9.1
Balance of Payments, Selected Years (US$ m) 1

I
Items 1976/7 1980/1 1987/8 1994/5 2001/2 2010/11 2011/12p

Merchandise exports 1,132 2,799 4,362 7,759 9,140 25,356 18,323

Merchandise imports -2,418 -5,563 -6,919 -10,296 -9,434 35,872 29,941
Trade balance -1,286 -2,764 -2,557 -2,537 -294 -10,516 -11,618

Non-factor services (net) -187 -254 -553 -613 -298 -1,940 -2, 131
Investment income (net) -169 -261 -828 -:-1,771 -2,319 -3,017 -2,271
Income 33 95 105 182 111 716 627
Payments -202 -356 -933 -1,953 -2,430 3,733 2,898
Private transfers (net) 590 2,242 2,256 2,437 4,249 15,687 12,931
(Workers remittances) . (578) (2,116) (2,013) (1,866) (2,389) 11,201 9,736

Current account balance -1,052 -1,037 -1,682 -2,484 1,338

Private capital (net) 161 261 330 1,725 1,911
Direct investmenta 4 71 155 1,529 -144 338 -145
Other long-term 104 137 164 101 475
Short-term 53 53 11 95 -652
Public capital (net) 582 811 1,242 1,072 33
Disbursements, long-termb 807 843 1,679 2,559 532 2,377 1,411
Less: repayments, long-term -128 -270 -714 -1,455 2,911
Other (short- and long-term)c -97 238 277 -32 1,513
Allocation of SDRs (net) 0 37 0 0 -866
Change in reserves (- = increase) 252 -45 140 -238 -2,792
Errors and omissions (net) 57 -25 -30 -75 928 16 -538

a Includes portfolio investment, except Foreign Exchange Bearer Certificates and Dollar Bearer Certificates.
b Includes net official transfers.
clncludes Foreign Exchange Bearer Certificates (introduced with effect from August 1985) and Dollar Bearer Certificates (introduced with
effect from April 1991).
Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various years).
P = Provisional

last forty years, more than doubling from the previous year fell to 45 per cent in 1971/2, and were a mere 11 per cent in
in 1983/4, 1987/8, and 1992/3. These variations from one year 1994/5, but have risen again in more recent years. Similarly,
to another need to be seen in light of the whole economy. manufactured goods now contribute 70 per cent of exports,
Hence, Table 9.4 shows how some of these constituents having fallen from as much as 79 per cent of Pakistan's
of the balance of payments have changed with respect to exports in 2004/5. (However, these figures do not reveal
GDP. Exports have shown a healthy trend as their share of a very important aspect of the nature of manufactured
the GDP has increased since 1980/1, while that of imports exports which is discussed below). Regarding imports, capital
has fallen. The trade deficit has also been brought down to goods, such as machinery, and industrial raw materials have
manageable levels, but workers' remittances have fallen by replaced consumer goods as the main imported item. In
one-third compared to the huge contribution of 10 per cent 2012, industrial raw materials constituted more than three-
of GDP they made in 1981/2 except following the events of quarters of imports, and manufactured exports constituted
9/11, in 2002-see Chapter 18. The current account deficit 70 per cent, down from 79 per cent in 2004/05.
is one of the more important indicators for the whole of the Tables 9.6, 9;7, and 9.8 show the composition of trade
economy and has stayed on the high side, at a level which is in somewhat greater detail, revealing the brittle nature
considered to be unsustainable. Less than 3 per cent of GDP, of Pakistan's exports. Although 75 per cent of exports are
implying that there is not too great a difference between supposed to be manufactured items, in 2002/3 as much as
· imports and exports of all kinds, is considered a reasonable 70 per cent of Pakistan's exports (Table 9.8) were dependent
level for a country developing in the direction and at the rate on a single commodity, i.e. cotton. Raw cotton, cotton yarn,
of Pakistan. textiles, fabrics, cotton made-ups, garments, etc. have their
Table 9.5 and Figure 9.1 show how drastically the source in cotton; in 2012, this figure had changed little. Rice,
composition of exports and imports have changed. Primary vegetables and fruit, ·which formed about 8.6 per cent of
commodities, which were 99 per cent of exports in 1948/9, exports in 2011/12 are also agricultural commodities. Hence,
)

Chapter 9 Balance of Payments and Trade Regimes 203

r Table 9.2
Exports, Imports, and Trade Balance: 1950-2012 (US$ m)
[ 1980/1 2,958 5,409 2,451
Current prices 1981/2 2,464 5,622 3,158
Year 1982/3 2,694 5,357 -2,663
Exports Imports Balance 1983/4 2,768 5,685 -2,917
1984/5 2,491 5,906 3,415
1950/1 406 353 53
1985/6 3,070 5,634 -2,564
1951/2 279 445 -166
1986/7 3,686 5,380 -1,694
1952/3 262 307 --45
1987/8 4,455 6,391 -1,936
1953/4 194 249 -55
1988/9 4,661 7,034 -2,373
1954/5 149 237 -88
1989/90 4,954 6,935 -1,981
1955/6 156 203 --47
1990/1 6,131 7,619 -1,488
1956/7 147 319 -172
1991/2 6,904 9,252 -2,348
1957/8 91 276 -185
1992/3 6,813 9,941 -3,128
1958/9 93 215 -122
1993/4 6,803 8,564 -1,761
1959/60 160 379 -219
1994/5 8,137 10,394 -2,257
1960/1 114 457 -343
1995/6 8,707 11,805 -3,098
1961/2 114 470 -356
1996/7 8,320 11,894 -3,574
1962/3 210 588 -378
1997/8 8,628 10,118 -1,490
1963/4 226 626 --400
1998/9 7,779 9,432 -1,653
1964/5 239 772 -533
1999/2000 8,569 10,309 -1,740
1965/6 253 605 -352
2000/1 9,202 10,729 -1,527
1966/7 273 762 --489
2001/2 9,135 10,340 -1,205
1967/8 346 699 -353
2002/3 11,160 12,220 -1,060
1968/9 357 640 -283
2003/4 12,313 15,592 -3,279
1969/70 338 690 -352
2004/5 14,391 20,598 -6,207
1970/1 420 757 -337
2005/6 16,451 . 28,581 -12,130
1971/2 591 638 --47
2006/7 16,976 30,540 -13,564
1972/3 817 797 20
2007/8 19,052 39,966 -20,914
1973/4 1,026 1,362 -336
2008/9 17,688 34,822 -17,134
1974/5 1,039 2,114 -1,075
2009/10 19,290 34,710 -15,420
1975/6 1,137 2,067 -930
2010/11 24,810 40,414 -15,604
1976/7 1,141 2,325 -1,184
2011/12 23,641 44,912 -21,271
1977/8 1,311 2,810 -1,499
1978/9 1,710 3,676 -1,966 Source: Government of Pakistan, Pakistan Economic SuNey
1979/80 2,365 4,740 -2,375 (Islamabad: various years).

while in 1948/9 Pakistan exported mainly unprocessed raw mirrored in most countries of the world. Moreover, after
primary products, sixty-six years later, exports continued 9/11, Afghanistan has now emerged as one of Pakistan's
to be dependent on agricultural commodities and on the main export markets. The rise of the Middle East as a major
weather, which can have serious effects on the level of importer of Pakistani products after 1975 and as a source
exports.
The data for imports shows that not only does Pakistan Table 9.3
import a great deal of machinery and capital goods; it has also Balance of Payments Growth Rates: 1970-2002 (%)
imported wheat and cotton, two products in which Pakistan
should have achieved self-sufficiency many years ago. Almost
1970s 1980s 1990s 2000s 2008/9 2009/10
4 per cent of Pakistan's imports were for wheat in 1994/5
' when 2.6 million tons were imported. Animal and vegetable Exports 13.5 8.5 5.6 9.9 -7.2 9.1
oils and fats used for making cooking oil contributed more Imports 16.6 4.5 3.2 13.7 -12.9 -0.3
than 10 per cent of Pakistan's imports in 1994/5.
Trade deficit 20.5 0.9 -0.6 60.2 -16.4 -10.2
Table 9.9 is revealing of the direction that Pakistan's trade
has taken over the last twenty or so years. While the United Workers'
States is still Pakistan's main export market-a fact that remittances 1.9 -5.3 26.8 21.1 14.0
also has political overtones as discussed in Chapter 25- Current account
and was Pakistan's major trading partner for many years, deficit 21.2 12.2 --4.6 -35.3 -57.39
its share has fallen since 1973/4. China is now Pakistan's
main non-oil importing trading partner, a picture which is Source: Government of Pakistan, Pakistan Economic SuNey
(Islamabad: various issues).
204 Issues in Pakistan's Economy
1
Table 9.4 while Pakistan imported very little in return. Although there
Components of Balance of Payments: 1980-2012P has been some diversification in the direction of Pakistan's
(% of GDP Average) · trade since the 1970s, even by 1994/5 only four countries-
the USA, the UK, Germany, and Japan---constituted more
Current than 30 per cent of Pakistan's trade. In 2010/11, this pattern
Exports* Imports• Trade Workers' account
Year had changed, and now China is Pakistan's main non-oil
deficit* remittances• deficit**
producing trading partner, followed by the USA, Singapore,
and Germany. However, If we include oil imports as well,
1980-1985 8.96 18.72 9.74 8.30 3.82
then Pakistan's biggest trading partner is the UAE, followed
1985-1990 11.28 17.10 5.82 5.94 4.00
by Saudi Arabia and Kuwait. The surprise in trade direction
1990-1995 13.52 17.80 4.28 3.20 4.54
has been the rise of Afghanistan as Pakistan's second biggest
1995-2000 13.68 17.40 3.72 2.10 4.50
export market, after the US, even larger than the UAE.
2000-2002 15.60 17.90 2.30 2.95
One of the most important features of Pakistan's economy
2000-2005 12.94 15.74 2.80 3.50 1.86
in recent years, and particularly since 2002/3, has been the
2005-2010 11.64 21.84 10.20 4.08 5.16
contribution made by workers' remittances. Rising to 10 per
2010-2012p 9.60 16.70 7.15 4.75 0.70
cent of GDP in 1982/3, to a value of about $3 billion, they
P = Provisional then decreased substantially, although they still contributed
* based on the data complied by FBS 3 per cent of GDP or $1.86 billion in 1994/5. The fact that
** based on the data compiled by SBP Pakistan received more than $4.2 billion in 2002/3, equivalent
Source: Government of Pakistan, Pakistan Economic Survey to 15 per cent of GDP, was indeed astonishing (see Table
(Islamabad: various years). 9.10). This issue is discussed further in Chapter 18 where we
examine the very ·special and spedfic circumstances which
gave rise to this phenomenal increase. The main source of
for Pakistan's imports, mainly of petroleum, is also seen in
these remittances, by far, has been Saudi Arabia, followed by
the table. Kuwait, for example, provided almost 10 per cent
the United Arab Emirates. Interestingly, as Table 9.11 reveals,
of Pakistan's total imports in 2010/11, all of which was oil.
in 1972/3 the United Kingdom was the source of more than
However, Kuwait imports very little from Pakistan. The case
half of Pakistan's remittances, which were then a total of
of Saudi Arabia is more stark, where Saudi Arabia provides
only $136 million. But, what is most surprising, as much as
Pakistan oil and nothing else, and imports very little from
the surge in remittarn;es in 2002/3, is the fact that the United
Pakistan in exchange. This is also the case with Malaysia,
States replaced Saudi Arabia as the main source of workers'
where trade with Pakistan is mainly in one direction.
remittances that year. Saudi Arabia, which contributed
Malaysia provides Pakistan primarily with palm oil for the
nearly half previously, has only contributed one-seventh in
manufacture of edible oil and ghee, but Pakistan exports next
this exceptional year. The reasons for this switch are also
to nothing to Malaysia in comparison. This pattern is reversed
discussed in Chapter 18. After that extraordinary year, the
for Hong Kong, which used to import mostly cotton yarn,
pattern has now returned to a new normalcy, where Saudi

Table 9.5
Economic Classification of Exports and Imports (%)

Imports Exports

Industrial Industrial
raw material raw material
Capital for capital for consumer Consumer Primary Semi- Manufactured
Year goods goods ~oo_ds goods commodities manufactures goods

1971/2 42 11 , 24 23 45 27 28'
1976/7 38 6 40 16 41 17 42
1980/1 28 8 50 15 44 11 45
1987/8 36 7 43 14 28 20 52
1994/5 34 5 47 14 11 23 66
2001/2 28 6 55 11 11 14 75
2004-2005 36 8 46 10 11 10 79
2009-2010 28 7 52 13 18 10 72
2010-2011 24 7 53 16 18 13 69
2011-2012P 23 7 56 14 18 12 70

Note: Page 166 table 9.5 source of data.should be mentioned.

P = Provisional
Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various years).
 Chapter 9 Balance of Payments and Trade Regimes 205

Arabia and the UAE contribute almost half of all remittances, as the two Gulf Wars showed. Moreover, if the Middle
but the UK and the US now also provide a large amount, Eastern countries decide to opt for non-Pakistani workers,
signalling a different trend in the nature of remittances. It is or those that provide different skills (since most Pakistanis
probably correct to assume that in terms of the remittances, in the Middle East provide unskilled or low-skilled services),
the post-9/11 circumstances might still guide this trend but, this source of foreign exchange will also become somewhat
importantly, the nature of those who now remit incomes unstable as it was prior to 9/11. Between 1973/4 and 1993,
to Pakistan, may have undergone some change. From the Pakistan's exports grew nine-fold. However, between 1973
unskilled workers who worked in the Middle East and Gulf and 1993, Malaysia's exports increased twelve-fold, and
states in the 1970s and 1980s, a large number of skilled South Korea's twenty-eight times over; Singapore's exports,
Pakistanis now work and live abroad. It is probable that from a mere $1.8 billion ( slightly above Pakistan's) in 1973
many of them are the new export labourers who contribute. rose to a staggering $151 billion in 2004, to $350 billion in
While this causes a severe brain drain on Pakistan, it allows 2010, which was higher than its GDP of $222 billion. In
for remittances to grow and foreign exchange revenue to rise. contrast, Pakistan's GDP in 2011 was around $190 billion
However, there has been insufficient research which explains and its exports $25 billion. Pakistan's export and trade
the rise in these remittances, especially during a period of performance by its own standards may have improved, but
global recession and major political upheaval all across the clearly, by any comparison, Pakistan has not been able to ride
Middle East. the wave of dynamic export-led growth which has become a
This section has shown that, although the nature of key feature of the Asian Tigers, or even of many of the other
Pakistan's trade has changed considerably in a period of countries in the region. Some reasons for this can be found in
almost six decades, from producing and exporting primary the following sections of this chapter.
products to exporting manufactured products, agricultural
products, particularly cotton, still form the basis of those
exports. However, for many years, Pakistan's main export has 9.2 TRADE POLICY AND TRADE REGIMES
not been a tangible item, but the services provided by workers
in the Middle East, again a source of income that fluctuates, 9.2.1 The Early Years: 1947-582
In 1948/9, Pakistan's major trading partners were India
and the UK, which together accounted for 67 per cent
Primary commodities of Pakistan's trade, and Pakistan, along with both these
countries, was a member of the sterling area. In September
1949, the pound sterling was devalued by 31 per cent, and
Capital most countries linked to sterling also devalued. Pakistan,
goods however, decided to maintain its old exchange rate and did
not devalue, making imports from the UK and India cheaper,
while Pakistan's exports to these two countries became more
expensive. According to Rashid Amjad and Viqar Ahmad, 'the
raw material Industrial manufactures main motivation behind the non-devaluation decision was
for consumer raw material to be able to sell raw jute to Indian industry' .3 In l 949 more
goods for capital goods than 50 per cent of West Pakistan's trade and 80 per cent
of East Pakistan's trade was with India, and raw jute and
Imports, 1971/2 Exports, 1971 /2 cotton accounted for about 65 per cent of exports to India. 4
India, however, was 'resentful and refused to recognize the
new exchange rate of its currency in terms of the Pakistani
Rupee', 5 and trade between the two countries came to a halt.
Primary
commodities The Pakistani government had to abandon its more liberal
import policy and impose some 'rather loose' quantitative
controls on imports and exports in September 1949.
However, the trade regime was again liberalized within
one year after the Korean War broke out and demand for
Pakistan's exports-which were mainly composed of jute
and cotton-increased by 109 per cent. Not only was there
Industrial increased demand for these raw materials, but their prices
raw material Industrial raw manufactures also increased appreciably. The balance of payments position
for consumer material for 12%
capital goods improved substantially, and subsequently, trade with India
goods
70% 7% was also restored, but not before Pakistan had found other
trading partners as well. The Korean boom lasted about
Imports, 2011/12P Exports, 2011 ;12P
two years and, as the balance of payments situation was
particularly good, the government liberalized trade to the
Figure 9.1 extent that by June l 951 as much as 85 per cent of the
Economic Classification of Exports And Imports (%)
P = Provisional
Table 9.6 I\)
0
Pakistan: Major Exports I 0)

1971/2 1980/1 1986/7 1994/5 2011P iii

UI
Rs. m % of total Rs. m % of total Rs. m % of total US$ m % of total US$m % C
~
UI
Textile yarn, fabrics, 993.0 29.45 4,170.0 14.24 26,306.3 41.52 4,295.6 52.76 3232 12.70
made-up articles, and ::I
related products "tJ
I»
Articles of clothing and
clothing accessories
Leather manufacturers
2,715.0 9.27 9,522.7 15.03 1,669.9 20.51 2736

1,116
10.76

4.39
-
C.
UI
I»
::I
UI~
Rice 274.1 8.13 5,601.6 19.13 5,139.2 8.11 454.6 5.58 2,213 8.7 m
C,
Cotton 982.5 29.14 5,222.3 17.84 7,776.9 12.28 126.8 1.55 4,758 18.70 0
::I
Vegetables and fruit 20.0 166.0 827.6 1.30 215.3 2.64 3,300 12.97 0
3
Fish 96.7 2.87 511.9 1.74 195.0 154.3 1.90 209 0.82 '<
Others 1,005.1 29.81 10,892.8 37.20 9,433.5 14.89 943.6 11.60 873 3.43
Total 3,371.4 29,279.5 63,354.9 8,141.3 25,439 100.00

P = Provisional
Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various years).

Table 9.7
Pakistan: Major Imports II

1971/2 1980/1 1986/7 1994/5 2009 2010 2011P

Rs. m % of total Rs. m % of total Rs. m % of total US$ m% of total US$m % US$m % US$m %

Machinery and transport 1,048.6 30.00 11,590.0 21.65 27,543.5 29.80 2,989.6 28.74 5,757 18.13 5,392 17.28 5,459 15.28
equipment
Chemicals and related 389.1 11.13 7,349.2 13.73 15,773.1 17.06 1,587.4 15.26 4,130 13.01 4,683 15.01 4,709 13.18
products
Petroleum and related 294.4 8.42 15,354.0 28.68 13,976.8 15.12 1,587.5 15.26 10,763 33.90 10,998 35.24 12,941 36.22
products
Wheat 269.8 7.72 0.1 1,184.0 1.30 413.3 3.97
Animals and vegetable 130.8 3.74 3,137.0 5.86 5,003.4 5.41 1,078.5 10.37 1,477 4.65 1,336 4.28 2,028 5.68
oil and fats
Cotton 9.4 23.0 307.2 2.95 646 2.03 622 1.99 1091 3.05
Others 1,353.3 38.72 16,089.8 30.05 28,950.0 31.32 2,437.6 23.43 534 1.68 20 0.06 653 1.83
Total 3,495.4 53,543.0 92,430.8 10,401.1 31,747 100.00 31,209 100.00 35,727 100.00

P = Provisional
Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various years).
 Table 9.8
Major Exports and Imports: 2002/3 and 2011 /12

Exports Imports

US$m % of total US$m % of total

2002/3 2011/12 2002/3 2011 /12 2002/3 2011/12 2002/3 2011/12

Vegetable products 954.8 2,899 8.6 11.7 Animal or vegetable oils and fats 667.8 2,629 5.5 6.5

(inc. cereals) Petroleum and related products 3,150.7 14,878 25.8 37.1

Leather related products 693.1 1,141 6.2 4.6 Chemical and related products 1,801.3 5,272 14.7 13.1

Cotton 2,351.3 4,931 21.1 20.0 Plastics and rubber 599.9 1,922 4.9 4.8

Textiles and textiles articles 5,443.2 8,250 48.8 33.5 Machinery and transport equipment 2,934.2 5,679 24.0 14.1

Others 1,717.9 7,436 15.3 30.1 Others 3,066.4 9,761 25.1 24.3

Total 11,160.3 24,657 Total 12,220.3 40,138

Source: The State Bank of Pakistan, Annual Report 2011-2012, Volume I (Karachi: SBP, 2012). 0
::r
ro
"O
.......
CD
Table 9.9 ......
CD
Pakistan: Direction of Trade (%)
OJ
1973/4 1980/1 1986/7 1994/5 2002/3 2011/12 Cl)

Countries Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports
iii'
:::,
from from to from to from from (")
to to to to from (I)
USA
UK
Germany
Kuwait
5.32
6.76
4.56
1.43
25.61
7.05
7.79
3.7
6.05
3.97
4.3
10.92
6.12
5.03
7.99
10.12
7.14
7.03
11.02
6.68
7.52
7.43
16.16
7.06
7.01
9.38
5.11
6.77
5.81
23.4
7.1
5.2
6.0
2.9
4.6
6.6
13.9
5.2
4.7
0.36
2.99
2.26
3.44
9.4
-
0
"ti
Cl)
'<
1.8 3.5 3.6 2.8 2 3.95 1.8 9.3 12.4 7.9 16.0
3

-
UAE (I)
Saudi Arabia 3.91 6.62 5.95 12.83 7.12 5.3 2.74 4.94 4.3 10.7 1.67 11.94 :::,
Other Middle 5.75 8.55 2.8 2.30 0.97 UI
Cl)
Eastern countries :::,
China 3.5 12.2 3.3 3.9 4.4 2.2 6.9 7.3 10.7 a.
Hong Kong 10.98 3.9 2.8 6.6 4.6 :;I
6.2 9.35 6.4 11.56 10.86 16.4 6.67 9.56 1.3 6.6 2.75 3.8 Cl)
Japan
2.81 3.02 8.77 4.6
a.
Malaysia 0.63 5.4 (I)
South Korea 3.1 2.16 3.33 3.2 2.8 0.61 5.68 ::IJ
2.2 1.3 1.7 2.08 1.0 (I)
Bangladesh 0.1 5.66 cg
Indonesia 9.48 2.1 3.57 0.24
Iran 3.23 1.64 7.8 1.5 1.08 2.5 0.51 0.97 3
(I)
India 1.3 3.12 UI

Afghanistan 5.6 I\)

0
Source: State Bank of Pakistan, Annual Report 2011-12, Volume I (Karachi: SBP, 2012). .....
208 Issues in Pakistan's Economy
7
Table 9.10 imports were virtually without licence, importable on the
Workers' Remittances: 1972-2012 {US$ m) Open General Licence System (OGL) 6 (see Box 9.1).
Following the collapse of the Korean boom, the government
Year Total reimposed trade and foreign exchange controls in 1952,
which according to an Asian Development Bank Study was
1972/3 136.00
'probably the most important cause of the rapid rate of
1973/4 139.14 growth of manufacturing in Pakistan' 7 in the early years. The
1974/5 211.10 study continues:
1975/6 339.02 Probably the most important cause of the rapid
1976/7 577.72 rate of growth of manufacturing in Pakistan .
was the system of trade and foreign exchange
1977/8 1,156.33 controls it adopted. The country set off on this
1978/9 1,397.93 course in 1952 when it chose licensing and
quantitative import controls over devaluation as
1979/80 1,744.14
a means of dealing with its balance-of-payments
1980/1 2,115.88 problems which emerged after the collapse of
the Korean War raw material boom.
1981/2 2,224.89
Indeed, the import control system adopted in
1982/3 2,885.67 1952 remained the sole basis of import licensing
decisions up to 1959, and was dominant in
1983/4 2,737.44
these decisions throughout the 1960s. This
1984/5 2,445.92 system allowed the rupee to remain overvalued
1985/6 2,595.31
throughout the period, which in tum created
excess demand for imports at duty-paid prices
1986/7 2,278.56 and made rationing of imports via quantitative
1987/8 2,012.60 controls necessary. 8

1988/9 1,896.99 This policy of 'high tariff walls and stringent quantitative
1989/90 1,942.35 controls on imports' 9 was responsible for the initiation of
1990/1 1,848.29 industrialization in general, and of the import substituting
industrialization in particular, which took place in the 1950s.
1991/2 1,467.48 For Stephen Lewis, the decision by the government not to
1992/3 1,562.24 devalue in either 1949 or 1952, but instead to rely on exchange
1993/4 1,445.56
controls and quantitative restrictions to control imports,
was one of the 'two major factors determining the course
1994/5 1,866.10 of industrial growth in Pakistan in the 1950s and into the
1995/6 1,461.4 early sixties'. 10 As high tariffs on consumer products raised
1996/7 1,409.5
their domestic prices, and industry became more profitable
as an option than trade, it became profitable to shift into
1997/8 1,489.6 the production of these commodities domestically ( see Table
1999/00 983.73 9.12 for the rate of duty on imported goods). Also, there was
2000/1 1,086.6
no real export promotion policy at least until 1956, when
the Export Promotion Scheme, which covered 67 primary
2001/2 2,389.1 commodities and 58 manufactured goods, was introduced,
2002/3 4,236.9 whereby exporters were entitled 'to be granted import
2003/04 3,871.6
licences for certain specific items to the extent of 25 per cent
and 40 per cent on various categories of manufactured goods
2004/05 4,168.8 and 15 per cent on the export of raw materials'. 11
2005/06 4,600.1 The trade restrictions that were imposed determined
2006/07 4,600.1
both the extent and pattern of industrialization that was
established in the 1950s and that set the trend for later
2007/08 6,451.2 developments. The trade restrictions affected industrialization
2008/09 7,811.4 in two ways:
2009/10 8,905.9
(i) Because of the quantitative restrictions in
2010/11 11,201.0 place, the protection to domestic producers was
2011/12
'far greater than that implied by a comparison
13,186.6
between domestic and duty paid prices of
competitive imports, and (ii) the general scarcity
Source: Government of Pakistan, Pakistan Economic SuNey created by ·the licensing system meant that the
(Islamabad: various years). incentives for investment were raised across
 Chapter 9 Balance of Payments and Trade Regimes 209

Table 9.11
Main Sources of Workers' Remittances (% of Total)

Countries 1972/3 1977/8 1980/1 1986/7 1995/6 2002/3 2004/05 2011/12

United Kingdom 53.04 6.63 8.74 8.99 7.62 6.53 8.96 11.54
Saudi Arabia 5.79 40.14 46.52 41.50 44.12 13.86 15.10 27.96
Kuwait 5.18 4.67 6.30 9.14 4.15 5.27 5.17 4.42
Oman 8.97 5.53 4.36 5.88 5.54 2.23 2.87 2.90
UAE 3.41 26.17 14.55 14.46 17.35 19.99 17.16 21.60
USA 7.34 4.46 3.35 8.42 9.70 29.53 31.17 17.70

Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various years).

the board rather than differentially between Their analysis of these controls is . that while the system
industries. The former points to the degree of was effective following the post-Korean recession between
channelling of investments that did take place 1952 and 1955, the control mechanisms 'not only failed to
and the latter [indicates] that any bias created keep pace with the basic economic changes, it also became
by the differences in tariff rates across sectors a source of corruption and bribery' . 14 It further resulted
was offset by the licensing system. 12
in importers making monopoly profits, especially after the
category system was introduced, and they argue, 'the licence
Viqar Ahmed and Rashid Amjad argue that these
system also became a source of economic disparity between
import controls became a very powerful lever East and West Pakistan', 15 as there were many more West
in the hands of the government to affect and Pakistani importers who received import licences.
influence resource allocation in the domestic The work by Stephen Lewis on trade policy and
economy. Firstly, the import control system industrialization in Pakistan is of particular interest, for he
after 1952 favoured mainly the establishment has extensively analysed the relationship between the two
of consumer goods industries by restricting the and the effect of the former on the latter, for the 1950s and
import of consumer goods and hindered the 1960s. He writes that after 1952 the salient features of the
establishment of capital goods and intermediate trade policy adopted by Pakistan were: '(i) overvaluation
goods industries since imports were freely
of the rupee with respect to other countries, (ii) use of
allowed. Secondly, the government gave import
licence privileges mainly to those importers who quantitative controls on imports to regulate the level
had imported during the 1950-2 period. These and the composition of imported goods and (iii) a highly
importers were called 'category holders' and this differentiated structure of tariffs on imports and export taxes
policy was referred to as the 'category system'. It on jute and cotton' . 16 The tariff structure favoured in the
obviously bestowed considerable economic gain earlier years was of a cascading type, with lower tariffs on
on those who were in this category as they had intermediate and capital goods than on final goods or more
almost a virtual monopoly in the trade of the
imported items. 13

Table 9.12
Rate of Duty on Imported Goods by Types of Commodity: 1955-60

Description 1955/6 1956/7 1957/8 1958/9 1959/60

Consumption goods
Essentials 35 35 35 35 35
Semi-luxuries 54 54 54 54 54
Luxuries 99 99 99 99 99
Raw materials for consumption goods 26 26 26 26 26
Unprocessed 43 43 43 43 43
Raw materials for capital goods
Unprocessed 23 23 23 23 23
Processed 38 38 38 38 38
Capital goods
Consumer durables 71 71 71 71 71
Machinery and equipment 14 14 14 14 14

Source: Lewis, Stephen, Economic Policy and Industrial Growth in Pakistan (London: Allen & Unwin, 1969).
21 O Issues in Pakistan's Economy

fully processed intermediate goods. Moreover, there was no war with India in 1965, the Government once
duty levied on capital goods or on industrial raw materials. again opting for direct controls. 19
However, Lewis makes the important point that 'while
the tariff structure played some role in directing resources Stephen Lewis argues that after 1959 there were a number
in Pakistan, that role was a relatively minor one. The principal of changes in economic policy and a shift from direct
determinant of the structure of imports and the set of to indirect controls on imports. In addition, a 'number
domestic relative prices was the import licensing system.' 17 of measures were taken in import licensing that made
Moreover, he makes the very interesting observation market forces more important in determining the commodity
that, despite numerous interventions and distortions by the composition of imports and the distribution of ownership of
government in the 1950s, the structure of production would import licences'. 20
have been quite similar without them. He argues that Unlike in the earlier years, during the 1960s there was a
direct emphasis on the promotion of manufactured exports
the differentiated effects of the tariff structure, as special consideration was given to exporting industries
the system of import licences, and the overvalued through the Export Bonus Scheme, and additional licences
currency had little influence on the structure of were also made available to import raw materials and spare
production that began to emerge in the mid 50s parts. Those industries that were export-oriented received a
since the scarcity of all manufactured goods in higher percentage of entitlement in licences.
Pakistan made it profitable to produce almost
The import liberalizing programme that started in 1959
any kind of manufacture. The restrictive trade
policy speeded the process of industrial growth by along with the Bonus Voucher Scheme was responsible for
transferring substantial amounts of income from the following:
the agricultural sector to manufactures, but it is
unlikely if the structure of production would have been (i) over 1959--64 total imports increased much
any different if, say, a floating exchange rate had more rapidly than exports or GNP. and the
been adopted to deal with the exchange crisis composition of imports continued to shift
of 1952. 18 towards the import of capital goods and
processed intermediate goods (ii) market forces
Hence, for Lewis, unlike other observers, the trade policies were increasingly relied upon to determine
the commodity composition of imports (iii) a
and the trade regime were not the principal cause of the
variety of new devices were introduced into the
pattern of industrial production adopted in the first decade, licensing scheme to increase the flexibility of
but only acted as a catalyst. For Lewis, the main cause of the entrance into the import trade (iv) substantial
structure of industrial production was the imbalance between increases in the rates of duties on import goods
the supply and demand for manufactured goods. which acted from the cost side, to reduce excess
demand for imports. 21
9.2.2 Trade Policy and the Decade of
In addition, the Open General Licensing system was expanded
Development to allow newcomers to enter the import trade 'particularly
A key feature of the high growth rates in industry in the 1960s those from areas outside the major industrial and commercial
was the trade regime adopted by the military government of centres. One of its principal effects was to give a wider
Ayub Khan. Possibly the single most important component distribution of the gains from processing an import licence', 22
of the trade policy was the Export Bonus or Bonus Voucher with a large amount of foreign exchange allocated to the new
Scheme (see Box 9.3). A study by the Asian Development OGL importers. Hence, the monopoly of the category holders
Bank summarizes the key features of the trade regime as of the 1950s was broken. In 1961 eleven commodities were
follows: on the OGL list, which was increased to fifty-one by 1964.
Despite the numerous liberalizing measures taken in the
The martial law government which came to early 1960s, Viqar Ahmed and Rashid Amjad argue that 'the
power in 1958 began to dismantle the system import trade was still more or less controlled by the licence
of direct controls on imports, prices, profit system which was strongly biased towards capital goods
margins, and investment. One important imports'. 23 ,
component of this program was the adoption of
The Export Bonus Scheme undoubtedly had a positive
the Export Bonus Scheme in 1959. This scheme
was essentially a floating multiple exchange effect on exports in the early 1960s. The scheme compensated
rate for exports. The gradual liberalization ·for the overvalued exchange rate and increased exports,
of import controls continued with the Open particularly of manufactured goods. The export of raw jute
General Licensing System and the Repeat and fell from 60 per cent of total exports in 1958/9 to 20 per cent
Automatic Licensing Schemes introduced in in 1968/9, while exports of cotton and jute textiles increased
I 961, and reached a peak with the introduction from 8.3 to 35 per cent in the same period, and other exports
of the Free List for selected raw materials in increased from 2 to 20 per cent in the same ten years. 24 The
1964 [see Table 9.12]. This liberalization process Bonus Voucher Scheme also made the import of raw materials
was unfortunately reversed in order to meet the
and machinery much easier when there was increased
foreign exchange shortages which arose after the
demand for such imports. For Asad Sayeed, the scheme 'was
an ingenious incentive for both export expansion and import
 Chapter 9 Balance of Payments and Trade Regimes 211

Box 9.3 markets, and helped to replace import-substitution-based

The Export Bonus Scheme growth with export expansion.
There is considerable evidence of the impact of the
The Bonus Voucher or Export Bonus Scheme has been Export Bonus Scheme on promoting manufactured
singled out as one of the most important instruments causing exports. [Meekal] Ahmad [had] found that 'empirical
distortions in Pakistan's trade and industrialization process. investigation shows that the introduction of the Export
However, a few studies have challenged that assertion and Bonus Scheme in 1959 rotated the entire export function
this excerpt from an Asian Development Bank Study reaches upwards'. Nurul Islam also found a high elasticity of
different conclusions. export supply with respect to the export incentive
schemes. However, the correlation between the ranking
Success in maintaining the momentum of growth in of manufactured exports by effective exchange rates
manufacturing during the 1960s was largely due to the and domestic resource cost was low and insignificant,
Export Bonus Scheme which allowed Pakistan to avoid leading to the conclusion that changes in effective
to some degree the inefficiencies of prolonged import exchange rates brought about by the frequent variation in
substitution. bonus entitlement during the post-1965 period tended to
Introduced in 1959, this scheme provided exchange confuse private decision-makers.
rates to exporters of manufactured goods more favourable The Export Bonus Scheme also functioned as a safety
than the official rate. Essentially, it allowed exporters valve for imports of critical items by industry, thus
of manufactured goods to receive a percentage of providing some flexibility to the import licensing system.
their export earnings in the form of transferable Bonus However, until the mid-1960s it was primarily used for
Vouchers in addition to the rupee equivalent of their importing luxury goods since the effective exchange
export earnings converted at the official rate. These rate on imports under the scheme was Rs. 11.90 per
vouchers allowed the holder either: (i) to purchase an dollar or more. Because of declining foreign aid and the
equivalent amount of foreign exchange at the official rate resulting foreign exchange shortages, a cash-cum-bonus
which can be used to import any item on the Bonus list, list for most industrial raw materials was introduced in
or (ii) to sell the voucher on an organized market. Since 1967 which provided an intermediate rate of Rs. 8.33 per
Bonus Vouchers were generally quoted on the stock dollar. Following this, the Export Bonus Scheme became
exchange at 1.5 to 1.8 times their face value, the effective something akin to a full fledged multiple exchange rate
exchange rate for voucher recipients was Rs. 6.19 to since it operated both on the import and export sides.
Rs. 7.62 per dollar or even higher against the official rate
of Rs. 4.76 per dollar. This compensated exporters of Source: Asian Development Bank, Strategies for Economic
manufactured goods for the overvaluation of the rupee, Growth and Development: The Bank's Role in Pakistan (Manila:
allowing them to successfully compete in international Asian Development Bank, 1985), 361-2.

substitution' .25 He quotes a study where it was shown that they calculated their return in rupees in which
the Bonus Voucher Scheme accounted for 72 per cent of the terms the loss could be made up by the sale of
effect of incentives on exports. bonus vouchers. 26
Although exports did increase due to the Bonus Voucher
The early import liberalizing policy of the military
Scheme, the scheme has been criticized for giving wrong
government included the dismantling of the import controls
signals and causing distortions (see Box 9.3). Viqar Ahmed
and Rashid Amjad criticize the scheme on the following of the 1950s, and the items importable on licences, which
were 90.3 per cent of imports in 1960/1, fell to 39.5 per cent
grounds:
in 1964/5 (Table 9.13 ). Also, the Free List, where commodities
The value of exports covered under the scheme could be imported without licences, was increased from four
did increase appreciably but the data does not to fifty items in two years, and by 1964/5 about half of all
tell the whole story. The rise in exports of imports were on the Free List.
processed goods was at the expense of the One reason why the government was able to be so
raw materials that would' otherwise have been generous in its import policy was the large amount of foreign
exported. Also, to the extent that the diversion aid the military government received. More than 40 per
of certain goods from the home to the foreign cent of the imports of the government were financed by
market releases domestic purchasing •power the foreign aid component, which was 6 per cent of GDP in
to procure goods which could otherwise be
1964/5. 27 The Asian Development Bank study argues that
exported, there is a presumed loss of earnings.
Moreover, allowing for a trend factor, some rise 'clearly, the import liberalization that took place during the
in exports may have taken place even if this first half of the 1960s, would have been impossible without
scheme had not been introduced. Finally, many this large increase in aid' .28 Following the foreign exchange
exporters sold their goods in the foreign market squeeze when aid was severely curtailed after June 1965,
at lower prices, sometimes even below cost, since the government had to abandon its liberal import policy and
212 Issues in Pakistan's Economy

Table 9.13 1971 took over a new country and especially with regard to
Change in Import Patterns from Licences to Bonus the trade regime.
Vouchers in the 1960s Almost half of West Pakistan's 'exports' went to East
Pakistan in 1969/70, while 18 per cent of the western region's
Year Licensed Free List• Bonus imports came from the east (see Box 9.2). 31 East Pakistan
sold its jute, tea, and other products in international markets
1960/1 90.3 9.7 and earned over half of united Pakistan's exports, paying for
1961/2 89.6 9.4 its own imports through these export receipts. On account of
1962/3 86.3 2.8 10.9 East Pakistan's exports, West Pakistan was in a position to
1963/4 75.3 14.9 9.8 import much more than its own export earnings, since raw
1964/5 39.5 48.9 11.6 jute and jute textiles were Pakistan's main export earners.
1965/6 32.6 40.0 27.4 Thus, the loss of East Pakistan was a major structural break
1966/7 26.2 49.9 ·23.9 for Pakistan. In addition, many of the reforms that were
identified with the Ayub Khan regime were perceived to be
•After June 1965, the Free List was subject to varying and the causes of income concentration in the 1960s. In May 1972
increasing degrees of administrative restriction. the government took steps to abolish the import licensing
Source: Amjad, Rashid, Private Industrial Investment in Pakistan, system, as well as the multiple exchange rate system and the
1960-1970 (Cambridge: Cambridge University Press,
Export Bonus Scheme, and the import of all luxury items was
1982), 40.
banned. However, 'the most dramatic and perhaps the most
crucial of the economic measures taken in the early months
felt it necessary to reimpose a number of import controls. of the PPP government was the devaluation of the rupee.
The Free List, for example-'the most important step in the A criticism of the Ayub and Yahya regimes had been their
decontrol of imports taken during the first half .of the 60s- unwillingness to devalue the rupee, despite the exchange
was subject to increasing administrative restrictions which rate's patent unrealistic and distortive effects on exports and
negated its very purpose'. 29 The Free List was reduced from investment decisions.' 32
sixty-six items in I 964 to fourteen in 1968 and to eleven in In May 1972, along with the other measures listed above,
1971. There was also a cut in the licensable list, but the Bonus the rupee was devalued by 56 per cent from Rs. 4.74 to one
List expanded from 215 in 1966/7 to 277 in 1970. 30 US dollar to Rs. 11, and after the US dollar was devalued in
February 1973, the rupee found its new exchange value of
Rs. 9.90 to one US dollar, a rate that remained fixed for about
9.2.3 A New Country: 1972-77 eight years (see Box 9.4).
The Bhutto government took over a Pakistan in 1971 that After the devaluation, there were considerable changes in
was different in almost every respect from that of the 1950s import policy. Viqar Ahmed and Rashid Amjad write that
and I 960s. Most importantly, the East Wing had become
independent Bangladesh. Not only was half the country except for a few items reserved for industrial
no longer part of Pakistan, but most of the policies of the users, all registered importers could obtain
1960s which were held responsible for the negative outcomes licences for any number of importable items.
The import trade was thus thrown wide open
regarding income and regional inequality were also quickly
and imports were again liberalized after having
done away with. The People's Party government in December gone through a restrictive phase. This was

Box 9.4 was in this situation during the 1970s when the rupee was
A Pegged Exchange Rate pegged to the US dollar. The dollar and the rupee moved
downwards between 1972 and 1975 and this encouraged
John Adams and Sabiha Iqbal explain how the crawling peg Pakistan's exports, but with the appreciation of the dollar
works: in 1976-77 there were complaints from exporters that their
competitiveness was being damaged. In any case, neither
When a country decides to peg its currency to that of a the downward nor the upward movement in the value of
major trading partner, the rate between the two is stabilized, the dollar, and of the linked rupee, reflected cost and price
but the two currencies then move jointly against others. changes in Pakistan. Moreover, Pakistan's trade has become
Such a policy means that the pegged country abandons diversified enough to reduce the predominant importance of
autonomous control of its exchange rate which then moves the US dollar in its external transactions.
independently of its policies and conditions. An increase
in the value of the currency, due to a rise in the value of Source: Adams, John and Sabiha Iqbal, Exports, Politics and
the currency to which it is pegged, could damage exports Economic Development in Pakistan (Lahore: Vanguard, 1987),
by limiting growth and diversification of exports. Pakistan 59-60.
 Chapter 9 Balance of Payments and Trade Regimes 213

done in order to increase the availability of incentives, often inclined towards big exporters
all types of goods so that industries could with established records. Emerging firms did
improve their capacity utilization and increase not qualify for many programs. Exemptions
production in anticipation of a higher demand from excise and sales taxes were not positive
for exportable goods as a result of devaluation. incentives but merely equalized Pakistan's
The liberalization trend continued during the external competitive position. The Bhutto
seventies and the Free List was extended to 407 government was absorbed in domestic reforms
items in 1976 and 438 in 1978-9. 33 and connected exports and export concessions
with the previous orientation towards fostering
John Adams and Sabiha Iqbal write that 'a prominent big industries. The bureaucracy was demoralized
feature of the Bhutto era was the absence of an explicit and not charged with formulating export policy.
export policy. Between 1972 and 1977, and even beyond, Policy first moved in the direction of diverting
Pakistan lacked a formal, organized export policy in which potential profits from the devaluation. Poor
export performance, attributable to a weak
clear objectives and the means to realize them were laid
international economy and to a lack of domestic
out. ... The government never issued a formal document, push, engendered new incentive policies. These
or sequence of documents, articulating an export policy.' 34 policies were devised slowly, in a patchwork way,
They argue that 'there was a lack of appreciation of the role with many changes. The direction of movement
of exports in the nation's development. Decisions that were was to facilitate most kinds of exports but most
made were often inconsistent with existing policy. The result programs were not heavily utilized and were not
was that economic incentives and disincentives for exports very effective. 37
coexisted simultaneously.' 35
Thus, the devaluation was seen as the main, if not the only,
means of encouraging exports, and exports did indeed grow 9.2.4 The Beginning of a Liberal Trade
by 38.4 and 24. 7 per cent in 1972/3 and 1973/4, respectively. 36
Regime: 1977-88
The government also collected additional revenue by imposing
export taxes and was able to share in the windfall profits Soon after coming into power, the Zia government began
generated. However, the export boom was short lived due a series of steps to liberalize the trade regime, particularly
to the quadrupling of oil prices in 1974---affecting oil and imports, by reducing the number of banned goods and lifting
fertilizer imports, and worsening the balance of payments other restrictions. Most non-tariff barriers, which had been
position-and the recession that followed in the developed imposed after the oil shock and foreign exchange stringency
countries. Moreover, a sequence of bad crops due to floods, in the 1970s, were also removed. Between 1977 and 1983
pests, and other natural factors affected cotton and rice, the number of items on the Free List was increased and the
Pakistan's two main export items. Hence all positive effects procedure for importing commodities was streamlined and
of the devaluation were very soon lost and the consequences made much easier. In 1977, the Free List contained 438 items,
on the rebound were particularly severe. and by 1982/3 91 new items had been added, including some
The one-probably the only-positive outcome for Pakistan consumer items. 38
of the developments on the international scene in the mid- Despite these early measures, the World Bank, in a report
l 970s was a consequence of the oil price rise and boom in the examining the trade policy regime of the 1980s, argued that
Middle East. Pakistan was one of those countries that gained in 1980, 'Pakistan's import regime reached its most restrictive
in various ways from the opening up of the new markets. stage, [and] about 41% of the domestic industrial value
In terms of labour and commodity exports, the new Middle added was protected by import bans, and another 22% by
East markets were able, partially, to compensate for the loss various forms of import restrictions. By 1986, the equivalent
of East Pakistan's exports. Remittances touched about US$3 percentages were 29% and 3.7%, respectively.' 39
billion in the 1980s and in many ways transformed the social The government took the step of removing explicit import
structure of the country, but the beneficiary of the opening quotas on non-capital imports and the 'number of commodity
up of the Middle East was not Bhutto, who was responsible categories subject to import licensing value ceilings was
for building close ties with the Islamic countries, but his reduced from 406 in 1980/81 to 5 consumer goods in July
detractor General Zia. 1983' .40 In addition, previously banned and restricted imports
It is difficult to identify many positive export-promoting were also liberalized. In July 1983, when the import policy
measures by the Bhutto government, with the possible for the fiscal year 1983/4 was announced, the classification of
exception of the concessionary credit facilities for exporters, imports was changed:
where the rate of interest charged by commercial banks on
Whereas previously all items not specifically
export credits was lower than the normal bank lending rate.
permitted were banned, now all items not
Other than that, the following verdict from John Adams specifically banned were importable. Under the
and Sahiba Iqbal best summarizes the policies of the Bhutto present system there are two lists: a banned
government towards exports. list and a restricted list, the latter having three
parts: consumer goods subject to quantitative
Between 1972 and 1977 Pakistan did not devise an restrictions, items importable exclusively from a
adequate policy to encourage exports. The various tied source, and items importable by the public
measures were complex and provided weak sector only. Along with the above changes, a

I
214 Issues in Pakistan's Economy

number of items were made freely importable: customs duties in excess of 75%'. 44 By 1988 the World Bank felt
148 previously banned items, 5 items previously that the trade regime that existed then 'still seems to be biased
importable only by the public sector, and 15 in favour of import substituting production. Domestic markets
items, previous importable only from tied are insulated from foreign competition through non-tariff
sources. In September 1983, 70 additional items barriers and high tariffs.' 45
were removed from the negative list, of which
14 were transferred to the tied list, 17 were
placed on the list of items importable· only by 9.2.5 Trade Liberalization Under
the public sector, and the remaining 39 items Structural Adjustment: 1988
were made fully importable. Another significant
feature of import liberalization was the virtual Onwards
elimination of licensing ceilings for permitted In the budget announced in June 1988, a number of
imports, though import licensing remains in important and far-reaching measures were announced with
effect. 41
regard to the trade policy.
While tariff and import duty adjustments were a repeated The main policy measures consisted of improving
occurrence in the 1980s, some measures were also taken the tariff structure, reducing the number
to boost exports. These measures included export rebates, of items in the banned and restricted lists,
concessionary credit for exports, and income tax and import creating a better set of export incentives, and
facilities for exporters. However, the most important policy streamlining import licensing requirements. The
reforms that affected exports were the delinking of the maximum ad valorem duty rate on all imports,
Pakistani rupee from the dollar and the introduction of a with the exception for luxury cars and alcoholic
flexible exchange rate. Earlier, the rupee/dollar rate was fixed beverages, was reduced from a range of 150%-
at Rs. 9.90 per dollar, and the strong dollar in 1980/1 also 225% to 125%. This change affected close to 400
items, mostly consumer goods. In conjunction
appreciated the Pakistani rupee vis-a-vis other currencies,
with this measure, the authorities reduced the
reducing the competitiveness of Pakistan's exports on world average level and narrowed the dispersion of
markets. duty rates on imported raw materials, which
Although there were frequent tariff reductions during the Zia now range from 20 to 50% ad valorem. Greater
regime, in 1986 Pakistan's nominal tariff rates for manufacturing rationalization of the tariff structure was also
industries were still among the highest in the world. 42 Table accomplished by consolidating the duty rates on
9.14 shows the nominal tariffs faced by Pakistan's imports in all items with ·similar degree of processing within
1987. In June 1987, comprehensive changes were made in the a narrow range and by adopting graduated rates
trade regime, where tariff slabs were reduced from 17 to 10. on most imports according to the stage or
Other changes included the reduction of the economy-wide processing. In all, tariff rates were decreased for
a total of 1134 items and increased for 462 items,
unweighted average tariff from 77 per cent to 66 per cent, while
out of a total of more than 3200 tariff lines. The
the dispersion of the tariffs remained the same. The largest improvement in the dispersion of the duty rates,
proportionate decline was in capital goods, where the average particularly for imported inputs not produced in
tariff fell from 61 to 51 per cent. 43 Despite these changes, 'about Pakistan, should help to spur industrial activity
50% of all tariff categories, and 84% of consumer goods, carry and economic growth. Similar positive effects

Table 9.14
Unweighted Average and Frequency Distribution of Nominal Tariffs in Pakistan: 1986/7

Consumer Intermediate Capital

Manufacturing
goods goods goods

Average tariff (%) 67.5 100.4 57.8 51.1

Standard deviation 54.2 52.9 53.8 43.6
Frequency distribution (% of goods)
0-25 26.5 8.6 23.9 42.3
26-50 16.0 5.5 29.2 12.4
51-75 5.3 1.8 11.6 2.5
76-100 37.2 46.8 30.3 35.9
101-125 6.2 12.5 2.9 4.3
126-150 9.0 232.6 0.8 2.5
151-175 0.1 0 0.3 0
176-200 0.2 0 0.2 0
201-350 0.5 1.2 0.3 0.1

Source: Sayeed, Asad, 'Political Alignments, the State and Industrial Policy in Pakistan: A Comparison of Performance in the 1960s and
1980s', unpublished PhD dissertation, University of Cambridge, 1995, 126.

l
I Chapter 9 Balance of Payments and Trade Regimes 215

should result from the decision to reduce the FCDs were almost as large (about 75%) as Pakistan's total
number of commodities whose import were capital acco'!nt balance. However, the reliance on FCDs has
previously prohibited or restricted. 46 increased Pakistan's vulnerability to external shocks, in particular
in view of the low reserve cover.' 50 A warning which was
Under the first major Structural Adjustment Programme prescient and came true in May 1998 when the government
begun in 1988, the government of Pakistan was committed froze the FCD accounts after its nuclear tests-see
to making extensive changes in its trade regime. The major Chapter 18.
components of the agreement with the IMF which related to At the end of the 1988 Structural Adjustment Programme,
foreign trade were as follows: the World Bank suggested that the government of Pakistan
should take the trade policy measures further, especially
The emphasis is on the removal of non-tariff
with reference to the trade taxation regime. These measures
barriers (NTBs) and their replacement by tariffs,
with the objective of reducing the number of included:
banned commodity categories from about 400
to 80 by FY9 l [ 1990/1], leaving only those on (i) removal of all remaining non-tariff barriers to
account of religion, security, reciprocity, and imports, except those in force for health, safety,
international agreements. Also on the import and religious reasons; (ii) removal of import tax
side, the adjustment program contains tariff exemptions and partial concessions, except to
measures as well, including the reduction of the exporters; and conversion of specific duties into
maximum tariff to 125% in FY89 and further ad valorem duties; (iii) reduction of the range of
to 100% by FY91, tariff alterations aimed at customs duty rates with a maximum rate of 30%
establishing some escalation with the degree of and a minimum rate of 10% (with only 3 rates,
processing, and gradual removal of most tariff 10% for raw materials, 20% for intermediates,
exemptions and concessions, except the duty 30% for finished consumer goods); (iv) removal
drawbacks afforded to exports and exemptions of Iqra and the license fee; (v) elimination
granted to some key industries. Phasing out tariff of export taxes; and (vi) extension of the
exemptions will help the resource mobilization coverage of the sales tax to imports of all
effort and also constitute an important step in manufactured goods, concurrently with the
the process of streamlining the tariff structure. removal of exemptions from sales tax granted
On the export side, the adjustment program to domestically produced manufactures, and
continues to emphasize export promotion by elimination of any inequality in the treatment
replacing the previous uniform income tax rebate of domestically produced and imported goods
system with a graduated one that encourages with regard to excise duties. Finally, further
higher valued exports, by permitting Export actions are also needed to reform the existing
Houses to retain a small part ( 5%) of their deletion programs (related to domestic content
foreign exchange earnings, and by allowing the requirements) and to enhance the effectiveness
private sector a greater involvement in exporting of export promotion schemes aimed at putting
rice and cotton. 47 exporters on a 'duty-free basis' while at the same
time reviewing the cost effectiveness of other
export incentives such as the income tax rebates.
By 1993 a number of important steps based on the
Such a program should be accompanied by
Structural Adjustment Programme had been taken. The continued active and timely use of the exchange
maximum tariff had been reduced from 225 per cent in 1988 rate policy. 51
to 90 per cent at the end of the adjustment programme. In
March 1991, import licensing had been abolished except for In light of these and other recommendations, the govern-
commodities on the negative list, while this list of banned ment in 1993 announced a new trade reform package, the
and restricted imports was cut down. main features of which were as follows:
One of the more important policies undertaken by the
government was initiated in February 1991, when resident 1. Maximum tariff levels will be set at only 35
Pakistanis were allowed to open foreign currency deposit or 50 per cent with six slabs of 10, 15, 25, 35,
(FCD) accounts, which were previously allowed only to 45, and 50 per cent. Existing tariff rates will
foreigners and non-resident Pakistanis. The procedure for apply to motor vehicles, alcoholic beverages,
opening such FCD accounts was greatly liberalized and banks POL, wheat, fertilizers, pesticides, and life-
saving drugs.
paid higher interest rates on these deposits than LIBOR. 48
2. Tariff reduction will be phased in gradually
Although the rupee was not fully convertible, no questions over a three-year period.
were asked about the source of funds. Foreign currency 3. Many concessions and exemptions present in
deposits increased from $1.6 billion in June 1988 to $2.3 the existing tariff regime will be withdrawn
billion in February 1991, and to $3.7 billion in June 1992, gradually.
rising to more than $8.5 billion in August 1996. Of the last 4. Tariff structure will represent a cascading
amount, 37 per cent was held by Pakistani residents. 49 The of nominal tariffs with progressive stages of
World Bank believed that since 1990 'the foreign exchange manufacturing. Locally produced goods will
inflows into FCDs have significantly helped meet Pakistan's be subjected to higher tariff rates compared
to goods not produced domestically.
external financing requirements. In FY92 new inflows into
216 Issues in Pakistan's Economy

5. Tariffs on machinery and equipment will be Given Mexico's geographical and political importance with
10 per cent unless this machinery is produced respect to the USA, and the fact that it is one of the three
locally. states along with the USA and Canada which form the North
6. High-priority domestic industries (such as American Free Trade Association (NAFTA), the comparison
engineering and chemicals) will receive with Pakistan may seem a little irrelevant. Moreover, the
nominal protection of 50 per cent.
crash of the Mexican economy in December 1994 was also
7. Raw materials and intermediate goods
predominantly used in the production of blamed on the liberalization programme followed by its
exports would be subjected to zero rate of government, and other countries would be wiser to learn
duty. from Mexico's mistakes rather than follow its example (see
8. Existing import licence fee, Iqra surcharge, also Chapter 17). (The international trade environment has
and flood relief surcharge will be merged changed since the formation of the World Trade Organization
with the statutory tariff rates. 52 in 1995. Repercussions for Pakistan are discussed in Section
9.5 and Appendix 9.1.) It would be fair to say, that from the
The importance of the trade regime, and imports in
mid-1990s and after the formation of the WTO, there has not
particular, can be gauged from the fact that 54 per cent of
been significant reform in the trade sector in Pakistan. Most
total federal government revenue in 1992/3 originated from
of the trade reforms were undertaken in the 1988-95 period,
import taxes. Hence, any attempt to change the tariff regime
and other than occasional interventions to change a few rates
would also have significant effects on revenue generation.
or to give some incentives, the basic structure and direction of
Riaz Riazuddin evaluates this policy and in Table 9.15
intervention has been the same since the mid-1990s.
shows the rate-wise value of imports and _import- duties for
the fiscal year 1991/2. He shows that as· much as 45 per
cent of total imports were no longer subject to any duty.
And although the statutory duty rates ranged from O to 435
9.3 THE DEBATE OVER EFFICIENCY AND
per cent, 'the effective rate of duty which is the proportion THE TRADE REGIME
of actual duty collection to the value of imports subjected
to duty is only 33 per cent'. 53 The table also shows that as Asad Sayeed writes that 'protection through tariffs, quotas
much as 61 per cent of collection was obtained from the and exchange rate distortions is deemed to distort allocative
statutory duty range of 40-90 per cent, while duty rates of efficiency and hence reduce growth and productivity of
below and above this range contributed only 16 per cent of the economy over time'. 56 We will now examine this claim
the collection. with respect to trade policy in Pakistan, especially in the
For Riazuddin, 'there is a likelihood that lower tariffs in 1980s. (Although some of the discussion from Section
the short run can cause balance of payment difficulties as 8.6 is repeated here, this present section focuses more on
well as displacement costs. The phased reduction of tariffs trade-related inefficiencies and the impact on the effective
and gradual withdrawal of exemptions is likely to lessen exchange rate.)
these costs.' 54 These suggestions are quite different to those With respect to the rapid industrialization and high
proposed by the World Bank, which believed that 'with growth of exports in the 1960s, John Adams and Sabiha
regard to the phasing of the proposed reforms package, Iqbal summarize the issues as foIJows: 'Pakistan followed
international experience shows that a speedy process is feasible a highly protective industrial policy to encourage import
and has strong advantages'. 55 The World Bank cites Mexico's substitution. Incentives were provided in the form of a highly
trade reform programme of I 985-9 as a good example of graduated tariff structure, import licensing, and quantitative
this approach, where the maximum tariff rate was reduced restrictions on imports. At the same time, elaborate stimuli
from I 00 per cent to just 20 per cent within two years. were provided to encourage the export of manufactured

Table 9.15
Rate-Wise Value of Imports and Duties: 1991/2

Statutory rate Total Duty-free Dutiable Import Effective

of duty import value imports imports duty rate of duty

Zero to 40% 44,843 32,391 . 12,425 2,600 21

40% to 90% 67,771 20,187 ;47,584 19,593 41
90%to 435% 4,023 813 3,210 2,307 72
Specific 54,955 23,977 30,978 6,220 20
171,592 77,368 94,224 30,720 33
Share in total import value 100% 45% 55% 18%

Note: Figures are for Custom House, Karachi, representing 85 per cent of Pakistan's total import duty collection.
Source: Central Board of Revenue, Yearbook 1991-92 (Islamabad: CSR, 1992), 330; Riazuddin, Riaz, 'An Evaluation of Trade Policy',
Pakistan Journal of Applied Economics, vol. X, nos. 1 and 2, 1994, 119.
r

Chapter 9 Balance of Payments and Trade Regimes 217

goods.' 57 Asad Sayeed argues that 'the incentives provided by of non-tariff barriers is a problem because they 'generate
the tariff structure have been the central bone of contention more serious distortions, with greater resource allocation
in discussions about efficiency of the industrial sector in the inefficiencies, than direct price protection obtained through
I 960s' 58 And the result, for John Adams and Sabiha Iqbal tariffs'. 61 Moreover, they create a host of other inefficiencies,
as for so many others before them ( see Section 8.6 in the as follows:
previous chapter), was as follows:
As is well known, import bans/restrictions break
Although the profusion of inducements the link between domestic and international
encouraged the growth of the output and exports relative prices, pushing the economy further
of the manufacturing sector, they generated away from resource allocation patterns consistent
inefficient resource use in industry and created with the country's comparative advantage. NTBs
a bias against exports of agricultural goods. [non-tariff barriers] work to create monopolies
Within the manufacturing sector resources and oligopolies through the elimination of
were often attracted to high-cost industries foreign competition in industries where scale
dependent upon imported inputs. Guisinger economies are important. Government attempts
and Lewis estimated effective rates of protection to regulate and control such markets rarely
for thirty industries and found negative value- achieve the level of efficiency generated by the
added for three cases, implying that the world spur of foreign competition. In other industries
market value of material inputs exceeded the where the domestic market is too small to
value of output. Others were also critical of the support production at a minimum efficient
import-substitution policy. Pakistan's industries scale, NTBs, combined with existing investment
were using processes which were economically sanctioning procedures, allow several firms
inefficient, when judged by world market prices to operate profitably in the small domestic
for inputs and output. Since domestic prices market with no pressure to improve their cost
had become distorted by tariffs, quantitative competitiveness. Examples of fragmentation of
restrictions, and multiple exchange rates, production are evident in some of Pakistan's
economically inefficient choices of processes and manufacturing industries, such as transport
techniques by private businessmen became real equipment, polyester yarn, electrical machinery,
possibilities. In effect, producers could purchase and household appliances. 62
capital inputs at well below the opportunity cost
to the economy since they were direct licensees The World Bank very strongly recommends the replacement
for imported goods. An incentive was thereby of non-tariff barriers by tariffs, as the latter form of protection
created to use excessively capital-intensive for domestic industry is deemed to be much less inefficient.
techniques. Khan found that the capital-labour However, due to the high tariff rates and dispersion of the
ratio in many industries in Pakistan was higher tariffs, the structure is still considered to be highly inefficient
than in countries where labour was far less
and protectionist. Summarizing the main features of the
abundant. 59
trade regime in the late 1980s, with its numerous faults and
resulting distortions, the World Bank argues that
We have argued in Section 8.6 that almost all these
allegations were proven to be incorrect by scholars once they
Pakistan's import regime provides high and
studied the data in much greater detail. However, even today extremely uneven levels of protection afforded
the same sort of criticism continues to be launched of the to various domestic industries, with many
industrial policy pursued in Pakistan. commodities benefiting from almost absolute
In recent years, the World Bank and the IMF have become protection (subject to the fact that smuggling
the greatest champions of free trade in Pakistan and all restricts these levels). Due to exemptions, baggage
across the globe. They castigate countries like Pakistan for allowances and extensive smuggling, some
maintaining tariffs, restrictions, and non-tariff barriers, and, products enjoy lower nominal protection than
in general, an import-substituting regime. The World Bank those implied by the statutory tariff rates. This
combination of heavy protection and extensive
and the IMF argue that such import-substituting policies
exemptions and import leakages (formal and
have an anti-export bias and cause allocative inefficiencies. informal) has fostered an inconsistent structure

I
Their recommendations include a drastic cut in tariffs, the of protection with indeterminate and, perhaps,
removal of all non-tariff barriers, and constant devaluation. continuously changing effects on the incentives
They recommend a 'liberalized', 'neutral' trade regime based for industrial investments. As a result, socially
on the 'rationalization' of the tariff structure, with lower suboptimal production and investment decisions
average tariff rates and the elimination of exemptions. For in terms of production mix, diversification and
them, not to take these comprehensive steps would result in plant scale are being undertaken while other
continued inefficiency. economic opportunities are foregone. Finally, as
The World Bank, in its analysis of the trade regime in a result of the complexity and diverse effects of
various elements of the protective structure, it is
Pakistan, argues that despite the very extensive and far-
very difficult for the Government to determine
reaching changes that have been made since the early 1980s, the effects of the present import regime and thus
'the changes have not been substantial enough to establish administer the protective system in a way that
a more neutral trade regime'. 60 The continued presence supports Pakistan's economic objectives.63
218 Issues in Pakistan's Economy

While the foregoing quote finds faults with the trade words, countries with low tariffs do not necessarily have
regime on the import side, the export side is also not spared. high growth, and vice versa. 67 The World Bank has also held
The World Bank believes that the trade regime has a strong Pakistan's high tariff dispersion to be a cause of inefficiency
anti-export bias: 'The fundamental problem is that Pakistan's in the industrial sector, yet it has been shown that 'a high
export growth prospects are being adversely affected by the dispersion of tariffs was central to Taiwan's successful trade
remaining import-substituting bias of the trade regime.' 64 regime'. 68 Moreover, it has been seen that countries with the
This anti-export bias is shown using estimates for effective highest dispersion in tariffs may actually have high growth
exchange rates for imports and exports and their ratios (Table rates in manufacturing.
9.16). The EER (effective exchange rate) ratios in the table Sayeed's study also questions the overemphasis on
indicates neutrality if the ratio is 1, and a bias towards import showing the causality between tariffs and growth, and
substitution and against export promotion, as is actually shows that actually 'productivity growth, or any other
revealed by the table, when the ratio is greater than 1. The measure of efficiency, therefore, is more criticaJly determined
table shows that the import substitution bias has increased by other policies and the political economy of the sector' 69
over time (row 4A), and that there is a bias against primary and tariffs cannot be singled out as the causal factor. The
agricultural exports (row 4C). The final conclusion: 'both the empirical and conceptual problems that effective rates of
qualitative and quantitative evidence suggests that Pakistan's protection (a central component of perceived inefficiency in
trade regime is still biased in favour of import-substituting the industrial sector) had in the scholarship of researchers
production', 65 and hence is inefficient. in the 1970s still persist, and Asad Sayeed finds that there
Just as in the 1970s there was a strong bombardment of are serious difficulties in their calculation and use. He very
'evidence' and analysis that the government in the 1960s strongly rejects the claims made by the World Bank that
had got its industrial and trade policies all wrong, with the Pakistan's import policy has resulted in inefficiency in
result that it was claimed that there was huge inefficiency industrial production. He says 'that the excessive importance
in the industrial sector, so in the 1980s and 1990s the World given to the tariff and non-tariff barriers is unwarranted.
Bank and the IMF have taken it upon themselves to expose Firstly, there is no definite conclusion that can be drawn
the persistent perceived inefficiencies in Pakistan's trade about efficiency reducing elements from the import regime.
and industrial regime. However, unlike the scholars who Secondly, no major inconsistency between the tariff regime
examined Pakistan's trade and industrial structure in the and the structure of tariff exemptions and non-tariff barriers
I 960s and found inefficiencies, the World Bank and the IMF was identified.' 70
in the 1980s and 1990s are in a position where they cannot just One of the major allegations against the Ayub regime was
recommend, but impose, alternatives. Clearly, the Structural that, since there were inefficiencies in the nature of protection,
Adjustment Programmes since 1988 are evidence of that. there was too much emphasis on import substitution at the
However, even in the 1970s and later, there were a group of expense of exports. This was seen to be incorrect, for there
scholars who showed that much of what was considered to was ample growth and diversification of exports under Ayub,
be conventional wisdom was, in fact, pure myth, and that despite inefficiencies and an anti-export bias. The same
the extent of inefficiency in the industrial structure in the allegations that the trade regime of the 1980s was anti-export
1960s was grossly exaggerated (see section 8.6 in Chapter 8). based are equally untrue, for Pakistan's aggregate export
It is possible, then, that as further independent research is growth in this period was a healthy 9 per cent per annum.
conducted on the trade and industrial regime of the 1980s, While there are numerous problems with Pakistan's export
much of the evidence, 'both qualitative and quantitative', structure, especially that it has such a narrow base, that it is
will be exposed as incorrect and biased. One recent study has dependent on one commodity-cotton-and that the textile
donejustthat. sector has been in a crisis in recent years, the annual growth
The work by Asad Sayeed has shown that virtually every of exports has, nevertheless, been quite impressive. Clearly,
study and analysis conducted on the manufacturing sector there is a need to diversify into more value-added products
in Pakistan in the 1980s argues that protection through within the textile sector, and in other sectors, but it would
tariffs, quotas, or exchange rate distortions affects allocative seem to be a little harsh to draw the conclusion, as the World
efficiency negatively and, consequently, reduces growth Bank does, that Pakistan has had an anti-export bias.
over time. There seems to be almost an identical repeat of The barrage of criticism of the industrial and trade policies
the situation prevalent in the 1970s at the end of the Ayub of the Ayub regime was never articulated into policy, for the
regime, when virtually every study and analysis conducted Ayub regime was replaced by a regime which had different
on the manufacturing sector argued that the Ayub regime priorities. Moreover, those who found fault with the policies
was highly inefficient. Just as the high-growth regime of were not in a position to implement alternatives. It was
Ayub Khan was labelled as inefficient, so the high-growth Zia another matter that much of the analysis was found to be
regime been put in the same category. 66 faulty later on. The difference is that the analysis and evidence
Asad Sayeed has taken great pains to show that much that is currently invoked to identify the extent of inefficiency
of what has been suggested about the consequences of in the trade regime also makes recommendations that can
the trade regime under Zia is incorrect. Although Pakistan actually be translated into. policy. It is too soon for studies to
had the highest average tariff rates compared with other emerge, as they did earlier, to examine in detail the claims
developing countries in 1986, there was no direct relationship made that industry was indeed inefficient. However, even if
with the growth performance of the manufacturing sector-in other such evidence does emerge, it may be a little late to reverse
r Chapter 9 Balance of Payments and Trade Regimes 219

the policies currently being advocated and implemented since devaluation of the pound sterling by about 37 per cent, caused
they are now part of the new, pre-liberalization, globalized, a great deal of uproar and eventually had serious, albeit
conventional wisdom. positive, repercussions for the economy of the country (see
Chapter 6 and Section 9.2 above). The decision taken by the
government was so important that it has become known as
9.4 THE EXCHANGE RATE the 'Non-Devaluation' decision. While the young government
of Pakistan faced a serious crisis on the exchange rate front
The exchange rate has played a critical role in the trade so early in its tenure, which added to numerous other
regime and the process of industrialization in Pakistan on crises of that era, the role that the exchange rate has played
more than a few occasions. As early as 1949, a conscious throughout the nearly fifty years of Pakistan's existence is
decision by the government of the day not to revise its very significant indeed. This section will highlight some of
exchange rate downwards, i.e. devalue, in line with the the features of the foreign exchange regime in Pakistan.

Table 9.16
Effective Exchange Rates for Exports and Imports, and their Ratio

1980/1 1984/5 1986/7ad

Nominal exchange rate (Rs/$) - period averages 9.90 15.15 17.00

2 EERs for importsa

A All imports
a) Based on statutory import levies (EERm) 19.27 30.25 33.35
b) Based on actual import taxes (EERm2) 15.74 25.90 n.a.
B Import EER by commodity categories:
a) Consumer goods
EERm1 25.74 40.15 40.03
EERm2 19.01 27.30 n.a.
b) Raw materials for consumer goods
EERm1
EERm2 15.92 30.75 n.a.
c) Raw materials for capital goods
EERm1
EERm2 15.25 23.76 n.a.
d) Capital goods
EERm1 18.13 28.50 30.60
EERm2 14.81 24.09 n.a.
e) Textile products
EERm1 24.95 38.94 38.76
EERm2 n.a. n.a. n.a.

3 EERs for exportsb

A All exports (EERx) 11.02 17.18 17.92
B Export EERs by commodity categoriesc
a) Raw cotton 8.91 13.64 15.50
b) Rice 9.90 15.15 17.00
c) Cotton yarn 11.66 16.45 17.19
d) Cotton cloth 11.75 17.75 18.22
e) Leather products 10.49 16.66 18.69
f) Carpets 10.99 18.50 18.63
g) Ready-made garments 16.25 23.79 25.00

4 EER ratios
A EERm1/EERx 1.75 1.76 1.86
B EERm2/EERx 1.43 1.51 n.a.
C (EERx for manufactured exports/EERx for primary agr. exports) 1.25 1.27 1.21

8 Customs duties, sales tax, and surcharges are included in the calculations. Due to unavailability of information on domestic and
international prices, no attempt was made to take scarcity premiums resulting from non-tariff barriers into account.
b Duty and tax drawbacks, compensatory rebates (until mid-1986), and the subsidy components of concessionary export credited and
included in the calculations.
°Further disaggregation was not possible because of lack of detailed data.
dJuly-November period. • ·
Source: World Bank, Pakistan: Growth Through Adjustment, Report No. 7118-Pak, Washington, 1988, 74.
220 Issues in Pakistan's Economy
l
For nearly 35 years, Pakistan maintained a fixed-peg devaluation of the rupee removed at one stroke the subsidy
regime for its exchange rate. The rupee was first Jinked to the industrialists had received in the earlier period because
the pound sterling in the early years after 1947, and Pakistan of the overvalued exchange rate'. 73 While earlier in 1949,
was a member of the sterling area. Later, as the USA became 1952, and 196 7 the governments had been criticized for
more dominant across the globe, and as Pakistan's political not devaluing, in 1972 the government was criticized for
fortunes became more aligned with those of the USA, the US devaluation and for the extent of the devaluation. The
dollar became the key currency with respect to the Pakistani arguments which criticized the devaluation decision were as
rupee, as it did with most other currencies. follows:
Pakistan did not devalue in 1949 when other countries
linked to the pound sterling followed the fate of the pound a) devaluation on such a high scale could have
and devalued; nor did it devalue in 1952, following the been justified if domestic production of
Korean War boom, once the post-boom recession had set exportable goods could also be increased
rapidly which was doubtful at that particular
in and foreign exchange was scarce. Instead, Pakistan
time due to the unsettled environment
pursued import controls so that imports could be regulated created by the loss of East Pakistan;
and the foreign exchange crisis managed. The government b) devaluation increased the cost of investment
was criticized on both counts: for not devaluing and for [involving foreign exchange] by about 131
imposing controls and tariffs on the free import of goods. per cent (which was the increase in the value
Such controls were considered to be inefficient in attracting of the dollar in terms of the Pakistan Rupee);
scarce resources, and a more market-friendly mechanism was c) the internal price structure was adversely
considered to be more efficient. Finally, the first devaluation affected since devaluation raised the overall
took place in June 1955, when the rupee was devalued by 30 cost structure and thus accelerated the
per cent with respect to the pound sterling in order to bring inflationary pressures on the economy. 74
it in line with other trading countries.
Hence, the nominal exchange rate of the Pakistani rupee
For the next seventeen years, the official, nominal
was changed by the government only twice during the period
exchange rate of the rupee was fixed at Rs. 4.76 to one US
1947-82, once by 30 per cent in 1956, and then by 58 per
dollar. However, as far as almost all analysts are concerned,
cent in 1972. In February 1973, the US dollar was devalued
the rupee was, for most of those seventeen years, grossly
by 10 per cent and hence the Pakistani rupee was revalued
overvalued (see Sections 8.6 and 9.3 ). Not only was the rupee
by 10 per cent to Rs. 9.90 per dollar, the official rate which
overvalued, but a system of multiple exchange rates is said
continued until January 1982. Until then, the government
to have undermined all semblance of efficiency normally
had maintained a fixed-peg exchange rate, needing to
attributed to a reliable and correct exchange rate value.
intervene only twice. The rupee/dollar exchange rate was
Gustav Papanek shows how the official Pakistani exchange
fixed, and the Pakistani rupee's fortunes were inextricably
rate was, in a real sense, a multiple exchange rate:
linked to those of the dollar ( see Box 9 .4). When the dollar
Some exporters faced an effective rate of 8 appreciated, so did Pakistan's currency with respect to its
rupees to the dollar, if their commodities had numerous other trading partners. Hence, Pakistan's economy
been assigned 40 per cent vouchers, all of which was tied to the prospects of an economy sixty times its size.
could be sold in the open market. At the other While alignment in the political sphere between Pakistan
extreme, exporters who received no vouchers and the USA had progressed a great deal, this linking of the
and export duties faced an effective rate of less currencies was perhaps taking things a bit too far.
than 4. 7 rupees to the dollar.... 71 On the recommendations of the IMF, the old system of
. . . The importer who could get a regular pegging the rupee was replaced by a flexible exchange rate
import license paid the official exchange rate
(4.7 rupees to the dollar). The importer who mechanism, whereby the government of Pakistan-actually
had to buy a bonus voucher paid more than the State Bank of Pakistan, to be more precise-sets a rate
twice that amount (as much as 12 rupees to for the Pakistani rupee based on a weighted average of the
the dollar). Finally the importer who bought a currencies of Pakistan's major trading partners. After 1982,
voucher restricted to the import of raw materials the US dollar no longer retained its unique status as the
or investment goods, could pay yet a third rate, determinant of the rate of the Pakistani rupee, but became one
somewhere between the other two. 72 of many in the basket of currencies that collectively determine
that rate. This mechanism of determining the exchange rate
The entire Ayub period, despite the substantial success for the Pakistani rupee vis-a-vis other currencies, established
related to the growth rate and exports, was criticized for in 1982, is still followed today. However, the very controlled
maintaining multiple exchange rates and an overvalued nature of the exchange rate market in the 1980s has given
rupee. When Zulfikar Ali Bhutto took over after the elections, way to a more open market in the 1990s (see Box 9.5). The
much of the old order was drastically changed and the rupee 'market' rate, which is indeed determined by the supply and
was devalued by 58 per cent. demand for currencies, is now the official exchange rate, and
Not only did the rupee find a new value of Rs. 11 to the the premium between official and kerb rates is rather small.
US dollar, but the entire system of multiple exchange rates From Rs. 4.76 to one dollar in April 1972 to Rs. 9.90
and the Bonus Voucher Scheme was done away with. Viqar for a period of nine years, once the rupee was allowed a
Ahmed and Rashid Amjad argue that 'the substantial net managed float, its value depreciated by more than 230
 Chapter 9 Balance of Payments and Trade Regimes 221

Box 9.5 not generally anticipate changes in the official rate. Indeed,
The Foreign Exchange Market the premium tends to widen immediately after official
exchange rate adjustments by the SBP. If, following some
In previous years, there was no foreign exchange 'market', adjustments, the official rate is held fixed for some time, the
and the State Bank of Pakistan rationed foreign currency. premium tends to return to its trend level. Thus, it appears
All that has now changed, and foreign currency can now be that rather than responding to economic fundamentals,
purchased openly in the market. the parallel foreign exchange market premium responds to
exchange rate moves by the SBP in the short run.
Foreign exchange is bought and sold in Pakistan in two
As an alternative to selling foreign exchange on the
markets-the official market and the parallel market. In the
parallel market, individuals may purchase Foreign
official market, the State Bank of Pakistan (SBP) announces
Exchange Bearer Certificates (FEBCs) from commercial
every morning rates at which it stands ready to buy or
banks. FEBCs, though purchased with foreign exchange,
sell foreign currency to authorized dealers, which, in turn,
are rupee-denominated obligations of the Government of
transact with customers at a specified spread. Purchases
Pakistan, and pay a rupee return. The certificates, the face
and sales of foreign currency for trade transactions are
value of which is determined at the official spot rate when
required to take place through the official market. Some
purchased, may be encashed at any time in either rupees
capital account transactions, such as repatriable foreign
or foreign currency. If the bearer of the FEBC chooses to
currency portfolio flows, also go through the official market.
encash in foreign currency, the official spot exchange rate
In addition, banks are required to turn over foreign exchange
prevailing at the time of encashment is applied. The FEBC
held in foreign currency accounts to SBP at the official
is a bearer certificate, and the purchaser is not required
exchange rate, and may buy the foreign currency back
to declare the source of foreign exchange at the time of
when the deposit matures or is withdrawn.
purchase.
All other transactions take place on the parallel market,
There also exists a secondary market for FEBCs, in which
which_ consists of money changers licensed by the SBP.
the certificates are bought and sold for a premium over their
Transactions on this market are not taxed, nor are identities
face value. Arbitrage between the parallel foreign exchange
of the transactors recorded. The money changers set
market and this secondary market equates the premia
exchange rates to equilibrate market supply and demand,
associated with foreign exchange and FEBCs.
thereby determining the size of the premium that foreign
Finally, there also exists a forward market for foreign
exchange on the parallel market commands over the official
exchange. Authorized commercial banks are allowed to
rate.
quote forward buy and sell rates of foreign currency in
The parallel foreign exchange market in Pakistan can
rupees for transactions that would go through the official
provide potentially useful information about the likely
market. While these rates are set to equate supply and
course of future official exchange rate adjustments by
demand at the various maturities, they do not necessarily
the SBP. In principle, an increase in the parallel market
reflect true market forces since market players are not
premium should reflect market expectations that the rupee
allowed to take positions except to offset foreign currency
is misaligned, presumably because reserves have dwindled
receipts or payments for trade transactions.
or because inflation has eroded external competitiveness.
In either event, a devaluation would be required to ease the
economy's external adjustment. Source: ABN AMRO Economic Bulletin, The Exchange Rate,
Actual daily data from the parallel market, however, vol. 1, no. 7, Special Issue, Economics Department, ABN
suggest that, at least in recent months, the premium does AMRO Bank N.V. [Pakistan] September/October 1995.

per cent between January 1982 and June 1996 ( see Table numerous reasons, the rupee/dollar rate saw a significant
9.17). Figure 9.2 shows the annual depreciation for each deterioration. In the 2008-13 period, the rupee depreciated
year, ranging from a minimum of 2.3 per cent in 1994/5 by as much as 37 per cent, from Rs. 61.7 to Rs. 98.15. In
to 28.28 per cent in the very first year. For much of the the 2002-08 period the rupee/dollar rate changed only from
1980s the fall in the value of the rupee was caused by the Rs. 60.09 in 2002, to Rs. 61.76 in early 2008 when the PPP
crawling peg or floating exchange rate, under which the government took over-see Chapter 18 for further discussion.
State Bank of Pakistan nominally depreciated the rupee by How much devaluation is enough? What should be the
a few paisas whenever needed. From 1993 onwards these 'correct' rate for the rupee/dollar? Many analysts feel that
depreciations-or technical adjustments as the State Bank the Pakistani rupee has always been and continues to be
called them-were supplemented by direct devaluation. overvalued, and hence Pakistan's exports are overpriced
However, since 2000, the State Bank has managed the rate and uncompetitive compared to its competitors. They would
differently through other mechanisms, rather than through prefer to see a substantial devaluation of the rupee at frequent
direct devaluation and the rate stabilized for some years and intervals. Different reasons are given for this constant
even appreciated. However, while the exchange rate was adjustment, some quite irresponsible (see Appendix 9.2).
kept steady in the 2002-08 Musharraf period, after 2008, for Nevertheless, despite the argument made repeatedly that
222 Issues in Pakistan's Economy

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 Chapter 9 Balance of Payments and Trade Regimes 223

Box 9.6 making windfall gains on account of a depreciating rupee,

Has Pakistan's Substantial Devaluation the textile industry may avoid making the required capital
investment decisions to moving up the value ladder.
Increased Exports?
While exports have not grown by as much as the depreciation
The general argument put forward for devaluation is that it would have warranted, there have also been substantial import
should make our exportable commodities cheaper in the and related costs on account of this depreciation.
international market, in absolute terms and also compared Having had to service a great deal of extra debt throughout
to our competitors, and should so increase exports. The the 1990s, increased devaluation raises the rupee cost for
downside is that as the currency depreciates, imports also conversion of the dollar. For example, in 1995/6 external debt
become more expensive and can cause inflation and costs servicing grew by 0.5 per cent in US dollar terms, the total
to rise if a country devalues. While Tables 9.1-9.3 (in the interest and principal payments increased by 15.5 per cent in
text) show Pakistan's trade figures, Table 9.17 shows the rupee terms. In 1997/8, while debt servicing in US dollar terms
extent of the rupee devaluation. Since 1982/3 the rupee has was lower by over 8 per cent year on year, the rupee costs
depreciated by nearly 500 per cent, from Rs. 9.90 to one US were higher by 17.2 per cent on account of a weaker rupee.
dollar to nearly Rs. 60 today. Clearly, exports have not risen a Two other factors associated with a cheaper rupee in
fraction as much. the case of Pakistan, have been higher imported inflation
While Pakistan's main exports have increased both in with increases in domestic oil and petroleum, and hence,
terms of volume and in terms of value, this increase has electricity prices, throughout the 1990s, and the phenomenon
been very small compared to the fall in the value of the of 'dollarization'. Industrial electricity tariffs increased by
rupee. One reason for this is that most of Pakistan's exports 85 per cent in the period 1993-2000, while furnace oil's
are textiles and textiles still face a regime of quotas. Hence, price rose by 292 per cent-both partly due to devaluation,
no matter by how much the rupee depreciates compared although other factors were also responsible. Dollarization
to Pakistan's competitors in this market, Pakistan's textile in Pakistan's context, seen for much of the 1990s, has been
exports will increase only up to the permitted quota ceiling. the buying of dollars in the open market expecting the rupee
Hence, analysing the overall export trend in the 1990s on the to devalue further and consistently, making profits by this
basis of volumes exported rather than by receipts in US dollar conversion. With a depreciating rupee, the expectation that it
terms, provides support to skepticism about the benefits to will depreciate further, will cause it to do so as people push up
exports from the continual and heavy adjustments undertaken. the rate while buying dollars.
Perhaps non-price factors, like quality, have a more important It seems that the costs associated with a depreciation of the
bearing on boosting factors. rupee are significant while the benefits are uncertain.
There is also an interesting moral hazard problem involved
here. The continued devaluation of the rupee may actually Source: Sherani, Sakib, 'Pakistan's exchange rate
retard Pakistan's move into value-added textiles, by insulating management-recent experience and current policy
the margins of producers of low value-added goods such challenges', Economics Department, ABN-AMRO Bank N.V.
as yarn and grey cloth over an extended period of time. By [Pakistan] (Islamabad, June 2000).

this agenda by preparing the ground for corporations to Now, external and non-elected officials-of the IMF,
make headway into the expanding global market. The World Bank, other donors-play a major role in shaping
International Financial Institutions ( IFis) have established an macroeconomic and social decisions that affect the basic
institutional framework for a process of development and free structure of the economy and living standards of nations.
international trade. Structural Adjustment Programmes-see Today, in many parts of the world-including Pakistan, as
Part VI of this book-led to a new 'enabling policy frame- Part VI of this book shows-officials from these agencies
work' with the 'liberalization' and opening up of economies decide on government spending, property relations (private
where restrictions and government interventions have been versus public ownership), development strategies and many
increasingly done away with opening the doors to global other decisive aspects of social existence bypassing the
capital. With IFis and large corporations, along with of electoral system of countries. These global agencies have
course, political actors as well, 75 determining the economic usurped power from states and local governments and have
and political agenda of countries, the powers of the nation- deprived the state of the nation's sovereignty.
state have been significantly eroded, giving way to the There have also been countries which have restricted the role
influence of international institutions. As a result, the power of IFis while still being major players-and beneficiaries-of
of the state has been drastically reduced and it is less able globalization. India and Malaysia come to mind, where both
to regulate and make policies pertinent to its own country. are growing global players, yet they have. set their own terms
The Keynesian welfare state or the strong developmentalist in negotiations with the transworld governance agencies, and
state of the late twentieth century, able to determine national have prnspered as a result. What seems to play a key role in
policy over vital economic and social life, has been waning. determining the country's ability to take on these IFis, is an
224 Issues in Pakistan's Economy

active and political civil society and political groups (as in 9.5.2 Globalization and WTO's Impact on
India) and/or strong nationalistic leadership (as in Malaysia).
Pakistan, sadly, has neither.
Pakistan
Trade, one of the key instruments of globalization, Much of Part VI of this book, on structural adjustment, and
does have a great number of benefits and many of the many of the chapters elsewhere, is on Pakistan's interaction
East Asian countries including China, have prospered on with globalization in the guise of the IFis mentioned
account of this globalization. India, too, in recent years has above. Without a doubt, the impact of globalization on
benefitted on account of the information technology boom Pakistan's economy, has been significant, both positive as
exporting software and other services. With world travel and well as negative. Even in the case of the industrial sector as
communications increasing and improving, tourism in many we show (Chapter 7), the economy has been affected since
parts of the world has emerged as an important earner of 1988 by following policies of liberalization, a key component
foreign exchange. There has been some transfer of technology of globalization. Although Pakistan's economy has been
to countries where multinational corporations have shifted far more open and more liberal, and for longer, than most
manufacturing, as in the case of Mexico, so as to cut costs. others---compared to India, for example-it has since 1988
Those countries which have had a highly skilled and educated reached a higher plane altogether. Since this theme has been
workforce have benefitted far more than those countries discussed in numerous contexts in this book, in this section
where skill and literacy levels are low. Also, more peaceful, we merely look at some important aspects which affect
less corrupt, and perhaps more democratic countries, may Pakistan's economy under the guise of globalization and as
have prospered more on account of globalization than a consequence of the World Trade Organization agreements
countries like Pakistan which has neither been peaceful nor which came into existence after 2005-the WTO came into
democratic. One must not forget either, that globalization, existence in 1995.
particularly of capital-hot money-has had a devastating Pakistan, like all countries of the world, has implemented
effect on many countries in the l 990s-Mexico, Argentina, the provisions of the World Trade Organization guidelines
and countries in East Asia. and agreements. Trade and industrial sectors have undergone
One of the major objections to globalization by demon- radical change in compliance, first with the Structural
strators in Seattle, Prague, Bangkok, and other sites has been Adjustment Programmes of the IMF and World Bank, and
that it is an unfair system in an unequal world. There is no more recently, in compliance with GATT and WTO rules
'level playing field', and developed countries, particularly the and regulations. These rules provide a legal framework for
US, European Union, and Japan, determine the rules of the international commerce and there are various protocols
game. In many cases, the rules and regulations that these which affect different sectors.
Big Three along with the IFis, enforce on underdeveloped Countries were required to improve access to foreign goods
countries, are not followed through in their own countries. and markets by reducing/eliminating tariffs and abolishing
The IFis and these countries insist that subsidies to different quotas. In addition, subsidies both on exports, credit, and
sectors in underdeveloped countries and protection or on domestic goods-as we argue in the section above-were
special privileges be done away with, yet fail to follow to be eliminated and countervailing and anti-dumping
suit. Economist Joseph Stiglitz who won the Nobel Prize measures taken. Let us see how these measures have affected
reveals the extent of these subsidies in Europe and the US Pakistan's textiles, which constitute more than 60 per cent
and says: subsidies in advanced countries exceed the total of its exports-also see Chapter 8 Section 8.3, for far more
income of sub-Saharan Africa-around $1 billion a day! the details on the Textile Industry.
average European subsidy per cow matches the $2 per day International trade in textiles and clothing has been
poverty level on which billions of people barely subsist; and, subject to quantitative restrictions in industrial countries.
America's $4 billion cotton subsidies to a mere 25,000 well- Historically, these restrictions were governed by the Multi
off farmers brings misery to 1O million African farmers:7 6 On Fibre Agreement (MFA) which started in 1974 and was last
average, it has been estimated that the prices these farmers extended up to 31 December 1994. Following the Uruguay
receive for their output are 31 per cent above what they will Round of multilateral trade negotiations (1986-1994), the
get in international trade. Farmers receive 80 per cent higher WTO Agreement on Textiles and Clothing (ATC) came
prices for milk, 100 per cent more on sugar, and 360 per cent into force from 1 January 1995. It envisaged a transitional
for rice, all behind high tariff walls. So much for free trade. period of ten years till 31 December 2004 by when the MFA
Undoubtedly, not a level playing field (see Box 9.7). restrictions on textiles and clothing were phased out in four
There is no way one can escape globalization, and phases. From 1 January 2005, the entire textiles and clothing
perhaps there is no need either. Globalization has led to sector was integrated with General Agreement on Tariffs and
deindustrialization in some countries as well as increased Trade ( GATT) 1994 and all restrictions on imports of textiles
capital formation in others. Exports have increased in some, by any of the WTO members, were to have come to an end,
while imports due to lower tariffs have increased in others. opening up the textiles sector on the basis of a 'free' market
The domestic economic, social-particularly education, skill, and 'free' movement of goods and services. The ATC principle,
and infrastructure-and political arrangements (civil and in essence was to remove all quantitative restrictions by
governmental) determine how individual countries negotiate industrial countries on imports of textiles and clothing from
and benefit from globalization (also see Box 9.8). all countries, allowing far greater access to exports from
developing countries such as Pakistan, bringing in a new,
 Chapter 9 Balance of Payments and Trade Regimes 225

Box9.7 Western banks benefitted from the loosening of capital

Globalization and its Discontents market controls in Latin America and Asia, but those
regions suffered when inflows of speculative hot money
Nobel Prize winner for Economics in 2001, Professor Joseph (money that comes into and out of a country, often
Stiglitz, has been a critic of the way globalization has taken overnight, often little more than betting on whether a
place and the way it has been made use of by developed currency is going to appreciate or depreciate) that had
countries. Some excerpts from his writings. poured into countries suddenly reversed. The abrupt
The critics of globalization accuse Western countries of outflow of money left behind collapsed currencies and
hypocrisy, and the critics are right. The Western countries weakened banking systems. The Uruguay Round also
have pushed poor countries to eliminate trade barriers, strengthened intellectual property rights. American
but kept up their own barriers, preventing developing and other Western drug companies could now stop
countries from exporting their agricultural products and drug companies in India and Brazil from 'stealing' their
so depriving them of desperately needed export income. intellectual property. But these drug companies in the
The United States was, of course, one of the prime developing world were making these life-saving drugs
culprits .... available to their citizens at a fraction of the price at which
But even when not guilty of hypocrisy, the West has the drugs were sold by the Western drug companies ....
driven the globalization agenda, ensuring that it garners Not only in trade liberalization but in every other aspect
a disproportionate share of the benefits, at the expense of globalization even seemingly well-intentioned efforts
of the developing world. It was not just that the more have often backfired. When projects, whether agriculture
advanced industrial countries declined to open up their or infrastructure, recommended by the West, designed
markets to the goods of the developing countries- with the advice of Western advisers, and financed by
for instance, keeping their quotas on a multitude the World Bank or others have failed, unless there is
of goods from textiles to sugar-while insisting that some form of debt forgiveness, the poor people in the
those countries open up their markets to the goods of developing world still must repay the loans.
the wealthier countries; it was not just that the more If, in too many instances, the benefits of globalization
advanced industrial countries continued to subsidize have been less than its advocates claim, the price
agriculture, making it difficult for the developing countries paid has been greater, as the environment has been
to compete, while insisting that the developing countries destroyed, as political processes have been corrupted,
eliminate their subsidies on industrial goods. Looking and as the rapid pace of change has not allowed
at the 'terms of trade'-the prices which developed countries time for cultural adaptation. The crises that
and less developed countries get for the products they have brought in their wake massive unemployment
produce-after the last trade agreement in 1995 (the have, in tum, been followed by long-term problems of
eighth), the net effect was to lower the prices some of social dissolution-from urban violence in Latin America
the poorest countries in the world received relative to to ethnic conflicts in other parts of the world, such as
what they paid for their imports. The result was that Indonesia.
some of the poorest countries in the world were actually Source: Joseph Stiglitz, Globalization and its Discontents
made worse off. (London: Allen Lane, 2002), 6-8.

forceful, era of global competition. It was felt that the new Musleh-ud-Din and Kalbe Abbas present a very interesting
regime would have a significant impact on countries which analysis of what the earlier MFA tariff and quantitative regime
were enjoying secured market access which they would no was doing. They argue that the MFA had restricted potential
longer have; on the other hand, countries which were being imports into major industrial markets and that growth
constrained by quotas would now be able to enhance market in volume of textiles and clothing exports · of developing
access under the new, 'free', regime (also see Box 9.9). The countries had been slower because of the agreement. They
quota regime was expected to be over, once and for all. make numerous important points and say: 'Countries that
Before we see how this has had an impact on Pakistan, are efficient producers of textile and clothing products have
let us briefly look at what the old regime of restrictions and been particularly vulnerable to the imposition or tightening
reforms was like. First of all, the incidence of protection of MFA quotas .... Other effects of the MFA include trade
in industrialized countries for textile and clothing has diversion to less restricted countries away from competitive
been much higher than other manufactured products. On suppliers .... The rigidities of the quota system under the
average, these tariffs were three or four times those on other MFA have also enabled traditional suppliers to maintain their
manufactured products, with tariffs increasing with each market shares despite declining competitiveness, and thus
stage of processing. 77 Average tariffs on fibres were about have prevented more efficient new entrants from competing
l per cent, while on clothing often more than 20 per cent. on equal terms'. 78
226 Issues in Pakistan's Economy

Box 9.8 • Dry and lead acid batteries: Chinese dry batteries cost
Trade Liberalization and the Indian Industry: a fraction of locally produced ones. Similarly lead acid
batteries imports from Bangladesh are cheaper than the
Some Illustrations of Adverse Impact cost of materials going into them. Obviously the local
The liberalization of trade regime over the past years has manufacturers of these have been hit.
sparked off the process of efficiency-seeking restructuring • Acrylic fibre, yarn and PP/HOPE woven fabric: Taking
of the Indian industry. In the process a number of industries advantage of free trade agreement with India, Nepal has
have also been adversely affected. In particular, the recent captured 12 per cent of India's acrylic yarn market. Acrylic
phase out of the QRs has affected adversely a large number fibre imports from Nepal have increased from just 2,500
of small-scale industries that manufacture items reserved for tonnes in 1997 to 12,000 tonnes in 2000. About 1,000
small-scale units. It has been estimated that about 400,000 tonnes of woven PP/HOPE fabric sacks is also coming from
small and medium industries have closed down in India due Nepal every month that is about 40 per cent cheaper than
to their inability to face competition from imports. The Strategic (locally produced one. JK Synthetics has downed shutters
Management Group in the PMO has apparently identified while Indian Acrylics, IPCL, Pashupati Acrylon, Vardhman
45 product groups whose imports have increased sharply Acrylics and Consolidated Fibre & Chemicals are cutting
following the liberalization. The government is taking action to capacity utilization.
safeguard the country's interests wherever necessary. • Banaspati and edible oils: Nepalese manufacturers import
Some illustrative cases of surging imports adversely edible oils from Malaysia at negligible duties, process them
affecting the local industry are noted below. into vanaspati and export it to India which works out to be
• Watches and clocks: Unable to face competition from at least Rs. 4 per kg cheaper than the locally produced one.
cheaper imports, a number of well established manufactures Capacity utilization of Indian units has been reduced to 25
have closed down. These include Jaina Time Industries, per cent.
Bifora, Allwyn, Timestar, and Action. Ajanta is shifting • Copper wire rods: An estimated 32,000 tonnes of copper in
production to China. various forms is entering India from Nepal where the duty
• Electrical fittings and other household electrical goods: rate on it is low at 5 per cent (compared to 38.5 per cent in
Owing to a sharp increase in cheaper Chinese goods, India). It is affecting the local producers, viz. Birla Copper,
over 300 factories making electrical goods have reportedly Hindustan Copper, and Sterlite [Industries (India) Ltd.] in
closed down. terms of their capacity utilization.
• Toys: Imports of Chinese toys that are cheap, have wide
variety, and better quality have critically affected the Indian
toys industry. Many units have closed down, some are Source: Research and Information System for the Non-Aligned
working at much lower capacity utilization than earlier. Many and Other Developing Countries, South Asia Development and
of the toys manufacturers have turned traders dealing in Cooperation Report 2001/02, New Delhi, 2002, 65-66.
Chinese toys.

The Pakistan government loosened government controls on quota-free world takes over, Pakistan's main exports, textiles,
cotton exports under WTO commitments. The All Pakistan would get a huge boost as there would be an increase in
Textile Manufacturers Association (APTMA) argued that the Pakistan's exports not restricted to quotas as it was earlier.
unrestricted export of cotton would deprive the spinning On the face of it, this argument made a Jot of sense, after
industry of raw material and push up production costs to all, the argument went, developed countries earlier bought
uneconomic levels. Since most countries have removed trade only a certain amount of Pakistan's textiles constrained by
barriers (i.e. import restrictions) and as quotas were removed set quotas. In addition, there were those in Pakistan who
from other garment and made-up producing countries as argued that quotas in Pakistan were being sold at a premium
well, it was anticipated that there would be greater demand in the black market since there was perceived to be a shortage
for Pakistani yarn and fabric and therefore, there would be of quotas, and this premium was borne as an additional
even Jess cotton available for local producers. According to cost to textile exporters and in some cases was considered
WTO rules, the government is not in a position to intervene to constitute a major part of the exported item's price.
either in terms of discouraging exports of cotton, yarn, Both these factors suggested that Pakistan's textiles would
or fabrics, or provide subsidies to garments and made-up increase as one element of costs would fall and there would
exports. The fear that textile manufacturers had was that be greater demand. But, this is only one side of the picture.
their industry would suffer and Pakistan would lose out on First of all, Pakistan is not the only country which has
valuable exports. However, it is was also considered possible had quota restrictions removed-all countries, including
that farmers, or at least owners of large land on which cotton Pakistan's main competitors China, India and Turkey, can
is grown, would benefit by access to the free market. sell as much as they possibly can. In fact, one argument was
One argument put forward by many Pakistani policymakers made that Pakistan should be grateful for the existence of
and industrialists at that time, was that after 2005 when a a quota regime because it limits imports from competitors
 Chapter 9 Balance of Payments and Trade Regimes 227

Figure 9.2
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P = Provisional
Source: The data for the graph is taken from Government of Pakistan, Pakistan Economic Survey 2011 /12 Islamabad, 2012
Positive and negative values denote depreciation and appreciation, respectively.

like China and India, and allows at least some Pakistani of Pakistan's surgical goods exports. Social barriers or those
textiles to get through. A quota-free regime meant increased pertaining to child labour or other kinds of restrictions can
competition and only the best and cheapest products would circumvent the no-barriers provision. Political, rather than
compete and sell. There was no guarantee that Pakistan economic or trade-related, factors have come to dominate the
could meet the new standards and one was not in a position new, free trade, world order-see Appendix 9.4. Also see Box
in 2005, before the lifting of quotas, to say for sure that 9.10 for how Pakistan's exports have failed to diversify while
Pakistan's exports would increase; they could also have fallen other countries have shifted to higher value added products.
(also see Appendix 9.3).
There were dozens, if not scores, of studies which looked at
the anticipated impact of the fuller imposition of WTO rules 9.6 SUMMARY AND FURTHER READING
and agreements on Pakistan, and a large majority warned
that globalization and further expansion of the WTO umbrella 9.6.1 Summary
would have a very negative impact on Pakistan's main Pakistan's trade pattern has changed dramatically since
exports. This has clearly not been the case and Pakistan's 194 7. From being a primary goods exporter, Pakistan now
textile exports have expanded, given the constraints and exports primarily manufactured and semi-manufactured
issues mentioned in an earlier section. Imports have certainly commodities. However, its exports are still critically
increased a great deal, including of consumer goods, but dependent on cotton, which contributes around 65 per cent
as we argue above, the main commodities imported into to exports. From about 11 per cent of GDP in 1947, exports
Pakistan, have not been luxury items or consumer goods, but and imports together now amount to around 35 per cent of
industrial raw material and, of course, petroleum products. GDP. Remittances have played an important role in Pakistan's
There has not been much research after 2005 on the impact economy since the late 1970s, and once provided as much as
of globalization and WTO rules on Pakistan's exports, but 10 per cent of GDP; their role has since diminished, albeit is
impressions and evidence suggests that perhaps the impact still considerable and they -now usually account for around
may not have been as devastating as many feared. The 6 per cent of GDP.
world seems to have benefitted from economic globalization, The rupee has depreciated markedly in the last many years,
although there are serious negative consequences, both of a since the exchange rate was Rs. 9.9 to one US dollar. Since
political and economic nature-see Appendix 9.3 and 9.4. it was allowed a managed float, the annual devaluation of
Moreover, it is also clear, that developed countries still have the rupee has been, on average, 8 per cent a year, fluctuating
the power and dominance in a highly unequal world, to between 2 per cent in one year, and as much as 16 or 17 per
impose quota restrictions and construct other barriers which cent in another year. Given the nature of Pakistan's macro-
restrict imports from developing countries. While tariff and economy, its inflation rate, fiscal deficit, and adherence to
quantity restrictions have been somewhat done away with the Structural Adjustment Programme, one can expect a
under the WTO regime, new forms of non-tariff barriers continuous drift in the value of the Pakistani rupee into the
have been imposed. Sanitary and environmental standards future.
have been imposed, as they were some years ago in the case
228 Issues in Pakistan's Economy

Box 9.9 The textiles and clothing sector in Pakistan is an important

Agreement on Textiles and Clothing (ATC) and segment of the economy. It accounts for 8 per cent of GDP
and 30 per cent of the value-added and 40 per cent of the
South Asian Textiles and Garments Exports: A labour force in the manufacturing sector, and over 75 per cent
Case Study of Pakistan of merchandise exports. The rapid expansion of the industry
has.been facilitated by the availability of raw cotton and cheap
Developing countries and, in particular, the South Asian
labour. While the number of spindles doubled from 3,226 to
countries have a comparative advantage in textiles and
8,356 between 1972-73 and 1998-99, the number of looms
clothing. However, their exports of textiles and clothing have
actually fell by half from 29 to 10 over the same period.
been subject to a high degree of protectionist treatment.
Pakistan's textiles and clothing are exported largely to
Developed countries have been following a restrictive trade
the western countries. North America is a major market and
regime of high tariffs and non-tariff barriers in relation to the
accounts for more than 50 per cent of the exports of hosiery,
textiles and clothing industry. The Multi-Fibre Agreement (MFA
towels, and made-ups. Similarly, about 49 per cent of the
allotted quotas to regulate imports of textiles and clothing into
readymade garments are exported to the United States and
developed countries from developing countries. MFA applies
Canada. Next comes Europe in the export of cotton fabrics,
to 80 per cent of the world textile and clothing exports, with
ready-made garments, hosiery, towels and made-ups. Asia
around 40 participants and 100 bilateral restraint agreements.
accounts for 66.36 per cent of the cotton yarn exports.
MFA quotas have thus led to a loss in the export earnings of
The phase-out of MFA quotas under ATC poses a big
developing countries.
challenge of the industry and has critical dimensions for the
MFA was aimed at providing 'temporary' protection to
economy and its export earnings. It requires the country
developed countries' home industries and at providing 'orderly'
to take steps to improve, consolidate and strengthen its
access to developing countries entering the developed country
competitiveness by improving efficiency. Pakistan does have
markets. Moreover, prior to the Uruguay Round, the tariffs on
the traditional advantage in raw cotton availability but has not
textiles and clothing averaged 18 per cent for developed
yet exploited it to the maximum potential. The low level of MFA
countries compared to 6 per cent for other manufactured
quotas being used show that all is not well with the domestic
products. These tariffs also increase with the value-addition
textile sector. Some of the challenges faced by the Pakistani
being 1 per cent on fibres and 20 per cent on clothing. '
textiles and clothing industry are as follows:
As per the WTO Agreement on Textiles and Clothing
(ATC), MFA in textiles and clothing is to be phased out in
• There is a need to improve quality standards of all its textiles
four steps within 10 years starting from 1 January 1995.
from raw cotton to finished products. Efforts have to be
As a part of the implementation of ATC, the developed
made at improving the quality of domestic cotton through
countries will have to eliminate these quotas, even though
greater R&D so as to develop superior varieties of long
it is back-loaded with most of the liberalization to be carried
staple cotton.
out at the end of the period. This leaves room for discretion
• The industry should diversify its base from cotton products
in their phase-out schedules. The Agreement requires that
to synthetics to take into account the consumption pattern
importing countries should include at least one product from
of the major export markets. There is a growing market for
each of the four groups-tops and yarns, fabrics, made-up
manmade fibre and products which should be tapped by
textiles, and clothing-to make the transition more even. The
increasing the production capacity of synthetic blends.
Agreement also has transitional safeguards for unexpected
• The main focus of attention should be value-addition
surges in imports which are not yet integrated into the
instead of intermediate and raw products. This requires a
GATT framework. However, keeping in mind the interests of
strong and modern weaving and processing base with a
developing countries, these safeguards can only be applied
vertical integration of textile units.
selectively and for a maximum of 3 years. ATC also provides
for a reduction of 22 per cent in industrial countries' bound • Efficient utilization of resources as well as 1ncreasing the
productivity and efficiency of the industry.
tariffs. This will reduce the proportion of developed country
imports subjected to peak tariffs from 35 per cent of the pre-
Besides steps taken at the domestic level, intra-regional
Uruguay Round to 28 per cent. This is much lower than the
co-ordination based on specialization and vertical integration
proportional tariff cuts in bound tariffs which are applicable for
among the South Asian countries may help in strengthening
the other industrial products.
Thus, it is clear that implementation of ATC offers great the competitiveness of their exports of textiles and garments
by enabling them to benefit from economies of specialization
potential to developing countries for an increase in their
and scale.
exports of textiles and clothing. However, it also poses a
challenge: With the elimination of quotas, the South Asian
countries will be competing freely with other countries, some
of which might be more competitive. Hence, the South Asian
countries may lose their market share unless adequate steps Source: Research and Information System for the Non-Aligned
are taken to strengthen their competitiveness. In this context, and Other Development Countries, South Asia Development
Pakistan's case study is illustrative. and Cooperation Report 2001/02, New Delhi, 2002, 93.
 Chapter 9 Balance of Payments and Trade Regimes 229

Box 9.10 1980 compared to 9 per cent annual growth in India-certainly

Pakistan's Falling Exports and Rising Exports not a stellar performer in the export field.
As a late comer to the field of manufactured exports, except
of Other Developing Countries
in textiles and clothing, Pakistan faces formidable challenges.
But, there are several grounds of optimism. First, Pakistan's
While Pakistan's exports have stagnated over the years and
market share in the world manufactured goods other than
have been stuck in a singularly textile mode, other countries
textiles and clothing is miniscule. Secondly, though right now
in the region have performed far better. The Fourth Annual
Pakistan is not very competitive in textiles and clothing, the
Report of the Institute of Public Policy, Beaconhouse National
room for productive improvements is immense provided the
University, Lahore, brings this point out clearly.
right investments in modernizing industry and upgrading skills
are made with the help of foreign partners. Pakistan should
Over time Pakistan has steadily lost ground in manufactured
look for help to China as well as countries like South Korea,
exports to all other major developing countries: its share in this
Malaysia, Turkey, and Hong Kong that increasingly face limits
group was 1.4 per cent in 1980 but had fallen to 0.4 per cent
on their textile and clothing exports because of rising wage
by 2008. Even excluding China, Pakistan's share has dropped
costs. Thirdly, proximity to China and India, the two fastest
more than 50 per cent to 0.4 per cent over 1980-2008 (see
growing markets in the world, offer great long-term potential
Table 1). There are three main factors for this relative decline
though right now there are political obstacles in the way of
and missed opportunities. First, Pakistan remains heavily
expanding trade with India, and Pakistan actually has a large
dependent on relatively slow growing textile exports-it has
trade deficit with China. Finally, the potential of agricultural
also made less headway in faster expanding garment exports.
exports has not even begun to be explored seriously.
Secondly, since 2005, it has lost market share in both textiles
and clothing not only to China but also to emerging important
Table 1
exporters like India, Turkey, and Vietnam. (see Table 2) Third,
World manufactured exports and major developing
its record in fast expanding other manufactured exports
countries' market share
whether sports goods, surgical equipment, automotive parts,
or jewellery has been dismal and its presence in international US$ Billion Market Share (%)
markets is negligible. Pakistan missed out on purely non-
1980 2008 1980 2005 2008
cotton textiles in the 60s due to its restrictions and high import
China 8.7 1329.6 0.80 9.6 12.7
duties on inputs for mixed or synthetic textiles. It missed on
Hong Kong 18.0 348.0 1.60 3.8 3.3
electronics in the 60s and 70s and information technology in
the 1990s. Lack of structural changes has been responsible for South Korea 15.7 365.0 1.43 3.5 3.5
slow growth as well as low value added in exports. Singapore 8.3 236.9 0.76 2.5 2.3
There is some satisfaction that textile and clothing exports at Taiwan 17.4 222.3 1.59 2.4 2.1
the annual rate of $12.5 billion in July-December 201 Oshowed Mexico 4.4 212.3 0.40 2.3 2.0
an improvement of over 25 per cent over the corresponding Malaysia 2.4 129.9 0.22 1.4 1.2
period last year. But this represents largely a recovery from Thailand 1.6 127.2 0.15 1.2 1.2
the low level in 2009. More importantly, a significant part of the India 5.0 112.2 0.46 0.96 1.07
improvement is due to the much higher prices of cotton and
Brazil 7.5 86.4 0.69 0.85 0.83
cotton goods in recent months.
Turkey 0.8 103.8 0.07 0.82 0.99
How far we have fallen in the export field, compared to
Indonesia 0.5 52.7 0.05 0.54 0.50
some of our peers and competitors, is also clear from Table 3
on the trend in exports of goods and services and the share of Philipines 2.1 40.5 0.19 0.50 0.39
exports in GDP. Just three decades ago, Pakistan had greater Veitnam 32.7 0.22 0.31
export orientation than any of the countries in the table. Now, Pakistan 1.3 14.9 0.12 0.18 0.14
even the two continental economies, India and China, have Bangladesh 0.5 13.5 0.05 0.12 0.13
a much larger export sector than Pakistan. Turkey, an inward Total for above 94.1 3427.8 7.82 30.88 32.78
looking economy in 1980, has transformed itself. countries
Vietnam a new comer to the export field is now far ahead of World Exports 1,092.4 10458.1 100.0 100.0 100.0
Pakistan in just a couple of decades. In real terms, adjusted
for rise in international prices, Pakistan's exports are estimated Source: WTO Statistical Tables
Note: Figures for Singapore, Bangladesh and Vietnam
to have grown by an average of 4.5 per cent per annum since
relate to 2005
230 Issues in Pakistan's Economy

-··· ··- ·-· -...- . -- •LX-•·-• ·-- .---- -··, -· ~ ~ - -~·~· ___,_

Table 2 World manufactured exports and major developing

Textiles and clothing exports of major developing countries' market share
countries
1980 2008 1980 2005 2008
Textile Clothing % Change
China 8.7 1,329.6 0.80 9.6 12.7
Exports Exports in Exports
Hong Kong 18 348.0 1.60 3.8 3.3
2005 2008 2005 2008 Textile Clothing
South Korea 15.7 365.0 1.43 3.5 3.5
China 41.1 65.3 74.2 120.0 59.0 61.8
Singapore 8.3 236.9 0.76 2.5 2.3
Hong Kong 13.8 12.3 27.3 27.9 -11.2 2.3 Taiwan 17.4 222.3 1.59 2.4 2.1
South Korea 10.4 10.4 2.6 1.7 -0.2 -32.5 Mexico 4.4 212.3 0.40 2.3 2.0
Maxico 2.1 2.0 7.3 4.9 -6.8 -32.8 Malaysia 2.4 129.9 0.22 1.4 1.2
Malaysia 1.4 1.5 2.5 3.6 14.2 46.2 Thailand 1.6 127.2 0.15 1.2 1.2
Thailand 2.8 3.2 4.1 4.2 16.2 3.8 India 5.0 112.2 0.46 0.96 1.07
India 8.3 10.3 8.6 10.9 23.9 26.3 Brazil 7.5 86.4 0.69 0.85 0.83
Turkey 7.1 9.4 11.8 13.6 32.8 14.9 Turkey 0.8 103.8 0.07 0.82 0.99
Indonesia 0.5 52.7 0.05 0.54 0.50
Indonesia 3.4 3.7 5.0 6.3 9.6 26.7
Philippines 2.1 40.5 0.19 0.5 0.39
Philippines 0.3 0.2 2.3 2.0 -27.9 -13.5
Vietnam 32.7 0.22 0.31
Vietnam 0.7 1.6 4.7 9.0 126.1 91.6
Pakistan 1.3 14.9 0.12 0.18 0.14
Pakistan 7.1 7.2 3.6 3.9 1.4 8.4
Bangladesh 0.5 13.5 0.05 0.12 0.13
Bangladesh 0.7 1.1 6.9 10.9 54.6 58.5 Total for above 94.1 3427.8 7.82 30.88 32.78
Total for Above 99.0 128.1 160.8 218.9 29.4 36.2 countries
Countries World Exports 1,092.4 10,458.1 100 100 100.00
World Exports 204.3 250.2 277.1 361.9 22.4 30.6
Note: Figures for Singapore, Bangladesh, and Vietnam
Source: WTO Statistical Tables relate to 2005.
Note: Figures for Singapore, Bangladesh and Vietnam
relate to 2005.
Textiles and clothing exports of major developing
countries
Table 3
Exports of goods and services ($ billions) Textiles Clothing % change in
1980 Country Exports Exports Exports
2000 2008 2009
2005 2008 2005 2008 Textiles Clothing
Bangladesh 1.0 7.2 17.5 17.0
(5.0) (14.0) (20.0) (19.0) China 41.1 65.3 74.2 120.0 59.0 61.8
Hong Kong 13.8 12.3 27.3 27.9 -11.2 2.3
China 279.6 1581.7 1333.3
South Korea 10.4 10.4 2.6 1.7 -0.2 -32.5
(11.0) (23.0) (35.0) (27.0)
Mexico 2.1 2.0 7.3 4.9 -6.8 -32.8
India 11.3 59.9 302.8 258.8 Malaysia 1.4 1.5 2.5 3.6 14.2 46.2
(6.0) (13.0) (24.0) (21.0)
Thailand 2.8 3.2 4.1 4.2 16.2 3.8
Pakistan 3.2 10.1 25.5 22.2 India 8.3 10.3 8.6 10.9 23.9 26.3
(12.0) (13.0) (13.0) (13.0) Turkey 7.1 9.4 11.8 13.6 32.8 14.9
Turkey 3.6 50.3 175.8 142.8 Indonesia 3.4 3.7 5.0 6.3 9.6 26.7
(5.0) (20.0) (24.0) (23.0) Philippines 0.3 0.2 2.3 2.0 -27.9 -13.5
Vietnam 17.1 69.7 62.9 Vietnam 0.7 1.6 4.7 9.0 126.1 91.6
(55.0) (78.0) (68.0) Pakistan 7.1 7.2 3.6 3.9 1.4 8.4
Bangladesh 0.7 1.1 6.9 10.9 54.6 58.5
Figures in parenthesis give share in GDP
Total for above 99 128.1 160.8 218.9 29.4 36.2
Source: World Bank Data
countries
World exports 204.3 250.2 277.1 361.9 22.4 30.6

Note: Figures for Singapore, Bangladesh, and Vietnam

relate to.2005.
Source.: The Institute of Public Policy, The State of the
Economy: Devolution in Pakistan, Fourth Annual
Report 2011 (Lahore: Institute of Public Policy,
Beaconhouse National University, 2011), 28-30.
l
1:_1
 Chapter 9 Balance of Payments and Trade Regimes 231

Just as the industrial policy of the early years was maligned Export-led growth is considered to be a key ingredient in
for causing inefficiencies in the economy, so too was trade economic development as the much-cited East Asian miracle
policy. The same reasons were given for distortions being suggests. However, the important factor overlooked by
caused in the structure of the economy by trade policy, as Pakistan's policymakers is that the supply-side incentives-
were alleged to have resulted from industrial policy. However, prices, inputs, tax incentives, etc.-do not help exports as
this chapter, reviewing the work of some scholars, has argued much as removing structural weaknesses. Quality control,
that many of the so called distortions had export-enhancing the provision of infrastructure like communications and
impacts, and that these measures were productive. The Bonus energy, and direct incentives to exporters are all necessary
Voucher Scheme of the 1960s, in particular, was singled to ensure that exports increase to an extent where they
out as a mechanism that caused serious distortions in the contribute extensively to economic development. To do that,
economy. However, as this chapter has shown, the scheme Pakistan requires an export bias in policy, a fact that has been
was conducive to promoting industrialization and exports. ignored for most years.
Pakistan's trade pattern and trade policy have continuously
been moving towards fewer and fewer controls, lower tariffs, 9.6.2 Further Reading
and more openness. Non-tariff barriers have been replaced
by tariffs, and tariff rates have come tumbling down. Since Since industrialization and trade are so closely linked, many
1988, as per the agreement with the IMF and the World of the references given in Chapters 6-8 should also be studied
Bank under the Structural Adjustment Programme, a 'liberal' to understand how trade influenced industrialization in
import policy has been pursued, with lower tariff rates and Pakistan. On Pakistan's trade: Adams, Adams and Sabiha
fewer tariff slabs, along with a persistent 'readjustment' of Iqbal, Export Politics and Economic Development in Pakistan
the Pakistani rupee. Despite the substantial devaluation that (Lahore: Vanguard, 1987); see also Viqar Ahmed and Rashid
has taken place, Pakistan's exports have not responded as one Amjad's The Management of Pakistan's Economy, 1947-82
would have hoped. (Karachi: Oxford University Press, 1984). Some references in
the Notes will also be useful for additional reading on trade.

Appendix 9.1
But like all agreements, the WTO Agreement has its
The World Trade Organization loopholes and provisos, its qualifications and conditions and
The following is an edited extract from a report by the Export its Schedule of Commitment which can help protect infant
Promotion Bureau in 1995. industries and restrict market access.
So, did the Marrakesh Agreement achieve nothing more
lt all began in the Latin American resort town of Punta del than a 'new and improved' label? The answer depends on how
Este, Uruguay. And it seemingly ended in Marrakesh in April the world implements the accord.
1994. Seemingly, because now is the real beginning of the
Objectives of the WTO Agreement
outcome of the talks that commenced in Uruguay in 1986.
On 1 January 1995, a new organization came into Recognizing that their relations in the field of trade and
existence-the World Trade Organization (WTO). This new economic endeavour should be conducted with a view
organization replaces the General Agreement on Tariffs to raising standards of living, ensuring full employment
and Trade (GATT) and will supervise and oversee the most and a large and steadily growing volume of real income
ambitious global trade accord ever. and effective demand, and expanding the production of
What is this GATT accord and how is this likely to affect and trade in goods and services, while allowing for the
Pakistan's exports? optimal use of the world's resources in accordance with
The Uruguay Round of trade talks ended with the signing the objective of sustainable development, seeking both
of an accord that is about 500 pages long which contains to protect and preserve the environment and to enhance
resolutions that affect a wide variety of subjects both directly the means for doing so in a manner consistent with
and indirectly. their respective needs and concerns at different levels of
The signing of this accord could allow Citibank to open economic development,
more branches in Pakistan. lt could result in the closing Recognizing further that there is need for positive
up of thousands of factories across the country because of efforts designed to ensure that developing countries, and
accusations of environmental pollution. lt could reverse our especially the least developed among them, secure a share
efforts to make Pakistanis computer literate. lt could threaten in the growth in international trade commensurate with
our carpet exports because of social dumping. lt could rake the needs of their economic development,
in profits for our garment and footwear exporters. The list Being desirous of contributing to these objectives
goes on. by entering into reciprocal and mutually advantageous
232 Issues in Pakistan's Economy

arrangements directed to the substantia 1 reduction of additional branch, it is seeking market access. lf the procedure
tariffs and other barriers to trade and to the elimination of for licensing of new branches is less onerous for domestic
discriminatory treatment in international trade relations.... banks than it is for foreign banks, then the country can be
accused of discriminatory restrictions.
A group of 117 countries agreed on 15 April 1994 to set up
a World Trade Organization to implement, administer, operate WTO and tariff reductions
and further the objectives of the multilateral trade accord.
The results of the market access negotiations of the Uruguay
The basis of the WTO Agreement is the premise that free Round of talks has been the agreement to reduce tariff rates
trade is good for all. By lowering tariffs and quotas the playing
on non-agricultural goods by about 40°/o. These rates have
field will be levelled and everyone will have the opportunity to
been annexed to the agreement in the forrn of national
compete in a free world market.
schedules of concessions.
Studies have estimated that by removing restrictions, world
The tariff reduction programme agreed upon is to be
income is likely to grow by over $200 billion a year by the
implemented in five equal rate reductions unless otherwise
year 2002. This growth will be shared by all countries, albeit
specified by a country. The first such reduction has come
disproportionately-the developing countries are likely to
into effect on 1 January 1995 and the final rate is to become
experience slower growth in their income.
effective within a period of four years.
Salient features of WTO Agreement Pakistan has been very liberal in its tariff reduction and
market access programme and has already announced the
The GATT accord is expected to reduce tariffs around the
reduction in tariffs on several important product categories.
world by an average of about 400/o. This will make consumers
On 1 January 1995 Pakistan slashed by 500/o the tariff on
happy because prices of imported goods will decrease. lt will
an item of interest to both the US and Europe-cotton and
make exporters glad because reduced prices will stimulate
silk fabrics. Our textile mills will now have to compete with
increased demand for their exports. However, developing
European and US fabrics under protectionist fences that have
country industrialists with large excess capacity or inefficient
been lowered from about 700/o (plus 150/o sales tax) to 350/o
plant and management who were previously protected by
(plus sales tax).
prohibitive import duties will have to face price as well as
The government has also committed itself to reducing
quality competition.
average tariffs from the current 70°/o to 450/o in 1995-96
According to the WTO agreement, developed nations which
and 3 50/o in 1996-97. Used to working under a regime of
were restricting the import of textiles and clothing have to
import restrictions and licensing, Pakistan's industrial sector
phase out the Multi-Fibre Arrangement (MFA)-quantitative
has numerous inefficient and obsolete factories. The tariff
restrictions on the import of fibre, textiles, and apparel.
reductions that will come into effect will result in a shake out
Quotas are to be totally lifted over a staggered period of ten
and inefficient producers will have to shape up or close down.
years. This will mean that Pakistani apparel exporters can sell
as many T-shirts in America as US buyers want. However, Tariff reductions and government revenue
restrictions on importing T-shirts from lndia, Bangladesh, and
Pakistan relies heavily on indirect taxation for government
Hong Kong will also be removed and Pakistani shirt exporters
revenue. lmport duties and sales tax on imports account for
will have to be competitively priced.
over 400/o of total government revenue and a reduction in
This agreement has also introduced new patent and
tariffs is expected to cut heavily into this source of funds. This
copyright protection laws for intellectual property. We will
may exacerbate the budget deficit.
now have to pay top dollars for computer software. Pirated
However, the government is banking on the success of its
software will be confiscated and destroyed. The computer
taxation reforms to bridge the gap. First, reduction in import
revolution that is sweeping across developing countries may
tariffs compounded with restrictions and monitoring of
come to a grinding halt-unless software manufacturers in the
Afghan Transit Trade may result in a reduction in smuggling.
West adopt LDC user-friendly pricing policies.
More imports will come in through the legal channel thereby
While pirate shops will have to go underground, authorized
generating import duty income for the government. Secondly,
dealers of computer software and vendors of audio and
introduction of VAT-a broad based General Sales Tax-is likely
video cassettes and CDs will experience a massive growth in
their sales. The recent introduction of Time-Warner videos
to increase revenues. And, finally, greater sectoral coverage of t
income tax through the inclusion of agricultural income in the
in Pakistan shows the tremendous market opportunities
tax net is expected to yield sufficient revenues to bring down
available. Even though Time-Warner video rental rates are over
the budget deficit to 30/o of GDP by 1996-97. lf the political
1000/o higher than those of pirated videos, the introduction
will to enforce all aspects of the tax reforrns programme is
of a quality product has been well accepted in the market.
lacking, we may end up with lower import duty collections
Appropriately priced computer software can also take off.
and a yawning deficit.
The WTO agreement also addresses the problems of trade in
services-including banking and insurance. A country cannot The WTO Agreement and agriculture
indefinitely limit market access to foreign firms in the service
The Uruguay Round of talks have deliberated on various
sector based on quantitative restrictions on the number of
aspects of the agricultural sector. This sector is heavily
service suppliers or the total value of service transactions, or
protected not only in developing countries but also in
the number of service operations. For example, if a foreign
developed countries. Tariffs on agricultural products are to be
bank which already exists in a country applies to open an
 Chapter 9 Balance of Payments and Trade Regimes 233

reduced by 360/o in developed countries, 240/o in developing An important issue related to agriculture is the protection
countries. This reduction is to be undertaken over a period given to intellectual property rights insofar as they apply to
of 6 years for the developed countries but over 10 years for patents for plant varieties and 'breeder's rights'. This could
developing nations. Least developed countries are not required mean that farmers would have to pay royalties for growing
to reduce their tariffs. crops of a particular type even if they used their own seeds.
The Japanese rice growers have a powerful lobby that Such royalty payments could affect the profitability of farmers
almost managed to disrupt the Uruguay accords by preventing in developing countries. Indigenous research into plant
the opening up of the Japanese rice market to foreign varieties-especially rice and cotton in Pakistan-should be
competition. However, they later agreed to minimal market speeded up to avoid heayy royalty payments.
access-between 30/o to 80/o of domestic consumption over a
ten-year period. The WTO Agreement and textile exports
European Community farmers also work under heayy farm World trade in textiles and clothing is heavily restricted and
I subsidies. Their subsidized output is sold in the domestic subjected to quantitative restrictions. The United States and
market as well as to foreign buyers. Reduction of these Canada as well as most of Western Europe have shuttered out
t farm subsidies may lead to higher international food prices
as subsidizers reduce the surplus that they dump overseas.
suppliers of clothing and textiles from Asia, Latin America, and
several other regions to protect their own overpaid workers.
Developing countries that import such food grains will suffer. One of the major achievements of the Uruguay Round of
Domestic farm support policies that have a limited impact trade talks is the agreement to phase out the Multi-Fibre
on trade are excluded from reduction commitments. Such Arrangement and put an end to quotas on textiles and
policies include government support for research, disease clothing. The phasing out of quotas is scheduled to take place
control, food security, and environmental programmes. Other over a ten-year period in three phases. The first phase began
farm support policies which are not exempted will have to on 1 January 1995 when the quota imposing countries lifted
be reduced by 200/o by developed countries and 13.30/o by quotas on several items allowing the free import of a number
developing countries (excluding the least developed). of textile and clothing products from Pakistan.
Direct export subsidies on farm products have to be reduced According to the agreement, 160/o of total 1990 imports of
and the total quantity of subsidized exports also has to be textiles were integrated into the GATT-freed from quotas-on
limited. However, subsidies to reduce the cost of marketing 1 January 1995. These products are from a specific list in
exports of agricultural exports or inland transport and export the agreement and have to include items from each of the
freight charges have not been subjected to reduction. This following categories: fibres and yarn, fabrics, textile madeups,
is of significance to Pakistan as we are currently providing a and clothing.
250/o freight subsidy to encourage the export of fresh fruits On 1 January 1998, in the second phase, an additional
and vegetables. 170/o of 1990 imports would be integrated followed by
Circumvention of the agreement through food aid donations a further 180/o of 1990 imports on 1 January 2002. All
and export credits is to be controlled through certain remaining products would be integrated on 1 January 2005.
provisions in the agreement. Between each phase, the level of quotas imposed on the
As protectionist farm policies supported by strong products that remain under restraint is to be reduced by a
political lobbying are expected to threaten the accord, the speedy enhancement of quota limits. According to the MFA,
WTO agreement includes an agreement on Sanitary and annual growth levels accepted for most categories are about
Phytosanitary Measures. This gives governments the right to 5-70/o. These are to be increased by 160/o in Phase l, by 250/o
control food safety and plant protection but has to be limited during Phase 11 and by 270/o in Phase 111. This means that a
to the extent necessary to protect human, animal, or plant life. product that remains under quotas for the entire duration
Japan's recent removal of the ban on the import of of the ten-year phasing out period will have its quota level
Washington apples from the United States is an example of enhanced by 5.80/o every year between 1995-98 from the
how this policy could open up markets. What is important is existing level of 50/o. ln Phase 11 (1998-2002) the annual
that the countries which have signed up should apply these growth level will be enhanced to 7.250/o and in Phase 111
rules across the board. Succumbing to US pressure, Japan (2002-2005) this will increase to 9.20/o.
could selectively open its market for agricultural imports but During the initial three years there will be a marginal
phytosanitary regulations could be enforced to ward off rice opening up of the textile and clothing sector. Between
imports from Pakistan. 1998-2002 the level of integration will be only 330/o. It is
The EC has recently stiffened its import regulations for only after the seventh year of the accord begins in 2002 that
fruit and vegetables, introducing packaging as well as quality 510/o of the textile products under quotas will be freed. The
standards. Pesticides and fungicides imported from developed developed countries have, therefore, delayed the opening up
countries are used in the production of fruit and vegetables in of their textile sector to unhindered foreign competition but
developing countries and at times residues of such products they have negotiated with developing countries like Pakistan
constitute grounds for barring entry. With good intentions, and India to lower tariff levels on imported fabrics and textile
the WTO agreement can help resolve these problems. But products. ln fact, Pakistan has already agreed to allow the
if nations so desire, they can wield the quality card for import of foreign fabrics and children's garments at a nominal
discriminating against foreign imports. tariff level of 350/o. This lowering of the tariff level took effect
on 1 January 1995.
234 Issues in Pakistan's Economy

Impact of the WTO Agreement on Pakistan's textile exporters and we should be able to increase our exports of
exports such products.
The current cotton crisis has pushed up the cost of raw
Cotton yarn
material-yam-for made-ups manufacturers and they are
Pakistan's most significant textile export is cotton yam which
experiencing difficulties in export at their traditional low
accounts for about a third of all textile exports. Selling yam prices. What is required is that exporters of made-ups should
has never posed a major problem and greater market access
invest in upgrading their marketing skills and cater to the
for our yam will not lead to any significant trade gains. lt is
higher level of the market.
the availability of cotton which will determine growth in this
Providing institutional linen in bulk-plain white towels and
sector. lf cotton is available in abundant quantity, our textile
bedlinen-may generate export sales but dyed, embroidered.
spinners can convert it into yam for both domestic sale and
and appliqued towels fetch prices that are several times
export.
greater. Admittedly, they require more marketing efforts but
The declining cotton crop may lead to increased usage of
they are the long term saviours. A shipment of cheap towels
man-made fibres and poly-cotton yam. Spinning mills have
from China can immediately displace exports from Pakistan
to be flexible enough to make both types of yam. Besides,
but a well-designed and packaged product from Pakistan will
finer counts of yam will be spun when cotton is not readily
.not be easily dislodged by foreign competition.
available. Both these point towards quality upgradation as a
means of increasing export earnings. Garments and knitwear
Increased exports of textiles and apparel in a quota-free The clothing sector possesses the biggest promise for

l
world will increase the demand for cotton yarn and push delivering Pakistan out of the under $10 billion exporters
up prices which have already climbed up from an average of dub. Our knitted T-shirts are in great demand in the US and
about $1.5 per kg to $2.75 per kg within the last two years. Europe and quotas on the export of T-shirts have been stifling
ln 1992-93 and in 1991-92 we doubled our textile growth in this sector. Once the quotas are removed we should
spinning machinery imports each successive year and we now experience a tremendous growth in the demand for a large
have sufficient capacity in our spinning sector to meet our number of our clothing goods.
domestic needs and export over $2 billion worth of yam in However, it is unclear as to when quotas on these items will
1996-97 (from the current $1.2bn) provided we have. a good be reduced. lt seems most likely that quotas on major clothing
cotton crop. exports will only be lifted in 2005. This will mean that there
The WTO accord may help keep yam prices up but removal will be no significant change in our exports of garments and
of supply constraints is important to keep our yam exports knitwear for the next ten years.
going. ln six years our yam exports jumped up in value from As the phasing out of the MFA involves the lifting of
$260 million in 1984-85 to $1, 183 million in 1990-91. They restrictions of different categories during different periods,
have only remained stagnant during the last few years due to it is likely that Pakistan's exports of, for example, trousers,
lack of cotton. · will become quota free while export of trousers from lndia
and Hong Kong will continue to remain under quotas. These
Cotton fabrics and synthetic textiles
opportunities have to be seized and efforts have to be made
Some cotton fabrics and synthetic fabrics are subjected to
to get our foot in the door as soon as possible.
quota restrictions and it is expected that as soon as quotas
There will be continued resistance from the West to our
are lifted, their exports will grow.
clothing exports as is evident from the following statement
About 300/o of our cotton fabrics and 500/o of our synthetic
made by the President of the US Amalgamated Clothing and
textiles go to developed countries and the WTO accord may
Textile Workers Union:
lead to an initial spurt in exports to these countries. However,
increased competition from the Far East may reduce US and
[By signing] the accord without toughening its labour
European apparel and textile made-up manufacturing and
sta_ndards, Congress and the administration are putting
the fabrics being exported by Pakistan may find a bigger and
millions of US jobs at risk by linking the American
growing market in the Far East or Latin America rather than
economy to those of countries that lag dramatically behind
in Europe or North America.
America in wages and work standards.
Quality improvements in the processing of fabrics will
[Supporting this agreement is to] rob children and
be needed to meet competition from the Far East. Colour
young adults of their youth. The [WTO] should include
fast printing and dyeing as well as a quantum leap in
mechanisms to enforce internationally recognized
the designing of motifs and patterns will be essential for
workers' rights, including outlawing child labour, and set
upgrading the quality of our fabric exports. Flawless weaving
environmental standards.
and strict quality control will also ensure growth of this sector.

Textile made-ups lf such 'social dumping' or 'environmental dumping' objections

Bedsheets, towels, and other textile made-ups supplied by are given weightage, the West will continue to have a ploy for
Pakistan are among the cheapest in the world-barring China. limiting our dothing exports.
Exports of most of these items are affected by quotas. The As it is, the first phase of abolishing quotas has shown that
WTO agreement will provide greater market access to our the West is planning to take the harder decisions later. By only
abolishing quotas on items such as 'umbrellas' and 'fabrics for
 Chapter 9 Balance of Payments and Trade Regimes 235

making parachutes', it is obvious that apparel exporters need industrial purposes (making sake and rice noodles). 'Quality
not celebrate just yet. considerations' prevented the import of our rice.
Long term prospects for growth in Pakistan's garment and The opening up of the rice market in Japan is unlikely to
knitwear exports, however, are quite positive. ln the last five create any major new opportunities for us.
years, garment exports have grown from $394 million to $613 We should be watchful of conditions on 'quality' safeguards
million w.hile hosiery (knitwear) exports have grown from that will need to be taken on the export of fruits and
$274 million to $509 million. vegetables. Traces of pesticides and chemicals-that were sold
The textile export sector-aided by the Export Promotion to Pakistan by the West-are posing as hurdles in our export
Bureau-is making investments in improving fashion designing of produce.
and upgrading skills in manufacturing by setting up a dozen We have to educate our farmers on the proper usage
textile training institutes and a fashion design school. By of chemicals and a back-to-basics approach is ideal for
the time quotas on the export of apparel are lifted, these green vegetable exports. Proper packaging and temperature
institutes should have turned out enough trained professionals controls are also needed to increase our exports of fruits and
to meet the quality requirements of an unfettered world of vegetables.
competition. Fish and seafood exports are also affected by quality
standards. Untreated sewage flows into the sea and is
Leather and leather goods exports polluting our marine environment. lndustrial effluents are
After textiles, leather is the most important sector of Pakistan's also being dumped untreated into the sea. These, along with
exports. Every year, we have been supplying over 15 million sq. overfishing, have affected our fish catch. lndiscriminate use
metres of leather to the world, of which 3 million sq. metres of fine mesh nets and fishing during the breeding season is
goes to ltaly alone-ltaly's famous Gucci shoes may be made reducing our fish population.
of Pakistani leather! These problems need to be addressed if our fish exports
During the last ten years we have also developed our leather are to grow. But what is more important is the quality
garments industry which is now generating exports of $376 upgradation that we have to undertake to ensure that we are
million. Our footwear industry is, however, still in its infancy not subjected to restrictive trade practices.
and is expected to take off in the next few years. ln early 1994, French fishermen protested against the
The entire leather group today contributes about 4600 cheap import of fish from abroad by destroying containers
million in export earnings. With some marketing and training of imported fish. Within weeks of this incident, the French
efforts leather garments exports can grow substantially. authorities asked the Pakistani government to supply them
Footwear exports can also grow dramatically if import with a list of exporters of seafood whose fishing and
regulations for raw material used in the footwear industry are packaging practices conform to the health and hygiene
relaxed. The leather industry has the potential to become a requirements of the EC.
$2 billion export industry within five years if we continue to An attempt was apparently made to bow down to domestic
upgrade skills and also ensure adequate supplies of hides and pressure by using the subterfuge of quality.
skins by tapping the Central Asian markets. Our seafood exporters generally work in extremely
Central Asia presents a very large export market for our unhygienic conditions. They have to upgrade their facilities to
leather products and is currently catered for by 'tourist- conform to internationally acceptable standa_rds as the sword
businessmen'. Streamlining the financial and banking of quality will be used more and more aggressively in the new,
arrangements between the region and Pakistan will help liberated world of trade.
boost exports there.
One major problem that looms large for the leather sector is WTO and ISO 9000
the environmental rules that infiltrate into the WTO. The WTO When quotas on our textile exports are removed, the world
agreement incorporates an Agreement on Technical Barriers to will have another instrument to restrict our exports. This is
Trade which covers processing and production methods related the 1S0 9000 rule, 1S0 9000 is a new quality standard that
to the characteristics of the product itself. lf the leather that is is being espoused by the world to foster good manufacturing
being exported by Pakistan is being manufactured in tanneries practices and quality safeguards in all processes both in the
that spew untreated effluent into the environment, countries manufacturing and service sectors.
can restrict our leather exports. ln Pakistan one company has so far been certified to
The lea_ther industry of Pakistan has taken cognizance of be conforming to 1S0 9000 standard-AEG. Unless other
this and is already undertaking efforts to minimize ecological manufacturers and exporters join the bandwagon and begin
damage. standardization and quality controls, Pakistan's exports will
perpetually remain under the ominous threat of quality
Food exports-rice, fruit and vegetables, and seafood sanctions.
Last year, when the Japanese government opened up its
rice market due to a bad rice crop it was very selective in
its policy. Pakistan was unable to get a share of its market. Source: The Export Promotion Bureau, Uruguay Round of Trade
Although we do not produce the glutinous rice that is eaten Talks: lmpact on Pakistan's Exports, Export Promotion Bureau,
by the Japanese, we do produce rice which can be used for Karachi, 1995.
236 Issues in Pakistan's Economy

Appendix 9.2
of September, the spot buying rate of the rupee with respect
Devaluation: Arguments For and to the dollar was 31.55. The Governor of the State Bank, for
Against his part, has called this drop a 'corrective adjustment' and not
a devaluation.
The following three articles, two written a few days prior to the
Bankers and currency analysts, however, are forecasting
28 October 1995 devaluation, one immediately following the 12
a substantial devaluation before the end of the year. They
September 1996 devaluation, examine the arguments for and
predict that the December rupee-dollar parity will be 32
against devaluation in Pakistan.
rupees to the dollar at the very minimum, but will most likely
The devaluation dilemma be closer to the 33 rupee mark. One analyst believes that
the 'most real value for the rupee before the year is out' is a
Business and banking circles in Karachi are abuzz these days
massive 35 rupees to the dollar. Another view, that of a senior
with the prospects of an imminent devaluation. Exporters and
banker in a leading US bank, is that the rupee will depreciate
importers, understandably alert, are hedging their bets as they
by 10-15 per cent by early November. This means that his
believe that the Government of Pakistan is about to devalue
bank is advising its clients that the dollar will be worth 36.2
the rupee substantially. Leading currency analysts in the city,
rupees in a few weeks, well before the end of the year.
for their part, are also predicting a massive devaluation of the
Most analysts give four reasons for the impending
rupee against the US dollar before the end of the year.
devaluation, three of which relate to what are called
These devaluation rumours have been sweeping the market
'fundamentals'. They believe that there is a need for
for many weeks and have intensified of late, resulting in a
devaluation because of the continued widening of the trade
near panic buying of dollars. At the same time, importers have
gap, the fall in foreign exchange reserves and mounting
stepped up business considerably in a bid to capitalize on the
inflationary pressures. The fourth reason is said to be the
higher existing exchange rate before imports become more
recent adjustment in the lndian rupee. Not all of these claims
expensive. Even the federal commerce minister, Chaudhry
are valid.
Ahmed Mukhtar, joined the fray a few days ago, revealing
The trade and current account deficits, for instance, have
that the government intends to devalue the rupee by three per
both been falling over the last few years, not widening. The
cent by the end of the year. ln all this ruckus, the only quarter
trade deficit in the last financial year 1994-95 as a percentage
which has consistently taken a different stance is, in fact, the
of GDP was the lowest since 1980. The current account deficit
very institution that is supposed to announce changes in the
(as a percentage of GDP) for the last year, meanwhile, was
value of the rupee, the State Bank of Pakistan.
the lowest since 1987 with the exception of 1991-92. The
State Bank Governor Yaqub has repeatedly and strongly
trend for the two deficits, which are very closely related to the
denied all the rumours and speculation about devaluation,
exchange rate, has, therefore, been downward. On the other
massive or otherwise. With statements ranging from 'no
hand, foreign exchange reserves have been rising consistently
devaluation in the offing' and reports that he has 'ruled out
since 1990, and at the end of the last financial year stood
devaluation', to the stronger 'dismissal' of the commerce
at 2. 7 4 billion dollars, the highest level ever. On these two
minister's statement, Governor Yaqub has consistently clung
counts, which reveal important trends related to the exchange
to his claim that devaluation will not take place. Furthermore,
rate, currency analysts have got the direction of the movement
he has warned those 'gambling' on a probable devaluation of
wrong.
the rupee to do so 'at their own risk', in the process reminding
lnflation is the only fundamental on which the analysts are
them of a similar warning issued by him when the government
right, but for the wrong reasons. lnflation has been on the
decided to make the rupee convertible in June 1994.
rise and has affected what is known as the real exchange rate,
At the time, currency analysts and market players were, as
which compares the inflation rate in exporting and importing
is the case now, expecting a massive downward movement
countries. l-ligh inflation in one trading country vis-a-vis the
in the rupee and had consequently indulged in 'a pre-1994
other implies a deteriorating real exchange rate, and hence
budget buying spree to make windfall profits'. ln the event,
the need to devalue the nominal exchange rate to make our
however, the rupee depreciated and adjusted by only 9.3 per
goods more competitive. lt is true that Pakistan's inflation rate
cent after the partial convertibility on 1 July 1994. But despite
is higher than that of its trading partners, but devaluation on
the claims and warnings by the governor that devaluation is
these grounds.would only add fuel to the fire. Devaluation for
nowhere in sight, the fact remains that the rupee has seen as
Pakistan would prove to be inflationary and further worsen an
many as nine downward adjustments since the budget was
already explosive price situation.
announced on 14 June.
The main reason extended in favour of devaluation is that
The spot buying rate of the rupee was pegged to the US
it will make exports more competitive-that is, cheaper-and
dollar at 30.97 prior to the budget. The first post-budget
thereby increase the volume of exports and foreign exchange
downward movement occurred on 28 June, when it lost four
earnings. l-lowever, even at a theoretical level this is a
paisas and settled at 31.01 rupees. ln the 14 weeks from
questionable proposition. Firstly, exports may ryot be price
the mid-June budget to the end of September, ·the nine
sensitive and they may respond to non-price factors; as such,
downward adjustments have resulted in a 58 paisa, or 1.87
lowering the price of exports may not affect volume and
per cent, depreciation in the value of the rupee. At the end
 Chapter 9 Balance of Payments and Trade Regimes 237

lead to an increase in demand. This very phenomenon was At the moment the government's most immediate task is to
observed in Pakistan after Moeen Qureshi's devaluation two deal with rising inflation, which was 14.8 per cent in August
years ago. Often, a J-curve effect is seen, where the balance on a year-on-year basis. Devaluation at this point will only fuel
of trade-the value of exports minus the value of imports- inflation without necessarily improving the balance of trade
first deteriorates before any improvement is seen. This often position. Exports showed a healthy trend last year growing
produces the knee-jerk reaction of further devaluation and by 15.7 per cent with a total value of 7.8 billion dollars. The
only adds to existing problems. target for the current fiscal year 1995-96 is 9.2 billion dollars,
Also, even if exports do indeed increase, the price of imports and if the cotton crop is good, as is very probable, one can
will also rise at the same time, and under numerous conditions expect an increase in exports. The stumbling block for high
the effect of devaluation may substantially worsen the balance exports is not the rupee-dollar parity rate, but the anarchic
of trade and negate the entire exercise. Furthermore, after and devastating political situation in Karachi. All attempts
the utter devastation of the Mexican economy following a at improving the economy and expanding exports must be
bungled devaluation nine months ago, foreign investors have predicated on finding a quick and just solution to the politics
become more cautious about such interventions in emerging of Karachi.
markets, and local governments are aware of these concerns. To this end, the business community should be pressurizing
The fourth argument for devaluation is the weakest. The the government to come to terms with the real concerns of
justification in fashion these days is that since the value of the the people of this city. ln comparison, the whole hype about
Indian rupee has fallen, or depreciated, to be precise, Pakistan devaluation as the key to our economic problems will soon
must devalue immediately. Newspaper articles are clamouring fall into perspective.
that the 'Indian move is an economic invasion to knock out
Pakistani exports in the world market: There are numerous Source: Zaidi, S. Akbar, 'The Devaluation Dilemma', The Herald,
inconsistencies in this claim. Karachi, October 1'995.
Firstly, lndian goods are not strictly comparable to Pakistani
exports and nor are all of them perfect substitutes. Secondly,
export orders and contracts are usually signed well in advance, Walking the exchange rate tightrope
and are based on numerous non-price considerations such Most governments hate to devalue because in the short-run
as political factors, long-term dealings, practices and ties, there are more losers from devaluation than there are gainers.
institutional factors, tradition, culture and a host of other The reason is simple. Imports and locally produced import
influences. Thirdly, lndian exports generate almost four times substitutes become more expensive after devaluation and this
the foreign exchange that Pakistani exports are able to bring affects the consumption basket of a large number of voters.
in, implying that the lndian market is already more established On the other hand, exporters who benefit from devaluation
than Pakistan's. Fourthly, the devaluation seen in the lndian are relatively few and the benefits of export-led income
rupee actually took place in the kerb market, where the rupee and employment growth come with a lag. So, why did the
fell to 35 per dollar for a short while, but then stabilized at Governor of the State Bank of Pakistan devalue the rupee last
around 33.80. The official value of the lndian rupee did not week by 3.65 per cent?
change. Prudent exchange rate management is a delicate balancing
Finally, lndian exports have surged this year, rising by as act. Ours is a managed float, whereby the Governor of the
much as 29 per cent which is a very healthy trend indeed. State Bank sets the value of the rupee in view of the supply
Essentially, then, a devaluation in the Indian rupee by a few and demand for other currencies. In so doing, he weighs in
percentage points should not cause concern to our exporters. the fact that the evidence on supply and demand is made
What matters for us is the US dollar. murky by speculators. lf he misreads the signals, and devalues
Strangely enough, while all currency analysts and traders excessively, the result is inflation and extra debt burden. lf he
have been arguing in favour of devaluation, they have not over-values the currency, he risks out-pricing Pakistani exports
given enough weight to what happens to the US dollar. and under-pricing imports, resulting in a trade deficit.
Pakistan follows a managed float and although there is a What should the Governor be guided by? The bazaar value
basket of currencies to which the rupee is linked, the US dollar of the rupee-dollar exchange rate and the FEBC premium are
is still the key currency. This April the dollar fell to an all time usually contaminated by speculation. More reliable guides
low of one dollar to 80 Japanese yen, and after a 15-month are domestic and international inflation rates and the fiscal
high is now hovering around 100 yen. The US dollar started and trade deficits. Inflation in Pakistan, currently running
its upward movement in July and the changes in the dollar- at 13-14 per cent, is considerably higher than the trading
Pakistani rupee rate need to be seen in that context. A partners' inflation of around 4 per cent. This suggests an
stronger US dollar would put pressure on the Pakistani rupee, appreciation of the real exchange rate, which requires a
and hence the need for the 'technical adjustments'. · devaluation of the nominal exchange rate (real exchange rate
The key determinant in the next few months for the is the nominal exchange rate times relative inflation; if the
Pakistani rupee will be the value of the US dollar, not the latter goes up, the nominal exchange rate has to be adjusted
lndian rupee. Once the dollar stabilizes, so should the rupee. to maintain the value of the real exchange rate).
Furthermore, there has been very little adjustment so far this The other guide is the fiscal and the trade deficit, which
year, mainly because the dollar was weaker, and based on past together affect the current account in the balance of
trends, there is considerable room to manoeuvre. payments. A large current account deficit means that we

J
238 Issues in Pakistan's Economy

are spending more than we are earning. The fiscal deficit is by fighting obesity at both the aggregate and the individual
unsustainable at over 4 per cent (post-budgetary shenanigans level, will we achieve a stable and realistic exchange rate, which
render the government's fiscal target for this year less credible) is the corner stone of sound macroeconomic management.
and the trade deficit has shot up to $3.5 billion. 1f these
deficits were temporary, due to crop failure or other calamities, Source: Nabi, ljaz, The Friday Times, Lahore, 19-25 September
and if we had the reserves, we could have run those down 1996.
to tide over the emergency. Alternatively, we could borrow
short term in the international commercial capital market to
cushion the economic shock. But if the problem is endemic Is there a case for devaluation?
and if reserves are already low, the international capital market The answer to this question is pretty straightforward. There is
demands a heavy premium, which increases the debt burden. no evidence at all that the Pakistani rupee is over-valued and,
ln any case, such quick fixes are unlikely to get to the root therefore, there is little reason to believe that a devaluation is
cause of the problem, which is that as a nation we spend more on the cards. Neither movements in the balance of payments
than we earn. and the capital account nor in the real exchange rate vis-a-
What the Governor needs is a policy measure that reduces vis our major trading partners and competitors suggest that
our expenditures and increases our earnings. Given the current the rupee is misaligned. Indeed, a devaluation, when none is
macroeconomic picture, a sizeable devaluation of the currency called for, may actually retard our principal policy objective of
is precisely such a policy measure. lt sends a strong signal to reining in inflation.
domestic spenders that imports are expensive, so avoid them. First, the balance of payments. A sudden surge of imports
Simultaneously, a message is sent to foreign consumers that or a sharp fall in exports or in factor payments registers as a
Pakistani goods are cheaper, come and get them. This brings balance of payments deficit. lf it is not funded by movements
down the trade deficit and checks the pressure on reserves. on the capital account, reserves begin to be depleted. This
Having arrived at this conclusion without any arm twisting, we shows that we want the rest of the world's goods and
may now approach the concessionary international lenders, therefore its currencies more than the world wants ours. This
i.e. the lMF and the World Bank, borrow at low rates and be is a clear signal that we must adjust downwards the value of
rewarded for our wisdom! our currency.
lt is often argued that neither Pakistani imports nor exports However, the evidence on recent movements in balance
respond to price changes and therefore devaluation is an of payments does not show any sudden deterioration. The
ineffective instrument. This is nonsense. ln the aggregate, balance of trade is a negative $2.3 billion, which is in keeping
responsiveness to price signals is rational human behaviour. with the medium-term trend. The services account is also in
When imports become expensive, we postpone purchases the negative at around $2.5 billion, again fairly close to the
and that reduces aggregate demand. Similarly, why should trend. Remittances, on the other hand, have registered an
foreigners not buy more Pakistani goods when they become increase of around $500 million over the previous year. All of
cheaper? this adds up to a current account deficit of $2 billion, which is
But let us ask ourselves what would happen if we did a little worse than last year's but is a substantial improvement
not devalue. An increasing number of people would take a over the year before that, when we went on a spending binge
position against the Pak rupee, confident that the value of the (the yellow cabs scheme).
rupee cannot be sustained. This would put greater pressure A current account deficit is consistent with the fact that
on the rupee and the needed devaluation to correct the being a developing country, we are a net importer of capital.
imbalance later would have to be much larger. The capital account shows that direct foreign investment
Another woolly argument is that we do not have 'exportable and concessionary official flows have financed most of the
surpluses' and therefore exports do not increase when we current account deficit-in fact, our reserves actually improved
devalue. This notion of exportable surpluses is a perplexing by $242 million in 1994-95 as a result of such transfers. All
one. Does Lahore export knitwear because T-shirts are left of this adds up to the conclusion that there is absolutely
over after the Lahoris have bought what they need? Does no untoward development in the balance of payments or in
Sialkot export soccer balls because it has some to spare after capital movements that calls for a devaluation of the rupee.
meeting the needs of Sialkoti soccer players? Countries don't The second argument for devaluation is that, as a result
export because they have surpluses, but because they have a of high inflation relative to our trading partners, the real
comparative advantage based on their abundant factor, which exchange rate (which is simply the nominal exchange rate
in our case is labour, raw cotton, and leather. lf we price these adjusted for the change in relative prices) has appreciated.
factors correctly via the exchange rate, we will export, surplus This has raised the price of our exports and lowered the price
or no surplus. of imports. This loss of international competitiveness, it is
Finally, we must begin to address the fundamental problems argued.must be remedied by a devaluation of the rupee.
faced by the economy to avoid devaluations, which may
sometimes be necessary but are always disruptive. We must Installation triggered
tame the impulses that result in fiscal deficits and address the This is a sophisticated argument and requires a careful look at
perverse incentive structure that retards export-led growth. the evidence on movements in the nominal exchange rate and
Otherwise, we shall find ourselves running frequently to the relative prices vis-a-vis our trading partners. l have done this
tailor to loosen our belts when the real culprit is obesity. Only for our five major partners, the US, Japan, Germany, UK, and
 .Chapter 9 Balance of Payments and Trade Regimes 239

Table 1 Table2
Nominal effective exchange rate Trade-weighted relative .price index

Sept. Trade-
1980/1 (R1-RO)/ Trade
1995 NEER Sept. weighted
(RO) Roi weight 1980/1 (P1-PO)/ Trade
(R1) 1995 consumer
(PO) Roi weight
(P1) price
USA 9.91 31.55 2.2 35 111.4 index
France 2.11 6.46 2.1 8 24.5
Germany 4.92 22.29 3.5 19 86.1 USA 100 172 0.72 35 60.2
UK 22.68 50.4 1.2 17 37.8 France 100 204 1.04 8 16.3
Japan 0.0463 0.32 5.9 21 145.1 Germany 100 148 0.48 19 28.1
Total 404.9 UK 100 218 1.18 17 37.1
Japan 100 125 0.25 · 21 26.3
Pakistan 100 323 2.23
Relative price index 167.95
242
France who together account for nearly half of our foreign
trade (imports plus exports).
Table 1 gives the movement in the nominal effective
exchange rate, or NEER, (which is simply an index of two indices in the countries has moved fairly close together
the nominal exchange rates of the five major trading over the years and Pakistan has not suffered any loss of price
partners weighted by their shares in trade) between 1980-81 competitiveness vis-a-vis India. India's exchange rate is now
and September 1995. The calculations show that NEER market determined and short run fluctuations in it do not call
depreciated from 100 to 405. ln other words, the same unit for an immediate response from us.
of major trading partners' currency now costs nearly four lt is interesting that the market has read the evidence
times as much as in 1980-81. This is a substantial nominal correctly and is not signalling a lack of confidence in the
devaluation of the rupee. The question is: is it enough given nominal value of the exchange rate. There is virtually no
that inflation in Pakistan is considerably higher than in the premium, other than the small margin to cover transaction
major trading partners? costs, either in the curb market or the FEBC rate of exchange.
To answer this, we have to look at how the relative prices lt is worth bearing in mind that exchange rate policy
have moved between Pakistan and the major trading partners. can influence only the nominal exchange and not the real
Table 2 traces the movement of prices in Pakistan and its five exchange rate. The latter, which is the proper measure of
major trading partners. The last column of the table shows competitiveness, is determined by relative price movements.
that the trade weighted consumer price index of our trading Indeed, it may well be that a short term devaluation, when it
partners has increased from 100 to 168, while the index for is not called for, may buy a lot of long term inflation, resulting
Pakistan has increased from 100 to 323. lt is this relative increase in an appreciation of the real exchange rate, thus producing
that exporters bemoan when they ask for a devaluation. results contrary to those intended.
ln other words, what the exporters want is a depreciation Furthermore, a devaluation always has some short run
of the real effective exchange rate (REER), which is simply the costs such as an increase in the international debt burden
relative price index (calculated in Table 2) divided by NEER and a general reduction in the standard of living. lf there is a
(calculated in Table 1). Notice that NEER is 405 and the crisis in the balance of payments or a substantial appreciation
relative price index 241. Thus the depreciation in the nominal of the real exchange rate, it might be worthwhile to bear
exchange rate has more than· compensated for the higher the short run pain. But when such misalignments are not
price level in Pakistan relative to the major trading partners. indicated, it seems unnecessary to add to the difficulties
ln fact, there has been a substantial depreciation of the real of the ordinary citizen already suffering under the ongoing
effective exchange rate, so that Pakistani exports have become structural adjustment. '
even more price competitive than in the past. Thus there is Having said all this, we must recognize that exporters
no justification at present for a devaluation of the nominal indeed are hurting. But the real culprit is high domestic
exchange rate to restore price competitiveness. inflation, which has raised the costs of production, including
The recent adjustment of the lndian rupee is being cited the high interest rates. To control inflation, our principal
as the third argument for devaluation. The evidence does policy target must continue to be a reduction in the fiscal
not support this either. Between 197 4 and 197 5, lndia 's deficit. This is the best way to restore competitiveness in the
CPl index increased from 100 to 488.5, while the nominal long run to put the economy on the path of exported growth.
exchange rate index fell from 100 to 24.23. Meanwhile,
Pakistan's CPl increased from 100 to 379 and the nominal Source: Nabi, ljai, DAWN, Economic and Business Review,
exchange rate fell from 100 to 31.36. Thus the ratio of the Karachi, 11-17 November 1995.
240 Issues in Pakistan's Economy

Appendix 9.3
Angora Textiles (a vertically integrated unit specializing in knit
Winner or Loser? A Post-Quota Case garments, woven garments, and denim products that handled
Study of Pakistan's Textiles and orders from high-end clothing brands) was one of the foremost
casualties of the quota expiration process. According to Mazhar, a
Clothing Exports major cause behind Pakistan's decline in the value-added sector is
Umair Hafeez Ghori analyses the impact on Pakistan's Textiles low labour productivity along with extraneous factors such as the
and Clothing (TEtC) sector after the quota regime came to an end. security situation, rising costs, energy constraints, and negative
Excerpts from his detailed analysis follow. image of Pakistan as an outsourcing venue. Mazhar claims that
he followed and acted upon 'all those analysis that over informed
Issues for consideration me when quotas were about to run out and the virtues of
vertical integration'. Mazhar not only upgraded his manufacturing
A major weakness of Pakistan's TEtC industry is the lack of capacities by importing state-of-the-art equipment but also
diversity (both in terms of products and target markets). Since embarked upon an ambitious employee training regime.
the end of quotas, growth was recorded only in selected textiles Mazhar also provides unique insights of how the flawed
segments, while clothing exports declined significantly. The investment policies of the Government of Pakistan affected the
emphasis on cotton textiles is a major factor behind the lack of value-added industries, for example, in a bid to attract the global
product diversity into the man-made fibre (MMF) and composite chemicals giant lCl into investing in the polyester subsector of
MMF-cotton categories. This especially affected Pakistan's Pakistan, the government offered lCl a 15 per cent tariff wall
exports to the EU/US in the wake of the economic slowdown. against any competing imports. As a result of this protection
Prior to the economic slowdown in the EU/US market, there from competition, the polyester manufacturers in Pakistan
were predictions that the looming crisis may affect Pakistani TEtC often demand a price of their choice from the textile industries
exports. The main reason behind the need to diversify from heavy that combines traditional cotton yarn with MME The increase
reliance on cotton-based products is that polyester and MMF in cost is transferred from the textiles industries to the va Jue
products are considered more affordable than 100 per cent cotton added industries that are forced to source their inputs from local
products (that cost more and are difficult to maintain). Since the manufacturers because of high tariffs on textiles imports. These
global financial crisis affected the average spending on clothing, comments by Mazhar provide a link to Anis-ul-Haq's comments
consumers preferred the cheaper composite fibre products. This is of Pakistan being 'caught in the web of 80-20' (as mentioned
further reinforced by statistics examined where growth is visible earlier).
only in textiles related made-ups sector rather than value-added The implication of these comments is that unless Pakistan
clothing industries. reduces tariffs on textiles imports and MMF sectors, the input
Anis-ul-Haq (Deputy Secretary of the All Pakistan Textiles costs will continue to rise and will directly affect any value added
Mills Association-APTMA) admits this weakness and comments sectors that are import-dependent. Unlike the MMF dependent
that: ' ... we are caught in the web of 80-20! 80 per cent of clothing sector, bed linen, towels, and cotton denim fabric are
our exports go to 20 per cent of countries. Similarly our fabric not import dependent. This is the primary reason why these
composition is mainly 80 per cent cotton and 20 per cent sectors have seen growth in the post-quota period and the value
synthetic fibre. Our export reliance versus domestic use is also in added industry has not.
80:20 ratio whereby we place 80 per cent reliance on export and Exports from Pakistan's value added industries were also
rather than value addition. We suffer from structural imbalance affected by the yarn crisis of 2009-2010. This crisis sprang from
and hence are not trained in value addition production' high global yarn prices. Since Pakistani yarn is widely viewed
According to Anis-ul-Haq, Pakistan's industry is handicapped as relatively cheaper in US dollar terms as compared to Indian
because very few entrepreneurs venture out and search for and Chinese yarn, most yarn manufacturers exported their
alternative markets. Pakistani entrepreneurs mostly rely and plan output rather than selling domestically causing yarn shortage
on the basis of business information gleaned either through for the clothing industries. The clothing industry pressured the
business magazines and informal networking rather than through Government of Pakistan to introduce a temporary 15 per cent
trade offices abroad. export duty based on quotas in a bid to limit exports. However,
ln addition to the typical Third World problems and supply this restriction was removed in July 2010 after the apex body of
side constraints such as power shortages, poor infrastructure, the textiles industry (APTMA) reported that 50 yarn-producing
bureaucratic inefficiencies and political instability, Pakistan units had either shutdown or scaled down their operations.
faces gradual obsolescence of its industrial infrastructure. The ln addition to the issues highlighted above, Pakistan's value
average performance of Pakistani TEtC was not unexpected, added industry is significantly impaired by their inability to offer
given that exporters and industries were well aware of the full-package service for foreign retailers. Syed Shad Mustafa
risks and potentials of quota expiration. Most entrepreneurs (director of an intermediary company that sources local inputs
invested in upgrading infrastructure and capacity building of for foreign clients) dispels the impression that only supply side
workers through training programmes in order to enhance their constraints are to blame for Pakistan's performance in the value
productivity for the post-quota period challenges. added segment. Mustafa cites extended power shortages in some
The value added industries have incurred the bulk of losses cities of India, frequent natural disasters and civil disturbances
in the post-quota period in Pakistan. Awais Mazhar, owner of
 Chapter 9 Balance of Payments and Trade Regimes 241

in Bangladesh and states that the decisive factor in modern fear preys most on the minds of the politicians that dictate trade
clothing trade is the ability to follow the 'direct-to-store' service policy rather than economists.
(the 'DTS Model'). Mustafa further elaborates that instead of Since the larger TEtC groups are aware of their competitive
being entirely dependent on reports by experts and business advantage, they see regional liberalization as opening up of
magazines to inform them of shifting market dynamics, Pakistani an additional market. The small- to medium-sized enterprises,
manufacturers following the DTS Model maintain overseas particularly the cottage industry-sized clothing units apprehend
offices and warehouses. This allows them to gauge changes diversion of their orders to lndia if Pakistan's fabric manufacturers
in fashion trends, and offer superior client service including get a better rate as a result of tariff liberalization. These clothing
reduced turnaround times for fashion-sensitive categories. lf units also fear that the influx of competing imports would affect
Mustafa's comments on DTS Model are contrasted with Awais their business in the local markets as well. Therefore, these sectors
Mazhar's experience, it may well explain why a vertically oppose regional trade liberalization in the Stolper-Samuelson
integrated processing unit that supplied leading foreign retailers sense.
went bankrupt. However, realistically speaking, the small- to The fears of the sectors are not unfounded. ln a poor country
medium-sized operator does not possess enough resources to with high inflation and unemployment rate, repercussion of mass
maintain overseas offices. Therefore, the disparity between large lay-offs and decline in the leading industry is something that no
operators and their business advantage over small- to medium- policymaker can ignore. However, the myths and fears that have
sized operators are likely to continue in the future. built in the minds of the small- to medium-sized operator against
Another factor affecting the performance of the Pakistan's regional liberalization must be dispelled; for example, regional
TEtC industry as a whole is preferential access. ln the backdrop liberalization in the textiles sector would have meant that tariffs
of the War on Terror, it was expected that the US would 'reward' on fabrics and yarns would be considerably reduced, thereby
Pakistan by concluding an FTA and reduce barriers to market enabling the clothing industries to use imported inputs. The
entry (tariffs were as high as 29 per cent in some categories). The recent yarn crisis in Pakistan could certainly have been avoided if
US retail industry backed Pakistan but there was heavy opposition the tariffs on yarn imports were lower!
by the US textiles industry groups. This opposition has continued The public choice theory also explains why Pakistan has not
to date and as a result no FTA with the US has materialized so far. moved in the direction of regional liberalization, even where the
Pakistan's industry also needs to shift its focus on to other government appears to acknowledge the positive effects this
developed economies. Any FTA with the developed countries would carry for the Pakistani economy. The reality is that similar
such as the EU, Canada or Japan would give Pakistan's TEtC to developed countries, trade policy is dictated by the politicians
industry a competitive edge over its regional rivals. The need that keep political, and not economic, considerations in mind.
for an FTA with developed countries is further reinforced if the As a result, any measures that promote free competition with
impending EU-lndia free trade agreement (FTA) is taken into foreign imports are often looked at with hostility. Therefore,
consideration. Currently, Pakistan has an FTA arrangement with the Government of Pakistan must shoulder some blame for the
China which allows Pakistan to export textiles products to China mediocre performance of Pakistani TEtC industries in the post-
while not extending preferential treatment to Chinese TEtC quota period.
imports into Pakistan. However, Trade Development Authority of Nevertheless, the recent positive steps taken by Government
Pakistan (TDAP) data shows that the only significant Pakistani of Pakistan building on the Textile Vision 2005 scheme must
TEtC exports are raw cotton and cotton yarn. 1t is obvious be appreciated. The new Textile Policy for 2009-2014 scheme
that Pakistan's exports have less potential to succeed in China aims to enhance TEtC exports to 25 billion USO by 2015. The
currently; therefore, exporters primarily concentrate on targeting policy extends PKR 42 billion in incentives during the fiscal year
US/EU markets. 2009-2010. Export refinance is reduced at a rate of 5 per cent
While the TEtC industry would definitely like to see FTAs with with a PKR 2.5 billion allocation. PKR 5 billion. is allocated as a
developed countries, the policymakers have cautious opinions relief on the existing long-term loans of the textile industry. Duty
about regional FTAs, especially liberalizing the currently impotent drawbacks are offered between 1 to 3 per cent for a period of two
South Asian Free Trade Area (SAFTA) which excludes several TEtC years for value added textile exports which will aid the industry
tariff lines from liberalization schedule. ln this context, Omer to offset both its direct and indirect costs. Most importantly,
Hameed of the TDAP states that the government is generally this policy exempts the industry from regulated power supply
in favour of trade liberalization but certain sectors in the TEtC (referred to as 'load shedding' in Pakistan) and allows it to
industries voice strong opposition to it. Hameed forcefully have a prioritized gas supply. The new policy also establishes a
argues in favour of trade liberalization and comments that 'our Technology Upgradation Fund (TUF) that will contribute as a
industries need to decide whether they want to stay in infancy grant around 20 per cent of the capital cost on upgrade of TEtC
of development or diversify and be competitive'. The opposition infrastructure.
to sectoral liberalization usually comes from small- to medium- Pakistan's TEtC value added industries have yet to be weaned
sized operators that are more numerous and exert significant off their dependency on preferential access to the developed
pressure on the government. As a result, the Government of markets even after lapse of quotas, for example, Pakistan lobbied
Pakistan is reluctant in opening up sensitive sectors such as TEtC aggressively to secure preferential access to the EU market after
and agriculture. Policymakers are perhaps also mindful that they 2005, having been unable to secure concessions under the EU
lack the resources to retrain, adjust, and compensate laid-off GSP+ regime. More recently, these efforts culminated in the offer
workers in wake of regional liberalization of the TEtC sector. This by EU to extend preferential treatment to Pakistan's TEtC exports
in October 2010 and also to assist the Pakistani recovery in the
242 Issues in Pakistan's Economy

aftermath of the severe flooding in the country. The October TEtC manufacturers will now determine trade performance more
2010 package of concessions featured three .years of duty-free than preferential treatment or higher quotas in the developed
access for 75 per cent of tariff lines accounting for 27 per cent markets.
of Pakistan's exports to the EU (mainly in the textiles sector).
These concessions were later 'watered down' in November Conclusions
because of pressure from lndia and other EU members engaged
in textiles production (namely, ltaly, Portugal, Spain, and France). Pakistan has the potential to excel in the post-ATC TEtC trading
environment but has so far managed lacklustre performance.
The revised package still kept the duty-free access for 75 tariff
Quotas skewed the manufacturing strengths of Pakistan and
lines, but reduced the duty-free access period from three to
two years, with a third year conditional on an assessment. induced artificial diversification into manufacturing activities
where there was little or no comparative advantage. The
Furthermore, the EU has incorporated quotas on sensitive
categories (for example, fabrics, towels, women's jeans, and socks) liberalized trading environment suits Pakistan in certain value
added categories (which quotas had suppressed earlier). This is
which incorporate a suspension of duty-free access if imports
grow by more than 20 per cent. For other products, a safeguard demonstrated by the superior performance in bed linen, cotton
yarn, towels, and cotton denim fabric categories. Conversely,
mechanism will serve as a safety net to protect against any major
manufacturers that concentrated on categories purely due to
import surges. The EU package still has to secure official approval
from the EU parliament and is further subject to waiver granted availability of quotas have experienced declines However, with
by the WfO. There is a strong likelihood that the waiver may the possible signs of 'flying geese' type transmission of certain
clothing industries from China, Pakistan may well be one of the
face opposition from both the EU-based textiles manufacturing
countries and other TEtC exporters that compete against Pakistan recipients of the categories jettisoned by the Chinese clothing
in the EU TEtC market. However, recently lndia dropped its industries. This view receives further support from the fact that
opposition to the proposed EU package. ln exchange, Pakistan Pakistan possesses a large cotton base and some level of vertical
has agreed to grant lndia most-favoured nation (MFN) status that integration in its TEtC structure along with low labour costs.
From the 'flying geese' perspective, lack of liberalization will
it previously had not extended to Indian imports.
Pakistan's TEtC industries are understandably desperate to also mean that regional investment will be channelled towards
enhance their competitive standing in the EU market. However, more liberalized countries instead (such as ASEAN countries).
larger TEtC segments in Pakistan are more willing to support
even when this concession package comes into force, it brings
moderate benefits to the Pakistan's TEtC industry (especially the market liberalization as compared to the small- and medium-
value added segment comprising clothing products). Statistics sized entrepreneurs. The sensitive nature of the TEtC industry
examined in this research note have demonstrated that Pakistan's has meant that the policymakers are reluctant to take any steps
apparel exports have not experienced positive growth after 2005. that may affect the smaller manufacturers. Pakistan also lacks
Furthermore, availing this package would effectively mean that the resources to compensate and re-adjust the industry segments
Pakistan's exports will be subjected to quotas and safeguards that are inevitably affected by trade liberalization process. Hence
again which could artificially restrain the more profitable the reluctance and lack of resources undermine the growth and
exporters of TEtC in the country along similar lines in the Multi diversification of Pakistan's TEtC industries.
Fibre Arrangement/Agreement on Textiles and Clothing (MFA/ lf a 'flying geese' type regional transmission does occur,
ATC) period. Pakistan's falling clothing exports may receive a significant boost.
lt is also interesting to note that Pakistan's bed linen exports to ln order to attract this investment, Pakistan's entrepreneurs have
the EU, which already enjoys a significant share of the EU market, to overcome· two major shortcomings. First, adopt measures to
are being extended tariff concessions. The predictable positive ensure availability of yarn for local clothing manufactures, and
effect of these EU concessions is that it will encourage more second, to increase productive capacities by adopting the DTS
exports of bed linen to the EU. However, due to the proposed model of manufacturing. lf the clothing industry signals its
quota restrictions and the in-built quota growth rate coupled willingness to weather an increasingly competitive environment
with safeguards to contain any spillover, the risk is that Pakistan that follows liberalization, it may benefit from cheaper inputs
may attract trade restrictions on its bed linen again (similar to which will allow this sector to become competitive again,
the anti-dumping measures imposed by the EU on Pakistan's bed espec_ially when China is exhibiting signs of graduation to
linen exports in 2004). higher value added sectors. The challenge for Pakistan's value
The EU concession package can also be criticized on the added industry is how it adapts to increase in competition that
grounds that it does not encourage exports of labour-intensive inevitably follows sectoral liberalization. To this, there is no easy
clothing products. Instead, the package seems to buttress the answer. Currently, the Pakistani economy is characterized by high
already strong capital-intensive segments such as bed linen inflation rate, low employment, negative effects of the security
or other textiles made-ups. By designating some categories as situation and the floods. ln these circumstances, the Government
sensitive, the flow of preferential treatment has been tightened of Pakistan would be reluctant to risk any economic liberalization
considerably. With the EU concession package in the backdrop, in the TEtC sector, fearing adverse effects on its most vital
it remains to be seen how Pakistan fares in the coming years. industry.
The current statistics show that Pakistan's TEtC industry is now
coming to terms with its strengths and weaknesses that were Source: Ghori Umair Hafeez, 'Winner or loser? A Post-Quota Case
previously masked by the quota system. The liberalized trading Study of Pakistan's Textiles and Clothing Exports', South Asia
environment has meant that competitive strengths of various Economic Journal, vol. 13, no 1, 2012, 105-29.
 Chapter 9 Balance of Payments and Trade Regimes 243

Appendix 9.4
heartlands of the system (the Atlantic economy and Japan)
Globalization: Another Name for and an unprecedented geographical spread of economic
Imperialism? growth (to China, east and south-east Asia, eastern Europe
to Latin America, and latterly to India). This in turn may now
Nigel Harris discusses the political economy of the nature of
draw into the process sub-Saharan Africa. ln the first phase,
globalization and imperialism in our Age.
opinion rejoiced that apparently the world had mastered
the secret of sustained and spreading economic growth; in
The charge of 'imperialism' has served the Left for a very long
the second, marred at the end by severe economic crisis in
time as a supreme accusation against the political order of the
the heartlands, there were growing fears that globalization
world. The term implies not that strong states invariably try to
had robbed the world of political governance, the state,
bully weaker ones, nor that 'imperialism' is just a fancy name for
and imposed a global territorial division of labour which
Washington, but that there is a world political order embodying
made it impossible to employ the mass of the labour force,
systemic relations of domination. However, while once there
implying long-term mass unemployment. There seemed to be
might have been relatively robust theoretical underpinnings to
simultaneously an existential political crisis of the state and an
this approach (in· Lenin's popularisation of the combination of
economic crisis of material surviva 1.
Hobson and Hilferding), the thesis has long since been shown to
(3) Historically, the current transition is the second great
be doubtful.
surge towards economic globalization. The first, between
On the other hand, imperialism's opposite, 'national self-
say- 1870 and 1914-ended with two world wars and the
determination', seems equally of doubtful validity in conditions
Great Slump in which states not only clawed back powers they
of economic globalization. lndeed, these theoretical difficulties
had conceded to global markets, but immensely enhanced
become even sharper when it is recognized that Washington,
and centralized political control over their respective national
the supposed global hegemon, is itself trapped in an apparently
economies to an unprecedented degree, epitomised in the
insoluble crisis in the global economic order-the political agenda
extraordinary concentration of state power in Nazi Germany
comes apart from the economic. What follows are some notes and Soviet Russia. More generally, the period established
for discussion on an alternative approach to characterising the an uncritical faith in the potential of state planning and
world order. dominant public sectors, nowhere more so than in Nehru's
India. Everywhere governments mimicked the imperatives of
(1) Since about 1980, the world economy and its constituent
the war economy, even in peacetime. lt took nearly another
national parts, has been dominated by the transition to a half century after the end of the Second World War to resume
single global economy, 'economic globalization'. This imposes the drive to economic globalizaton, now with much enhanced
on the world a changing pattern of territorial specialisation vigour and comprehensiveness, and encompassing the whole
and interdependence, organized by global markets, not-as world, not just the Atlantic economy.
hitherto rightly or wrongly believed-by national states. The (4) lndeed, never before in the history of capitalism,
economic integration of the separate political territories it seems, has the ethic of competitive markets and 'neo-
(former 'national economies') into a single economic system libera lism ', penetrated so deeply into the domestic operations
has been achieved by states (at different times and stages) of the state, into virtually every cell of the social order.
relinquishing control of external trade, of capital movement Neo-liberalism has established an extraordinary intellectual
and finally, albeit partially, of labour. Indeed, by now it hegemony, founded not upon an excess of greed (that was
is doubtful in the core of the system whether 'national always there), nor an intellectual error among economists,
economies' -discrete territorial areas of autonomous economic but rather as the ideological expression of an order of global
activity, defined by political boundaries-any longer exist as capital-the neo-liberals are the product of the process, not its
objects of effective government policy. States here at best seek source. We are now within sight of the reversal of many of the
to manage global economic flows that begin and end beyond major historical efforts to limit the power of markets-from
both their authority and even knowledge. The free flow of the New Deal and Great Society legislation in the US (even
the global factors of production is creating a ·single integrated including the right to collective bargaining) to the welfare
economy outside the control of any one national political state and social services in Europe. ln the period from the
authority (as in the original creation of national economies 1950s to the present, there has been an almost complete
free movement within carved out a national economic entity reversal of the dominant statist narrative. ln that time, in the
from what had been often a regional economy-witness, for developing countries, accelerated economic growth was seen
example, the formation of Germany or the partition of India). as exclusively attainable through economic isolation, closure
The destruction of the old Soviet Union and the former to the world; now it is seen as exclusively attainable through
eastern bloc, of apartheid in South Africa, as well as the 'opening up'.
coming transformations of others (North Korea, Myanmar, (5) 'Opening up' the national economy {and undertaking
Cuba, etc.) can be seen as only the more extreme examples of all the domestic reforms for this to work) involves allowing
this apparently inexorable process of economic globalization. the integration of national and global economies, allowing
(2) The first phase of the current transition has been domestic economic activity to be decided by global markets
characterised both by extraordinary levels of prosperity in the
244 Issues in Pakistan's Economy

rather than by the state-or electoral-priorities. By implication, course, the longer the crisis persists, the more it may become
the state relinquishes any ambition to shape the domestic an existential issue for the state, especially if marked by
economy in any particular direction, restricting itself to popular revolt against economic austerity. Then greater the
managing efficiently and facilitating the accommodation of danger, states will seek to recover their lost powers, and reverse
global forces. economic globalization, sacrificing the welfare of their own-
(6) However, the emergence of a national 'global state' and the world inhabitants-to their own political survival. The
(that is, a state, the function of which is to manage the local issue of a world slump was only settled last time around by
economy and society in conformity with global, not local, resort to a world war and a terrible orgy of self-destruction.
imperatives) profoundly weakens the political position of the At the moment, world war seems unlikely but one should
State, compared to the past. The state is obliged to relinquish not underestimate the potential for auto-destruct when one
much of what used to be a national political agenda which or other state's existence appears threatened, producing the
involves the management of external trade, capital movements 'common ruin of the contending nations/classes'.
and, in principle, labour flows. lt relinquishes power to bribe (9) These trends-if 'trends' they are-go with attempts
the electorate and to secure its political perpetuation, to disenfranchise the citizenry, to isolate government from
to reward patrons, etc. To put it, simplistically, it faces 'politics', to protect the global system (and states) from
contradictory options-to secure economic growth (through popular demands and pressures, and install technical or
integration in the world economy) but with weakened state expert administration (the World Bank and lnternational
control over its political environment; or to enhance its Monetary Fund (lMF) play a key role here in training a global
political dominance at home with economic stagnation. Of cadre of experts to direct the financial administration of
course, depending on specific circumstances of a particular states). lndependent central banks-and independent national
state (and the cumulative effect of past policies), opening statistical agencies-are required to reassure 'global investors'
up to the world may not lead to economic growth, in which that mere governments-or 'politics'-cannot be allowed to
case, the state has no recourse except to rule by violence. interfere either with monetary policy or basic data. ln the
ln an existential crisis (such as, for example, faces the Assad special case of Europe, experts have been parachuted to run
regime in Syria), the state will be obliged to sacrifice present Greece and Italy, and binding clauses inserted in respective
and future economic growth-and indeed, the inhabitants-to constitutions to enshrine conditions of national management.
hold on to power. Some of the language betrays the displacement of the
(7) The threat to state power is political in a different sovereign people-'citizens' become 'clients' or customers
way-through undermining the domestic social solidarity for state services, where the criterion of judgment becomes
that is supposedly a precondition for stable government. No efficiency and cost of provision not the exercise of popular
population is likely to remain indefinitely loyal to a state seen sovereignty. Undermining popular representation further
as working exclusively for foreigners (the 'world system'). erodes the legitimacy of the state.
Nowhere is this more apparent in developed countries (10) ln crisis, the limits imposed on national sovereignty by
than in the field of immigration. The mobility of labour the new order are slowly becoming dearer. On the economic
internationally seems now to be a precondition for economic front, the global economic nexus and global market, severely
growth. No advanced economy is now self-sufficient in labour discipline national policy, and those constraints are reinforced
(including here the changing diversity of skills required to cope by the political order of states, the so called 'international
with changes in the economy imposed by changing global community'. The state begins to behave as an agent for an
demand). However, the solidarity underpinning the old state economic and political world order, enforcing global imperatives
required levels of xenophobia, and sometimes racism which on the domestic population, rather than representing it to the
are incompatible with continued immigration, required to world at large (let alone defending it against external threats).
sustain the 'churning' of the labour force to sustain economic lf state sovereignty is no longer practicable, will the world's
growth (especially where there are high levels of native fascination with 'national liberation' be undermined? Not
unemployment). Everywhere today, certainly in the heartlands, while aspirant ruling classes are willing to fight for a place at
there are increasing restrictions on immigration and mobility, the top table and there are no alternative options for popular
despite the damage this does to economic growth (not to self-emancipation. Winning national independence and a new
speak of the welfare of an ageing native-born population). state allows privileged access to loot the new country-and
States are again caught in a contradiction-the conditions of then deposit the proceeds in Vermont or Kent or Provence (as
growth undermine the elements of national closure (zero net with the Gaddafis or the Bhuttos).
migration) supposedly required to make state power secure ( 11) The conjuncture exposes the separation of what we
(seen most vividly in North Korea and the old Stalinist states). might call two ruling classes: a territorial national ruling
(8) lt is perhaps this contradictory position which today class, whose very existence depends on holding a national
inhibits states from copying the reactions to the interwar territory (composed of the state administration, armed forces
Great Depression which ended the firstsurge of globalization- and security services, crony capital, owners of land and
economic closure and domestic authoritarianism. The infrastructure, etc), and a global ruling class which directs
reaction now is fragmentary and contradictory-moves to the companies and corporations which constitute the global
authoritarianism, along with continued neo-liberal reform, economy, the mobile global rich, the staff of international
attempts to cut immigration, to demonise 'illegal immigrants' agencies and non-governmental organizations (NGOs), etc.
(and Muslims) but without systematic protectionism. Of That is, a global social stratum for whom nationality is a
 Chapter 9 Balance of Payments and Trade Regimes 245

mere contingency, not a matter of defining identity and (14) Left to itself, the global system appears incapable of
loyalty. ln practice, the two classes are not at all clearly resisting self-destruction. Markets and the competitive drive
distinguishable, and members pass freely between the two. to profit seem incapable of establishing the self-discipline to
What is distinguishable is a political interest (for example, escape crash. The global capitalist class shows little potential
between neo-liberalism and economic nationalism), and a role for political self-government. For that, they are dependent
(national versus international). on the existing political order. Yet the fragmented political
(12) Thus, we may be entering a period which combines order appears incapable of overcoming its ferocious rivalries
both the extraordinary potential for an end of world to achieve unified action. The core problem, in sum, is an
poverty, and an existential crisis of the fractured political integrated world economy, driven by global markets (the
order of the world. The danger is that the territorial ruling outcome of which can neither be determined nor predicted)
classes may use their overwhelming control of the powers and which faces a fractured political order of competing
of physical coercion to restore national dominance of the states, each undermined by global capital. Capital for a
global economy, resulting in domestic authoritarianism with very long period was able to hide behind one or other state
economic stagnation (with possible perpetual warfare on the but now in the final phases of the completion of a global
borderlands to enforce social discipline, a combination so bourgeois revolution, it is obliged to step into the limelight,
brilliantly imagined in George Orwell's 1984). ln practice- unprotected by political power. Meanwhile, the opposition
and hopefully-global economic integration is by now so to global capital-from the scattered occupations, the Arab
advanced, it cannot be comprehensively reversed, even if Spring, the trade union fight against austerity in Europe,
components can be qualified (for example, free movement to the hundreds of peasant agitations and strikes in China-

I
of labour), and states will continue to try to cheat on the remains trapped within each national context, each assuming
rules. States have an interest in the developed countries, in a state which can change their environment for the better.
inflating the popular fear that the new international division The creativity of these movements is not in doubt, yet we
of labour will render redundant larger sections of the labour cannot even begin to visualize a realistic road map to one
force, to support populist authoritarianism that could damage world, a world without war, with a unified drive to end world
economic globalization-and hence global welfare. Elements poverty, secure a livelihood for all with security, in a safe and
of possible national capitalisms already might be seen to sustainable environment. Revolutions in one country can no
exist in the marriage between national militaries and crony longer achieve 'national liberation' (that requires breaking the
capitalism in some important states (Russia, China, Pakistan, global order), and though revolutions may spread (as we have
lran, etc). seen in the Arab spring), the outcome only reiterates the same
(13) As we have noted, many states have already been order of competing states, itself at the core of the underlying
making adjustments to the new circumstances. One of the problem.
more curious-if not risible-by-products of this has been the (15) These notes began with an implied criticism of the
ubiquitous spread of debates on what it is to be a native, the Left insofar as it identified the contemporary world as
'values' supposed to unite the natives, often under the pretext 'imperialist'. The charge put Washington at the centre of a
of the need to 'integrate' non-natives (immigrants, refugees, world system of domination, implying that achieving self-
etc.). The discussion is obscure since what united, say, the determination by overthrowing Washington would achieve
British, was never shared values but common subordination the liberation of the world. However, Washington itself is
to the British state. But it is embarrassing to admit that there victim to a global capitalist order. Not only is it mired in an
is nothing else in common. As so often, out of its peculiar apparently insoluble economic crisis, it has lost its economy
circumstances (including immense cultural diversity), lsrael (and its capital, now global), now a junction in global flows.
appears as a pioneer making these adjustments-combining lts spectacular armaments in no way resolve the economic
militarized ethno-nationalism, religious orthodoxy, and problem. Washington's extension into the world is not
authoritarianism, employing the Arab Israelis and Palestinians 'imperialism' but an attempt to create a substitute for the
as an anvil on which to forge unity out of immigrant diversity, missing world government, not in the interests of the people
with perpetual war in the occupied territories as a source of of the world so much as the tiny minority that directs the US.
popular fear. However, the combination in the medium term
could be suicidal for an economy as globalized as that of Source: Harris, Nigel, 'On Economic Globalization, Neo-liberalism
Israel. and the Nature of the Period', Economic & Political Weekly,
vol. xlvii no. 22, 2 June 2012, 28-32.
246 Issues in Pakistan's Economy

NOTES
I. All these numbers are from Ahmed, Viqar and Rashid 42. Sayeed, Asad, op. cit., 1995, 125.
Amjad, The Management of Pakistan's Economy, 1947-82 43. World Bank, op. cit., 1988, 68.
(Karachi: Oxford University Press, 1984), 245. 44. Ibid .. 68.
2. See Ahmed, Viqar and Rashid Amjad, op. cit., 1984; Lewis, 45. Ibid. 63.
Stephen, Economic Policy and Industrial Growth in Pakistan 46. Ibid. 32-3.
(London: George Allen and Unwin, 1969); and Lewis, 47. · World Bank, Pakistan: Medium-term Economic Policy
Stephen, Pakistan: Industrialization and Trade Policies (London: Adjustments, Report No. 7591-Pak (Washington DC: World
George Allen and Unwin, 1970), for more extensive Bank, 1989), 49.
commentary on the trade pattern in the early years. 48. LIBOR is the London Interbank Offered Rate; this is
3. Ahmed, Viqar and Rashid Amjad, op. cit., 65. an important international money market rate, showing
4. Lewis, Stephen, op. cit., 1969, 59. the going rate for short-term loans among depositary
5. Ahmed, Viqar and Rashid Amjad, op. cit., 243. institutions in England.
6. Ibid. 243. 49. World Bank, Pakistan: Country Economic Memorandum FY93:
7. Asian Development Bank, Strategies for Economic Growth and Progress Under the Adjustment Programs, Report No. 11590-Pak
Development: The Bank's Role in Pakistan (Manila, 1985 ), 357. (Washington DC: World Bank, 1993), 25.
8. Ibid. 357-8. 50. Ibid., 37, emphasis added.
9. Ibid. 358. 51. Ibid. 44.
10. Lewis, Stephen, op. cit., 1969, 12. 52. Riazuddin, Riaz, 'An Evaluation of Trade Policy', Pakistan
11. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 244-5. Journal of Applied Economics, vol. 10, nos. I and 2, I 994,
12. Institute of Developing Economies, The Study on Japanese 117.
Cooperation in Industrial Policy for Developing Economies, (Tokyo, 53: Ibid. 118.
1994), 129. 54. Ibid. 125.
13. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 74. 55. World Bank, op. cit., 1993, 45, emphasis added.
14. Ibid. 246. 56. Sayeed, Asad, op. cit., 1995, 124.
15. Ibid. 246. 57. Adams, John and Sabiha Iqbal, op. cit., 1987, I 1.
16. Lewis, Stephen, op. cit., 1969, 40. 58. Sayeed, Asad, op. cit., 1995, 5 l.
17. Ibid. 75, emphasis added. 59. Adams, John and Sabiha Iqbal; op. cit., 11-13.
18. Ibid. 161, emphasis added. 60. World Bank, op. cit., 1998, 64.
19. Asian Development Bank, op. cit., 1985, 359. 61. Ibid. 67.
20. Lewis, Stephen, op. cit., 1969, 80. 62. Ibid. 67.
21. Ibid. 69. 63. Ibid. 71.
22. Ibid. 80. 64: Ibid. 72.
23. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 24. 65. Ibid. 75.
24. Institute of Developing Economies, op. cit., 1994, 21. 66. Sayeed, Asad, op. cit., 1995, 124.
25. Sayeed, Asad, 'Political Alignments, the State and Industrial 67. Ibid. 125.
Policy in Pakistan: A Comparison of Performance in the 68. Ibid. 126.
1960s and I 980s', unpublished PhD dissertation, University 69. Ibid. 127.
of Cambridge, I 995, 49. 70. Ibid. 130.
26. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 247-8. 71. Papanek, Gustav, Pakistan's Development: Social Goals and
27. Asian Development Bank, op. cit., 1985, 359. Private Incentives (Cambridge, Mass.,: Harvard University
28. Ibid. Press, I 967), 128-9.
29. Ibid. 72. Ibid. 130-1.
30. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 249. 73. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 93.
31. Ibid. 250. 74. Ibid. 251.
32. Adams, John and Sabiha Iqbal, Exports, Politics and Economic 75. See the excellent book by Nobel Laureate Joseph Stiglitz
Development in Pakistan (Lahore: Vanguard, 1987), 29-30. who shows how it is not just IFis who play a key role under
33. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 252-3. globalization, but US policymakers as well: Globalization and
34. Adams, John and Sabiha Iqbal, op. cit., 1987, 91. its Discontents (London: Allen Lane, 2002).
35. Ibid. 92. 76. Stiglitz, Joseph, 'Trade Imbalances', Guardian Weekly, 15
36. Ahmed, Viqar and Rashid Amjad, op. cit., 1984, 252. August 2003.
37. Adams, John and Sabiha Iqbal, op, cit., 1987, 105. 77. Din, Musleh-ud and Kalbe Abbas, 'The Uruguay Round and
38. Asian Development Bank, op. cit., 1985, 390. Agreement and Pakistan's Trade in Textiles and Clothing',
39. World Bank, Pakistan: Growth Through Adjustment, Report No. Paper presented at the 15th Annual General Meeting and
7118-Pak (Washington DC: World Bank, 1988), 64. Conference, Pakistan Society of Development Economist
40. Ibid. 64. (November 1999).
41. Asian Development Bank, op. cit., 1985, 390. 78. Ibid. 7.
 Part3

Fiscal Policy
The two chapters that constitute Part 3 of this book are devoted to issues of taxation
and expenditure, debt and deficit (i.e. fiscal policy). We examine the tax structure as it
existed in Pakistan up to around 2011, following which much changed, and examine
the fiscal relationship between different tiers of government prior to that time. The
tax-to-GDP ratio and the nature and structure of taxation in Pakistan are analysed
in detail, since they form a fundamental part of the fiscal policy. Pakistan's perennial
fiscal deficit, and hence the ever-increasing debt burden, is considered to be one of
the most serious problems of the economy, affecting a number of other variables as
well. We question the claim that the fiscal deficit causes most of the problems in the
economy that are attributed to it. We find that while government expenditure in
excess of revenue is a problem, the more conventional attributes of a fiscal deficit are
found wanting in the case of Pakistan. Our analysis suggests that the issues of politics,
governance, and quality of public expenditure should perhaps form the focus of
informed debate about the fiscal deficit. After the 18th Amendment and 7th National
Finance Commission Award in 2010, there have been fundamental changes in the
manner that different tiers of government will function and deliver social services, and
the way they will relate to each other. These issues are discussed further in the new,
added, Part IV of this book.
 Resource Mobilization and the
Structure of Taxation

On 30 December 2009, in the presence of the Chief Ministers some other factors. Fiscal federalism and the implications
of the four provinces and the Prime Minister of Pakistan, and consequences are specifically discussed in Chapter 13,
the signing of the 7th National Finance Commission (NFC) in Part IV. Chapter 10 examines issues pertaining to public
Award by the members of the NFC, took place at Gwadar policy and fiscal finances, and deals with issues prior to the
in Balochistan. Agreement on this Award was reached after 2010 changes which are still in a process of being established.
six meetings of the NFC, and the Award came into force on One of the major functions of government is to tax its
1 July 2010 for a period of five years as mandated by the people. This revenue is then supposed to be used for a number
Constitution of Pakistan. As a Report of the Institute of Public of purposes, which include the running of government itself,
Policy states, the provision of law and order, the defence of the country,
and for infrastructure and social development. Governments
it has been rightly acclaimed as a great
achievement. It enhances significantly the share build roads, schools, hospitals, and dams, and provide a host
of the provinces in the federal divisible pool from of other services. For all these purposes, governments raise
46.25 to 56 per cent in the first year and 57.5 per revenue from those who make profit, from one source or
cent in the remaining years of the award. Punjati another, within the country. Even though the role and extent
showed great accommodation by accepting of government involvement in the economy and in the lives
multiple indicators for horizontal distribution, of the people has been debated, with growing concerns that
primarily for the benefit of the smaller provinces. there may be 'too much government', and taxes, like death,
It gave up its position that population should are one of the two certainties that affect our lives.
be the only criterion for allocating central Taxation structures and the extent of taxation vary
government generated revenue. 1
from country to country, and often, governments within
According to the Institute of Public Policy Annual Report for a country may suggest taxation reform based on their
2011, this was the first of two major 'hallmark developments'. particular political dispensation. In Pakistan, a well-defined
The second major event which reinforced the process of constitutional framework determines the nature of resource
strengthening provincial autonomy, and has largely redefined mobilization and the responsibilities of each of the different
the nature of fiscal policy-tax and expenditure-is the 18th tiers of government, and has undergone change from time to
Amendment to the Constitution of Pakistan, which became time, but perhaps not as radically as after the 7th NFC Award
law on 9 April 2010. According to the Institute of Public and the 18th Amendment in 2010. This chapter discusses
Policy Report, the structure, nature, and extent of taxation in Pakistan
prior to these changes, focusing on the issues at each level of
with this Amendment the Concurrent List of
government. From the constitutionally ordained legislative
the Constitution stands abolished, devolving
the functions contained in this list largely to functions of government to the relationship between
the provincial governments. This significantly different levels of government, and to the extent of revenue
enhances the range of functional responsibilities collected from different sources, this chapter examines the
of provincial governments and constitutes an salient features of Pakistan's taxation structure. This chapter
important step in bringing the government provides an historical account of how taxation and fiscal
closer to the people. 2 issues existed and were structured until 2011, and despite the
Not only does the 18th Amendment bring about changes in changes which are still in a process of being implemented,
there are numerous aspects of the old structure and system of
the structure of the government, it also radically redefines
federal and provincial fiscal issues, and the relationship public finance, which is still very pertinent to understanding
how public policy works in Pakistan.
between the federation and provinces. The Institute of Public
Policy maintains, that on account of these two developments,
'the years 2009-10 and 2010-11 will be memorable years in
the history of Pakistan'. 3 Such is the nature and impact of
10.1 THE STRUCTURE OF GOVERNMENT
these interventions-also see Chapter 13 for further details. AND T AXATION 4
The consequences of such extensive transformations are
discussed in different places in the Third Edition of this book, 10.1.1 Legislative Functions
for they have an impact on taxation, expenditure, provincial The Federation of Pakistan is governed by the Constitution
autonomy, regional inequality, social sector delivery, and of Pakistan of 1973 and all its amendments thereafter. The
r
I

Chapter 1O Resource Mobilization and the Structure of Taxation 249

Cons ti tu tion specifies the functions of the federal government 10.1). In addition to these functions, which were the
and of the provincial governments. The federal government exclusive responsibility of the federal government, there
has exclusive responsibility for undertaking functions under was also a Concurrent Legislative List which contained
the Federal Legislative List, which is contained in the Fourth functions which were performed by either the federal or
Schedule [Article 70( 4)] of the 1973 Constitution. provincial governments, or both. These service functions
The Federal Legislative List includes functions of a included population planning and social welfare, tourism,
regulatory and service nature. Service functions include and education. Residual functions not specifically contained
defence, external affairs, currency, stock exchanges, national in either the Federal Legislative List or the Concurrent
highways, and strategic roads, railways, etc. ( see Figure Legislative List were the responsibility, primarily, of the

Legislative Actual allocations

Services
responsibilities of functions

Defence
External affairs and foreign aid
Post, telegraph, telephone, radio, and TV
Currency and foreign exchange
Institutes for research
Nuclear energy
Federal Federal
Parts and aerodromes
government government
Shipping, air service, railways, and national highways
Stock exchanges
Geographical and meteorological survey
Censuses
Mineral oil and natural gas
Industries

Population planning
Electricity (except KESC)
Curriculum development, syllabus planning, and centres of excellence
Tourism
Federal/provincial
governments
Social welfare and employment exchanges Federal/
Vocational{Technical training provincial
Historical sites and monuments governments

Law and order, justice

Provincial Highways and urban transport
governments Agricultural extension and distribution of inputs
Irrigation and land reclamation
Secondary and higher education Provincial
governments

Curative health
Land development
Primary education

Preventive health
Provincial/local
Farm-to-market roads
Water supply, drainage, and sewerage governments
Local governments

Link roads
Intra-urban roads
Street lighting Local
Solid waste management governments
Firefighting
Parks, playgrounds

Source: Hanif, Naveed, 'The Structure of Government in Pakistan', News on Friday, Karachi, 25 August 1996.

Figure 10.1
Legislative and Actual Allocation of Functions among Different Levels of Government in Pakistan Prior to 2010
250 Issues in Pakistan's Economy

provincial governments-functions such as agricultural functions that urban councils, in particular, were expected
extension, irrigation, justice, and police. While the specific to perform, in addition to an optional set of functions, which,
roles and functions of the federal and provincial governments as the name suggests, may or may not be performed by the
were part of the 1973 Constitution, the existence of local local governments.
governments was not a formal part of the Constitution. The status Figure 10.1 presents the services and functions that each
of the District Governments after 2001, was also not formally of the three tiers of government were expected to perform,
part of the Constitution, although they were part of the Legal and those which they actually did perform. As the diagram
Framework Ordinance (LFO) and found temporary reprieve shows, the federal government's role was, and continued to
under the 17th Amendment to the Constitution. Although be of a more macro nature, while the provincial and local
amendment 140A to the Constitution based on the Legal governments performed the key role in the provision of basic
Framework Order of 2002 required provinces to establish social and physical services and infrastructure. Moreover,
and empower local governments, it did not recognize local an important observation from the way the responsibilities
government formally as the third tier of the State. This meant of the three governments were structured was that the_ type
that under this new, partially protected, District Government and number of functions that could be performed was 'very
System, local governments had no constitutional protection, exhaustive and provides potentially for a high degree of
and provinces still retained disproportionate power. (Article decentralization of functions to local governments even in
140A stated: 'Each Province shall, by law, establish a local the rural areas'. 6
government system and devolve political, administrative While the potential of the role of different, especially
and financial responsibility and authority to the elected lower, tiers of government may have been extensive, Figure
representatives of the local governments'-LFO 2002). The 10.1 shows that most of the functions which were on the
elected government after 2008, eventually disbanded the Concurrent List, and hence were the functional responsibility
2001 District Government system, and as has been the of both the provincial and federal governments, were actually
pattern of elected governments-see Chapter 12-no elected being performed by the federal government. Similarly, a
local governments existed anywhere in Pakistan for some large number of responsibilities that were technically in the
years, a state which continued to prevail well in to 2013. jurisdiction of local governments, were being performed
Many of the residual functions that were not part of by the provincial governments. This was more marked in
either of the Legislative Lists, and which were supposed smaller cities and the rural areas. Hence, it seems that some
to be performed by the provincial governments, used to be of the responsibilities of the lower tiers of government were
delegated to the local governments by the promulgation of being undertaken by a higher tier: the federal government
ordinances. The 1979 Local Government Ordinance, which in the case of the provincial governments, and the provincial
defined and allocated the responsibility of local government, government in the case of the local governments. Whether it
was operative in the Punjab, Sindh, and the NWFP, while the was the higher tier that infringed on the jurisdiction of the
1980 Ordinance applied to Balochistan until 2001, when the lower tier, or the lower tier's inability-in terms of limited
Local Government Ordinances of 2001 replaced the earlier financial resources and/or inadequate institutional capacity-
ordinances. These ordinances defined the functions and to cope with its designated responsibilities that was the
roles of the local government as delegated to them by the cause of the encroachment, will be discussed in subsequent
provincial governments. 5 sections of this chapter. Partially as a consequence of these
Of the functions allocated to local government by the problems, a new District Government System was designed
provincial governments, there were a set of compulsory and put into place by 2001.

Table 10.1
Direct and Indirect Taxes at Different Tiers of Government

Direct taxes Indirect taxes

Federal government Income tax Sales tax

Corporation tax Excise duty
Wealth tax Import duty
Property taxes Exports duty
Gas, petroleum surcharge
Foreign travel tax

Provincial government Land revenue Stamp duty

Urban immovable property tax Motor vehicle tax
Tax on transfer of property Entertainment tax
Agriculture income tax Excise duty
Capital gains tax Cotton fee
Tax on professions, trades, and callings Electricity duty
 Chapter 1O Resource Mobilization and the Structure of Taxation 251

10.1.2 Inter-Governmental Fiscal Relations when they fell short of funds. Surprisingly, no such general
grant-in-aid from provincial to local governments existed.
Prior to 2010 7 The grants-in-aid from provincial government to local
Provincial and Local Governments councils were specific in nature and used to finance recurring
expenditure on education and health. Local governments had
Before the implementation of the District Government
to take care of their recurring deficits themselves.
System in 2001, local governments were extensions of
Moreover, local governments made further payments and
provincial governments and the former acted on behalf of the
transfers to provincial governments in the form of revenue
latter. There was, therefore, a great deal of overlap between
from a surcharge on local taxes, especially in the NWFP and
these tiers of government.
the Punjab. For example, an education cess of 12 per cent
The provincial tax machinery used to collect some taxes
on octroi was charged in the NWFP, which was transferred
which were then returned to the local councils. The Excise
totally to the provincial government. As an important and
and Taxation Department and the Registrar of Stamp Duties,
detailed report argued, 'this tendency of the provincial
both of the provincial government, were responsible for
governments to ride on the back of the Local Government is
collecting the local property tax and the tax on the transfer of
a unique feature of the public finance structure of Pakistan'. 10
property. The reasons given for this were as follows:
Under the new system of 2001-now disbanded-as in
The justifications generally offered for provincial the past, the districts continued to rely on federal transfers.
collection (with revenue sharing) of municipal In the earlier structure, octroi collected by urban councils
taxes are, first, that sophisticated procedures are constituted 50-60 per cent of autonomous local revenues,
involved in the assessment of liabilities of some while zila export tax on agricultural goods out of rural
taxes. These procedures are perhaps beyond councils (zila councils) collected about the same for these
the capabilities of local taxation departments, administrative units. These taxes were abolished in 1999-
especially in the smaller jurisdictions. This is 2000 before the District Government Plan was implemented
the justification given for assumption of the and the arrangement was that the federal government
responsibility for property tax collection by would come up with a replacement grant paid out to
the provincial governments. Second, that it is
the Tehsils. Under the new system, District Governments
possible to realize significant economies of scale
and/or avoid double taxation. This is the case relied heavily on revenue transfers from the provinces and
particularly with a local tax which is levied on a from funds marked for vertical programmes. In addition,
similar tax base as a provincial tax. For example, similar to the National Finance Commission Award, which
the base for the tax on transfer of property is distributes funds from the federation to the provinces, a
analogous to that for stamp duty and that for the Provincial Finance Commission was also designed in each of
local rate is identical to that for land revenue. As the provinces, although they never came into being in any
such, it is efficient for the provincial tax agency effective manner.
to collect both taxes at the same time and hand
over the local component of revenue to the
councils. 8 Federal and Provincial Governments
It is somewhat surprising that local governments had been
In 1985/6, provincial governments, on behalf of local expected to keep their revenues and resources in check
governments, had collected about 12 per cent of the total and maintain a significant ability to self-finance their
revenue receipts of urban local governments, and 5 per cent expenditures, while provincial governments were, for the
of the receipt of rural councils. 9 most part, given a somewhat freer hand by the federal
There used to be a revenue-sharing arrangement between government. There existed an elaborate mechanism by which
provincial and local governments which consisted mainly of fiscal transfers from the federal to the provincial governments
the property tax and betterment tax, where a major portion took place from taxes collected by the former. In fact, this
of these taxes were transferred to the relevant local councils. mechanism was sanctified by the Constitution, where 'the
In the case of the property tax, 85 per cent was returned to Federal Government was required to transfer revenues from
the local governments in the Punjab, Sindh, and Balochistan, taxes, as may be specified from time to time, to the provincial
while in the NWFP, as much as 95 per cent of total receipts governments. Taxes to be included in the divisible pool and
of this head (net of collection costs) were made available to the share to be given to each province is determined by
the local councils. It is important to point out that, while various awards/commissions.' 11 -see Table 10.2.
provincial governments received revenue from the federal The National Finance Commission (NFC) is a body
government on the basis of population, the local governments constituted by the President of Pakistan which is meant to
received revenue on the basis of collection. Hence, there was divide the revenue-sharing formula for the divisible pool
no cross-subsidization and the larger the amount of revenue of resources to be made available from the federal to the
collected from a particular urban local council, the more it provincial governments. The NFC is supposed to announce
received, irrespective of its size. (There were no revenue- an award every five years, on which basis the divisible pool
sharing arrangements between the provincial governments is determined. However, as Table 10.3 shows, the NFC has
and local rural councils.) · not been constituted every five years and there was a gap of
Provincial governments used to have access to revenue- seventeen years between the 1991 award and the previous
deficit grants from federal governments that bailed them out
252 Issues in Pakistan's Economy

Table 10.2 fact that the total revenue accruing to the four provincial
Share of Provinces in Federal Revenue Receipts governments more than doubled from Rs. 7.1 billion in 1990/1
(Rs. m) to Rs. 15.9 billion the next year after the award in 1991/2.
2010-11 2011-12 While provincial governments' tax revenue in these two years
Classification increased by 40 per cent, non-tax revenues increased by 370
Revised Budget
per cent!1 3 The 1991 NFC award gave a much needed boost to
DIVISIBLE POOL TAXES provincial government finances, which ended up in surplus
Income Tax 337,304 407,924 for a change, but in subsequent years, they again ran into
Capital Value Tax 2,493 0 the perennial problem of huge deficits (see Appendix 10.1 in
Sales Tax excl. GST 330,398 437,404 the first edition of this book). See Chapter 13 on the 7th NFC
Federal Excise (Net of Gas) 69,122 85,977 Award and for more recent developments.
Customs Duties (excl. EDS) 95,348 112,627 In the case of revenue transfers from provincial to local
Royalty on Crude Oil 19,213 14,879 governments, it was revenue raised from each council
Royalty on Natural Gas 34,440 32,140 that determined the amount transferred to the urban local
Gas Development Surcharge (GOS) 31,072 24,427 councils. In case of the NFC award and transfers from the
Excise Duty on Natural Gas 12,326 15,359 federal to the provincial governments, it used to be essentially
GST on Services* 65,985 72,583 a single factor, population, which determined which province
Total: 997,701 1,203,321 would get what share from the divisible pool. Hence, cross-
subsidization would take place from a province that provided
PROVINCE-WISE SHARE a greater share to the exchequer, to a province that did
Punjab 463,594 576,862 not contribute as much, simply because it was to receive
Sindh 277,878 324,409 a certain amount based on its population share (see also
Khyber Pakhtunkhwa** 156,921 191,847 Appendix 10.1 ).
Balochistan 99,307 110,204 Despite an elaborate mechanism of resource transfers
Total: 997,701 1,203,321 from the federal to the provincial governments, provincial
* The indicative shares of GST on Services are strictly provisional
governments were very frequently in deficit.. Whenever
at this stage. These shares would be revised and adjusted in the this happened, the federal government had given ad hoc
light of decision taken after discussions with the provinces. subventions and grants. Moreover, the Annual Development
** Inclusive 1% War on Terror Programmes of the provinces had also been financed, at
times totally, by resources transferred from the federal to
the provincial governments. Another important difference
between provincial and local governments was that provincial
award of 1974. Attempts were made in 1979 and 1985 to governments had recourse to interest-bearing loans from the
form the NFC, but all such initiatives failed. The next award federal government, which local governments did not.
was to be made in June 1996, but was delayed by a few Under the 1997 NFC Award a number ofinter-governmental
months and was finally announced by one of Pakistan's transfers were available to the provincial governments, three
numerous unelected, so called caretaker governments in of which were 'unconditional'. The first was revenue sharing
late 1996. However, numerous objections to the award were on the basis of population which included revenue from a
raised by members of parliament elected to the provincial divisible pool of taxes that was shared on a 62.5/37.5 basis
and federal governments following the 1997 general elections between the federal and provincial governments, where
(see Appendix 10.1 )-also see Chapter 13 for the most recent population share determined which province would get
NFC Award of 2010. what-see Table 10.3. The population-based transfers formed

I
Table 10.3 shows how the composition and size of the the largest amount available under this 'unconditional'
divisible pool from the federal to the provincial governments category. Then there were shares in the form of straight
has changed over time. After an increase in the number and transfers, based on origin, and included revenue from
the amount of taxes between 1951 and 1970, there was a royalty and development surcharges on gas, royalty on crude
contraction in both in 1974, reducing the size of the divisible oil, and profits from hydroelectric projects. Finally, special
pool. The NFC award of 1991 distributed 80 per cent of the grants were made to Balochistan and the NWFP as these
revenues from the federal to the provincial governments in were considered to be less developed than either the Punjab
the case of income tax, export duty on cotton, excise duty on or Sindh. Apart from these three unconditional sources of
tobacco, and sales tax. 'In addition, the Federal Government revenue given from the federation to the provinces, there
took over the responsibility of financing any residual deficits
of the provincial governments in their recurring budgets.
These ad hoc subventions and grants have grown very rapidly
in subsequent years.' 12 Hence, the provincial governments got
were numerous 'conditional' grants, many of which were
based on a matching basis-see Box 10.1 for an evaluation
of the intergovernmental transfer system. 14 However, as
Chapter 13 shows, 7th NFC Award of 2009 was a major
j
a far better deal through this revenue-sharing arrangement departure from past practices, and brings about substantial
in 1991 than ever before. This is most noticeable from the changes from previous NFC Awards.
 Chapter 10 Resource Mobilization and the Structure of Taxation 253

Table 10.3
Revenue-Sharing Arrangements under Various NFC Awards

Raisman NFC NFC NFC NFC NFC NFC

Divisible Pool
1951 1961-1962 1964 1970 1974 1990 1997

A. Income tax 50 50 65 80 80 80 37.5

& Corporation Tax
8. Other Direct Taxes 37.5
C. Sales Duty 50 60 65 80 80 80 37.5
D. Excise Duty 37.5
-Tea 50 60 65 80
-Tobacco 50 60 65 80 80
- Sugar 80
- Betelnut 50 60 65 80

E. Export duties 37.5

- Cotton 100 65 80 80 80
- Jute 62.5 100 65 80
F. Import Duties 37.5
G. Estate/ 100 100 37.5
Succession
Duties
H. Capital Value 100 100 37.5
Tax on Immovable
Properties
I. Petroleum 100
Sugar cane
J. Gas Development 100
Surcharge

Total

Div. Pool Transfers as 12.8 23.1 27 33.4 29.8 35.3 37.3

% of Fed. Tax Revenue

Assigned shares to provinces under NFC Awards (percentages)

Raisman NFC NFC NFC NFC

Province
1951 1970 1974 1990 1997

Punjab 59 57 60 58 58
(64) (62) (60) (58) (58)

Sindh 24 23 23 23 23
(20) (22) (23) (23) (23)

NWFP 15 16 13 14 14
(14) (14) (13) (14) (14)

Balochistan 2 4 4 5 5
(2) (2) (4) (5) (5)

Total 100 100 100 100 100

Source: Ahmad, Nuzhat and Syed Ashraf Wasti, 'Pakistan', in Smoke, Paul, and Yun-Hwan Kim {eds.) Intergovernmental Fiscal Transfers
in Asia: Current Practice and Challenges for the Future (Manila: Asian Development Bank, December 2002).
254 Issues in Pakistan's Economy

Box 10.1 due to improvements in tax collection and administration. The

programme also shows a lack of concern with additional burden of
Overall Evaluation of the Intergovernmental taxation at a time of deteriorating quality and quantity of provincial
Transfer System Prior to 201 O public services. The services provided by the provinces have been
deteriorating over time, and additional taxation from the provinces
The intergovernmental transfer arrangements in Pakistan, which without an accompanying increase in quality of provision may
include shared taxes based on population, straight transfers not be acceptable to the taxpayers. To be successful, rewarding
based on collection origin and various grants, have been criticized general fiscal efforts as opposed to the present, more limited
by experts for several reasons. The straight transfers component approach may prove to be more powerful in raising provincial
(12 per cent of total transfer revenues) returns selected resource revenues.
revenues (oil, gas excises and royalties, and hydroelectric profits) Federal-provincial specific purpose transfers in Pakistan are
to the point of collection. These arrangements are criticized for generally ad hoc and discretionary, and they primarily meet
having no particular economic justification. On the other hand, political rather than economic objectives. Certain transfers are
they do benefit the smaller and less wealthy provinces, but this intended to compensate the two fiscally disadvantaged provinces
creates some major resentment. Larger, wealthy provinces are for their weak fiscal capacities but higher expenditure needs.
now seeking similar resource treatment for their agricultural In the absence of significant tax decentralization and a formal
commodities. Some argue that revenues from straight transfers equalization programme, these represent a pragmatic approach
would be better utilized for equalization if they were a part of a to dealing with expenditure need differentials. As discussed later
federal general revenue pool used for financing fiscal equalization in our recommendations, however, a distribution formula based
if they were a part of a federal general revenue pool used for on indicators of backwardness would be more appropriate for
financing fiscal equalization transfers to the provinces. However, distributing funds to these provinces.
given the distribution of natural resources and the current political The deliberations of a newly constituted National Finance
environment, it may be advisable to continue with the present Commission (NFC) have commenced and the respective positions
system of straight transfers as they provide some resources to of the federation and the federation units regarding future
backward provinces. intergovernmental revenue-sharing arrangements have become
The flow of funds through tax revenue-sharing arrangements (62 clear. The research team interviewed various representatives of
per cent of total transfer funds) is done on the basis of population. the Ministry of Finance, the provincial governments of the Punjab,
This programme is to be commended for its simplicity and Sindh, Balochistan, and NWFP, experts on public finance and
objectivity in transferring a large pool of resources in a predictable media personnel. Various articles in the newspapers on the 1997

l
fashion to bridge vertical fiscal imbalances. Moreover, Shah NFC Award were also consulted. First, it appears that there is a
(1997) points out that these transfers are equalizing with respect lack of federal willingness to further share tax revenues with the
to own tax collections and also mildly redistributive with respect provinces. This stems from the current state of federal finances,
to provincial GDP. The programme, however, does promote with a high and rising budget deficit. The federal government has
excessive dependence of provincial governments on federal the primary responsibility for controlling the national budgetary
transfers, which reduces own-source revenue collection incentives deficit and retiring and servicing the activities in the country.
and encourages weak tax administration. As a consequence, the Second, there exists in federal circles a perception of profligacy in
provincial tax bases are far from fully exploited, and further tax expenditures and lack of own revenue generation at the provincial
decentralization remains an unexplored option. level, further dampening interest in providing additional resources.
Traditionally very little attention has been given in Pakistan to The federal government needs to resolve these problems by
fiscal capacity in addressing regional equity issues. The transfers creating proper incentives for the provinces to behave as a
system has lacked an explicit equalization standard against responsible tier of government, rather than taking punitive actions,
which achievements can be evaluated. Adoption of a formal fiscal such as a substantial cut in revenue-sharing transfers.
capacity equalization programme and allocation among provinces The perspectives of the various provinces generally reflect their
by an appropriate predetermined formula would set a specific intent in increasing the share of resources that they receive. Sindh,
standard of equalization to be achieved. This would also help to for example, which accounts for 70 per cent of the revenue from
determine the total amounts of transfers in advance, facilitating all taxes, advocates a greater weight for origin of collection in the
the planning of expenditures. The approach adopted by the NFC transfer of resources. Punjab is pushing for instituting royalties
prior to the 1997 Award was purely one of gap filling where the on their important commodities (wheat, rice, and cotton), arguing
deficits in the provincial budgets were being met. There were also that these, like oil, are natural resources and should be treated as
no incentives in the system to reward greater revenue effort or such. Balochistan, being the largest province, would like to see a
efficiency in expenditure management. distribution formula that places considerable emphasis on area.
The NFC of 1997 introduced a matching grant system. Under The NWFP is concerned that it is not receiving its electricity royalty
this system, an additional matching grant, which is equal to as provided for in the Constitution. One point of agreement among
additional revenue mobilized from taxation reforms involving the provinces was that the federal government has been paying
rate increases, removal of exemptions or introduction of new little attention to the provincial concerns, and more needs to be
taxes, is given to the provinces. There are two contrasting views done to meet their demands. There seemed to have been little
on the impact of this reform. One view is that for the first time, room for negotiations in the past. The recent decision to constitute
emphasis has been placed on incentives for better resource Provincial Finance Commissions is considered a step in the right
mobilization and an explicit premium is placed on the level of direction.- In the present environment and period of resource
fiscal effort in the revenue sharing formula. The closed-ended scarcity, however, there is concern that designing a system that is
nature of the programme is also seen as limiting potential abuses. acceptable to all of the major players may be difficult.
If considerable improvements in revenues were seen, proponents
argue that the matching grants system could be expanded to
Source: Ahmad, Nuzhat and Syed Ashraf Wasti, 'Pakistan',
include all revenues in its net.
The contrasting view is that the programme of matching in Smoke, Paul and Yun-Hwan Kim, (eds.), Intergovernmental
transfers for resource mobilization is not well conceived. It rewards Fiscal Transfers in Asia: Current Practice and Challenges
provinces for higher tax effort due to changes in structure and for the Future (Manila: Asian Development Bank, December
rates of taxation but provides no incentives for revenue increases 2002), 207-13.
 Chapter 1O Resource Mobilization and the Structure of Taxation 255

10.2 THE STRUCTURE OF TAXATION Almost all the major taxes worth any real revenue potential
according to the 1973 Constitution, were with the federal
The 1973 Constitution outlined the taxes and duties that government, and after the 18th Amendment, there has been
the federal government was required to collect based on the a change in this mechanism. The Agricultural Income Tax
Federal Legislative List prior to the 18th Amendment. These (which is largely ineffective, though), Urban Immovable
were as follows: Property Tax, the Motor Vehicle Tax and Stamp Duties
were the only exceptions. The revenue heads-see Table
Duties of customs, including export duties; 10.2-assigned to the new order of local governments after
duties of excise, including duties on salt, but not 2001, were unable to generate sufficient revenue to meet
including duties on alcoholic liquors, opium, and local government expenditure needs. As a consequence,
other narcotics; duties in respect of succession local government-District Government-continue to rely
to property; estate duty in respect of property; heavily on revenue transfers from provinces, and on direct,
taxes on income other than agricultural income;
earmarked transfers from vertical programmes: 16
taxes on corporations; taxes on the sales
and purchases of goods imported, exported, However, it must be remembered that, since the existence
produced, manufactured, or consumed; taxes of local governments was not constitutionally ordained or
on the capital value of the assets, not including protected, their position was always somewhat tenuous.
taxes on capital gains on immovable property; This was also reflected in the nature of fiscal powers that
taxes on mineral oil, natural gas, and minerals provincial governments had granted local governments. A
for use in generation of nuclear energy; taxes report highlights that 'although separate fiscal powers have
and duties on the production capacity of any been specified for local councils, the provincial government
plant, machinery, undertaking, establishment, or has the overriding power to direct any local council within
installation in lieu of any one or more of them; the province either to levy any tax or to increase or reduce any
terminal taxes on goods or passengers carried
such tax by the specified extent or to suspend or abolish the
by railway, sea, or air; taxes on their fares and
freights; and fees in respect of any of the matters levy of any such tax'. 17
enumerated in the Fourth Schedule, but not
including fees taken in any court. 15 Understanding Pakistan's Taxation
The provincial governments had the powers to make Jaws
Structure
with respect to any matter other than those reserved for the This section summarizes some of the key issues and
federal government as described above. Just as the provincial components of Pakistan's revenue and taxations system
governments had delegated some of their legislative functions and structure, primarily of the federal government, given its
to local government, they had also allowed local governments dominance in the taxation structure. 18 Also see Box 10.2 and
to collect some taxes that the provincial government did not Appendix 10.2 which look at similar issues.
itself collect. Hence, the provincial governments collected The revenue receipts of the federal government constitute
taxes that the federal government did not collect, and the tax revenue receipts and non-tax revenue receipts. The
local governments collected the residual taxes that the revenue receipts of the federal government are derived
provincial governments did not collect. The distinction from the following sources: i) proceeds from taxation; ii)
between direct and indirect taxes is also important, as net revenue of the Commercial Departments; iii) interest
discussed later. Table 10.1 gives a breakdown of the two types on loans advanced by the federal government; iv) return
of taxes at the provincial and federal level prior to the 18th on investments made by the federal government; v) fees
Amendment. and other receipts realized by administrative ministries
The revenue sources, based on rates and taxes that the and divisions of the federal government; vi) surcharges on
provincial governments collected, included the following: tax petroleum and natural gas, and vii) dividends.
on agricultural income; water rate; tax on trade professions, Tax revenue collected by the Federal Board of Revenue
callings, and employment; capital gains tax on immovable (FBR) comprises of inland revenue and customs. Inland
property; excise duties on alcoholic liquor, opium, and other revenue comprise of income tax, sales tax,· and federal excise
narcotics; tax on immovable property; land revenue; motor duty. Tax revenue is of two types, direct and indirect, where
vehicle tax; stamp duties; electricity duties; entertainment direct taxes comprise income tax, workers' welfare tax,
duty; tolls on roads and bridges; betterment tax; taxes on workers' participation fund and capital value tax. The indirect
cinemas and hotels; arms licence fee; court fee; cotton fee; taxes are comprised customs, sales tax, federal excise,
and various other fees and taxes. surcharge on gas, petroleum levy, taxes collected by the
The provincial governments did not have the authority Islamabad Capital Territory (ICT) administration and airport
to assess and collect the entertainment duty or the urban tax. The major part of the revenue is administered by the
immovable property tax in the Cantonment Areas in Federal Board of Revenue. The non-tax revenue of the federal
the provinces. Nevertheless, the collecting and assessing government is administered by various ministries/divisions
authority in these areas, the Cantonment Board, did collect and comprises the following sources: i) income from property
and pass on a certain percentage of this tax to the provincial and enterprise; ii) receipts from civil administration and
governments. other functions; and iii) miscellaneous receipts. In recent
years, the largest component of non-tax revenue has usually

_J
256 Issues in Pakistan's Economy

Box 10.2 current fiscal year, the IMF said in a report released recently.
Tax Evasion in Pakistan In the last fiscal year, the FBR missed the target of Rs. 1,588
billion and collected Rs. 1,558 billion, showing a deficit of
One reason why Pakistan continues to have a low tax-to-GDP Rs. 30 billion.
ratio, is the 'massive' tax evasion which takes place. Here are The IMF projection of tax-to-GDP (gross domestic
some accounts of the scale and estimates of this tax evasion. product) ratio is also behind the government target of 9.3
per cent. The tax-to-GDP ratio is estimated at 9.2 per cent
1. Tax evasion hit 79 per cent, FBR admits for the current fiscal year, which was 8.9 per cent in the
Mubarak Zeb Khan, Dawn, Karachi 1·June 2011 reported: last fiscal year. The international agency attributed low tax
revenue to weak fiscal structure, which resulted in a poor
The Federal Board of Revenue admitted on Monday that tax tax-to-GDP ratio, which is one of the lowest in the world.
evasion hit 79 per cent this year and said it would have to be 'There is a general unwillingness to pay taxes, due to poor
reduced to achieve the revenue target set for 2011-12. The public service delivery and because of perceived unfairness
tax gap (tax evasion) is the difference between potential and in the tax system,' the IMF said. It said that agriculture is
actual tax collection. The potential is the amount of tax the mostly outside the tax net; besides the number of taxpayer
government will collect if everyone fully complies with the filing income tax returns is very small-about one per cent
tax law. Briefing reporters on new taxation measures taken of the population.
in the budget, FBR Chairman Salman Siddique, however, Against dismal revenue collection, the IMF report said
said there was no increase in the tax gap over the past few that there are large demands for government spending.
years. 'Most notably, subsidies (mostly electricity subsidies) and
According to a World Bank study, the tax gap, which was interest payments consume almost half of government
69 per cent in 2008, has now gone up to 79 per cent. But revenue while security spending uses up another quarter,'
Mr Siddique said as the figure of 69 per cent was calculated it added. As a result, there are large budget deficits that are
by using a different methodology, the two figures were not difficult to finance, especially when foreign assistance is
comparable. However, he conceded that 79 per cent was limited. Therefore, budgetary management relies too much
the highest-ever figure. At the same time, he said, the tax- on the containment of investment spending and borrowing
to-GDP ratio also fell to 9.1 per cent from last year's 9.2 per from the banking system, the report said.
cent. He projected the next year's figure at 9.5 per cent. For a sustainable reduction in deficit, the IMF stressed
Mr Siddique said the FBR was focusing on reducing upon a consistent growth in tax revenue collection.
the tax gap. 'There is a potential to reduce the evasion Besides, IMF suggested another attempt should be made
percentage to 40 to 50 per cent.' The FBR chief said it was at implementing the reformed general sales tax (GST),
not possible to reduce the tax gap to zero. This was not which can generate revenue up to three per cent of GDP in
even possible in developed countries like the USA (tax gap additional revenue.
22 per cent) and Britain (8 per cent). The tax gap in Pakistan
could be brought down with constant efforts, he added. 3. Mubarak Zeb Khan, Dawn, Karachi, 16 March 2011
A 2008 study showed that the gap in direct tax was 143
per cent, which was much higher than the 36 per cent gap If official figures are to be believed, out of Pakistan's 1.7
in indirect taxes. This shows that a large number of people million taxpayers, around 1.6 million taxpayers pay about
are not paying income tax. Rs. 21,000 each as income tax every year. All of these
Mr Siddique said there were nine such sectors people fall into the lowest tax bracket where their annual
(withholding agents), but they were not paying proper income tax is less than Rs. 500,000.
taxes collected from the taxpayers. 'We have full support of Even more interesting is the fact that this particular tax
the top leadership, including the president and the prime bracket has not gained many new entrants over the past
minister, for broadening the tax base and bringing evaders three years; to be exact, statistics show that 1.663 million
and non-taxpayers under the net,' he said. In reply to a taxpayers paid less than Rs. 500,000 as income tax in 2008.
question, he admitted that there was a huge gap between This number went down to 1.478 million in 2009 and then
the tax collection and its potential and said that efforts would back to 1.662 million in the tax year 2010. Clearly, over the
be made to bridge the gap by improving the performance past three years not many new taxpayers have stood up and
of FBR. been counted by the FBR.
This is not the only staggering statistic compiled by
2. Shahnawaz Akhter, The News, Karachi, 19 February 2012 the Federal Board of Revenue; less than 20,000 people in
Pakistan earned enough to pay between Rs. 1 million and
The International Monetary Fund (IMF) has projected a Rs. 5 million (10 to 50 lakhs) as their annual income tax in
shortfall of Rs. 29 billion in revenue collection by the Federal 2010, while 21,077 taxpayers have paid annual income tax
Board of Revenue (FBR) against the target of Rs. 1,952 in the range of Rs. 0.5 million to Rs. 1 million (five to 10
billion for fiscal year 2011-12 (FY12). According to baseline lakhs) and earned the state exchequer a little over Rs. 13.5
projections of the IMF, the FBR collection would stay billion.
around Rs. 1,923 billion. After any further improvement in This means that each of these 21,077 people paid an
tax collection, the tally may settle at Rs. 1,934 billion for the annual income tax of around Rs. 650,000. And this was
 Chapter 1O Resource Mobilization and the Structure of Taxation 257

the income tax bracket with the second highest number provisional tax notice with a two-month deadline to respond,
of taxpayers. No wonder Pakistan is known for its low following which the recovery effort will start.
compliance level to income tax rules and international The FBR plans to prosecute tax evaders using indirect
donors want the country to widen its tax base before asking estimates of their income and lifestyle. The ownership
the rest of the world for more aid and help. of movable and immovable property, foreign visits, and
Only 7,680 taxpayers earned enough to pay income accounts in foreign banks will be used as evidence against
tax in the range of Rs. 1 million to Rs. 1.5 million (10 to 15 suspected tax evaders. Siddiqui, however, was somewhat
lakhs). With a total collection of over Rs. 8 billion, each of cautious about an aggressive campaign against tax evaders,
these taxpayers contributed a mere Rs. 1.52 million to the fearing a negative impact on the economy. According to the
government exchequer in the year. Around 3,000 taxpayers FBR, over 70 per cent of all taxes evaded are corporate
paid income tax between Rs. 1.5 million and Rs. 2 million income taxes.
(15 to 20 lakhs) a year while 2,414 taxpayers paid tax in The Securities and Exchanges Commission of Pakistan
the range of Rs. 2 million to Rs. 2.5 million (20 to 25 lakhs). has registered over 59,000 companies but only a little over
For the next tax bracket, the number of taxpayers dropped 20,000 file their income tax returns with the FBR. The Senate
steeply. Only 1,526 people paid tax in the range of Rs. 2.5 committee's response suggested a degree of scepticism
million to Rs. 3 million (25 to 30 lakhs) followed by 838 about the ability of the FBR to conduct an effective
taxpayers who paid Rs. 3.5 million to Rs. 4 million (35 to 40 crackdown against tax evasion. 'My fear is that when the
lakhs) as annual tax in 2010. recovery campaign will be at its peak, the chairman of
The number reduces to a mere 602 when it comes to the FBR and his team will be transferred and that will be
people who paid more than Rs. 4 million to Rs. 4.5 million fault of the politicians,' said Senator Haroon Akhtar of the
(40 to 45 lakhs) as annual tax. And only 526 taxpayers paid Pakistan Muslim League-Quaid. Other senators went even
up to Rs. 5 million (50 lakhs). Each of them contributed further, suggesting complicity between FBR officials and tax
Rs. 4.5 million (45 lakhs) to the government; this is less evaders. 'Tax evasion is not possible without the connivance
than the amount that one would need to purchase a Prado of the FBR and the bleak scenario reflects that its efficiency
Land Cruiser. Also, there are only 4,426 taxpayers across is zero,' said Senator Ahmed Ali of the Muttahida Qaumi
Pakistan who declared income tax to be more than Rs. 5 Movement, the chairman of the committee.
million. However, FBR officials point out that this bracket Siddiqui acknowledged that corruption within the
includes corporate and other businesses. department was a problem and pointed out that until some
Although the number of these taxpayers was low, of the senior members bf his team were not removed
their contribution in the total income collection stood at from their posts, the FBR would not be able to effectively
Rs. 286.023 billion during 2010 out of the total collection prosecute evaders. He was also candid about the FBR's
of Rs. 373.685 billion from 1,706 taxpayers. In other words, inability to meet its revenue targets for the current fiscal
income tax collection from Pakistan's 1.6 million taxpayers year, describing the collection of Rs. 1,667 billion as 'out of
remained Rs. 87.662 billion. the question.' He put the more realistic figure at Rs. 1,586
billion, without any new measures to increase revenues.
4. Shahbaz Rana, Express Tribune, Karachi, 24 February 2011
5. Shahbaz Rana, Express Tribune, Karachi, 3 March 2011
For every Rs. 100 collected by the Federal Board of
Revenue in taxes, it misses another Rs. 79 due to tax The government is reluctant to give tax authorities the green
evasion, said Salman Siddiqui, chairman of the FBR, while signal to crack down on 700,000 tax evaders, even at a time
testifying before the Senate Committee on Finance and when there is a shortfall in revenue collection. The February
Revenue on Wednesday. The FBR estimates that the total tax collection target was missed by a margin of Rs. 27 billion
revenue lost by the government as a result of tax evasion mainly because of a 1O per cent drop in direct tax collection,
comes out to Rs. 1.27 trillion for the fiscal year ending 30 according to provisional statistics released by the Federal
June 2011. This number is higher than the World Bank's Board of Revenue (FBR). FBR managed to collect Rs. 103.1
most recent estimate of Rs. 796 billion and is equal to 8 per billion in taxes against the target of Rs. 130 billion.
cent of the GDP, nearly equal to the worst case scenario for The shortfall is almost equivalent to what the government
the projected fiscal deficit for the current year. wants to collect by promulgating a new ordinance. The
With numbers as astounding as this, a wide-ranging government is considering levying flood surcharge and
crackdown against tax evaders seems to be on the cards. doubling special excise duty rate in the ordinance to boost
The FBR detailed its plan to begin prosecuting evasion. 'The tax collection. Total tax collection in the first eight months of
FBR has credible evidence against 708,600 tax evaders the current financial year (July-February) stood at Rs. 873.2
and a campaign against them will start from Friday', billion, a shortfall of Rs. 34 billion. Hence, the tax authorities
said Siddiqui. The number represents people who have are now facing an uphill task to collect Rs. 757 billion in the
taxpayer identification numbers, known as NTNs, but remaining four months. The FBR needs to collect an average
have not filed their tax returns. According to the plan, the Rs. 189.3 billion per month to achieve the target, which is
FBR will give tax evaders a 30 day deadline to submit the 'over-ambitious' according to a former FBR chairman. FBR
details of their income and spending. If the evaders do not Chairman Salman Siddique said his goal 'is to achieve the
submit declarations voluntarily, tax authorities will issue a year-end target of Rs. 1.63 trillion by all means.'
258 Issues in Pakistan's Economy

Statistics show that from the Rs. 873 billion collection, 58 per cent. 'The share of taxpayers belonging to the
direct taxes were Rs. 309.4 billion, which is just 35.4 per non-corporate sector is close to 99 per cent in the total
cent of the total collection. A member of FBR said that return filers. On the other hand, the corporate sector that
the shortfall in income tax collection was Rs. 16 billion, contributes around 66 per cent in the total income tax
indicating that something was wrong with the. audit and collection has a share of only one per cent in the income
income tax wings of FBR. The international community tax base.'
has largely stopped loan disbursements due to the Pakistan's tax collection has failed to improve since the
government's inability to implement reforms. The budgetary late 1990s mainly due to inherent structural problems,
support by the international community dropped to a mere including a narrow tax base, massive tax evasion, and
Rs. 17.9 billion, shows the finance ministry's fiscal operation administrative weaknesses, Federal Board of Revenue
summary. The revenue shortfall compels the authorities to (FBR) said in its quarterly report. The report said that
borrow from the central bank to finance the budget deficit taxpayers distrust public institutions and the tax-to-gross
that further fuels inflation. domestic product (GDP) ratio had declined in recent years.
On 23 February in a meeting of the Senate Standing But in fiscal 2009/10 (July-June), the tax-to-GDP ratio is
Committee on Finance, the FBR chairman said that tax expected to rise to 9.3 per cent from 8.8 per cent in 2008/09.
evasions amounted to 79 per cent of total taxes in the In order to ensure adequate public funding for the
country. FBR had credible evidences against 708,600 tax development and safeguard macroeconomic stability, the
evaders and would launch a campaign to net the evaders government plans to increase tax collection to 13 to 15
from 25 February, he added. Only 1.9 million people submit per cent of GDP in the next five years, the report said. This
income tax statements out of the registered 2.9 million commitment is linked with the implementation of broad-
national tax number holders, a gap of one million. based value added tax (VAT) from fiscal 2010/11, it added.
'International experience shows that tax reform can deliver
The plan large increases in the tax-to-GDP ratio. While there are
other developing countries at Pakistanis income level with
'Everything from newspaper advertisements to provisional similarly low tax-to-GDP ratios, countries in the region set a
tax demands against the evaders is ready, but we are waiting different example.' 'The simple average of the tax-to-GDP
for the green signal from the higher authorities,' says the FBR ratio in Bangladesh, India, and Sri Lanka----countries with
official. The FBR's plan requires approval of the Economic similar tax policies and administration-is systematically
Coordination Committee (ECG) of the cabinet. ECG did not higher than Pakistan,' the report said adding that this gap
take up the issue of approving a framework to broaden the increased during the present decade.
tax net in the meeting held on Tuesday. The authorities have The reports said that Malaysia, India, Thailand, Turkey,
chalked out a plan to collect at least Rs. 5 billion from the tax and Sweden saw rapid growth and rising tax ratios, while
evaders during April to June this year. According to details, in Pakistan tax collection rose just in line with the economic
FBR will give tax evaders a 30-day deadline to submit details growth. In Asia-Pacific countries, the tax collection ratio
of their income and spending through media advertisements increased from 13.8 per cent in 2000 to 16.5 per cent in
and if they don't, tax authorities will raise provisional tax 2004, while in Pakistan it remained roughly constant as a
demands with a two-month deadline to respond. If the per cent of GDP since the early 2000.
people do not even turn up after the two-month deadline, Exemptions are made part of the tax system for a variety
provisional demands will be considered as a final tax liability of reasons including the income tax threshold and GST
and after that recovery will start. exemption on basic foodstuffs are granted to protect the
FBR has obtained information from the data bank of the most vulnerable groups of society, the FBR report said.
National Database Registration Authority (NADRA) while Exemptions are also introduced to protect certain industries,
evidence is based on ownership of movable and immovable including those which are new, it added. 'There are also
property, foreign visits, and accounts in foreign banks of the political exemptions (for) diplomats, top echelon of civil and
tax evaders. military bureaucracy, and employees of the international
organizations. Temporary exemptions are also granted to
6. Haris Zamir, The News, Karachi, 6 April 2010 address issues that arise from time-to-time.' Tax exemptions
are also given for the import of essential commodities to
Only 2.75 million Pakistanis, or 1.6 per cent of the country's counter inflationary pressures, it said. 'The estimated total
estimated 160 million people, are registered taxpayers and cost of all of the exemptions that could be around Rs. 200
posses the National Tax Numbers (NTN), FBR report said. billion, which comes to 3 per cent of the GDP.'
Out of these NTN holders, only around two million people The report said that Pakistan needs to look thoroughly
file their returns to the tax authorities, the report said. 'The at the available reform options, pursuing twin-track reforms
compliance ratio has always been below. The share of of tax policy and administration, which would help the
taxpayers to population is low when compared with the few government to meet its medium-term revenue collection
selected developing and developed countries, where the targets. 'Different studies conducted on Pakistan taxation
share ranges between 4.7 per cent and 86.4 per cent' The system highlight that Pakistan has the potential to achieve
report said that in India, the share of taxpayers to population the objective of increasing the tax to GDP ratio by 13-15 per
is 4.7 per cent, in Argentina 16.5 per cent, France around cent over the next five years.'
 Chapter 1O Resource Mobilization and the Structure of Taxation 259

been State Bank of Pakistan's profit. The second major source Table 10.5
has been Coalition Support Fund (CSF) from the United Summary of Revenue Receipts II (Rs. m)
States of America, although this depends on Pakistan-US 2010-11 2011-12
relations. The other heads of non-tax revenue constitute Revised Budget
profits from Pakistan Telecommunication Authority and
dividend from OGDCL, Pak Arab Refinery Ltd, and PSO. Receipts from Civil Admn. and 302,640.2 321,382.778
Other sources include possible potential of receipts from the Other Functions
eventual auction of 3-G Licences-see Tables 10.4 and 10.5. General Administration 702.3 800.5
The sales tax is a tax on consumption levied on manu- SBP Profit 185,000.0 200,000.0
facturers and retailers with an annual turnover of more Defence 115,298.0 118,739.0
than Rs. 5 million, as well as on importers, wholesalers, Law and Order 671.2 866.0
distributors, dealers, and specified services at a standard Community services 498.5 530.1
rate of 16 per cent, as approved in the Budget of 2012/13. 447.2
Social Services 384.1
However, some commodities are subjected to sales tax at 19
per cent and 22 per cent and there are others, such as basic
Miscellaneous Receipts 150,260.5 141,254.9
foodstuff, agricultural produce (not subjected to any further
process), medicines, books, and live animals, etc. which are Economic Services 2,213.4 2,388.3
exempted from the sales tax. Citizenship, Naturalization & Passport 10,700.0 13,750.0
Petroleum products and edible oil remain the top revenue Fees
source of sales tax on imports. Within the domestic Development Surcharge on Gas 31,706.4 24,925.1
component of sales tax collection, the largest contributions Royalty on Oil 19,604.9 15,183.1
come from POL products, telecom, services, natural gas, Royalty on Gas 35,143.3 32,796.4

~
Discount Retained on Local Crude Oil 25,189.0 25,100.0
Others 25,703.5 27,112.0
Table 10.4
Summary of Revenue Receipts I (Rs. m) Gross Federal Revenue Receipts 2,235,888.8 2,732,149.9

I B * TAX REVENUE
2010-11
Revised
2011-12
Budget
1,679,363.0 2,074,182.1
Less: Provincial Share
Net Federal Revenue Receipts
997,700.7
1,238, 188.1
1,203,321.0
1,528,828.9

I Direct taxes
Income Tax
Workers' Welfare Tax and
Workers' Participation Fund
626,900.0
602,500.0
20,000.0
0.0
743,600.0
718,600.0
25,000.0
0.0
Revenue Receipts

Classification
2010-11
Revised
(Rs. m)
2011-12
Budget

Capital Value Tax 4,400.0 0.0 Tax Revenue 1,679,363 2,074,182

- Direct Taxes 626,900 743,600
Indirect taxes 1,052,463.0 1,330,582.1 - Indirect Taxes 1,052,463 1,330,582
173,300.0 206,400.0 Non-Tax Revenue 556,526 657,968
Customs
- Property and Enterprise 103,625 195,330
Sales Tax 654,600.0 836,700.0
- Civil Administration and Other 302,640 321,383
Federal Excise 132,900.0 165,600.0
Functions
Petroleum Levy 90,000.0 120,000.0
- Miscellaneous Receipts 150,261 141,255
Other Taxes (ICT) 1,590.0 1,807.1 Revenue Receipts (Gross) 2,235,889 2,732,150
Airport Tax 71.0 75.0 Less: Provincial Share 997,701 1,203,321
Revenue Receipts (Net) 1,238,188 1,528,829
NON TAX REVENUE 556,525.8 657,967.8
Income from Property 103,625.1 195,330.2
and Enterprise sugar, and cigarettes. Domestic sales tax collection also
benefited from the revenue measures announced in March
Profits (Pakistan Post office) -140.0 -2,195.0 2011 when the sales tax was applied on the market price
PTA 0.0 75,000.0 of sugar. Moreover, exemptions for sales tax on fertilizers,
Interest (Provinces) 18,508.3 15,638.1 pesticides and tractors, and zero rating on plants, machinery,
and equipment including parts, have also been withdrawn.
Interest (PSEs & others) 41,775.6 52,503.4
Changes in what should be taxed take place periodically as
Dividends 43,481.1 64,383.7
and when the government decides.
* Out of which FBR collection has been estimated at Rs. 1587.700 In terms of collection from federal excise duties (FEDs),
billion for R. E. 2010-11 and at Rs. 1952.300 billion for B. E. there are six major areas of revenue wh.ich include cigarettes,
2011-12
260 Issues in Pakistan's Economy

beverages, POL products, cement, natural gas, and special The sales tax was the second major revenue generation
excise duty. Almost 76 per cent of excise duty collection source of the country during 2009/10. It constituted around
(domestic) is collected from these six commodities. Of the 65 per cent and 39 per cent of the collection of indirect taxes
total domestic collection of FED, cigarettes and tobacco, and total federal taxes, respectively, during 2009/10. The
cement, and services are usually the biggest contributors. The collection of sales tax has always been highly concentrated
main source of customs receipts is from the duties levied on in some commodities, with only petroleum products and the
vehicles and from POL products. telecom sector contributing more than 60 per cent of the total
Non-tax receipts of the federal government comprise of (i) domestic sales tax. Ten commodities contribute almost 90
income from property and enterprise, (ii) receipts from civil per cent of the total net sales tax from domestic sources, and
administration, and (iii) miscellaneous receipts of the federal include petroleum products, telecom services, natural gas,
ministries, divisions and departments. other services, cigarettes, sugar, electrical energy, beverages,
The direct tax has contributed around 40 per cent of total tea, and cement. Like the domestic sales tax, the receipts of
tax _receipts. The share of direct taxes in total federal tax sales tax on imports are also concentrated in a few sectors.
receipts has increased from around IS per cent in the early Petroleum products alone contributed around 40 per cent
I 990s to 32 per cent in 2000/01, and was 40 per cent in of overall collection of sales tax on imports during 2009/10.
2009/l 0. The contribution of income tax iil total direct taxes Despite the large-scale import tariff rationalization in the last
has been around 95-97 per cent. The structure of income tax two decades, with tariffs down to a maximum of 30 per cent,
is based on withholding taxes (WHT), voluntary payments customs duty is still an important component of federal tax
(VP), and collection on demand (COD). The collection during receipts. It contributed around 20.2 per cent and 12.2 per cent
2009/l O shows that the share of WHT, VP, and COD in gross of indirect taxes and total federal tax receipts, respectively,
collection was 53 per cent, 29.5 per cent, and 17.5 per cent, during 2009/10. Federal excise duty is levied on imports .and
respectively. WHT is the leading source of direct tax receipts domestic stages. The major portion of the receipts emanates
given the large undocumented sector of the economy. Nine from the domestic sector. The base of the federal excise duty Ii
major withholding taxes contributed around 92 per cent
of total WHT collection in 2009/10. These were: contracts,
imports, salary, telephone, export, bank interest/securities,
electricity, cash withdrawal, and dividends.
is quite narrow and is limited to a few commodities. Despite
this narrow base, the federal excise duty contributed 9.1 per
cent of total tax collection during 2009/10. I
I

Table 10.6
I
Principal Sources of Revenue and Expenditure for United Pakistan (Rs. m)
Part (a)

Revenue

Income
Central Total
tax and Sales
Year Customs excise revenue
corporation tax
duty receipts
tax

1947/8 113.7 13.8 27.0 198.9

1957/8 420.5 193.7 240.4 142.7 1,525.0
1964/5 1,030.2 697.0 342.3 268.6 3,301.0
1970/1 1,700.0 2,159.7 385.0 247.6 6,461.3

Part (b)

Expenditure

General Total Total non-

Social Total Surplus/
Year admin- Defence development development
sectors expenditure deficit
istration expenditure expenditure

1947/8 8.2 7.2 153.8 236.0 -37.1 98.1 22.4

1957/8 68.3 86.4 854.2 1,521.8 3.2 1,457.2 125.3
1964/5 111.1 132.3 1,262.3 2,736.2 564.8 2,426.0 254.5
1970/1 188.4 301.2 3,200.0 6,002.6 458.7 4,725.8 941.0

Source: Government of Pakistan, Pakistan Economic Swvey 1972-73 (Islamabad, 1973), 170-1.
 Chapter 1O Resource Mobilization and the Structure of Taxation 261

Prior to the passing of the 18th Amendment and the 7th This should not be very surprising if Part II of this book has
NFC Award, about 90-93 per cent of resources were generated been studied, where the contribution of trade has been shown
at the federal level whereas only 7 per cent resources were to be substantial in economic development. With high tariff
generated by the provinces. Provinces relied on the federal barriers and import substituting industrialization, this is a
government for meeting their expenditure requirements. In logical outcome. Taxes from imports were, until recently, the
order to maintain inter-governmental fiscal relationships, main source of revenue for the exchequer. Another interesting
Article 160 of the Constitution provides for setting up of figure on the revenue side in Table 10.6 is the contribution
the National Finance Commission (NFC) at intervals not of income and corporation taxes. Despite the impressive
exceeding five years. The mandate of NFC is to recommend industrialization and dynamic economic growth that took
to the President for the distribution of resources between place in the 1960s, the contribution of income and corporate
the federal and provincial governments-see Chapter 13 for taxes actually declined as a percentage of total revenue receipts
details on the NFC for United Pakistan. From 15.7 per cent in 1957/8, they fell
to less than 6 per cent in 1970/1. The issue of income tax is
discussed in subsequent sections of this book, but it seems
10.3 PUBLIC FINANCE: THE BASIC FACTS that the pattern of tax evasion and underreporting may have
been established very early in Pakistan.
As has been the pattern in much of this book, having On the expenditure side, it seems that Pakistan's was
introduced the subject of public finance in Pakistan, we an economy of defence, with more than half of total
now present some data. This section is made cumbersome expenditure being spent on defence from l 947 to at least
by the extensive nature of public finance statistics covering 1970/1. In 1970/1, 53 per cent of total expenditure was on
three tiers of government: federal, provincial, and local. defence, a figure astronomically high by any standards.
Nevertheless, in order to appreciate the issues involved, a Because Pakistan's economy, up to the l 970s, was highly
study of hard data is unavoidable. dependent on external resources in the form of aid, grants,
Of the tables that follow, Tables 10.6 to 10.11 provide basic and foreign debt, development expenditure was higher than
and historical information and data about the nature of non-development expenditure. In 1962/3, for example, of
Pakistan's public finances. Table 10.6 presents the expenditure the total resources available to spend in Pakistan, as much
and revenue pattern in Pakistan prior to the independence of as 73 per cent were external funds; in 1966/7, this figure
Bangladesh. It shows that the main source of revenue has was 74 per cent. As soon as the military government of Ayub
historically been from customs duties, i.e. taxation on trade. I<han took control of Pakistan in 1958, the share of external

Graph 10.1: Revenue Statistics of Federal Government 1961/2-2010/11

25.00% ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

--Total Revenue to GDP Ratio

····••FederalTax to GDP Ratio
- - Direct Tax to GDP
---lndirectTex to GDP
\
, r
'--., ',,"\
.
\ .--- ......
5.00% ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

I
l
262 Issues in Pakistan's Economy

funds in total resources jumped to over half. The arguments in 2011/12 was less than 19 per cent of total provincial and
made in Chapter 6, that Pakistan's economy was highly federal current expenditure. This pattern contrasts sharply
dependent on aid and that much of the industrialization with that seen in the period prior to 1971. The data also
boom of the Decade of Development was foreign funded, are show that defence and interest payments accounted for more
re-emphasized on the basis of public finance data for those than half of all government expenditure. This issue is of key
years. 19-also see Chapter 25. importance to the economy and politics, and is discussed in
To understand the nature of public finance statistics, greater detail in this chapter and the next.
Tables 10.7 to 10.11 provide a good introduction. Table Since the figures in Tables 10.7 to 10.9 are in current market
10.7 gives a basic overview of how the Government of prices, a more useful indication of trend is a measurement of
Pakistan presents its consolidated provincial and federal these figures with respect to a constant, say GDP. Table IO. IO
government expenditure and revenue, and includes figures shows how total revenue has fallen over the last decade
on development expenditure and on the extent of the fiscal and ranges around 9 per cent of GDP. Tax revenue is only
deficit and its funding for each year. What is interesting from around 6.8 per cent and is cause for serious concern. Figure
Table 10.7 is that even after 26 years of structural reforms, 10.2 shows the almost unchanging trend and relationship
very little has changed, and in fact, in the case of tax revenues between tax and non-tax revenue since 1986/7.
as a per cent of GDP, there is substantial deterioration. Tables Shahid Kardar explains the range of the problems Pakistan
10.8 and 10.9 break down the revenue and expenditure has in collecting taxes, and argues, that Pakistan has one of
statements of the government in greater detail. the lowest tax to GDP ratios and, even considering developing
In Table 10.8, we see that revenue from taxation is far countries alone, it is in the bottom ranked nations in terms
greater than that from non-tax revenue, and that indirect of the proportion of population registered as taxpayers-less
taxes continue to be many times as large as· direct taxes. than 5 per cent of household population. There is rampant tax
Within the category of indirect taxes, import duties used to evasion, partly with the collusion of the official machinery.
dominate by far, and provided the largest source of income Whereas 3.1 million people have the National Tax Number, a
to the government. This has all changed and has been one mere 1.2 million filed an income tax return in 2010/11. What
of the most significant changes in Pakistan's economy as a is even more startling is that of 47,800 companies that have
result of lowering tariffs and overall reforms. Today the sales NTNs, less than 16,800 filed an income tax return against
tax is the largest source of revenue to the government. On the 400,000 industrial electricity connections. As admitted by
expenditure side (Table 10.9), development expenditure is FBR, there is a tax gap of 79 per cent (the difference between
far lower than current or non-development expenditure, and potential revenues under the existing system and those

Graph 10.2: Expenditure Statistics of Federal Government 1961/2-2010/11

- - - Tax Revenue to GDP Ratio - - Total Expenditure to GDP ····•·Current Expenditure to GDP - Development Expenditure
to GDP Ratio
35.00% , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

5.00% +---------__,..,..._____________________.....,_....,---------~,.._......,___
-', ... _,,---" , .......
0.00% +-,-,-,.....,,.....,--,--,-,---,---,---,--,--,--,---,--,-,--,--,-,-,.....,,.....,,.....,-,.-,---,---,---,--,--,--,---,--,-,--,--,-,-,.....,,.....,_ _,.--,---,---,--,--,--,-~
 . T,-~-
r 0
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264 Issues in Pakistan's Economy

actually collected) .20 See Appendix 10.3 for a proposal to has increased quite substantially over the five decades. The
reform Pakistan's taxation system. dependence on external resources, if high in the 1960s and
At the end of the fiscal year 2011/12, the size of Pakistan's 1970s, was even higher at the end of the 1980s.
economy was estimated at Rs. 20.653 trillion. Over the last So far we have been discussing largely consolidated
decade, the tax-to-GDP ratio fell from around 11.5 per cent figures. Before we turn to a disaggregation of revenue and
in 2002/3 to 8.5 per cent in 2011/12. Hence, if the tax-to-GDP expenditure patterns at different levels of government,
ratio would have been maintained at even the low level of Table 10.14 shows us the degree and role of each level
2002/3, the additional tax revenue accruing to Pakistan's of government in revenue and expenditure. The federal
economy would be Rs. 600 billion, enough to address the government collected about 90 per cent of total revenue and
energy crisis in terms of the outstanding circular debt. If of tax receipts, while the local government did as well as the
Pakistan's proportion of taxpayers was the same as that of provincial government, despite numerous constraints and
India's, a low 4.7 per cent of the population, then Pakistan's obstacles in raising revenue. Since the federal government
tax paying population should have been more than three provided provincial government's funds, the provinces' share
times what it is today, and this when India's tax model has of development expenditure was greater than the revenue t
numerous problems similar to Pakistan's. See Box 10.3 for they raised. In 2001, while provincial governments collected
one of many assessments of Pakistan's tax-to-GDP ratio. 5 per cent of total revenue receipts, they spent 31 per cent
Table 10.11 shows how government
expenditures have grown over time
and the extent of allocation to different
expenditure heads. One sees that while Table 10.7
defence and interest payments have Summary of Public Finances: 1987/8, 2002/3 and 2011 /12
shown only positive, at times dramatic,
increases over the previous year, 1987/8 2002/3d 2011/12
development expenditure has even
been cut, by equally dramatic amounts, Rs. m % of GDP Rs. m % of GDP Rs. m % of GDP
in some years. What is more alarming
from the lower panel in Table 10.11 Total revenues 117,021 17.3 706,100 17.6 2,568,060 12.8
is that the proportion of development Federal 110,949 660,300 2,412,843
Provincial 8 6,072 45,800 155,217
expenditure in total expenditure, while
A Tax revenues 93,456 14.3 553,300 13.8 2,077,392 10.3
very low, has continued to fall over Federal 88,958 530,200 1,970,203
the last decade with an increase in Provincial 4,498 23,100 107,189
allocation, after having fallen markedly, B Non-tax revenues 23,565 3.7 152,800 3.8 490,668 2.4
in the last two years. Table 10.12 Federal 21,991 130,100 442,640
looks at these expenditure figures as Provincial 1,574 22,700 48,028
a proportion of GDP, and shows that Surplus of
interest payments and defence consume autonomous
almost half of total expenditure. bodies and SAPc 5,789 5,000
Having provided an overview of Expenditures 180,373 26.7 892,500 22.2 3,973,764 19.6
Federal 136,151 318,057
public finance statistics, we can now
Provincial 44,222 110,224
examine some of the key public finance Current 8 133,645 728,800 3,122,502
ratios in Pakistan over a period of about Federal 104,200 543,700 2,154,732
fifty years, as shown in Table 10.13. Provincial 29,445 185,100 967,770
While there has been some change in Development 46,728 134,000 731,868
tax revenue as a proportion of total Federal 31,951 60,100
revenue in the last fifty years, the Provincial 14,777 21,800
change has not been very substantial Overall deficit 57,563 8.5 186,400 4.6 1,369,704 6.8
except in the last decade. Moreover, External (net) 12,691 102,500 128,650
most ratios-those for direct taxes, Domestic
(non-bank) 30,931 101,100 529,384
indirect taxes-have not shown much
Banking systemb 13,941 29,200 711,670
change, although the nature and. Memorandum items
structure of the economy has changed GDP at market
considerably in fifty years. One should prices (Rs. bn) 0.675 4.01 20,091
have expected changes in the revenue
structure along with structural changes 8 Current subsidies are incl~ded in current expenditure and development subsidies in
in the economy and the main change development expenditure. · -
comes about due to a fall in customs bDiffers from monetary statistics due to coverage and timing.
duties over the last decade. There are csAP from 1992/3.
significant changes, however, on the dModified Budget Estimates.
expenditure side, where debt servicing Source: Government of Pakistan, Pakistan Economic SuNey (Islamabad: various
issues).

_J
r

r Chapter 1O Resource Mobilization and the Structure of Taxation 265

Table 10.8 Table 10.9

I
Consolidated Federal and Provincial Government Consolidated Federal and Provincial Government
Revenues: 1987/8, 2002/3, and 2011 /12 (Rs. m) Expenditure: 1987/8, 2002/3, and 2011 /12 (Rs. m)

1987/8 2002/3d 2011/12 1987/8 2002/3C 2011/12

Total revenues (I + II) 117,021 706,100 2,568,060 Current expenditurea 133,645 728,800 3,122,502
Federal a 110,949 660,300 2,412,843 Federal 104,200 543,700 2,154,732
Provincial a 6,072 45,800 155,217 Provincial 29,445 185,100 967,770
Tax revenues (A + B) 93,456 553,300 2,077,392 Defenceb 47,015 158,000 507,159
Federal 88,958 530,200 1,970,203 Interest 33,238 241,829 901,919
Provincial 4,498 23,100 107,189 Federal 31,702 212,300 889,044
A Direct taxes (1 + 2) 12,441 152,072 746,656 Provincial 1,536 29,529 12,875
1 Income and corp. taxb 11,528 54,300 Current subsidies 7,950 59,135 166,976
2 Taxes on property 913 5,076 Federal 4,332 49,800
Federal 313 3,700 Provincial 3,618 9,335
Provincial 600 1,376 General administration 8,642 101,223
B Indirect taxes Federal 5,098 57,900
(3 + 4 + 5 + 6 + 7) 81,015 397,657 1,330,736 Provincial 3,444 43,323
3 Excise duty 17,560 49,095 126,656 All others 19,575 168,613
Federal 17,399 47,500 122,460 Development expenditure 46,728 134,000 731,818
Provincial 161 1,595 4,195 Total expenditure 180,373 892,500 3,937,764
4 Sales taxb 8,743 204,000 808,846 Federal 136,151 318,056
5 Taxes on 38,001 59,000 216,898 Provincial 44,222 110,224
international trade
6 Surchargesb 12,974 66,000 83,329 acurrent subsidies are included in current expenditure and
6.1 Gasb 3,075 18,000 22,960 development expenditure.
6.2 Petroleumb 9,899 48,000 60,369 bExpenditures under these heads are exclusively federal.
7 Othertaxesc 3,737 19,562 99,008 Source: Government of Pakistan, Pakistan Economic Survey
7.1 Stamp dutiesc 1,671 6,554 16,522 (Islamabad: various issues).
7.2 Motor vehicle taxesc 856 3,585 11,140
7.3 Foreign travel tax 1,710 0
7.4 Othersc 1,210 7,713 71,341 of total government expenditure. On the other hand, local
II Non-tax revenues 23,565 152,800 490,668 government's share of total expenditure was about the
Federal 21,991 130,100 442,640 same as the revenue it raised ( see Figure 10.3). However, as
Provincial 1,574 22,700 48,028 Chapter 13 explains in greater detail, these proportions have
changed after the 18th Amendment.
asince consolidated revenues are invariant to 'Transfers to Tables 10.15 to 10.17 show in greater detail the federal
provinces', adjustment for such transfers has not been made in government's revenue receipts over the last few years and
the federal and provincial figures. provide a far more relevant comparison of the different types
bRevenues under these heads are exclusively federal. of tax and their shares. While the share of income tax has
cRevenues under these heads are exclusively provincial. increased since 1983, as has that of the sales tax, indirect
Source: Government of Pakistan, Pakistan Economic Survey
taxes still constituted almost 60 per cent of the total taxes
(Islamabad: various issues).
collected in 2010. Figures 10.4 and 10.5 depict these changes

Table 10.10
Summary of Public Finance: Consolidated Federal and Provincial Governments: 1978-2013
(% of GDP at Market Prices)

1960s 1970s 1980s 1990s

,, 1978/79 1980/1 1990/1 1998/9 2004/5 2012/13p
;r average average average average
Total revenues 13.1 15.7 16.8 16.9 17.3 16.9 15.9 17.1 13.8 9.3
Tax revenues 12.9 14.0 13.8 12.7 13.3 13.4 10.1 6.8
Non-tax revenues 2.8 2.9 3.5 4.2 2.6 3.7 3.7 2.5
Expenditures 11.6 25.1 25.1 22.9 24.9 25.7 22.0 24.1 17.3 13.9
Development 9.3 7.3 6.4 3.4 4.7 3.9 1.9
Expenditure
Overall deficit 2.1 8.9 5.3 5.3 7.1 8.8 6.1 6.9 3.3 4.6

Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various issues).

P = Provisional
266 Issues in Pakistan's Economy

over time quite starkly. While the issue of income tax, the
~
C)C\Jst(X) (") C) sales tax, and •the proportion of direct to indirect taxes is
0
;; ccioai<i
(\J ~ <i discussed in greater detail in later sections of this chapter,
(\J
it is interesting to see how Pakistan performs compared to
similar underdeveloped countries. Table 10.18 provides such
~ I!) I!) co CX) a comparison.
0 <i <i tri ai
0
(\J From the table it seems that, as GDP rises, the share of
total taxes should also rise, and direct taxes, in particular,
0 should play a greater role in the overall taxation structure of
~
C)
l!)CX)
<i<ioii~1~oi
COCOC">l'-l!J the country. Pakistan's tax effort is quite poor compared even
C) with countries with similar levels of income, especially in
the case of direct taxes. At.3.91 per cent of GDP, even poorer
countries had a better tax effort than Pakistan. Indirect
~ C">stCO~OOCOC\J I!) 0 I!)
taxes do not vary all that much, although, not surprisingly,
C)
C) c,j,riaiRoiccilljiC\i <iC\i<itri
(\J (")
CX)
'"i" as income grows, foreign indirect taxes are also expected to
increase. Hence, while a growth factor is important, tax effort
and special effort also play an important role.
~
C)
stCOCOCOCO('!i'-:C\J
Like Table 10.12, Table 10.19 provides a similar comparison
C) cciccitritric,j (\J~r-..:
(\J ~ (")
across five decades. Direct taxes have not shown much
change, although indirect taxes, and in particular import
l'-
(0 0 C\JCOCX)CX)
duties, had increased substantially. There is also an increase
V LO ~ ~ C\J (") st
C)
C) r-..: cci 1'i 'i'1cJi<i ~ ~ gj tri in excise duties and the sales tax. Indirect taxes are often
consumption taxes, which means that, as the economy
grows and as the demand for and consumption of goods also
0 CO C\J 0 increases, so does the revenue collected from the taxes on
~ ~ oi ~ those goods. This is clearly visible from the table in the case
of Pakistan, which corroborates the international evidence
shown in Table 10.18.
~ 0 I'- I'- I'- CO 'Sf'. C\J st Box 10.4 explains the measures of elasticity and buoyancy
CX) tric,jaiccir-..: oiai in the tax structure, and Tables 10.20 and 10.21 show the
C) (") (") '"i" (\J
........ en
extent of both for some important taxes. The elasticity
Q) coefficient of a tax measures the built-in response of tax
0

....r,..~ a
CX)
C)
I'- I!)
C\i (\J
co
(")
<i oi (")
r-..:
l'-
:::,
en
.!!l
en
revenue to growth in income, without any change in the
:::, tax rate, while the buoyancy coefficient measures the total
....a, 0
-~ responsiveness in the tax revenue to the growth of income,
i!!:::, > inclusive of changes in tax revenue. Table 10.20 shows that

-
:Ca
Cl)
CO

st .C\J
O
tri cci cci <i
st

I!)
i:i
Ol
.0

E
Ol

Ol
except for the sales tax, and for income tax during 1972/3
to 1980/1, the elasticity figures were less than 1, implying
that a 1 per cent increase in income increases tax revenue by
a.
>< ~
-
w
C
Cl)
E X
less than 1 per cent. Customs duties and the sales tax had
a buoyancy of more than 1, while excise duties and income
tax had a less-than-I buoyancy, implying that inclusive of all
C
-~
!
C,
0
a en 16.0 ~ - - - - - - - - - - - - - - - - - - - - ~
cij J:l Q)
u 14.0 - + - ~ - - - - - - - ~ - - - - - - - - - - - - l
·uC C: "§_
-ll! o5 12.0
">0 ~ --" 10.0
...
a.
8!. <ii
E 8.0
cOl
'O
C iii 6.0
IU Cl)~
~ ~
en
...
cij Q)
i 4.0
Cl) 2
'6
.2
uC
E
t5
o 2.0
'O C w E
Cl) 0.0
Q)
LL C.
Q)
c. - Q)
E ~- 0 §
-
Q) Q)
Ol c
~ ::i
CD
'O
Cl)
X
Q) ""O ... CJ) fil 0

..... E =aC E :::, w "'

...- IU
'O Q) Ql CD Ej
0 ·-
.... 0 §_ & ~ E a;C!J [] Tax revenues ■ Non-tax revenues
.c E .2 ~ c:~§--.::m
~... :5~
Cl) Ill 'cu
::c g ~ cu
Ql-a;
CDQ)> o:5 Figure 10.2
~o ~ ;§ 0 EQ)~o
Cl 0 o ., en Tax and Non-Tax Revenue: 1986-2013 (% of GDP)
'T

Chapter 1O Resource Mobilization and the Structure of Taxation 267

Box 10.3 changes to the structure of those taxes. The extensive use
FBR and the Tax-to-GDP Ratio of withholding taxes, often being considered a final tax-as
opposed to being adjustable against final full liabilities-
1. The frequent changes in tax legislation have distorted has added to the complexity and arbitrariness of the tax
the overall tax structure, which has played a key role system. The inadequate standards in maintaining tax
in lowering tax-to-GDP ratio in Pakistan. Sources told data do not allow a complete study of the impact of these
Business Recorder here on Wednesday that a report on distortions, sources said.
the tax gap analysis revealed that frequent changes in tax In spite of partial reforms, there is a long way to
legislation has made the overall tax structure incoherent go to fully modernise the tax administration. This long-
and tax base narrow: Tax policy reform in Pakistan has standing bottleneck is characterized by over-reliance
often been piecemeal and disconnected. on easier 'tax handles' through an extensive system
Many changes in the tax system were either made to of withholding taxes, inefficiencies in administrative
cater to the interest of specific economic sectors or firms, structure and operations, and weak enforcement. Around
or introduced as matter of administrative convenience, as 58 per cent of the legal tax base still goes untapped.
was the case of zero rating of five sectors. The government The situation gives rise to the inadequacy of revenue
does not know the revenue losses of the incentives given, yields and loss of confidence in the fairness of the
and has no rigorous system to evaluate the objectives and system due to large horizontal inequities, sources added.
benefits.
These policies have contributed to the narrowing of the Source: Sarfaraz, Sohail, 'Tax-to-GDP Ratio Lowered', Business
tax base and the decrease in tax effort. They have also Recorder, 15 March 2012.
compromised the fairness of the tax system, reduced
voluntary compliance and increased tax. Sources said
that the main problem with the tax system is its sustained 2. The Federal Board of Revenue (FBR) has identified factors
inability to raise adequate revenue to finance the public like exemptions and narrow tax base as major reasons for
sector budget. In fact, over the 2000s tax revenue has high tax gap in Pakistan.
barely kept pace with GDP, and the tax revenue to GDP ratio Tax gap analysis has revealed that there are several
even declined in the last years of the decade. Based on factors contributing to the high tax gap in Pakistan. The
international comparisons, Pakistan is a low taxing country. structural problem, such as a narrow tax base due to
Given the large development needs for social services and exemptions exists with tax evasion and distrust of public
public infrastructure, there remains a structural fiscal gap institutions, and administrative weaknesses, all also taking
equivalent to about five per cent of GDP. a toll on tax collection. Recent reviews of tax returns reveal
The efficiency costs of the tax system to the economy that even compliant taxpayers do not provide essential
are high: Pakistan"s tax system levy taxes on different information in the returns. Due to these discrepancies in
economic sectors and types of assets at very different the returns, a number of opportunities for underreporting
marginal effective tax rates, which create significant income or claiming lower rates and liabilities are generated.
distortions. Although some distortions may be intentional, As better quality data becomes available, a more refined
the real consequence of the distortions is that many analysis will be possible to highlight specific issues in
investment decisions are guided by tax considerations as individual sectors.
opposed to economic considerations. · International experience shows that tax reform can
The result is an overall less efficient allocation of deliver large increases in tax effort. The countries with
resources and lower levels of output and rates of economic income levels comparable to Pakistan generate higher tax-
growth for Pakistan. These distortions are caused, among to-GDP ratios. The simple tax-to-GDP ratio in Bangladesh,
other issues, by the favourable treatment of certain India, Nepal and Sri Lanka are systematically higher than
investments and sectors. Pakistan's despite these countries having similar tax
The report said that currently, the tax laws are such that policies and administrations.
individuals with the same income or businesses with the In Asian and Pacific countries overall, central government
same profits can be treated very unequally in terms of tax collections increased from 13.8 per cent in 2000 to 16.5
the final taxes the law requires them to pay. This report per cent by middle of the decade, it remained almost
shows that gap estimates vary widely across sectors. The constant in Pakistan and then declined with the global
horizontal unfairness of the tax system is exaggerated by economic crisis.
the uneven application of tax enforcement: while compliant Sources said that the gap analysis in the report
taxpayers bear the full burden of taxes, the failure of tax corroborates the worries that tax revenue in Pakistan is
enforcement mechanisms allows other taxpayers to evade raised in an inefficient way, favouring certain sectors and
their taxes with a large degree of impunity. economic activities over others. Such incidence of taxation
Even though the basic structure of Pakistan's tax system can deter people from investing the most productive
is broadly in line with international practice, these taxes sectors and earning more from the resource available
have become more complex over the years, because of and ultimately adversely affect economic growth. Some
exemptions, other preferential treatments, and ad hoc sectors are much more heavily taxed compared to their
 7

268 Issues in Pakistan's Economy

contribution to GDP than other sectors. It is already known complicated and most taxpayers have little knowledge of
that about one fifth of GDP comes from agriculture, yet this their obligations, sources referred to the report.
sector yields no more than 1 per cent in FBR revenues. Sources said that Pakistan can take measures to increase
Services make up almost half of economic value added, the tax to GDP ratio by around 3.5 percentage points over
but generate only one quarter of central taxes due to the the medium-term. In order to ensure a healthy long-
low tax receipts from wholesale, retail, and transport. Given run economic development, Pakistan needs to embrace
the shortfall in agriculture and services, industry carries the substantial changes in tax policy aimed at increasing the
brunt of the tax burden-its tax share is three-times as high buoyancy of the tax system, broadening the tax base. The
as its GDP share. measures like reduction in distortions and phasing out
Within the industrial sector the variations in tax gap exemptions will contribute to closing the tax gap. Such tax
estimates demonstrate the unequal incidence of taxation. reforms are also required to deal with the risks stemming
In addition, there are question marks to what extent the tax from sustained large budget deficits, sources added
system, through the way it treats different income classes
of people differently, is sufficiently equitable. While some Source: Business Recorder, 15 March 2012. This news item
progress has been made, Pakistan's tax code remains has been slightly edited.

the discretionary measures, a 1 per cent increase in income, electricity duty, due to Karachi's very large industrial and
would result in less than 1 per cent change in tax revenue. population base, that for hoteis due to Karachi's dominance
The reasons for the low elasticity include the presence of of larger hotels, and other duties, such as on stamps and on
a large black economy and tax evasion, the presence of property mainly from Karachi, have in all likelihood resulted
a wide array of exemptions, and a poor and corrupt tax in this increase for Sindh overall.
administration system. Table 10.25 is an extensive summary of most fiscal
We can now move from federal taxes to the provincial indicators from the period 1961/2 to 2010/11, and Figures
tax structure. As explained earlier, the NFC award of 1991 10.6 to 10.9, visually demonstrate some key trends from the
suddenly put all four provinces into a surplus position, table.
as seen in Table I 0.22. However, what the table reveals is Let us now turn to the more substantive issues in the
that provinces' own revenue effort fell appreciably after taxation debate and examine the causes of many of the ratios
1990/1, and development expenditures, which were mainly and the consequences of some of the trends discussed in this
the responsibility of the provinces ( see Table 10.23) either section.
decreased, as in the case of the Punjab, or did not show much
improvement, in the other three provinces. Education, health,
and water supply and sanitation were the main sectors where 10.4 KEY ISSUES IN TAXATION
the provincial governments dominated, and in 1991 overall
64 per cent of expenditure on the social sectors was incurred 10.4.1 Federal Ta>ces
at the provincial level. Table 10.24 nevertheless, shows that Hafiz Pasha summarizes the key features and problems of the
considerable effort to increase revenue had been made. All (federal) tax system as follows:
the provinces made considerable progress, especially Sindh,
which registered double-digit growth in almost all taxes. Pakistan's tax system is characterized by a
Karachi's contribution in raising revenue for the whole number of structural problems. First, the overall
of Sindh is likely to be quite substantial. The increase in level of fiscal effort is low and the tax-to-
GDP ratio has remained, more or less, stagnant

Table 10.12
Composition of Government's Total Expenditure: 1971-2003 (% of GDP)

1980s 1990s
1971/2 1977/8 1980/1 1990/1 1998/9 2002/3 average · average

Current expenditure 10.4 10.8 13.6 19.2 18.6 16.4 17.6 19.4
Development expenditure 4.9 9.9 9.3 6.4 3.4 2.2 7.3 4.7
Defence expenditure 6.8 5.5 5.0 6.3 4.9 3.3 6.5 5.6
Interest payment 1.8 1.7 2.1 4.9 7.5 4.9 3.8 6.8

Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various issues).

 Chapter 1O Resource Mobilization and the Structure of Taxation 269

Table 10.13
Key Public Financial Ratios and Selected Years

Revenue receipt of federal government 1964/5 1972/3 1985/6 1989/90

Tax revenue as % of TR 73 75 80 76
Non-tax revenue as % of TR 27 25 20 24
Direct tax as % of TXR 14 13 14 14
Indirect tax as % of TXR 83 87 86 86
Custom duties as % of TXR 43 44 41 46
Excise duties as % of TXR 23 37 22 21
Sales duties as % of TXR 11 5 7 18
TAX to GDP ratio 9 9 14 14
External resources as % of total capital exp. 49 48 58 73
Internal resources as % of total capital exp. 20 52 42 45
Debt servicing as % of total exp. of fed. govt. 3 6 27 39
Internal debt servicing as % of total recurring exp. 5 3 6 21
Ratio of development exp. to non-development exp. 1:3 1:2.8 1:2.3 1:2.6
Federal tax assignment as % of provincial receipts 16 14 31 39
Federal govt's recurring exp. in total recurring exp. 72 68 76 80
Prov. govt's recurring exp. in total recurring exp. 28 22 24 20
Budget deficit as % of GDP 8.1 6.5

Source: Applied Economics Research Centre (AERC), Resource Mobilization by Federal Government in Pakistan, Research Report
No. 91 (Karachi: AERC, 1992), 67.

at between 12 to 13 per cent. This is one Chapter 11 and Part VI of this book). Many years later,
major explanation why budget deficits have following the 2009 IMF stabilization loan, the programme
been high, generally in excess of six per cent of was cancelled in 2010 by the IMF, because Pakistan was not
the GDP. Second, there is overdependence on able to raise revenue through new taxes in the form of a
indirect taxes, which until recently accounted
for a share in revenues of over 80 per cent.
1990/1
This has increased the regressivity of the tax
system and imposed a higher excess burden
Local Local
of taxation. Third, within indirect taxes there
6% 4%
is domination of taxes on international trade,
which has promoted inefficiency, distorted the
allocation of resources and encouraged illicit
trade. Fourth, the effective tax bases of most
taxes is narrow due to wide ranging exemptions
and concessions and rampant tax evasion. For
example, there is less than one income tax
assessee per JOO persons and Jess than 60 per Federal
cent of imports actually pay duty. Consequently, 88% .____ 68%
tax rates have had to be pitched at high levels Total revenue Total expenditure
which has created a vicious circle of more
tax base erosion and higher tax rates. Fifthly, 2001
tax administration is characterized by primitive
and out-moded procedures, complex laws and Local Local
considerable arbitrariness and discretion. The Provincial 4.8% 5.8%
common perception is one of high levels of
corruption and inefficiency. 21

The World Bank, in its extensive evaluation of the economy

prior to the commencement of the first major Structural
Adjustment Programme of 1988, 22 identified the issues of
resource mobilization and the budget deficit as amongst the Federal Federal
most important. Revenue generation was to be given special 90.2% 63.1%
emphasis in any sort of adjustment programme, as the World Total revenue Total expenditure
Bank argued that, unless this area of the economy was put
in order, much of the rest of the efforts would also fail ( see Figure 10.3
Total Revenue Receipts and Expenditure: 1990/1, 2001
270 Issues in Pakistan's Economy

Table 10.14
Share of Different Levels of Government in Revenues and Expenditure 8 in Pakistan: '1979/80, 1990/1, and 2001 (Rs. m)

1979/80 1990/1 2001

Revenue/expenditure
category Share Share Share
Level Level
(%) (%) (%)

Tax receipts 41.3 100.0 136.2 100.0 100.0

Federal 36.5 88.4 120.6 88.5 90.2
Provincial 2.3 5.6 6.8 5.0 5.0
Local 2.5 6.0 8.8 6.5 4.8
Total revenue receipts 50.0 100.0 214.7 100.0
Federal 44.1 88.2 189.5 88.2
Provincial 2.8 5.6 13.0 6.0
Local 3.1 6.0 12.2 5.8
Current expenditure 39.6 100.0 241.9 100.0
Federal. 28.8 72.7 171.6 70.9
Provincial 9.1 23.0 63.3 26.2
Local 1.7 4.3 7.0 2.9
Development
expenditure 26.6 100.0 76.6 100.0
Federal 20.9 78.6 48.0 62.7
Provincial 4.9 18.4 23.3 30.4
Local 0.8 3.0 5.3 6.9
Total expenditure 66.2 100.0 321.6 100.0 100.0
Federal 49.7 75.1 219.6 68.3 63.1
Provincial 14.0 21.1 89.5 27.8 31.1
Local 2.5 3.8 12.5 3.9 5.8

aFor the country as a whole, in view of the difficulty in allocating federal expenditure to each province.
Source: Hanif, Naveed, 'The Structure of Government in Pakistan, News on Friday, 25 August 1995; for 2001, Anjum, Zulqarnain, 'New
local government system: A step towards community empowerment?' The Pakistan Development Review, Vol. 40, No. 4, Part II,
2001, 858.

Value Added Tax. Revenue generation has been a perennial 10.25 shows, has fallen considerably from even this dismal
problem in Pakistan, one which is at the core of taxation and figure. The income elasticity of the tax system is low
the political economy of revenue generation. because of the very narrow tax base and the large number of
The World Bank report argued that the budget potential of exemptions given in sales tax, excise duty, income tax, and
an increase in resource mobilization comes from strengthening customs duties. The pre•Structural Adjustment Programme
Pakistan's tax base, since tax revenues accounted for only report emphasized that there was a need to 'broaden the tax
13-14 per cent of GDP, a figure far less thari that of other base and increase the elasticity of the tax system by shifting
countries at similar levels of development, which, as Table the emphasis in indirect taxes towards domestic consumption

Table 10.15
Federal Tax Receipts (net): 1983-2012 (Rs. m)

Indirect taxes Direct taxes

Total
Year Customs Central Sales Total Income Wealth Gift Capital Estate W.W. Total federal
excise tax tax tax tax value tax duty fund taxes
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

1983/4 21,532 15,652 4,624 41,808 8,573 163 17 34 8,788 50,596

1990/1 50,528 23,239 17,008 90,775 19,079 496 105 188 19,868 110,643
2002/3 68,836 44,754 195,139 308,729 145,366 228 608 5,693 151,898 460,627
2009/10 160,273 124,784 516,348 801,405 496,632 23 4,002 25,320 525,977 1,327,382
2011/12 216,906 122,464 804,899 1,144,269 710,018 6 126 27,275 738,425 1,882,694

Source: Federal Board of Revenue, FBR Year Book (Islamabad: various years).
 Chapter 10 Resource Mobilization and the Structure of Taxation 271

Table 10.16 Sales tax

Taxes and their Distribution: 1983-2012 Income tax
(% Share in Total Tax)

Income Other Customs Central Sales Other direct taxes

Year tax direct excise tax 0%
taxes
(1) (2) (3) (4) (5) (6) Central excise
31%
1983/4 17.00 0.40 42.60 30.90 9.10
1990/1 17.30 0.70 45.60 21.00 15.40
! 2002/3 31.56 1.40 14.94 9.72 42.36
43%
2009/10 37.41 2.21 12.07 9.40 38.90
2011/12 37.77 1.46 11.52 6.50 42.75 1983/4

~· Source: Federal Board of Revenue, FBR Year Book {Islamabad:

various issues).

Table 10.17
Distribution of Direct and Indirect Taxes: 1983-2013 Sales tax
(% Share in Total Taxes) 43%

Direct Indirect
Year
tax tax
Other direct taxes
1983/4 17.40 82.60 1%
1990/1 18.00 82.00
2002/3 32.98 67.02 15%
10%
2009/10 39.63 60.37 2002/3
2012/13 39.10 60.90

Source: Federal Board of Revenue, FBR Year Book (Islamabad:

various issues).

(of both domestic and foreign products) and ra1smg the

contribution of the income tax'. 23 An extension of the sales 39%
tax to transform it into a consumption-type value added tax
(VAT) needed to be imposed at the manufacturers' level.
A theme which continues to be repeated in most analysis Other direct taxes
of the taxation structure, the need to subject agricultural 2%
income to taxation, was also identified by the World Bank.
All subsequent analyses of the taxation and revenue system
of Pakistan, have underscored these problems-see Boxes 12%
9%
10.5 to 10.7 for key issue and constraints in Pakistan taxation 2009/10
system.
While the need to increase direct taxes as a share of total Figure 10.4
tax revenue has been an important realization, attempts Percentage Share of Main Taxes in Total Tax: 1983/4,
to change the structure of indirect taxes have found equal 2002/3 and 2009/1 o
emphasis. With trade taxes by far the key feature of Pakistan's
taxation regime in the past, Pakistan's resource mobilization
efforts have been subject to impacts not necessarily of tax on domestic consumption that is neutral
Pakistan's own doing. Hence, the need to develop another between products made in Pakistan and imports.
sort of tax that is consumption based and domestic. The This would involve a modification of Pakistan's
World Bank report identified the need for a sales tax and present sales and excise taxes. In principle, all
goods produced/manufactured in Pakistan and
highlighted various problems prior to attempts to remedy
sold wholesale are now subject to a sales tax,
them in the Structural Adjustment Programme of 1988: but practice has differed from principle. So
many products have been granted exemptions
The objective for indirect taxation is to shift the that the sales tax now resembles a special
emphasis from imports toward a broad-based consumption or excise tax rather than a broad-
272 Issues in Pakistan's Economy

Direct tax from taxes on outputs, similar to the procedures

under a value-added tax (VAT).
The simplest way, administratively, to develop
a broad-based consumption tax would be to
expand the coverage of the existing sales tax by
drastically curtailing the number of exempted
manufactured products. The present sales tax
taxes domestic products and imports at the
same rate (except for the differential coverage),
covers imported goods extensively, and allows
Indirect Tax taxes paid on inputs to be credited against
83% taxes paid on outputs. Cutting the excessive
number of exemptions would serve the objective
of increasing the tax burden on domestic
1983/4 consumption. 24

A key feature of the change in the taxation structure

Direct tax
suggested was to cut the excessive number of exemptions
under the existing taxation regime, which would then fulfil
the objective of increasing the tax burden on consumption.
The emphasis was on implementing VAT-a 'manufacturer's
level consumption-type VAT'. This shift from a sales tax to a
value added tax would require the extension of the coverage
of taxation to almost all products at the manufacturers'
level and would tax domestic and imported products at the
Indirect Tax same rate (see Appendices 10.3 and 10.4 in the first edition
67% of Issues). This need to establish a Value Added Tax has
continued for many years, and lead to a suspension of the
2008 IMF programme-see Box 10.6.
2002/3 In the Structural Adjustment Programme of 1988, a
number of measures regarding the sales tax were undertaken
(see Table 10.26). A gradual extension of the coverage of
the sales tax on imported and domestically produced goods
began. More and more commodities came under the sales
tax and items previously exempted were now taxed. The
adjustment programme envisaged a fully-fledged general
sales tax (GST)-very much like a value added tax-by
the end of the programme in 1991. The tax was extended
quite substantially from the manufacturer/importer level
to wholesalers and retailers for some products. However,
Indirect Tax the evaluation at the end of the Structural Adjustment
61% Programme revealed that 'the expansion in the tax base ...
remained significantly less than what was initially envisaged,
both in terms of the sectoral coverage and the number of
2012/13 taxpayers'. 25 There were many political considerations and
constraints which continue to make the GST or VAT a very
Figure 10.5
. difficult tax to impose (see also Appendices 10.3 and 10.4).
Percentage Share of Direct and Indirect Taxes in Total
Moreover, Hafiz Pasha identified a number of problems with
Tax: 1983/4, 2002/3 and 2012/13
the large-scale introduction of a full scale VAT in Pakistan.
He argued that
based consumption tax. In addition, differential there are some basic problems with the large
coverage and differential rates between domestic scale introduction of VAT in Pakistan. First,
products and imports (with higher rates for in the absence of proper accounting and
imports) have meant that the tax has 'protective documentation of transactions, especially by
effects' in addition to those generated by the smaller manufacturing and trading entities,
tariff system. In the FY87 budget, the rates for enforcement of the tax becomes difficult.
domestic products and imports were made equal, Also, there appears to be some reluctance
but unequal coverage still leaves some protective on the part of large-scale units to accept tax
effects intact. Cascading of the sales tax through invoicing of inputs and outputs because of
several stages of production has been avoided in the fear that furnishing of this information
Pakistan by making taxes on inputs deductible will also enable better determination of income
 Chapter 1O Resource Mobilization and the Structure of Taxation 273

Table 10.18
Level and Composition of Tax Revenues in Developing Countries and in Pakistan (% of GDP)

Developing countries Pakistan

With per With per

capita income capita income
Tax All 1989/90 1992/3
of less than of $360 to
$360 $750

Direct taxes 3.91 6.84 7.26 1.83 2.71

Income tax 3.27 5.53 5.11 1.75 2.58
Wealth and property tax 0.24 0.31 0.45 0.08 0.13
Social security taxes 0.21 0.79 1.30
Others 0.19 0.21 0.40

Indirect taxes (domestic) 4.55 4.74 5.21 4.81 4.33

Sales, turnover, VAT 2.44 2.30 2.46 2.17 1.74
Excises 1:55 1.95 2.07 2.64 2.59
Others 0.46 0.49 0.68

Indirect taxes (foreign) 5.30 7.58 5.13 5.68 4.52

Import duties 4.05 6.70 4.32 5.11 4.46
Export duties 1.09 0.64 0.62 0.57 0.06
Others 0.16 0.22 0.20

Others 0.26 0.41 0.45 0.51 0.70

Total taxes 14.02 19.66 18.05 12.83 12.26

Sources: Pasha, Hafiz and M. Asif Iqbal, 'Taxation Reforms in Pakistan', Pakistan Journal of Applied Economics, vol. 10, nos. 1 and 2,
1994, 50.

Table 10.19
Tax/GDP Ratios of Individual Taxes in Pakistan

I
Tax/GDP ratio (%)
Nature of tax
1960/1 1971/2 1977/8 1987/8 1989/90 2002/03 2011/12

I A Direct taxes 1.64 2.30 1.60 1.81 1.85 3.6 3.6

1 Income taxes 1.60 2.20 1.60 1.68 1.70 3.5 3.4

B Indirect taxes 5.50 7.70 9.20 11.80 12.40 7.4 5.6

1 Customs duties 2.20 2.40 4.70 5.50 5.70 1.6 1.1
2 Excise duties 1.40 3.80 3.50 2.50 2.60 1.1 0.6
3 Sales tax 1.84 0.88 1.00 2.00 2.20 4.6 3.9

C Total taxes 7.20 10.00 11.00 13.60 14.30 10.98 9.2

Source: Applied Economies Research Centre (AERC), Resource Mobilization by Federal Government in Pakistan, Research Report
No. 91 (Karachi: AERC, 1992), 67, and Federal Bureau of Revenue, FBR Year Book (Islamabad: various years).

tax liabilities and thereby limit possibilities of Nevertheless, as numerous tables have shown in this
evasion. Second, there is a degree of political chapter, import duties have been replaced as the main source
reluctance to levy GST on the consumption of of revenue for government by a sales tax now at 16 per cent.
goods like tea, vegetable ghee, etc. Third, there Now 42 per cent of government revenue comes from the sales
is a constitutional restriction on the extension of tax, while customs duties provide only 15 per cent. 27
sales taxes to services by the federal government
Direct taxes still form a small part of the total revenue
in Pakistan. This implies that the GST cannot be
levied on major service inputs like power, gas, collected by the federal government, and income tax
transport, etc. and as such it is impossible to constitutes as much as 95 per cent of direct taxes, yet it
make GST correspond to a true value added tax suffers from numerous deficiencies. There is a very poor
in the absence of an appropriate constitutional coverage of taxpayers, a narrow tax base is riddled with
amendment. 26 exceptions and exemptions, and the income tax procedure
274 Issues in Pakistan's Economy

Box 10.4 to a change in tax base and the latter encompasses the
The Elasticity and Buoyancy of Taxes effect of changes in base due to change in income.
The value of the tax-to-base elasticity .depends on tax
· The elasticity and buoyancy of taxes helps determine how rates and the progressivity of the tax structure. If the rate
cha11ges in the economy will impact on revenue. structure is progressive or if there is an improvement in tax
administration then the tax-to-base elasticity is likely to be
The measure of elasticity of a tax system gives the automatic high, thereby implying a higher overall elasticity. However,
or natural · responsiveness of tax yields to changes in if high marginal tax rates induce higher evasion· and
national income. It is defined as a percentage change in corruption in tax payment then the tax-to-base elasticity. is
total yield (or yields of individual taxes) associated with likely to be lower. Alternatively, if tax rates are specific rather·
a •given percentage change in GDP (or the relevant GDP than ad valorem then revenues may not rise proportionately
component) without any change in the statutory rate of with the increase in tax base and the elasticity in this··case
' existing tax(es), in administrative efficiency or due to the would be less than unity.
introduction of new taxes. The base-to-income elasticity primarily dep.ends ul)on the
Buoyancy measures the total response of revenue from a nature .of the relationship between changes in income a_nd
tax or taxes due#.to a change in income. It shows the growth changes in the tax base. This elasticity can be assumed
that results from automatic growth of the base caused by to be largely exogenous and beyond the control of the tax
the increase in GDP and from discretionary tax changes. collecting agency. In contrast to this, the magnitude of the
The buoyancy of a tax system or individual tax is usually tax-to-base elasticity can be influenced by l)Olicy action.
. greater than or equal to the elasticity because tax rates are The elasticity of the entire tax system at any particular time
usually increased over time. is the weighted sum of the elasticities of the individual taxes,
The magnitude of the elasticity depends on the level of with the weights corresponding to the revenue shares. If the
tax rates, the progressivity of the rate structure, whether share·of elastic taxes is higher, then the overall tax system
tax. rates are specific or ad valorem in character and the will be more elastic.
change in the .t.ax base due to changes in income. For the
purpos·e of analysis, it is usually possible to break up the Source: Applied Economics Research Centre (AERC),
coefficient of elasticity into tax-to-base and base-to-income Resource Mobilization by Provincial and Local Governments in
components. The first gives the responsiveness of tax yield Pakistan, Research Report No. 93 (Karachi: AERC, 1992), 56-8.

Table 10.20 is badly integrated with company law. The large number of
Elasticity and Buoyancy of Major Taxes w.r.t. Income exemptions have 'traditionally been justified as incentives
(GDP) for investment, saving, exports, regional development, etc.'. 28
Only 3 million income taxpayers in a population of 180
Coefficient
million exemplifies the extent of tax evasion in the country,
1972/3 1972/3 1981/2
and according to one observer, as many as three-quarters of
Federal taxes to to to potential taxpayers in Pakistan do not pay taxes. 29 According
1989/90 1980/1 1989/90 to another estimate, it is estimated that the evasion of income
tax is almost five times the collected amount. 30 Hence, the
Custom duty Elasticity 0.692 0.943 0.696 'collection of income tax has remained restricted largely
Buoyancy 1.063 1.177 1.065 to the industrial and financial sectors, to public limited
Excise duty Elasticity 0.658 0.916 0.526 companies and multinationals, to corporate profits and salary
Buoyancy 0.894 1.148 0.532 income and to the metropolitan cities of Pakistan'. 31 Also see
Sales tax Elasticity 1.010 1.082 1.446 Box 10.2 and Box 10.6, and Appendix 10.3 on the income tax.
Buoyancy 1.259 1.256 1.713 To be able to have a more broad-based income tax, it would
Income tax Elasticity 0.946 1.377 0.294 be necessary to have proper documentation of the economy
Buoyancy 1.098 1.347 0.643 and to do away with the numerous exemptions, as well as
Total tax Elasticity 0.800 1.064 0.800 to streamline the taxation structure so as to make it easier
Buoyancy 1.070 1.206 0.983 to catch tax offenders. However, given the fact that the
tax administration is highly corrupt and often in collusion
Source: Applied Economics Research Centre (AERC), Resource with tax evaders, even if an effective income tax structure
Mobilization by Federal Government in Pakistan, were imposed, it is likely that the real culprits would be
Research Report No. 91 (Karachi: AERC, 1992), 67. able to get away, and only the smaller offenders would be
caught, as is often the case. Nevertheless, the reform of
tax administration, irrespective of cultural and structural
problems such as pervasive and excessive corruption, is a
minimum condition that must be fulfilled °if any worthwhile
I
I
Chapter 1O Resource Mobilization and the Structure of Taxation 275

Table 10.21
Decomposition of Buoyancy of Major Taxes

1972/3 to 1989/90 1972/3 to 1980/81 1981 /2 to 1989/90

Federal taxes Tax base Tax to Tax base Tax to Tax to Tax base Tax to Tax to Tax base Tax to
tax base to income income tax base to income income tax base to income income
buoyancy buoyancy buoyancy buoyancy buoyancy buoyancy buoyancy buoyancy buoyancy

Import duty Value of imports 1.002 1.061 1.063 0.920 1.271 1.177 1.208 0.881 1.065

Excise duty Value added in large-

scale manufacturing 0.776 1.152 0.894 0.675 1.701 1.148 0.563 0.945 0.532

Sales tax Value of imports + Value

of industrial production
+ Custom duty 1.203 1.047 1.259 1.188 1.057 1.256 1.561 1.097 1.173

Income tax Non-agriculture GDP 1.024 1.072 1.098 1.260 1.069 1.347 0.596 1.079 0.643

Source: Applied Economics Research Centre (AERC), Resource Mobilization by Federal Government in Pakistan, Research Report
No. 91 (Karachi: AERC, 1992), 67.

Table 10.22
Key Financial Ratios of the Provinces: 1990-1995

As percentage of recurring expenditure As percentage of total expenditure 8

Year Federal Provincial Revenue Total

Debt Development.
tax own surplus/ federal
servicing expenditures
assignmentb revenue deficit transferc

Punjab
1990/1 59.5 25.7 -6.3 25.3 24.8 75.9
1991/2 77.8 23.8 4.7 24.9 23.5 81.8
1994/5 89.7 17.8 7.6 22.0 18.7 87.4

Sindh
1990/1 48.6 20.6 -20.7 21.7 28.1 65.5
1991/2 78.4 19.0 1.1 24.1 23.5 87.1
1994/5 79.7 15.9 2.3 21.5 29.9 99.0

NWFP
1990/1 41.8 11.6 -0.7 28.4 27.2 93.7
1991 /2 97.6 10.2 11.0 30.8 33.6 87.6
1994/5 99.2 10.3 9.6 28.8 28.8 90.5

Balochistan
1990/1 49.5 6.3 -15.5 23.5 33.9 85.5
1991/2 119.8 4.8 26.5 22.0 39.5 96.5
1994/5 112.5 5.4 18.1 20.5 33.0 96.6

Four combined
1990/1 53.0 20.5 -9.9 24.7 26.9 77.0
1991 /2 84.9 18.6 6.7 25.4 27.1 85.7
1994/5 90.6 15.0 7.4 22.9 25.0 92.4

8 Total expenditure = Development expenditure + Current expenditure.

blncluding profit from hydro-electricity.

cFederal transfer = Federal tax assignment + Development grants + Federal loans + Development revenue receipts.
Source: Ghaus, Rafia and Abdul Rauf Khan, 'Fiscal Status of the Provincial Government in Pakistan', News on Friday, 25 August 1993.
276 Issues in Pakistan's Economy

Table 10.23 by provincial and local governments, hence the need to

Share of Different Levels of Government in Expenditure examine issues particular to resource mobilization ( see Table
on Social Sectors in Pakistan: 1990/91 8 (%) 10.23 ). After the 18th Amendment, that role of provincial
government has been much enhanced, and due to the 7th
Federal Provincial Local National Finance Commission Award of 2009/10, so have the
financial resources available to the provinces.
Education and training 13 83 4 Provincial governments had access to resources from a
Health and nutrition 16 62 22 'divisible pool of federal taxes for their recurring account, as
Population welfare 97 3 0 per the prescribed formula of the earlier National Finance
Social welfare 73 27 0 Commission awards. In that award, 37.5 per cent of revenues
Physical planning and housingb 5 50 45 of the federal government income tax, export duty on
Manpower and employment 74 26 0 cotton, excise duty on tobacco, and the sales tax were
Others 37 32 31 given to the provincial governments on the basis of their
Total 20 64 16 population share. Prior to the 1991 NFC award, the federal
government used to fulfil the deficit financing component
8Latest year for which local government figures are available. of the provincial governments in the form of grants-in-aid
bMostly water supply and sanitation. or loans. At their peak, in 1987/8, these grants were worth
Source: Hanif, Naveed, 'The Structure of Government in Rs. 17 billion or 2 per cent of GDP. However, the 1991 Award
Pakistan', News on Friday, 25 August 1996.
stopped such payments from the federal government to the
provincial governments, and there was greater pressure on
the provincial governments to put their house in order and to
measures towards better tax effort and resource mobilization self-finance their revenue deficits.
are to take place (see Appendix 10.4 and 10.5). At the same Aisha Ghaus and Asif Iqbal identified the following
time, it is important to emphasize that there are numerous problems in the provincial resource mobilization structure
vested interests in maintaining the status quo who may be which existed prior to 2010, although similarities still exist
unwilling to permit any sort of change (see Boxes 10.5 to post-2010.
10.7).
1 Limited scope of resource mobilization as the large and
relatively buoyant taxes, such as import duties, income
10.4.2 Resource Mobilization at the
and corporate tax, excise duties and sales tax, have been
Provincial Level 'pre-empted by the federal government. The taking over
Prior to the changes initiated in the 18th Amendment and of the sales tax, in particular, by the federation soon after
through the 7th NFC Award which will have an impact on partition has been cited as a major encroachment on
resource mobilization, almost 90 per cent of revenue was provincial fiscal power.' 32
collected at the federal level and the remaining 10 per cent 2 The Islamization process has caused loss of revenue from
distributed between the two lower tiers of government, yet provincial excises, entertainment tax and land revenue.
the role that both provincial and local governments played
3 Provincial governments have not been able to exploit the
in the delivery of services prior to the 18th Amendment was
agricultural income tax, tax on value added in the services
often critical. Social services, in particular, such as education,
sector and capltal gains on immovable properties.
health, and water supply and sanitation, were provided

Table 10.24
Annual Compound Growth Rate in Tax Revenue by Province: 1990/1 to 1994/5 (%)

Tax Punjab Sindh NWFP Balochistan Pakistan

j
Stamp duty
Urban immovable property tax
Tax on transfer of property
Land revenue
Tax on professions, trades, and callings
0.1
15.5
-2.6
17.6
11.4
23.9

19.6
13.3
21.3
25.1
7.0
7.5
3.9
10.0
12.2
21.5
28.2
0.0
7.5
33.0
6.1
16.3
18.1
I
Provincial excise 28.7 14.3 7.5 179.1 19.5
Motor vehicle tax 13.0 15.5 7.1 0.0 12.2
Entertainment tax 2.3 -7.8 0.0 2.6 0.3
Cotton fees -0.1 4.9 0.5
Hotel tax 19.1 47.0 9.8 34.1
Electricity duty -12.3 80.7 20.9 10.8 0.0
Other taxes -6.0 37.2 -10.0 22.4
Total 3.8 23.8 13.9 6.3 9.5

Source: Ghaus, Rafia and Abdul Rauf Khan, 'Fiscal Status of the Provincial Governments in Pakistan', News on Friday, 25 August 1993.

I
 Chapter 1O Resource Mobilization and the Structure of Taxation 277

Table 10.25: Total Revenue and Taxes: 1961-2011 4 The elasticity of provincial taxes is low, which means low
growth in tax revenue.
Total Tax Direct Indirect
Revenue Revenue Taxes Taxes 5 'The incentive environment prevalent in the country has
Year
not been conducive to greater fiscal effort by the provinces.
--------- As Percentage of GDP at Factor Cost ---------
Automatic access to ad hoc revenue deficit grants provided
1961-62 11.85 8.78 1.97 6.81 an opportunity to the provincial governments to declare
1962-63 9.80 8.05 1.34 6.71 higher revenue deficits (by lowering own revenue effort
1963-64 12.12 8.04 1.33 6.72 and by raising expenditure) and thereby receiving a higher
1964-65 12.37 9.01 1.28 6.98 grant from the federal government.' 33
1965-66 12.89 8.64 0.95 7.69 6 Poor tax administrators.
1966-67 13.46 9.84 0.99 8.85
1967-68 12.98 9.26 0.74 8.52 With pressure on them, surprisingly, provincial governments
1968-69 14.95 10.88 0.84 10.04 tried to deal with having to raise revenue and meet their
1969-70 15.19 10.93 1.10 9.84 deficit requirements. The provinces, since the 1991 NFC
1970-71 12.93 9.12 0.48 8.64 award, 'adopted a diversified resource mobilization strategy
1971-72 12.04 8.57 1.66 6.92 focusing on most of the existing taxes like stamp duties,
1972-73 12.12 9.48 1.23 8.25 property tax, motor vehicle tax, hotel tax, tax on professions,
1973-74 13.39 10.35 0.96 9.38 trading and callings, electricity duty, paddy development fee,
1974-75 12.43 9.60 0.91 8.69 cotton fee and land revenue'. 34 This was done by removing
1975-76 12.60 9.45 0.66 8.79 exemptions and by expanding the tax net. Those tax rates
which were very low were enhanced, such as stamp duties,
1976-77 12.96 9.68 0.61 9.78
motor vehicle tax, paddy fees, cotton duty, and electricity
1977-78 13.75 9.97 0.43 10.30
duty. Also, there was a switch from specific to ad valorem
1978-79 14.28 10.35 0.44 10.63
taxes. The consequence of these measures had been a
1979-80 18.23 15.72 2.61 13.12
considerable increase in the growth rate in provincial tax
1980-81 18.70 14.73 2.90 11.83 revenues between 1990 and 1995, especially in Sindh and the
1981-82 17.42 13.67 2.89 10.78 NWFP (see Table 10.23).
1982-83 18.02 15.66 2.82 12.84 Aisha Ghaus and Asif Iqbal conclude their evaluation of the
1983-84 19.31 15.59 2.46 13.13 substantial changes in the provincial governments' resource

I
1984-85 18.21 14.40 2.29 12.11 mobilization strategy since the 1991 NFC award on a positive
1985-86 19.27 15.53 2.20 13.33 note. Although they add that these reforms constitute only a
1986-87 20.15 16.09 2.15 13.93 'small step in the right direction' and much more needs to be
1987-88 19.47 15.55 2.07 13.48 done, their overall analysis was as follows:
1988-89 20.36 16.15 2.14 14.02
On the whole, it appears that the tax reforms
1989-90 20.60 16.14 2.26 13.88

'
introduced by the provincial governments in
1990-91 19.83 15.57 2.19 13.38 the last few years will broaden somewhat that
1991-92 21.60 15.33 2.78 12.55 provincial tax base, introduce an element of
1992-93 20.24 14.97 3.17 11.80 buoyancy in tax revenues and reduce revenue
1993-94 19.47 14.88 3.18 11.69 leakages. On top of this, given the nature of
1994-95 19.31 15.42 3.78 11.65 provincial taxes like stamp duties, property tax,
etc. with a heavy concentration on physical
1995-96 19.70 15.83 4.15 11.69
and financial assets the incremental burden of
1996-97 17.26 14.58 3.91 10.67 most of the reforms is likely to be on the upper
1997-98 17.60 14.58 4.24 6.10 income groups and, therefore, the reforms will
1998-99 17.13 14.28 3.86 10.42 increase the progressivity of the provincial tax
1999-00 14.39 11.39 3.25 8.14 system. Also, the reforms are unlikely to have
2000-01 14.10 11.26 3.28 8.05 had a significant impact on the price level of
basic goods. 35
2001-02 15.05 11.56 3.56 8.01
2002-03 15.90 12.26 3.48 8.74
These efforts at reform and improvement notwithstanding,
2003-04 15.07 11.59 3.24 8.38 there were numerous problems and issues regarding
2004-05 14.70 10.77 3.15 7.62 provincial resource mobilization measures which had not
2005-06 15.04 11.23 3.22 8.32 been addressed and even after post-2010, continue to persist.
2006-07 15.76 10.80 4.10 6.70 The urban immovable property tax was a case in point.
2007-08 15.11 10.59 3.94 6.65 This tax is dependent and based on the gross annual
2008-09 15.28 9.95 3.67 6.97 rental values (GARVs) of properties, with assessment by the
2009-10 14.77 10.66 3.80 6.86 provincial governments due every five years. None of the
2010-11 13.21 9.98 3.54 6.61 provincial governments regularly revised its assessment every
five years, and the last actual assessment in the province of
Source: This table has been provided by Fahd Ali.
278 Issues in Pakistan's Economy·

Table 10.26
Taxation and Expenditure Proposals according to the Structural Adjustment Programmes: 1988-1991 and 1993-1996

Policy areas Objectives and targets Strategies and measures

Structural Adjustment Programme, 1988-1991

Overall deficit Achieve a reduction in the overall fiscal deficit/ Major improvements in overall revenue performance and tight
GDP ratio to 4,8 per cent by the end of the control of expenditure growth.
programme period; reduce budget's dependence
on private savings and domestic bank borrowing,
Revenue Foster domestic resource mobilization in order Begin to implement a tax reform directed at expanding the tax
to achieve a sustainable level of development base and at increasing tax elasticity; continue the strengthening
and essential current expenditures aimed at of tax administration.
maintaining high economic growth in the context Extension of sales tax on about 22 per cent of domestic industrial
of economic and financial stability, Achieve an production.
increase in the revenue/GDP ratio to about 20 per Extension of sales tax on 30 per cent of domestic industrial
cent by the end of the programme period, production.
Increases in telephone charges.
Extension of ad valorem excise on certain services such as travel.
Annual revision in those excises which are at specific rates so that
there is revenue elasticity.
Initiate a programme of action to prepare for the introduction of a
general sales tax (GST) by 1 July 1990.
Proceed with the implementation programme of action.
Effective implementation of the general sales tax.
Guidelines issued to income tax panels to set criteria for initiating
prosecution against tax evaders.
Maintain income and profit tax exemption limits at current levels.
Review experience of self-assessment procedure for taxpayers
earning less than Rs. 100,000.
Removal of most exemptions from the standard customs 1989/9

I
duties, except for duty drawbacks for exports and incentives for
industries as given in the 1988/9 budget. It is the authorities'
intention that these exemptions will not be extended beyond
1990/1, except for backward areas as defined in the 1988/9 budget.
Continue implementation of tax reform.
Structural Adjustment Programme, 1993-1996
Budget Improve structure of the budget and revenue In GST following measures are to be implemented by 1 July 1994:
elasticity, Removal of exemptions for mostly locally produced goods
Direct taxes and imports (except basic foodstuff, medicines, fertilizers, and
Reduce the wide-ranging exemptions and
pesticides).
concessions.
Elimination of capacity scheme within the framework of GST.
Extend coverage to agricultural sector 1993/4;
Introduction of turnover threshold for registration as taxpayer.
further expand the base 1994/5.
All specific rates and assessments based on official prices and
Simplify the rate structure for direct taxation,
lower rates for manufacturers that do not claim tax credit to be
Contain basic personal exemptions and provisions
eliminated.
concerning employee benefits.
Unification of corporate profit tax rate. Evaluation of VAT to firms in trading and services sector by
1 July 1994.
Reduction of tax holiday provisions,
Excise regime will be rationalized.
Transfer the current presumptive tax provisions
relating to supplies, contract, imports, and exports
into an advance payment for regular income tax.
Indirect taxes Reduce maximum tariffs.
Import licence fee requirement to be eliminated by
30 June 1994,
Eliminate export taxes by 30 June 1994.
Conversion of GST into modern broad-based
VAT through significant expansion in the number
of registered taxpayers, extension of horizontal
and vertical coverage, and removal of exemptions.

Sources: World Bank, Pakistan: Medium-term Economic Policy Adjustments, Report No. 7591-Pak (Washington DC: World Bank, 1989), 159;
Karachi Chamber of Commerce and Industry, Proceedings of a Seminar on Reducing Fiscal Deficit - Key to Salvage Economy
(Karachi: CCI, 1994), 41.
 Chapter 1O Resource Mobilization and the Structure of Taxation 279

Box 10.5 resort to inflationary mechanisms for financing the budget

Vested Interests and the Taxation Structure deficit.
The need for retention of the capital gains on financial
Hafiz Pasha argues that the taxation structure needs to be assets has been successfully argued by representatives
seen in the context of different interest groups active in the of stock exchanges in the country. Various associations
economy. He writes: of members of stock exchanges have portrayed the
share market as a barometer of the performance of the
Behind each major tax exemption or concession there is a
government and the economy. They have stressed the
strong, entrenched vested interest group in Pakistan. Each
need for fiscal incentives to attract foreign private portfolio
group has organized itself as an effective lobbying entity,
investment and thereby improve the balance of payments
which has not only blatantly demonstrated its power in
position, and so on.
political terms, but in more subtle terms also has played
Altogether, tax reform involving broad-basing of direct
the game of patronage seeking through party donations,
taxes through the removal of major exemptions and
supporting influential politicians, etc. and developed
concessions has been effectively frustrated by entrenched,
credible arguments for the retention of these exemptions
powerful, well-organized and articulate interest groups. The
and fiscal incentives in the greater national interest.
government has had to retreat in the face of opposition
Perhaps the best example of this is the agricultural
from such groups. It has been left with the worst possible
lobby. It is extremely well organized and enjoys enormous
outcome. Tax rates have come down, while the multitude of
political power. Over 80 per cent of the elected members
tax expenditures continues.
of the parliament either represent the feudal class or are
The failure of government to broaden the base of
sympathetic to the interests of this group. It is not surprising,
direct taxes by reducing tax expenditures leads to the
therefore, that any legislation to change the status quo is
identification of a number of factors which mitigate against
effectively blocked. A number of arguments have also been
success of reform initiatives as follows:
developed to justify the exemption of agricultural income
tax [including) the fact that the sector is already 'overtaxed'
i) Lack of commitment to the reform by agents of the state,
through the pricing mechanism (domestic prices below
arising from a perception that the reform may damage
world prices), that food production is vital for national
vital national interests like food production, savings,
security and that the high costs of collection of the tax on
exports, etc.
agricultural income will not be justified because of the likely
ii) 'State capture' by special interest groups like the
low revenue yield [see also Chapter 5].
traditional feudal elite, bureaucracy and the emerging
Tax holidays have been aggressively supported by
corporate business interests which extract substantial
industrial interests who have formed an alliance with the
rent from the existing tax-expenditure system and are
provincial governments of backward areas. They have been unwilling to give up their privileges.
successful in playing up the sensitive issue of large and iii) Wrong strategy of implementation of reforms. By first
widening regional disparities in the country. The Ministry reducing tax rates the opportunity which existed for
of Finance (a key agent of the state itself) has justified bargaining with (and compensating) losers was lost.
the exemption of interest income on government savings
instruments on the ground that this actually improves the
income distribution because the bulk of participation in Source: Pasha, Hafiz, 'Political Economy of Tax Reforms: The
such savings schemes is by lower and middle income Pakistan Experience', Pakistan Journal of Applied Economics,
households, and that this incentive reduces the need to vol. II, nos. 1 and 2, 1995, 143-4.

Sindh was made fifty years ago, in 1968! There can be no internationally one of the principal sources of
denying the fact that there is a very strong case for immediate local revenue. 36
reassessment of the rental value of properties in urban areas.
According to a report: This particular tax, which has always had immense
potential as far as revenue from provincial governments
The case, therefore, for a more or less immediate was concerned, is one of the most underdeveloped sources
reassessment of GARVs is very strong. The of revenue for the provincial governments. Moreover, since
longer this process continues to be delayed on most of the revenue from this tax (85 to 95 per cent in the
the grounds of political expediency or otherwise, past) was given to the local governments at the lower tier,
the less will be the degree of exploitation of the underdevelopment of this tax and low effort on the part
the revenue potential of this tax. This is of
of provincial governments had a serious negative impact
particular significance to the local governments
at the local level as well. The constraint on developing and
in the country who generally get the dominant
share of revenues collected. Municipal revenues expanding this tax on the basis of new assessments and
have tended to be constrained by the low level at enhanced rates has always been political. Although the
of revenues from the property tax which is Ordinances require reassessment of property value every five
280 Issues in Pakistan's Economy

Box 10.6 There are two types of waive-offs,' the finance minister's
Waivers and Exemptions, and the Culture of statement says. There are those which are 'claimed by the
taxpayers at the time of filing tax returns' and those that are
SROs allowed by the government 'any time during the year keeping
in view the economic realities'. The latter variety of exemptions
1. Khurram Hussain, shows one of the many unsavoury sides of
are granted through what are known as a statutory regulatory
Pakistan's taxation structure, where numerous industries, firms
order, or SRO, and other miscellaneous notifications that the
and individuals have been granted waivers and exemptions
tax bureaucracy is empowered to issue on its own.
and do not have to pay taxes.
And only a day after the finance minister's statement before
the National Assembly, the Public Accounts Committee was
If you like big numbers, you'll love this. On Monday our
informed that more than 4,500 SROs have been granted in the
finance minister told us all that more than Rs. 650 billion worth
last four years. 'It seems the country is running on the SROs,'
of tax exemptions have been granted to various entities over
the committee's chairman reportedly said upon hearing this.
the last four years.
This power to grant waivers and exemptions is not new, nor
To get some perspective on the scale of that number
is this the only government to have used it so widely. In fact,
consider this: the total amount of money that Pakistan has
it's decades old, with some of the legislation dating back to
received from the IMF over the same time period is a little over
1969, and the last modifications to the statutory authority of
$5bn, which converts to less than Rs. 500bn, for now anyway.
the tax bureaucracy to grant waivers and exemptions having
Get it? The amount that has been given away through
been made in 2001 .
exemptions and waivers on taxes to a whole galaxy of
Every government for as far as our memory is allowed to
domestic stakeholders is larger than the amount that Pakistan
travel has used these powers extensively to play a complex
has sought as a bailout from foreign creditors over the last
game of give and take with the country's business elite.
four years.
Sometimes this complex game of give and take has
Quietly and rather matter of factly, our finance minister has
operated through minor adjustments to the administered
informed us that we go around the world asking for aid in
prices, like in the case of sugar, and other times through
all shapes and varieties, and this is what we essentially do
legislation that skews the pitch in favour of one player or
with the aid money when it arrives. We give it away to large
category of players, like in the refusal to impose a proper
stakeholders in the form of waivers and exemptions on taxes.
capital gains tax on stock brokers.
The math gets truly infernal. Just annualise the amount
But fine-tuning of this game, this political economy of the
given to us by the IMF, for instance, and you get a figure of
rentier state, works through the ad hoc grants of waiver and
about Rs. 125bn per year as the amount we've received from
exemptions that are often designed for the benefit of a single
the facility that began in November 2008.
party.
And if you look at the revenue amounts waived during the
The finance minister's statement is accompanied by a list
same years, they average out to above Rs. 150bn each year,
of those entities that have availed of a waiver of customs duty
meaning that our own revenues are being used to cover the
larger than Rs. 1 million, and the list contains names of NGOs,
revenue loss from these waivers and exemptions after all aid
lots of government departments, as well as private companies.
money has been consumed.
But the real list we need to see is the one that contains
I could cut this any number of ways and it gets worse and
names of parties that have had amounts waived under the
worse. Not only are we asking foreign creditors to help us
sales tax, where the large trade-offs are applied.
pay for these exemptions and waivers, we're leaning on the
Unfortunately, the minister's statement says that such a list
generosity and philanthropic instincts of our friends and allies,
is 'not maintained by the FBR/field formations'.
we're invoking the blood and sacrifice of our war dead, we're
This is the real reason behind the failure to bring about a
parading the plight of our flood victims on the world stage to
value-added tax in this country, in spite of efforts for over a
buttress our demands.
decade. VAT shuts down this power to issue SROs and grant
And all the while, the waivers and exemptions have
waivers and exemptions, and as a result closes the back door
continued unabated. In the year of the great flood, to take one
through which successive governments have gamed their
example, while the country went to every forum in the world
fortunes.
to ask for financial assistance in the name of the flood victims,
Closing down this window of opportunity, if one may
while the government hosted a donors' conference of sorts in
play with a metaphor, is critical to placing the country on a
the comfort of the Serena Hotel in Islamabad, the total amount
sustainable footing, to ending our constant search for a walk-
given away through waivers and exemptions was just over
on role in a great powers war.
Rs. 150bn, larger than the amount of money we got in aid in
the name of the floods.
There are four separate categories under which these
waivers and exemptions are typically granted. The Customs
Act of 1969, and the respective statutes that govern the
operation of the sales tax, income tax and federal excise
duties. Each statute contains specific clauses that give the Source: Husain, Khurram, 'Of Waivers and Exemptions',
power to grant exemptions. Dawn, Karachi, 13 December 2012.
l Chapter 1O Resource Mobilization and the Structure of Taxation 281

2. Mubarak Zeb Khan, shows how Pakistan's elite benefit from 'We want to bring all 3.8 million people into the tax net in an

t exemptions of duties.

Almost 84 per cent of tariff and duty rates have either been
honourable way,' he said.
Mr Hakeem said that 2.9 million tax evaders had been
identified with the help of Nadra. Of these, 2.2 million are
exempted or reduced for the benefit of certain influential non-national tax number (NTN) holders and 0. 7 million NTN
lobbies and the elite in the country through notorious statutory holders, but non-filers/evaders. He said 200,000 tax evaders
regulatory orders (SROs) issued by the present government. were rich people who did not even exist on the tax roll. 'We will
The startling revelation was made by Federal Board of issue notices to them in the next few days,' the FBR chairman
Revenue Chairman Ali Arshad Hakeem at a meeting of the said and clarified that the proposed amnesty schemes would
Senate standing committee on finance held here on Thursday. not apply to them.
'This is a 'financial NAO' in the form of SROs for the elite,' he The FBR chairman said that because of capacity constraint,
said. The meeting was convened to discuss the tax amnesty the remaining 2.7 million people would be given an option to
bill. come under the tax net by paying Rs. 40,000 on declaring their
When Senator lshaq Dar of the PML-N termed the bill hidden income/assets of up to Rs. 5 million. They will have to
a 'financial NAO', the FBR chief pointed out that certain pay Rs. 50,000 in the second month and Rs. 70,000 in the third
influential lobbies and the elite were already enjoying these month to avail the facility.
exemptions and concessions. Defending the amnesty If the amount of undeclared income/assets/expenditures
scheme, Mr Hakeem said exemptions in income tax, customs exceeds Rs. 5 million, tax rate for the declared value will be
duties and general sales tax had created anomalies in the tax one per cent in the first month of the scheme, 1.25 per cent in
system and could be called financial NAO. 'We will approach the second month and 1.75 per cent in the third month. The
the finance minister next week to remove these anomalies and FBR chairman said the existing taxpayers who disclosed their
enact a fair and equitable taxation system for all.' undeclared income/assets of up to Rs. 5 million would pay
He said there was a permanent window available for a token money of Rs. 100. No question about the source of
whitening money under section 111 (4) of the Income undisclosed income/assets/expenditure would be asked, he
Tax Ordinance. No questions were asked about foreign added.
remittances, he said, adding that it provided an easy way
to tax evaders for whitening black money. Mr Hakeem said Khan, Mubarak Zeb, 'Elite got 84 pc tariff, duties exempted or
there was no economic justification for concessions because reduced: FBR chief', Dawn, Karachi, 29 December 2012. The
favours were mostly given to friends, political cronies and article has been slightly edited.
powerful inefficient producers. 'We will soon work out the
financial impact of these favours in duty and taxes given to
influential people.' 3. Shahid Kardar, writes about how SROs have destroyed
Senator Nasreen Jalil, chairperson of the committee, put Pakistan's tax culture.
a number of questions to the FBR team and said the
amnesty bill had many controversial clauses which needed THE Public Accounts Committee (PAC), and especially its
clarification from the FBR. lshaq Dar was of the opinion that chairman Nadeem Afzal Gonda! and member Zahid Hamid,
the committee should reject the proposed bill in totality. After deserve to be applauded for taking up the issue of the
some arguments by the FBR team and suggestions, mostly notorious instrument called the SRO (Statutory Regulatory
from Mr Dar, the committee decided to hold another meeting, Order) and for articulating the need to end the practice of the
probably on 4 January for making recommendations on the executive issuing SROs. The latter make a complete mockery
bill before sending it the Senate for approval. of the tax structure approved by parliament through the
Noting that the bill in its existing shape could be challenged finance bill tabled with the budgetary proposals for the year.
in court, Mr Dar suggested to the FBR to bring the specific Seemingly unbeknown to parliament and the public at large
amnesty scheme with the bill for approval at the next meeting. the government of the day can, through this notorious SRO,
He was of the opinion that parliament could not give power grant favours to friends, political cronies and powerful specific
to any institution to bring such schemes at the name of groups/lobbies of inefficient producers through concessions
national interest. Senator Hamayun Khan Mandokhel also in income tax, customs duties and GST (general sales tax).
said parliament could not give blanket power to the FBR, The Federal Board of Revenue's notifications through
adding that the present bill was not clear and needed further these SROs nullify the provisions of the finance bill approved
clarification. Senator Haji Adeel of the ANP asked the FBR why by parliament, which under our constitution is the ultimate
notices had not been issued to tax evaders. repository of such powers. It is indeed revealing that the cost
The FBR chairman said he feared that data would be of such tax waivers and exemptions is in excess of Rs. 150
misused by tax officials who would get kickbacks from the billion a year, and then we lament that our tax-to-GDP ratio is
identified tax evaders instead of collecting revenue for the amongst the lowest in the world!
government. The data collected by Nadra is a 'gold mine' and For illustration take the case of customs duties. We find
it needs to be used efficiently and carefully,' he said. that as against the effectively traded 5,000 tariff lines there are
The FBR chairman said he still believed that tax officials SROs covering 84 per cent of them-impacting 45 per cent of
would harass taxpayers, despite the fact that salary and imports and encompassing almost all sub-sectors, rendering
perks of officials had been doubled over the past few years. the actual tariff different from the standard tariff.
--------------------------------------------------------

282 Issues in Pakistan's Economy

7
This has resulted in the customs tariff having multiple although its approval would have to be obtained within 90
rates, several exemptions and several conditions' requirement days.
fulfilment, providing opportunities for the discretionary use of As for the argument on loss of revenues it is instructive
powers by officials, raising the cost of doing business and that because of these SAOs that its proponents would seek
incentivising malpractices, corruption and misdeclaration for to retain, approximately 2,000 tariff lines (representing 50 per
evading duties. cent of the SAOs) are liable for import duties of less than 5.1
The power of the administrative apparatus to issue SROs per cent, with almost 900 of them zero-rated! So much for the
has, therefore, provided money-making opportunities for those likely claims about the potential loss of revenue.
empowered to approve such exemptions. As regards SROs issued to date there should be a
These arrangements under the cover of the reprehensible comprehensive review of each SRO with its retention being
practice of issuing SROs represent a cosy pact between the contingent on parliamentary ratification (through incorporation
well-connected and the bureaucracy or the political masters in in a finance bill), otherwise there should be an action plan for
power. The abuse of such discretionary powers has enabled its gradual phasing out.
inefficient producers to thrive at the expense of us unfortunate, http://dawn.com/2012/12/25/the-curse-of-sros/
hapless consumers who pay a heavy price for keeping afloat
producers who are not competitive internationally. Kardar, Shahid, 'The curse of SROs', Dawn, Karachi, 25
Their preferential treatment enables the beneficiaries to December 2012. http://www.brecorder.com/taxation/181:
'extract rents' and make easy money without having to make pakistan/1273827:sros-a-kind-of-financial-nro-fbr-chief/?
the effort to produce and market competitively a good quality date= 2012-12-29
product. Many a rags-to-riches story can be traced to this
ubiquitous instrument, which has made large chunks of the
manufacturing sector addicted to high levels of protection.
Moreover, in this way neither those favoured nor those
favouring them are accountable to parliament for striking such SROs a kind of financial NRO: FBR chief
bargains. Tragically, even the courts have, through a host of
decisions, protected those benefiting from SROs. And the cost The Chairman of the Federal Bureau of Revenue, stated that
to the economy of this protection has also been huge in terms the SAOs which abound in the country, are a carte blanche to
of scarce resources being tied up in the inefficient production thise who benefit, a 'financial NAO'.
of goods.
Investors are understandably shy of operating in an Chairman Federal Board of Revenue (FBA) Ali Arshad
environment muddied by such concessions, which has Hakim on Friday made a courageous admission before the
resulted in the shifting of the goal posts in favour of the chosen Senate Standing Committee on Finance. According to him, the
few who acquire a monopolistic status or are in a position elite class and powerful lobbies have been granted huge tax
to form cartels. Consequently, the policy and supporting tax exemptions through statuary regulatory orders (SROs), 'which
structure incentivises investments in speculative ventures is also a kind of financial National Reconciliation Ordinance
rather than longer gestation projects of greater importance to (NAO).'
the economy. Giving a realistic picture of tax culture in Pakistan, the FBR
By abdicating its power and allowing the executive to Chairman informed the committee that the tax laws had given
arrogate to itself the power to give such dispensations not massive exemptions to influential groups and powerful lobbies
only has parliament been a party to rendering meaningless through SAOs. Unfortunately, however, general public finds it
the sanctity of the federal budget and the finance bill that it has extremely difficult to start a new business due to discriminatory
itself passed, it has been an accomplice to acts that are ultra tax laws. The entire tax system is like an NAO for the elite class
vires to the country's constitution. whereas the poor people cannot start their businesses in the
Apparently, the power of the executive flows from an old existing tax environment, according to him.
1969 act under which it was delegated such powers by He said powerful sectors had obtained extraordinary tax
parliament. The PAC having taken the lead to change the exemptions through SROs issued from time to time, adding
narrative should demand that this act be repealed, to take _that a narrow tax base in the country was evident from the
away all such powers of the executive in the future, restoring fact that there were 805,465 corrected numbers of taxpayers
them rightfully to parliament. This would be consistent with during 2011. Additional revenue and documentation measures
international best practices, the world having discontinued could generate Rs. 250 billion which can raise the Tax-to-GDP
with such a practice. ratio by one per cent and the country could increase 2-2.5
Of course, nonsensical arguments will be made about per cent Tax-to-GOP ratio with the help of system, withdrawal
the possible loss of revenues and the need to facilitate of unnecessary exemptions and removal of distortions in the
governments to take quick decisions in emergency situations. tax system.
And that depriving the executive of such flexibility would The FBR Chairman also said that potential taxpayers were
hamper governmental operations in a rapidly changing global identified through consumption and behavioural patterns,
environment. including repeated foreign travels, multiple bank accounts,
In this writer's view, conditions could be drafted under heavy utilities" consumption, expensive vehicles, weapons,
which prior parliamentary permission would not be required,
 Chapter 1O Resource Mobilization and the Structure of Taxation 283

credit cards, -posh residences, education, profession and In response to a question on corruption in the tax machinery,
family patterns (vacations;'children studying abroad, etc). If all the FBR Chairman said that as Nadra chairman he used to
persons are taxed with the help of consumption behaviour, no transfer Nadra employees to significantly reduce the incidence
income can be concealed anywhere in the country, according of corruption. 'However, you can decide what should be done
to him. in .the tax machinery, he added.
With the help of this. 'data.mine', 2.9 million tax evaders About the benefits of schemes, Hakim said the
were identified; 2:2 miilion non-NTN holders and 0.7 million implementation of schemes would deepen and broaden the
NTN holders.butnon-tiiers/evaders were also identified, Hakim tax base; lifetime value of repeat tax payments. Database
said .. He said the FBR was-now.equipped with 'a goldmine of value will be much higher than yearly value; database will be
data'iand its effective utilization would facilitate the generations a.great help with creation of analytics for automatic detection.
to come. He added <that. his department had very clear Moreover, it will help document the economy; improve Tax-to-
viewpoint on .the documentatioi:i of potential persons. ·'This GDP ratio; cause buoyancy in national economy; increase tax
data isagoldrllineand.we should have to use it very carefully base & collection. According to him, the government will lower
to avoid misusElof the data,' FBR Chairman said. Around theJax rates in coming.years and encourage people to bring
. 200,000;pe'rsonJ:' would .be ;documented without allowing assets to Pakistan.
them to :avail r~gistration. stheme: According to him, these .In the past, the survey of markets and shops · in 2000
persons have exceptionally high expenditures and they have remained unsuccessful as it was done through force without
not even obtained. the National Tax Numbers (NTNs). They the support of any authentic data or third party information.
will be registered under.the existing tax laws. The remaining 'It is not possible to forcefully bring these individuals into the
individuals vioul.d be allowed to avail the schemes. Once these tax net. We cannot document persons by using force which
persons are in the fax net, the department can ask them to file is evident from the past experience of tax survey of 2000.
their income tax 'returns next year. However, it could be done by providing them an opportunity
He said if ttie data of 2.9 million·tax evader was given to to voluntarily come within the documented regime,' he said.
the,tax rnachin'ery for furtheraction; it might not achieve the Referring to investment .made in Dubai, FBR Chairman said
a
desired results: In such situation, FBR would not be able to that the biggest weighing scheme had been seen in the form
getanytax. Therefore,,hisdepartment wanted to bring these of investments taken to Dubai by local residents to whiten
2,9 million pe~sons into the tax net with the help of amnesty their money.
schemes:- 'The legal process is very lengthy and amnesty
schema' i.s the 6nly;~ay to bring these potential persons into
the tax net,' he said. Business Recorder, Karachi, 29 December 2012

years, there are parliamentary requirements that reassessed current and development) to fulfil the expanded functions. 37
rental values cannot exceed 10 per cent of the previous value. However, as we showed earlier, district governments did not
This continues to lead to an under-assessment of the true have the financial capacity to provide for even a fraction
property value. Even if the rates are reassessed as frequently of these services. The burden then fell on the provincial
as they are supposed to be, the market values of urban governments, especially when they also had to come up with
property have increased by as much as fifteen or twenty times Provincial Finance Commission awards.
in recent years. Thus the assessed values would only capture The problem was, that while provincial governments
a very small percentage of the real market rental values. along with district governments, were to be held responsible
One of the main slogans raised by General Musharraf's for providing essential services, neither and especially the
government after it took over in October 1999, was the latter, had sufficient resources to do so. Without effective
repeated claim that his government had established a devolution from the federal government to the provincial-
devolved and decentralized system of government. The which includes the devolution of responsibility, power and
irony is that while there had been some devolution and financial resources-it was unlikely that the devolved district
decentralization from the provincial to the local (district) government system of 2001 could work effectively.
government level, there had been none from the federal
to the provincial level. Both these factors had significant 10.4.3 Local Government Revenues 38
implications for resource mobilization at the provincial level
throughout the duration of his rule. The common perception in the past has been that local
As we have shown in the earlier sections of this chapter, governments were nonentities when it came to resource
a large number of functions previously in the jurisdiction generation, expenditure, or the provision of services.
of provincial government had been passed on to its district Provincial governments were perceived to be the main
governments. In addition, new functions were also added to providers of benefits to the people, and it was assumed
district governments. Aisha Ghaus-Pasha and Hafiz Pasha that they were also better at raising revenues. However, the
estimated that local governments would have required surprising evidence is that local governments in the earlier
approximately 40 per cent of provincial budgets (both system prior to Musharraf's District Governments of 2001,
284 Issues in Pakistan's Economy

Box 10.7 NTN, 13,201 individuals have arms licenses but do not have
The Rich Pay No Tax in Pakistan any NTN, 25,133 citizens are in the best profession but do not
pay tax.
Usman Manzoor, cites data from NADRA which shows that Through data mining 2,376,523 potential tax payers have
more than two million Pakistanis, almost all of whom are rich, been identified who are not even listed on the NTN master
pay no taxes. index. 'There are around 1,228,440 other than the potential
taxpayers who are on the master index but exist in the non-
The latest investigation conducted by a number of filer category'.
government organizations establishes that there are hundreds The FBR will be briefing the prime minister regarding the
of thousands of multi-millionaires in Pakistan who enjoy elitist findings of potential tax payers. The sources said Nadra and
lifestyle but don't bother to pay tax. FBR would also be signing an agreement 'Broadening The
The National Database and Registration Authority (Nadra), Tax Net' in which Nadra would be identifying tax payers while
in collaboration with various departments, has compiled data the FBR would announce taxation schemes and enforce them.
of some 2,376,523 potential tax payers who do not have any The sources said 93 million Pakistanis have CNIC and this
National Tax Number. Sources in Nadra claim that if these data is being integrated with the data of immigration, passport
tax-dodgers are brought into the tax-net, then the government office, FBR, banks, etc so that the tax net could be widened.
can earn revenue of over Rs. 86 billion. However, FBR expects The sources said there are thousands of citizens who fall
to fetch Rs. 176 bn revenue through amnesty schemes in almost every category made by Nadra to identify potential
announced by it for tax dodgers. taxpayers. For instance, a frequent traveller has a residence in
These potential tax-payers include frequent travellers outside a posh area and the utility services consumed by him are also
the country but not having NTN number. Similarly, people who very high and he also has multiple bank accounts and arm
do not have any NTN number but have multiple bank account licenses. 'We will count two tax-payers not one if someone
ho.lders; owners of posh residences and expensive vehicles; is living in a rented accommodation in a posh area and his
heavy consumers of utility services and posses arm licenses. utility bills are high as the owner of the house would be dealt
Non-taxpayers in best professions have also been highlighted for having expensive accommodation while the tenant will be
in the Nadra data. dealt under living an elite lifestyle and dodging the tax net', the
According to the data compiled by Nadra, there are some sources added.
1,611,153 people who frequent travel abroad but are not Sources also disclosed that Nadra might get 1 to 2 per cent
NTN holders. Some 584,730 individuals having multiple bank share of the revenue collected through potential tax-payers
accounts do not have any NTN. Similarly 56,421 owners identified by it.
of residences in posh localities are dodging the tax net as
they do not have any NTN. Some 19,149 Pakistanis own
expensive vehicles but are not NTN holders. As many as Source: Manzoor, Usman, 'Over two million millionaires have
66,736 individuals heavily consume utility services without any no NTN, studies show', The News, Karachi, 4 October 2012.

especially in large cities, had been successful in increasing base of local councils. However, after octroi was done away
their contribution to total revenues and there had been an with in 1999, local governments were forced to become
improvement in the revenue mobilization efforts of local dependent on federal fiscal transfers which compensated for
governments. In the 1980s, local taxes grew by an annual this loss.
rate of 18 per cent, far higher than the growth in revenues One area of reform that was identified was the way
at the federal or provincial level. Moreover, in 1990/1, prior local taxes were collected. The provincial tax machinery
to the 1991 NFC award, local governments contributed collected the property tax and the tax on the transfer of
Rs. 8.8 billion in tax receipts compared to the Rs. 6.8 billion property in urban areas, and the local rate in rural areas.
contributed by the four provincial governments. Hence, The justifications given for provincial collection followed
6.5 per cent of total tax receipts came from the lowest tier by revenue sharing of municipal taxes have been discuss.ed
compared to 5 per cent from provincial governments. But earlier in Section 10.l.3.
this figure should not detract from the very serious problems However, the problem was that the buoyancy and revenue-
faced by local governments, some of which •are discussed in raising potential of, say, the property taxes, depended on
this section and in Chapter 12. the reassessment frequency and vaiue, as discussed in the
Much of the credit for the good fiscal effort of local councils previous section, where the provincial government played
was due to a handful of large urban local government's and the only role. Since 85 to 95 per cent of the revenue was
some districts. There were very large variations between the handed over to the local councils, provincial governments
levels of effort and results in resource mobilization among had few incentives to collect higher revenues as 'the net gain
urban and rural, and between small and large, councils. With to them is very small in relation to the high political costs'. 39
just one tax-octroi-accounting for more than half of the Hence, arguments were made in favour of decentralizing the
revenue of nearly all urban councils, there could have been property tax to municipal governments. It was believed that
little disagreement with the urgent need to broaden the tax local governments ought to have more .incentive to mobilize
 I

Chapter 1O Resource Mobilization and the Structure of Taxation 285

revenues so as to diminish their complete dependence more accessible and involved in local issues. This view is also
on octroi, and that people may also have been willing to shared by Aisha Ghaus, who argues that
pay higher taxes because they saw a closer link between
payment and the provision of municipal services. The most decentralization of local services along with
important point, however, was that 'provincial governments higher flows of funds to local governments is
have pre-empted a number of taxes which fall within the likely to improve the overall level of provision of
local services in the country. Therefore, from a
fiscal powers of local government', 40 which meant that
pure service delivery point of view a case exists
they had encroached on the revenue-generating avenues for decentralizing delivery of local services to local
of local governments. Taxes such as the tax on the rental governments. This strengthens the traditional
value of land and property, the motor vehicle tax, the tax on arguments that have been made in favour of
professions, trades and callings, and the entertainment tax decentralization on economic, institutional and
could all have been collected by local governments. political grounds. 46
Aisha Ghaus has argued that the 'current pattern of
intergovernmental fiscal relations between the provincial If the arguments for decentralized local government are
and local governments in the country is such that the so obvious, why are there no elected local governments in
former is instrumental in retarding the development, in terms of Pakistan when democratic (or at least, elected) governments
expenditure growth, of the latter. This is the case because the exist at the provincial and federal level? The answer is to
provincial governments substitute for local governments in be found in the political economy of power, its capture,
the provision of some important local services.' 41 After the its use, and its distribution. Often simple technocratic
18th Amendment and with local government elections to be issues, which while well-meaning and probably correct,
held after the May 2013 elections, one wonders how these fail precisely because they are not located in a political
persistent issues will be addressed. economy framework or context, where the relationship to
Interestingly, there is also evidence from an analysis of the power, is central. Chapter 12, examines why it is, that local
sharing of revenues from taxes of local origin, where there are governments continue to, perhaps are made to, fail under
elected governments, and why they are made to work under
sizeable transfers of resources in Pakistan military dictatorships.
from local jurisdictions to higher levels of
government, especially provincial. This would
seem to justify some reallocation of fiscal powers in
favour of municipal governments and/or the 10.5 SUMMARY AND FURTHER READING
establishment of more elaborate revenue sharing 10.5.1 Summary
arrangements with provincial governments. The
case for this becomes even stronger if a further Government expenditures arise from the revenue that
devolution of functions to local governments government can raise through taxation, or the money that it
takes place in Pakistan. 42 can borrow from domestic or external sources, or the money
that it can print. In this chapter, we have looked at the
This argument for decentralization to local government has taxation and revenue side of government and at the overall
gained much currency. taxation structure that exists in Pakistan. The three tiers
The extensive and detailed Applied Economics Research of government-federal, provincial, and district-all raise
Centre (AERC) reports on local government43 argued for revenue and all incur expenditures. The largest share, in both
decentralization, which they believed was 'justified on both revenue and expenditure, is made by federal government.
economic and political' grounds. The economic justification With just 1 per cent of Pakistan's population paying income
rests on the premise that there would be an increase tax, indirect taxes provide about three-quarters of total tax
in efficiency in the provision of services, 'either by cost collected, with sales tax the largest single contributor. We
reductions or by enhancements in the quality of service (by have also discussed in detail the National Finance Awards.
more effective administration)', and that iflocal governments This chapter has identified and discussed the problems that
are included in the provision of services, then the quality exist between the three tiers of government, and has shown
of such services is also likely to be higher.44 The main that each higher tier of government used to trespass on the
justification for decentralization based on political grounds jurisdiction and functions of the lower tier. The arguments
has always been that decentralization ought to 'induce a for more decentralization to the provincial and local level
sense of participation at the grass roots level of people in the were also made, and the numerous problems in the structure
provision and management of basic services that are of vital and administration of the taxation systems were highlighted.
importance in influencing their quality of life. This process
of involvement not only creates a sense of greater control
10.5.2 Further Reading
and self-reliance but also provides for a clearer articulation
of local needs and preferences.'45 The presence of elected The main sources cited in this chapter all deserve a thorough
representatives from smaller communities is said to be review. A large number of reports documented by the Applied
'beneficial' as local representatives have greater knowledge Economics Research Centre (AERC) of the University of
of local problems and priorities, and are supposed to be Karachi, in particular, deserve special mention. These reports
are still the most comprehensive literature on the subject. The
286 Issues in Pakistan's Economy

following reports published by the AERC are recommended Local Government (Karachi: Oxford University Press, 1999).
for a better understanding of the taxation structure in See also Chapter 12.
Pakistan: Local Government Finances and Administration in There has been much research and discussion on issues
Pakistan (in two volumes), Research Report No. 72, 1990; which have been raised in this chapter especially on the
Resource Mobilization and Institutional Capacity (in seven previous District Government. Amongst some reports that
volumes), Research Report No. 85, 1991; Resource Mobilization are available, see: Jackie Charlton et al. Devolved Service Delivery
by Federal Government, Research Report No. 91, 1992; Resource Study: Emerging Concerns (Islamabad: Asian Development
Mobilization by Provincial and Local Governments in Pakistan, Bank, 2003) and Nick Manning et al. Devolution in Pakistan-
Research Report No. 93, 1992; and Metropolitan Resource Preparing for Service Delivery Improvements (Islamabad: World
Generation Study, Research Report No. 97, 1993. Bank, 2003 ). T1~io Important academic papers are: Ali
On the taxation structure, see Pasha, Hafiz, 'Political Cheema and Shandana Khan Mohmand's, Local Government
Economy of Tax Reforms: The Pakistan Experience', Pakistan Reforms in Pakistan: Legitimism, Centralization or a Driver for
Journal of Applied Economics, vol. 11, nos. 1 and 2, 1995; Pro-poor Change? (Lahore: LUMS, 2003 ); and Ali Cheema
and Pasha, Hafiz and M. Asif Iqbal, 'Taxation Reforms in et al. 'Decentralization in Pakistan: Context, Contents and
Pakistan', Pakistan Journal of Applied Economics, vol. 10, nos. 1 Causes', in D. Mookherjee and P. Bardhan (eds.), The Rise
and 2, 1994. In addition, because there have been numerous of Local Government in Developing Countries: A Comparative
changes in the taxation structure in recent years, the Perspective (forthcoming). Papers by Aisha Ghaus-Pasha and
Central Board of Revenue Yearbooks and the annual Pakistan Hafiz Pasha: 'Devolution and Fiscal Decentralization', The
Economic Survey should be consulted. The following World Pakistan Development Review vol. 39, no. 4, Part 2, 2000, and z.
Bank publications are also useful: Pakistan: Growth Through H. Anjum, 'New Local Government System: A Step Towards
Adjustment, Report No. 7118-Pak (Washington DC, 1988); and Community Empowerment', The Pakistan Development Review
Pakistan: Country Economic Memorandum FY93: Progress Under vol. 40, no. 4, Part 2, 2001, were amongst the earlier papers
the Adjustment Program, Report No. 11590-Pak (Washington published on the new District Government system.
DC, 1993). Since much of this chapter focuses on the pre-18th
For the old system of local government and for a review of Amendment structure and system, references which look
its history and related issues, see the following publications at decentralization after the 18th Amendment are given in
by S. Akbar Zaidi: 'Effective Local Level Delivery of Human Chapter 13.
Resources: Development Related Programmes-The Case of A small selection of references on the fiscal deficit are given
Pakistan', mimeo (Bangkok: UNESCAP, 1991); 'A Study on in the Notes, but a more detailed reading list including recent
Making Optional Use of Municipal Budgets to Finance Child work is provided in the next chapter.
Development (Pakistan)', mimeo (Karachi: UNICEF, 1994); As has been argued in this Chapter, taxation is a major
'Urban Local Government in Pakistan: Expecting Too Much issue in Pakistan, yet recent research has been insufficient,
From Too Little', Economic and Political Weekly, vol. 31, no. 44, both in quality and in the number of publications. See, of
1996; 'Urban Local Governance in Pakistan' in Islam, Nazrul various quality: Pakistan Institute of Legislative Development
and M. M. Khan, Urban Governance in Bangladesh and Pakistan, and Transparency (PILDAT), Taxing the Agriculture Income in
Centre for Urban Studies, (Dhaka: University of Dhaka, Pakistan; PILDAT Briefing Paper No. 42 (Islamabad: PILDAT,
1997); 'Politics, Poverty, Institutions: The Case of Karachi', November 2011 ); Haq, Ikramul and Huzaima Bukhari,
Economic and Political Weekly, vol. 32, no. 51, 1997; 'Karachi: Pakistan: Enigma of Taxation-Fitting the Pieces Together
Prospects for the Future', in Khuhro, Hameeda (ed.), Karachi: ( Saarbriicken, Germany: Lambert Academic Publishing,
Megacity of Our Times (Karachi: Oxford University Press, 2011); Nasirii, Anjum, Agricultural Income Taxation: Estimation
1997); and the papers in Zaid, S. Akbar (ed.), The New of the Revenue Potential in Punjab, Policy Brief No. 01-12
Development Paradigm: Papers on institutions, NGOs, Gender and (Lahore: Institute of Development and Economic Alternatives
(IDEAS), November 2012).
 Chapter 1o Resource Mobilization and the Structure of Taxation 287

Appendix 10.1
petroleum that yields Rs. 50-60 bn annually was kept out
The National Finance Commission and of the pool which Punjab rightly wants now to be included.
Fiscal Federalism The 1997 Award was a device to shore up the depleting tax
revenue of the federal government, eroded by rapid reduction
Jawaid Bokhari follows the 2003/4 debates around the earlier
in customs tariff under pressure of multilateral donors. The
National Finance Commission Awards. The National "Finance
Award also terminated the cash development loans given by
Commission (NFC) appears to have reached a near consensus on
the federal government to the provinces. However, it gave a
the ratios of tax revenues in divisible pool to be shared between
strong message that each province would have to manage
the federation and the provinces. The radical departure made in
its own resources within the centrally defined resource
the Award in 2009, is elaborated in detail in Chapter 13 in Part N
distribution framework.
of this book. Given the fiscal space, there are strong chances that fiscal
devolution may gain momentum under Prime Minister
Although federal Finance Minister Shaukat Aziz has not
Zafarullah Khan Jamali who enjoys good equation with his
committed himself on exact ratios, the provincial finance
coalition partners.
ministers indicated to newsmen that it would be on 50:50
Fiscal federalism is currently very weak. There is massive
basis, up from 37.5 per cent for the provinces under ·the imbalance between taxes collected by the provinces (20 per
1997 NFC Award and just over 40 per cent under the existing cent) and the federation (80 per cent) All rich revenue yielding
formula. taxes are collected by a centralized authority. And the rate
Whereas the share of provinces in the divisible pool will and incidence of taxes are adjusted, from time to time, by
increase, the two minority provinces NWFP and Balochistan
lslamabad with varying impacts on different provinces.
will lose subventions and grants amounting to Rs. 8.5 billion
ln lndia, fiscal federalism has been strengthened by
set aside for them by the previous NFC Award. The agreed allowing provinces to collect sales tax while retaining it as part
Rs. 20 bn subventions and grants for the .new award to which of the divisible pool. 50 per cent of the sales tax proceeds are
the federation was to contribute Rs. 15 bn and the provinces
transferred to the central government by the provinces, says Dr
Rs. 5 bn, the lion's share coming from the Punjab, is to be
Ayub Meher. Such an arrangement can help to stabilize erratic
shelved. ln this case, the beneficiaries would have been the · financial flows to the provinces.
three minority provinces. The provincial governments have failed to tax effectively
Earlier, officials estimated that the proposed Rs. 20 bn incomes on agriculture which contributes about a quarter
subvention and grants combined with 2.5 per cent of shares of the country's Gross Domestic Product. lt could become a
in General Sales Tax, assessed at around Rs. 40 bn, would major source of tax revenue, if properly tapped. . .
have inflated the share of the provinces in the divisible pool The current centralized system separates the taxmg
to 44.6 pc. and spending authority for reasons of efficiency (that is
The federal government is now in a position to spare questionable) and erodes accountability of the provincial
more money for the provinces in view of the enlarged fiscal governments to tax payers and of elected representatives to
space, prompted by mounting public pressures to address the electorate.
the problem of rising poverty and unemployment. Nation- And again to quote an official, 'the central government
building is primarily in provincial domain. periodically determines on the basis of needs, both the level
lf the share of the provinces is raised to 50 per cent, it of fiscal transfers and the method of distribution.' lt damages
would be a significant step towards fiscal autonomy of the provincial harmony.
provinces. The system of patronage, a product of feudal As an understanding between the provinces and the
mindset, will be replaced by the eligibility of funds based on federation on sharing of finances under the divisible pool
partial recognition of rights of the federating units. seems to have been largely settled, the next NFC meeting
Prior to the 1990 Award, the entire fiscal deficits of the (scheduled for 5 February in Karachi but may be postponed
provinces were picked up by the central government, breeding due to a holiday), will take up. the issues of inter-provincial
fiscal indiscipline and making provinces heavily dependent distribution. And indications are that sharing of pool money
on lslamabad. Later, this led to freezing of provincial on the population basis may be replaced by a multiple
expenditures. The national financial system was designed to factored formula such as popula_tion, backwardness, revenue
serve the unitary military government. The 1979 and 1985 generation and area.
NFC awards were not notified and nor were the provinces With subventions and grants abolished, the money saved
informed about any NFC decisions. For the first time, the can be apportioned on the basis of provincial backwardness.
1990 Award laid some stress on self-reliance to improve fiscal Currently, the divisible pool is shared between the provinces
management. lt was a small step towards fiscal federalism .. of the sole criteria of population: Punjab gets 57.88, Sindh
But the 1997 Award deprived the provinces of a fair share 23.28, NWFP 13.54, and Balochistan 5.30 per cent.
of a fast growing revenue source-sales tax. Federal taxes Conceptually though not ratio-wise, it is not unlikely that
were included in the divisible pool and the share of provinces inter-province distribution of resources may begin to follow
was cut from 80 per cent to 37.5 per cent by an interim the pattern set by provincial finance commissions (PFCs) for
government having no public mandate. The surcharge on current expenditure.
288 Issues in Pakistan's Economy

Under the PFC awards, 60 per cent of the net proceeds The formula for distribution of resources between the
of the provincial pool is retained by the provinces and 40 provinces and districts takes care of regional backwardness
per cent, with marginal variations, is distributed among the within each province. Similarly, there is some realization within
districts. The federation and the provinces currently share the NFC that the divisible pool needs to be distributed on the
federal divisible pool on the same basis. basis of different stages of development of each province and
The pool money is given to the districts on the basis of the its specific needs in the spirit of federalism.
following formula: population 50 per cent, backwardness 17.5 Yet, fiscal federalism has multi-dimensional facets and
per cent, tax collection 7.5 per cent and transitional transfer poses problems which can only be resolved step by step. One
25 per cent. aspect is the method of fiscal transfers and controls that
Under the PFC awards for development expenditure, the makes financial flows erratic and retards the pace of project
first 'legitimate charge' is to provide counterpart rupee to execution and economic development. Limits have been set
foreign aided projects. 5 per cent from the left~over amount is for approval of projects by provincial (up to Rs. 200 million)
set aside for compensating those districts which may get less and districts (Rs. 20 million. Projects costing over Rs. 200
revenue through formula-driven fiscal transfers. million are sanctioned by the federal government. First of all,
The remaining amount is distributed in the ration of 30:70 ceilings are pretty low and need to be revised from time to
between provincial based schemes and district government time.
projects. And district allocations for development are shared Secondly, the efficiency at all levels requires that the
as follows: population 50 per cent, backwardness 30 per cent, three tiers of the government should be answerable to each
backlog of ongoing schemes 10 per cent and equal share 10 other. Accountability should be a two-way street to become
per cent. Karachi gets two and a half times higher than any effective. The centralized system under which lower tiers of
district in equal share. government are responsible to a centralized authority has
Khushhal Pakistan Programmes are distributed in the ratio: failed to impart efficiency and enhanced productivity.
population 70 per cent and backwardness 30 per cent.
Source: Economic and Business Review, Dawn, Karachi, 2-8
February 2004.

Appendix 10.2

Constitutional Aspects of Taxing on per-acre basis. The charge is usually Rs. 150 per acre from
the irrigated areas and Rs. 100 per acre from non-irrigated lands.
Agricultural Incomes This acreage-based charge is in gross violation of the Constitution
that stipulates tax on agricultural income as defined in Article
Huzaima Bukhari and lkramul Haq make the case for imposing a
260(1). Entry 47, Part 1 of Federal Legislative List contained in
proper agricultural income tax on Pakistan's untaxed agricultural
the Fourth Schedule to the Constitution (it remains intact even
sector.
after the 18th Amendment), empowers the federal government
to levy 'Taxes on income other than agricultural income'. The
Taxing agricultural income is the sole prerogative of provincial
expression 'agricultural income' is defined in Article 260(1) of the
governments under the 1973 Constitution of Pakistan. These
Constitution, which says: 'Agricultural income' means agricultural
days confusion prevails about the laws in force for levy of income
income as defined for the purpose of the law relating to income_
tax on agricultural income. lt is strange to note that politicians,
tax.'
parliamentarians, TV anchors and so called experts are not clear
The word 'means' signifies that this is an exhaustive definition
about these laws. They keep on criticizing federal government for
that binds all the provincial legislatures to levy tax on 'agricultural
not levying income tax on 'agricultural income' without realizing
income' as defined in the lncome Tax Ordinance, 2001. However,
_that the fault lies with the provincial governments.
the provinces, instead of following that definition, are levying
The total collection by all the four provinces under these laws
fixed tax. Nobody has taken note of this gross violation till
was dismally low in 2009 at just Rs. 1.89 billion collected against
today. Both the federation and provinces under the Constitution
the actual potential of Rs. 200 billion. The share of agriculture in
are bound to follow the definition of 'agricultural income' as
GDP that year was about 22 per cent. The low collection proves
provided in the lncome Tax Law while determining their legislative
beyond any doubt lack of will to tax the rich absentee landlords
powers in terms of Article 70(4), Article 141, and Article 142 read
in Pakistan; their number is meagre but their clout in politics is
with the Fourth Schedule to the Constitution. However, it is a
very strong. This influential class includes the generals and other
matter of great concern that all the four provinces are perpetually
high-ranking military officers, who now own substantial state
violating the command of the supreme law of Pakistan.
land, given to them as awards. They have emerged as a new
Even a cursory look at laws (and amendments therein from
landed aristocracy. Like barons of feudal Europe, they control our
time to time) promulgated by them, to tax 'agricultural income'
politico-economic system.
shows that:
Presently, the provincial governments are not levying and
collecting tax on agricultural income but charging a fixed tax
 Chapter 1O Resource Mobilization and the Structure of Taxation 289

(a) Khyber Pakhtunkhwa has not even provided the definition gimmick of sasti roti that was not restricted to the needy alone.
of 'agricultural income' in its Northwest frontier Province But certainly, even the Sharifs have no intention to tax the rich
Agricultural Income Tax Ordinance, 1993. The tax levied under and mighty feudals. They themselves have joined this class by
the name of 'lncome Tax' is, in fact, a land tax on the basis of grabbing many lucrative lands. See palatial palaces in Jati Umra,
produce index units. This is nothing but a mockery of legislative flats in Mayfair London, property in Saudi Arabia, Dubai, and
process. lf there was no political will to impose income tax on elsewhere.
'agricultural income', then what was the need to hoodwink the (d) ln Balochistan, the position is no different. from 1993
people by calling it Agricultural lncome Tax? Since 1993 no to 1999, the Governor of Balochistan promulgated various
government of the province has bothered to correct this anomaly. Agricultural Income Tax Ordinances that were amended from
This shows the level of understanding of Constitutional provisions time to time, following the same pattern as in the other three
by our legislators (sic). provinces.
(b) The same is the case with Sindh Agricultural Income Tax Act The above analysis shows that none of the four provinces,
of 1994 as amended from time to time. The PPP government is while levying income tax on 'agricultural income' followed Article
keen to collect VAT or sales tax on services, which it should as its 260(1) of the Constitution. All the agricultural income tax laws
constitutional right, but it has no desire to tax the rich pirs and passed by them are superficial whereas in substance no tax on
waderas. Would this nation be informed how much tax is paid by 'agricultural income' has been imposed by any province, showing
Chief Minister Qaim Ali Shah, Makhdoom Amin fahim, and many an attitude of contempt and apathy towards the Constitutional
other feudal-cum-pirs of Sindh on their agricultural income? provisions.
(c) The Punjab Agricultural Income Tax of 1997, as amended None of the four provinces has levied income tax on
from time to time, is no exception. No effort was made till 2000 'agricultural income' as defined in the Constitution. The military
to impose income tax on total income earned from this source. and civil governments have consistently shown disrespect to
A face-saving device was introduced to levy yet another tax the Constitution. This explains why constitutional democracy
on acre basis at different rates in respect of irrigated and non- has failed to work in Pakistan; economic interests of landed
irrigated lands. Chief Minister Shahbaz Sharif has never bothered aristocracy have primacy over the Constitutional rule whereas it
to tax rich absentee landlords of his province-'many of whom should have been the other way around.
dominate PML(N). Proper legislation should have been made as
per Constitution to tax the Khosas, Gilanis, Quershis, Tiwanas,
Sardars, Chaudharis, Maliks-just to mention a few. Such taxation Source: This is an edited version of, Bukhari, l-luzaima and l-laq,
could have provided room to initiate a number of meaningful lkramul, 'Taxing Agricultural Income', The News on Sunday,
welfare and job-oriented schemes for the have-nots, unlike the Karachi, 19 December 2010.

Appendix 10.3
limited through greater reliance on automated computerised
An Agenda for Tax Reform? systems.
Shahid Kardar, a former Governor of the State Bank, proposes a The general tax reforms would include taxation of all incomes
comprehensive agenda to reform Pakistan's tax system. of same levels equally irrespective of source, with a swift reversal
of the travesty of the recent amnesty granted to trading in
Pakistan has one of the lowest tax to GDP ratios and, even shares. There is also need for legislation that will render all
considering developing countries alone, it is in the bottom ranked Benami Transactions illegal and subjecting all cabinet members,
nations in terms of the proportion of population registered as who should all be taxpayers, to detailed tax scrutiny throughout
taxpayers-less than 5 per cent of household population. There period of office, and they should all be taxpayers. The tax returns
is rampant tax evasion, partly with the collusion of the official and Wealth Statements of all parliamentarians and holders of
machinery. Whereas 3.1 million people have the National tax key public offices and their spouses (including Secretaries, Chief
Number, a mere 1.2 million filed an income tax return in 2010/ 11. Justices, Chief of Army Staff, Governor State Bank, Auditor and
What is even more startling is that of 47,800 companies that Attorney Generals) should be public during period of office
have NTNs, less than 16,800 filed an income tax return against and one year thereafter. finally, following good results of tax
400,000 industrial electricity connections. mobilisation initiatives, individual and corporate income tax rates
As admitted by fBR, there is a tax gap of 79 per cent (the and the GST rate could be lowered under a phased programme.
difference between potential revenues under the existing system The specific reforms under different tax heads would be the
and that actually collected). Revenues can be raised through following: for Income Tax: Greater dependence needs to be
broadening of bases, improving the equity of the tax regime, placed on technology and through that on the CNlC for tracking
incentivising documentation, checking evasion by embracing a commercial transactions to identify potential tax evasion/evaders,
zero-tolerance policy, checking harassment of, or collusion with, including movements in bank accounts of large deposit holders.
taxpayers by simplifying tax returns and making FBR a faceless The FBR should periodically reconcile the property tax registers
bureaucracy, with interaction between taxpayers and tax officials of all provincial governments, names of credit card holders
and members of private clubs with those allotted National Tax
290 Issues in Pakistan's Economy .

Numbers, for the system to generate notices to non-tilers. All of property 'market values' with a small tax credit for self/owner-
presumptive taxes should be replaced by withholding taxes (which occupied residential properties and appropriate exemption limits
presently contribute 60 per cent of income tax revenues). And the for small sized residential space. For commercial properties 'rental
rates of all withholding taxes should be increased by at least two values' should be assessed at 3 per cent.
percentage points as a revenue enhancing measure, to incentivise ln the case of GST the proposed reforms are: the rate for sales
documentation and penalise those trying to avoid capture in the to entities registered for GST should be 12.5 per cent while for
tax net. unregistered it should be retained at the base rate of 16 per cent,
To prevent tax arbitrage by major shareholder executives the the latter being the rate that is charged to the fin a1 consumer.
tax differential between the highest individual tax rate and the For extending sales tax to retail trade, we need to examine the
corporate income tax rate should be narrowed sharply, if not fully possibility of a single-stage sales tax to be levied by a provincial
eliminated. For individuals there should be a Minimum Asset Tax government based on location, shop area and nature of business.
of 2 per cent which should be allowed as a tax credit. Such a For Customs Duties, to check abuse we need to identify items
measure is being proposed for reasons of equity and for ensuring prone to dumping and under-invoicing and a system of lTPs
that large farmers do end up payi-ng some tax, considering the should be introduced. As long as this list is a short one, the
poor success that provincial governments have had in collecting country will not run-foul of WTO rules and regulations. To both
tax on their incomes. Any CNlC holder receiving remittances of enhance revenues and simplify the tariff structure there is a
more than US$50,000 a year should be required to pay a tax at need to consider levying a minimum rate of duty on all imports
5 per cent on receipts in excess of US$50,000. other than those protected by sovereign agreements (currently
There is also a need to consider re-introducing the scheme Rs. 1 trillion worth of imports are duty free). We have a highly
whereby unlisted companies paying a 20 per cent higher tax distortionary tariff regime that levies different rates of import
than that paid n the previous year would not be subjected to any duties on the same material based on the consuming industry,
audit. Adequate safeguards should be built into the system to thereby creating opportunities for 'extracting rent'. There is a
prevent incentive abuse by entrepreneurs closing down existing need to simplify the tariff structure further by considering a
companies/businesses and starting new ones. Bills in excess of system of 'one-chapter one-rate'.
Rs. 10,000 per month of domestic and all bills of commercial Finally, to address issues related to Afghan Transit Trade,
consumers of electricity should be subject to a withholding tax we should consider incentivising use of Pakistan Railways for
of 10 per cent and 15 per cent respectively. Compared with 3.2 transportation and employ use technology-tracker and GSP
million commercial electricity connections (excluding countless systems. We can also consider using quantitative restrictions for
illegal connections) in the country today (including retail and items prone to smuggling.
wholesale outlets, offices of companies, partnerships, restaurants On the administration side, focus should be a) on improving
and hotels) last year only 22,000 wholesalers and 12,000 retailers the quality of FBR's data warehouse and lT systems; b) ensuring
paid income tax of Rs. 6.2 billion and Rs. 1.8 billion respectively that the taxes collected by the 'withholding agents' or from
paid income tax, either directly or under the withholding the end consumer in the GST are eventually deposited in
tax regime. By levying a minimum flat rate of Rs. 12,000 to the governments' coffers; and c) on audit/tax notices being
Rs. 25,000 on small retailers more revenue can be raised. Large, generated electronically stating in detail the reasons why the
well-known, retailers would be assessed for income tax in the system raised the notice. And to check collusion, two tax officials
normal way. However, it is recommended that the withholding should be required to sign the notice and interview the assesee.
tax on cash withdrawals in excess of Rs. 25,000 be abolished to The above should represent the minimum tax reform agenda
incentivise the entry of the Rs. 1. 7 trillion currency in circulation for any new government to assume office after the forthcoming
into the banking system thereby helping lower the government's elections. 1t should be able to generate additional revenues of 1
debt servicing costs. per cent of GDP per annum. However, while some proposals will
Moreover, provincial governments should tax agricultural be politically tough to implement as they will require legislative
incomes, using lease rates in the area or the revised produce index changes or face resistance-not to mention the estimate of
units as proxies of taxable income from agriculture. The current additional revenues each year looks ambitious in a sluggish
exemption limits for income tax purposes should continue to economy-the continued postponement of fundamental revenue,
apply. However, to ensure that the database in the system at the expenditure, policy and institutional reforms is also no longer
Federal level is up to date all farmers with holdings of more than sustainable.
50 acres should be required to file a tax return.
To augment revenues from the under-exploited provincial
property tax, 'rental values' for determining property tax liability Kardar, Shahid, 'Tax Reform Agenda for Next Government', The
of residential accommodation should be assessed at 1 per cent. News, Karachi, 28 March 2012.
 Chapter 1O Resource Mobilization and the Structure of Taxation 291

Appendix 10.4

How Can Truces Be Increased? expert completely oblivious to the local conditions purely
on the pattern of a developed economy. This law became
Sardar lrshad Shaheen, in a detailed article, discusses numerous operative as the Income Tax Ordinance, 2001. Even senior
ideas and proposals to raise Pakistan's tax to GDP ratio. This is an field officers were not taken into confidence and the entire
edited version of a longer article. exercise was done under the compulsion of IMF and World
Bank. ln the name of reforms every detail was prepared by
l-ligh tax rates and an overall complicated tax system in IMF through a 'confidential' paper in which the designation,
Pakistan are the main causes of the black economy and tax nomenclature, the design of offices and number of officers
evasion, non-documentation and corruption. The informal sector and employees were proposed by foreigners. The dominant
is thriving due to unchecked illegal activities such as smuggling, role allowed to the World Bank and IMF made many field
black marketing, and drug trafficking that are taking place in officers believe for quite some time that funds for reforms
major parts of the country to the advantage of pressure groups supplied by these institutions. were grants and not loans. Not
who are helped by powerful mafias and vested interests. They only was the road map prepared by the IMF followed literally,
are further promoted and protected by politico-bureaucratic but the loan money had been squandered recklessly. After the
amalgam through erosion of institutional stability and hollow promulgation of the Income Tax Ordinance, 2001, more than
cosmetic measures. four hundred amendments had to be made in it during the
lt is a proven fact that all taxes in any shape are unwelcome, first month alone. Over two thousand amendments have so far
but income tax is the most unpleasant of all taxes, and it remains been made in the Income Tax Ordinance, 2001, as it was not
so in whatever from it is introduced anywhere in the world. A in tune with the domestic requirements. lt was an unnecessary
chief reason for its unacceptability is that it does not provide any exercise of mere experimentation which greatly eroded the
direct return or benefit to the taxpayer. institutional fabric of the tax organization and added a great
deal of confusion.
A country's tax system can be successful only if it has: After the operation of the Income Tax Ordinance, 2001,
repeated concessions were allowed to taxpayers some of which
(1) Clarity of law and communicable simplicity of procedure. were not even demanded by them. Our system of income tax
(2) Stability in institution building and continuity of policies today is one of the most concession-orientated systems in the
for promoting tax culture, in accordance with the stage of world. But compliance of tax laws has shown no improvement.
development of a society. (3) Specialised and professional ln comparison, India redrafted the lncome Tax Act 1922
top management equipped with practical experience in tax in 1961 and income tax laws have been enacted under the
field. (4) Enforcement of law in letter and spirit. (5) Provision Income Tax Act 1961 with effect from 13-09-1961. ln this
of incentives to the taxpayers with some direct social and act amendments have been made through 109 finance acts so
material advantages. far. These amendments have been smoothly made by adding
Simplicity of tax law and procedure will not succeed unless additional sections and sub sections without drafting new
the number and rate of taxes are reduced to a reasonable level. laws again and again. For instance in Chapter-VI A dealing
A few years back more than hundred different taxes were in with some deductions, section 80A has 67 additional sections
operation in our country out of which the most frequently (besides sub sections) from section 80A to 80 WA, and
charged 77 taxes included; 20 federal taxes, 19 provisional section 115 has 75 additional sections from 115A to 115WL.
taxes, 14 local taxes and 24 other levies and surcharges. The Indian income tax rules revised in 1962 are still operative. We
businessmen were entirely at the mercy of various government replaced the Income Tax Act 1922 with Income Tax Ordinance
departments. The tax rates were also unreasonably high since 1979, which was repealed and replaced by the Income Tax
it was an easy way to increase revenues by increasing the Ordinance 2001 drafted by a foreign expert based on the
number or rate of taxes. model of an advanced country.
The Indian tax system had the closest affinity with
Simplifying tax laws through experimentation: our business and social environment since both countries
Legal provisions under the lncome Tax Act 1922 were inherited the Income Tax Act, 1922. But instead of sharing
considered quite complex particularly due to new requirements common experience with Indian tax laws, we preferred aping
faced by taxpayers in the emerging business environment. This a model of a distant advanced country having little relevance
act was replaced by the Income Tax Ordinance, 1979, in which to our ground realities.
legal provisions and procedures were re-arranged in a much
simplified manner. lt was welcomed by all the stakeholders. Erosion of FBR as an institution:
There was no strong demand to replace this law by a new one. An imported finance minister (later prime minister) had
The only demand of the taxpayers then was that Universal Self managed to thrust upon the FBR five members from the
Assessment Scheme be given legal cover instead of changing private sector who had little working expertise in a taxation
it every year through circulars. department. l-luge amounts were spent on them as perks
Nevertheless to the amazement of every stakeholder, a with hardly any positive achievements. All this was done in
new law was drafted not by local experts, but by a foreign the name of reforms and introduction of fresh (but alien)
292 Issues in Pakistan's Economy

experience in this specialised organization. These members provisions in the lncome Tax Ordinance 2001. Every return
could hardly match the career tax officers having over 30 of income filed by a taxpayer is to be accepted irrespective
years of practical field experience. The officers and workforce of declared figure of income or loss. The rates of income tax
remained disillusioned and no positive long lasting result could were also to be reduced with some variation and the minimum
be achieved. Major attention was focused on withholding tax rate should be half per cent and maximum twenty per cent
which has been imposed on nearly every consumable item or for every taxpayer including the corporate sector. This would
receipt, and income tax got converted into an indirect tax have reduced evasion,· malpractices and corruption, resulting
which is suicidal for the very spirit of direct tax system. Even in expansion of the tax base. But the government fixed the
the formulation of the budget has beeri artificial as major rate at 3 5 per cent on corporate sector whereas on salary
chunk of revenue came from sales tax, customs duties and income, the maximum rate was reduced to 20 per cent. The
withholding tax on constantly increasing imports. So when FBR has again failed to appreciate the role of continuity and
these sources fell, the budget target also fell significantly. As credibility of tax laws. Having failed to broaden the tax base,
if this was not enough, the federal government appointed tax rates have been increased on all classes of income with
a generalist as chairman FBR last year (who was junior to complicated methods.
38 officers of FBR). This was done at the most crucial time,
(3) The government on the advice of non-technical consultants
when collection of revenue was most needed during the end
and advisors has constantly been introducing whitening
of last financial year and the government could ill afford
schemes, despite the fact that foreign remittances through
such an adventure. When the career members protested at
banking channels were a constant source of whitening the
this appointment, they were sidelined: This year too, just four

I
untaxed money. The latest adventure by the government
months before the end of the financial year, the previous
was that only two per cent tax was to be paid through a
head of FBR has been replaced by a new generalist officer.
whitening scheme for whitening any amount of assets or
The appointment of a generalist as head of a technical and
black money, but the response was a paltry payment of Rs. 3.2
professional organization reflects total disregard of national
billion income tax for whitening assets, just 1.23 per cent of
interests, particularly at this critical time.
the total size of economy. This sorry state of affairs in the
Such an attitude appears to be a deliberate attempt to
presence of every concession allowed by the government is
erode national institutions which is a classic example of
most unfortunate and speaks loudly of the apathy of the
bad governance. The undeniable fact is that FBR has been
policymakers. This also shows that the government would

I
failing in raising its tax-to-GDP ratio due to: (a) excessive
not want FBR to be an independent stable institution run
experimentation and resultant erosion of intuitions, and (bl
by experts and experienced tax officers. Obviously the first
little importance given to career offices and tax experts in
priority of the government must be that highly experienced
policy making and top postings.
career officers of tax service be posted to top management
levels of FBR and there should be no room for any mediocrity.
Current state of affairs:
(4) Back in 1998 the number of taxpayers stood at 961,090.
( 1) The budget target of the FBR was fixed at Rs. 1,630
These taxpayers included salaried persons (411,000) and
billion which was revised and re-fixed at Rs. 1,588 billion.
business class (534,000). After eleven years the position as on
With two months left, FBR's total collection up to April 2011
30-06-2009 and 30-06-2010 was as shown in Table-1.
was Rs. 1,147 billion, leaving Rs. 441 billion balance to be
The figures in Table 1 dearly reflect the dismal performance
collected. Collection of such a huge amount does not appear
of the policymakers. The documented sector (or corporate
to be possible. The policymakers not only banked heavily on
sector) is very small which mainly bears the brunt of tax
foreign borrowings but had no definite plan for the economy
collection. Top one hundred taxpayers paid Rs. 174 billion
despite the energy crisis, slash in PSDP (twice) and substantial
in 2010 besides deduction at source and advance tax (mostly
interest payments on foreign debt amounting to Rs. 1,300
paid by petroleum, banking and manufacturing sectors). Other
billion, which consumed a large proportion of the national

l
than the active registered companies and salaried class, the
resources together with expenditure on the war on terror.
number of business taxpayers is quite low. Their share in the
The quality of economic analysis and research of our
income tax collection is less than 10 per cent of the gross
financial experts can be found in Economic Survey 2009-10.
collection whereas the share of a salaried person is 7 per
The information and figures spread over various pages lack
cent. After deducting the collection of tax paid by corporate
any descriptive scrutiny leading to no direction. As a whole
the survey appears to have been prepared with no thought or
effort. lf such is the government's priority then one should
sector at Rs. 176 billion plus gross withholding tax (with CVT
collection), the balance amount left is Rs. 15 billion only
which is around 3 per cent of total tax collection. lt is argued
:
I
not be surprised if the revenue system today is in such a mess.
that the business community pays withholding tax on almost
(2) As pointed out earlier, our income tax system today is each item, but the same is true of the whole population
heavily concession oriented, but despite that the tax base has including the large majority of poor people. The common
not expanded adequately and the tax-to-GDP ratio is still man pays withholding tax on mobile phones and other items
plummeting.
Taxpayers must be provided a guarantee of stability in
tax rates and procedure of the system. Legal guarantee of
Universal Self Assessment has been provided through statutory
(including CVT), which was almost 54 per cent of the gross
income tax collection in 2009. lt may also be added that
corporate sector, government corporations, banks and some
multinational companies including oil companies, have been
I
I
__J
 Chapter 1O Resource Mobilization and the Structure of Taxation 293

paying bulk of the tax revenue. Almost the same number of The following measures, therefore, need to be adopted
companies (one hundred) paid over 80 per cent of indirect for immediate and long-term stability and efficiency of the
taxes. Obviously the number of regular business taxpayers who taxation system, which would also help to expand the tax base
filed returns of income could not increase. and increase revenue:
A - (1) FBR is traditionally plagued with political pressure
(5) Overall collection of FBR as on 30-06-09 and 30-06-10
and bureaucratic (vested interest) influence. The first step
shows an unpromising situation. (see Table-2)
should be to select a chairman of FBR on merit. For this
The figures in Table 2 indicate that the amount of
purpose, the post of chairman should be advertised for
withholding income tax, sales tax on imports and federal
selection through Public Service Commission for a fixed tenure
excise on imports and customs duties works out to be 51 per
of four years based on academic qualification and professional
cent and 63 per cent in both years, respectively. Major source
experience. Such a step would go a long way in stability
of even domestic sales tax and federal excise duty comprise of:
and efficiency of the FBR with no apprehension of political
(a) Consumption of sugar and products of edible and
interference.
medicine, etc.
(2) Job classification with career planning must be clearly
(b) Utility bills and excise duty on bank transaction.
defined with strict application at all levels for postings and
(c) Purchases by government and semi-government
transfers. Job performance of various sections of FBR needs
organizations, corporations and various contracts. Add
to be revamped for better coordination and only those officers
to it the withholding tax on almost every item and it
should be posted in FBR who have sufficient field experience
would be clear that the burden of 70 per cent of all
tum by tum for a fixed period.
taxes is being borne by the common man through
(3) A full fledged research and development wing needs
indirect imposition of taxes.
to be established to guide the FBR in the tax policy matters
1t is a matter of grave concern that the situation is
and suggest practical ways for effective coordination between
deteriorating. The tax-to-GDP rate has plunged to 8.8 per
FBR and field formations in the light of ever emerging new
cent. The number of income tax business returns received
situations.
during the last two years was quite unsatisfactory.
(4) Systems of appraisement of customs duty and Pakistan
As regards to sales tax, the situation is worse. The number
Customs Computerised Systems (PACCs) and system of sales
of enrolled sales taxpayers is merely 102,167 and only 90,204
tax processing and Sales Tax Automated Refund Repository
returns are now regularly being filed. During the financial System (STARR) should not be dosed, but upgraded for
year ending on 30.06.2010, only one hundred corporate
application in all the dry ports and sea ports to make them
taxpayers paid 81 per cent sales tax (Rs. 240 billion) out of a
transparent and less time consuming. Only fully trained and
total collection of Rs. 295 billion domestic sales tax. A major
honest officers should be empowered to appraise and assess
amount of domestic federal excise duty was also paid by only
tax liabilities in accordance with best practices principle.
twenty four corporate taxpayers (mostly petroleum companies).
(5) Smuggling is perhaps the most lucrative and organized
Solution: business in Pakistan and smuggled goods are sold openly
The past experience of over three decades leads us to everywhere particularly due to misuse of Afghan Transit Trade
the conclusion that frequent experimentation and outside (ATT). Many departments including Federal lnvestigation
interference has caused erosion of the FBR as a stable tax Agency, commerce ministry, and foreign office deal in anti-
collecting institution, with severe repercussions for the smuggling cases. Other agencies like Coast Guards, Frontier
taxpayers and officials alike. The Central Board of Revenue Constabulary, Levies and even the police department have
was re-designated as Federal Board of Revenue through been given anti-smuggling powers. 1t not only creates
an act of parliament with effect from 1 November 2007 as overlapping and delay in taking proper action, but it also
a semi autonomous body after years of deliberations and becomes a source of organized corruption which explains why
efforts. The newly established organization's performance smuggled goods are available not only in big cities but also in
was affected by mindless experimentation and appointment small towns. These agencies mostly run after tracing smuggled
of non professional individuals at the helm of affairs. The goods for corrupt practices and they do not focus on their
FBR appears to lack direction and functions without proper own duties. A single agency fully trained and equipped must
coordination among various tiers of its departments. There is be empowered in dealing with anti-smuggling in an effective
great deal of confusion and dissatisfaction all around. and transparent manner.
lf the government is really serious in tackling the issue of (6) All exemptions from sales and income tax should be
tax revenue collection, it must consider the FBR as an essential withdrawn. The chief commissioner should be empowered to
state institution. The right people for the right job must be a allow exemption in genuine cases for a specified period.
permanent feature with well defined career-oriented expertise (7) At present only one hundred taxpayers of the corporate
in the organizational hierarchy. ln areas like reforms and sector pay 90 per cent of sales tax on imported and domestic
restructuring, the task must be left to experienced and senior items. To _make it acceptable within the business community,
officers of FBR only, who can re-examine every aspect of sales tax or RGST should be considerably reduced to 5 per
structural anomaly according to the actual requirements and cent starting from a fixed rate of 1 per cent or Rs. 100 on
ground realities. lt must be emphasized that the FBR needs specified monthly sales (gradually increasing up to 5 per cent
to be strengthened as an organization based on professional which should be adjustable). Sales tax at the rate of 1 per cent
competence. should also be imposed on defence purchases as well as on
294 Issues in Pakistan's Economy

all medicines which should be non-adjustable. lnternational should be made mandatory under the law for every person
tenders should also be taxed 1 per cent non-adjustable sales contesting in the election (at any level) to get a NTN and
tax. file their return of income and wealth statement. Any person
(8) Federal excise duty should be merged with sales tax to found guilty of tax evasion must immediately be disqualified.
reduce the number of taxes and hassle for the taxpayers. The Such a step will give substantial boost to payment of taxes
sales tax 5Ystem must not only be fully automated to minimise as leaders of the people will become a role model for them,
delays and corruption, however a strict 5Ystem of audit should dispelling the public perception that they consider themselves
also be put in place to eliminate the misuse of the 5Ystem. above the law.
(9) Claim of refund on account of input cost has been (b) Due to a powerful lobby of authoritative landowners,
a major source of corruption and malpractice. This can be agricultural income is exempt from income tax as it is a
curbed by reducing sales tax rates and abolishing exemptions. provincial subject under the constitution. Tax exemption to
lnstead alternate incentives can be offered to exporters such a large section of economy reflects a huge distortion
including exemption of income tax and other taxes/levies on and the tax laws appear as inequitable. Taxing the agriculture
exported goods. income will make the taxation 5YStem not only equitable but
it will greatly help boost the low tax-to-GDP ratio. Three steps
B - (1) Tax revenue enhancing measures:
should be taken in this direction:
For expanding the tax base, some provisions of law need to be
(i) Agriculture land up to 15 acres should be exempted from
amended/added to ensure that:
income tax.
(a) All property transactions involving plots of 2 kanals and
(ii) lncome tax rates should be reduced (even for other
above in the urban areas of big cities should be registered
taxpayers) to make the tax acceptable and to reduce the
only after verification of national tax number (NTN) of seller
tendency of evasion.
and purchaser;
(iii) Agriculturists can be compensated by provision of cheap
(b) Similar method should be adopted for sale and purchase
fertilisers, electricity and irrigation water
of commercial property of any size in big cities;
(c) At present the FBR has not devised a worthwhile
(c) All types of vehicles with market value of one
effective procedure of audit both for income and sales tax.
million rupees or above should be registered/transferred after
There is no practical deterrence against evasion of tax after
verification of NTN from the tax officer; ·
introduction of Universal Self Assessment Scheme. There
(d) Every person travelling abroad, except students and
needs to be a transparent provision in law that each case shall
foreign nationals should be required to obtain NTN from the
be audited on its turn after every third or fourth year (unless
income tax department. This should also include travel for
caught earlier on account of some definite evasion).
Umrah, Hajj or Ziarat, medical treatment and personal visits;
(d) Typically traditional bureaucratic method for raising
(e) Expenditure on lavish functions, including marriage and
revenues is to increase the rate of tax and number of taxes,
social/political gatherings and conferences should be taxed
which is counter-productive as such a method encourages tax
either at a fixed rate or booked for assessment of income after
theft and makes the tax base shrink. Not only the minimum
verification of NTN of the person concerned;
rate should start from the lowest slab, but the maximum rate
(f) Services sector is highly under taxed, particularly the
of income tax should not be more than 20 per cent, as no one
income of surgeons, physicians, advocates and professionals
would willingly pay tax more than that. .lnstead of promoting
rendering consultancy services. Surgeons earn an average
short-term interests, the FBR must bring the tax rates to a
of Rs. 0.5 million to Rs. 20 million per month. A specialist's
reasonably acceptable level so that measures adopted for
income ranges from Rs. 0.2 million to Rs. 1.5 million per
increasing the number of taxpayers and revenue become
month, whereas their annual declared income is generally even
fruitful. Lower tax rates can be a better tool of persuasion for
less than their monthly income. Fees of private professional
taxing agriculture income. Moreover, another very important
colleges and schools are also very high. Their share in revenue
advantage of lower tax rates would be that it can help in
is nominal but no meaningful audit has ever been conducted.
introducing sales tax even at the retail level. The traders dislike
A mechanism needs to be adopted to properly tap this very
documentation due to fear of paying income tax. lf they can
important under taxed source of revenue;
declare maximum receipts and incomes because of lower tax
(g) For better compliance, tax returns should be prepared
rates, the. resistance to the imposition of sales tax would be
in Urdu together with pamphlets for proper guidance of
minimised.
taxpayers.
(3) Wealth tax:
(2) Making the tax laws equitable:
(a) Wealth tax was abolished in 2000 under th_e pressure of
(a) The most frequently raised objection by the business
powerful lobbyists, comprising mostly of civil and military
community in particular and public in general is that
bureaucracy, who did not want to pay wealth tax on their
politicians are selected by the people to safeguard their
properties and plots. Tax on wealth is an important instrument
rights and are supposed to make laws in the best interests
of a fiscal policy whkh endeavours to establish an equitable
of the populace. Nonetheless, our politicians violate the law
economic 5Ystem. Due to rising trend of investment in non-
themselves when it comes to paying tax. Statistics show that
productive sector like properties, it would be advisable to
very few legislatures of the national, senate and provincial
impose wealth tax on all immovable properties at a fixed rate
assemblies are on tax rolls; and those who have a NTN pay
to be paid at the time of purchase/transfer. Wealth tax on
an insignificant amount ~ompared to their lavish expenses. 1t
each property measuring 2 kanals and above should also be
 Chapter 1o Resource Mobilization and the Structure of Taxation 295

charged annually. Other assets including costly vehicles can

also be taxed accordingly.
Table 2
(b) All the measures require the will of the government to Year ending Year ending
Taxes
enforce the law in letter and spirit. Successive governments 30-06-09 30-06-10
have been bullied by apprehension of traders' strikes, and Sales Tax (total) 478284m 516348m
they have wrongly considered them their decisive political
(1) Sales Tax on imports 203323m 247246m
constituency. A few hundred thousand traders can never
change the fate of a government or political party if it remains (2) Sales Tax on domestic 274961m 269102m
more sensitive to the well being of the large population of Federal Excise Duty (total) 113715m 124784m
180 million people. Moreover, the ruling elite itself sometimes
proves to be biggest hurdle in the enforcement of law. A tax ( 1) FED on .imports 14617m 13557m
collector sent his officials to monitor sales of one restaurant (2) FED on domestic 99098m 111227m
in Lahore, which incidentally belonged to the minister of Customs (Net) 155905m 160273m
state for finance. The collector was immediately made officer
on special duty (OSD) and the whole campaign resulted in Income Tax (Net) 480487m 525977m
a fiasco. The political leaders in general and the party in (Including withholding tax + CVf)
power in particular consider themselves above the law. Such Source: Shaheen, Sardar lrshad, 'Higher revenue generation:
a mindset would never enable us to stand on our own feet. an uphill task', http://jang.com.pk/thenews/may2011-week1y/
busrev-23-05-2011 /index.html accessed 10 July 2012.
Table 1
S Year ending Year ending
· Total Number of Tax Payers 30_06 _09 30_0 6-10
No.
Number of companies 18973 19755
2 AOP Cases 28779 31135
3 Salaried Cases 145019 196101
4 Non corporate business 549252 638633
5 Number of return filers 765461 1444389
No. of persons shown in
statements, certificates of
6 1766998 2313606
salaries, imports and exports,
etc.

Appendix 10.5
a national tax number (NTN). More than half of the cabinet
Key Issues in Pakistan's Taxation ministers did not bother to file returns. Those who paid ·meagre
System am~unts inconsistent with their lifestyle included the prime
minister and foreign minister.
Maleeha Lodhi details many of the main issues in Pakistan's The report showed that the national practice of tax evasion
taxation structure which continue to keep the tax-to-GDP ratio is rampant among lawmakers. lts conclusion was clear: 'The
below 9 per cent. problem starts at the top. Those who make revenue policies, run
the government and collect taxes have not been able to set good
The prize for the most disingenuous response of 2012 must go examples for others'.
to the group of parliamentarians who cast a report on MPs' tax- The reaction from most parties in parliament was of indignant
paying record as a conspiracy and chose to shoot the· messenger denial. Many castigated the report as an effort to 'defame
rather than address the message. politicians'. Others wrapped themselves in victimhood. 'Why pick
The findings of'Representation without Taxation' are important on us, ·why not others?' said one, as if 'others' could serve as alibis
though unsurprising in a country where less than one per cent for their malfeasance. This pass-the-buck stance was reinforced
of people pay income tax. The study revealed that nearly 70 per when the National Assembly's finance committee asked the
cent of members of parliament did not fulfil their legal obligation Federal Board of Revenue to prepare a report on how much tax
to file tax returns in 2011. Eighty-eight lawmakers did not have judges, generals and civil servants paid.
296 Issues in Pakistan's Economy

Instead of this transparent bid to obfuscate the issue, than one per cent of total revenue. The service sector, which
parliamentarians would have been better off welcoming a debate, now contributes the largest share to GDP-around 50 per cent-
admonishing tax-dodgers in their ranks, correcting any errors in contributes just 16 per cent to revenue. Of over a million taxable
the report, but above all highlighting the serious consequences retail outlets only about 160,000 are registered. Of these less than
that flow from the state's inability to collect taxes. The report 28,000 paid tax last year.
should have urged parliamentarians to examine why the country This means that at least 70 per cent of the formal economy
lacks a tax culture and propose ways of addressing this to signal is untaxed, lightly taxed or non-compliant. lf the informal,
the importance they assign to the issue. undocumented economy is factored in, an even larger swath of
Pakistan's tax-to-GDP ratio of less than ten per cent is at the the economy is outside the tax net.
heart of its enduring fiscal troubles. Failure to generate domestic Not only is the present tax regime inelastic, it is also iniquitous,
resources is a major factor for the country's economic stagnation putting a heavier burden by way of indirect taxes on those least
and why the economy is in the critical ward today. able to bear it, while offering the powerful 'legal' escape routes.
A decade ago, a task force established to reform the tax system The SRO regime exemplifies this. Statutory regulatory orders are
held out a stark warning: 'Pakistan's fiscal crisis is deep. Taxes administrative instruments providing ad hoc exemptions that
are insufficient for debt service and defence. lf the tax-to-GDP have been used by successive governments to grant concessions
ratio does not increase significantly Pakistan cannot be governed to special interests, individuals and sectors. This translates into
effectively, essential public services cannot be delivered and high billions in lost tax revenue. Last month the finance minister told
inflation is inevitable. Reform of the tax administration is the parliament that Rs. 650 billion worth of exemptions and tax
single most important economic task for the government'. waivers were given in the last four years alone. This regime fosters
This counsel has long been ignored. Availability of external cronyism and negates any notion of a level playing field.
financing from overseas official assistance has acted as a An unfair tax system is an important reason behind low
disincentive for reform. Bank borrowing-printing currency revenue collection and poor compliance. Relatively high rates of
notes-to finance budget deficits has served as a 'substitute' for tax are imposed on a narrow band of people and a few sectors.
taxation but at great cost to the economy. The corporate sector for example is the highest contributor (62
Mobilisation of domestic resources continues to be a story per cent) to direct tax revenue. But non-compliance in corporate
of weak political will, half-hearted reform, poor enforcement, income tax is also high at 58 per cent.
dependence on foreign inflows and domestic borrowing, and Systemic weaknesses in tax administration produce major
ascendancy of powerful political and economic lobbies. Successive 'leakages'. The 2001 task force found that 50 per cent of due
governments' inability to raise revenue can mostly be explained in taxes never reach the treasury, illustrating the power of the rich
terrns of a 'privilegentsia' that refuses to tax itself and is averse to to thwart the law. The lMF estimates that the equivalent of $3
measures that can undermine its economic interests. billion raised in revenue never makes it to the exchequer because
This has contributed to miring Pakistan in perpetual financial of collusion between the influential and the tax bureaucracy.
crises that are temporarily 'resolved' by bailouts from abroad, lnability to raise enough direct taxes has led to reliance
either as strategic payoffs for its foreign policy alignments or on indirect taxes, many of which are regressive. For example
promises ofreform, which are reneged on as soon as front-loaded Pakistanis pay a greater proportion of their income as tax
tranches are received from multilateral lenders. on petrol than any other country in the world. The major
The sorry state of tax efforts is laid bare by the dismal statistics. contributions to revenue are: direct taxes (39 per cent); sales tax
Tax as a percentage of GDP has remained virtually static for (43 per cent); customs duty (12 per cent) and federal excise duties
decades. Hovering around 11 per cent in the 1990s, it fell to nine (6 per cent). Indirect taxes, however, are woefully inadequate to
per cent in the last decade and has stayed there, making it among meet budgetary requirements.
the lowest in the world. To resolve its chronic fiscal crisis and generate the means for
This is not the only disconcerting indicator. The number of its future progress, Pakistan has to raise more revenue. Unless
income taxpayers rose from an abysmal quarter of a million the present nine per cent of GDP is increased by at least 3-4 per
in 1995 to a million in 2000. By 2011 the number of people cent, reliance on deficit financing through borrowing, with all its
registered with tax authorities through NTNs increased to 3.1 pernicious economic effects, cannot be ended. This is essential to
million. But only half or 1.5 million filed returns. The number reduce inflation, the cruellest 'tax' on the poor and major cause
of income taxpayers actually dropped from one per cent of the for the rise in poverty in recent years.
population to 0.92 per cent in the past five years. The key question is this: how can Pakistan chart a way out of
This fact is more telling when set against data from the 2011 a growing fiscal crisis, overcome economic stagnation and reverse
household survey that shows the number of people earning the deterioration in public services without broadening its tax
enough to pay income tax. Only 17 per· cent of 4.5 million base and ensuring equity and efficiency in revenue collection?
taxable Pakistanis-one in six-are verifiable taxpayers. The rest Parliamentarians ought to focus on answering this question
do not pay tax. rather than assailing those who only held up a mirror to their
A more fundamental issue is the large swath of the formal conduct.
economy that is still untaxed. The most spectacular example of
a privileged elite's refusal to pay is the absence of an agricultural
income tax. Agriculture accounts for around 20 per cent of GDP Lodhi, Maleeha, 'Taxing Issues', The News, Karachi, 1 January
and employs 40 per cent of the labour force but yields little more 2013.
 Chapter 1O Resource Mobilization and the Structure of Taxation 297

NOTES
1. The Institute of Public Policy, The State of the Economy: 22. World Bank, Pakistan: Growth Through Adjustment, Report No.
Devolution in Pakistan, Fourth Annual Report 2011 (Lahore: 7118-Pak (Washington, 1988).
Institute of Public Policy, Beaconhouse National University, 23. Ibid., (vii).
2011), 62. 24. Ibid., 47.
2. Ibid. 25. World Bank, Pakistan: Country Economic Memorandum FY93:
3. Ibid. Progress Under the Adjustment Program, Report No. 11590-Pak
4. See the following reports prepared by the Applied Economics (Washington, 1993 ), l l.
Research Centre (AERC), Karachi: Local Government Finances 26. Pasha, Hafiz and M. Asif Iqbal, 'Taxation Reforms in
and Administration in Pakistan (in two volumes), Research Pakistan', Pakistan Journal ofApplied Economics, vol. 10, nos. 1
Report No. 72, 1990; Resource Mobilization and Institutional and 2, 1994, 70.
Capacity, (in seven volumes), Research Report No. 85, 1991; 27. See Fatima, Mahnaz and Qazi Masood Ahmed, 'Political
Resource Mobilization by Federal Government, Research Report economy of fiscal reforms in the 1990' s, The Pakistan
No. 91, 1992(a); Resource Mobilization by Provincial and Local Development Review, vol. 40, no. 4, Part 2, 2001.
Governments in Pakistan, Research Report No. 93, 1992(b); 28. Pasha and Iqbal, op. cit., 49.
Metropolitan Resource Generation Study, Research Report No. 97, 29. Khan, Mohsin, 'Comments', in V Thomas et al. Restructuring
1993. Economies in Distress (Oxford: Oxford University Press, 1991).
5. Although the 1979 and 1980 Ordinances were supposed to 30. AERC, op. cit., 1992(a), 20.
be operative, in effect, all local governments were dismissed 31. Pasha, Hafiz and M. Asif Iqbal, op. cit., 1994, 49.
in the 1990s and local bodies were run by federal and 32. Ghaus, Aisha and Mohammad Asif Iqbal, 'Resource
provincial government-appointed Administrators. See also Mobilization by Provincial Governments', News on Friday,
section 10.4, below. 25 August 1996.
6. AERC, op. cit., 1990, (iii). 33. Ibid.
7. See AERC, op. cit., 1990, and AERC, op. cit., 1992(b). 34. Ibid.
8. AERC, op. cit., 1992(b), 112. 35. Ibid.
9. Ibid., 115. 36. Applied Economics Research Centre, An Analysis of Provincial
10. AERC, op. cit., 1990, 78. Finances in Pakistan, Research Report No. 55 (Karachi, 1986),
11. Ibid., 66. 55.
12. AERC, op. cit., 1992(a), 5. 37. Ghaus-Pasha, Aisha, and Hafiz Pasha, 'Devolution and
13. Government of Pakistan, Pakistan Economic Survey 1995-96, Fiscal Decentralization', The Pakistan Development Review,
(Islamabad, 1996 ), 130. vol. 39, no. 4, Part 2, 2000.
14. Also see, Ahmad, Nuzhat, and Syed AshrafWasti, 'Pakistan', 38. For a more detailed analysis of local government and its
in Smoke, Paul and Yun-Hwan Kim (eds.), Intergovernmental finances, see Zaidi, S. Akbar, 'Urban Local Government in
Fiscal Transfers in Asia: Current Practice and Challenges for the Pakistan: Expecting Too Much From Too Little?', Economic
Future, Asian Development Bank, (Manila: ADB, December and Political Weekly, vol. 31, no. 44, 1996; Zaidi, S. Akbar
2002). 'Urban Local Governance in Pakistan', in Islam, Nazrul
15. AERC, op. cit., 1990, (iii). and M. M. Khan (eds.), Urban Governance in Bangladesh and
16. Manning, Nick et al. Devolution in Pakistan-Preparing for Pakistan, Centre for Urban Studies, University of Dhaka,
Service Delivery Improvements, World Bank (Islamabad: World 1997(a); Zaidi, S. Akbar, 'Poverty, Politics, Institutions: The
Bank, 2003 ). Case of Karachi', Economic and Political Weekly, vol. 32, no. 51,
17. AERC, op. cit., 1990, 58. 1997(b); and Zaidi, S. Akbar, The New Development Paradigm:
18. This Section makes use of a number of Government of Papers on Institutions, NGOs, Gender and Local Government
Pakistan publications, such as: the Explanatory Memorandum (Karachi: Oxford University Press, 1999).
on Federal Receipts, Federal Budget 2011-12, Government of 39. AERC, op. cit., 1992(b), 120.
Pakistan, Finance Division, Islamabad, 3 June 2011; the 40. AERC, op. cit., l 992(b ), 120.
Budget in Brief 2011-12, Federal Budget, Government of 41. Ghaus, Aisha, 'Local Government Finances: Efficiency,
Pakistan, Finance Division, Islamabad, 3 June 2011; the Equity and Optimality', unpublished, PhD dissertation,
Annual Review 2011, the State Bank of Pakistan, Karachi, University of Leeds, 1994.
2011; and Fiscal Policy Statement 2010-11, Debt Policy 42. AERC, op. cit., 1990, 14-16.
Coordination Office, Ministry of Finance (Islamabad, 2011 ). 43. See AERC, op. cit., 1990; AERC, op. cit., 1991; AERC, op. cit.,
19. See Government of Pakistan, Pakistan Economic Survey 1972- 1992(a).
73 (Islamabad, 1973 ), 172-5, for these figures. 44. AERC, op. cit., 1990, 16-17.
20. Kardar, Shahid, 'Tax Reform Agenda for Next Government', 45. Ibid.
The News, Karachi, 28 March 2012. 46. Ghaus, Aisha, op. cit., 1994, 89.
21. Pasha, Hafiz, 'Political Economy of Tax Reforms: The
Pakistan Experience', Pakistan Journal of Applied Economics,
vol. 11, nos. l and 2, 1995, 129.
 Debt and Deficits

For many years now, the role that the fiscal deficit has and everywhere, regardless of circumstances,
played in the economy of any country-whether developing ;nd discretionary spending cuts and/or tax
or developed-has been one of the most talked about increases should be implemented to reduce
topics around which other economic issues have revolved. these deficits always and everywhere regardless
of circumstances'. 1
Academicians, policymakers and politicians have spent
written extensive and numerous papers and reports regarding <in..the case of Pakistan, the fiscal deficit is seen to be the cause
the problem of public debt and of the fiscal deficit. In the of almost all the ills facing the economf Shahid Hasan Khan,
western developed countries, and especially in the United Special Assistant on Economic Affairs to the Prime Minister
States, political campaigns, including the US presidential of Pakistan during the second Benazir Bhutto government,
campaign, have had the growing fiscal deficit as one.of the. had said that 'the fiscal deficit is the primary cause of all
most important issues on which candidates were expected major ills of the e~onomy. Consequently, any effort all:1ed at
to have a clear policy position. Some years ago, Ross Perot, rehabilitating the economy would have the elimination of
the independent candidate in the elections, made the deficit fiscal deficit as the number one item in its agenda.' 2 Every
his principal issue and came up with a number of somewhat
extreme 'solutions' to what is considered to be the US's
single IMF and World Bank document on Pakistan, especially
since the StructuraL4djJ1stment Programmes of 1988, says
major 'problem', which included an amendment to the..!:!i exactly the same (see Chapters 16 and 17).
constitution making it obligatory to balance the budget each Given the substantial imRor,tmce of the fiscal.deficit, this
year, which was subsequently approved by the Congress in chapter will try to identify the issues involved. We will first l
1995. In 2013, the US Congress and President Obama were highlight some of the more general and standard theoretical
at loggerheads around issues of taxation, spending, and the a_rgµments,. and then examine the claim that fiscal deficits
public debt, having very different and divergentsiews and _are always bad, regardless of the consequences. This chapter
solutions to these problems. In Europe, too, the Maastricht will also address the issue of the fiscal deficit in Pakistan,
Treaty for European unity includes a clause that requires and will analyse whether it really is the primary cause of 'all
fiscal 'discipline' by its members. The crisis in Europe, in majors ills of the economy'.
Greece, Spain, Italy and Ireland after 2008, and particularly
in 2011 and 2012, has shown the significant role of public
finance, and of debts and deficits. - 11.1 DOES THE FISCAL DEFICIT MATTER?
The general concern is that the existing levels of budgetary
deficit are abnormal and undesirable, and many OECD Despite, or because of, t~_growing awareness and concern
countries have felt the need to follow budgetary strategies regarding budget deficits and public debt, there is a great deal
that attempt to reduce, and if possible eliminate, the entire of confusion about what the implications and consequences
deficit as soon as possible. The general consensus seems to be of large and/or increasing .budget deficits really_are .• Do ·
that these large current deficits are not sustainable, and that go~ernment deficits absorb private savings? Does public debt
unless some forceful and direct action is tak~n,_tlie d~ficits diminish private demand for stocks of productive capital
~ likely to continue growing until they swamp the entire assets? Can the burden of current government expenditure be
,economy. shifted to future generations? Are inflations caused by deficits
In the case of underdeveloped countries, the importance and public debt? vYillgove_rnment borrowing continue to raise
attached to fiscal deficits is even greater. ~he World Bank interest.rates? Alia will a tax cut mean bigger deficits while
and the IMF believe that the fiscal deficit is the single it stimulates aggregate demand, employment, and output, or
most important policy variable that affects the rest of the will it have no real consequences whatsoever? These are some
economy, and they are able to express this belief through the of the numerous themes and questions that reappear in the
implementation of their Structural Adjustment Programmes.) deb<).te concerning pubUc debt, whi_ch has been singled out as ·----
As Willem Buiter, a leading academician who has carried out C<!us\ng most of the se~li)US problems faced by the ecQI).QJny.
extensive work on the fiscal deficit writes, As James Tobin, an economist and winner of the ~obe-l..pFize.
the International Monetary Fund lectures . in 19-78,-argues: 'few issues of economic theory and fact evoke
finance ministers and heads of central banks ... such polar disagreement. The contesting views carry radically
as follows: public sector deficits, and especially divergent implications for public fiscal and financial policy.' 3
increases in public sector defi~its, are bad alwi_!ys _ Willem Buiter goes even further: 'probably more uninformed
 Chapter 11 Debt and Deficits · 299

Box 11.1 Both the minister and secretary of finance would give an
Pakistan's Fiscal Responsibility Bill undertaking about the authenticity of the information and data
provided to Parliament.
1. In order to address Pakistan's high debt and deficit If the government continuously fails to meet the target of
problem, the government in October 2003 tabled the Fiscal debt to GDP ratio specified for any reason for two years, the
Responsibility and Debt Limitation Bill 2003 in Parliament. government shall take all necessary measures including the
curtailment of the sums authorized to be paid and applied from
The government on Monday introduced in the National and out of the federal consolidated fund to return to the debt
Assembly the Fiscal Responsibility and Debt Limitation Bill reduction path by the end of the next two fiscal years.
2003 to make it binding on the government to bring down He said the government would be required to establish
revenue deficit to zero by 30 June 2008, and maintain a a debt policy coordination office comprising two non-
revenue surplus thereafter. government members and a director general who would work
Briefing reporters here on Wednesday about the Bill, directly under the finance minister.
Finance Minister Shaukat Aziz said the economic managers of Asked as to why the provision relating to cut in the salaries
the country will be made answerable to Parliament in case of of related officials in case of non-compliance with the set
any deviation from the set targets. targets had been eliminated from the bill, the minister said
Transparency about public spending and borrowings will be that loss to the national interest or objectives could not be
ensured through comprehensive public disclosures, he said. protected through salary cuts. He, however, said that no other
Under the law, a target has been set to reduce public debt punishment had been envisaged in the law which could be
to 60 per cent of GDP by the year 2013 and to keep cutting it improved in the days ahead.
by 2.5 per cent in subsequent years. He said the government
guarantees to the public-sector entities would not amount to Source: Dawn, Karachi, 28 October 2003.
more than 2 per cent of GDP.
The minister said few countries in the developing world had
taken such an initiative to control public expenditure. 2. The following is an edited excerpt from the Fiscal Policy
He said deviations from the targeted expenditure could only Statement 2010-11, Debt Policy Coordination. Office, Ministry
be made in case of unforeseen demands on the finances of the of Finance, Islamabad, 2011, about the Fiscal Responsibility
government resulting from either a national security situation and Debt Limitation Act 2005.
or a national calamity as determined by the National Assembly.
However, the finance minister would have to specify the The Fiscal Responsibility and Debt Limitation (FRDL) Act,
reasons to the Assembly for making such a departure. 2005 was approved on 13 June 2005. The FRDL Act, 2005
The government would be responsible to file three requires that the federal government take measures to reduce
statements every year to the National Assembly, namely, the total public debt and maintain it within prudent limits thereof.
medium-term budgetary statement along with a three-year Here we identify the various limits prescribed by the FRDL Act
rolling target, the fiscal policy statement and the debt policy 2005.
statement.
In the fiscal policy statement, the government would be The FRDL Act 2005 requires the following:
required to submit key macro-economic indicators like total
expenditure, total revenue, total fiscal deficit, revenue deficit (1) Reducing the revenue deficit to nil not later than the thirtieth
and total public debt. June 2008 and thereafter maintaining a revenue surplus. (2).
In the debt policy statement, the government would explain Ensure 'that within a period of ten financial year, beginning
the set targets concerning debt strategy and say if these had from the first July 2003 and ending on thirtieth June 2013, the
been met, and if not, for what reasons. total public debt at the end of the tenth financial year does not
The government would also submit the analysis of the exceed sixty per cent of the estimated gross domestic product
foreign currency exposure of Pakistan's external debt along for that year and thereafter maintaining the total public debt
with evaluations of the cost of external and domestic debts. below sixty per cent of gross domestic product for any given
The government would also be required to inform the year.' (3) Ensure 'that in every financial year, beginning from
National Assembly about any major economic decision which the first July 2003, and ending on the thirtieth June 2013,
it might have introduced during the year but the minister said the total public debt is reduced by no less than two and a
there was no definition of the major decision. half per cent of the estimated gross domestic product for
Under section 8 of the bill which deals with disclosure of any given year, provided that social and poverty alleviation
policy decisions, the finance minister would not be bound related expenditures are not reduced below 4.5 per cent of
to disclose information which he felt would prejudice the the estimated gross domestic product for any given year
substantial economic interest of Pakistan, or the security or and budgetary allocation to education and health, will be
defence of Pakistan or its international relations. Information doubled from the existing level in terms of percentage of gross
which might compromise the federal government in a material domestic product during the next ten years.' (4) Not issue
way in negotiations, litigation or commercial activity or which 'new guarantees, including those for rupee lending, bonds,
may result in material loss of value to the federal government,. rates of return, output purchase agreements and all other
would also be not disclosed. claims and commitments that may be prescribed, from time to
300 Issues in Pakistan's Economy

time, for any amount exceeding two per cent of the estimated higher commodity prices, have all put enormous pressure on
gross domestic product in any financial year: Provided that the the government's limited fiscal resources. Given the severity of
renewal of existing guarantees shall be considered as issuing these constraints, the government has been able to manage
a new guarantee.' the fiscal deficits at reasonable levels though was unable
Since the last few years, Pakistan has been faced with to totally comply with some provisions of FRDL Act 2005.
serious challenges both at the domestic and international However, the government remains fully committed to adhere to
fronts. The serious internal security situation, energy all the provisions of FRDL Act 2005 in the future.
shortages, rehabilitation of IDPs, severe floods, and rising
Source: Debt Policy Coordination Office, Fiscal Policy State-
inflation combined with global economic and credit crises and
ment 2010-11 (Islamabad: Ministry of Finance, 2011), 48-50.

statements have been made on the issue of public sector James Tobin, arguing against the balanced budget and tax
debt and deficits than on any other topic in macroeconomics. limitation amendment which were first proposed in the US
Proof by repeated assertion has frequently appeared to be an in the 1980s, takes a very clear stance. His focus was on the
acceptable substitute for the more conventional methods of US Senate's resolution which would force future Congresses
proof by deduction or by induction.' 4- -- - · to balance every year's federal b~dget, and would limit the
Given the extensive literature that · has been generated growth of federal revenues and outlays. In no uncertain
o;er the last decade, it is not possible in our brief review to terms, he says: 'to me it seems incredibly ironic that anyone
examine all the effects and consequences of large public debt would take this proposal seriously at this time .... The effects
and deficits. We present only a few themes which we feel are oo the economy would be disastrous, converting the present
important, and attempt to do justice_ to ·them: We examine depression into a great depression.' 8 Similar arguments
the issue of balanced budgets and the problem~of..)!l~asuring have been made in the US and in Europe after the 2008
the deficit itself. We then look at themes related-to the effect global recession, where economists have argued that these __
of the deficit on future generations and on issues regarding £Q~I1_tries need a fiscal st~UluJ-more spending-not fiscal
intertemporal equity and distribution. The macroeconomic restraint.
concerns of fiscal deficits-inflation, cro~ding out, etc.-are · Unlike a school of thought which insists that deficits are
discussed very briefly in Section 11. i.4, and in more detail always bad, Tobin argues that federal deficits may even be
with reference to Pakistan, below. ' economically desirable in specific circumstances,' and what is
really important is appropriate public policy, which may 'or may
11 .1.1 Should -Budgets Always be not produce a balanced budget. However, he argues · that
making deficits unconstitutional would increase economic
Balanced? instability. It would force ill-timed expenditure cuts or tax
Possibly, the converse of public debt and deficit is no debt and increases, which would then make recessions much worse.
no deficit, i.e. a surplus, or at least a balanced budget. The 'To force Congress to decrease expenditure or increase taxes
argument is that, like households and firms, governments .to offset cyclical deficits would further depress the economy.
~hould also live within their means and not go into indefinite The deficits perform a useful function in absorbing saving
Pond extensive debt. But as TQ_bin argues, 'central government that would otherwise be wasted in unemployment, excess
i.~ _different from other economic agents. It is entrusted with capacity, or lower production.' 9 Tobin argues that; there are
the ultimate taxing and monetary powers and responsibilities built-in stabilizers in the fiscal syste!!} which give it a sense
of society. Its horizon spans the generations.' 5 Hence, the of balance, but if there were a compulsion to balance the
analogy·between households and nations living beyond their budget every year, these stabilizers would lose their efficacy.
means does not really hold. However, the main focus for Tobin is sensiqle and appropriate pubfic
Alan Blinder and Robert Solow, writing four decades ago, l?.El#x.rather than afvcation with the balanced budget. This view is
before public debt in the United States had accumulated to shared by Willem Buiter, who argues that 'optimal, or merely
the present levels, argued that 'at the crudest level, the desire sensible, budgetary policy is bound to be characterized by
for a ste~dy government policy translates into a plea for an systematic, predictable, and sometimes persiste~t departures
annually balanced budget .... The belief that government from budget balance. Even in long run equilibrium, zero is
deficits (but not surpluses) are somehow wrong, lingers not a uniquely interesting figure for the budget deficit.' 10 See
in the mind of many politicians.' 6 At the time -they wrote, Box 11.1 for Pakistan's Fiscal Responsibility Bill.
balanced budgets were not in vogue, but since then, there has
been a demand by politicians in the US, that an appropriate 11.1.2 The Problem of Measuring Deficit
way to maintain fiscal 'discipline' without stabilizing the
economy would be 'to determine the level of government _While concern about the deficit_and the_g!l)!Villg public
spending on its own merits, independent of the requirements debt has invoked substantial debate, there has also been
of stabilization policy, and to set tax rates so as to produce a ~ fair amount of discussion around the 11].~asurement of
balance (or a small surplus) at full employment'. 7 The deman,d the debt and the d,eficit_and about which items constitute ·
to legislate for balanced budgets constraining government government assets and/or liabili~ies. - -
activity was approved by the US Congress in 1995.
 Chapter 11 Debt and Deficits 301

Robert Eisner and P. J. Piepper argue that conventional in the context of measuring deficit and debt, there is a built-
~e~iscaLdefici.t-.m.d-debt are 'fundamentally. in warning which urges 0~0Jq_ok,bey0nd.t-he~v.~b¥ious,.
flawed'.. In their analysis they correct the figures for debt and examine the data and assumptions on which claims
for ch~nges in the market value of government debt due to are being made. As Buiter argues, 'none of the (doctored
changes in interest rates and changes in the real value due or undoctored) deficit measures. are reliable-inoiGatGFS of
to inflation. They find these adjustments in measurement the magnitude or even sign of the effects of fiscal policy on
critical to their findings: 'failure to measure deficits correctly interest rates, capital formation, or the capital account of the
has not only contributed to a false view of fiscal impotence, balance of payments'. 13 Food for though!,~! See Box
but has possibly lead to an overestimate of the importance 11.2 for definitions of the deficit.
of money'. 11
M. J. Boskins also questions the figure quoted for the 11.1.3 Fiscal Deficits, lntertemporal
officially reported deficit, which for him is a very poor indicator
of the underlying public debt policies. He feels that there are Equity, and Distribution
'very significant if not overwhelming difficulties of gauging T. Ihori asks the important question of whether increasing
the extent of true debt policies from official reports'. 12 For debt finance is adding an _increasingly ~fair-b'i.irden~Gn
Boskins, the particular view of the federal financial' picture future generations. If the answer is in the affirmative, then
depends critically on what one chooses to include as a measure one may conclude .that present generations are benefiting
o.f..skJzLq.ndJfle_deficJJ,. By making certain assumptions and by -consuming services provided currently, while future
adjustments, one can end up with very different figures for generations will have to foot_t~e bill; hence, one should not
the deficit and debt, and thus one can make use of them to borrow. On the other hand, one may be able to argue that, by
~uit one's own particular goa}. Despite the apparent cynicism borrowing now, there will be greater intergenerational equity,

Box 11.2 The primary budget deficit

Different Budget Deficits Usually budget deficits measure impacts of discretionary
government policy. However, one important variable
Different figures for the budget deficit are quoted by different of the budget, i.e. debt servicing, is non-discretionary
people due to the different definitions in use and also because and is predetermined by the size and terms of previous
of problems of measurement. Here ·we show how three budgeting decisions and loans. The primary budget deficit,
different figures can be generated and used, depending on by excluding the debt service, measures the impact of all
expediency. discretionary changes of the government in any year. It is
calculated by subtracting the interest payments on domestic
Revenue budget surplus/deficit
and foreign debt from the overall budget deficit.
A revenue surplus or deficit of the budget is equal to
the difference between net revenue receipts and current
expenditure minus the repayment of foreign debt. Net Source: Qazi Masood Ahmed and Hafiz Pasha, 'Definition,
revenue receipts are equal to the gross revenues of the Measurement and Implications of Different Deficits in the
federal government minus the transfer to the provinces. The Budget', unpublished manuscript, n/d.
revenue surplus shows the extent of public sector saving,
where a surplus implies positive saving by the government, Debt or deflcit?
and a deficit negative saving. This revenue surplus or deficit Few people seem to know the difference between debt and
is the bridge between the revenue and capital account of deficit, and use the terms interchangeably. The deficit is the
the government. In the case of Pakistan, public saving has amount by which expenditures exceed tax revenues in a
been negative for many years, thus a revenue deficit of the given period or, in the more comprehensive official jargon,
budget. An increase in the revenue budget deficit shows 'outlays' exceed 'receipts', and hence the amount that must
that the government is using its borrowings increasingly be borrowed or added to the debt over the period. The debt
to meet current expenditure, especially the salaries of is the amount owed at any point in time-what has been
government employees. borrowed and not paid back. In the case ·of any country
Overall budget deficit which has accumulated a large debt, even a dramatic
This is the most commonly used indicator to refer to the decrease in the deficit over a few years will not decrease
state of a country's public finances, and measures the the nominal debt-it will, in fact, increase the debt. Only if
difference between the total expenditure of the government there were a budget surplus would there be some decrease
and its resources. It measures current expenditure plus in the debt.
development expenditure minus repayment of foreign
debt minus net revenue receipts minus the contribution
by autonomous bodies minus the amount earned by Source: Eisner, R., 'Sense and Nonsense about Budget
disinvestment of shares. Deficits' ,.Harvard Business Review, May-June 1993.
302 Issues in Pakistan's Economy

since part of the cost of capital outlays will be passed on to the Researchers also find 'strong evidence' from empirical studies
future. He feels that the answer to the question of whether examining the role of underdeveloped countries which
debt is passed on to future generations depends critically_ supports the claims made above.
on the definition of the burden of debt. F. Modigliani's Professor Robert Eisner, a leading proponent of the minority
definition rests on the assumption that a permanent increase Keynesian view regarding budget deficits, argues that budget
in government debt would crowd out private investment in deficits do matter and their effects can be substanti:;f"imt •
the )ong run, causing a net decrease in the capital stock. He 'the current size of the federal deficit [in the USA] is not "our
calls this negative effect on the capital stock a burden of the number one economic problem", if indeed it is a problem.at
public debt-that is, 'each generation "burdens" the next one all' . 18 He cites data from the ysA 'the world.'..s largest debt.9r
by bequeathing them a smaller aggregate stock of capital' .14 nation'-and shows that, despite a large and growing deficit
Even though some arguments suggest that a growing in the 1980s, inflation, thought to be orie of the key victim_s_ gf
d_ebt.that.must be financed.by increasing interest pay~qits large-b_udget.defjcit~, had declined sharply. In fact, he argues,
is unfair to future generations, it could, in fact, be argued 'the time-series relation between deficits and inflation in the
that future generations are better off because of the manner United States has generally been negative; bigger deficits
in which the public debt is spent. If governments invest in have come with less inflation and smaller deficits with more
improving the quality oflife of present and future generations inflation' .19 What is more surprisi~g, and what contradicts
by investing in social goods like health, education, and conventional wisdom, is the relationship between the deficit
infrastructure, future generations may actually be b·etter off and growth: empirical evidence shows how US deficits
in real (and human capital) terms.'However, if deficits grow 'have over· the last several decades proved stimulatory to the
due to massive increases in military spending (as in the economy' 20-the greater the deficit between 1955 and 1983,
case of Pakistan, discussed below) and large tax cuts, one the greater was the next year's increase in GNP; and the
could argue that the burden of debt on future generations less the deficit, the less was the subsequent increase in GNP.
(and on the present one) may not be very fair. ~ s the Budget deficits are seen to be related not smly to the growth
Jia,ture of spending public money and who actually decides of GNP as a whole, but also positively to consumption and
where it should be spent is a critical factor often ignored in investment. Furthermore, there is evidence that 'deficits
a debate that has become obsessed by the amount of public have not crowded out investment [but] there has rather been
expenditure. crowding in'. 21 ·
For the purposes of our analysis of Pakistan's fiscal deficit,
11.1.4 Macroeconomic Implications 15 we will be concerned mainly with the macroeconomic effects
oJJhe_deficit_s. As the arguments above shovi there is some
The IMF and the World Bank are agreed on one point, that disagreement over the macroeconomic implications of a large
dealing with budget deficits is one of the most 'vexing fiscal deficit. However, almost all conventional economistC
problems' for the majority of underdeveloped countries, especially those who work in and advise international
and hence fiscal policy is now an essential component agencies, particularly the World Bank and the IMF, argue that
of adjustment programmes, where fiscal 'discipline' and the fiscal deficit is bad and unwanted. They claim that the
'restraint' are viewed as prerequisites for macroeconomic economy will suffer appreciably if the deficit is not removed,
stabilization (see, for example, the issues in Chapters 16 and and for them, it is:..P.LQQiilJly~the single most critical statistic
l 7). Many observers argue that the f~cal deficit is a useful that determines the health of the economy. Let us now
indicator of overall economic performance, and have found examine this role in the context of Pakistan.
'a significant statistical relationship between the deficit
and many, though not all, macr.oeconomic performance
variables'. 1~
(The budget deficit is held responsible for high inflation,
11.2 CRITICAL CONCERNS REGARDING
low growth, a current account deficit, and the crowding out PAKISTAN'S FISCAL DEFICIT22
of private investment and consumption. The relationship
between deficits and other macroeconomic variables is said If one single factor were to be identified on whid1_the.entjJe
to depend on how the·deficits arefinanced'.· Simply put, this syuctural AdjustITl~~t!'.rog:r:_~mmes from 1988 to 201 Lhaye
view holds that been based, it would have to be the.fi~cal deficit (see Chapters
16, and 17). The reduction of the fiscal deficit is, without
!!!_Oney creation leads to inflation. Domestic , doubt, tll_e.key.. component of the adjustment programmes,'
~rowing leads to a credit sq-;:;-;ze_:through and most other measures seem to revolve around this
higher interest rates or, when interest rates are objective.
fixed, through credit allocation and ever more The World Bank in its reports on Pakistan's Structural
stringent financial repression-and the cr~wding
Adjustment Programmes, has consistently emphasized
out of private investment and consumption.
Externa!J~orrpwing)~?ds_t.() a current.account_ the iIE£9rtance of debt reductio~23 For the World Bank,
deficit and appreciation of the ,real_ eMI:i-2.~ge Pakistan's long-term growth path and the government's
rate..and.sometimes to.a balance.of.payments_ attempts to make development sustainable would have been
cri~is (if foreign resources are run down) 9r_an._. severely jeopardized if the large deficits had not been reduced
external debt crisis (if debt is too high) .17 in the mid-l 980s, when they were more than 8 per cent of
 Chapter 11 Debt and Deficits 303

GDP. Following the first of the major adjustment programmes {I_here are essentially three types of domestic debt ( see
in 1988, the World Bank concluded that 'the implementation Table 11.2 ). Floating debt is of a short-term nature; it includes
of the adjustment program was weakest in the area of fiscal cash credit by commercialized banks to the government
24 and that ~e high fiscal deficit would ultimately undermine for its working capital needs and constitutes ad hoc and
growth and inflation objectives, and put pressure on imports, regular Treasury Bills held by the State Bank of Pakistan and
worsening the current account deficit position. commercialized banks. In 2002/3 it constituted 49 per cent
iThe level of domestic debt outstanding between 1980 of the debt and was 54 per cent in 2012/13. All banks were
and 2012 is shown in Table 11.1."This debt has been funded required to keep 30 per cent of their deposits in government
by borrowing from both external and domestic sources, paper (the liquid assets requirement), most of which are
with greater reliance on domestic borrowing, particularly in the form of Treasury Bills that are available on tap.
non-bank borrowing. By relying on non-bank borrowing, Medium-term borrowings constitute unfunded debt, which is
Pakistan avoided the inflationary effects seen especially in made up of voluntary savings schemes aimed at the general
Latin America. The government was able to avoid printing public, largely comprising the National Savings Scheme
too much money to fund the deficit, and kept external debt instruments. This part of the government debt. accounted
'manageable'.' However, the World Bank in the past has for 23.5 per cent of total debt and has high, usually tax-free,
argued that yields. The permanent debt of the government is the long-term
debt; it constitutes long-term market loans with maturities
this borrowing strategy [i.e. non-bank borrowing] of between seven and twenty years and is usually held by
is not the most efficient, from the point of view institutions ;:;;;h as insurance companies and commercial
of cost-effectiveness of debt finance and flexible banks. Table 11.2 shows how permanent debt first rose
monetary management. Furthermore, it has
and then fell, with floating debt falling. Total debt as a
negative consequences on the development of
financial markets, because of the size of the debt, percentage of GDP more than doubled after 1980/1 but fell
its large array of instruments and interest rates, again later. After the introduction of open mc;trket operations,
and the credit ceilings imposed. on commercial six-month Treasury Bills constitute the largest instrument
banks, to avoid inflationary consequences. 25 of government debt, followed by Federal Investment Bonds,
both of which are usually held by banks and other financial
In the past, the government has also been held responsible institutions.
for rel}'.ing on the 'high-cost' non-bank borrowing source, One of the problems identified with the reliance on non-
· causii:;-g_@_incr<:;ase.Jn_interest.rateS:anaJie'nce~crowding- bank borrowing to finance the debt has been that the debt's
o.ill_ domestic_investment. On the one hand, the World Bank maturity structure is short term, and since much of this
compliments Pakistan for avoiding the inflationary impact of debt can be cashed on demand, it is very liquid. The private
the deficit, but on the other, it castigates it for having done so. sector prefers these investments because of easy liquidity

Table 11.1
Domestic Debt Outstanding: 1980-2013

1980/1 1986/7 1990/1 1997/8 1999/2000 2001/2 2010/11 2012/13p

Total debt
(Rs. bn) 62.5 284.47 448.16 1,056 1,642 1,757 11,908 13,626
Total debt
(% of GDP) 22.9 43.4 43.9 43.5 52.2 48.4 66,0 59.50

P: Provisional
Source: Pakistan Economic SuNey (Islamabad: various issues); State Bank of Pakistan, Annual Report (Karachi: various issue~).

Table 11.2
Domestic Debt Outstanding at End of Period: 1980-2013

Type of debt 1980/1 1987/8 1990/1 1992/3 1996/7 2001/2 2011)12 2012/13p

% share in total debt

Permanent debt 23.7 27.6 25.9 40.4 27.4 23.2 20 22.2
Floating debt 54.5 42.2 38.0 35.5 41.1 31.7 53 54.3
Unfunded debt 21.8 30.2 36.1 24.1 31.5 45.1 27 23.5

P: Provisional
Note: The figures in this table may vary from those in Table 10.24 as data sources vary.
Source: Government of Pakistan, Pakistan Economic SuNey (Islamabad: various issues); State Bank of Pakistan Annual Reports
(Karachi: various issues).
 304 Issues in Pakistan's Economy

and also because the tax-free r~tes are usually higher than and 17. Also see Box 11.3, which links the issue of taxation
the alternative saving instruments available. Moreover, the with the debt and deficit.
return on this form of debt is not particularly lower than Based on the large number of tables on the public finance
for long-term debt. The problem for the government, given structure presented in Chapter 10, and particularly those
the liquidity and maturity structure of the national saving related to key variables, such as total expenditure, defence
schemes, is that it has to take large refunding operations on and development expenditure, intere~yments, and the
a continuous basis. extent and trend of the public debt, we can summarize the
main_features of Pakistan's public finances and fiscal deficit
More importantly, these features make it as follows: These patterns have prevailedfor many decades
difficult to plan precisely the refunding levels now. ( Since debt and deposits arise out of taxation and
needed. Under such conditions, unforeseen expenditure readers are recommended to revisit Chapter 10
circumstances, such as the recent political
and look at the data, graphs, and trends shown there).
and economic uncertainties that led investors ,,,.
to accelerate the withdrawal of funds from l :-Total expenditure exceeds total revenue, and the growth in
the National Saving Schemes, can also expenditure is greater than that in revenue.
undermine the Government's al;iility to manage
monetary policy. In those instances, when the 2: Current expenditure alone exceeds t9tal rey_enue.
Government cannot cover the public's ·demand 3. Development expenditure has been falling, while current
by issuing additional debt, the authorities may expenditure for the most part, has grown.
be compelled to monetize part of the debt 4. Defence expenditure has been very high, and much
temporarily. Such policy would require allowing higher than even development expenditure, and although
monetary financing to exceed its targets for
It shows signs of falling in recent years, this is due to
a period of time, possibly without significant
consequences. But potential problems could accounting gimmickry more than anything else.
arise if the outflows are sustained or if they are 5: Interest payments along with defence expenditure
very large. 26 constitute more than half of annual expenditure.
6: The main source for financing the fiscal deficit has been
\The World Bank and the IMF believe that, if Pakistan is to non-bank borrowing, rather than bank borrowing.
build long-term foundations for economic development, 'the
7. Domestic debt is greater than foreign debt.
fiscal deficit must be brought down to a sustainable level:'A
sustainable deficit is one which permits an acceptable level 8. The financing of the deficit is substantially from domestic
of economic expansion within a framework of price stability sources rather than from foreign sources.
·and debt accumulation comparable with reasonable domestic 9. The fiscal deficit of the government of Pakistan had been
and debt servicing ratios.' 27 The figure for the budget deficit around 8 per cent of GDP for much of the 1980s, fell in
which is supposed to be sustainable and which does not the 2000s under Musharraf due to the_iis.calspac~ created
cause the numerous ills-iJJflation, low_growth,. ct1n:ent afte.r-WU-=see Chapter 18-but ro_s_e again after 2007 ana---
account deficits,-etc.-is believed to be 4 per cent of GDP. in 2012/13, was closer to 9 per cent of GDP.
Table 11.3, does, indeed, show how-debtservicing has been Moreover, Table 11.5 shows some interesting trends since
e<!!_ing up .a substantial.and growing part of the economy, 1980, which are also worth highlighting.
while Table 11.4 shows how the fiscal deficit continues to be
~,_sausing domestic and foreign debt to grow, ;hich 1. Total revenue remained, with some variations over time,
eventually needs to be serviced. Interest payments are now more or less the same for about two decades despite
the-}argest component of the_b_udget ,announced by the reforms of different sorts. However, as the economy has
government each year. Some reasons why interest payments grown after 2002, the trend rate of total revenue has
have been rising and why Pakistan continues to live on a high fallen.
debt path, and its implications, are discussed in Chapters 16 · 2. Total expenditure has fallen, since 1980/1 to relatively
lower levels since 1999 compared to the I 980s.

Table 11.3
Debt Servicing: 1983-2012 (% of GDP) -:'I
1983/4 1986/7 1990/1 1996/7 1999/2000 2001/02 2011/12 'I
Interest on domestic federal debt 2.0 2.8 3.5 5.2 6.7 5.2 4.1
Interest on foreign debt 1.2 1.3 1.4 1.2 1.5 1.7 0.3

-
Repayment of foreign debt 2.1 2.1 2.1 4.1 3.1 4.5 0.7
- Total debt servicing 4.4 4.2 7.2 10.8 11.8 11.9 5.7

Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various issues);.State Bank of Pakistan, Annual Reports
(Karachi: various issues).
 Chapter 11 Debt and Deficits 305

3. Although total.expenditure has fallen, current expenditure

<D ...
~
0000 actually rose considerably in the 1990s, although has
C\I LI')
<D LI') (I) s:t (I) a:i
C")(O-..;t.._
O> fallen significantly since 1999.
O>
"'" ...
.-: r,:j
4. Since a high de_gree of debt was accumulated in the.J980s,
Q) I'- 0000 co
"'"0
0 I!)
r--:C')C)C') ci debt servicing increased over time. The highest proportion
C\J r,,... c.o --
LOC\i
LI') ...
ever, 8.3 per cent of GDP, was paid out in 1999/2000,
although as Chapter 18 shows, Pakistan's debt problem
~ ~~
0000
Mr--:aia:i was suddenly and significantly 'resolved' after 9/11 and
0) C\I
0)
O> men
... <D
C\J ....... .,- LO
_tpe beginning of the War on Terror.
5. Defence expenditure has fallen over time, although due to
~~ LI')"'" 0010 0
O> 0
... <D ci ci ci (I) changes in the composition of what constitutes defence
c,; r.i '? "'~"- C\I co co
co ... expenditure, one needs to be cautious about making
absolute claims-see Box 11.4.
... COC\l<DCO
......
C').-
0> 0 "'" (0
C\I Q)
0
0) I'-(") s:i LO «i a:i 6. Development expenditure has fallen very dramatically
C\I I'- C\I"'"
0)
gjgf g1 from a high of 9.3 per cent of GDP in 1980/1 to around
3 per cent in the early 2000s, despite ample fiscal space;
0

~
... "'"
co(")
LI') LI')
O>.-CO(")
ciaiC\i«i
"'"I!) I!)
"'"
ci according to the Pakistan Economic Survey for 2011/12, it
co
0)
~ C') was a me:re 2.1 per cent in 2000/1 perhaps the lowest ever,

~ ~~
Q) ...
LI')
(0 ...
Q)
O>
co
m--coLO
_: co <ri _:
...ci although the same source shows that for 2011/12, it was
probably even lower.
co <D (0
O> uS r,:j
LI') ...
.-:
C')
C')

7. The budget deficit had been brought down to early 1980

~ ra oi
LI') <D
~~
O> O>
0 0 l'-C"l
C\i a:i C') s:t
...C\i levels, but began to rise quite dramatically after the mid-
2000s.
co C\I I'- C\I
O> "-"C\i
LI') ...
ocn
C') ...
I!)

There seems to be complete agreement amongst many

l'-
(0
co
O'<t
... C\I
I'-"'"
... LI')
I'- ...
(") O>
r-: 0
0 0 <D '<I"
a:i C\i a:i C')
... co I!) C\I
.... Pakistani economists and contributors in the press over the
0)
~r,:j C\I ... claim that the federal budget d~ficit is the most important
threat facing Pakistan's economy. 28
~
<D "'" o,· I!)
c:i CJ)~ r-...: Fiscal policy has been identified as a 'critical failure'
co C\I I'- I'-
0) in the context of Pakistan, and as one of Pakistan's key
macroeconomic problems, threatening price stability; balance
~
co
i:: m
I'- ...
C') LI')
I'- C')
Q) ,-.
... O> 0
s:i co
... iri ci
LO (") I!)
O> 0
-i of payments, 'constraining essential government investment
O> uS
C')
LO N r.i in economic and social infrastructure, and thereby,
endangering growth prospects'. 29 See Appendix 11.1 for a
I'- ... 0 (0 O> (X) C"')
O? part_icularly forceful presentation of this view.
i
T'""

"'"0
.-o
Q) (0
C\I co ai ci cri _:
0) g LO C\i,,: ... co "'" C') The persistent reference to the 'high and unsustainable'
fiscal deficit by the IMF and World Bank (and sundry other
--coo co
co "'"
<D C\I
(") ...CD ciaicoM
commentators)-'the fiscal deficit has been perceived as a
continuing problem in Pakistan' 30-since at least .the early
II)
Cl)
...
..,f
C\11'- I!) C\I

1980s, when the first Structural Adjustment Programme

....
Cl)

~ C') <D l!l O O l!l was initiated on the recommendations of the iMF, must
cb
r-- ai ~ LO LO s:i ci s:t
C\11'-(")"'" rest on the premise that the budget deficit is responsible
O> uS LO
....
CI)
for most of the macroeconomic ills in the country; and thus,
.;.; n,eeds redress. The IMF, following the conventional wisdom
·u
iC
aco
O>
Q)
.- l'-
<D O>
..,f
I'-

uS
(0 LI')
co
C\I
LON
LI')
C')
V C") C\I .._
r,-: C\i «i «i
"'" LI') C') ...
Q)
ci which it has helped frame, would, in all likelihood, hold the
deficit in Pakistan responsible for some, if not all, of the
~Ill (").-
<D I!)
I'- I!)
00
'<l"COCO0
r--: C\i ai"'
l'-
C\i
following consequences: growing inflation, crowding ou,!_ o.!
<D 0) "'"(") private investment, a falling growth rate, and the twin of the
ii: ..,f CD ~ r.o "'" LI') "'"
budget -deficit, the continuing deterioration of the current

-
Q)
.c account deficit. We must assume that, unless it was seen as a
co C\I
eCn 00
... I!) primary· cause of the problems in the economy, it would not
·u C\i cxi
form the central tenet of policy statements and adjustment
C
ca programmes that Pakistan continuously undertakes ( also see
C

"it' 0-
ii:
,..: Ill
,.. Q)
Chapters 16 and 17). Let us examine some of the evidence.
Table 11.6 presents a summary picture of Pakistan's key
macroeconomic variables over a long period of time, and
Q) f it "is worth examining trends particularly since 1980. The
:a 6 b~~.t.deficit as a perce~ge of G:QP_is..presented alongside
~"'
306 Issues in Pakistan's Economy

Box 11.3 The second central matter with respect to fiscal reforms is of
Taxation and the Fiscal Deficit reducing the uncontrollable fiscal deficit: The existing strategy
of reducing the deficit by making substantial cuts in public
M. Sharif sh_ows how problems in Pakistan's taxation lead to development expenditure, burdening power and oil sectors
problems of expenditure choices and the fiscal deficit. with taxes, pursuing ittight monetary policy, and opting for
indiscrete bank borrowing have culminated in slow economic
The most crucial issues pertaining to giving a boost to growth. A more practical option to trim down the deficit
the country's tax revenue collection is making the overall tax would be to cut down the subsidies·provided to unproductive
regime equitable, reducing dependence on indirect taxation, state-owned enterprises that equals to Rs. 350 billion per
and increasing direct taxation. The national leadership and year, eradicate corruption within the tax administration that
'the FBR have uphill task in addressing these issues in the costs the public exchequer around Rs. 700 billion annually
next budget as the repercussions of not executing tax reforms and reduce the cabinet's expenditure that is Rs. 100 billion
would be severe for the country and its citizens. a year. The ruling elite has no choice but to implement strict
There is a widespread consensus among stakeholders austerity measures and demonstrate strong financial discipline
· that all incomes including agriculture, big businesses, and if reducing the surging fiscal deficit is on its economic agenda.
real estate ought to .be taxed in making the tax system more Otherwise the country will have to rely upon foreign assistance
equitable and fair. According to the central bank, during the last to bridge the huge f\scal gap that prevails in the country:
fiscal year the agriculture sector generated Rs. 3.016 trillion, In the last three budgets, the governmenf,could hardly
. slightly lower than the amount generated by industrial sector. formulate a viable growth strategy because of 'its pre-
The latter contributes around 18.0 per cent in tax revenue occupation with the SBA programme. The. end result was
through different layers of taxation whereas contribution of that the economy ended up with a' d~plorable growth· rate,
the agriculture sector is hardly·1 per cent. Similarly, according heightened fiscal deficit and rampant inflation:· The ground
to FBR estimates there are 2.3 million potential taxpayers reality hardly matches the objectives laid down at the initiation
a
wi'th taxable income. Out of these, 0.7 million people fall in of the SBA programme. The present situation clearly reflects
the higher income bracket but do not possess a national tax that a sustainable growth strategy cannot be pursued unless
number. FBR officials also complain that the commercial banks pivotal financial reforms are put in place that.. should focus on
do not' cooperate with them to detect concealed incomes with enhancing tax revenue and cutting
the result th.at out of 30 million account holders, there are
only 2.9 registered income taxpayers. All these hitches will
have to be sorted out in case the government is serious about Sharif,. M. 'Fiscal Policy Reforms and Growth Strategy', The
increasing tax ~evenue and tax-to-GDP ratio. News, Karachi, 9 May 2012.

other variables which it is supposed to affect. Let us consider which has averaged 7 per cent in the same period·. Surely, the
growth. The 'very high', 'escalating' budget deficit, according numbers m.:!,lS!_give pause for thought.
to the IMF theory of causality, should have had severe The inflation rate is another key variable that should have
repercussions on the growth of the economy. This has clearly exploded given the high budget deficit. An average of only 7
not always been the case. Pakistan has experienced very per cent inflation over a decade is quite creditable. Moreover,
high growth rates compared toother oevelopingcountries only. 9 of the 26 years between 1980 and 2006 have seen
and averaged well over 6.5 per cent per annum in the 1980s. double-digit inflation, with a maximum of n:9 per cent.
This is no mean achievement given the huge budget deficit, According to estimates, Pakistan's inflation rate should

Table 11.5: Summary Fiscal Policy Statistics (% of GDP)

Total Total Current Debt Defence Development Budget

Revenue Expenditure Expenditure Servicing Expenditure Expenditure Deficit

1980/1 16.9 22.9 13.6 2.1 5.5 9.3 5.3

1980s average 17.3 24.9 17.6 3.8 6.5 7.3 7.1
1980s highest 18.6 26.7 20.3 5.4 7.0 9.3 8.7
and lowest 16.0 21.9 13.7 2.1 5.5 6.3 5.3
1990s average 17.1 24.1 19.4 6.8 5.6 4.7 6.9
1990s highest 19.2 26.7 20.5 7.6 6.7 7.6 8.8
and lowest 15.8 22.0 18.5 4.9 '4.9 3.4 5.6
2000s average 14.2 18.7 15.4 4.9 ·3;2 3.4 4.5
2011/12 12.8 19.6 15.5 4.5 ·2.,5 3.7 6.8 ·

Source: Government of Pakistan, Pakistan Economic Survey-(lslamabad: various issues).

 Chapter 11 Debt and Deficits 307

Box 11.4 equivalent to 21 per cent of the total budget outlay, or 2.9 per
Exactly How Large is the Defence Budget? cent of projected GDP. Most discussion of defence spending is
restricted to the issue of the size of the expenditure outlay. An
Sakib Sherani examines the size of the defence budget important question that needs to be examined in any balanced
announced in the 2012-13 budget in June 2012, showing that discussion is: what are the implications for the wider economy
that the figure which is announced, usually under-reports the (the externalities) of expenditure of this quantum?
actual size of the defence budget, by a considerable margin. While I have not done such an analysis, one can list the
possible areas of spill over. These would include direct and
One of the most scrutinized and commented upon items in indirect stable employment for a significantly large pool of
the budget is the allocation for defence spending. Depending people and its associated spending effects (with the value of
on the ideological leanings of those doing the commentary, this factor increasing in times of severe economic uncertainty),
the number is either 'too high' or 'too low'. The more dominant income support to over a million families via pensions and
narrative, however, has been that the budgetary allocations for the multiplier effect of substantial spending on civil works and
the defence sector leave little fiscal or policy space for civilian other infrastructure, especially in remote areas where much
governments by 'crowding out' much-needed spending on the of this activity occurs. On the flip side, if defence expenditure
social sectors. It is an important issue that needs an unbiased is displacing resources from spending on development, the
examination. trade-off for society needs to be worked out. A critical factor
While the budgetary allocations for 'defence' have been in any such exercise is determination of the 'optimum' level of
made far more transparent in the past few years than ever defence spending for a country facing multiple security as well
before, with an unprecedented break-up between personnel- as developmental challenges. This is where broader issues
related expenses and operating expenses etc.-which is not related to defence spending come in, beyond the size of the
available in the case of many countries, including regional defence budgeL
ones-the complete allocation still remains shrouded in These broader issues relate to transparency of spending by
mystery. This is so because, not unlike the global 'best the defence sector, its accountability, and civil-military shared
practice', defence spending is spread over a number of oversight. A related-and thorny-issue is. determination
different heads in the budget-with parliament and the media of the 'threat perception' that generates the armed forces
usually focusing on the largest item, 'defence affairs and procurement plans. Currently, these areas are the sole
services'. prerogative of the security establishment in Pakistan . .On all
The other expenditure heads contain relatively smaller, but these issues, far more progress has to be made to optimise
not insignificant, amounts and include, for example, allocations the defence sector budget, and to reduce the significant waste
for payment of 'legacy expenditures' incurred for upgradation and corruption that occurs in the procurement p"rocess-from
of conventional capability, or to finance military operations in purchase of ordinary everyday supplies, to land for real-estate
the northwest, or a non-civilian component of the public-sector development, to the procurement of expensive weapons
development program,me (PSDP). Another example of an item systems and platforms.
related to the defence budget but subsumed under a different The submission of the defence budget with greater details
head is 'debt servicing' of military loans (amounting to Rs. 4bn to the parliamentary standing committees, and a threadbare
in 2010-11). in camera discussion, will be an important starting point.
All told, I estimate this year's budgetary allocation for the Equally important, two other steps need to be taken: (1) the
defence sector to be around Rs. 800 bn, or approximately application of PPRA (public-sector procurement) rules on any
28 per cent of the total budgeted expenditure. This figure substantive procurement by the defence sector; and (2) the
includes military pensions, but excludes other security-related extension of the jurisdiction of the auditor general of Pakistan
spending that falls under 'civilian' armed forces' (such as to entities such as the Frontier Works Organization and
Rangers and the police). It is important to emphasize that National Logistics Cell, for starters.
this is an approximation since I have used a past estimate Finally, another issue involving the armed forces relates
of the non-civilian component of the PSDP. On its own, the to economic governance. There are at least two areas of
non-civilian component of the PSDP is not a very large item, the economy where the military has direct stakes and can
accounting for under 10 per cent of the total allocation, with play a more positive role: ensuring that real estate is brought
projects in the nature of construction of barracks, or building more effectively into the tax net (something it has resisted in
schools in cantonments etc. An important caveat is that the the past on account of being one of the larger developers in
figure arrived at is the gross allocation for defence-related the country), and ensuring that smuggling across the border
spending. For the past several years, sizeable inflows have with Afghanistan, where personnel of the armed forces
occurred under 'defence receipts' (mostly relating to inflows are deployed and which has damaged the economy very
under the Coalition Support Fund), which have provided substantially, is drastically contained.
an important offset to the recourse to budgetary resources In conclusion, the defence budget is not as large as it
is purported to be, in net terms. In addition, it has certain
by the armed forces. These payments are provided as
important externalities (positive spill-overs) into the wider
reimbursements for expenditures already incurred by the
economy. Nonetheless, it suffers from a lack of parliamentary
armed forces for deployment and operations in the northwest.
debate, transparency, accountability and civilian oversight.
Hence, on a net basis, after netting off gross expenditure
with receipts, the total estimated allocation for the defence Source: Sherani, Sakib, 'The Defence Budget', Dawn, Karachi,
sector in the 2012-13 budget amounts to Rs. 679 bn. This is 15 June 2012.
308 Issues in Pakistan's Economy

have averaged in excess of 50 per cent, given

I CO ('I') 0 .,.- ,... C\J C\J .,.- LO LO t,,... 0) C\J the high and unsustainable budget deficit. 31
c-jC\iC\i cicio999'-f 'T 9'T With Latin American deficits, Pakistan has
continued to have South Asian rates of inflation.
Interestingly, however, in the early 1990s when
or--incncncoinsrr--~stMMr--
the budget deficit was 8. 7 per.cent, after which it
r-: cx:i r-: r-: LO LO u:i u:i r-: u:i LO si sic-; feil, inflation actually rose in this period. It seems
that there might even be an inverse relationship
between the two, at least in the case of Pakistan.
Moreover, the persistent rise in inflation to
I COC1lC\JC1l<Xll!)(')C0C0l!)C1l0C\JC1l double-digits after 2007/8, is not attributable
c-; si LO LO LO LO u:i u:i r-: r-: u:i u:i u:i si to the fiscal deficit, which was actually quite
low, but due to rising international oil and food
prices, as well as to a devaluation of the Pakistani
rupee. Mismanagement of the economy, in the
I C\Jstl!)I--COststincnstC\11--CilC\J interim set-up at the end of 2007 up to March
r-:u:ir-:LOs:t"Sts:tMMMN,...:NN 2008, and then the way the People's Party
government mismanaged and bungled economic
policy all the way from 2008 to 2013, was also
responsible. However, importantly, there seems
to be no evidence which links Pakistan's fiscal
I l!)(')(')l!)C1lC0COC\J~C1loC\Jst(')
u:i u:i u:i u:i LO LO LO LO LO si ,i c-; c-; c-; deficit with its inflation rate.
The crowding-out phenomenon is a key
favourite of orthodoxy and neoclassicists, given
their penchant for the private sector. The theory
1 1 r--coco~cooC\JC\J~~cor--cnco
0
c-j,i(\jr-,:c-j,ir-,:u:,ic-j,i,...:ci,...:c-j suggests that the goverr1__ment,Jg_ its financipg
t5 ~ ++ of the deficit, would have pushed up interest
r~tes to such an extent that the private sector

-
·c:;
;.:::
Cl) c
I C\J(')I--I--C1ll!)C00stCOC1lstC\J(')C\J
r-:r-:cx:ioioioicx:ioioioir-:cici,...:,...:
T""" T""" T'"" T"""
would have found it unaffordable to invest,Jl_nd
thus would have been crowded o_ut. This would
C Q) have implied a growth rate of far less than
a.. E the hugely impressive 15 per cent per annum
Q) ci5
Cl 0
"C Cl
Q)
> experienced by the private sector in the 1980s.
..!: I C\JCO(')C00(')(')C\JCOC\J~cor--C\JCO
::I 0 Moreover, with the even greater 'burgeoning
m oicx:icx:icx:ioicx:icx:icx:iu:iLOu:iLOLOs:tM
"C ?ft of the budget deficit' in 1990/1 (8.7 per cent),
C
I'll ~ 1991/2 (7.5), and 1992/3 (7.9), one would not
0 I I C\JCOOOl--stC\Jcn~srcn~coin have expected the 19, 30, and 13 per cent growth
,...: ,i c-; si u:i u:i si LO ci u:i C\i LO ci u:i
t5 C\1~'7~"fC\J<Xl~l!)C\J'?'?~~ in the private sector over the same years. Clearly,

-C
::I
0
() a: C0(')(')1--C0C0(')0COCO<Xll--COstin~
there seems to be little truth in the claim that
the private sector has been crowded out due to
government policies or the budget deficit. The
c,jC\ir-:C\icic,i,...:c,jci,...:r-:LO(')'StMM
evidence, no .matter how superficial, points to
~
0 T'"",....

-...
T""" T"""

different conclusions. Moreover, in the period

C
l!! sin<::e 1988 when the deficit has been particularly
C1l00C\J(')stC01!)1--C0(')st(')C\J(')C\J
::I
ci r-: LO oi ci c-; ,...: cx:i ,....,....,-,--,-
cx:i oi c-; ,...: si r-: r-: oi high, so mggi_s_ojh_9t_the Structural Adjustment
(J (\I.,-,--.,-(").,.-.,.-
c~ I Progra!llme_of 198_8 emphasized the need to cut_
0 tg_e deficit drastically-and has continue~ to do
~
:;::::
so after the 2008 IMF Agreement-the economy
C has behaved even more unconventionally with
respect to IMF theory: real per capita GDP
tl'
::I rose by 10.4 per cent between 1988 and 1992;
"C
0 merchandise exports expanded by an average
r:t a.. CO CO LO <O r,.... C'? LO .,.- <0 I'-- LO C\J 0) CO ,-- .,.-
0 u:i s:t u:i LO r-: N s:t LO u:i,...: ('j ,i ('j,...: ('j LO of 14 per cent per annum in volume; private
() Cl
sector gross fixed capital formation gradually
i
Cl) expanded from 7.7 to 9.4 per cent of GDP; and
E
co.o even domestic savings rose from 10.5 to 12.2
...
.-c
~ gi wen w~~~~!Q~t::.fe.~~.!:.~f2.
0
0
0 per cent 32 ( see Chapter 7 for why growth was
oooo~C\JMstincor--cocno~C\J so high in this period). Furthermore, even the
.c 0 cor--cocncncncncncncncncncnooo
~<5 cncncncncncncncncncncncncnooo
T"'" ,....
T""" T'"" T"""C\J C\J C\J
T'"" ,- ,- T""" T'"" T'"" T""" T"""
current account deficit behaved quite contrary
 Chapter 11 Debt and Deficits 309

to IMF theory. In the later 2000s, especially after 2007/8, it not strong enough to balance the crowding-in effect in
was the consequences of the War on Terror, the militancy the period covered [ 1972-88] and is consistent with the

I
in Pakistan, the transition from a military dictatorship to view, inter alia, as to the importance of upgrading the
democratic rule, as well as the international crises and price country's roads and transportation networks, and improving
rises, which caused Pakistan's economy to come undone-see thedrainage system'. 38 This government investment in
Chapter 18. It was not the fiscal deficit which was responsible -infrastructure was 'estimated to be the most important positive
for these problems. With this evidence, one is forced to determinant' of private investment in the period covered. The
re-examine the questions: does the budget deficit matter in investment in infrastructure is expected to continue to have
the context of Pakistan and how does the IMF/World Bank a 'significant crowding-in effect' in the future. Interestingly,
J feel about this issue? 33 similar conclusions have been reached for India as well,
based on an evaluation of past trends. Significantly, after
11.2.1 The IMF/World Bank View of 1996/7 when public sector investment was cut drastically,
private investment also fell, accentuated by the consequences
Pakistan's Fiscal Deficit, 1980-97 of the nuclear tests. As Chapter 8 shows, since public sector
Given its repeated concern over the issue of the budget deficit, investment has fallen sharply over the last decade, so too has
one is led to believe that the IMF has views on Pakistan's private sector investment.
budget deficit consistent with its theoretical construct. Not The IMF believes that the deficit has not behaved in
so. The IMF/World Bank admit that Pakistan as it should have in this period, for several reasons:

the macro consequences of fiscal deficits in 1. There was a very high rate of growth of real output ( 6 per
Pakistan have apparently been quite dissimilar cent per annum) which permitted a fairly rapid expansion
from those in other developing countries of both interest-bearing and non-interest-bearing debt
with fiscal deficits of comparable magnitude. without recourse to inflationary finance.
Specifically, Pakistan has experienced neither 2. The equilibrium deficit was quite high-5.5 per cent of
hyperinflation nor debt rescheduling . ... Growth has
GNP-despite a low inflation rate because of a very high
remained quite strong through the last two decades,
inflation has not been high, and the current account underlying rate of growth of real output.
deficit has averaged about2 per cent of GNP, remaining 3. The government of Pakistan was able to borrow, both
largely financeable and not posing debt servicing domestically and externally, at rates below the marginal
problems for the country. 34 cost of funds in the international private capital markets. 39

These institutions, despite their insistence on the need to lower In addition, throughout the 1980s, the budget deficit was not
the deficit, admit that the deficits have been 'quite benign' monetized, and external funds and non-bank borrowing.were~
and that, despite the presence of fiscal deficits 'that are very the~n:iain,sources of funds to .fi12i'!nce the _de.[cjt, so inflation
high by international standards, the country's macroeconomic remained low. It was only after 1990/1, when bank borrowing
pe.!Jormance has been relatively good .... There is no evidence contributed a very large share of the financing of the budget
in Pakistan of the chronic acute macroeconomic crises-manifest deficit, that inflationary pressures emerged. However, after
in extended periods of negative per capita income growth, 1993/4 bank borrowing returned to the low, pre-1990 level.
hyperinflation, and inability to service external debt-that Our own observations regarding the impact of the
have characterized many other developing countries with budg~eficit_on_ key, _macroeconomic_variables question
comparable fiscal performance.' 35 t!_J._e economic orthodoxy.JYith re~~s_t to Pakistan, as do the
The institutions that insist on cutting down the deficit observations and findings of IMF staff and IMF-sponsored
admit that 'inflation performance in Pakistan appears to have studies. While the monetarist neoclassical assumptions and
been remarkably good .... At the same time economic growth predictions regarding the behaviour of the budget deficit
has been robust', 36 and real GNP per capita between 1972 and are clearly spurious, if not outrightly rejected, the Keynesian
1987 has shown a cumulative increase of more than 60 per interpretations, where public spending causes an increase in
cent. Additionally, even the crowding-out argument seems aggregate demand and, subsequently, growth, given the less
to have been rejected, albeit reluctantly, with the IMF/World than full capacity of the economy, seem somewhat closer to
Bank admitting that public and private investment seem to reality._ The greater the public expenditure, the greater th~
be positively correlated and 'the infrastructural build up that rate of growth of GDP and the greater the private investment.
results from government investment appears to facilitate Moreover, since there is no crowding out through the
private investment'. 37 Public investment was reduced mechanism of the interest rate as predicted by theory, one is
d!astically after 1996/7 as a consequence of privatization led to believe that there are ample loanable funds available
and with restraints on government spending, while private at a given interest rate. Easterly and Schmidt-Hebbel, in
investment turned negative after the 1998 nuclear tests-see their review of developing countries, found that priv~
also Chapter 18. investment does not respond much to interest_rates. 40 As has
A study conducted by the IMF on determinants of private been argued extensively. elsewhere, 41 the evidence suggests
investment in Pakistan argued that aggregate government that Pakistan's economy had been in far better shape for
_investment had a significant positive impact on private the duration of the Structural Adjustment Programmes than
investment, implying 'that the _crowding-out effect was the IMF/World Bank believed. Whether this was due to the
huge underreported informal economy or to any other factor
31 O Issues in Pakistan's Economy

is open to debate. In fact, it is interesting to note that, if A second explanation for this trend is that in the post-
indeed it is true that Pakistan's GDP is under-reported by as martial law period, while the military was not in government,

l
much as 40 per cent, 42 then the size of the budget deficit as there is little disagreement that the military continued to be
a percentage of the true GDP would be much less than the in power. Furthermore, given democracy's inability to deal
reported official figure of 8 per cent and the present figure with political problems in Pakistan, the military played a
may even be 'sustainable'. Although this is a debatable more overt policing role. Therefore, a high share is given
and controversial point, it may nevertheless be the key in to defence expenditure-and a smaller residual share to
answering the question of why the deficit has, continued to development-under democracy. 44
remain 'benign', and did disrupt the positive trends in the If the budget deficit is 'the number one problem of
economy as it should have. Given the nature and robustness Pakistan's economy\, as most observers believe, ·it is for
of the economy, a fact conceded even by the IMF, it seems reasons connected with the role and distribution of public
quite clear that, in the conventional orthodox framework,.i.!!£ expenditure, and is not dependent on the fetish of an
budget dsfi.c.iLm.ay_not be the r§al culprit after all. abstract, arbitrary, badly calculated statistic. The question
of governance, or how public money is utilized, allocated,
11.2.2 Re-examining Critical Concerns managed, and siphoned off, is of critical importance. With
corruption rampant at all levels of government, and with
Having just argued that the b\l.dge.t,deficit,.in the conventional political power being bought and sold in different provincial
orthodox neoclassical framework, does not matter with and national. governments in the past, it is clear that the
regard.to Pakistan, we will now argue that it is perhaps the taxpayer's money continues to be used to buy off opposition
most important statistic around which debate ought to take and keep dissent under control. Unquestionably, the specific
place. However, we take this view for very different reasons context of fiscal policy and budgetary deficits is all important
from the IMF and World Bank. ( see also Box 11.5 and Appendix 11.2).
The obsession that policymakers in Pakistan have with the
budget deficit detracts attention from the really important
issues. The focus should not be on asking the question:
how high is the budget deficit, and is it sustainable? The
11.3 THE DOMESTIC AND FOREIGN DEBT
r<?afconcern regarding the deficit is the 1J_sue_9fJP..e..~dinq_ CRISES
and rf_dJ~triqutio_n ..JJ is more important to ask the questions:
What use is being made of public money? Who is funding General Pervez Musharraf set up a Debt Is~duction and
government expenditure, i.e. who is being taxed? How is M_anagement Committee in January 2000, to ti).ckle Pakistan's
public expenditure managed? And so on. serious problem of external and internal debt, which had
Tables 11.5 and 11.6 again provide a very brief· overview grown to a size greater than that of the GDP. Unlike many
of what we feel is the central issue regarding the budget other countries which had either a foreign debt problem or
deficit: The contrast in the patterns of defence expenditure a domestic one, Pakistan was in that category which faced
and development expenditure is the ktT concern regarding a serious crisis on both fronts, domestic and foreign. As a
the budget. deficit and*public-spending_ In fact, Pakistan consequence, the Committee released a report called the
might well be the only underdeveloped country where Debt Reduction and Management Strategy45 (DRMS), which
defence spending has outweighed.development expenditure. laid down the causes for the excessive debt and numerous
Since 1980, development expenditure has fallen far sharply possibilities and solutions to alleviating that debt. During
than the small reduction in defence expenditure., Moreover, 1999-2000, after the nuclear tests of May 1998 and following
between 1985-1995, defence spending increased by 150 per the military coup, Pakistan was besieged with a far greater
cent, compared to an 89 per cent increase in development proportion of problems than what we had become used to in
expenditure. Ironically, prior to 1985-6 when there was the past-see also Chapter 18 for the background of events.
a military government in power and Pakistan was under lr_adirtg up.to.these.problems. For much of the decade of the
martial law for most of the time, defence expenditure was 2000s it seemed that at least the external debt crisis had been
considerably lower than development expenditure. After the resolved partially after an unprecedented debt rescheduling
advent of dei;nocracy in Pakistan, between 1988-1999 defence package-see Chapter 18. And since pressure had been lifted
spending was higher than development expenditure in every off the extemal._debt situation, this should have a]cJ~<:_d
single year, except one! There are two possible explanations great deal of fiscal space to address issues of domestic debt as
for this pattern: according to one view, during military rule, well. For quite exceptional, extraneous,-r~i;;s n~t7elated
not only was the military making direct use of the defence to Pakistan's Debt Reduction and Management Strategy,
budget, but also, due to its status as 'the government' and due considerable pressure had indeed been lifted off the debt
to various privileges, it acquired a large share in the civilian crisis. This section of this chapter, examines. the extent and
side of the economy. Thus, in real terms, defence expenditure reasons for Pakistan's extraordinary debt profile prior to the
was just a fraction of the extent to which the military really debt rescheduling that took place. 46
benefited. 43 This also explains why the primary budget deficit Writing in 2001 when no one could have imagined
~g)1er_in.t~e 1980-,6 period (averaging-i6 per cent) than tqat in a few months time Pakistan's debt profile would
in the 1986-9 3 period when it averaged 1. 9 per cent. change drastically on account of its foreign debt being

I
rescheduled, the DRMS stated: 'P~kistan's public debt has

1
 Chapter 11 Debt and Deficits 311

Box 11.5 As far as raising revenue is concerned, despite the

Fixing Targets for the Budget Deficit numerous tax measures taken each year to increase overall
revenue-essentially by imposing a heavier burden on
In this excerpt, we examine whether having a fixed target for those who already pay taxes-in real terms very little has
the budget deficit for Pakistan is a wise policy move or not. been achieved in the form of additional revenue. Moreover,
there is growing resentment amongst those who currently
If the government's deficit is used for stepping up public
pay taxes, for they believe that the tax system is riddled with
capital formation, then not only does it stimulate the
glaring inequities with a large and wealthy section of society
economy from the demand side, but also it keeps relaxing
remaining exempt. Add to that the fact that for each increase
the· economy from the supply side, both through its direct
in the tax rate and in tax collection, the quantity and quality
effect on the magnitude of capital stock and through its
of public services-from law and order to education and
indirect effect via stimulating private investment. On the
health-has deteriorated sharply. With additional taxes worth
other hand, if the increase in the government's deficit is . ..
25-30 billion expected in the next budget, with agricultural
confined to non-capital expenditure then revival of the
income·s still exempt, each taxpayer does indeed have the
economy would necessarily be brief and evanescent, since
right to complain and question the government's logic of
such a revival would fairly soon run into an inflationary
trying to raise more revenue to cut the budget deficit so that
barrier.
it could get yet another IMF loan. .
This consideration is particularly important for an economy
One obvious way to raise additional revenue, and thereby
where agriculture accounts for a major part of the consumer
cut the deficit, would be to tax agricultural income. But for
goods sector. It may, for instance, be argued that any
purely political reasons, the present government is loath to
government expenditure (even non-capital expenditure),
tax its ally, the wealthy agricultural lobby. And herein lies the
by stimulating the economy, would call forth private dilemma. The agriculturists cannot be taxed, .but to remain
investment via accelerator effects, so that the inflationary in the good books of the IMF the budget deficit has to be
barrier would keep getting pushed back: this argument, cut. The government's solution: additional taxes on those
however, would certainly not hold in the case of agriculture. who have no option but to pay, and fewer government
Private investment in agriculture is not governed by any schools and hospitals. In essence then, what the IMF loans
version of the acceleration (or capacity utilization or even do is that they allow the wealthy-whether rural or urban-
profit) principle. It depends essentially upon the availability to continue with their lifestyles without having to pay the
of complementary inputs like supra-individual irrigation ·
consequences of living well beyond their private as well
facilities, power, extension facilities, seed-fertilizer packages, as collective means. As such, the continued access to and
etc. whose provision is contingent upon public investment availability of IMF and World Bank loans has become an
effort. In short, in an India-type economy it is not just any excuse to postpone structural reforms, such as land reforms
expansion in the government's deficit which can trigger off and levying agricultural income tax.
a sustained boom, but an expansion that takes the form of By propping up regimes which do not have the ability or
a larger investment effort. And this is precisely what the last inclination to take sensitive or tough decisions, organizations
two years' deficit expansion has not been used for. such as the World Bank and the IMF ensure their longevity.
It seems that Budget '96 is going to revolve around By lowering the budget deficit to 4 per cent of GDP, as per
one ~ingle figure--4 per cent. All fndications about the IMF instructions for the coming year, the present government
deliberations underway at different levels of government in in Islamabad can be assured of another large IMF loan, and
the build-up to the new budget suggest that Islamabad is at the same time will ensure its survival by not disturbing the
going to do its utmost to bring the deficit down to 4 per cent powerful agricultural lobby. For this government at least, 4
of GDP. One of the key indicators which the government per cent is indeed sacrosanct.
has specifically tried to control, the budget deficit, seems
to have grown in importance over the last few years. In the
coming financial year 1996/7, it will probably become the
government's obsession, having extensive ramifications on Source: This is an edited version of Zaidi, S. Akbar's, 'Is Four
a number of areas of the economy. Per Cent Sacrosanct?', The Herald, June 1996.

, reached alarming proportions. The downward rigidity of (a) larg~ and persistent fiscal and current
budgetary expenditures and lack of buoyancy in revenues accou'ii.t balance of deficits; (b) imp!udent_
1
have generated persiste~tly large fiscal qefi_cits over the last use -of borrowed resources, such as wasteful
two decades. This has resulted in the accumulation of public government spending, resort to borrowing for
debt at a fast rate .... There are no quick fix reme~es to the non-development expendi!ures, undert~ing of
low economic priority development projects,
debt problem. Pakistan will have to live with macroeconomic
and poor implementation of foreign-aided
consequences of a heavy debt burden for several years'. 47 The projects; (c) weakening debt cartying capacity in
Report argued that Pakistan's twin debt burden-domestic terms of stagnant or declining real government
as well as extemal-i~ell beyond sustaiiiaole limits'. The revenues ·and exports, and (d) rising real cost
re~~ns- for this high debt were summarized as follows: o!_.&gvernment borrowing, both domestic and
-.---
· foreign. 48
 312 Issues in Pakistan's Economy

In the understanding of the DRMS, the debt crisis was far better then than they had been for many years. lJ!!.t:il.the
'essentially triggered by the un-sustainability of the level of h!:!g~_debt rescheduling of 2002, most indicators regarding
current account balance of payments deficits and the pattern debt as a percentage of total revenue, tax revenue, current
of their financing in the 1990s' .49 The Report argued that it expenditure, etc. were not particularly impressive, which just
was this current account problem which caused.both typ~ goes to reinforce the observation made in Chapter 18, that
of debts to accumulate, yet argued correctly, that there is a 9/11 proved to be a real life saver for Pakistan, although of
need to examine the issue of both domestic and foreign debt course, in subsequent years, the War on Terror caused huge
separately, since they have a different nature and impact.op_ human and economic damage to Pakistan. The period prior
the economy. - - to debt rescheduling, 2000/1 in particular, has exceptionally
Table 11.7 gives key data for Pakistan's d_ol_Ilestic. and worrying statistics, with foreign debt more than 60 per cent
. external debt between 1993-2003. Total debt rose to 100 of GDP-see Table 11.7 .
per cent of GDP in 1998/9, although this had come down The general belief is that Pakistan's debt problem emerged
substantially in 2002/3 and has over the last· few years, frop the profligate 1980s, when General Zia ul-Haq's
remained between 55-60 per cent of GDP. As we show in government was spending far more money than it was
Chapter 18, both key foreign debt ratios-external debt recriv~ng. ·Pervez Hasan in Pakistan's Economy at the Crossroads
servicing as a percentage of foreign exchange earnings and of was one of the first who drew attention to this fact. He
export earnings-fell a great deal in around 2001/2 and were argued that while there were very h~gi:owth,ril_tes)J! _the

Table 11.7
Profile of Domestic and External Debt: 1993-2011 (in Billion of Rupees)

1993/4 1994/5 1995/6 1996/7 1997/8 1998/9 1999/2000 2000/1 2001/2 2002/3 2010/11

TD (1 +2+3) 1,451.0 1,583.0 1,860.0 2,169.0 2,671.0 3,077.0 3,336.0 3,884.0 3,783.0 3,821.0 12,530
1. DD 702.0 798.0 909.0 1,041.0 1,176.0 1,392.0 1,578.0 1,731.0 1,717.0 1,852.0 6012
(48.4) (50.4) (48.9) (48.0) (44.0) (45.5) (47.3) (44.6) (45.4) (48.5) (48)
2. ED 749.0 785.0 951.0 1,127.0 1,483.0 1,614.0 1,682.0 2,059.0 2,005.0 1,927.0 5707
{51.6) (49.6) (51.1) {52.0) {55.5) (52.8) {50.4) (53.0) {53.0) (50.4) (46)
3.EL 12.6 70.1 75.4 94.0 59.5 41.6 811
(0.5) (2.3) {2.3) {2.4) (1.6) (1.1) (6)
Total public 134.4 154.4 201.8 258.7 278.3 343.1 366.3 340.3 431.2 304.7 436.4
debt servicing

Figures in parentheses are shares in total debt.

Ratio of external debt servicing to:

EE 55.4 35.3 36.5 38.0 44.8 28.8

FEE 34.9 23.6 23.4 23.7 26.5 16.0

EE: Export Earnings; and FEE: Foreign Exchange Earnings.

Ratio of total public debt servicing to:

Tax Revenue 78.4 87.8 90.3 77.1 90.2 54.8

Total Revenue 49.6 48.6 54.8 67.3 64.8 73.2 71.5 61.5 69.1 42.3
Total Expenditure 36.8 36.1 39.0 47.8 43.9 53.0 51.7 .47.4 52.2 33.9
Current Expenditure 45.8 44.6 47.6 56.8 52.5 62.7 58.5 52.7 61.6 39.0

As%GDP

TD 92.2 84.1 85.9 90.2 99.8 104.7 106.0 113.5 104.3 95.1
DD 44.6 42.4 42.0 43.3 43.9 47.4 50.2 50.6 47.3 46.1
ED 47.6 41.7 43.9 46.9 55.4 54.9 53.5 60.2 55.3 48.0
EL 0.5 2.4 2.4 2.7 1.6 1.0

TD: Total debt; DD: Domestic Debt; ED: External Debt; EL: Explicit Liabilities;
Note: In 1997/8 the State Bank of Pakistan changed its classification of external debt and included Explicit Liabilities which were not
accounted for earlier-see chapter 16 for further details .. This means that the data for 1993-97 is not strictly comparable to ·that of more
recent years since there were definitional changes-which were justified improvements-which make comparison difficulty. Nevertheless,
one can draw a great deal of inference from the data.
Source: State Bank of Pakistan, Annual Reports (Karachi: various issues).
I Chapter 11 Debt and Deficits

1980s, debt was being created which was being traJlsferred_ rates. With a huge debt overhang and with high amounts
to future generations who would eventually have.to,pay.the.
high costs incurred during the l 980s. 50 The nominal public
of debt servicing at a time when the economy was doing
noticeably poorly in the mid- l 990s, and when governments
313

debt grew from around Rs. 155 billion to Rs. 802 billion in were being changed ·frequently, interest rates were allowed
1990 and further to 3,200 billion by 2000. The total debt to reach their 'correct'/market prices/levels. The result was
burden was a mere 66 per cent in 1980 and rose to over 100 that the Moeen Qureshi government, one of Pa~istan's many
per cent by 1999. In 1980, the outstanding stock of public caretaker governments, allowed interest rates to rise to the'
debt rose from 400 per cent of revenues to over 610 per cent ridiculous level of over 20 per cent per annum, despite· the· ·
by the end of 1999. Pakistan's public debt to revenue ratio fact ~hat there was debt to be paid and the economy_Vl'asJ.!L
in 2000 which was around 610 per cent was almost double a poor situation. The consequences should not have been
India's (385 per cent), three times Mexico's (220 per cent), surprising to anyone. Clearly, the market had failed and in
r., and ten times Chile's (60 per cent). 51
Perhaps what is a surprising result is that it was the l 996-
fact wrought havoc on an otherwise fledgling economy-see
Box 11.6 for a hard hitting critique of the liberalization of
I
9<uJ.e.riod.in-which·the·public debt burden rose very sharply, interest rates, and see Box 11. 7 in which Mahnaz Fatima and
from 515 per cent of government revenues to 625 per cent, Qazi Masood Ahmed provide a useful analysis and summary
'which was a more rapid increase than in the entire decade of revenue and tax issues in the 1990s.
of the 1980s'. 52 The reasons for this are discussed below. Table While there were numerous repercussions to the
11.8 shows the real costs of borrowing and .. the.real.interest domestic debt crisis throughout the 1990s, the government
rates which were being used to repay-the.debt. In the 1980s, sponsored DRMS, surprisingly, rather candidly, adds that as a
while the deficit was high and so was the accumulated debt, consequence of the aggravating debt situation and declining
the economy was at least buoyant and growth was also very revenues 'there has been a serious upsetting of the balance
impressive; revenues were rising, development spending was between defence and development since the early 1980s. The
high, and the economy was growing. the reasons why the .. share of development in total government spending, which
debt burden increased so sharply in 1996-99 and the debt was 40 per cent in 1980 and 25 per cent in 1990, declined
crisis came to the fore, was beca_use growth rates had fallen to 13 per cent in 2000. Almost all the increase in share of interest
in the 1990s and so had revenue. In the 1980s, there was real payments has come_ at the cost of development. While defence
revenue growth of 8.2 per cent per annum while it was 3.9 spending in constant prices more than doubled between
r per cent in the 1996-99 period, implying that not only was 1980-81 and 1999-2000, real development expenditure
debt increasing, but it was becoming even more difficult to actually declined over that period' .54 Defence expenditure is
service the debt. 53 However, added to all this, the real crunch now 50 per cent greater than development expenditure, while
came when interest rates jumped from negligible levels in the two decades ago, development spending was two-thirds
1980s and from a negative real interest rate in the early 1990s, higher than defence.
t to substantially high real interest rates in the 1996-99 period. The DRMS argued that 'large as the public debt...in
l One of the major criticisms that has been made against the Pakistan is, the debt crisis was essentially triggered by the
way the Structural Adjustment Programmes in Pakistan had unsustainability of the level of the current account balance of

I been imposed, had been around the 'liberalization' of interest

Table 11.8
payments deficits and the pattern of their financing'. 55 The

f Costs of Borrowing and Interest Rates (Domestic Debt)

1980s 1990-96 1996-99 1998/9 1999/2000

t
Primary Fiscal Deficit as 4.7 2.0 -0.3
% of GDP
Real Cost of Borrowing 2.5 --0.5 5.2
% per annum
Real growth of debt 9.9 5.7 5.8
% per annum
Real growth in revenues 8.2 3.9 --0.7
% per annum
Real growth of debt 1.6 1.8 6.5
burden % per annum
Stock of DD Rs. bn 353 846 1,125 1,288 1,481
Interest Payments Rs. bn 36 104 175 175 198
Nominal interest rate % 7.7 10.9 13.9 13.6 13.4
Price change % 7.2 11.2 9.0 5.9 3.5
Real interest rate % 0.5 --0.3 4.9 7.7 9.9

Source: Government of Pakistan, A Debt Reduction and Management Strategy, Debt Reduction and Management Committee
(Islamabad: 2001).
314 Issues in Pakistan's Economy 1
,,

Box 11.6 deficit. The sharp acceleration in inflation during 1990-1996

Real Cost of Public Borrowing: Determinants ultimately wiped out the effect of higher nominal interest rates,
so that average real interest rate on government domestic debt
and Trends
was slightly negative during 1990-1996.
The real cost of domestic borrowing is the nominal interest For the most part of the last two decades, the real cost of
rate minus the rate of inflation. As the table below indicates, government domestic borrowing has been negligible and,
the real costs of Pakistan's domestic debt have varied greatly therefore, the growth in burden of public debt was moderated.
over time. During the 1980s the average nominal cost of 7.7 The situation now is sharply different. The real cost of domestic
per cent per annum was largely offset by an inflation rate of borrowing jumped up to the average of 9 per cent per annum
7.2 per cent per annum. The real cost of domestic public debt over 1998-2000, as the inflation rate dropped and nominal
was thus only 0.5 per cent per annum. At first sight, this may interest rates stayed high. Even with the sharp reductions in
appear surprising because the government started paying the rates of return on the NSS since May 1999, the average
very high nominal interest rates on National Saving Schemes interest rate paid on these schemes will remain high for some
(NSS) in the early 1980s while inflation was still relatively low. years because of the very substantial time lags mentioned
Two factors dampened the impact of high rates of return on above. The Debt Committee is assuming that the real cost of
NSS instruments on government interest payments. First, government domestic borrowing can be brought down to 3-4
the initial weight of unfunded debt (borrowing through NSS) per cent in the coming years mainly through a sharp reduction
on rates offered for fresh borrowing.
was small. Second, the reported interest payments on NSS
were low because the bulk of this borrowing is in the form of
zero coupon five or 10-year certificates, the interest on which
The issue of interest payments on foreign debt has not
received much attention, at least in relation to public debt.
1
is recorded only where the term certificates are encashed. Nominal interest payments on foreign debt at Rs. 47 billion
There is thus a considerable lag in interest payments. But the
principal reason why government nominal and real interest
in 1999--00 were only a fraction of the interest payments on
domestic debt of Rs. 198 billion. As a percentage of GDP,
1
rates were low in the 1980s was that the bulk of government
borrowing was at less than market rates as all interest rates
interest payments on foreign debt have rarely exceeded 1.5
per cent. The average annual nominal interest rate on external
l
were administratively determined and government debt was debt until recently did not exceed 4 per cent because in
sold in segmented markets. The large reserve requirements general Pakistan avoided high cost commercial borrowing
for commercial banks (5 per cent cash reserve requirement till the mid-1990s. But just as in domestic debt, the relevant
and 30 per cent liquid asset requirement) forced them to buy rate for external debt is the real rate of interest after allowing
low-interest Treasury paper. for international inflation. International inflation, already low in
the 1980s, came down to zero during 1995-1999, implying a
Real Cost of Public Debt steady rise in the real interest rate on Pakistan's foreign debt
(% Per annum) in dollars. Furthermore, there has been real devaluation of the
Rupee, which increases the real interest rate by increasing
j
Real Cost Real Cost Total Cost the real burden of external debt. There has been, in fact,
of External of Domestic of Public substantial real depreciation of the rupee during the 1980s, i1
Debt Debt Debt relatively little change during 1990-1996 and significant real
devaluation since then. I
In estimating the real cost of foreign public debt, the
1980s 3.4 0.5 2.5
1990-96 -0.9 -0.3 -0.5
Committee has added the capital loss on foreign exchange
to the nominal interest payment on external debt and then
J
1996-99 5.4 4.9 5.2
adjusted this nominal cost for the rate of domestic inflation.
2000-4 (Projected) 4.4 4.4 4.4
2004-10 (Projected) The calculations suggest that real cost of external debt
1.8 3.4 2.5
averaged 3.4 per cent per annum during the 1980s. It has
risen significantly since then, reflecting both low international
Financial sector liberalization, initiated in 1989 with the
assistance of the World Bank, led to a full market-based
auction programme for government borrowing. However,
inflation and the accelerated pace of real depreciation of
the Rupee during the last few years. For the period 1996-
1999, the real cost of external borrowing is estimated at
j
this liberalization was. premature and ill timed because it 5.4 per cent per annum, even higher than the high cost of
assumed a quick reduction in fiscal deficit to sustainable domestic debt. In projecting future costs of external debt, it is
levels (Hasan, 1998). Its impact, on the contrary, was to necessary to take into account the expected changes in the
sharply raise the Government interest bill. Between ·1987-88 . nominal value of Pakistan's currency, which captures both the
and 1993-94 interest payments on domestic debt increased differential between international and domestic inflation and
nearly trebled and the average nominal interest rate rose by real depreciation, if any.
84 per cent to 11 .5 per cent. Paradoxically, the much higher
interest payments made the fiscal deficit reduction difficult Source: Government of Pakistan, A Debt Reduction and
and the Government resorted during 1990-1993 to very large Management Strategy, Debt Reduction and Management
borrowing from the banking system to finance the burgeoning Committee (Islamabad: 2001), 18-19.
 Chapter 11 , Debt and Deficits 315

Box 11.7 However, the contribution of various types of taxes to total

Fiscal Issues in the 1990s tax collection did change. While the share of direct taxes and
sales tax increased, that of import duties fell significantly.
The overall policy thrust during the decade of the 1990s was, Import duties underwent drastic reduction mainly under IMF's
therefore, to increase the overall tax-to-GDP ratio by focusing pressure to liberalize trade more than that required even under
on generating a greater share of direct taxes. There was the WTO agreements. While this measure definitely affected
commensurate emphasis on liberalization. The assumption was domestic industrial production adversely as most domestic
that decrease in custom duties would discourage smuggling producers are still ill-prepared to compete with imported
and would thereby enable higher domestic production that finished goods, domestic production effort also experienced
would, in turn, contribute to higher tax generation overall. This the negative impact of increase in direct and sales taxes.
assumption did not bear out as it appeared that smuggling As the IMF prescribed tax effort was deflationary, significant
in Pakistan became more an administrative issue than an increases in output could not be recorded that could have
economic issue. By and large, domestic industry was still ill- fed back favourably into tax generation and budget deficit
equipped to compete with imported finished goods. Import reduction.
duty reduction would, therefore, have an adverse impact on The upshot was that a relationship between the tax-to-
domestic production capability, thereby adversely affecting tax GDP ratio and the budget deficit-to-GDP ratio could not be
revenue generation. The upshot, therefore, was a lower share ascertained. Despite this, the governments mostly remained
of custom duties which would be offset through a higher share determined to follow the IMF prescriptions about tax reforms
of sales tax and periodically through petroleum surcharge. too. The second Benazir government that resisted the IMF
The decade of the 1990s can, therefore, be seen as the one in import duty reduction soon found itself out of the office.
throughout which there was a great emphasis on increase in Pakistan's taxation reform was, therefore, driven not just by
direct taxes, reduction in import duties, and compensation of domestic politico-economic considerations but also by those
the loss in revenue due to the latter through increase in sales of the countries which are the major financiers of the IMF.
tax. The combined effect of the above moves, however, did These countries would like to have our economic frontiers
not make a dent in the overall tax-to-GDP ratio which not only thrown open so that their manufactured products and services
fluctuated between 10.48 per cent and 12.26 per cent but find easy passage into the markets of developing countries.
actually fell from 11.82 per cent in FY1991 to 11 ,71 per cent As the overall tax-to-GDP ratio could not be increased
in FY2001. Clearly, there were gaps not just in implementation appreciably, budget deficits had to be kept contained by
but also in the taxation policy that was adopted under the decreasing the development expenditure. This was required
influence of the IMF that emphasized rapid reduction in all the more also because of increasing pressure on debt-
import duties which had been a r)"lajor source of revenues in a servicing. As percentage share of internal resources in total
country ill-equipped to increase direct tax collection efficiently resources declined due to the reasons discussed herein, the
and equitably. The effort during the decade of the 1990s can share of external resources increased. Pakistan's reliance on
be characterized as one that aimed more at offsetting the external financing increased due to a tax reform effort that
loss from import duties' reduction rather than attempting to remained unsuccessful not only intrinsically as it failed to
increase tax revenue generation as such. As is evident from generate more resources internally but also because it affected
Table 4, while the share of direct taxes increased from 16.6 the production potential of the country adversely. This latter
per cent in FY1991 to 32.9 per cent in FY2001 and that of effect fed back into the issue of budget deficits and rising
sales tax increased from 16.6 per cent in FY1991 to 38.3 per external dependence. More requirement of external financing
cent in FY2001, the share of import duties in total taxes fell means more of the financiers' conditionalities. That is, the
from 40.8 per cent in FY1991 to 15.9 per cent in FY2001. The above cycle stands reinforced when the need is to break away
upshot was a bare minimum ability to maintain the overall tax- from it. While the fiscal reform exercise has been self-defeating,
to-GDP ratio which may be viewed as an achievement given we pursue more of it as it suits both domestic and international
the reduction in import duties. Or, it may be viewed as a failure politico-economic agendas.
given the inability to increase direct taxes and/or sales taxes in
proportions greater than the decrease in import duties. Source: Fatima, Mahnaz and Qazi Masood Ahmed, 'Political
The analysis demonstrates that the efforts to increase Economy of Fiscal Reforms, The Pakistan Development
the overall tax-to-GDP ratio did not prove to be successful. Review, PIDE, vol. 40, 2001 ..

current account balance during the 1990s was on average it mp_re_ex.pemiavg-t-0-6@l<W.c-e-.foreign debt-in-.rupee_tcr,ms,
4.8 per c~nLof5D-e. increasing further to 6 per cent if one something that has continued to happen in 201 l_a11d 2012.
( correctly) includes the Foreign Currency Accounts. Exports With the economy doing poorly, revenues not rising and an
and remittances had both fallen to below par levels in this overall investment and confidence crisis in the country, it
period and there was a decline in foreign exchange earnings is not surprising that foreign debt and debt servicing kept
from 1996 to 1999. Added to all this, as we show in the increasing. As Box 11.8 shows, P~kistan paid back in terms
chapters on structural adjustment-Chapters l6_and 17- of ipter_es1..._alone,_m_Q~p_more than it actually borr,~ed, a
there was constant ·devaluation of the rupee which made strange arrangement if ever there was one.
316 Issues in Pakistan's Economy

Box 11.8 repayments made each year as shown in column VI. In

What Have Our Loans Cost Us? 1990-91, short and medium term loans were a mere 1O per
cent of outstanding external debt to official creditors; this
Much has been written about our external debt, and rightly amount more than doubled in 1998-99 when it was 22.2 per
so. The fact that Pakistan's external debt is almost 54 per cent cent, and since 1995-96 has been almost a fifth of the total
of our GDP is indeed worrying. Add to that the fact that the debt. In contrast, long term debt has increased by only 5.7 per
country's domestic debt is only slightly lower, and we have cent since 1994-95, while short and medium term debts have
a major crisis on our hands. In this brief article, I propose to increased by 28 per cent over the same period.
look at a critical dimension which relates to Pakistan's external There are two aspects to rely increasingly on short term
debt and its repayment, which has been overlooked by most and medium term debts. Firstly, by definition, they have to be
analysts. repaid (or rolled over) far sooner than the longer term debt
The table below reveals a number of extraordinary facts which could have a tenor of even a decade, compared to the
related to the growth in external debt over the last decade. one-to-three year shorter term debt. Secondly, because of
Perhaps the most astonishing revelation is that net addition to its nature, this debt is far costlier than longer term debt. The
Total Debt Outstanding in the period 1990--2000 was $15.451 IMF's three-year Enhanced Structural Adjustment Facility for
billion while in the same period the total amount repaid as example, which constitutes long term debt, carries an interest
Interest and Principal was $36.611 billion. Pakistan has been rate of only 0.5 per cent and has a five-and-a-half year grace
making average repayments to its loans enacted over many period and a 10-year maturity period. In contrast, even IMF
decades of the order of $3.66 billion annually over the last short-term loans (such as Stand-by Arrangements), which are
decade alone, and yet, has seen its external liabilities almost far less costly than commercial loans, carry an interest rate
double. Much of these repayments have been based upon which is a weighted average of rates on short-term paper of
increased borrowing, suggesting that a substantial proportion the five currencies which constitute the IMF currency, the SOR
of new loans enacted each year do not come into the country (Special Drawing Rights). The Annual Report 1999-2000 of the
and are used simply to pay-off old debts. This is an important State Bank of Pakistan concedes the fact that due to the nature
point to consider as this point is usually overlooked whenever of the small and medium term debts, payments of principal
a new loan is granted to Pakistan. The euphoria which follows (column IV) dominate those made as interest (column V).
such agreements ignores the reality that only a small amount Yet another important finding from the table is that in the last
of the new loan is actually available to be made use of in the two fiscal years, the total debt servicing has fallen substantially.
country. This has happened only because of the rescheduling that
Another revealing feature of the table is the increase in had taken place two years ago. The importance of this
the proportion of short and medium term debt over the last rescheduling can be gauged from the fact that in the last
decade, which is probably responsible for the large annual financial year 199g..:.2000, the total debt to be repaid had there
been no such arrangement, was of the order of $7.827 billion

External Debt $ billion

Year Total Debt Outstanding Annual Debt Servicing

II Ill IV V VI

Long Short/Med Total Principal Interest Total

Term Term

1990-91 15.471 1.824 17.295 1.669 0.711 2.381

1991-92 17.361 2.268 19.629 2.086 0.767 2.853
1992-93 19.044 3.002 22.046 2.130 0.814 2.944
1993-94 20.322 4.160 24.483 2.722 0.890 3.612
1994-95 22.117 4.409 26.526 3.304 1.020 4.324
1995-96 22.275 5.460 27.735 3.262 1.085 4.347
1996-97 23.145 5.140 28.285 4.038 1.042 5.080
1997-98 23.042 5.940 28.982 3.575 1.095 4.670
1998-99 23.101 6.572 29.673 1.905 0.752 2.657
1999-2000 23.834 5.622 32.746* 2.366 1.377 3.743

* Includes the 'New Category' of debt worth $3.29, introduced by the State Bank of Pakistan this year, which has not been
included in previous formats.
Source: State Bank of Pakistan, Annual Report (Karachi: various years).
 Chapter 11 Debt and Deficits 317

the highest ever. However, $4.084 billion was rescheduled debts, so has Pakistan. Like peasants, we too have paid out
and Pakistan had to repay only (!} $3.743 billion. It is difficult huge sums of money in the form of interest and principal but
to imagine where Pakistan would have come up with the despite this, rather than diminishing, our debt liability has
additional money had the rescheduling not taken place. The increased markedly.
fact that the economy saw some signs of improvement and Over the last two decades whenever I have spoken about
'stability' reflected in a small improvement in the growth rate, the international financial institutions and donors, and have
were critically dependent on this rescheduling. shown how loans and debts have had a negative impact on
Probably the most important conclusion to draw from the Pakistan's economy bringing it on the verge of bankruptcy
table and arguments presented here is that Pakistan is caught and default on so many occasions, I have always been asked:
in a deep debt (death?} trap from which there seems to be no then why do these institutions and countries make loans to
way out. Those institutions and countries which have lent us a country like Pakistan? The answer from this table should
money over the last few decades, have reaped great rewards be quite obvious. Even near-bankrupt and close-to-default
from their investments. They are like the money lender or countries like Pakistan, are profitable investments for the
landlord, and Pakistan the indebted peasant, where just to loaners. Not only do they get far more than what they loaned,
survive and pay off some of our earlier debts, we are having the debt liability increases and countries like Pakistan are
to borrow, increasing further our debt liabilities in the process. caught in a perpetual debt trap having to make repayments for
Just as generations of peasants have been enslaved by their years to come. A very profitable business indeed!

Source: Zaidi, S. Akbar, 'What are we paying for our Loans?', Pakistan Journal of Applied Economics, vol. 15, nos. 1 & 2, 1999,
(published in 2001).

It was the 1996-99 period again, in which there was compared to the increase in GDP'-political interference
further deterioration in the external debt situation, while and weak institutions have been held responsible for this,
all the relevant variables were deteriorating-see Table as well as schemes such as the Motorway and the Yellow
11.9. Based on Table 11.9 the DRMS report argued that Cab Scheme; the 2ublic sector has borne large losses which_
during 1b_e_l996=99~period,...({he •real·interest-rate. on. ex-ternal_ tl,Le_publi-c-sector·in·general;·has·-had to bale out; there was
~~~e~le real growth~in_forei.gn. exchange_e2"~ni_Dgs a declin,eJll.!@g.!,erm c_c!:gjJal.inJlons~OYt:.Uhe_l 990s: which
turned negative . . . . Given the enormous current account 'compelled authorities to place greater reliance on elU?ensive
balance of payments deficits and the very fragile pattern of commerct~lJ?.Q~g~agreeing with the DRM~_based on
their financing through RFCDs [Resident Foreign Currency the work of the IMF, the 'most important causative factor'
Deposits], there was a certain inevitability about Pakistan's behind the increase in external debt 'was the,.Qgsistence_
foreign exchange crisis. T,b_e,irnp_ositi9_n....2f_economic sanctions of large non-interest_crnenLaccoun._t deficits'; as we argue ~
iwp_e_L99B..merely.acceJerated,its. arrival'. 56 above as well, the sequencing of reforms has also been a
Sakib Sherani identified a number of 'principal factors' problem with substantially higher market interest rates as
that had been res2onsible for Pakistan's high and increasing a consequence of liberalization; the structural adjustment
d~J:?t. 57Thisl~tincluded d~p_;~ated_s!ructural~~and•A reforms also put a lower ceiling on bank borrowing for
shorter term causes. These include a low savings rate far budgetary support, which forced government to shift to non-
below comparable countries, and to make matters worse, bank borrowing; and, there was capital flight as well, which
national savings have been declining; there has been a caused the vulnerability of the external account-also see
1;;-zrorffscaTclls'§p_Iine, with tax revenue having declined Table I 1.10 for some international comparisons.
as a per cent of GDP in_the.1990s,andj11_tl_)._e 2000~,as_;yell, What is interesting and worth emphasizing, however, is
wfiicninaicates 'lower nominal growth in tax collection as the impact of Pakistan receiving considerable foreign 'aid' -a

Table 11.9
Dynamics of the External Debt Burden

Growth in
Non-interest Real cost of Real growth of Real growth in
external debt
CAD borrowing external debt FEE
burden

1980s -2.9 2.0 6.4 4.7 1.7

1990-96 -2.5 2.8 6.9 5.4 1.5
1996-99 -1.3 4.0 7,6 0.1 7.5

Source: Government of Pakistan, A Debt Reduction and Management Strategy, Debt Reduction and Management Committee
(Islamabad: 2001), 25.
318 Issues in Pakistan's Economy

Table 11.1 O A Cross-Country Comparison of External Debt Indicators

Total External Debt

(% of Gross National Income) 1990 2000
Pakistan 52.9 53.8
All developing countries 34.1 39.1
Low-income developing countries 49.2 53.4
Middle-income developing countries 30.3 36.3
Heavily-indebted countries 88.1 100.3
South Asia 32.4 27.2

Total External Debt Service

(% of Gross National Income) 1990 2000
Pakistan 4.9 4.8
All developing countries 3.8 6.3
Low-income developing countries 3.8 4.6
Middle-income developing countries 3.8 6.6
Heavily-indebted countries 7.0 8.1
South Asia 2.9 2.4

Total External Debt

(% of Current Foreign Exchange Receipts) 1990 2000
Pakistan 250.0 300.6
All developing countries 161.0 113.3
Low-income developing countries 298.8 181.5
Middle-income developing countries 135.6 102.4
Heavily-indebted countries 331.0 237.9
South Asia 324.7 141.5

Total External Debt Service

(% of Current Foreign Exchange Receipts) 1990 2000
Pakistan 23.0 26.8
All developing countries 18.1 18.1
Low-income developing countries 23.0 15.8
Middle-income developing countries 17.2 18.5
Heavily-indebted countries 26.2 19.3
South Asia 28.7 13.8

Source: Sherani, Sakib, Escaping the Debt Trap: An Assessment of Pakistan's External Debt Substantiality, Asian Development Bank,
Pakistan Resident Mission Working Paper Series No. 1 (Islamabad, December 2002), 32.

misnomer, no doubt, for these are loans-and <!_Ccumulating latter half of the 1990s, was the frequency and magnitude of
e.2£2Lt!Han.t.amounts of debt. One would have expected that currency devaluation that took place'. 60
such huge amounts of inflows-see Box 11.8 and Chapter Looking at the situation soon after 9/11, say in 2004, it
25 on war and aid-would have benefitted the country in was difficult to appreciate the fact that clearly, Pakistan
terms of growth and poverty reduction. However, in the case had a massive and acute debt crisis just a few years ago,-for
of Pakistan, foreign capital inflows have been used entirely to -all of the 1990s. The reprieve that the economy had been
finance consumption, but moreover, 'the increase in foreign given, came about on the basis of fortuitous extraneous
capital has resulted in lowering th~ sayings _by _the same factors, and not on the strategy proposed by the Debt
magnitude, and as such foreign aid may have contributed Reduction and Management Committee or on other factors.
almost nothing to growth'.~8 -Mo;eover, while this 'aid' has As a consequence, there w~debt rescheduling worth $12.5
not been put to proper use, A. R. Kemal concludes, not billion, debt write-offs, and the creation of sufficient fiscal
surprisingly, that 'debt accumulation in the case of Pakistan space-lY_l}_i_cl:!. alloFed~ government to target some key
is resulting _in low gr~th'. 57 areas of the economy, notably development and poverty
While tnere are a large number of factors that may have issues. A lower interesfrate also helped, as did an increase in
aggravated the debt problem, Sherani argued that 'initiated exports and growing remittances which helped raise foreign
in 1989 as part of financial sector liberalization under the exchange reserves to over $12 billion, and further stil!)
aegis of the IFis [international financial institutions], nearly Nevertheless, with the total debt almost 5.] p9:_sent oLGDP,
trebled the interest payments on domestic debt between FY it will always have a bearing on some aspects of the economy,
1989 and FY 1994. The average nominal effective interest such as interest payments, and will need to be kept as low as
rate rose from less than 6 per cent to 11.5 per cent. The other is sustainable. That sustainability will arise through higher
factor which became increasingly relevant, especially for the economic growth, better and larger investments, and far
 Chapter 11 Debt and Deficits 319

greater tax generation. Moreover, the claim by some sections was a serious debt crisis in Pakistan-:-Unlike most countries,
of Pakistan's civil society that Pakistan's loans should have Pakistan had both an external and domestic debt problem
been written off, is made absurd, when what is required is for most of the 1990s. We assess the causes for accumulated
greater accountability-see Box 11.9. debt and found that reforms and structural adjustment had
a crucial role to play in creating and aggravating this crisis.
_..After 2008 both, the deficit and debt, rose to extremely
11.4 SUMMARY AND FURTHER READING high levels and it is clear that here the IMF or World
Bank were less to blame. The People's Party government's
11.4.1 Summary mismanagement, along With a number of negative global
This chapter makes the simple, though important, point that factors, aggravated the situation-also see Chapter 18.
fiscal deficits and expenditure by government in excess of its
revenue are not always and everywhere 'a bad thing'. What 11.4.2 Further Reading
matters is the type of expenditure and the context of the
There are no books which examine the issue of the fiscal
fiscal deficit. We have looked at the conventional wisdom
deficit; some academic journal articles are all that are
which states that numerous ills that afflict the economy are
available. For the case of Pakistan, see: Zaidi, S. Akbar, 'The
said to originate from high fiscal deficits. After looking at the
Structural Adjustment Programme and Pakistan: External
more general arguments, in which we showed that it is not
Influence or Internal Acquiescence?', Pakistan Journal of
always such a good idea to reduce public spending or to have
Applied Economics, vol. 10, nos. 1 and 2, 1994; Zaidi, S. Akbar,
a fiscal surplus or balanced budget, we then examined the
'Locating the Budget Deficit in Context: The Case of Pakistan',
specific case of Pakistan.
Pakistan Journal of Applied Economics, vol. 11, nos. l and 2,
In the case of Pakistan, it seems that conventional wisdom
1995; Haque, Nadeemul and Peter J. Montiel, 'Fiscal Policy
regarding the fiscal deficit has been turned on its head. The
Choices and Macroeconomic Performance in the Nineties',
high fiscal deficit did not do all the things it was supposed
in Nasim, Anjum (ed.), Financing Pakistan's Development in
to, and until more recently was rather 'benign', yet, at around
the 1990s (Karachi: Oxford University Press, 1992); Haque,
between 4-6 per cent, the fiscal deficit in Pakistan is an
Nadeemul and Peter J. Montiel, 'The Macroeconomics of
important issue.
Public Sector Deficits: The Case of Pakistan', Working Paper
We have emphasized the point that, in itself, the fiscal
no. 673,(Washington DC: World Bank, 1991 ); and Haque,
deficit should not be of concern. What is critical is the
Nadeemul and Peter J. Montiel, 'Fiscal Adjustment in
use to which public money is being put (Box 11.5 and
Pakistan', IMF Staff Papers, vol. 40, no. 2, 1993. See also the
Appendix 11.2). If government spends more on the military
references cited in note 23-in particular, the World Bank
and on interest payments, as opposed to the social sectors
publications.
and development, causing the deficit to increase, that is a
For a more general treatment of fiscal deficits, see:
worrying sign. It is important to have some accountability
Buiter, Willem, Principles of Budgetary and Financial Policy
about where the domestic and foreign debt has gone.
(Brighton: Harvester, 1990); Blinder, A. S. and Robert Solow,
Has it been used productively, or .. has it been squandered~
The Economics of Public Finance (Washington DC: Brookings
a_!Vay? Hence, the question of public expenditure and fiscal
Institute, 1974); Arrow, Kenneth and M. J. Boskins, (eds.),
deficits may be better answered by recourse to issues and
The Economics of Public Debt (London: Macmillan, 1988);
ideas of governance, rather than according to the rather
Easterly, W. and K. Schmidt-Hebbel, 'Fiscal Deficits and
limited concerns of accountancy. Schemes like Nawaz Sharif's
Macroeconomic Performance in Developing Countries', World
'National Debt Retirement Programme' were meaningless
Bank Research Observer, vol. 8, no. 2, 1993; Easterly, W. and
given the huge size of the debt, and avoided issues of K. Schmidt-Hebbel, 'The Macroeconomics of Public Sector
accountability-see Box 11.9. For this reason, we also
Deficits: A Synthesis', Working Paper no. 775 (Washington
suggest that debt. retirement from privatization proceeds is
DC: World Bank, 1992); and Eisner, Robert, 'Budget Deficits:
improbable and would be a waste of money: which could be
Rhetoric and Reality', Journal of Economic Perspectives, vol. 3,
put to better use in social and infrastructure development
no. 2, 1989.
(Appendix 11.3 ).
The following reports and papers are also useful: Fatima,
One problem that the debt raises is the high interest rate
Mahnaz and Qazi Masood Ahmed, 'Political Economy of
which government must pay on domestic debt, which was
Fiscal Reforms in the 1990s', The Pakistan Development Review,
close to 20 per cent per annum in the mid 1990s, and rose
vol. 40, no. 4, Part 2, 2001; A. R. Kemal, 'Debt Accumulation
again to 16 and 17 per cent in 2011 and 2012)The financial and its implications for Growth and Poverty', The Pakistan
sector liberalization reforms under the Structural Adjustment Development Review, vol. 40, no. 4, Part 1, 209t; Sa½ib Sherani,
Programme are partly responsible for these high interest 'Escaping the Debt Trap: An Assessment' •of ·-Pakistan's
rates, and are discussed along with the fiscal deficit issue in External Debt Sustainability', Pakistan Resident Mission Working
Part VI of this book. Paper No. I (Islamabad: Asian Development Bank, December'
As mentioned in Chapter 18, Pakistan, until 2002, had a 2002); and perhaps the most important, A Debt Reduction and
massive debt problem, where debt was in excess of 100 per_ Management Strategy, produced by the Debt Reduction and
cent of the GDP. Debt servicing was eating away revenue Management Committee of the Government of Pakistan,
received for development and other expenditure, and there
March 2001.
320 Issues in Pakistan's Economy

Box 11.9 questions about the use of that aid and those loans. If it can
Accountability, Not Write-off prove-which would not be very difficult-that much has been
stolen, it needs to hold the leaders and governments who took
Civil society's 'demand' for a write-off of Pakistan's foreign the loans, to be made accountable to the people of Pakistan
debt following the floods and the devastation they have on whose name they keep going back for even more loans.
caused, while well meaning, is a serious case of flawed It is accountability that civil society should be demanding,
politics. It is also, sadly, reflective of many aspects of civil not debt write-offs. Civil society needs to make an assessment
society which many observers, even those sympathetic to of the amount of aid taken in the past, its use, how much was
civil society, have critiqued for some years now. Perhaps the spent, and how much seems to have gone missing. It then
most important observation following this so-called demand needs to hold all governments accountable about the loans
is, that civil society has now become completely depoliticised taken in the people's name. Moreover, it also needs to hold
and members and organizations which constitute civil society, donors accountable to explain why they continue to fund
have now become part of the status quo of the state, rather dead projects and why they pump in huge amounts of money
than in contradiction to it, challenging that status quo. Had the which is badly spent and often not accounted for. However,
finance minister or the prime minister made such a demand, these are political questions, not those one expects an answer
one would have understood, but civil society has only exposed from a civil society which has also now become increasingly
its own lack of political understanding. donor-dependent.
Clearly, Pakistan's debt of $55 billion is a huge burden One finds it odd that civil society has asked donors to write-
on the economy and on the common people. However, the off debts, while its own donor-dependence has only increased
problem is that the loans that 'Pakistan' has acquired over in recent years. Just as the country has asked for increased
the last three decades when the debt problem got out of donor assistance, so has civil society. Where else would
hand, have all been taken by Pakistan's governments, both human rights, or women's, or minority groups be, if there
military and those composed of Pakistan's civil and political was no donor funding. There are few civil society initiatives in
elites. The 'common man' (seldom the common woman) on Pakistan which would survive without donor funding. In fact,
whose names these loans have ostensibly been taken, has many donors set the development and human rights agenda
never been consulted, although she has had to bear the in Pakistan, and Pakistan's civil society and NGOs merely
burden of these loans and the debt they have created. While work on projects till the funding runs out. And often while civil
Pakistan's elites who are represented in government take society has held its elected representatives accountable-
these loans, usually so that they do not have to impose taxes such as during the continuing fake degree scandal-and held
on themselves, it is left to the common man and common government responsible for not fulfilling its promises, it has
woman to pay back these loans, through higher indirect taxes, seldom volunteered to hold itself accountable for what it does
reduced subsidies, and increased surcharges. or does not do, or how it uses donor funds.
On the one hand then, it makes sense to make the demand Perhaps it is this reason why civil society organizations
that this unfair burden be lifted from Pakistan's poor common have launched a campaign for an 'unconditional' write-off of
men and women, and this is why the government of the day Pakistan's external debt, rather than for a campaign to hold
can make such requests to donors. However, the bigger donors and government accountable for the loans being taken
problem is a political economy one: the question needs to be in the people's name. For the most part, Pakistan's NGOs
asked as to what has happened to the loans taken by this and have increasingly become contractors doing the government's
previous governments. While loans of many billions of dollars bidding, and civil society's voice would hardly be heard if it
have been taken in the past and continue to be taken, there was not for donor funding. A depoliticised, donor-dependent
is little to show in terms of development output which would civil society is the last forum where one would expect to hear
have suggested that the money has been fairly and honestly political demands. Pakistan's civil society needs to realise that
utilized. All evidence points to the fact, that there has been in order for it to emerge as an independent entity, not as an
much embezzlement and misappropriation of the money appendage or mouthpiece for government, it needs to think
received in the name of Pakistan's common people, and there and act politically.
are allegations that even humanitarian aid money which came
in after the 2005 earthquake, was pocketed by some of those Source: Zaidi, S Akbar 'A Senseless Demand', Dawn, Karachi,
in power. If this is indeed the case, civil society needs to ask 3 September 2010.
 Chapter 11 Debt and Deficits 321

Appendix 11.1
the present low tax/GDP ratio (13.3 per cent in 1993/94),
The Budgetary Deficit and the Economy the tax system needs to be supplemented with frequent
Aftab Ahmad Khan presents his considered opinion on the budget ad-hoc measures. ln other words it is inelastic. Perhaps more
deficit and argues, like many others, that the large budgetary importantly the tax system has haphazard effect on resource
deficit is the most serious issue confronting the economy. allocations as a large number of concessions result in widely
different effective rates within the same industry. Moreover tax
lt is a well known fact that Pakistan has experienced large fiscal evasion has encouraged the growth of the 'black' or 'parallel'
deficits over the last two decades and currently budgetary economy, which in turn results in cumulative revenue loss to
imbalance is the most serious macro problem confronting the the public exchequer.
economy, requiring bold structural policy actions with long On the expenditure front, defence spending accounts for
lasting effects on financial stability. Repeated attempts by 23.4 per cent of consolidated government expenditures and
the government, including the implementation of structural interest payments constitute 24.5 per cent. The share of
adjustment programmes with assistance from the lnternational general administration in total governmental expenditures is
Monetary Fund (]MF), have only achieved partial success. The 6.7 per cent while social, economic and community services
consolidated fiscal deficit during the period 1980/81-1991 /92 account for 15.4 per cent. With this pattern of current
averaged around 7.2 per cent of Gross Domestic Product expenditures, it has not been possible to impose large cuts.
(GDP) annually. ln 1992/93 this deficit was Rs. 107.7 billion The burden of expenditure reduction, accordingly, has fallen
or 8 per cent of the GDP. ln 1993/94 it was brought down to and continues to fall on development expenditure at the cost
Rs. 907 billion or 5.8 per cent of the GDP. ln the current fiscal of renovating and expanding the much needed infrastructure
year (1994/95) while the budget estimated it at Rs. 71.9 billion facilities.
(4 per cent of the projected GDP), the current indications are Pakistan, like most developing countries, makes use of three
that it would be around Rs. 105 billion or 5.7 per cent of the methods to finance the budget deficit: domestic borrowing
revised projected GDP of Rs. 1846 billion. from non-bank sources, external borrowing, and borrowing
lt is crystal clear that Pakistan has to reduce the dimensions from the banking system. The magnitude of the deficit and
of the overall fiscal deficit; otherwise there would be further the sources and amounts of financing since 1981 /82 are
deterioration of the already weak budgetary position with depicted in [Table 1].
profound de-stabilizing consequences for the economy. lt Each method of covering the deficit carries different costs
would intensify pressures on the already strained balance and benefits for the economy. Besides the direct budgetary
of payments with consequent financial instability, thus cost, domestic borrowing from non-bank sources can lead
undermining Pakistan's international credit worthiness, to crowding out of investment by raising the interest rates or
crowd out private investment by pushing real interest rates as a result of non-price credit rationing. However, it has the
upward and/or fuel inflationary expectations as increasing benefit of avoiding or postponing the inflationary impact of
monetization of the deficit becomes unavoidable. With the given deficit.
large and growing deficits the economy could easily enter External financing helps to preserve domestic investment
into a trap where an upward spiralling cycle of inflation- rates, but at the cost of crowding out future domestic
devaluation-rising interest rates-rising wages and salaries- consumption/investment when the foreign debt must be
rising inflation could disrupt production and investment serviced or repaid through higher exports and lower imports.
activity and could lead to large scale capital flight. Bank borrowing for budgetary support can be either from
The deficit has remained high because of the political commercial banks or the central bank. When a commercial
and administrative inability of the Government of Pakistan bank subscribes to a government loan, its cash (including
to mobilize adequate resources or to restrain expenditures. deposits with the State Bank of Pakistan) is reduced. This act
The present tax structure of Pakistan falls short in all major by itself involves a withdrawal of private purchasing power
functions of a modern tax system: revenue generation, at the same time as there is an addition to public purchasing
efficient resource allocation, and equity. The system is power. The expenditure of Government thus financed is,
characterized by the dominance of indirect taxes (nearly 78 therefore, non-inflationary. But the crucial point is, how did
per cent of total tax proceeds). the bank acquire the cash to subscribe to the government
At the same time the system has many exemptions and loan and how are the bank's future operations affected
concessions. Several income categories including agricultural as a result of the subscription to the government loan?
are excluded from income taxation and those subject to Assuming that the bank had no surplus cash when it made
taxation, with the exception of wage and salary earners, the investment in government securities, the cash needed for
are known to pay only a fraction of their share. Despite the loan subscription could be acquired out of the proceeds
considerable wealth concentration and sharp increases in of maturing loans or maturing investments in government
asset values, especially real estate, Government revenue securities. ln such a case, the new asset replaces the· old
from taxation of wealth and capital gains is small. Tax asset, and the bank does not add to the aggregate volume
administration is weak, resulting in a high level of tax evasion, of its assets (and liabilities). lf this description were to apply
corruption and harassment of taxpayers. ln order to maintain to the banking system as a whole, the process of financing a
322 Issues in Pakistan's Economy

Table 1: Sources and amounts of financing the consolidated budget deficit of federal and provincial governments,
1980-1995 (Rs. bn)

Banking system Non-banking External (net)

Consolidated Deficit as
budget deficit % of GDP Amount % Amount % Amount %

1980/1 14.6 5.3 2.4 16.1 4.5 30.9 7.7 52.9

1981/2 17.2 5.3 5.5 32.1 6.3 36.8 5.3 31.1
1982/3 25.7 7.1 6.1 23.9 14.4 56.0 5.2 20.1
1983/4 25.1 6.3 7.9 31.3 12.3 48.8 5.0 19.9
1984/5 36.8 7.7 18.7 50.9 12.9 35.0 5.2 14.1
1985/6 41.6 8.1 6.1 14.6 27.0 64.7 8.6 20.6
1986/7 16.7 8.2 10.9 23.4 27.4 58.6 8.4 18.0
1987/8 57.6 8.5 13.9 24.2 30.9 53.7 12.7 22.0
1988/9 56.9 7.4 0.8 1.4 37.9 66.6 18.2 32.0
1989/90 56.1 6.5 3.5 6.3 29.6 52.8 22.9 40.9
1990/1 89.2 8.7 43.4 48.6 23.7 26.6 22.1 24.8
1991/2 90.0 7.4 70.5 78.3 -3.1 -3.4 22.6 25.1
1992/3 107.7 8.0 62.6 58.1 19.7 18.3 25.4 23.6
1993/4 (PA) 90.7 5.8 12.9 14.2 55.0 60.0 22.8 25.1
1994/5 (BE) 71.9 4.0 15.0 20.9 26.3 36.6 30.6 42.6

PA = Provisional actuals. BE = Budget estimates.

Source: State Bank of Pakistan, Annual Report 1994-95 (Karachi: SBP, 1995).

government deficit through subscriptions to government loans On the basis of studies conducted by the lnternational
would be non-inflationary. Suppose, however, the banking Monetary Fund and the Ministry of Finance it appears that a
system acquires cash for the purpose of subscription to fiscal deficit in excess of 4 per cent of GDP could have adverse
government loans not out of maturing loans and investments, macro-economic consequences including the danger of the
but through fresh deposits which it receives in consequence economy sliding into the delirium of high inflation.
of depositors receiving additional incomes (which is liable lt has to be appreciated that the government's ability to
to happen when disbursements exceed revenues raised by create additional debt for financing the budgetary deficit
the government); the subscription to government loans will is considerably constrained by the existing high level of
have taken place without reducing the existing investment indebtedness which at the end of 1993/94 constituted 88.4
in government securities (i.e. it would be net addition to per cent of GDP. The demand for Government debt could
resources lent to the government) and without reducing the decline, if as a result of Government debt burden, the lender's
existing volume of loans. ln this situation, the process is confiden·ce in the ability of the Government to faithfully fulfil
inflationary, for the proceeds of loans when spent constitute its obligations in this regard is shaken or there is a fear of
a net addition to the amount of private purchasing power. sharp erosion in the purchasing power of the rupee. ln such
ln the case of borrowing from the State Bank of Pakistan a situation, the Government would also be forced to sharply
for financing the budgetary deficit, the process is clearly raise its interest rates or further- crowd out private investment.
inflationary because the proceeds of borrowing when spent ln case the Government finds itself unable to increase its
go directly to enlarge the cash basis (including deposits non-bank borrowing or cut its spending or enhance revenues
with SBP) of the commercial banks. Not only has the initial by means of taxation, there is only one option: to monetize
step of meeting the deficit through central bank borrowing the deficit and collect a higher inflat_ion tax. The scope of
increased the volume of private purchasing power, but 'the mobilizing additional revenues through inflation, however, is
direct expansion of the cash of the commercial banks enlarges significantly reduced on account of the removal of restrictions
their ability to contribute to additional government loans or on capital flows from Pakistan as well as foreign currency
to make further advances. holdings by domestic residents. Expectations of an increase in
ln order to understand fiscal choices for the coming years, the rate of inflation in the future would lead to acceleration
there has to be a clear understanding of the connotation of in the pace of currency substitution, thus shrinking the
'sustainable deficit'. This can be defined simply as the deficit Government's inflation tax base.
level that can be financed without adding to the country's The need for reducing fiscal deficit to a sustainable level is
overall debt burden as a proportion of GDP, .and without thus clearly indicated. ·
violating the government's macro objectives such as low
inflation and real economic growth at the -socially warranted Source: The News, Karachi, Business and Finance Review, 6 May
rate, which in our case is at least 6.5 per cent per annum. 1995.
 Chapter 11 Debt and Deficits 323

Appendix 11.2
Although many analysts frequently talk about Pakistan's
Public Debt Reconsidered annual fiscal deficit, and the IMF insists that it be reduced
After the Nawaz Sharif government was returned to power from the currently estimated 6.3 per cent of the GDP to 4 per
in February 1997, it launched the 'National Debt Retirement cent by June this year (an irrational and ridiculous imposition,
Programme', and emphasis returned to the recurrent problem of to say the least, and an impossibility, no doubt), what is often
public debt. Here we present a different view of the issue. overlooked is the fact that the Primary Budget Deficit has
been negative for the last few years: What this means is that in
The issue of Pakistan's public debt has returned to the top of terms of the simple revenue/expenditure divide, if we exclude
the economic agenda yet again. The country's two leading interest payments accumulated on past debt, then revenue,
monthly magazines have devoted their cover stories to the for the last three years, has been greater than expenditure.
problem of the 'exploding debt bomb', and a number of However, lest this fact result in an immediate cheer, it is
articles, many by eminent economists, have appeared in the necessary to point out that this positive balance over the last
press reiterating the claim that the problem of Pakistan's few years is not simply due to additions in revenue, but also
debt burden is the single biggest economic problem facing due to larger cuts in expenditure.
the country today. Moreover, the Prime Minister's National ln the current fiscal year alone, the original allocation for
Debt Retirement Programme, an attempt to involve the public the annual development programme was reduced by 19 per
and capitalise on their patriotism and enthusiasm, is part of cent from a mere Rs. 105 billion to a dismal Rs. 85 billion,
the same scheme of things, where it is hoped that the public by the caretaker government of Shahid Javed Burki. As Burki
will help ease the burden of debt upon the government, by in a much cited article himself confessed, 'if this figure is
reaching well into their own pockets and contributing to the finally realized, Pakistan would have scored another low in its
government's coffers. economic history in terms of the proportion of gross domestic
lf ever there was consensus on one single issue of importance product committed to development'. ln order to cut the fiscal
amongst economists, bureaucrats, and politicians, then it must deficit and be as dose to the 4 per cent target proposed by
be over the agreement about the huge and growing debt and the lMF and endorsed by the caretaker government between
upon its consequences. However, 1 will argue that this focus November 1996-February 1997, this year 1996-97, Pakistan's
is misplaced. ln the light of such sentiment which constitutes development expenditure will be no more than 3.4 per cent of
much of conventional wisdom, it is necessary to consider the GDP, down from a peak of 9.3 per cent a little over a decade
importance of the debt and expose a number of myths which ago. More interesting, however, has been the contrast in the
constitute this feeling. pattern of expenditure on development with that on defence
The facts regarding Pakistan's debt, however, are indeed since 1980. Over the period 1980-90 when a military dictator
quite startling. Pakistan's domestic debt has accumulated to ruled Pakistan for much of the decade, defence expenditure
more than Rs. 900 billion, or 42 per cent of GDP, with debt averaged around 6.5 per cent of GDP, with development
servicing accounting for more than 5 per cent of GNP each getting 7.3 per cent. Currently, development receives less than
year. The rate at which this debt has been raised is on the half of what it got in the eighties, and receives only 3.4 per
high side, with interest rates in nominal terms around 16 to cent, while defence receives almost 6 per cent. Hence the
18 per cent, or between 4 to 6 per cent if we assume a (very composition of government expenditure is a critical factor
conservative and undervalued) rate of inflation of around 12 overlooked by those who advocate its reduction .
per cent. Foreign debt accounts for about US$30 billion (46 .lf the question of the debt burden is to be considered, the
per cent of GDP), but for the most part, carries a far lower, fiscal deficit forms an important part of the equation. And,
single digit rate of interest. Much of this is longer term if the fiscal deficit is of importance, then we must examine
debt, and despite Pakistan's immediate needs to meet some the nature and the productivity of government expenditure,
repayments which come due over the next nine months, the not simply its level or even the size of the deficit. This is the
more serious and chronic problem is considered to be that of first factor ignored when issues of public debt are debated.
domestic debt. To re-emphasize the point, we argue that it is not borrowing
Because of the large domestic debt, interest payments are as such which is the problem, but the use made of borrowed
high, and due to this, we end up having a large fiscal deficit money. The argument is valid both for domestic and foreign
each year. lnterest payments and defence take up almost loans.
all of the budgeted annual expenditure, leaving very little The problem then, is not to tell government to reduce its
for development and the social sectors. Given the excessive spending, as the IMF insists all governments should do at
debt that has accumulated over the last few years, it is not all times, under all circumstances, nor even the matter that
likely that any recourse to patriotism will result in more than government's try their utmost to raise taxes, as has been the
a minuscule amount being pocketed and the debt 'burden' case with ever increasing taxation in Pakistan in the recent
or 'problem' is unlikely to go away for a long time tff come. past, but what is imperative is that government expenditure
Given this fact, it is important to consider the other 'villain' of be productive. The essential and minimum requirement is
the piece, the fiscal deficit, and see what sort of impact that the need to hold government accountable for spending
has on the economy. productively. One of the many reasons why Pakistanis refuse
324 Issues in Pakistan's Economy

to pay taxes is that they feel cheated by government, in that lt is unlikely that all of Pakistan's debt will ever be retired,
they feel that their contribution to the exchequer is being and what needs to be put in focus is the current fiscal deficit,
squandered away. People may agree to pay more taxes only if and particularly, the use made of government spending each
they felt that their money was being used productively. year. Nevertheless, the large amount of accumulated debt
Another important caveat to the debt burden issue, linked in the past cannot be ignored, and it is essential that an
to the efficient and productive use of expenditure, is the evaluation be made of the use to which loans taken in the
relationship between borrowing and growth. lf the real rate past have been put. Much of fiscal policy in Pakistan, which
of growth of the economy is greater than the real rate of has resulted in the high debt in the first place, has been ill-
interest at which government borrows, the problem is not a conceived, impractical, and downright irresponsible. Current
serious one at all. lf economic growth can be sustained at proposals for reducing part of the debt, such as debt-for-
around 7 to 9 per cent, a number of problems which persist equity swap, privatization proceeds set aside for this specific
in the economy and are related to the debt/deficit issue will purpose, and the use of the begging bowl, may make a small
cease to exist. Firstly, a higher growth rate should generate a ·dent in the amount of debt outstanding. However, so as
higher level of revenue to the government, both from direct not to make the same mistakes again in the future, those
and indirect sources. ln fact, this is one of the assumptions responsible for creating the problem in the first place must be
which are inbuilt into the economic revival package of Prime held accountable. This is the bare minimum for the success of
Minister Nawaz Sharif announced last week. Secondly, the any long term viable economic reforms package. The rest is
government can continue to borrow as long as the differential mere window dressing.
between the rate of growth and the rate of borrowing remains
positive. Finally, higher growth may generate more investable
funds for the economy, possibly also lowering the interest
rate. ln all this, a check by government on prices and on Source: Zaidi, S. Akbar, 'Focus on Debt Misplaced', DAWN,
interest rates would be extremely useful as well. Economic and Business Review, 7-13 April 1997.

Appendix 11.3
be earmarked for debt retirement. ln the current fiscal
Debt Retirement is a Waste of Money year, in excess of Rs. 40 billion were accumulated by the
What should the use of privatization proceeds be? Debt retirement government through its privatization programme, and next
or social sector development? Here we present one view. year, the government hopes to acquire Rs. 100 billion from
the privatization of 26 per cent shares of PTC alone. lf UBL
There is an argument which has been floating around for a and Habib Bank are also privatized over the next couple of
few months which has been propagated in the press by many years, the government can hope to receive considerably more.
learned and well-reputed journalists. The argument is based Proponents of the debt retirement view believe that by using
on the following facts: Pakistan's domestic debt has grown these privatization proceeds, the problem of domestic debt
to gargantuan proportions and was Rs. 744 billion or 44.2 and its annual interest bearing component can be dealt with.
per cent of GDP at the beginning of the current fiscal year However, this view is highly fallacious for reasons that l make
1994-95, and is equal to our foreign debt. Thus, total debt clear below.
was equal to 88.4 per cent of GDP. At the end of the current Some facts other than those presented above will help
fiscal year 1994-95, domestic debt outstanding is expected to make things clear. Each year based on the trend since 1990
rise by a further Rs. 102 billion, taking the total domestic debt on average, Rs. 74 billion is added to our domestic debt. This
outstanding to Rs. 846 billion on 1 July 1995. Debt servicing year Rs. 102 billion will be added. ln fiscal year 1994-95,
in the current fiscal year was supposed to be Rs. 136 billion, Rs. 82.7 billion contributed towards interest payments on the
of which Rs. 82.7 billion (60 per cent) was meant for interest domestic debt of Rs. 744 billion, which was 11 per cent of the
payments on domestic debt alone and the remainder was total domestic debt outstanding. For the sake of argument, let
distributed between foreign debt repayment and interest on us assume that the government of Pakistan, by some sleight
foreign debt. lt is believed that domestic debt and interest on of a magic wand is able to bring down the fiscal deficit to
it each year are serious problems facing our economy which 4 per cent of GDP (from the likely 5.6 per cent this current
lead to high inflation, low savings, and other sundry problems. fiscal year) and is able to maintain this level for the next three
These proponents believe that the high interest payments each years. The critical point which most observers have missed is
year are causing a huge drain on our economic resources and that even if the fiscal deficit is a mere 1 per cent of GDP-an
should thus be reduced. impossible happening, no doubt-the debt will still grow and
On the basis of the evidence presented above, the argument accumulate.
which is being made is that Pakistan must retire some of Let us construct a highly favourable scenario to illustrate
its debt if is to deal .with the problem of high deficits and our point. By using the proceeds from privatization for debt
low growth and other repercussions. ln this regard, it has retirement, the following scenario takes place: First, let us
been suggested that the proceeds from privatization should assume that GDP is Rs. 1,847 billion at the end of this year
I Chapter 11 Debt and Deficits 325

Table 1

I (All in billion rupees)

1995/6 1996/7 1997/8

Gross domestic product 1,847 1,957 2,075

(with an annual growth of 6% per annum)
Fiscal deficit 73 78 83
(at 4% of GDP)
Domestic debt outstanding 846 919 998
Interest payment without retirement 93 101 109
(at 11 % of domestic debt)
Domestic debt after debt retirement 846-100=746 819-100=719 797-100=697
Interest payments after debt retirement 82 79 77
(at11%)
Domestic debt for next year 746+73=819 719+78=797 697+83=780

Total interest payments without debt repayment of Rs. 100 bn for three consecutive years:
93 + 101 + 109 = 303 bn
With debt repayment of 300 bn:
82 + 79 + 77 = 238 bn
Net difference = Rs. 65 bn
By spending RS300 bn, the government saves Rs. 65 bn.

and grows at a constant high rate of 6 per cent over the next and control of the economy, total domestic debt increases by
three years. Along with this favourable growth rate, we also more than Rs. 73 billion each year, and interest payments on
assume that the government achieves its target of a fiscal domestic debt alone will exceed Rs. 100 billion. Let us now
deficit of 4 per cent of GDP over the next three years. This bring debt retirement into the picture.
means that GDP will grow from Rs. 1,847 billion at the end of Let us also take a highly favourable scenario regarding
this fiscal year to Rs. 1,957 billion next year and to Rs. 2,075 debt retirement and assume that in each of the next three
billion for our third year of analysis. Similarly, the fiscal deficit years, the government will amass the considerable amount of
in these three years at the rate of 4 per cent of GDP will be Rs. 100 billion from the sale of state owned enterprises and
Rs. 73.9 billion, Rs. 78.3 billion, and Rs. 83.0 billion [see will use this amount exclusively for debt retirement. As can be
Table 1]. seen from the table, despite such an extensive amount being
What is important here is that each year a considerable retired each year, the net difference in interest repayment on
amount (4 per cent of GDP which accrues in the form of the domestic debt would only be Rs. 11 billion each year, and
the annual fiscal deficit) is being accumulated as part of the we would still be paying more than Rs. 80 billion in interest
domestic debt and is being added to it. Now let us examine on the earlier accumulated domestic debt alone.
the repercussion on interest payments each year. The total The proponents of the debt retirement view have failed to
debt in our scenario increases from the present Rs. 744 distinguish between the concept of debt (which is a stock) and
billion, to Rs. 846 billion at the start of the next fiscal deficit (which is a flow and is added each year to the debt).
year, and then to Rs. 919.88 billion and finally to Rs. 998 They have also overlooked the fact that debt retirement of a
billion at the end of three years. lf we take the current rate huge amount of Rs. 100 billion each year will only make a very
of repayment of domestic interest, which is 11 per cent of small, negligible net contribution at the margin. By giving up
domestic debt outstanding, we have the following figures for Rs. 100 billion, we will be left with a gain of Rs. 11 billion
interest payments for the next three years: Rs. 93.06 billion, only. The privatization proceeds should be used for direct
Rs. 101.18 billion and Rs. 109.8 billion in the third year when development projects rather than debt retirement, which will
our domestic debt should have grown to Rs. 998 billion. be a total waste of money.
Although we have not introduced the possibility of debt
retirement in our argument as yet, based on the above highly Source: Zaidi, S. Akbar, 'Debt Retirement is a Waste of Money',
positive economic growth and management scenario, the The News, Karachi, 28 June 1995.
following picture emerges: despite excellent management
326 Issues in Pakistan's Economy

NOTES
1. Buiter, Willem, Principles· of Budgetary and Financial Policy et al. op. cit., 1991; Applied Economics Research Centre,
(Brighton: Harvester, 1990), ,25. Resource Mobilization by the Federal Government (Karachi:
2. Karachi Chamber of Commerce and Industry (KCCI) AERC, 1992); Pasha, Hafiz and Mohammad Akbar, 'IMF
Proceedings of the Seminar on Reducing Fiscal Deficit-Key to Conditionality's and Structural Adjustments in Public
Salvage Economy (Karachi: KCCI, 1994). Finances', Pakistan Economic and Social Review, 1993; Pasha,
3. Tobin, James, Asset Accumulation and Economic Activity Hafiz and Mohammad Iqbal, 'Taxation Reforms in Pakistan',
(Oxford: Blackwell, 1980), 49. Pakistan Journal of Applied Economics, vol. 10, nos. 1 and 2.
4. Buiter, Willem, op. cit., 1990, 90. 1994; and Karachi Chamber of Commerce and Industry,
5. Tobin, James, Policies for Prosperity: Essays in a Keynesian Mode op. cit., 1994.
(Brighton: Wheatsheaf, 1987), 221. 24. World Bank, op. cit., 1993, 11.
6. Blinder, A. S. and Robert Solow, The Economics of Public 25. World Bank, op. cit., 1988, 98.
Finance (Washington DC: Brookings Institute, 1974), 37. 26. World Bank, op. cit., 1989, 47.
7. Ibid. 27. Ibid.
8. Tobin, James, op. cit., 1987, 219. 28. See the references cited in Endnote 23, above.
9. Ibid. 222. 29. World Bank, op. cit., 1992, 2.
JO. Buiter, Willem, op. cit., 1990, 42. 30. Haque, Nadeem-ul and Peter Montiel, op. cit., 1991.
11. Eisner, Robert and P. J. Piepper, 'Deficits, Monetary Policy 31. Ibid.
and Real Economic Activity', in Arrow, Kenneth J. and 32. World Bank, op. cit., 1993, 36.
M. J. Baskins (eds.), The Economics of Public Debt (London: 33. Before anyone uses the 1992/3 data from Table 11.2 and
Macmillan, 1988), 28. scores a point arguing that finally, with a 7.9 per cent
12. Baskins, M. J., 'Concepts and Measures of Federal Deficits deficit, the IMF-predicted scenario of disaster hit Pakistan's
and Debt and their Impact on Economic Activity', in Arrow, economy, it is best to put things in perspective. The World
Kenneth J. and M. J. Baskins, op. cit., 1988, 84. Bank ( 1993) report has explained this as follows: The
13. Buiter, Willem, op. cit., 1990, 9. economy was severely affected by the 1992 floods, the worst
14. Ihori, I., 'Debt Burden and Intergeneration Equity', in in 50 years, which hit the country in August/September.
Arrow, Kenneth J. and M. J. Baskins, op. cit., 1988, 149. There was extensive .damage to crops and livestock, 15
15. This section is drawn from the paper by Zaidi, S. Akbar, per cent of cotton and rice was lost, and IO per cent of
'Locating the Budget Deficit in Context: The Case of sugar cane was ruined. Subsequently, there was a loss of
Pakistan', Pakistan Journal ofApplied Economics, vol. 11, nos. I exports from cotton and rice, an increase in the import of
and 2, 1995. wheat, relief items, fertilizers and reconstruction material
16. Easterly, W. and K. Schmidt-Hebbel, 'The Macroeconomics and equipment. On the revenue side, there was a loss of
of Public Sector Deficits: A Synthesis', Working Paper No. Rs.10 billion due to exemption from loan repayment, relief
775 (Washington DC: World Bank, 1992 ), 2. packages, and 'flood effectees' were given exemptions from
17. Easterly, W. and K. Schmidt-Hebbel, 'Fiscal Deficits and a number of taxes. There was also an additional expenditure
Macroeconomic Performance in Developing Countries', of Rs.13 billion on reconstruction and relief goods (World
World Bank Research Observer, vol. 8, no. 2 (Washington DC: Bank, op. cit., 1993, 9).
World Bank, 1993), 213. 34. Haque, Nadeem-ul and Peter Montiel, op. cit., 1991, 1,
I 8. Eisner, Robert, 'Budget Deficits: Rhetoric and R~ality', emphasis added.
Journal of Economic Perspectz"ves, vol. 3, no. 2, 1989, 74. 35. Ibid., 2., emphasis added.
19. Eisner, Robert, 'Sense and Nonsense about Budget Deficits', 36. Ibid. 39.
Harvard Business Review, May-June 1993, 104. 37. Ibid. 39.
20. Eisner, Robert op. cit., 1989, 81. 38. Sakr, Khalid, 'Developments of Private Investment in
21. Ibid. 83. Pakistan', IMF Working Paper, 1993, 16.
22. This section is drawn from Zaidi, S. Akbar, op. cit., 1995. 39. See Haque, Nadeetn-uland Peter Montiel, op. cit., 1991.
23. See, for example: World Bank, Pakistan: Growth Through 40. Easterly, W. and K. Schmidt-Hebbel, op. cit., 1993.
Adjustment, Report No. 7118-Pak (Washington DC: World 41. See Zaidi, S.. Akbar, 'The Structural Adjustment Programme
Bank, I 988 ); World Bank, Pakistan: Medium-term Economic and Pakistan: External Influence or Internal Acquiescence?',
Policy Adjustments, Report No. 7591-Pak (Washington DC: Pakistan Journal of Applied Economics, vol. 10, nos. 1 and 2,
World· Bank, 1989); World Bank, Changes in Trade and 1994(a).
Domestic Taxation for Reform of the jncentive Regime and Fiscal 42. Ibid.
Adjustment, Report No. 9828-Pak, (Washington DC: World 43. · See Zaidi, S. Akbar, 'How the Bourgeoisie View Pakistan',
Bank, I 992 ); World Bank, Pakistan: Country Economic Economic and Political Weekly, vol. 23, no. 48, 1988; and
Memorandum FY93, Report No. 11590-Pak (Washington DC: Zaidi, S. Akbar, 'Sindhi v Mohajir: Contradiction, Conflict,
World Bank, 1993); Haque, Nadeem-ul and Peter Montiel, Compromise', Economic and Political Weekly, vol. 26, no: 28,
'The Macroeconomics of Public Sector Deficits: The Case of 1991.
Pakistan', World Bank Working Paper No. 673 (Washington 44. See Zaidi, S. Akbar, 'The Roots of the Crisis', The Herald,
DC: World Bank, 1991); Khan, Mohsin S., 'Comments', in V. August 1992; Zaidi, S. Akbar, op. cit., 1994(a); Zaidi, S.
Thomas et al. Restructuring Economies in Distress (New York: Akbar, 'Pakistan's Economy in Deep Crisis', Economic and
Oxford University Press, 1991 ); Mclearly, W. A., 'Pakistan: Political Weekly, vol. 29, no. 28, 1994(b).
Structural Adjustment and Economic Growth', in V. Thomas
 Chapter 11 Debt and Deficits 327

45. Government of Pakistan, A Debt Reduction and Management 52. Ibid. 14.
Strategy, Debt Reduction and Management Committee, 53. Ibid. 17.
(Islamabad, March 2001 ). 54. Ibid., 19, emphasis added.
46. Also see the excellent paper by Hasan, Parvez, 'Pakistan's 55. Ibid. 21.
Debt Problem: Its Changing Nature and Growing Gravity'. 56. Ibid. 25.
4 7. Government of Pakistan, A Debt Reduction and Management 57. Sherani, Sakib, Escaping the Debt Trap: An Assessment of
Strategy, op. cit., v. Pakistan's External Debt Sustainability, Asian Development
48. Ibid. X. Bank, Pakistan Resident Mission Working paper Series,
49. Ibid. xv. No. 1 (Islamabad: ADB, December 2002).
50. Hasan, Parvez, Pakistan's Economy at the Crossroads (Karachi: 58. Kemal, A R, 'Debt Accumulation and its Implications
Oxford University Press, 1998 ). for Growth and Poverty', The Pakistan Development Review,
5 I. Government of Pakistan, A Debt Reduction and Management vol. 40, no. 4, 2001, 267.
Strategy, Debt Reduction and Management Committee, 59. Ibid.
Islamabad, op. cit., xiii. 60. Sherani, Sakib, op. cit., 44.

I
 Part4

[D)@w@~llIJiD@ITT) ©1ITT)~
fD®©©l~ f@~@rr©l~B®m
Devolution, decentralization, delegation, and similar concepts related to granting more
autonomy to sub-national administrative units, are now in much use as there has been a
realisation, or at least an assumption, that smaller administrative units are better placed to
deliver on social development and welfare. Local governments, especially, are perceived to
be better-equipped to address the needs of the people with whom they interact. Moreover,
assumptions are also made that, since local governments are 'closer' to the people they are
expected to serve, they are also more accountable, and people in general have more control over
such entities. This is the assumption even when local governments are not elected, but if they
are elected, then there is supposed to be even greater accountability.
The irony in Pakistan's history, and there have been far too many, is that elected local
governments have almost exclusively been the choice of military dictators, of which again, there
have been far too many in the last sixty-six years. All three of Pakistan's military generals-
Ayub, Zia, and Musharraf-proposed their own systems of elected local government as soon as
they came to power. In contrast, when (real) elections were held for the Provincial and National
Assemblies in Pakistan and parliament was elected, the elected governments at the centre or
the provincial level, all did away with the elected system of the previous military dictators,
not replacing those systems with their own. Hence, military dictators preferred elected local
government under the guise of praetorian democracy at the federal and provincial level, while
elected members of the National and Provincial Assemblies preferred to have administrators
imposed as focal government heads. This latter apparent contradiction. explains the power of
local government, where elected provincial members see it in conflict with their own sources of
power. They undermine elected local government to enforce their own power.
These two-chapters examine how different systems of local government have evolved in
Pakistan and how they have performed. They also reveal that despite the proclamation that
power had been devolved to the local level as General Musharraf often stated with regard to
his District Government system, such 'power' was a fiction without the devolution of financial
resources. Even if local government performed well in some cases, their lack of fiscal autonomy
undermined their efficacy.
Chapter 13 discusses what just might be one of the more radical aspects of fiscal federalism
and of provincial autonomy ever granted to Pakistan's sub-national units, after the 18th
Amendment in the Constitution. Although it is four years since the passing of the 18th
Amendment, as well as after the Seventh National Finance Commission Award, and there are
many features of both which are incomplete and in contradiction with each other, Pakistan's
administrative system, as well as its financial one, has been radically altered. Provinces now
have become far more important, and richer, than ever before especially in terms of social sector
development, although they may not yet have the human resources or skills required to deal
with these new responsibilities.

-- J
 Local Government and the Political
Economy of Decentralization 1

The decentralization, devolution, and deconcentration of The purpose of this chapter is to explore broadly, the
power and the mechanism of delivery of services, undertaken decentralization and devolution debate and experience in
separately or in some combination of all three, particularly in Pakistan, in a political economy framework and context, with
developing countries, has become the mantra of administrative, emphasis on contextualising power and examining issues of
managerial and governance related interventions and reforms. devolution and decentralization within a wider framework
Development theory and its practices, are no longer conceived and context of state-society relations. 2 An attempt will
to be seen as the prerogative of a strong, centralized state but, be made to keep the debates on devolution in Pakistan
rather, smaller and more representative administrative and embedded in a wider debate on postcolonial state-society
political units are presumed to be better at delivering and relations and their context, with discussion on the meaning
implementing development. Not only have the structures· of the state to the ordinary people, and examining earlier
and the role of the state changed in administrative terms, experiences of devolution and decentralization. The changing
but there has also been a simultaneous realization that nature of the Pakistani state, its class formation, and the
forms of democracy and participation are essential to make nature of politics that emerges for participation, democracy,
development work. Perhaps over the last half century, these and civil society institutions, in a much wider context and
1wo notions, of devolving power and delivery along with the not simply related to decentralization and devolution in a
greater participation by the people, have become the sine qua local government context, will need to be explored, so that
non of development. · · one can locate the specific issues of local government and
There has been a considerable and diverse response by local power relations within the broad structure of state, class
international financial institutions, development agencies, and transition-also see Chapter 26 and 27. Clearly, the main
donors, · and independent governments to these two core contribution of this chapter is that it follows this particular
changes that have been brought ab0ut over recent decades, political economy approach and framework which requires a
and in particular after the fall of the Berlin Wall in 1989. In broader, more holistic view, and distances itself from a purely
projects devised by donors and international development administrative/manageriaVgovernance-related evaluation.
agencies, for example, some component of community This is an important conceptual point which needs to be
participation and civil society participation has become a understood and emphasized in order to get a full flavour of
prerequisite for loans to be disbursed. In other contexts, experiences, possibilities, and constraints within the context
due to social and political change that has taken place over of this chapter.
the years, forms of people's power ·have emerged .as one of The chapter will also include a discussion of identified
the forces that not just respond to state-led initiatives, but strengths and weaknesses of devolution schemes with sug-
actually lead them, as in the case of the Philippines and gestions for further research. Its focus is on examining the
South Africa. In other countries where there has been a deep political and institutional set-up of devolution and local
and growing tradition of formal politics and electioneering, government in Pakistanin a historical context looking at key
as in India, civil society groups have played a significant issues as they exist.
role in countering formal democratic politics, offering This chapter makes use of the very extensive recent literature
solutions which are more suited to the responses of diverse that has emerged on devolution and decentralization in the
communities. In other cases, development agencies have been . context of local go:vernment reform in Pakistan, as well as
able to persuade and, perhaps even force, governments to on the nature of the politkal economy of the state, classes
undertake reforms to restructure their government and state · and on the political settlement in Pakistan. It is important
institutions. The effective role of civil society in redefining to point out that while we examine the historical evolution
politics and property relations, as well as reconfiguring the of decentralization, devolution, and local government in the
state in its entirety, is best demonstrated by events and broader .political economy context, we are more concerned
processes that unfolded in the late 1980s and early 1990s with recent-post 1999--events and attempts at reform
across Eastern Europe, led mainly by civil society groups. The than with earlier attempts, although we do discuss earlier
case of Pakistan discussed in this" chapter, in many interesting processes in some detail as well. Within the literature on
and critical ways, differs considerably from these numerous local government reform, there are two broad strands, one
other experiences,· and emerges as an ·interesting case- of which deals with administrative, managerial, financial
study which runs against the grain of many of the patterns and largely governance-related studies, many commissicmed
observed across the globe. by donor agencies and undertaken by international financial
 Chapter 12 Local Government and the Political Economy of Decentralization 331

agencies ·and donors themselves, all in· recent years after' under General Musharraf, again in a broad political economy
the takeover of the Musharraf regime in October 1999. 3 The framework identifying key political issues that have emerged
other, more recent and in our opinion, far more interesting in the new millennium. In fact, one of the key underlying
and creative work has emerged in light of examining the arguments and strands to the analysis in this chapter is,
political economy nature of decentralization, looking at that it was political changes as well as socio-economic ones,
issues of class and state. 4 Linked to and prior to this, is the around which the evolution of the local government system
recent academic literature which has emerged and which took place. Section 12.2 deals with financial issues related to
examines issues related to the broader political economy of local government, since the performance of local government
the Pakistani state-also see Chapters 26 and 27. 5 has been very dependent on the availability of funds available
to make it work. ln this section we examine how financial
issues have helped or hindered service delivery at a devolved
12.1 LOCAL GOVERNMENT IN PAKISTAN level. Finally, in Section 12.3, we evaluate the politics of the
devolution and decentralization process in Pakistan in recent
Given the broad scope and interest of this chapter, this years.
is not a chapter which simply recounts a secular account
of developments that have taken place with regard to 12.1.1 The Basic Democracies of the
decentralization as the history of local government. Its
concern is more with contemporary issues post-I 999, hence it 1960s6
focuses more on recent developments and the wider context Coming in to existence on 14 August 1947 as an independent
in which they have taken place. The chapter begins with state, created out of the partition of British India, Pakistan
a brief account of previous attempts at decentralization in emerged as a geographical entity and a country, but perhaps,
Pakistan and then leads on to developments over the period a country without a well-formed state. It inherited the
1999-2005. bureaucratic steel frame of British India which continued
There have been three substantive interventions in the for many decades. The ruling groups of politicians and
decentralization and devolution process and structure administrators had migrated from areas that became India,
in Pakistan since 1947, manifest through different and in many ways were alien to tp.e areas that became (West)
administrative structures of local government. While all Pakistan, one of the few explanations as to why democratic
three differ substantially from each other in substance and forms of government never took hold in Pakistan. Landlords
structure, they share many similarities, most importantly, and bureaucrats formed the broad nexus of rulers in Pakistan,
in intention. The fact that all the three attempts at local which had little industry and no middle class. The political
government reform in the form of decentralization and bodies constituted to undertake some form of constitutional
devolution have been undertaken not just by undemocratic, reform, never agreed to any system or Constitution which
unrepresentative, unelected governments, but by the three could be put in place. In this political and institutional
military governments which have taken power through force, arrangement, the most important actor was Pakistan's
gives the narrative in Pakistan a very different twist compared military. Hence, in the first decade of Pakistan's existence,
to other experiences. In fact, the irony of the history of local politicians were unable to come to political agreements and
government reform in Pakistan has been that the three settlements, with different unelected groups of politicians
military governments which have ruled Pakistan directly for being replaced by the head of state. Pakistan lacked adequate
33 of its 66 years since independence-and half as many years infrastructure, was highly rural and underdeveloped. Many
behind the scenes-have aggressively supported this process of the country's problems were aggravated by the movement
of devolution, while all elected governments have consciously of 7 million refugees who came from India after partition,
undermined this tier of government. This contradiction, and rehabilitating them was Pakistan's first development
between democratic politics and the military's politics, problem. In a state which was far from modern, it was the two
perhaps underlies not just discussion about devolution and most modern institutions, ihe bureaucracy and the military,
local government reform, but discussion about the state, which set Pakistan on course towards a path of development,
society and politics in Pakistan. but also on a path, which in contrast to independent India,
This chapter begins with a presentation of the political led from one military rule to another.
and structural context of the 1959 local government reforms, Douglas E. Ashford, writing in 1967, when General Ayub
known as the Basic Democracies system of General Ayub Khan was still very much in power, and soon to celebrate his
I<han. Section 12.1.2 then moves on to an analysis of the Decade of Development, after examining two other cases of
political, social demographic and institutional context of local government reform, wrote:
Pakistan's second military regime, that of General Zia ul-Haq
and his local government system, a system that continued The elaborate system of councils organized by
for eleven years even after Zia's death. Clearly, over a period the Pakistani military-bureaucratic oligarchy
of two decades between each set of reforms, there had been is certainly the most ambitious of the three
schemes for local reform .... The ruling oligarchy
substantial demographic and social change in Pakistan, a fact
has made local reforms the keystone of its
that is also reflected in the nature of the local government domestic policy, and President Ayub Khan has
reforms undertaken as well as in the nature of politics. Then, regarded the Basic Democracies program as his
in Section 12.1.3 we look at the District Government system most important reform. 7
332 Issues in Pakistan's Economy

We will find in other sections where we talk about the two representing special interest and the officials' which came
i
sets of reforms undertaken later, that exactly this sentiment from 'Nation Building Departments', such as education,
was expressed by the two other military rulers in Pakistan health, agriculture, public works, etc. 11 It is important to
as well. Ashford utters a hugely misplaced and preposterous note, that in this highly restricted participatory and electoral
statement about the Ayub regime which has also been framework, the far more important figure of the chairman of
repeated in other contexts almost forty years later: 'the Ayub the Municipal Committee was appointed by the government.
regime has shown itself to be seriously and energetically In other cases, an Assistant Commissioner or Tehsildar would
devoted to the restoration of civilian government'. 8 However, be the chairman, with a Deputy Commissioner the chairman
there were not many in Pakistan who shared this feeling. of a District Council and the Commissioner heading a
General Ayub · Khan imposed the first Martial Law in Divisional Council. Clearly, the 'controlling authority' in every
Pakistan in 1958 and took over government from a group of case, was the bureaucracy and officials of the government. 12
politicians who were unable to resolve their differences, clearly Ali Cheema and his colleagues argue that this controlling
not an uncommon occurrence in societies where issues take authority by the bureaucracy, 'had the power to quash
time to be resolved through dialogue and discussion. Ayub proceedings; suspend resolutions passed or orders made by
disbanded all previous partial political systems of government any local body; prohibit the doing of anything proposed to
as they existed and restrained politicians through draconian be done; and to require the local body to take some action' . 13
measures. It is worth quoting· Ashford again just for the Quoting H. J. Friedman writing in 1960, and clearly at
absurdity of a statement which one finds repeated over time: odds with Ashford cited above, they concur that 'the Basic
Democracies Scheme is not, in reality, democracy, for it does
With true professional perspective the president not represent control by the people over government power
saw that irresponsible politics at the centre, except in an extremely limited manner'. 14
and the consequent corruption and economic Given the fact that a very large majority of Pakistanis
stagnation could only be prevented if new
lived in rural areas, the structure of the Basic Democracies
leadership was introduced and a more solid
basis for political participation was constructed. system was perceived by many, to be able to undertake
His answer was the Basic Democracies plan, development related activities along with the ongoing Village
which was to provide an interlude for village AID (Agricultural and Industrial Development) programme,
instruction and revival. 9 and in fact it did have an impact and along with Ayub's land
reforms, did play a role in transforming rural economic and
With the dissolution of all forms of representative govern- social structures and social relations of production; after all,
ment and with curbs on politicians, General Ayub initiated the elections of Basic Democrats were the first Pakistan-level
the structure and system of a form of devolution and elections in its history. However, it was the use of the 80,000
decentralization which resulted in the system of local Basic Democrats as an Electoral College for the election of
government in the guise of Basic Democracies. The Basic the President to consolidate his own rule, which was the real
Democracies Order appeared in October 1959 and two issue. 15 The Basic Democrats became a constituency for the
months later Basic Democrats were elected. In April 1960, the military and particularly for General Ayub and there was,
Municipal Administration Ordinance specifically for urban as is always the case with politics, ample opportunity for
areas was enacted, giving rise to what some observers think corruption and for patronage. As we show on a number of
was an 'integrated pattern of urbo-rural local government in occasions below, .whenever democratic politics comes into
Pakistan'. 10 contradiction with the military's politics, and especially
The Basic Democracies Order 1959 envisaged a new system when the military's local government is confronted with
of local government built up through a hierarchical four- representation, the artificial system set up by the military
tier system. The 37,959 villages in Pakistan were divided comes undone. The military and participatory or democratic
into Union Councils in rural areas and Town Committees politics, despite the military's attempts, do not go together.
(in towns with less than 14,000 inhabitants) and Union Ayub Khan's civilian and military bureaucratic regime was
Committees in towns with more than 14,000 inhabitants, at a developmentalist regime, with equal and substantial focus
the lowest tier in the structure. The next higher tier was that towards increasing production and capital in both urban and
of Tehsil Councils in rural areas and Municipal Committees rural areas. 16 As we show in earlier chapters, both industrial
and Cantonment Boards in urban areas, followed by District and agricultural output saw phenomenal rates of growth
Councils and finally Divisional Councils, the latter two of and in many ways altered the social relations of production
which covered both urban and rural areas. irreversibly. Although there is debate about the reasons for
It was the lowest tier, that of Union Councils, Town the land reform of 1959, whether it was undertaken to break
Committees, and Union Committees which had members the hold of the bickering political landowning class, or to
elected on the basis of adult franchise, who then elected provide an impetus to the process of capitalist agricultural
a chairman from amongst themselves. The higher tiers development, the consequences of the reform were that
had some members which were indirectly elected by these both outcomes took place. The hold of the large landowners
directly elected members, as well as members nominated by was indeed dented, but more importantly, the reforms
government. For example, each Municipal Committee had a and the numerous other interventions that took place in
Council composed of all the chairmen of Union Committees the agricultural sector brought about nothing less than a
within the Municipal Committee, as well as 'councillors revolution in agricultural production and social relations
 Chapter 12 Local Government and the Political Economy of Decentralization 333

of production, and in fact altered the face of Pakistan once the political super-structure of Ayub Govern-
and for all. Shahid Javed Burki has argued that, towards the ment rested on the foundations of Basic
late 1950s, landlords were again emerging on the political Democracies, a political system which reflected
horizon, and Ayub Khan's shifting of power from Karachi to the political philosophy both of the soldiers and

r the Punjab and Rawalpindi resulted in more representation

for indigenous and rural Pakistan, which is one reason why
the bureaucrats' .19 Once the broader political
structure of the Ayub regime began to collapse,
as it happens so often in Pakistan, many of the
agriculture gained prominence throughout the decade. 17 initiatives of a fallen regime are removed with
The 1960s witnessed the emergence and consolidation of it. Such was the case of the Basic Democracies
many political groups and economic classes. In agriculture, system. With the system in abeyance under
the hold of the large landowners may not have been broken, General Yahya Khan who replaced Ayub after
but it was certainly shaken enough to allow other economic he surrendered to the political forces let loose by
categories to emerge. Many of the large landowners had the process of demographic and social change,

r the foresight to read the writing on the wall, and accepted

the Green Revolution technology package introduced by
the government. Although this was an elite farmer strategy,
it took the newly elected President, Zulfikar Ali
Bhutto, to say a few days after assuming power
in 1971, that 'I am abandoning the system of
Basic Democracy that has bred nothing but
given the high costs associated with the purchase of tractors,
nepotism and corruption, a system that reduced
the sinking of tube wells, and other ingredients of the democracy to a farce. 20
package, state subsidization gave the middle farmers, too, the
opportunity to adopt this technology. This was the essence of The democratically elected Bhutto promised to introduce
the Green Revolution: the middle and kulak farmers, along a better system of local government. Although two Local
with many other farmers at both ends of the spectrum, Government Ordinances were introduced in 1972 and in
emerged as capitalist farmers, soon to become a dominant 1975, there was no implementation of any sort of local
economic and political force in agriculture and in the country. government, and despite the doing away of the Ayub era's
In the rural areas, alongside this emerging capitalist farmer model, in many ways the unrepresentative structure of
we also see the genesis of the small-scale manufacturers, and implementing government at the local level-largely through
the skilled and technical workers, the growth of an ancillary the bureaucratic structure-remained. There were, of course,
service sector in order to service the new economy, and a huge differences between the 1970s and the I 960s, not
disenfranchised, landless agricultural wage-labour class. To least because there was an active cadre of political workers
some extent, the political ambitions of the newly emerging at all levels of governmental and civil society levels, most
agricultural capitalists were accommodated in the Basic of them members of political parties, who were involved
Democracies scheme of Ayub Khan, but without giving them in some form of intervention in development. Rather than
any real political power. This was perhaps the beginning of a formal structure as under Ayub, there was a greater
the apprenticeship of this class of rural politicians, which was awami and populist culture of government, at times tending
to emerge, especially in the Punjab, in the 1970s and was to towards authoritarianism. In fact, it was this politicization
stamp its mark on the political economy of the country. The of politics that probably stopped Bhutto-like other civilian
military and civilian bureaucrats under Ayub 'had forged governments after him-to undertake any real reform at the
a strong political alliance with a number of middle class local level. Ali Cheema and Shandana Mohmand argue that
urban and rural groups', which helped in fostering economic Bhutto did not want to undertake local government reform
development and political participation. Moreover, the Basic due to the
Democracies system 'not only gave a voice to the middle
class peasantry of Punjab and the NWFP, but also converted fear of losing local support in key areas to
Pakistan's powerful civil bureaucracy from an apparatus for competing mass-based regional parties. . . .
maintaining law and order into a remarkable vehicle for Perversely, the rise of competing mass and
promoting development' . 18 cadre-based parties and the increase in electoral
In essence then, as social transformation took place, with competition at the provincial and local level in
1970 made Bhutto more reluctant to actually
increased urbanization and with the emergence of different
decentralize power to the local tier. 21
factions of the middle class, with rural to urban migration
rising, these processes came into contradiction with the Nevertheless, for our purposes, we can conclude that the
structure of government established by Ayub-and not just first democratically elected government in Pakistan did
the Basic Democracies system, but the whole edifice-came not bother to introduce a system of representative local
crumbling down. Once an originally designed 'non-political' government, and even the Constitution of Pakistan of
governance structure came into contradiction with the wider 1973 agreed to in this period by all political parties, those
politics of the time, it was not able to function adequately, if in government and those in the opposition, failed to allot
ever it did, with its bureaucratic authoritarianism which may local government recognition as the formal, third tier of
have become, at times, a softer, benevolent bureaucratism. government in Pakistan. This is one of the many ironies that
The Basic Democracies system was, and was seen to be, one crops up across time in Pakistan.
of the most important initiatives of the Ayub regime and was
perceived to be closely tied to him. As Rizvi states,
334 Issues in Pakistan's Economy

12.1.2 Local Government in the 1980s had taken root. People had now experienced, and perhaps
begun to understand, the meaning of participation and
(and 1990s)22 : Urban Pakistan and democracy. One needs to understand the Local Government
the Middle Classes Ordinance 1979, in light of these circumstances, and the
With the imposition of Martial Law following Pakistan's consequences that the _Ordinance let loose are predicated
second military coup and under its third military government upon the conditions which existed at that time.
in 1977, all political activities, as they had, almost two
decades earlier, come to a stop. While General Zia ul-Haq The Local Government System under the
promised elections within ninety days and did initially allow LGO 1979
some political campaigning to take place, it was soon dear to
most, that Pakistan was once again ready for the long haul In the Constitution of Pakistan 1973, which was suspended
under military rule. The national and provincial assemblies and in abeyance during the earlier part of General Zia's
had been disbanded and the stage was set for the revival regime, the allocations of _the functions of the federal and
of all military government's favourite hobby-horse, that of provincial governments are dearly specified. There are some
some form of devolution and decentralization in the guise functions which are the exclusive responsibility of the federal
of a structure of local government. Exactly 20 years after government, while others, according to the Constitution can
Pakistan's first attempt at devolution following the Basic either be performed by the federal or provincial governments.
Democracies Order of 1959, the Local Government Ordinance However, the existence of local governments was never
(LGO) of 1979 were promulgated and elections were held to formally embodied in the Constitution.
elect local councillors. Ali Cheema and Shandana Mohmand Local governments in Pakistan existed under the
argue that like Ayub Khan, supervision of the various provincial governments, where
provincial governments had merely delegated some of
Zia ul-Haq combined political centralization their functions and responsibilities to local governments
in the hands of the army at the federal and by the promulgation of ordinances. The Local Government
provincial levels with a legitimization strategy Ordinance of 1979, with its amendments was in operation
that revived electoral representation at the in the Punjab, Sindh, and the NWFP, while Balochistan's
local level. ... History was repeated as non-· local governments worked under the 1980 Ordinance. These
representative political centralization and the ordinances specified the allocation of the residuary functions
revival of local governments again came at the
of local governments. ·
expense of weakening the elected tiers at the
federal and provincial levels. 23 Under this Ordinance, in the urban areas there were
four levels of municipal government-Town Committees,
However, Pakistan was a very different country now than it Municipal Committees, Municipal Corporations, and
was 20 years earlier. Metropolitan Corporations. The senior officers of these
For purposes of brevity, if we were just to identify some councils were elected by members of the council and the
of the critical differences between 1959 and 1979, perhaps controlling authority was the elected house. There was a
the single most important would be that Pakistan was three tier system of local government in operation in Pakistan
half the country in 1979 compared to 1959 following the in the rural areas, where Union Councils, Tehsil or Taluka
secession of East Pakistan, the majority province, to emerge Councils, and District Councils existed. However, the middle
as independent Bangladesh in 1971. Pakistan over these two tier, the Tehsil/Taluka level was usually done away with
decades had also become increasingly urban, certainly not in in practice by provincial government, and mainly Union
statistical terms, but in terms of influences and culture one Councils and District Councils existed, which were elected on
could see the beginnings of an urban Pakistan, something the basis of adult franchise. The chairmen of these councils
that was to be further strengthened during the 1980s. So were elected by the elected members themselves.
called 'feudal' agrarian social and economic structures and The Local Government Ordinance specified two sets of
relations had also given way to more modem capitalist functions to be performed by local governments. The dif-
relations of production and exchange, foliowing the Green ferentiation between the two sets was between compulsory
Revolution, the implementation of two sets of land reforms, and optional functions. For the most past, most of the sets
and with the mechanization of agrarian production. In 1979, of functions for local governments in different provinces
one also sees the beginnings of the consolidation of the were more or less the same. There was further differentiation
middle classes as political and economic actors, something between the functions of a regulatory nature, and those that
that was further strengthened throughout the 1980s due relate to the provision of services.
to economic developments, particularly the Gulf boom over For the three larger provinces, a common list for all
that decade. Importantly, the structure and system of local urban councils containing compulsory and optional functions
government introduced in 1979 also strengthened the role existed. Thus, Town Committees, Municipal Committees,
and position of the middle classes in Pakistan. Another critical Municipal Corporations and Metropolitan Corporations (with
difference between Pakistan in 1959 and 1979 had been that the exception of Karachi) were supposed to perform the
in the decade prior to the 1979 local government reforms, the same functions. 24 The Karachi Metropolitan Corporation had
Pakistani people ·had participated in two rounds of General been given additional functions. Due to the limited extent
Elections and some forms of democracy, however muted, of urbanization in Balochistan, a smaller list of functions
 Chapter 12 Local Government and the Political Economy of Decentralization 335

existed for Town Committees. While there was a great deal of The two Metropolitan Corporations of Lahore and Karachi,
similarity of functions between the provinces, there were a few by virtue of their size had far more diverse and extensive
minor differences between what is deemed compulsory and organizational structures. For example, given the extensive
optional. The largest Metropolitan Corporation in Pakistan, nature of types of works which were to be performed
that of Karachi, had some additional responsibilities. in metropolitan areas, there was a need for additional
Like their urban counterpart, a long list of functions for departments which performed specialized functions pertaining
the two-tiered, rural, local government also existed. Union to legal affairs, land management and development, etc. The
Councillors were expected to perform civil, welfare, and larger Municipal Corporations in the country, along with
development functions. The civil functions included the the two Metropolitan Corporations also had development
provision and maintenance of public ways, sanitation, and authorities functioning as parallel organizations within the
conservancy; the slaughter of animals; and the maintenance cities. However, while the urban local councils performed
of wells, water pumps, and tanks. If calamities struck, more service related functions, the development authorities
the Union Councils were expected to undertake relief were more involved with engineering works and with urban
measures and other measures to promote welfare and and town planning as well as with traffic related issues.
health. The development functions of the Council included Despite the large number of legislative functions of
measures to increase food production, industry, and promote local councils and their often extensive organization and
community development. The District Councils had optional management structures, very few functions by local councils were
and compulsory functions. Compulsory functions included actually carried out. In urban areas, essentially three basic
the provision and maintenance of roads, bridges, public (compulsory) services were carried out-garbage disposal,
buildings, water supply, maintenance and management of maintenance of roads and street lighting. In the larger cities,
hospitals, maintenance and construction of school buildings, preventive health care was looked after by local government,
etc. Many of the optional functions of District Councils were which was beyond the scope of smaller urban councils. Most
similar to those of Town Committees. urban local councils were involved in the maintenance of
The Local Government Ordinances specified that a local area water and sanitation services. Essentially, urban local councils
in the context of urban areas would be a town, municipality, had restricted their role to some of the compulsory functions
city or metropolis; the corresponding local government which they were expected to perform. In smaller cities, even
was a Town Committee, Municipal Committee, Municipal these compulsory functions had been unfulfilled by the local
Corporation and Metropolitan Corporation. Municipal status council because they either did not have the funds or knew
was primarily a function of population. Urban settlements how to undertake the compulsory functions.
with population ranging from 5,000 to 30,000 were generally In rural areas, the actual role of Union Councils and District
designated as Town Committees. Municipal Committees Councils was even more limited than the role played by
had populations up to ;lS0,000. Cities beyond that size and smaller urban councils. Some District Councils were involved
provincial capitals had either Municipal or Metropolitan in the development and maintenance of link roads and
Corporation status. Property tax rating areas generally drainage, and that is about all. Union Councils had virtually
extended to the Municipal Committees and the larger town no role in the development or maintenance of services.
committees. The status of local government functionaries The larger District Councils had a partial involvement in
was directly correlated with municipal status of the particular the provision of preventive and curative health care and in
jurisdiction. While the number of councils varied, for the animal husbandry.
most part, there were two Metropolitan Corporations, 12 Under the Local Government Ordinances of 1979, elections
Municipal Corporations, 146 Municipal Committees, and 336 of all local bodies were to take place on an adult franchise
Town Committees functioning in Pakistan. basis, and did, in 1979 and 1983-for the story after that,
In urban areas, the four types of Municipal Committees see below. After the elections of all the members of a
had organizational setups which were more or less similar unit, the Chairmen, Vice Chairmen, and Mayors were all
across the provinces. Despite the fact that urban Union elected from amongst the members of the local council. The
Councils, from the Town Committee to the Municipal membership of each council was determined on the basis of
Corporations varied in size, and the latter may have been the distribution of population in that region. There was some
as much as a hundred times the size of the former, there separate representation for non-Muslims, peasants, workers,
were very clear similarities in organizational structure. and women, who were all to be elected by the members of
There were always three sections or departments comprising the councils.
general administration, finance, and engineering. Town The degree of electoral representation-seats to population
Committees had just these three departments which grew ratio-was highest at the lowest level of local government,
in size and qualitative specialization as the size of the the Union Council level, in rural areas. There was a maximum
urban area increased, i.e. when it was represented by a number of seats prescribed for district councils and municipal
municipal committee or corporation. Municipal Committees corporations in some provinces, which implied that the
and Corporations were also very similar in the nature of number of seats rose less than proportionately with respect
their organizational structures, and both had two additional to population. Close to 80,000 seats were contested in the
departments, viz. education and health. Furthermore, the local government elections, of which 89 per cent of the
accounts department consisted of two separate units, one for representatives sat in rural local councils, with 84 per cent
finance and the other for taxation. in Union Councils. Since Punjab had the greatest share of
336 Issues in Pakistan's Economy

Pakistan's population, it also had the highest proportion of even outcome-of local governments, much else, however,
overall local government seats, viz. 68 per cent. had changed.
There were a number of formal and informal mechanisms
which allowed, at least on paper, the representative The Intervention of Praetorian Politics
population to be involved in the affairs of the local councils.
Formal mechanisms for mass participation were included in Three sets of Local Bodies elections were held in Pakistan
the Local Government Ordinances. For example, in the case in 1979, 1983 and 1987 as per the mandate of the Local
of taxation, every taxation proposal was published along Government Ordinance (LGO) 1979. There was no other
with a notice in newspapers, so that members of the public representative forum for politics at that time in what is
could make their objections and suggestions. However, it generally regarded as a particularly repressive military regime
was the informal channels of public participation which which had used the Islamic card as an excuse to prolong
were, perhaps, more representative. There was, at times, a its rule. International factors after the Soviet invasion of
great awareness and involvement in the lives of the public Afghanistan in 1979 also helped perpetuate military rule
of services undertaken by local councils. Expectations about in the form of Martial Law when numerous anti-people,
the performance of local government are always high, especially anti-women and anti-religious minorities, laws
precisely because the tasks which this level of government were promulgated, and both women and minorities were the
is expected to perform influences the lives of a large number target of victimization and discrimination. The genius of the
of people at the local level. There is supposed to be frequent non-party elections at the local level was that they allowed
contact between elected councillors and their constituents, existing and emerging political groups to be involved in local
and opinions about performance are regularly aired. This level issues, leaving the supposedly more important issues
was supposed to be, perhaps, the most sensitive tier of of the economy, foreign policy, federation, etc. in the hands
government and one in which the public was expected to be of the military. Power throughout the Zia period, without a
most directly involved. doubt, was highly centralized and rested with the military
Despite elaborate structures and responsibilities, it is and its co-opted classes, fractions, and groups, particularly
very clear that in terms of service delivery, certainly one those that represented some Islamic faction and constituency
of the two most important pillars of decentralization and and were General Zia's key partners.
devolution in Pakistan in the form of the local government However, while the military had its own favourites and
system-the other of course, being some form and some carefully selected and favoured many social groups at different
degree of political representation and participation-the times, in different cities and provinces, and simultaneously
local government system in Pakistan from 1979 to 1999 persecuted the most popular political party, the Pakistan
when it was still effectively in operation, failed significantly. People's Party of Z. A. Bhutto later taken over by his daughter,
Studies have shown that in terms of the skill level of local social transformation was taking place independently, but
government staff and their aptitude and attitude-clearly, also as a consequence of economic policies followed in this
not a problem simply of local government but of all tiers of period. On the political front, it was the re-introduction of the
government in Pakistan-and due to the financial control by Local Bodies elections that led to the political emergence, and
higher tiers by both the provincial and federal government, possibly even consolidation, of the middle class, both urban
a problem that still continues to this day as we show below, and rural. Given the intrinsic connection ben-veen politics
and for a host of other reasons, the local government structure and economics in Pakistan, it is not surprising that each
and system Jailed to deliver, even before political issues came to reinforced the other.
the fore-see below. Hence, it was not merely politics which Since 'real' elections to the Provincial and National
undermined the potential and possibility of local government Assemblies were not held under Zia until at least 1985 (and
delivery in Pakistan, the system itself failed on technical and how 'real' they were is a moot point), most of the traditional
structural grounds. 25 However, politics did further accentuate political entities did not take the first Local Bodies elections
the problem complicating matters considerably. seriously. Also, because severe restrictions were imposed by
In their comparison of the Basic Democracies Order of General Zia's government on participation, many stalwarts
1959 and its subsequent Municipal Administrative Ordinance were excluded. This allowed those with some financial and
of I 960, with the Local Government Ordinance of I 979, Ali political means, essentially the emerging middle class, to
Cheema and Shandana Mohmand find that there 'was little contest elections, perhaps for the first time. They were able to
change in the functions and financial powers assigned to enter politics because room had been created by the absence of
local government. This indicates a continuity in the legislative the richer, more influential, traditional political actors. Local
structure of local governance and clearly shows that there government seemed to work well under military dictators,
was no intent during the Zia period to substantively empower and under Zia it seemed to work rather better, because of the
local governments. The purview of these bodies continued relative importance given to this tier of government by the
to remain confined to the provision of essential municipal large developmental funds channelled through it. Urban and
rural councillors were the only elected representatives of the
services with District Councils retaining the responsibility
of rural developments. Similarly, there was little change in
the financial powers given to local governments'. 26 While
regime, and were responsible and accountable, given their
limitations, to the needs and demands of the electorate.
-I
these similarities ·between both military dictators and their In I 985, General Zia's government decided to hold General
regimes may have existed in the structure-and perhaps Elections for the Provincial and National Assemblies on a
 Chapter 12 Local Government and the Political Economy of Decentralization 337

non-party basis. However, political parties did exist and new As far as our analysis is concerned, the 1985 General
ones had emerged, such as the Muhajir Qaumi Movement Elections created the first major tension and contradiction
(MQM) in Karachi, many of which had emerged as a between elected local government and elections at the other
consequence of the Local Bodies elections held earlier. While two higher tiers. This pattern was to re-emerge throughout
local government elections may also have been non-party the 1988-99 democratic interregnum. As we argue above,
elections, individuals did have party affiliations and identities a large number of local level politicians who had become
which were further crystallized in the General Elections prominent in their own region or constituency at the local

I
•
of 1985. What is interesting is that a very large number of
individuals who had been trained, for the first time ever in
politics, through the Local Bodies, emerged later as members
of the National and Provincial Assemblies in 1985 and in
level, contested the 1985 elections and were propelled to
provincial and national level status, as were some political
parties. 29 These politicians had begun to understand and
recognize the role, influence, and the importance of the local
subsequent elections. In 1985, of the 240 Members of the level political process, and once they were elevated to higher
Punjab Provincial Assembly, 124 were sitting Councillors; of status, anyone filling their local level seat, was seen as a
the eleven Metropolitan/Municipal Corporations of Punjab challenger and upstart who could consolidate his/her position
and Sindh, at one time or another, mayors of as many as at the local level, eventually challenging them at the higher
ten had been either Members of the National Assembly or level. In an era-and even now-where politics was the
Members of the Provincial Assembly; in the elections held in politics of patronage, there were numerous individuals and
1993, it was estimated that more than 70 per cent of members groups as candidates, competing to appropriate that power
of the Punjab and National Assemblies started their political and patronage. Local government had become important and
careers from local bodies. 27 These are quite amazing statistics politically powerful.
which reveal a very important fact which we will discuss later, Since local governments were not a central part of the
that of the importance of local government as a stepping stone Constitution, and had been merely delegated powers by
for higher political power. Elections were held in 1979, 1983, the provincial governments on the behest of the latter, it is
and 1987, which allowed the same sections of the economic not surprising that local governments actually owed their
middle class to emerge as members of the political classes. existence and powers to the provincial governments. Provincial
The main beneficiaries of the Zia regime were, then, governments could, and did, dismiss local governments, or
members of the urban and rural middle classes, and members on the advice of the federal government. Clearly, this was
of the civil and, particularly, military bureaucracy. The large a highly subjugative, dominating relationship with local
industrialists of the Ayub era also returned to Pakistan, government having no independence from, leave alone
although the nature of the entrepreneur under Zia was influence on, the provincial government, and the provincial
considerably different from that under Ayub. Rather than governments did use their influence on local governments at
22 families dominating Pakistan, there were perhaps a numerous junctures. From senior appointments to requests
few hundred or a thousand under Zia. The industrialists for more resources or the permission for increasing taxes
under Ayub may have been richer than those under Zia, and rates, local governments were completely dependent
but there was probably less concentration at the top under upon their provinces. It would not be unfair to say that local
Zia than under Ayub. However, despite this emergence of governments were controlled by the provinces; even the
the middle class and of the new entrepreneur under Zia, budgets of local councils had to be approved by the provincial
political power was clearly retained in the hands of the governments, who were entitled to make amendments and
military with a subservient bureaucracy. Large landowners, suggestions.
too, had made a comeback under Zia, hovering around the Prior to the 1985 General Elections, in the absence of
political establishment and being allowed some room in the elected assemblies, local governments were the only popularly
1985 elections. Nevertheless, the power of the military was elected bodies and thus played important political and
endorsed by the summary end to Mohammad Khan Junejo's developmentalist roles. After the election of Members and
tenure as Prime Minister in May 1988. The military, through Senators of the Provincial and National Assemblies, the role
its considerable patronage of particular political parties and of local governments was substantially marginalized. These
individuals-the Muhajir Qaumi Movement and Nawaz elected representatives had taken over some functions which
Sharif, are two of the best representatives of each category- local governments used to perform. Specific federal and
helped create classes, parties, and factions of collaborative provincial level programmes which were directed at elected
politicians, both at the local and higher tiers of government. provincial and federal members of parliament, such as the
Much of the intervention and interference in this period Five Point Programme of the Junejo government ( 1985-
created and consolidated, what some observers believe, 88), the People's Programme of the first Benazir Bhutto
was the 'localization and personalization of politics at the government, and other such programmes, had in many
local level.' 28 The somewhat unique concept of a praetorian ways, intervened in the evolution of proper and improved
democracy worked rather well for many months, but once local government and encroached upon the jurisdiction Qf
elements of the democratic forces began to impinge upon the the local governments. Under the above named programmes,
terrain of the military, the military demonstrated that it was elected members of Provincial and National Assemblies were
well in control. The period during Zia's rule marks the first given funds of considerable amount which they could use for
real demonstration and formal consolidation of the middle developmentalist projects, largely on their own discretion,
classes on Pakistan's economic and political map. in their political constituency. This had severely undermined
338 Issues in Pakistan's Economy

the role local governments had been playing, despite the takeover, and the intention and programme of each General.
shortcomings mentioned above, in the development of The speeches are so similar that they could have had the
particular (local) areas and regions. same speechwriter. While corruption and inefficiency and the
What is perhaps more intriguing is, that in the period incompetency of politicians-always politicians-are cited as
following the 1985 elections, but more so after the death the reasons why they ousted (in the last two cases at least)
of General Zia in 1988, when a more representative, albeit democratically elected governments, each General, especially
controlled, democracy with political parties emerged, the last two, also emphasized their supposed commitment
local government was dispensed with. With the return of to democracy. They all said they wanted a good, accountable,
democracy in Pakistan, all local governments were dissolved. and open system of democracy for the country. And, they all
In the NWFP, all local bodies were dissolved in 1991, in Sindh felt that power should be devolved to the people in some form
in 1992, and in the Punjab in August 1993. Different reasons of decentralization in the form of local government. In fact,
were given as to why the provincial governments dissolved perhaps the first substantive political intervention of all three
the local. governments in their own provinces. In the case military governments was the promulgation of ordinances that
of the NWFP, mismanagement and corruption were cited as brought about three different structures of local government.
reasons, while the Punjab provincial government dissolved In this section, we examine the Devolution Plan and the
its local governments in order to ensure that national District Government system initiated in 2001, by General
elections to be held in October 1993 were not influenced by Musharraf. 30 Before we turn to the local government reforms,
incumbent local government officials. Thus, in the absence a brief description of the politics of the Musharraf regime in
of democratically elected local government officials in the context of the reforms that were undertaken is given.
the rural and urban areas, Town Committees, Municipal
Committees, and Municipal Corporations, were all being run The Politics of the New Millennium
by Administrators who were members of either the federal
or provincial public (civil) service cadre. Administrators were The parallels between General Zia and General Musharraf's
appointed by the provincial government and were transferred regimes, even with regard to their attempts to start devolution
between different posts for unspecified duration of tenure. by setting up a local government system, are quite remarkable.
This fact that the elected principle of local bodies was put in Both military leaders set about bringing a local government
abeyance, reflects on the attitude of elected and non-elected system soon after taking power, before major world and
government officials. There seems to be an inherent conflict regional events changed the nature and status of their
of interest between different tiers of government, where regime permanently. General Zia started his local government
local governments, because they are assumed to be the most reforms in 1978 and 1979 at a time when his position was
expendable, have borne the brunt. weakening. However, after December 1979 when the Soviet
The local government reforms launched by General Zia Union invaded Afghanistan, Pakistan's status of a frontline
ul-Haq in 1979, largely to extend his rule by centralizing state propelled General Zia to the world stage ensuring his
power in the military and allowing local level politicians to do longevity with American support. Almost the same scene
politics, and perhaps some development as well, continued up was repeated with regard to General Musharraf's political
to 1985. However, even under General Zia's own praetorian career, although in his case, his position, because of US
democracy, local governments floundered as many of the support, remained far stronger than General Zia's ever was.
former councillors, mayors and chairmen graduated to the General Musharraf got to work on his local government
Provincial and National Assemblies. After 1988, however, reforms immediately after dismissing the democratically
when four General Elections were held in Pakistan, local elected government of Nawaz Sharif in October 1999, at
governments became almost redundant, primarily because a time when his position was being questioned as the
they became competing centres of patronage and power in contrast supposedly pro-democracy West castigated him for dealing
to elected representatives at the two higher tiers. Since a death blow to democracy, however weak it was. However,
the higher tiers had the power to dispense with these local after 11 September 2001, and after the second invasion of
governments, as argued above citing different reasons, they Afghanistan, this time by the only super power in the world,
did exactly that. With the return of democracy. in 1988, General Musharraf too, was propelled not just on the world
local government was made largely redundant. It had to stage like General Zia, but perhaps, along with President
be Pakistan's third military coup and fourth military ruler, George Bush and Prime Minister Tony Blair, as one of the
General Musharraf who took over power in 1999, to resurrect most important leaders in the US War Against Terror, once
a completely new system of devolution represented through again ensuring a very long political career.
yet another local government system under the Devolution Under the leadership of General Pervez Musharraf, the
Plan 2000 which set up District Governments. military reclaimed its central position in Pakistan's state
structure and political scene, as it had in the past, but far
more decisively and overtly. The naivete which many of us
12.1.3 Devolution in the New Millennium oelieved throughout the 1990s that the military had removed
An examination of three military takeovers and coups in itself from power and had allowed the democratic transition
Pakistan, in 1958, 1977, and 1999, and the earliest speeches to continue unhindered-as it has in some countries-
that Generals Ayub, Zia, and Musharraf made, show an received a major shock with Pakistan's third military coup
uncanny resemblance for the cau_ses and explanations for the and fourth military head of government. ·
 Chapter 12 Local Government and the Political Economy of Decentralization 339

General Musharraf, first as Chief of Army Staff and Chief At the tehsil level, the Naib Nazims of all Union Councils
Executive of Pakistan, and then in his subsequent position, of in the Tehsil became part of the Tehsil Council, which was
President of Pakistan but still Chief of Army Staff, began his headed by a Tehsil Nazim who was the head of the Tehsil
political interventions by beginning work on his Devolution Municipal Administration. He was also expected to make an
Plan in 1999/2000. Non-party based elections were held for Annual Budget Development Plan for municipal se_rvices at
representatives to be elected to the new District Government the Tehsil level. Since this was one higher rung on the District
setup in 2001, and the new system of local government Government tier, the structure of administration was slightly
was put in place in August 2001. A highly contentious and more advanced than at the simple Union Council level.
controversial referendum was also held in. Pakistan, just The Tehsil Nazim headed the council and was responsible
as it was under General Zia ul-Haq, which gave General for efficient municipal service delivery and executing the
Musharraf the perceived right to remain President for development plans approved by the Tehsil Council. He was
another five years-not that any General has ever required assisted by a Tehsil Municipal Officer and four other Tehsil
legitimacy from any referendum, with the power of the officers. The Tehsil Council consisted of the directly elected
military might determining that so called 'legitimacy'. After union Naib Nazims and around one-third indirectly elected
ensuring his own mandate and after the local government members such as women, minorities and peasants/Workers.
elections, General Musharraf held General Elections-again The Tehsil Municipal Administration which was responsible
like General Zia, although this time these were party-based for municipal functions and spatial planning, included the
elections-in 2002, and set in motion the process of party- offices of the Urban L_ocal Councils established under the
based politics after the party-less local government elections, repealed LGO of 1979, with some sub-offices of the old
again similar to General Zia. Hence, there existed a highly system passed on to the tehsil level.
vocal and diverse representation in the Provincial and The District Council was the highest and most important
National Assemblies where members were elected on party entity in the new structure of district government. The
tickets, as well as representatives at District Government, system of administration at the district level included the
who were elected prior to this, on a party-less basis. Zila Nazim who had a large team of district administrators.
The district administration comprised District Officers to
The Structure of District Governments31 carry out functions decentralized from previous provincial
departments. Some of the offices may have represented a
The political issues related to the Musharraf regime single department but had their group of offices headed
notwithstanding, the Devolution Plan and the new system of by an Executive District Officer (EDO) at the District,
District Government require a study on their own merit. This such as Education or Health. Similarly other officers with
section does just that. The District Government structure was related functions were grouped together under Executive
an integrated three-tier system, where rural and urban areas District Officers. The work of the district administration was
were linked together organizationally and administratively, co-ordinated by a District Co-ordination Officer who reported
perhaps in response to the changing demographic and to the elected head of government. The District Council
locational distribution of people in Pakistan, perhaps even consisted of the directly elected Union Council Nazims
emphasizing the primacy of urbanizm as a way of life and around one-third indirectly elected members such as
by removing the urban-rural divide. The system of local women, minorities and peasants/Workers. Hence, the elected
government ran from the Union to the Tehsil and then representatives at the lowest tier of government, the Union
District level, from the smallest electoral and administrative Council level, found themselves in the Union Council, with
unit to the highest. their Naib Nazims in the Tehsil Council and with the Nazims of
The three-tiered structure was based on the Union/Tehsil/ the Union Councils making up the District Councils. The four
District levels/stages of administrative hierarchy, with the provincial headquarters had been declared as City Districts
Union being the first level of contact in this structure, rising and if/When a city or tehsil became urbanized and grew in
to the more important and powerful District Council. The size, it could be designated as a City District. In a City District,
Union Council had an elected representation with the Union a Town Municipal Administration was organized on a pattern
Nazim and Union Naib Nazim as the heads of the Council. to the Tehsil Municipal Administration in any other district.
The Union Nazim was responsible for the preparation of The major social sector departments of Education and
the Annual Development Plan of the Union Council and Health were the key departments which had been devolved
decided the priorities and proposals with the Co11ncil. He was to the districts. Both of these departments had already
responsible for the execution of those projects for which funds undertaken some detailed planning for decentralization,
had been provided by the Union Council budget. He was to prior to the devolution programme of the military
send those proposals to the Tehsil Municipal Administration government. The management of all primary and secondary
and the district government for inclusion in their budgets schools and colleges was now the responsibility of the
and development plans which were beyond the scope of the District Government and not of the provincial Education
Union Council resources. The Union Council, the lowest level Department as in the past. The EDO Education, bore the
of elected government, had an average population of around major responsibility for ensuring that the educational needs
25,000, corresponding to several small villages or sub-villages of the District were adequately met; he was also responsible
and sub-towns in the larger settlements. Each Union Council for planning and establishing new institutions where
consisted of 21 members elected on a non-party basis. necessary. Amongst the duties and functions of the EDO
340 Issues in Pakistan's Economy

Education were the following: implementing the provincial October 2002 General Elections. Subsequently, parts of
education policy through the district education policy and the LFO. became incorporated, controversially; in the 17th
plan; preparing plans for development of education in the Amendment to the Constitution of Pakistan under which the
district covering the levels that fall within the responsibility District Government system received partial and temporary
of the district; and preparing the annual educational budget indemnity. Since, as has been the tradition in the past, all
of the district. military governments establish their own form of local
There had been many significant departures made from government first before any democracy at the higher tiers is
earlier models of local government under the District allowed-Ayub Khan's Basic Democracies, Zia ul-Haq's Local
Government system in use in Pakistan. Firstly, a number of Bodies, Pervez Musharraf's District Government-quite often
provincial government functions related to the delivery of democratically elected governments at higher tiers make local
social services had been devolved to the District Government. government redundant.
Moreover, many of the functionaries at the local level On paper then, it seems that the District Government
provincial administration had been transferred to the local system set up by the Musharraf military government, seemed
government and were accountable to the elected district level to have some new and innovative ideas. However, whether it
administration. While there had been some decentralization actually worked, both in terms of devolving political power
in the sense that some provincial powers, duties, and and allowing greater participation and accountability, and in
responsibilities had been transferred to the local level, there terms of its ability to be more responsive to the community's
had been no decentralization of any federal level powers, duties, or needs in terms of the better provision of public services, is
responsibilities to either the provincial or district level. Hence the partially discussed in Section 12.3. The first year of the new
accusation that in fact, rather than devolving power, power system had considerable teething problems, and studies
had actually become centralized in the state and its institutions, which looked at that period, not surprisingly; were critical.
particularly in the military. Even after some years, however, research was still lacking
Despite the big claim made about the nature of devolution and there was need to examine the system in some detail.
and decentralization by the Musharraf government, it However, as has always been the case, electoral politics at
is noteworthy that local government was still not part the higher tiers-provincial and national-had once again
of the Constitution. Only the highly controversial 17th hindered the evolution of the local government system in
Amendment allowed some partial, time-bound protection Pakistan, and any research and study which examines the
to local government. One of the more important, perhaps performance of local government qua local government,
revolutionary, interventions and changes made, however, had cannot ignore this imposing reality. After the 2002 elections,
been the allocation of one-third seats reserved for women. elected members at the provincial level, as had been the care
Now women, in addition to contesting seats at any level in the past began to come into conflict with members at the
directly, also had one-third seats available for them. Only district level, undermining the latter's sovereignty.
three women were able to become Nazims in the 106 District
Governments through direct elections and while there had
been stiff opposition to this move in more conservative areas 12.2 FINANCING LOCAL GOVERNMENT
of the NWFP and Balochistan provinces, for the most part,
there had been considerable space created for women to enter One of the two most critical factors that have an effect on
the political field. Of course, real and meaningful change takes the functioning of any devolved system of government, is the
time, but this was a very significant and positive development one related to the politics of power at the local level, but also
towards the politicization of women and bringing them in to at the provincial and federal levels-particularly in a country
the mainstream. Another equally important and impressive like Pakistan, where the military dominates, issues that have
change had been the end of separate electorates for religious been continually raised and elaborated upon in the context
minorities who have once again been reintegrated into the of the discussions that has taken place in earlier sections
political mainstream as well-see Box 12.1. and in other chapters in this book. Linked to the politics of
An important innovation with the District Government power, of course, is the financing of local government for,
system, on paper at least, since it was not fully functional, with service delivery the second cornerstone to devolution,
had been the setting up of Citizen Community Boards (CCBs) one cannot have a fully functioning and efficient local
in every area, where groups of non-elected citizens would government system unless financial issues around it are also
work towards the development and uplift of their areas. CCBs investigated. We argue, that while local governments have
could also raise funds through voluntary contributions, and had to deal with authoritarianism and other issues at the
could also receive financial support from local governments. provincial and federal level, they have also had to contend
Although most CCBs were still non-existent, there were a few with significant financial constraints which have an impact
cases where, for example, they had set-up shelters for schools on the performance, and hence on the failure or success,
in a district. of the functioning of local government. In this Section,
The District Government structure was part of the we describe, highlight and analyse some of the financial
controversial Legal Framework Ordinance (LFO) which i,ssues related to local government that have a bearing on its
was responsible for the complete disruption of elected performance.
Parliament for more than fifteen months after the
 Chapter 12 Local Government and the Political Economy of Decentralization 341

Box 12.1 Previously existing institutions and social, political and-in

Women, Democracy, and Devolution particular-power relations, were all challenged, changed
and affected. The irony cannot be lost that in many ways the
Afiya S. Zia and S. Akbar Zaidi examine the path of devolution devolution process by a military dictator may have actually
and local government in Pakistan, and look at how large helped democratise-through increased representation and
numbers of women were accommodated under General participation-the political involvement of citizens.
Musharraf's District Government system. There is not only the need to endorse the symbolic worth
of local governance. The pragmatic aspects too must be
Each of the three-not including Gen Yahya Khan-military seriously evaluated at this critical point. Practically all districts
men who ruled Pakistan--each for around a decade or so,
across all provinces (though not necessarily in equal measure)
devised his own form of devolution and decentralization
demonstrated a successful and organic process that gradually
reflected in different systems and manifestations of local
drew together developmental efforts on the part of councillors,
government. The pattern from 1958 has been repeated, where
NGOs, law-enforcement personnel, provincial representatives
the earliest intervention of a military dictator has been to devise
and implement his own preferred form of local government. and the people.
Once the military man was no longer in power, and especially Not always smooth and not without political leveraging,
when he was replaced with a democratic dispensation of many indicators nevertheless show that these relationships
varying sorts, his model of local government was virtually the have matured into what can only be assessed as a working
first component of the system to be dismantled. citizenship. By this we refer to the meetings of local actors
The incumbent PPP government that came into power in who attempted some mutual agreement at resolving conflict,
2008 took about two years to put to rest the devolution and implementing schemes and surviving or developing as a
local government system devised by Pakistan's most recent community.
military dictator, Gen Pervez Musharraf. There are also signs that indicate that working relationships
Such interventions were primarily meant to make it easier were potentially becoming more democratised and replacing
for each of the three military generals to manipulate the traditional ones that depended on biradari systems and
political order to ensure his control over the political system, forced marriages. Such emerging processes may be affected
often by postponing the electoral and democratic process at a adversely if not recognized as an important social change
provincial and national level. associated with devolution over this last decade.
However, one cannot deny the fact that eight or 10 years Ours is just one view on how the local government system
of a particular form of social engineering is bound to have functioned, and there are those who differ sharply. However,
numerous consequences, some even positive. Zia ul-Haq's
the problem is that while Musharraf's local government system
1979 Local Governance Ordinance helped more than a
has been thrown out, there has been no fair assessment of its
dozen urban and rural elected leaders to acquire passage to
functioning or achievements.
the highest institutions of government in Pakistan. A former
Donors, who were central in supporting the military dictator,
Pakistani president was a chairman in a district council before
especially his devolution plan, have not undertaken any
he was elevated to the highest civilian position in the country.
Moreover, urban political parties emerged as key players in the meaningful assessment of the millions of dollars they poured
assemblies.through Zia ul-Haq's system of local government. into it. They now wait for a new system to emerge, which they
The main consequence of former Gen Musharraf's devolu- will also support and pay for, and all this without accounting
tion system has undoubtedly been the extraordinary entrance for all that has already been spent.
of women as elected and nominated public representatives Clearly, before any new system of local government is
at the lowest tier of government. With 33 per cent reserved devised, there needs to be an honest appraisal of the one that
seats for women at all levels in the devolution system, 36,066 it will replace, rather than a simplistic or mechanical trade-
women councillors were elected and nominated in the first off. Even if it was created by a military dictator, democratic
round of local government elections in 2001. With the size governments can learn much from social relationships and
of the councils reduced in 2005, but still with the 33 per cent delivery processes of these last two terms.
reserved seats for women, 24,528 women were elected to Moreover, in the past, whenever elected governments
serve the public through the local government system. In a replaced the local government system inherited from military
society considered 'tribal', backward, conservative and much dictators, they chose to do away with elected local government
worse, this entry of women as public representatives must altogether. We recognize that the present electoral and
stand out as the most important outcome of the devolution democratic dispensation in parliament may be far more
reforms undertaken in Pakistan. representative and democratic in many important ways than
While cynics always point out that women in Pakistan are
such arrangements in the past. However, the true test of how
largely tools in the hands of their menfolk, one cannot be
far elected representatives are willing to go to bring about
oblivious to the impact the public presence of thousands of
and deepen democracy will come when they actually hold
women had on their, and their communities', lives.
elections at the local level and when elected representatives
Despite numerous flaws-in particular the absence of fiscal
decentralization-in Musharraf's local government system in are in place at all three tiers of government.
the eight years in which it was in place, considerable social
capital at the local level in the form of collective and participatory Source: Zia, Afiya S., and S. Akbar Zaidi, 'Democracy
activities, such as the citizens community boards, musalihat and Devolution, Dawn, Karachi, http://archives.dawn.com/
anjumans and other such participatory forums, was created. archives/30750
342 Issues in Pakistan's Economy

Financing under the 1979 Local Since local governments came under the jurisdiction
of provincial governments-they still do-their right to
Government System 32 levy taxes was also subject to the directives of the latter.
The Federation of Pakistan continues to be governed by Local governments assist the provincial governments in
the Constitution of Pakistan of 1973 and all amendments the collection of revenue, and thus provincial governments
in it since then, although it has been trampled upon and had delegated the right of the collection of taxes to local
altered, and subjugated to the personal and political whims governments as indicated in the Local Government Ordinance
of the two military Generals who have held power since. The of 1979.
Constitution specifies the functions of the federal government Local governments had been instructed to charge a local
and of the provincial governments. The federal government rate or local cess on all land assessable to either rent,
has exclusive responsibility for undertaking functions under land revenue, or ushr. in their jurisdiction. The provincial
the Federal Legislative List which is contained in the Fourth government would determine the rate to be charged and
Schedule [Article 70( 4)] of the 1973 Constitution-see could change it from time to time as it deemed fit. Local
Chapter 10 for more details. bodies were authorized by the provincial government to levy
Many of the Residual functions not part of either of the all or any of the taxes laid out in the Second Schedule of the
Legislative Lists which were supposed to be performed by LGO. All urban local governments on the direction of their
the provincial governments had been delegated to the local provincial governments could levy the following taxes:
governments by the promulgation of ordinances in the past,
especially prior to Decentralization Plan 2000-see below. Of Tax on the import of goods and animals in the
the functions allocated to local government in the past by jurisdiction of the Committee for consumption,
the provincial governments, there were a set of compulsory use or sale therein; tax on the annual rental
value of buildings and land; tax on cinemas and
functions which, especially urban councils, were expected to
cinema tickets; entertainment tax on dramatical
perform, in addition to an optional set of functions, which as [sic.] and theatrical shows; tax on the transfer of
the name suggests, may or may not have been performed by immovable property; water rate; drainage rate;
the local governments. conservancy rate; tax on all kinds of vehicles;
Under the old local government system and structure of lighting rate; tax on the birth of children; fee
the LGO 1979, the entire revenue of all local governments- for the erection and re-erection of buildings;
rural and urban-formed a mere 5 per cent of revenue marriage tax; fee for the licenses, sanctions
generated by the different tiers of government, with the and permits granted by the Committee; fees on
federal government earning close to 89 per cent, and the the slaughter of animals; tax on professions,
remaining being generated by the provincial governments. trade, callings and employment; market fees;
tax on advertisements; tax on feasts when
Over time, the share of revenue generated by local govern-
more than twenty persons, not belonging to the
ments had been rising, albeit marginally, while that of the household of the persons arranging the feast,
provincial governments had fallen. The local governments are entertained with foodstuffs; tax on animals
had collectively, been able to show a better fiscal effort in and sale of animals; toll tax on roads, bridges
terms of tax and non-tax revenue generation in the last ten and ferries maintained by the Committee; fees at
years. Nevertheless, as a share of all revenues generated, the fairs, agricultural shows, industrial exhibitions,
contribution of local governments was always very small. tournaments and other public gatherings; fees
As far as expenditure was concerned, local governments for specific services rendered by a Committee;
spent only about 4 per cent of the total expenditure of all tax for the construction or maintenance of any
forms of governments in the country, showing their relative work of public utility; parking fees; and any
unimportance in this regard. This relative amount fell over other tax which Government is empowered to
levy by law.
the last decade before the new system was put in plate. As far
as recurring expenditure was concerned, local governments
Other than the taxes identified in the Second Schedule,
spent a much larger share on establishment costs as ten
provincial governments could direct any specific local council
per cent of all expenditure on general administration in to levy any other tax:; to reduce or increase any existing tax;
the country used to be spent by local governments. Of
and to suspend or abolish the levy of any existing tax. The
the recurring expenditure on the social services in the
provincial government had also given permission to the local
country, provincial governments spent the largest share
councils and their Chairmen to make changes in the existing
since education and health were provincial concerns. Local
tax structure by drawing up specific taxation proposals. For
governments contributed ten per cent to the establishment
urban councils, there was basically no variation in fiscal
costs of social services. Over time, the federal government
powers by municipal status. Also, for the most part, the taxes,
shifted its contribution on the development side to the
rates, tolls, and fees that could be levied by Union Councils
provincial and local governments, hence causing both to
and District Councils, were very similar to those which could
contribute more over the 1990s. Thus, in 1979-80, provincial
be levied by urban government.
governments were incurring a share in total development
The Local Government Ordinance prescribed the various
expenditure in the country of about 18 per cent; this rose to
sources of revenue which local governments had access to.
29 per cent in 1985-86. Similarly, in the same period, local
As a whole, in urban areas taxes formed about 60 per cent of
government increased its share from 3 per cent to about
revenue, while the remainder accrued from non-tax sources.
6 per cent.
 Chapter 12 Local Government and the Political Economy of Decentralization 343
I -

The single largest source of revenue for urban councils was effectiveness. The new Plan tried to incorporate and address
the octroi tax which accounted for in excess of 50 per cent these weaknesses.
of revenue. This was more significant for larger corporations, In theory, at least, the provincial departments were not
while the share fell as the size of the urban council decreased. supposed to determine the distribution of funds. For this
This pattern was not unexpected, since this was based on purpose, a Provincial Finance Commission (PFC) was to
goods being brought into council areas. In highly developed be established by each province to develop fiscal transfer
areas with a larger consumer base, and with areas producing mechanisms and the formula for the distribution of funds. The
industrial goods, more goods were imported and consumed, Finance Commission was supposed to ensure the distribution
hence the higher share of the tax. of resources between the provincial and local governments
The property related taxes such, as the urban immovable out of the proceeds of the Provincial Consolidated Fund into
property tax and the tax on the transfer of property, constituted a Provincial Retained Account and a Provincial Allocable
the next largest source of revenue, and together constituted Amount, which was then supposed to be distributed to the
about ten per cent. Again, property related taxes yielded three tiers of local government in the provinces. The shares of
higher revenues in the larger cities such as metropolitan and each local government tier were to be provided on a monthly
municipal corporations. The smaller urban councils depended basis. The Provincial Allocable Amount and shares of the
on non-tax receipts more than did the larger councils. local governments were to be on the basis of monthly receipts
Licenses, fees and other non-tax receipts constituted a far of the government. ·
greater share in smaller towns/cities than in larger ones. The Each local government was expected to have a single fund,
only tax levied by both urban and rural councils was the tax which would have included the funds received from the
on transfer of property, which is levied at the time of sale on provincial governments, the transfer made according to the
immovable property. The assessment was based on the total formula of the PFC, and own revenue generated by the local
value of the property at the time of the transfer. governments. The transfer was to take place directly from the
provincial level to each local government. Since the octroi and
Financing under the 2001 Local zi/a tax, two of the most important local taxes had been done
away with in the new scheme, 2.5 per cent of the General
Government System Sales Tax was to be provided to the local governments. In
The Local Government Ordinance (LGO) promulgated by addition to the fiscal transfers from the provinces, the local
provincial governments duringAugust2001, with amendments governments had been authorised to levy a number of taxes,
during 2002, assigned clear powers, responsibilities and depending on the level and capacity of each tier of the local
service delivery functions to three levels of local governments: government structure. Local governments were given new
district, tehsil, and union. In effect, responsibilities for the statutory sources of revenue. They now had the independence
delivery of social and human development services, such as to decide on the rates as well as the levies. Two new taxes,
primary and basic health, education and social welfare, now namely health and education taxes, had been given to the
rests at the district level, whereas municipal services, such as local councils-see Tables 12.1 and 12.2.
water, sanitation and urban services, are to be delivered at Under the new budgeting system, the Nazim, before the
the tehsil level. commencement of each financial year, was expected to
The LGO 2001 made some bold changes into the earlier present the budget for approval by the respective Council
decentralized local government system with, perhaps, the at each tier. The provincial governments were to inform
biggest change and innovation with the case of fiscal the District Governments in March of each year, the total
decentralization. Fiscal decentralization requires provinces to share including development and non-development share,
devise transparent mechanisms to transfer revenues to local expected to be available to each local government. Once they
governments in the form of formula-driven block grants. were informed of the share, each local government would
Under the new system, local governments were to determine need to develop its own budgets for development and non-
budgets and expenditures for most services, whereas only development purposes. The development budget amount was
policy issues, guidelines and monitoring functions were to to be the amount left over after budgeting for recurring costs
remain with provincial and federal governments. Higher and liabilities. The budget for running the Councils was to be
levels of government were to provide additional, special a charged expenditure.
purpose and conditional transfer to local governments as With regard to the non-development expenditure, which
the primary means to encourage particular policy outcomes, was to cater to the recurring costs of offices and service
such as poverty reduction interventions, local economic delivery, the concerned Finance and Budget official was
development and natural resource management. responsible for preparing the non-development budget for
Until the implementation of the Devolution Plan and the district government, which was to be prepared by
the LGO 2001, as we show above, the system of budgeting function and by object. The district/city governments needed
was highly centralized and wrought with numerous serious to allocate the non-establishment budget to various offices
problems. On paper at least, the new Devolution Plan made under them; the single budget now included the expenditure
radical departures from the past. The new Plan, claimed of the Council and development and non-development
that earlier the identification, appraisal and approval of activities funded previously through the local fund.
development projects was highly centralized, witq. little The development budgets were to cater to the needs for
community participation, inappropriate design and poor cost new assets or for improving old ones at the local government
344 Issues in Pakistan's Economy

Table 12.1
Local Tax and Non-Tax Sources under District Governments, 2002

Zila Council
1. Education tax
2. Health tax
3. Tax on vehicles other than motor vehicles
4. Any other tax authorized by the Government
5. Local rate on lands assessable to land revenue
6. Fees in respect of schools, colleges, and health facilities established or maintained by the district government
7. Fees for licences granted by the district government
8. Fees for specific services rendered by a district government
9. Collection charges for recovery of tax on behalf of the government
1o. Toll on new roads, bridges, within the limits of a district, other than national and provincial highways and roads

Tehsil and Town Councils

1. Local tax on services
2. Tax on the transfer of immovable property
3. Property tax on annual rental value of buildings and lands
4. Fee on advertisement and billboards
5. Fee for fairs, agricultural shows, cattle fairs, industrial exhibitions, tournaments, and other public events
6. Fee for approval of building plans and erection and re-erection of buildings
7. Fee for licenses or permits and penalties or fines for violation of the licensing rules
8. Charges for execution and maintenance of works of public utility like lighting of public places, drainage, conservancy, and water
supply
9. Fee on cinemas, dramatical, theatrical shows and tickets thereof, and other entertainment.
1o. Collection charges for recovery of any tax on behalf of the Government, District Government, Union Administration or any statutory
authority

Union Councils
1. Fees for licensing of professions and vocations
2. Fee on sale of animals in cattle markets
3. Market fees
4. Fees for certification of births, marriages, and deaths
5. Charges for specific services rendered by the union council
6. Rate for the remuneration of Village and Neighbourhood guards
7. Rate for the execution or maintenance of any work of public utility like lighting of public places, drainage,
conservancy, and water supply

Source: Anjum, Zulqarnain Hussain, 'New Local Government System: A Step Towards Community Empowerment', The Pakistan
Development Review, vol. 40, no. 4 Part 2 {Islamabad: PIDE, 2001), 852.

level. The new system envisaged that development funds undertake development within its own area. Projects were
would be available after deducting all liabilities and recurring to be selected by all three levels of local government: Union
costs. The Executive District Officer (EDO) for Finance and Councils were required to play a pivotal role at the Union
Planning at the local level was to be responsible for the level where they identified and selected projects. The Tehsil
consolidation and co-ordination of the development budget Municipal Administration was to focus on municipal service
of the District Government. The Tehsil Officer for Planning projects like the sewerage system, drinking water, etc. while
was responsible for the consolidation of the development the district government focuses on social sector projects, like
budget at the tehsil municipal level. Under the new system, a building schools and the provision of basic health.
Citizen Community Board had been set up which was to play The new system claimed a radical departure from the old,
a crucial role in budgeting and planning at the district level. especially in terms of development planning, selection, and
At least twenty-five per cent of the development funds were execution. While, as we argue above, in the old system, project
to be spent through these boards, while the remaining 75 per identification and execution was managed by the federal and
cent could be spent through the offices of the concerned local provincial governments. The change envisaged was that at
governments. the District(fehsil/Union levels, project identification and
The military government proposed and began implementing selection was supposed to be made through a collaborative and
the Devolution Plan 2000 in order to restructure the entire consultative process involving communities and citizens. Table 12.3
governance and development structure of the country, shows how the new system oflocal government differed from
with the aim to empower citizens through their local the previous two.
governments. According to the new development planning Once a project had been identified, e.g. a school at the Union
system, every local government was required by law fo level, a women's college at the District level, or a Basic Health
 Chapter 12 Local Government and the Political Economy of Decentralization 345

Table 12.2
Expenditure Responsibilities of Districts, Tehsils, and Union Councils, 2002

Responsibility District Tehsil Union Council

Education Primary and secondary X X

education, literacy

Health Dispensaries and local X X

hospitals

Roads District roads Local roads and street Local streets

Water X Water supply systems Wells and ponds

Sewers and
Sanitation X Yes X
Fire services X Yes X
Parks and playgrounds X Yes Yes

Animals X Slaughterhouses, fairs Cattle pounds and grazing areas

Cultural and sport

services X Fairs, cultural events Libraries

Street Services X Street lighting, signals Street lighting

Varia X Register births and deaths

Source: Charlton, Jackie et al. Pakistan's Devolution: A Note in Support of the Development Policy Review (Islamabad: Asian
Development Bank/World Bank, 2002), 19.

Unit at the Union level, the project appraisal and approval time. Some studies, particularly by donors, made attempts
was supposed to take place. Under the new Local Government to examine these changes. The ADB/DFID/WB multi-volume
Ordinance, the planning and development function had study, found some overall 'modestly optimistic trends',
been decentralized to the local level. In the District Office although still found most districts were 'hugely' dependent
a separate office had been created to look after the District on transfers from higher tiers of government, and despite
functions, and was to perform broad economic and social the budgetary provisions discussed above, found that local
planning functions at the District, and ensure that it carried governments had limited autonomy in preparing their
out appraisals of the projects formulated by the District and budgets. Moreover, the tax base of most District Governments
submit these proposals for approval to the Zila Nazim and remained weak and very limited, which did not allow them to
to the Zila Council. The Finance and Planning Group Office raise substantial additional own-source revenues. 34
was required to furnish the working papers to the District It is important to state that ADB/DFID/WB study was an
consultative councils and boards and prepare a development apolitical, technocratic, study which looked at managerial
perspective for the whole District. Once finalized by the and fiscal issues, but specifically stayed away from political
District Government, the entire set of development projects issues. This undermines the worth of any analysis, for the
would constitute the Annual Development Programme of the real issues, as we argue in this chapter, are always about power
District and was to be approved by the Zila Council. Every and are, therefore, political. Even fiscal issues are about power,
Union Nazim was a part of the Zila Council and they knew control and politics. Time and again, we have seen that even
which of their projects (or those of others) had been accepted the best designed technocratic solutions fall apart when they
or rejected. Along with the Annual Development Budget, the enter the real world of politics. Nevertheless, it is worth just
non-development budget was also sent to the Zila Council highlighting the main observations from the ADB/DFID/WB
for approval. Once the Zila Council approved a project or the study, since it did cover a large area, even though the entire
budget, then the Executive District Officer for Finance and framework of the study was technocratic and side-steps
Planning, communicated the approval to all concerned. Once political issues-see Box 12.2.
finalized, the projects were ready for execution and the funds The study found 'evidence of genuine change, particularly
are available. in the opportunities that citizens have gained to make
It takes some years for the amount of change required, their concerns heard', yet found 'the evidence of progress
particularly in the case of fiscal decentralization and financial [in the practice of devolution] ... scattered'. On financial
reform with regard to local government, to make its presence control, clearly a political issue more than any other, the
felt. It is far easier to change the electoral college or the study identified problems which most people studying local
structure of governance systems, but fiscal issues, given government are familiar with, such as district officials having
the deep vested interests of all actors involved, take more 'weak control over staff numbers', that they could not decide
346 Issues in Pakistan's Economy

Table 12.3
Comparison between the Basic Democracies System,
LGO 1979, and the Devolution Plan, 2001
j
Dimensions

A. HIERARCHY OF LOCAL GOVERNMENT

BOO, 1959 LGO, 1979 Devolution Plan, 2001
1
I
1. Tiers of Rural Councils Four Tiers Three Tiers Four Tiers with
• Union Councils/Town • Union Council No Rural/Urban distinction
Committees • Tehsil Council • Village Committee
• Tehsil Council • Union Administration
• District Council • Tehsil/Town Municipal
• Divisional Council Administration

l
• District Council

2. Tiers of Urban Councils Four Tiers One Tier

• Union Committees • Town Committee or
• Municipal Committee Municipal Committee or
• District Council Municipal Corporation or
• Divisional Council Metropolitan Corporation

8. METHOD OF SELECTION OF MEMBERS

1. Union Councils Election Election Election

2. Tehsil Councils Ex officio: Chairman of UCs and Ex officio: Chairman of UCs Ex officio: Naib Nazim of UAs
Town Committees

3. District Councils Ex officio: Chairman of Tehsil Election: Nomination of Ex-officio: Nazims of UAs
Council; Municipal Committee; official Members
Nomination of offical Members

4. Municipal Committee/ Ex officio: Chairman of Union Election

Committee; Nomination of offical
Members

C. TERMS OF COUNCIL Five Years Four Years Four Years

D. HEAD OF THE COUNCIL UC - Elected UC - Elected UA- Elected

TC - Assistant TC - Elected TMA - Elected
Commissioner of Tehsildar MC - Elected DC - Elected
DC I - Deputy Commissioner
DC II - Commissioner
MC - Deputy Commissioner

E. REPRESENTATION OF Reserved seats for: Reserved seats for:

VULNERABLE GROUPS • Women • Women
• Workers/Peasants • Workers/Peasants
• Minorities • Minorities

F. COORDINATION WITH Strong Loose Loose

NATION BUILDING
DEPARTMENT

G. CONTROLLING Deputy-Commissioner or Chairman and House Chairman and House

AUTHORITY Commission

H. FREEDOM OF ACTION Restricted Less Restricted Less Restricted

OF COUNCIL

I. BUDGET APPROVAL Deputy Commissioner Elected House Elected House

Source: Institute of Public Policy, Fifth Annual Report 2008: The State of the Economy-Challenges and Opportunities (Lahore:
Institute of Public Policy, BNU, 2008), 127.
 Chapter 12 Local Government and the Political Economy of Decentralization 347

Box 12.2 efforts to raise revenues. Such imbalances can be mitigated

Fiscal Issues under Musharraf's District by a combination of formula-driven predictability in the
intergovernmental fiscal transfers, and autonomy for provincial
Government System
governments in relation to setting the tax rate and the tax base
If districts do raise additional revenues, then to date little for those revenues that are assigned to them. However, thus
attempt has been made to ensure horizontal (or vertical} far, the effect of the formula based transfers has been limited,
harmonization of taxes among various governments. as in order to provide for a smooth transition, financing of
Imposition of a new tax by a local government, without any recurrent expenditures has been determined according to the
corresponding levy by other similar governments, can make principle of 'revenue adequacy', that is, to maintain service
mobile taxed resources move out of the taxed jurisdiction to delivery at pre-devolution levels.
other locations. This has clear implications for business and The 'revenue adequacy' principle worked well to prevent
economic activity within the taxed jurisdiction. Inevitably, this large-scale disruptions in service delivery at the outset of the
discriminates against the more backward jurisdictions, where new system, but it has also preserved the disparities within
the revenue needs are the highest, but where, due lack of provinces that are evident in the per capita budgets before
infrastructure and other amenities, economic activities are the introduction of the interim PFC awards. This probably
already limited. In distinction to tax equalization, which argues means that, for the nazim of good intentions, 'grantsmanship',
f
I
for equal tax rates across all jurisdictions, tax harmonization
suggests that local tax structures should be consistent with the
the manipulation of expenditures in order to trigger greater
transfers in the future, remains a better bet than tax effort
economic and social conditions of each jurisdiction. This also for increasing district revenues. Still, it is intended that a
I does not rule out the possibility of an efficient and productive reallocation will gradually reflect relative need and revenue
tax competition among various local governments, whereby potential. There are some changes in the size of fiscal
a local government can enhance taxes but prevent its impact transfers, but the implication is not yet clear.
on business and economic activity by providing better living Overall, newly-appointed district and tehsil nazims will be
and business environment through its expenditure decisions. wary of raising additional taxes. The interim PFC awards in
In their first year, local governments employed a variety Sindh and the Punjab do seek to create some incentives for
of new revenue measures to meet their expenditure needs, increased revenue generation. For instance, in Sindh, districts
with no consideration given to the viability, efficiency or will be given an additional allocation matching their baseline
sustainability of these measures. For example, a tehsil in collection of certain items. However, this may have the
Khairpur district, decided to use its development funds to perverse effect of motivating districts to raise taxes regardless
establish public real estate, which could yield a future stream of how well they are spent. Districts with wider tax bases and
of rental income for the TMA. Not only does this run counter to lower efficiency may gain more than those with a narrow base
the government's stated objective of withdrawing from areas and higher efficiency.
of private sector expertise, the experiences of other countries In addition, the incentives remain weak for encouraging
point to grave risks in such a mode of revenue generation. user-fees for private goods. The community is willing to pay
After some Union Administrations resorted to collection of tolls for improvements in the delivery of services that they value. In
(and the defunct zila tax), the federal government intervened the case of water and sanitation, for example, devolving capital
to require that local governments get any new taxes that the expenditures from the provincial level to the district or tehsil
plan to levy vetted by the provincial finance department. While level, accompanied by good intentions to tie them to capacity
this is important for tax harmonization and coordination and for operations and maintenance, is unlikely to be sufficient to
for prohibiting the local governments from thwarting national discipline investment. Without a relationship between quality
and provincial policies and objectives through imprudent and quantity of services delivered, on the one hand, with
taxes and other fiscal measures, it potentially undermines the the cost of those services, on the other, infrastructure will
independence or discretion of local governments. suffer from under-investment and problems in operations and
Overall, districts are left with little incentive to raise additional maintenance will continue.
taxes, and even less incentive to raise them well. Indeed,
there are overwhelming political disincentives for nazims to
levy taxes. They are primarily dependent on fiscal transfers, Source: Manning, Nick et al. Devolution in Pakistan-Preparing
and under these circumstances subnational governments for Service Delivery Improvements (Islamabad: World Bank,
have few incentives either for cost efficiency or to improve 2003), 30-32.

salary budgets or dismiss surplus staff and nor could they Pakistan's highly centralized state. The ADB/DFID/WB study
recruit with a free hand. Importantly, the study found that did, nevertheless, make numerous recommendations of a
'neither district nor tehsil authorities have any autonomous 'governance'/managerial/administrative nature which could
power to determine pay policy'. Similarly, local officials 'must improve the functioning of local government, within limits,
respond to program goals and priorities that they have no but the broader issues of substantive change, as we argue
hand in defining', again, clearly highly political issues given below, are of a highly politicized and political nature.
348 Issues in Pakistan's Economy '·

12.3 THREE MILITARY RULERS AND THREE finances that local governments have available-as we argue
above-and hence research needs should address solutions to
LOCAL GOVERNMENT SYSTEMS this core problem. Another persistent problem in the quality
of delivery of services from local government, was their lack
Research for this chapter was conducted four years after of skills and training. Many District Governments did not
the then devolved and decentralized District Government have the capacity to do what they were expected to do, simply
system of General Musharraf's military regime had been because they did not have the managerial or administrative
in operation. At the time of research for this chapter, when capacity, areas where research could identify specific gaps.
local government elections were to be held in Pakistan However, while these governance and financial issues are
in August/September 2005, for the second time after the important, we feel that many of these problems had their
promulgation of the 2001 Local Government Ordinance, roots in the larger politics of the land and how the state was
not a day went by when the local press, both English and run and how resources are controlled.
Urdu, was inundated with articles, stories, news reports, The Dawn newspaper from Karachi in its 1 August 2005
and letters which discussed either the system itself, or report, for example, gave· a detailed report of a seminar held
the ongoing electioneering campaign. There were serious in Lahore in which technocrats, former Nazims, officials of
analyses by scholars about the District Government system the Musharraf government and a host of others, spoke. 35
and structure as well as interviews of candidates .and The Nazims of Kohat in the NWFP and of Karachi, both of
incumbent Nazims. The two themes that emerged in the whom were members of political parties and groups which
discussion were based broadly on the politics related to the were not in power at the provincial level, stated that their
system and about the impact and performance of the sitting local governments 'performed well during their first year
councils and their Nazims in terms of service delivery. In this [2001-02] iri office, but started having problems after the
section, we first, briefly, discuss developmental aspects of induction of provincial governments'. 36 The Chairman of
the devolution process, followed by the far more important the National Reconstruction Bureau, a governmerit think
political aspects, related to the state, participation and the tank responsible for managing and developing the District
military. Government system, defended the system and spoke about
Given Pakistan's huge development deficit, its development many of the new powers that Nazims had acquired through
'problems' will not go away in years to come. There will the new system, including some functions of the provincial
always be a shortfall of targets and aspirations, the demand government which had been devolved to the tier of local
for services will always outstrip supply. Governments will governments. Many of the other speakers criticized the
continue to be criticized for not doing enough, and perhaps system for its weaknesses, particularly because they felt that
local governments more than any other tier, since the the provincial government had too much power over the
woi:k-or Jack of it-which they are supposed to do, is more District Governments and had ample room to interfere. Many
visible. This makes assessment of the output/work of local speakers felt that the system had not really been devolved.
government difficult, yet something that cannot be avoided. However, from the newspaper. report one gets the sense
Clearly, for this reason it is not possible or fair, to make any that despite the problems and criticism, there was grudging
comments on the service provision and performance of the acceptance of the local government system as it then existed
local governments in Pakistan, especially given the fact that in practice.
data may be hard to come by. However, one could make In the same issue of the newspaper. while there were
some general observations about how one ought to look at the numerous reports about the.ongoing election campaign, there
performance and evaluation of local governments in Pakistan was also a detailed analytical article by one of Pakistan's more
and outline future research needs. prominent civil society democrats who also heads the Human
Without a doubt, there is a need for greater monitoring Rights Commission of Pakistan. The key argument that I. A.
and evaluation of local governments by citizens and research Rehman made, was that the four provincial ministers were
organizations outside of government. Perhaps some generic trying to make the local governments their 'fiefdoms' and
measure of 'best practices' needs to be drawn up against ensure that their candidates were elected. He wrote that
which one can assess the performance of other local the 'chief ministers . : . are working overtime to ensure that
governments. An institution (or long term research agenda) local government elections are won by their proteges and
can monitor the performance of a selection of District favourites, as if their future in office depends on this. (They
Governments against a set of measurable criteria underlining may well be right)':3 7 He argued, that it was the 'central
achievement and failure and publicizing the results in the authorities' who had 'willed that the local bodies should,
media, as a sort of local government watchdog. The absence instead of empowering the people, become fiefdoms of the
of Citizens Community Boards (CCBs), a cornerstone to the provincial chief ministers'. Rehman's article discussed the
District Government Plan, was a case in point. With very numerous amendments which had been made in the LGO
few CCBs existing, one already had a research and political 2001 for the current round of elections. He showed, for
angle to evaluating the performance of the local government example, that further powers had been given to the provincial
system in place in Pakistan. However, such an effort would chief ministers to dismiss elected Nazims, and how the Nazim's
have required a group of citizens working with a research powers had been curtailed through these amendments.
team at an institution, to follow this through. A key issue in Despite these changes, Rehman accepted that the reasons
the problems of local government has been the insufficient that 'the grant of unbridled powers to chief ministers over the
 Chapter 12 Local Government and the Political Economy of Decentralization 349

life and death of Nazims has not dampened the enthusiasm local governments between it and the provinces,
of candidates for such offices is easy to understand. If all that the centre, where the military continues to
a Nazim is required to do is to keep the boss in the provincial maintain its grip on the levers of state power, has
capital happy, the office becomes more attractive, not less'. 38 been strengthened at the cost of Pakistan's four
One gets the feeling, that we have been here before. federating units.
'If Pakistan's chequered political history is
The general perception in Pakistan in 2005, was that the
any barometer, the question of devolution cannot
much touted Devolution Plan of the military government be addressed in isolation from the larger issue of
was in the state of a near crisis. After the elections of provincial autonomy ... Pakistan's civil-military
the National and Provincial Assemblies, as has happened ruling elite ... has often used the administrative
so many times in the past, the local government system and coercive powers at its disposal to extend
imposed by the military, continued to be questioned by the the centre's control over the provinces. Since
elected members of the higher tiers of government. These military-inspired devolution is directed to local
elected Provincial and National Assembly members felt that levels, it enhances tensions between the centre
the system of District Government had taken away some and the provinces.' 41
of their control and privileges and so they felt threatened.
The ICG Report believed that 'the military's political
Hence, as in the past, a contradiction between the politics of
engineering that accompanies jt [local government reform]
democracy-even a praetorian democracy-and the politics
is widening divisions at the local and provincial levels.
of the military re-emerged. To make matters worse and to
Some of these could well lead to greater domestic violence
undermine the local government system established by the
and instability' .42 Clearly, in terms of the politics of local
military government, elected representatives at the National
government reform under the military, we see that the story
Assembly level had all been promised large sums of money
in Pakistan was repeated for the third time under its third
for developmental purposes which they were supposed to
military coup maker which created Pakistan's third devolved
spend in their constituency, throwing into peril the carefully
and decentralized local government system. History, it seems,
crafted local government fiscal and development model.
had repeated itself, not just the first time as tragedy, but the
Even donors, otherwise the most vociferous supporters of
second time, as farce. Both the previous local government
Musharraf and all his policies, particularly that of devolution,
systems which were seen to be the cornerstone ·of both
conceded that 'the opportunism of national and provincial
military governments, even after being in place for a decade
assembly politics has resulted in further competition between
or so, fell apart with the fall of the regime with which they
MPAs [Members of the Provincial Assembly] and local
were so closely associated.
councillors for control over assets through which they can
A second round of elections for the District Government
manage their constituency relations'. 39
were held and numerous innovations were made in the
Lest it be misunderstood that these examples are either
second tenure of these governments between 2005-09.
infrequent or very recent, related only to the electioneering
However, with the fall of the Musharraf regime and with
phase and the public debate, some examples from the
the end of the tenure of the elected District Governments,
past will only help highlight some of the many issues that
the People's Party government and its allies, decided to do
exist around the process and system of local government
away with the Musharraf model of decentralization and
in Pakistan. In March 2004, the International Crisis Group
devolution, and even after five years of being in power, were
(ICG) launched its Devolution in Pakistan Report and stated:
unwilling to propose a structure or model which would
While the ostensible aim of Musharraf's replace the previous system. Clearly, history did repeat itself,
devolution scheme may be the transfer of once again.
administrative, political and financial authority Moreover, what is interesting and instructive, is to
to the lowers tiers of government, the reality compare the role which local government played in 2005
is starkly different. Local governments in fact when the earthquake struck Pakistan and when elected
exercise only nominal autonomy with respect local governments existed, compared to 2010 and 2011,
to administrative and financial matters in their when floods hit Pakistan in the absence of elected local
respective jurisdictions. 40 government. While there are some problems in making a
direct comparison between the floods and the earthquake,
The Report adds, that:
the absence of elected local governments at the time of the
'Local governments have proved to be the key floods made relief and rehabilitation difficult. In the 2005
instruments in the military's manipulation of earthquake relief and rehabilitation process, elected local
the Pakistani polity to ensure regime survival. government officials played a critical role.
District nazims used public funds and other state Also worth pointing out is, that after the 18th Amendment
resources to stage pro-Musharraf rallies during to the Constitution when many powers from the federal
the April 2002 presidential referendum and to government had been devolved to the provincial government,
support the Pakistan Muslim League (Quiaid- as it ought to have happened, local government responsibilities .
e-Azam) parliamentary candidates in the 2002 and decisions about the nature of local government, such as
national polls. Local governments have also had what type of system they want or when elections are to
significant utility for the military's divide-and-
be held, are now the responsibility only of the provincial
rule tactics. By juxtaposing more than 100 new
government. A failure of local government and the inability
 350 Issues in Pakistan's Economy

to hold elections at the local government level is clearly a many governments lacked technical capabilities, financial
failure of the four provincial governments. One cannot hold constraints were even more severe.
the federal government responsible for delaying· elections at A very large share of municipal government expenditure was
the local government level any longer-see Appendix 12.1 recurring expenditure, a trend which was more pronounced in
for a post-Musharraf evaluation of his district government large cities. This expenditure went towards maintaining and
system. operating water supply schemes, public health, education,
and curative care. The highest per capita expenditure in
the urban councils of the two biggest provinces, Sindh and
12.4 IsLOCAL GOVERNMENT THE Punjab, was incurred on roads. In Balochistan and the NWFP
it was on drainage. In urban areas in the country, the high-
ANSWER? 43 priority sectors for development were water supply, sewerage
12.4.1 The Contribution of Municipal and drainage, and roads, collectively accounting for 50 per
cent of development expenditure. 47
Government in Development The picture regarding development provided and
The overall analysis of municipal, i.e. urban, local undertaken by municipal governments in the past, is therefore
governments regarding the provision of services in the old particularly dismal. Urban local governments, with the
system prior to 2000, suggests a number of conclusions. possible exception of the larger metropolitan corporations in
Firstly, almost all councils in the larger urban centres more Karachi and Lahore, along with a handful of the bigger cities,
or less restricted their role exclusively to the performance did not provide either services or facilities which would have
of some (or all) compulsory functions. In smaller towns a positive developmental effect. As we have argued in much
and cities, the financial and institutional capabilities of the of this chapter, while there has been some change in design
councils restricted even the performance of compulsory and structure under the new district government scheme, the
functions, leave alone those of an optional nature as well. generic problems remain the same as those in the past.
In these cases, the provincial government intervened to help
these governments make ends meet-both financially and 12.4.2 Potential for Development by Local
technically. In larger cities, water and sewerage authorities
and development agencies played a critical ancillary role Governments
to the municipal governments. Without this assistance, Urban local governments were specified a large and varied
it is unlikely that local governments, even in big cities, number of tasks and functions which they had to perform,
could have managed. Some of the optional functions of and some which they may themselves have chosen to
these governments were also performed by such specialized perform. The scope of the statutes regarding the provision of
agencies. 44 services and facilities was broad enough to encourage major
Even though education and health were the primary projects in the social sector which could have benefitted
responsibility of the provincial governments, both sectors underprivileged and vulnerable groups, especially women and
continued to play an extremely important role in the children. Almost all major areas were covered in the statutes
provision of services in cities. In larger cities, the provincial and very few more could have been added. Technically,
government played a minimal role, as a large number of provincial governments could delegate further responsibi-
schools and medical facilities were either private or had been lities to the local governments as they deem fit.
developed, administered, and financed by the local municipal The problem, then, was not one of statutory limitations,
government. However, even large cities such as Peshawar but financial and technical, and possibly conceptual and
(pop. 1.5 million), lacked the capability to run and develop motivational, constraints to developing facilities affecting
their own schools, hospitals, and dispensaries. 45 In smaller social welfare for the general public. There is a clear
towns, the provincial governments played a formidable role, relationship with size of city as far as the possibilities are
not only in education and health, but in almost all other concerned. The larger cities (or, as we argue now, the larger,
sectors as well. The reason for this is clear, that smaller richer districts) are usually in a position to raise funds and
urban centres lacked technical and administrative capabilities provide facilities and services for their population. Smaller
and did not have adequate staff to undertake substantial towns, cities and districts just do not have the resources-of
development works. In many cases, large schemes (water any kind-to provide other than the very basic facilities, such
supply, sanitation, drainage) which can only be undertaken as roads and drainage. To expect anything else would be
by the provincial department in the case of smaller towns very unrealistic. However, even the relatively large Peshawar
and cities were, after completion, handed over to the local Municipal Corporation in the past, spent as much as 86 per
council. The local council was then responsible for operation cent of its budget on salaries and on electricity bills. 48 While
and maintenance costs, which many were unable to meet. 46 Lahore Metropolitan Corporation did have a large number of
Essentially, then, local municipal governments, given the health and medical facilities, it spent in all less than one-half
structure at that time, especially that which came with of a per cent on health care, or ten paisa per inhabitant. 49
· a smaller size, did not have the capability to provide Thus, while the larger corporations did have access to more
essential services which could have had positive effects on funds, their budgets, too, were quite small. The low fiscal
development in terms of water supply, drainage and sanitation, outlay of the Municipal Councils necessarily made the salary
primary education, and hospitals and dispensaries. While and administrative costs look excessive. Thus, where revenue
 Chapter 12 Local Government and the Political Economy'of Decentralization 351'

and expenditure were limited, as was the case in almost all important tier in the hierarchy. Local government with the
councils, the costs of administration remained high, and will exception of a few large city district governments has been
continue to be so, until the time when the municipal revenue reduced to an institution that pays recurring costs incurred
base is restructured and substantially enhanced. by schemes often developed by other levels of government.
While financial constraints were the biggest hindrance to Furthermore, most, if not all, local governments face severe
the provision of services and facilities in cities, there were financial constraints and are not even in a position to,pay the
some others as well. In the larger cities, the establishment salaries of their employees. · ·
of development authorities and of specialized organizations In the early 1980s, local governments seemed set to play
like the water and sanitation agencies under the provincial a productive role in development, but ironically, the return
government played an important role in delivering services.so to democracy at the national and provincial levels helped to
In small cities, the provision of local infrastructure was subvert that possibility. Today, local government in _Pakistan
usually carried out by provincial line departments, in is the least likely, given existing administrative and financial
particular the Public Health and Engineering Department, structures, to be able to play any positive role in development.
in the case of water supply and sanitation. This meant that Unless substantial steps are taken to redefine.the context and
local bodies had been left in the role of having to prov~de nature of local development, local government .will continue
for solid waste management, cleansing services, drains, etc. to be ineffective. ·
This implied that while services and facilities were provided Even under General Pervez Musharraf's Devolution Plan
to the inhabitants, local governments had their role further under which District Governments had been created and
marginalized. It was relegated to that of operating and put in place, the basic contradiction between higher tiers-
maintaining services which were developed and created particularly provincial-emerged again. See Box 12.3 on the
by other agencies, a role that they were reluctant to play problems with local government.
as they felt they were not involved in the planning and It would also be fair to say that local governments
implementation process at an earlier stage. Furthermore, the are not solely responsible for the dire straits they are in.
link between service provision and local taxation had been Unless provincial and national governments practise better
weakened, and hence local government resource provision governance at all levels of the hierarchical structure, the
had been less than its potential. status quo is unlikely to be changed. Local governments are
The provision of services and facilities by other agencies ineffective not so much due to their own faults, but due to
had meant that local governments were not willing or eager the way they have been treated by the higher echelons of
to develop their own organizational and technical capability._ government. For local governments to work more effectively,
It has been seen that many communities are willing to pay higher tiers (?f government must have more confidence in
local taxes and user charges if they feel that adequate services them and must relinquish effective co.ntrol. Any meaningful
will be delivered. However, local bodies will have little desire for devolution and decentralization must incorporate
incentive to generate additional sources of income if they are the practice of devolving power and resources from the
not in a position or under compulsion to provide municipal federal level to the provincial first, before an effective local
services because such provision is under the control of other government under the provincial government can work
agencies. Thus, on the one hand, while specialist agencies productively. After the 18th Amendment, the onus is on
did provide facilities, their presence undermined the role that the provincial governments to develop their own local
local governments should have played.s 1 governments.s 2
An overview of municipal local government reveals that
even basic services and facilities were not provided by local
governments because they did not have the funds to do so. 12.5 SUMMARY AND FURTHER READING
Furthermore, even if there was expenditure on sanitation,
water, etc. there was no guarantee that the projects envisaged 12.5.1 Summary
by local governments would deliver to the more needy This chapter explores broadly the decentralization and
segment of the population. In most cities, it is the w~ll-to-do devolution debate and experience in Pakistan in a political
who have access to better facilities. Poorer neighbourhoods, economy framework ar1d context, with emphasis on
often on unregularized lands, where the most vulnerable and contextualizing power anq examining issues of devolution
underprivileged people live, do not have access to the most and decentralization within a wider framework and context
basic of facilities. The population which needs facilities most of state-society relations. The main contribution of this
for its development is often neglected the most by all tiers cif chapter is ~hat it follows a political economy approach and
government. framework yvhich requires a broader, more holistic view, and
distances .itself from a purely administrative/managerial/
12.4.3 Is Local Government the Answer? governance related evaluation, which have become the norm
for international donor organizations.
While there has recently been growing lip-service paid to the
There have been three substantive interventions in the
role that local governments in any guise, including that of the
decentralization and devolution process and structure in
district governments, are expected to play in development, it
Pakistan since 194 7, manifest through different administrative
seems quite clear that the existing structure of government
structures of local government. All the three attempts at
in Pakistan does still not permit any meaningful role to this
local government reform in the form of decentralization and
354 Issues in Pakistan's Economy ti

Appendix 12.1

Union Councils, the legal basis for local governments is laid

Democracy, Military Rule, and Local through two constitutional provisions under Articles 32 and
Government 140-A of the Constitution. Moreover, the system is run through.
Local Government Ordinances which were promulgated by
This selection of articles from various issues of the The News on
provincial governments respectively on. 14 August 2001. The
Sunday, over the last few years after the .fall of the Musharraf
Ordinances have been included in the Sixth Schedule of the 1973
regime and after the rehabilitation of democracy in Pakistan
Constitution for a period of six years. These ordinances can only
in 2008, highlights many of the issues which emerged with
be amended with the previous san~tion of the President after
regard to the local government system imposed by the fourth
consultations ~ith the Prifne Minister in accordance with the
military government. It shows how there was wide disagreement
provisions of Article 268(2) of the Constitution.
on whether the system should be done away with or whether
ln ·contrast to the originally envisaged plan, the autonomous
it should be replaced by that of another military dictator. By
face of the district g'overnments started dithering and was
September 2013, there were no elected local governments in
defaced thanks to drastic amendments in 2005 where, besides
Pakistan and there was little agreement in the four provinces
several"sfructural changes, the power to dismiss and suspend was
about which system suited them.
given into the hands of the chief ministers instead of the councils
that served as their electoral college.
I. Resultantly, sandwiched between the original NRB plan and
Sikander Ali Hullio writes: the reasserted authority of the chief ministers, the autonomy of
district governments was compromised in the 2005 amendments.
The dream project of military regimes-in the na~~- of ensuring This whetted the appetite of the conservative for power
real democracy and empowering grassroots communities, the accumulation at the provincial level. This appetite is going to
three-tier local government structure in Pakistan, is once again destroy the very essence of the system, leaving it at the mercy '
in hot waters and courting controversy in the wake of equal of the provincial governments which are going to take over as ('
demands being made either for drastic amendments of a temporarily the constitutional protection lapses next August with
complete repealing by major political forces that emerged out of the completion of four years second tenure of local governance
the general elections held early this year: in Pakistan.
Midwifed with much fanfare respectively by General Ayub, Another major structural change introduced last month is the
Zia ul-Haq, and Pervez Musharraf, this pet project of successive revival of the abolished structure of Divisions. Upon .abolition,
dictatorial regimes has never been fully owned as envisioned there were twenty-six divisions in country, five in Sindh, six in
by the major political forces in the country over the past five Balochistan, seven in North-West Frontier Province, and eight in
decades, except partial ownership in the seventies and late Punjab. Seven years ago, the widely believed sun which set on the
eighties. It merely outlined an agenda to implement under the 19th century colonia 1 style oLgovernance with the introduction
title, New Social Contract by Benazir Bhutto, in early nineties. of deyolution plan and abolishing of the archaic system of
The existing three-tier local governance was born out· of commissioners including deputy and additional ones, is going to
the much talked about seven-point reforms agenda announced rise again in the country. ln Punjab, the commissioners have been
by Pervez Musharraf after his Oct. 1999 takeover of power. restored after amending the Land Revenue Act, 1967, in?tead of
It was formally launched on 14 August 2001, after selective the widely expected Local Government Ordinance 2001.
countrywide consultations and deliberations made by the National Since its introduction seven years ago, several hurdles have
Reconstruction Bureau (NRB), created for the reconstruction of hampered the smooth functioning of this system. Blue-eyed
institutions, then headed by Lt Gen (r) Tanvir Naqvi who is widely bureaucracy emerged on the top, in a bid to have an upper
believed to be the father of the existing system. hand in terms of authority over the elected representatives.
Later, Daniyal Aziz effectively managed the reforms agenda, Academically, in a paternalistic elitist approach, which is based
but it started to lose strength with the weakening of the on the notion that people are not equipped to know best what
Musharraf regime early last year. is good for them, bureaucracy has always been ditching such
lnstead of piloting in some districts, as initially suggested efforts at empowering the people. This gave birth to rampant
to General Naqvi at that time by a panel of top governance transfers and postings of officers across the country, leading
consultants working with the NRB, the local governance system to misperceptions about the local governance and its very
was launched uniformly across the country on non-party basis implementation.
for a four-year term, having 23 members in every Union Council, Politically, the system was orphaned due to its essentially
which subsequently formed Tehsil and District councils. In its non-political nature and application. The major political parties
first tenure (2001-2005), the total strength of elected members landed their B-teams of close relatives in a bid to counter and
was around 140,000, which was reduced to nearly 80,000 in the contest the elections dominated by the pro-Musharaf forces.
second tenure (2005-2009) as the number of councilors was Besides, indirect election at District and Tehsil/Town level lowered
slashed from 23 to 13 due to over-representation. the chances of emergence of in-house leadership, as in most
Currently operational in 117 districts including 4 City cases a person with big political contacts and financial resources
Districts, 358 Tehsils, 62 Towns in City Districts, and 6,139
 Chapter 12 Local Government and the Political Economy of. Decentralization 355

landed important tiers. A direct election for the top slots would revive the 1979 local bodies with municipal corporations in urban
have worked better in terms of efficacy and ownership. areas and district councils in rural areas.
The Union Council, a grassroots organ of the local government, Instead of making amendments in the 'present system to
has suffered neglect, although it provides key Electoral College to increase its accountability and service delivety, the provincial
both upper tiers, Union Nazim (District Council) and Union Niab governments seem to have chosen a setup that could work as a
Nazim (Tehsil/Town Council). The entty and issuance of birth mere appendage to the provincial authority thus depriving the
and death certificates were its prominent jobs, while skipping the common people whatever little representation and participation
assistance and supervision of District and Tehsil/Town functions they had got in 2001.
and activities were undertaken at the Union level through Union To put the whole issue in perspective we take up the relevant
Monitoring Committees. Most of the functions, sanitation, questions one by one:
sewerage, which are being looked after at the upper·level, should
How do the local bodies work in Pakistan?
have been decentralized at the Union level. Moreover, it should
Legally speaking, local governments are an administrative
· have been ·given more financial autonomy.
arrangement of the provincial governments as they lack
The system envisages broad but loose monitoring mechanism
constitutional cover. Constitution recognizes only two tiers
through the formation of Monitoring Committees of elected
of governance-provincial and federal with chapters on them
members to assist and oversee each devolved department, which
but there is no chapter on local governments. l-lowever,
mostly remained intact for the sake of operational requirements
in principle, the retention of local government system is
but remained ineffective and reduntant. This produced a poor
necessaty to meet the requirements of Article 37(i) of the
auditing system, leaving room for massive corruption as alleged
constitution, that is; state's obligation to decentralize the
and unearthed in the case of the TMAs auditing conducted by
administration.
the Government of Punjab last month.
Lack of constitutional protection for these institutions has
Moreover, several institutional mechanisms remained either
led to the frequent disruption of the local bodies and gave
in papers or were a remote possibility during the process, which
the provincial governments leeway not to hold local body
could have played a highly effective role in institutionalising
elections regularly. For example, the Pakistan People's Party
the system. The formation and activation of Local Government
(PPP) governments never held local body elections in its two
Commissions in each province, including the. activation of
previous tenures in the 1970-77 and 1993-96.
Mohtasib (Ombudsman) office in each district, could oversee,
integrate and orchestrate the local goverment functioning Political significance of the local governments
effectively. Similarly, Musalihat Anjumans for the conflict ln Pakistan, local governments, besides trade and student
resolution would also have worked better if formed and activated unions, have been the nurseries for grooming political cadre
across the countty. and provided the middle class people an opportunity to
ln contrast, the citizens' participation and engagements participate in the political process.
through Citizen Community Boards (CCBs) have reportedly shown Representatives initially elected to the local councils rose
· · impressive results wherever formed and activated as per the local to the national and provincial assemblies. Ayub Khan's much-
needs. maligned basic democracy system threw up on the national
Largely, the critics of this system have said that the devolution scene politicians that filled the rank and file of the Pakistan
of power makes the district police and the civil administration People's Party. Gen Zia ul-Haq's local bodies raised another
subservient to the elected local councils but the plan could generation of politicians which today makes up the most of
not touch Pakistan's social and cultural peculiarities. With both factions of the Pakistan Muslim League. Prime Minister
the installation of the local governments, the partial power Yousaf Raza Gilani himself is a product of the local body
was devolved to the locally elected representatives including system.
decentralization of administrative and financial authority to local For the middle classes, the local government system is the
governments and the rest was robbed off during the process, only avenue to participate in governance as the national
which means that the less turned into reality and still much • politics is dominated either by the traditional landlord gentry
needed to be transformed, if genuinely the system is pushed or lately the moneyed urban class. A middle class person
ahead with a wider ownership in times to come. cannot think of applying for a major political party's ticket
for a national or provincial assembly seat, let alone bear the
Source: Hullio, Sikander Ali, 'A Structural Analysis of Pakistan's election expenses. Owing to wider participation, people's
Local Government System', The News on Sunday, Karachi, 23 participation in the past local elections has been vety high as
November 2008. compared to the national and provincial elections.
l-low was the 2001 system different from the 1979 order?
The 2001 local government system was quite radical as it
II. broke the 150-year long stranglehold of bureaucracy on the
Adnan Adil argues: country's power system. For the first time, it brought the
. police and the administration, though partly, under local
Keeping the tradition of undoing things implemented by its governance. District governments were entrusted powers to
predecessors, the government has allowed the 2001 local deal with 13 sub}ects on the provincial list, which meant
government system to expire on 31 December 2009, and that people in a far flung district did not need to travel to
according to news reports the provincial governments are set to the provincial capitals for issues related to say education,
356 Issues in Pakistan's Economy

health, etc. The local governments became a governance unit governments in managing 13 provincial subjects is loathed
instead of a municipal administrative unit of the provincial by MPs as they think they want to (mis)use this authority to
government as had been the practice in the past. perpetuate their influence at the local level.
The 2001 system gave to the common citizen at the The bureaucracy had never accepted the 2001 local
grassroots, particularly marginalized groups such as women, government system that had taken away powers enjoyed
minorities, and labour, increased representation .and a share by the bureaucrats earlier. lt demolished the epitome of
in public affairs and it provided women a very direct stake in bureaucratic power, the office of the deputy commissioner,
local governance. which in popular parlance used to be known as 'king of the
Tehsil municipal administration, previously limited to urban district' (zi/a ka badshah). Above all, the District Management
areas, was extended to rural areas as a result of which the Group and the police loathed subservience to local elected
rural population started benefiting from municipal facilities, people, whether they come from local governments or
including water supply, streetlights, etc. Under the 2001 provincial or national.
system, a local service was created in the districts while earlier Political parties and the bureaucracy cloak their vested
most officials in the district government used to come from interests under the arguments that local governments led to
the provincial cadre or superior services. massive corruption and bad law and order management. The
fact is poor law and order is incorrectly cited as a failure of
Was the 2001 system fully implemented?
the local governments because they had little control over
No. As bureaucracy and police loathed subservience to
police. Law and order remained a provincial matter and
the elected representatives, the bureaucracy resisted its
district nazims only had minimal powers to oversee police
implementation from day one. lt did not allow the system
performance.
to be fully implemented. Neither village councils, nor
citizen boards and police committees were formed. Central Was there any flaw in the 2001 system?
and provincial public safety commissions were not formed As resistance to devolution started from day one, the authority
to oversee the functioning of police for a long time, and was not fully decentralized to the district and tehsil level. A
when the institutions belatedly came into existence, they hotchpotch was made by delegating some authority to districts
did not function. ln 2005, the provincial governments made in 13 provincial subjects while retaining the provincial control
amendments in the 2001 system to reduce the powers of local at the same time. ln effect, control of the local government
mayors and bring them under their control. system was at the district level but it was made dependent
A major dishonesty was committed by retaining the huge on the service, cadre and implementation machinery of the
supervisory bureaucratic structure at the provincial level when provincial government.
the same functions were devolved to the districts in at least Under the 2001 system, local councils did not have any
13 departments. As a result, additional government officials development funds, because they had minimal direct taxation
were recruited in the districts side by side with the provincial powers. When the principal source for local government
cadre. lnstead of making the administration lean, the 2001 funding, the octroi tax, was given to the federal government
system was made to create additional bureaucracy and burden in the form of the general sales tax (GST), their income sources
the national kitty. The dual control of 13 departments by the were restricted to municipal corporations' assets in bigger
provincial and the local governments cost billions of rupees cities. lt is estimated that 80 per cent of the amount that local
to the taxpayers. councils got from the federal government on account of GST
collection was spent on salaries and overheads.
Why opposition to the 2001 system?
A major negative impact of the 2001 system was that
The leadership of political parties, bureaucracy, and
it consolidated the hold of big landlords at the local level.
nationalists in smaller provinces are three sworn enemies of
ln the absence of land reforms, the authority delegated to
the local governments. The powers exercised by the local
the district governments came into the hands of politically
representatives cut through the powers and political influence
influential landlords at the district level. As the election of
of the bureaucracy and the members of the national and
mayors (district nazims and tehsil nazims) was indirectly made
provincial assemblies.
by the directly elected representatives at the Union Council
The opponents of the local governments present the
level, the feudal elements prevailed. Thus, the 2001 system
kind of arguments that were put forth by the colonialists
strengthened local elites at the expense of national political
opposing the transfer of power to colonies, that is; the local
parties. Moreover, industrialists and landlords got elected
people are incapable of managing the system. This is the
from seats reserved for workers and peasants. Women lacked
kind of argument that proponents of the strong centre use
authority despite increased participation.
in opposing greater provincial autonomy, and in tum the
Despite these flaws, the 2001 system transferred authority,
nationalist parties seeking provincial autonomy use to oppose
though partly, from bureaucracy to the elected people,
the devolution of power to the districts.
increased the participation of the disadvantaged groups and
ln fact, provincial elected governments prefer dealing with
created a capacity at the local level to run the administration.
public servants rather than elected representatives because
This was a step towards decentralization and devolution,
public servants can be transferred, while an elected district
laying a foundation on which further improvements could
nazim can only be removed through a vote of no-confidence,
be made.
which may not always be possible. The authority of the local
 Chapter 12 Local Government and the Political Economy of Decentralization 357

What does the 2001 system rollback imply? advised by Prime Minister Yusuf Raza Gilani and also for a report
The provincial governments are yet to make legislation on from the Ministry of Law before he makes the final decision.
the new local system. However, reports suggest that while Reportedly, on 19 July 2009, the PM advised the president to
the local councils will remain, their nature will change and allow the provinces to amend the Local Government (LG) laws,
they are likely to become a municipal administrative unit to hence permitting them to dissolve the system and appoint
exercise municipal functions at best. The abolition of the 2001 administrators in place of district nazims until fresh LG elections.
system means the supervisory role granted to districts in 13 lt must be pointed out here that the local government system
departments will be abolished or reduced to make it minimal is protected under the Sixth Schedule of the Constitution until
or just ceremonial. ln other words, the local councils will be December 2009. The tenure of the present local government
reduced to sanitation-related work alone and there would be will expire on 17 October 2009. The power to take a decision
no political or governance aspect to them. on the LG will automatically go to the provinces on 1 January
News reports suggest under the revised system the provincial 2010, that will be free to amend the system in accordance with
governments are relying more on bureaucracy. They have their choices, without the federal government's approval. But
already restored the divisional tier of the administration that provincial governments are not willing to let this system function
was scrapped in 2001 and the reinstatement of deputy com- for the next four months.
missioners and district magistrates is also on the cards. Thus, Punjab Law Minister Rana Sanaullah tells TNS that there
the separation of power of the judiciary from the executive is a consensus among the four provinces over the fate of the
achieved after a three-decade struggle would be reversed. LG-'The provinces have agree to appoint administrators in place
The 2001 local government system entailed massive of nazims. They also agree that the next LG elections will be held
amendments in dozens of laws governing the administration. within a year.'
Significant changes were made in the 1861 Police Act to According to him, the local government system, introduced
incorporate district mayors' supervision of police though by a dictator, has become a symbol of corruption and political
they did not have effective powers on police. To roll back nepotism. 'The current shape of the system is not practicable and
the entire system, changes will be required in dozens of laws requires drastic amendments. ln fact, we want to benefit from
which involve district nazims. These wholesale amendments the 1979 local bodies system,' he says. Meanwhile, the Ministry of
in laws, especially Police Order 2002 and the CRPC, etc. will Law has promised to send the recommendations of the provinces
require coordinated efforts by the provincial governments and to the president before 7 August 2009-'so that the provinces can
the federal government as many laws fall in the purview of make amendments in their respective laws before 14 August (i.e.
the federation. to dissolve the LG and appoint administrators). For the time being
As local cadre of services was created at the district level there is no progress on the issue,' he confirms.
to run the administration of 13 devolved departments, this On the contrary, Muhammad Afzal Sindhu, Minister of State
may be abolished. lf it is retained to avoid political backlash, for Law and Justice, says: 'No time frame has been given for the
an additional bureaucracy will burden the local bodies submission of the report to the president. The ministry is yet to
having meagre resources. One option could be that the local decide on the appointment of the administrators to replace the
government employees are merged into the provincial cadre. nazims. All provinces are on board, but it is yet to be decided what
ln most likelihood, the bureaucracy will make the government will be the future course of action,' he tells TNS.
pull back all the devolved authority at the provincial level However, district nazims and local governments' representatives
but retain the existing posts at the local and provincial have adopted a different stance.- The focal person of the
levels as they provide larger scope of promotions and career Association of District Nazims in Punjab, Major (retired) Tahir
opportunities. Bureaucracy wins all! Sadiq, says the democratically elected government's decision
to bulldoze a representative institution with a massive public
Source: Adil, Adnan, 'Back to 1979?', The News on Sunday, mandate justified the acts of military dictators in the past. We
Karachi, 10 January 2010. see no difference between what happened on 12 October 1999
and now. Abolishment of LG will weaken the federation. The
demands of new provinces will become justified. They should
Ill. empower the LG representatives instead of sacking them in a
dictatorial manner.
Aoun Sahi makes the following arguments: He further says that section 140(A) of the constitution
clearly states that power can only be transferred to the elected
Many mainstream political parties-including PML-N, ANP, and
institutions. 'Punjab government has already approved a budget
some quarters of PPP (provincial governments of both Sindh and
of Rs. 84.5 million for new commissioners and other bureaucrats
Balochistan)-are pressing to bring about changes in the local
who will be replacing the district nazims.' He adds that both
government system introduced by General Pervez Musharraf in
PPP and PML-N had agreed under Article 10 of the Charter of
2001 through the Local Government Ordinance (LGO). Punjab
Democracy that the local government would be autonomous.
government headed by PML-N is the first to show reservation for
He states that for the past two years the Punjab government
the local government system. lt proposes the suspension of the
has been accusing the local government of corruption but has
system and appointment of non-political administrators in place
not been able to prove it-not even against a single nazim. 'There
of tehsil and district nazims.
are some reservations about audit reports in some districts but
But it seems the federal government is still not clear about the
t~is does not make the whole system corrupt,' he says.
future of the system: President Asif Ali Zardari is waiting to be
358 Issues in Pakistan's Economy

Some PPP sources disclose that President Asif Zardari is not a dairy cooperative, they initiated loan schemes for poor, landless
in favour of the appointment of non-political administrators; women in their area.
instead he awaits the schedule for the next local government I still remember l was simply floored by the confidence these
elections. 'PPP will not favour the appointment of non-political women exuded as they discussed the lack of jobs and other
administrators for at least another year.' issues with the then president of the world's superpower. And
ln Sindh, however, the MQM is strongly resisting the move and l wondered if we would ever get to see something like that
has challenged Chief Minister Qaim Ali Shah's order to ban the in Pakistan where, for years, women's political participation
sale, purchase, and lease of land by the district government of has been confined to being voters or campaigners for male
Karachi. The issue remains unresolved despite a series of meetings candidates. Very few have been elected as public representatives
by a recently-constituted committee comprising members of PPP on general seats at any level-federal, provincial, or local.
and MQM. ln the subcontinent, since 1935, a special legal provision
MQM's reluctance to endorse the abolition of the existing has existed for women's reserved seats in legislative bodies. The
system of local governance has made it difficult for the PPP's Devolution of Power Plan 2000 has been a key development in
Sindh leadership to implement the proposed appointment of the history of governance. Musharrafs government in March
administrators, says Haider Abbas Rizvi, MQM MNA. 2000 launched decentralization under the Local Government
According to him, there are many who accuse the local Ordinance (LGO) whereby 33 per cent quota for women at the
government of corruption and nepotism. 'But MQM has delivered District, Tehsil and Union council levels was adopted.
while remaining within the system. Karachi's nazim was declared The question arose as to how could women use this
the top three mayors of the world.' critical mass to affect public policy, particularly policies like
He does not believe that MQM is favouring the system because gender issues, poverty, education and mainstream themselves
it will help the party to strengthen its hold in Karachi. 'We have in the political arena. Today, almost eight years later, we have
been demanding the government to hold elections as soon as examples of many exuberant women councillors who have found
possible, at least in those provinces where law and order situation themselves through the LG system and are indebted to it. Here
is under control; he adds. are a few of them sharing their thoughts with TNS.
Salman Abid, political commentator and Regional Director Shamim Qaiser, D.ictrict Councillor from Peshawar, says, 'I
Strengthening Participatory Organization (SPO), says it is remember, in 2001 when the local government election schedule
understandable why PML-N is so keen to abolish the system- was announced, Aurat Foundation aired a radio programme from
'because the party puts more trust in bureaucracy than in public Gilgit asking, 'Will any women contest the elections?' I went on
representatives. A corrupt system is a mere excuse. The proposed air and said that the system would get an overwhelming response
amendments in the ordinance as recommended by PML-N will because women wanted to be heard. Many people were skeptical
change the complexion of the system totally.' about the 33 per cent quota being 'wasted' but the reception
The PML-N proposed amendments include regaining the was good indeed.
control of 12 departments devolved under 2001 ordinance while 'Women got an opportunity to come out of their homes and
the number of councillor has also been reduced to 9 from 13. work for the welfare of the people at large. ln 2001, I was elected
The party also proposes suspension of citizen community boards from Shaheen Town and for four years you should come and see
with the main focus on indirect election. Only 9 councillors .would how many developmental projects l initiated. From making roads
be elected through direct election while the rest through indirect to installing tube wells and laying sewerage lines I have worked
elections. More significantly, PML-N proposes non-party elections on .a variety of things-something that you wouldn't generally
of local governments for the next term. expect from a woman.
The focus, asserts Abid, should be on making the current 'Like all new systems even 2001 's LG system has loopholes,
system more effective, and most political parties had decided such as the allocation of fund_s for women councillors. We faced
to not disturb the political institutions under the Charter of a lot of problems .in claiming our share in the pie; we had to fight
Democracy. 'The problem is that in Pakistan every elected for it and a lot of times come out victorious. However, it doesn't
representative from councillor to president wants his/her control give anyone the right to wrap up the entire system; necessary
on the development budget, so the powerful prevail, for good or amendments should be made and more power should be given
bad, for democracy or not; he concludes. to the people's representatives.'
Shamim Mumtaz, City Councillor from Karachi, says, 'I won
Source: Sahi, Aoun, 'Three Tiers for Democracy', The News on the election from UC 10, Sardar Town, on the Labour seat.
Sunday, Karachi, 30 August 2009. Honestly speaking, no one in my family has ever ventured into
politics; I am the first one. But my family was very supportive
and encouraged me to work for the good of the people. l have
IV. been a social activist and have worked on issues of health,
unemployment, education, etc. l know that in order to be heard
Naila lnayat examines the issue -of women and local you have to be part of the decision-making process and the LG
government. system is there for this very purpose.
l am zealously watching the TV footage of former president . 'l am not the only one who has benefited from the system;
Clinton's visit to lndia. l see him sitting among a group of village I know women who have come up from rural Sindh. l'm sure in
women from Rajasthan, discussing democracy and power. The those under developed areas it would be much harder compared
women are all elected representatives of the panchayats. Running to urban areas.
r
I
I
Chapter 12 Local Government and the Political Economy of Decentralization 359

I 'Initially, it was very difficult for me to voice my opinion in

the assembly. But after attending training sessions and workshops
with the private NGOs l gained a lot of confidence. This system
The LG system as outlined in the local government ordinance
of 2001 provides 33 per cent representation to women, 5 per
cent to peasants and labour and one seat to minorities in each
has given us a platform to voice our views. Though there still are union council (UC). Experts on the devolution plan think that
women who are hesitant to become part of participatory politics. the local government system provided a large space to middle
Trust me, it is nothing short of a small revolution: and lower class citizens who otherwise remained outside (local)
Farzana Mumtaz, Programme Coordinator, Advocacy and power corridors. 'The space created by the representation of
Networking South Asia Partnership-Pakistan says, 'lt was for the women, labour and minority representatives is important; says
first time in the country's history that a mass of almost 40,000 Salman Abid, Regional Manager, Strengthening Participatory
women councillors were seen in any form of governance or Organization (SPO), and a'n expert on local government system.
decision making: 'You can see a lot of movement by these groups; even the recent
She believes that it opened up not only an enormous political resistance against scrapping of the local government system is
space but also a strategic opportunity for women to join in and proof that people got space because of the system:
make a difference in setting and implementing people's agenda. Obviously, the system is not free of flaws and needs due
'However, now the PPP led-government wants to bring back the attention and attempts to address them. For instance, there is a
1979 LG system which at least will not benefit the women, the general perception that the system was not implemented in the
minorities and the labourers. Most women councillors want the way it was perceived or propagated and there was no devolution
2001 Local Government Ordinance to be amended. How can they of power at all.
impose administrators on the masses?' However, the debate generated in recent months on whether
the system should continue or not makes one thing clear that
Source: lnayat, Naila, 'A Legal Provision', The News on Sunday, there is a popular demand for devolution of power. Political
Karachi, 30 August 2009. statements, speeches in seminars organized by civil society
organizations as well as discussions with the PPP leadership
suggest that there is a need to devolve power. There can be
differences on whether it should continue to.be as the Musharraf
V. model or remodeled. Salman says the demand is also the result of
Zulfiqar Shah examines how the Musharraf District the two tenures the system has seen.
Government system benfitted some parties, and how The local government system has also devolved 12 departments
others felt excluded. from provincial level to district levels and brought them under
district level control. Confusion around legal issues related to
As the local government completes its second tenure in October this plan and also a tussle between provincial departments and
this year, several controversies have already surfaced that district governments made this devolution difficult and on many
question the merits and demerits of the system. Ideally, the local occasions the nazims and provincial ministers went against each
government should be followed by elections and, eventually, the other publicly.
coming into power of the next set of elected representatives. The local government ordinance is blamed for most of the
However, the current situation is such that the entire system problems attributed to the system as it does not clarify power
seems to be at stake, as those for it and those against the system sharing and also the devolution of departments.
are pitched against each other. 'Entire power rests with nazims without any checks and
PML-Q and MQM, the two biggest beneficiaries of the balances; says Munazza. 'You get elected, but have no powers.
Musharraf policies including those regarding the local government This creates problems for you at the local level:
system, are going all out to save the system which, they believe, has She does not agree that increase in the women's representation
served the masses well at the local level whereas it works for them. made any big difference.
On the other hand, PML-N and PPP believe that the system Along with 25 other members she says she submitted a
was introduced to marginalize mainstream politics. They want proposal for lady health park to be built in Multan, but it was
massive changes or else a wrap-up of the system. never approved. 'We were 43 female members and supported the
Within these controversies, hardly any one is looking seriously proposal, but 150 male members vetoed it:
into details of the benefits this system has or even the losses it Despite these setbacks, she says all the women members have
entails. played their role in bringing local governance on track in the
Those who were a part of the system have mixed views on district. 'We pointed out and talked about it frankly in the council
the merits and demerits of the devolution system and they find it wherever we saw problems,' she adds.
hard to tell whether it was beneficial. There are other people who believe the system has many good,
ln view of Munazza Hashmi, a high court lawyer and in-built spaces for village-level development programmes, but
member of district council in Multan, the system has brought in such CCBs were manipulated by nazims and district coordination
representation at the grass roots level which is 'a v~ry positive officers. Full authority to nazims with no control of. provincial
thing'. l-lowever, she adds, little or no power rests with those who and line departments had also leveled a lot of corruption
came up through the grass roots. allegations as allotment of contacts and use of funds remain a
'There were elected representatives but they had no power; na?im's prerogative. The councils were supposed to be taken into
says Munazza. 'The local government ordinance was not clear; confidence but they weren't.
power rested only with the nazim, reducing the other members Source: Shah, Zulfiqar, 'Level of Politics', The News on Sunday,
of the union council to just nominal heads: Karachi, 30 August 2009.
360 Issues in Pakistan's Economy

NOTES
1. Much of this chapter was first written in 2005, as part and Institutional Dynamics in Pakistan (Karachi: City Press,
of the Swiss National Science Foundation and the Swiss 2003 ); Arif Hasan, The Unplanned Revolution (Karachi: City
Directorate for Development and Cooperation (SDC) Press, 2002); Mohammad Qadeer, 'Ruralopolises: The
funded Project: Swiss National Centre of Excellence in North- Spatial Organization and Residential Land Economy of
South Research Partnerships (NCCR-North-South). The High-density Rural Regions in South Asia', Urban Studies,
chapter was written under the supervision of Dr Urs Vol. 37, No. 9, 2000; Mohammad Qadeer, 'Urbanization
Geiser, In-charge Pakistan Programme, Development Study of Everybody: Institutional Imperatives and Social
Group, Department of Geography, Zurich University; the Transformation in Pakistan', Paper presented at the 15th
Development Study Group is a member of the consortium of Annual General Meeting and Conference of the Pakistan
six Swiss research organizations which were involved in this Society of Development Economists, November 1999;
Study. I am very grateful for detailed comments by Dr Urs Andrew Wilder, The Pakistani Voter: Electoral Politics and Voting
Geiser. Developments since 2005 have been added to update Behaviour in the Punjab (Karachi: Oxford University Press,
to the present. 1999). Other references can be found in in Chapters 26 and
2. For the most part, in the context of Pakistan, much 27.
of the literature uses devolution and decentralization 6. For further details and for insight on the reforms in this
interchangeably and both terms are almost exclusively period, see: Douglas E. Ashford, National Development and
used with regard to local government. The subtle nuances Local Reform: Political Participation in Morocco, Tunisia, and
and differences between devolution, decentralization and Pakistan (Princeton: Princeton University Press, 1967);
deconcentration are usually ignored. Najmul Abedin, Local Administration and Politics in Modernising
3. Amongst the studies which look at post-1999 measures, Societies: Bangladesh and Pakistan (Dhaka: National Institute
see: Asian Development Bank/Department for International of Public Administration, I 973 ); and S. Shahid Ali Rizvi,
Development/World Bank, Devolution in Pakistan, in three Local Government in Pakistan: A Study in Clash of Ideas (Karachi:
volumes (Islamabad, 2004), (hereinafter referred to as the Centre for Research in Local Government, University of
ADB/DFID/WB study); Nick Manning et al. Devolution in
Pakistan: Preparing for Service Delivery (Islamabad: World Bank,
Karachi, 1980).
7. Ashford, op. cit., 94.
1
2003 ); Jackie Charlton, et al. Pakistan Devolution: A Nole in 8. Ibid. 96.
Support of the Development Policy Review, mimeo (Islamabad: 9. Ibid. 96.
2002); National Reconstruction Bureau, Government of 10. Rizvi, op. cit., 32.
Pakistan, The Local Government Book (Islamabad, 2002); 11. Ibid. 42.
Zulqarnain H Anjum, 'New Local Government System: 12. Ali Cheema et al. op. cit., forthcoming.
A Step Towards Community Empowerment', Pakistan 13. Ibid. 6.
Development Review, vol. 40 no. 4, 2001; Aisha Ghaus-Pasha, 14. H.J. Friedman, 'Pakistan's Experiment in Basic Democracies',
and Hafiz Pasha, 'Devolution and Fiscal Decentralization', Pacific Affairs, vol. 33, June 1960, cited in Ibid.
Pakistan Development Review, vol. 39 no. 4, 2000; National 15. Interestingly, following the first few months after the
Reconstruction Bureau, Government of Pakistan, Local takeover by General Musharraf in October 1999, there
Government Plan (Islamabad, 2000). was talk about building a new local government system,
4. See the work of Ali Cheema, Asim Ijaz Khwaja and Adnan rumours were rife that the new system would be similar to
Qadir, 'Local Government Reform in Pakistan: Context, General Ayub's and would be used as an Electoral College
Content and Causes', in P. Bardhan and. D. Mookherjee for General Musharraf.
(eds.), Decentralization and Local Governance in Developing 16. Parts of this section are drawn from different chapters in
Countries: A Comparative Perspective (Massachusetts: MIT Press, this book.
2006); Ali Cheema. and Shandana Mohmand, 'The Political 17. Shahid Javed Burki, Pakistan: A Nation in the Making (Boulder,
Economy of Devolved Provision: Equity-based Targeting Colorado:: Westview Press, 1986 ), 112.
or Elite Capture-Case Evidence from Two Pakistani 18. Ibid. 54.
Unions', unpublished mimeo (Lahore: Lahore University of 19. Rizvi, op. cit., 228.
Management Sciences, 2005); Ali Cheema. and Shandana 20. Cited in Ibid., 229.
Mohmand, 'Provisional Responses to Devolved Service 21. Cheema and Mohmand, op. cit., 2003.
Delivery--Case Evidence from Jaranwala Tehsil', mimeo 22. A very large number of studies examining the local
(Lahore: Lahore University of Management Sciences, 2004); government system during the 1977-88 period (which,
Ali Cheema. and Shandana Mohmand, 'Local Government as we show, continued well into the 1990s) have been
Reforms in Pakistan: Legitimizing Centralization or a Driver conducted, many of them looking at fiscal and financial
for Pro-Poor Change?' unpublished mimeo, 2003. issues in the 1990s when the debt and deficit crisis had
5. See: Foqia Khan, 'Capitalist Transformation, State, Social reached unmanageable heights. Perhaps what is more
Groups and Law; A Case Study of Pakistan', unpublished interesting is that most of the studies that have been
mimeo, January 2004; Ali Cheema, 'State and Capital in undertaken, deal almost exclusively with urban (municipal)
Pakistan: The Changing Politics of Accumulation', in A reform rather than issues related to local government in
M Reed, Corporate Capitalism in Contemporary South Asia: general. It is not at all possible to give even a representative
Conventional Wisdoms and South Asian Realities (London: list, but for a small sampling of studies see: M. A. Z. Wajidi,
Palgrave, 2003 ); Reza Ali, 'Underestimating Urbanization?', Local Government in Pakistan: A Case Study of Karachi 1842-I 988
in S Akbar Zaidi, (ed.), Continuity and Change: Socio-Political (Karachi: Royal Book Company, 2000); S. Akbar Zaidi,
 Chapter 12 Local Government and the Political Economy of Decentralization 361

'Politics, Institution, Poverty: The Case of Karachi', Economic 34. See ADB/DFID/WB, op. cit., 2004.
and Political Weekly, vol. 32, no. 51, 1997; S. Akbar Zaidi, 35. Dawn, Karachi, I August 2005.
'Urban Local Government in Pakistan', Economic and Political 36. Since the 2001 District Government elections were held
Weekly vol. 31, no. 44, 1996; Applied Economics Research on a non-party basis, supposedly independent candidates
Centre, Resource Mobilization by Provincial and Local Government were elected. ln the 2002 party-based General Elections at
in Pakistan (Karachi: AERC, 1992); Applied Economics the provincial and national level, political parties formed
Research Centre, Resource Mobilization and Institutional Capacity governments. Whenever the provincial government,
Study, (in seven volumes) (Karachi: AERC, 1991); Applied particularly in the case of Sindh and the NWFP but in
Economics Research Centre, Local Government Finances and other provinces as well, came into conflict with a Nazim
Administration in Pakistan, (in three volumes) (Karachi: not of the ruling party in government in the province, the
AERC, 1990); Applied Economics Research Centre, A Model provincial governments made life very difficult for the
of Municipal Finance in Pakistan (Karachi: AERC, I 990). In Nazim, curtailing their mandate considerably, even starting
addition, the extensive research work by Arif Hasan and summary proceedings against them on various occasions.
Reza Ali, looking at urban, and hence municipal, issues, 37. I. A. Rehman, 'Local Bodies: Whose Fiefdom?', Dawn,
also need to be read for a better understanding of local Karachi, 1 August 2005.
government developments throughout the 1980s and 1990s. 38. Ibid.
23. Cheema and Mohmand, op. cit., 2003. 39. Asian Development Bank, Decentralization Support Programme:
24. For the local government system in Karachi, and particularly Progress Report (Manila: ADB, December 2004).
for its political manifestation, see: S. Akbar Zaidi, op. cit., 40. Cited in Nadeem Iqbal, 'Devolution Questioned', The News on
1997. Sunday, Karachi, 11 April 2004.
25. See the references cited in Footnote 22, as well as S. Akbar 41. Ibid.
Zaidi, 'The Role of Municipalities in Infrastructure: Some 42 Ibid.
Evidence from Small and Intermediate Towns in Sindh', 43. This section is a summarized extract from the paper by
in S. Akbar Zaidi, The New Development Paradigm: Papers on Zaidi, S. Akbar, 'Urban Local Government in Pakistan', op.
Institutions, NGOs, Gender and Local Government (Karachi: cit., 1996; See also Zaidi, S. Akbar, op. cit., I997(a); Zaidi, S.
Oxford University Press, 1999). Akbar, op. cit., 1997(b); and Zaidi, S. Akbar, op. cit., 1999.
26. Cheema and Mohmand, op. cit., 2003. 44. See AERC, op. cit., 1990; AERC, op. cit., 1993; Zaidi,
27. See The News on Friday, Special Report on Local Bodies, S. Akbar, 'Effective Local Level Delivery of Human Resources:
30 September 1994. Development Related Programmes-the Case of Pakistan',
28. Ali Cheema et al. op. cit., forthcoming. mimeo (Bangkok: UNE SCAP, 1991); Zaidi, S. Akbar, 'A
29. For example, Fakhr Imam, the Speaker of the National Study on Making Optimal Use of Municipal Budgets to
Assembly emerged on the national scene starting his Finance Child Development (Pakistan)', mimeo (Karachi:
political career at the local level in Faisalabad, as did Farooq UNICEF, 1994); Zaidi, S. Akbar, op. cit., 1996; Zaidi, S.
Leghari who came from the district level elections in Dera Akbar, op. cit., 1997(a); Zaidi, S. Akbar, op. cit., 1997(b);
Ghazi Khan to eventually become President of Pakistan; Zaidi, S. Akbar, op. cit., 1999.
the Mayors of Karachi and Lahore too, emerged as national 45. Zaidi, S. Akbar, op. cit., 1994; Zaidi, S. Akbar, op. cit., 1996;
level leaders once they were elected in the general elections. and Zaidi, S. Akbar, op. cit., 1997(a).
There are numerous other such examples. 46. AERC, op. cit., 1991; AERC, op. cit., 1993; Zaidi, S. Akbar,
30. Over a period of many months, elections were held under op. cit., I 994; Zaidi, S. Akbar, op. cit., I 996; Zaidi, S. Akbar,
General Musharraf's Devolution Plan in 2000 and 2001 and op. cit., !997(a); Zaidi, S. Akbar, op. cit., 1997(b); and Zaidi,
I
I all 106 District Governments were in place by August 2001. S. Akbar, op. cit., 1999.
At the time of writing, August 2005, District Governments 47. AERC, op. cit., I 990; AERC, op. cit., 1991.

l
had completed their four year tenure and stood dissolved 48. Zaidi, S. Akbar, op. cit., 1994.
with the election process underway to elect new local 49. Ibid.
government representatives. 50. AERC, op. cit., 1993; Zaidi, S. Akbar, op. cit., 1996; Zaidi,
3 I. This Section is drawn from a number of sources, in S. Akbar, op. cit., 1997(a); Zaidi, S, Akbar, op. cit., 1997(b);
particular: Ali Cheema et al. forthcoming; N. Manning et and Zaidi, S. Akbar, op. cit., 1999.
al. op. cit., 2003; Ali Cheema, and Shandana Mohmand, op. 51. AERC, op. cit., 1991; AERC, op. cit., 1992(a); AERC, op. cit.,
cit., 2003; National Reconstruction Bureau, op. cit., 2002; 1993; Zaidi, S. Akbar, op. cit., 1996; and Zaidi, S. Akbar,
and z. Anjum, op. cit., 2001. op. cit., 1997(a).
32. See many of the references cited in Note 22. 52. See Zaidi, S. Akbar, op. cit., I 996; Zaidi, S. Akbar, op. cit.,
33. Although we are talking about the financial issues related 1997(a); Zaidi, S. Akbar, op. cit., 1997(b); Zaidi, S. Akbar,
to the 1979 LGO, it is important to say that many of the 'Karachi: Prospects for the Future', in Khuhro, Hameeda
mechanisms of broad financial and budgeting are of a (ed.), Karachi: Megacity of Our Times (Karachi: Oxford
more generic nature and these problems and even the University Press, 1997); Zaidi, S. Akbar, op. cit., 1999(c).
mechanisms, continue to exist.
 Fis.cal Federalism in Pakistan:
Emerging Dynamics, Issues, and
Prospects 1

Much has changed in Pakistan, at least on paper and in 13.1 PRE-INDEPENDENCE EVOLUTION AND
constitutional terms, in the way the government is to
function and finances are to be allocated, after the passage DEVELOPMENT
of the Seventh National Finance Commission (NFC) Award,2
and especially after the passing o·f the 18th Amendment to The present evolution of federalism in Pakistan has a long
the Constitution of Pakistan, 3 in 2010. The earlier structures history from the colonial rule of the British Empire to four
of finance, expenditure, relationship of the federating units different military regimes of thirty-three years, and various
with the federation, and other aspects of how Pakistan's democratic governments. The three important legislative
government was required to be administered, changed developments in British India were the Government of
quite radically as a result of these two landmark legislative India Act 1885, the Government of India Act 1919, and the
actions, which were moreover adopted unanimously at Government of India Act, 1935.
the provincial and the federal level. Many of the earlier · The Government of India Act, 1885: The Act is part of
structures, as we showed in Chapters 10 and 12, are now legislative developments under British rule. It developed a
redundant, and the provinces have been given far more governance structure under Crown rule. Both the authority
responsibility for social sector development-see Part VII of and the governance structure were predominantly of a
this book. Although it has been three years sinc_e the passing centralized nature under this Act. The Secretary of State to
of both, the 7th NFC Award and the 18th Amendment, India was given enormous judicial, financial, and functional
the full consequences have not yet been realized nor have powers with immediate delegation to the Viceroy/Governor
they become manifest in the way governments function in General. For the purpose of the resolution of local territorial
Pakistan. Moreover, the academic as well as political debates disputes, the judicial powers were delegated to the princely
about the consequences of both have only just begun and states. The relations with princely states, communications,
there is limited literature which examines the possible and military were controlled by the centre.
outcomes of either or both. This chapter is one of the first · The Government of India Act, 1919: During the period
to be written on these issues, and explores possibilities, and of the First World War, British rule undertook reforms in the
potential and possible consequences. subcontinent. The Montagu-Chelmsford proposal regarding
It is believed that these significant changes will transform political, administrative, and financial reforms were made
the dynamics of the vertical structures of governance in a part of the India Act of 1919. One of the fiscal developments
more rational direction and create horizontal equalization by was the assignment of irrigation and land revenue, forestry,
strengthening decentralization and facilitating devolution and judicial stamp duties to the provinces, and the exercise of
of the power structure. Unlike the developments in Indian authority by the provinces was legitimized through this Act.
fiscal federalism after the 7th Indian Finance Commission The Government of India Act, 1935: Analysing its
( 1979-1 984) and compared to other developing countries, political developments the Act approved a bicameral political
the process of systematic scientific rationalization of fiscal system with a legislature consisting of two chambers, i.e. a
federalism had not taken place in ·Pakistan in the past. Council of State and a Federal Assembly. The Council of State
Consequently, increasing regional disparities created a sense was a permanent body with one-third of its members being
of insecurity and injustice amongst deprived provinces. elected after every three years, while the duration of the
Noor- ul-Islam4 argued that apart from other disturbing Federal Assembly was fixed for five years. On account of fiscal
factors, fiscal disparities were the major concerns that developments, revenues, and expenditures, assignments
led to the fall of East Pakistan. Apart from the linguistic were explicitly defined with a Federal Legislative List and
movement of Bengali nationalism, military operation, a Concurrent List ( the functions of which were the joint
and infringement of civil rights, there were constantly responsibility of both the centre and provinces). Details of
increasing inter-regional fiscal inequalities and disparities revenue assignment and sharing urider this Act were as
in the distribution of national resources which aggravated follows:
the sense of grievances and resulted in the Six Point 1) Taxes were assigned exclusively to the centre, e.g.
formula of the Awami League, and spurred the separatist import duties, revenue of railways, posts, and telegraph. 2)
movement. Taxes assigned to the provinces e.g. agriculture tax, sales tax,
land revenue irrigation charges, property tax on agriculture,
tolls, payroll taxes, excises, and levy on natural resources.
 Chapter 13 Fiscal Federalism in Pakistan 363

3) Taxes imposed by the centre but having revenue sharing of the State Bank of Pakistan on 1 July 1948 under the
arrangements with the provinces, e.g. export duties from Governorship of Zahid Hussain. Members of the Indian
jute, export duties and income taxes except agriculture tax. civil services of British India who migrated to Pakistan were
4) Taxes levied by the central government but distributed assigned charge of important positions. Unfortunately, the
and allocated among the provincial governments, i.e. stamp quest for a new constitution for Pakistan diminished after
duties, succession duties, freight earnings. the death of the first Governor General M. A. Jinnah on 11
September 1948 and the assassination of Liaquat Ali I<han
13.1.1 The Otto Niemeyer Award 19365 on 17 October 1951. Later, on 28 May 1955, iri pursuance
of the Governor General's Order No. 12 of 1955, the second

I
On 19 September 1935, the British Government announced Constituent Assembly was instituted. The Assembly consisted
an enquiry into how and when to announce provincial of 80 members, 40 from each of the wings, East and West
autonomy in India which had been demanded for some Pakistan. In 1956 this Constituent Assembly enacted the first
years. The mandate of the enquiry was as follows: Constitution of Pakistan.
Realistically speaking, during Pakistan's infancy, its
The need for inquiry arises from the fact that
although the main outlines of the system of national politics became part of a power game between
Federal finance have been established by the the civil bureaucracy and the military establishment. Six
Act, it provides that the allocation of certain governments were changed during a short span of seven
resources between the Central and the Provincial years.
Governments of India shall be settled by Order- The dismal state of affairs brought radical institutional
in-Council after the British Government has decay which continued over time. The ratification of the
been furnished with an independent review dismissal of the Constituent Assembly by the Governor
of the position of the Provinces and the centre General· Ghulam Muhammad in the Maulvi Tamizuddin
and with the technical advice that the financial vs the Federation of Pakistan case by the higher judiciary
questions involve. 6
advocating the principle of Salus Populi suprema lux est -'the
good of the people is supreme law' set out a precedent for
The final recommendations were submitted in 1936 and
the abrogation of the Constitution in the future. Justice
reported in the press as:
A. R. Cornelius was the only judge in the case to write a
His Majesty's Government may safely propose to dissenting note in this landmark decision. This judgment
Parliament that Part Three of the Government altogether changed the course of politics in Pakistan. History
of India Act should be brought into operation continually witnessed such coups legitimized by the courts
a year hence. He has formed the opinion that setting out the direction of Pakistan's destiny. The differences
the budgetary prospects of India, provided that and conflict of interest between institutions and the overall
there is prudent management of her finances, dominance of the military over civilian government affairs,
justify the view that adequate assignments made it difficult for Pakistan to build its state institutions.
can be made by steps to meet the financial Fiscal administration and policy is not an exception, and
implications of the new Constitution. In the the National Finance Commission has recorded a history of
detailed proposals submitted, the paramount
ad-hocism and a lack of scientific approach. We now discuss
importance, upon which the report insists, of
preserving the stability of the central finances the individual NFC Awards as a historical narrative and their
has been kept carefully in mind.7 merits and demerits in detail in the following section.

The Otto Niemeyer Award recommended a vertical 50:50

revenue sharing arrangement between the centre and 13.2 THE NATIONAL FINANCE
provinces. Under this Award and the 1935 Act, agriculture tax
COMMISSION AWARD: AN
was primarily a provincial subject and not part of the divisible
pool. Sales tax was also a provincial subject and was part of INTRODUCTION
the central divisible pool. In addition, Sindh and NWFP were
provided with annual fixed subvention of Rs.IO and Rs.10.5 The public finance structure of Pakistan has been significantly
million, respectively. dependant on intergovernmental fiscal transfers, i.e. transfers
of public resources between various levels of government,
federal, provincial, and local. This section is based on a
13.1.2 Post-Independence Evolution and
historical narrative of the evolution of the intergovernmental
Developments-NFC Awards in fiscal transfers system and it focuses on transfers between
Retrospect federal and provincial governments. The transfers to the local
tier of government are presently administered and governed
At the time of independence, the Government of India Act
through the Provincial Finance Commission, i.e. transfers of
of 1935 remained in place as a provisional constitutional
funds from provinces to local districts governments. Presently
instrument pending Pakistan framing its own constitution.
the federating units under the constitutional mandate of
In the absence of regulatory institutions and banking
the National Finance .Commission are the four provinces of
networks the Reserve Bank of India continued its operation
Pakistan, i.e. Punjab, Sindh, I<hyber Pakhtunkhwa (formerly
on both sides of the border, right up to the inauguration
364 Issues in Pakistan's Economy

the North West Frontier Province NWFP), and Balochistan. relatively smaller amounts on account of the divisible pool
The Federally Administered Tribal Areas (FATA), although transfers as compared to its share in the total population,
part of the federation are not covered under the formal and the case of the rest of the provinces is more or less the
arrangement of the federal transfer system; however, a converse. The divisible ·pool transfers had a neutral effect
system of special grants is in place and functional for on fiscal equalization up to the NFC 1991 and 1997 Awards,
FATA. 8 and no equalization in the NFC 2006 Award. However,
As per clause (I) of Article 160 of the Constitution of structural shifts to multiple criteria caused the transfers to be
Pakistan 1973, the President of Pakistan shall constitute more equalizing which can be a policy objective of multiple
a National Finance Commission with a formal structure criteria, although there are some inherent problems with this
consisting of Federal Minister of Finance and four provincial Award. Provinces have been given higher vertical shares and
finance ministers and non-statutory members (other persons) encumbered with high functional assignments after the 18th
as may be appointed by the President after consultations with Amendment.
Governors of the provinces.
The primary responsibility of the members of the National Straight Transfers
Finance Commission is to advise the President on the
distribution of resources from the divisible pool. After the As shown in Table 13.2, Balochistan dominated initially on
separation of East Pakistan, the divisible pool transfers account of straight transfers and this supremacy continued
have been distributed on the sole basis of the population until 1991, after which the share of Balochistan started
criterion. The 18th Amendment to the 1973 Constitution declining. More recently, Sindh has benefitted by gaining
of Pakistan, added clause 3(A) and 3(B) to Article 160, a higher share in straight transfers. The question of fiscal
where Article 3(A) gives protection to the province and equalization does not arise here because the right of provinces
specifies that the share of the province in each Award of the on these resources has been established, however, these
National Finance Commission shall not be less than the share transfers are fiscally administered by the federal government.
allocated to the Province in the preceding Award. Clause Below we empirically discuss straight transfers in the context
3( B) is related to the provision of good governance which of fiscal equalization (the Concentration Index) in detail, and
has now become an important feature of the Commission's compute the concentration index to analyse the direction and
stipulation. The clause designates the Federal Minister beneficiaries of these transfers.
Finance and provincial Finance Ministers to monitor and
administer the implementation of the Award, and to present Special Grants
their reports biannually before both houses of Parliament and Fiscal equalization is the objective for successful administra-
the Provincial Assemblies. tion of intergovernmental fiscal relations. Balochistan and
Apart from divisible pool transfers, under the article Khyber Pakhtunkhwa are the provinces far behind Punjab
163 of the Constitution, the NFC recognizes the rights of and Sindh in terms of human development, health, and
provinces on indigenous resources which are transferred by education indicators and growth rate in per capita income
the federal government to the provinces directly as straight (see Tables 13.15, 13.16, 13.17, 13.18 and 13.19). Keeping in
transfers. view the relative position of Balochistan and KPK, both are
The system of intergovernmental fiscal transfers by the
federal government to the provinces, generally provides two
types of fiscal transfers: I) unconditional and 2) conditional Table 13.1
transfers. The extent of unconditional transfers had pre- Average Divisible Pool Transfers during Various NFC
dominantly greater weightage as compared to the conditional Awards
transfers in the overall intergovernmental fiscal transfers in
Pakistan. NFC Awards Punjab Sindh KPK Balochistan
1973-1975 56.08 24.08 15.39 4.44
Unconditional Transfers 1976-1979 59.90 22.98 13.28 3.83
1980-1983 60.23 22.52 13.38 3.86
Divisible Pool Transfers 1984-1991 57.97 23.34 13.39 5.30
These transfers are vertical sharing arrangements between 1992-1997 57.75 23.46 13.51 5.29
the federation and the provinces and after the NFC 2010, 199$-2006 57.50 23.33 13.60 5.57
the size of the divisible pool available for the provinces 2007-2010 55.85 24.30 14.26 5.59
has considerably increased. This is how greater financial 2011-2014 50.70 24.06 16.06 9.19
autonomy is ensured. Further, the horizontal distribution
Average 57.13 23.43 13.93 5.52
criteria of the 7th NFC Award, 2010, provide for multiple
Maxima 60.23 . 24.30 16.06 9.19
indicators, i.e. population, poverty and backwardness, revenue
collection and generation, and inverse population density. Minima 50.70 22.52 13.28 3.83
All of the Awards preceding the present one distributed Source: Ratios are computed on the basis of Revised Estimates of
revenues on the sole criterion of population. The Award- the Federal Budget Explanatory Memorandum on Federal
wise analysis of the post-1971 divisible pool transfers in Receipts various issues. All percentages are computed on
Pakistan is shown in Table 13.1. On average, Punjab receives revised figures except 2013-14 (budgeted)
J Chapter 13 Fiscal Federalism in Pakistan 365

Table 13.2 Table 13.3

Average Straight Transfers during Various NFC Awards Average Non-Development Grants during Various NFC
Awards
NFC Awards Punjab Sindh KPK Balochistan
1973-1975 6.40 93.60 NFC Awards Punjab Sindh KPK Balochistan
1976-1979 8.27 3.97 87.77 1973-75 36.65 9.150 25.62 28.58
1980-1983 4.39 13.48 82.13 1976-79 25.25 10.03 41.68 23.05
1984-1991 4.56 24.04 71.40 rn80-83 11.11 10.30 58.12 20.47
1992-1997 8.20 27.68 34.65 29.46 1984-91 36.08 20.91 32.45 10.56
1998-2006 11.86 45.35 20.38 22.42 1992-97 26.60 48.37 5.320 19.71
2007-2010 11.21 62.45 10.57 15.78 1998-06 25.30 21.76 22.77 30.17
2011-2014 8.04 59.50 19.52 12.95 2007-10 39.69 29.98 18.58 11.74
Average 8.08 33.78 21.28 45.99 Average 28.67 21.50 29.22 20.61
Maxima 11.86 62.45 34.65 93.60 Maxima 39.69 48.37 58.12 30.17
Minima 4.39 3.97 10.57 12.95 Minima 11.11 9.150 5.320 10.56

Source: Ratios are computed on the basis of Revised Estimates of Source: Ratios are computed on the basis of Revised Estimates
the Federal Budget Explanatory Memorandum on Federal from Annual Budgets Statements
Receipts various issues. All percentages are computed on
revised figures except 2013-14 (budgeted)

entitled to special grants from the federal government. An sharing was based on two principles: pre-assigned share
important feature of these special grants is the indexation on and the derivation principle. 10 The distribution of income
the basis of CPI by the passage of time. tax was based on a pre-assigned share with East Pakistan
receiving 45 per cent, Punjab 27 per cent, Sindh 8 per cent,
Conditional Transfers and Balochistan 0.6 per cent-see Table 13.5.

13.2.2 The National Finance Commission

Development Grants
1961-62
The planning and development departments of the provincial
governments prepare the Annual Development Programmes The announcement of the next Award was supposed to
(ADPs) of their provinces. Following the approval of provincial be made in 1956. However, almost ten years following
ADPs by the Planning Commission of Pakistan, the federal the Raisman Award without any concrete development on
government provides grants to the provincial government the front of fiscal federalism, mainly due to continuous
keeping in mind its own budgetary position. institutional decay and the dismal state of political and
The nature of grants for the Social Action Programme, economic affairs in the country-see Table 13.6. Chief
Physical Planning and Housing Programme, Tameer-e- Martial Law Administrator General Ayub Khan instituted
Watan Programme, Tameer-e-Sindh Programme are also the National Finance Commission on 19 December 1961
of a conditional nature. See Table 13.3 for non-development with the constitutional mandate of developing a revenue
grants which are more equalizing than development grants
because the average magnitude of flow of non-development
, grants towards smaller relatively less developed provinces Table 13.4: Average Development Grants during
is higher than that of developed grants-see Table 13.4-- Various NFC Awards
howcvcr, on average both types of grants depict a similar
NFC Awards Punjab Sindh KPK Balochistan
pattern.
1973-75 44.93 34.97 11.16 8.95
1976-79 46.42 25.68 16.27 11.63
13.2.1 The Raisman Award 1951 9
1980-83 42.38 25.68 16.14 15.79
The Raisman Award was announced in 1951 without pre-
1984-91 34.57 34.08 9.57 21.79
defined constitutional arrangements. The vertical revenue
1992-97 32.53 31.29 23.10 13.08
sharing arrangement between the centre, provinces, and other
federating units was 50:50 from the central divisible pool 1998-06 32.36 27.20 25.61 14.83
which consisted of income tax, sales tax, and excise duties. 2007-10 26.68 31.42 17.69 24.21
See Table 13.5 which shows that the ratio of distribution Average 37.12 30.05 17.08 15.75
between East and West Pakistan was 45:55. Overall, this Maxima 46.42 34.97 25.61 24.21
Award ensured the widening of the size of the divisible Minima 26.68 25.68 9.57 8.95
pool and shared more taxes as compared to the adhoc
Source: Ratios are computed on the basis of revised estimates
arrangements in place just after independence. Horizontal
from Annual Budgets Statements
 366 Issues in Pakistan's Economy

Table 13.5
Horizontal Revenue Distribution-Raisman Award 1951

East KPK
Divisible Pool Unit Punjab Sindh Bahawalpur Khairpur Balochistan Remainder 1 Total
Pakistan (NWFP)
Income tax2 per cent 45.0 27.0 12.0 8.0 4.0 0.6 0.6 2.8 100
Excise duties per cent 45.0 27.0 12.0 8.0 4.0 0.6 0.6 2.8 100
Sales tax3 per cent Rs. 18 mn 4 54.0 16.0 mo 4.0 0.1 1.5 14.4 100

1. The percentage allocation earmarked for princely states that may consent to accede to Pakistan like the state of Bahawalpur acceded to
Pakistan on 7th October 1947 under Nawab Sadiq Muhammad Khan Abbasi.
2. Income tax collection other than the corporation tax and tax on salary of employees of federal government and their emoluments
3. The sales tax collection was the mandate of federation and the vertical distribution between centre and provinces was 50:50 ion derivation
principle.
4. A minimum share of Rs. 18 million was guaranteed along with collection at source principle.

Source: Reports of National Finance Commissions

Table 13.6: NFC Awards in Historical Perspective

NFC Instituted Commission Effective Consensus

Award by appointed From of provinces
Raisman Prime Minister Liaquat Ali Khan 1951 1 April 1952 Conclusive
1961/2 President General Ayub Khan 19 December 1961 1 July 1962 Conclusive
1964 President General Ayub Khan 1964 1 July 1965 Conclusive
1970 President General Yahya Khan 17 April 1970 1 July 1970 Inconclusive
1974 President Fazal llahi Chaudhry 9 February 1974 1 July 1975 Conclusive
1979 President General Zia ul-Haq 11 February 1979 1 July 1983 Inconclusive
1985 President General Zia ul-Haq 25 July 1985 Inconclusive
President Ghulam lshaq Khan 23 July 1990
1990 PPP Government dismissed 6 August 1990 1 July 1991 Conclusive
Commission reconstituted 30 December 1990
1997 President Farooq Ahmed Laghari 23 July 1995 1 July 1997 Conclusive
President General Pervez Musharraf 2 July 2000
2006 Commission reconstituted 13 November 2003 1 July 2006 Inconclusive
Commission reconstituted 21 July 2005
2010 President Asif Ali Zardari 24 July 2009 1 July 2010 Conclusive

Source: Compiled from reports of the National Finance Commission

sharing formula (vertical and horizontal) and settling the tax the two provinces on the basis of 54:46 (East Pakistan:West
jurisdiction (tax assignment and tax sharing) between the Pakistan).
federation and the provinces. Reforming borrowing powers Unlike the Raisman Award, vertical sharing was not that
and the debt and liabilities structure of the provinces was simple, a heterogeneous mix of criteria for different kind
also the part of agenda before the NFC. The Award came of taxes was introduced to be vertically shared between the
into effect from I July 1962 vide Presidential Order No. 23 federation and the two provinces. The allocation of income
of 1962 'The Distribution of Revenues and Consolidation and tax was 50 per cent (minimum percentage allocation of any
Repayment of Loans Order, l 962'. tax in th}s Award). Sales tax and excise duties were set out to
Earlier, the government of Prime Minister Chaudhry be 60 per cent and all other taxes; export and import duties
Muhammad Ali, under rationalization of administrative were allocated 100 per cent to the provinces.
reforms and to reduce the provincial expenditures and As Table 1_3.7 shows, the horizontal distribution formula
prejudices, had launched the One Unit 11 system. under was primarily based on two criteria: pre-assigned shares
which the four provinces of West Pakistan were merged and (approximating the provincial populations), while the other
declared as one province, with Lahore as provincial capital, taxes were shared on the basis of the collection principle.
' and East Pakistan was declared the other province with Income taxes, excise, and export and import duties, were
I Dhaka as provincial capital. After the formation of the one shared on the basis of a pre-assigned share and sales tax was
unit the horizontal revenue sharing came to be defined for shared 30 per cent on collection basis and 70 per cent on a

L
 Chapter 13 Fiscal Federalism in Pakistan 367

Table 13.7
Criteria for Horizontal Distribution of Divisible Pool under National Finance Commission NFC Pakistan

National Finance Commission Awards

Before 1971 1971 to Date
Raisman Award 1951 1961-62 1964 1970 1974 1990 1996 2006* 2010
Criteria of
Horizontal All Taxes All Taxes
Income All All
Distribution Sales Export Sales All Sales Less Less All All All
Tax& Other Other
Tax Duties Tax Taxes Tax Import Import Taxes Taxes Taxes
Excise Taxes Taxes
Duties Duties
-------------------·-Percentage----·----------------

Collection 50 30 30

Pre Assigned
50 100 100 70 100 100 70 100
Shares

Population 100 100 100 100 82.0

Poverty
and Back- 3** 10.3
wardness

Revenue
Collection/ 5.00
Generation

Inverse
Population 2.70
Density

Source: Table designed by author and statistics are compiled from reports of National Finance Commissions (various issues).
* Presidential order 1 of 2006. In 2006 there was no consensus as to formulation of award therefore; President Pervez Musharraf passed a
presidential order.
**The allocation of Grant out of this 3 per cent allocated among the four provinces was as Punjab (11 per cent), Sindh (21 per cent), KPK
(35 per cent) and Balochistan (33 per cent). No scientific approach was adopted for the distribution.

pre-assigned share. Succession duties on agricultural land and a comparatively higher share of 65 per cent to the provinces
capital value tax on immovable property, were fully assigned from the federal divisible pool comprised of income and
to the provinces. Further, the provinces were provided with a corporate taxes, sales tax, excise duty on tea, tobacco, and
special concession of 50 per cent on their federal outstanding betel nut, and export duties on jute and cotton-see Table
liabilities up to 30 June 1961 and the remaining 50 per cent 13.8. The horizontal criteria remained unaltered for the two
loan was converted into a single loan of twenty five years provinces as that of NFC 1962, i.e. 54 per cent allocated to
carrying a mark-up rate of 3.5 per cent per annum. East Pakistan and 46 per cent to West Pakistan. The final
recommendations of the Commission were applicable with
13.2.3 The National Finance Commission effect from 1 July I 965 for a period of five years up to 30
June 1970.
Award 1964 In September 1965 war with India broke out and later in
After two years of the imposition of Martial Law by General 1968 mass level unrest began. The situation was triggered
Ayub Khan, a Constitution Commission was set up on 17 by rising inequalities and disparities in the country. The
February 1960. The objective of the Commission was to controlled price of one kilo of sugar was increased by one
submit a report to the President about the provisions of rupee which led to mass agitation and extreme resentment,
strengthening democracy, socioeconomic justice, and Islamic bringing people onto the streets. The situation ended with
principles of justice. The report was submitted on 29 April many casualties, following which Ayub's popularity declined.
1961 and later the new Constitution of Pakistan, 1962 was With this, came the time for the sunset of his dictatorial
promulgated and announced on 1 March 1962. regime. He decided to hand over power to the Chief of Army
In pursuance of powers conferred upon him under Article Staff General Aga Muhammad Yahya Khan who declared
144( 1) of the Constitution of 1962, the President instituted a another Martial Law after assumption of the office of
National Finance Commission before the earlier Commission President of Pakistan and Chief Martial Law Administrator
would have lapsed. In the case of vertical distribution, this (CMLA) on 25 March 1969.
Award performed better than the preceding one and allocated
 (/1
Table 13.8 (/1
Vertical Revenue Sharing Arrangements between Federal and Provincial Governments under Various NFC Awards C
(1)
(/1

National Finance Commissions ::I

-a
Before 1971 1971 Onwards I»

-
;ii;-

NFC 2006 29 NFC 2010 ui"

Raisman I»
Divisible Pool Taxes 1962 1964 1970 1974 1990 1997 ::I~
1951 2012 U)
2007 2008 2009 2010 2011 2011 2013
Onwards m
n
-------------- Cumulative Percentage Share of Provincial Governments 0
::I
0
Income Tax & Corporation Tax30 50.0 50.0 65.0 80.0 80.0 80.0 37.5 41.5 42.5 43.75 45.0 46.25 31 56.0 57.5 57.5 3
'<
Wealth Tax 37.5 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Sales Taxes 32 50.0 60.0 65.0 80.0 80.0 80.0 37.5 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Excise Duty 37.5 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Tea 50.0 60.0 65.0 80.0 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Tobacco 50.0 60.0 65.0 80.0 80.0 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Sugar 80.0 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Betel nut 50.0 60.0 65.0 80.0 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Export Duties 37.5 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Cotton 100.0 65.0 80.0 80.0 80.0 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Jute 62.5 100.0 65.0 80.0

Import Duties 37.5 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Estate/Succession Duties 100 100.0 37.5 41.5 42.5 43.75 45.0 46.25 56.0 57.5 57.5

Capital Value Tax on Immovable Properties* 100 100.0 37.5 41.5 42.5 43.75 45.0

D.P Transfers as % of Fed Total Tax Revenue** 12.8 23.1 27.0 33.4 22.8 38.0 35.0 36.7 32.92 41.1 43.3 53.6 53.6 56.5 56.8

*Devolved after the passage of 18th amendment to the Constitution of Pakistan, 1973
**Calculated from data of FBR Year Books and Explanatory Memorandum of Budgets (various issues).
Source: Author's tabulation from the reports of National Finance Commissions/Distribution of Revenues and Grants-in-Aid Orders of President of Pakistan.
 Chapter 13 Fiscal Federalism in Pakistan 369

On 31 March 1970 the President promulgated the Legal from that of the preceding one, by a significant percentage of
Framework Order (LFO), 1970, under which One Unit was 6.4 per cent, i.e. from 27 per cent to 33.4 per cent (see Table
dissolved and the provinces Punjab, Sindh, and NWFP (now 13.8). On account of horizontal revenue sharing, the Award
KPK) were restored to their status prior to 22 November witnessed no change in the criteria-see Table 13.7.
1954, and a full-fledged province of Balochistan was created. The first general elections held in 1970 after the
Elections for a unicameral legislature and National Assembly independence of Pakistan led to the Awami League of
were called under the mandate of Legal Framework Order Sheikh Mujib-ur-Rehman winning 160 seats out of 162 in
(LFO). Unlike the Constitution of 1956 which ensured equal East Pakistan based on his Six Points campaign demanding
representation of the East and West wing, of 40 members greater provincial autonomy. PPP emerged as the second
each, the LFO declared proportionate representation for largest party with 81 seats. Yet Mujib was denied formation
the two wings. The more populous wing East Pakistan, was of his government in the National Assembly. In Operation
allotted a share of 162 seats and West Pakistan 138 seats. Searchlight by the Pakistan Army, he was arrested on 26
The horizontal share of East and West Pakistan remained March 1971. During his arrest and due to denial, despite
unaltered at 54:46. The decision of the dissolution of the attaining a 55 per cent majority, immense crisis erupted in
One Unit system led to the distribution of the 46 per cent East Pakistan. Later the crises became a movement of civil
horizontal share of West Pakistan among the provinces to disobedience leading to military suppression by the Pakistan
Punjab 56.5 per cent, Sindh 23.5 per cent, NWFP 15.5 per Army, resulting in East Pakistan becoming Bangladesh
cent, and Balochistan 4.5 per cent. on 16 December 1971 after the surrender by Lieutenant-
General A. A. K Niazi, joint commander of Pakistan before
13.2.4 The National Finance Committee Lieutenant General Jagjit Singh Aurora, joint commander
of the Bangladesh-India Allied Forces. After the fall of East
1970 Pakistan, CMLA General Yahya Khan handed over power
Just after the dissolution on 17 April 1970, Yahya Khan to Zulfikar Ali Bhutto, the leader of PPP who had gained
constituted a Committee instead of carrying on a legacy of victory in West Pakistan. Z. A. Bhutto assumed office on 20
instituting a high-powered National Finance Commission. December 1970 as President and first Civilian Martial Law
The committee was constituted under the Chairmanship Adminstartor (CMLA) of Pakistan.
of Nawab Muzzaffar Ali Khan Qizilbash, the then Finance On the fiscal federalism front post-1971, the share of
Minister in the cabinet of the CMLA. The terms of reference of East Pakistan was retained by the federal government on
the Committee were to re-examine the existing arrangement account of managing its priorities and to meet its huge
of intergovernmental fiscal relations in the country and expenditure needs in rebuilding the country. The provinces
to recommend to the President on the vertical (between in West Pakistan (present Pakistan) continued to enjoy their
federation and provinces) and horizontal (between provinces) respective shares out of the 46 per cent of the vertical share.
revenue sharing formula. The average vertical fiscal imbalance was 40.3 per cent (see
The Committee generously increased the vertical sharing by Table 13.9) during the period 1972/3 to 1974/5, which is the
15 per cent, i.e. now 80 per cent of the divisible pool resources highest from 1971 to date. One major change and shift in
were to be allocated to the provinces. The rationale behind the course of federalism was a sharp decline in the collection
this increase could have been to reconcile with the increasing of taxes. Export duties on jute and other taxes had been
disparities amongst the provinces and to grant the sub- contributing a huge share to that effect. On the external
national governments more fiscal powers. The overall size of account, the export of jute had been the main source of
the divisible pool as a percentage of federal taxes increased exchange earnings.

Table 13.9
Average Vertical Fiscal Imbalance between Federal and Provincial Governments-NFC Award Period

NFC Awards 1972-75 1976-80 1981-91* 1992-97 1998-06 2007-09 2010-13 Maxima Minima
Revenue Share per cent
Federal 85.8 89.9 92.6 94.3 94.0 93.1 93.8 94.3 85.8
Provincial 14.2 10.1 7.4 5.7 6.0 6.9 6.2 14.2 5.7
Expenditure Share per cent
Federal 45.5 63.1 75.0 73.4 72.9 69.2 71.8 75.0 45.5
Provincial 54.5 36.9 25.0 26.6 27.1 30.8 28.2 54.4 25.0
Vertical Imbalance per cent
Federal 40.3 26.8 17.6 20.9 21.1 23.9 22.0 40.3 17.6
Provincial -40.3 -26.8 -17.6 -20.9 -21.1 -23.9 -22.0 -40.3 -17.6

*No Award was announced during this period.

Source: Calculated from the data of Government of Pakistan, Pakistan Economic Survey (Islamabad: various issues).
370 Issues in Pakistan's Economy

13.2.5 The National Finance Commission It is believed that this situation resulted in the dominance of
Punjab-the reasons for Punjab's dominance were many-
Award 1974 one of them being that Punjab had the largest representation
The second phase of the intergovernmental fiscal relations in in the National Assembly on the basis of population.
Pakistan starts from I 971. West Pakistan (present Pakistan) The Commission recommended that the provinces of
administratively consisted of four provinces and federating NWFP and Balochistan were relatively less developed
units such as FATA, Gilgit-Baltistan 12 , and Azad Kashmir. compared to the rest; therefore, on account of their poverty
Although the federating units other than the provinces were and backwardness, federation subventions of Rs. 100 million
not covered under the mandate of NFC Awards, provision of and 50 million, respectively, were fixed for them. Special
special grants was functional. maintenance grants for highways and agency work were
Meanwhile, on 17 April 1972, Bhutto invited all approved in this Award. No ceiling was imposed on the
parliamentary parties for a meeting which ended with a borrowing limits of both tiers ofgovernment. The provisions
consensus on the need for a new constitution for Pakistan. of this Award were functional with effect from 1 July 1975.
PPP appointed a 25-member committee on 17 October 1972 Chief of Army Staff General Zia ul-Haqproclaimed the third
under the chairmanship of Abdul Hafeez Pirzada to prepare Martial Law in the country on 5 July 1977 and promised to
a draft for the new constitution. The draft bill of the new hold general elections in three months; however, he remained
constitution was moved in the National Assembly on 2 in power for a period of eleven years. The Zia government
February 1973 and passed by the Assembly unanimously on filed a murder case against former Prime Minister Bhutto and
I 9 February I 973. awarded death sentence to him.
Another important development was the population
census of 1972 which was delayed by one year due to the 13.2.6 The National Finance Commission
insurgency in East Pakistan and war with India. As Table
13.10 shows, the census revealed that the composition of Awards, 1979 and 1985
shares of provinces, changed, and the share of Punjab and On 11 February 1979 President Zia asked the National
NWFP had declined by 2.15 per cent (from 62.09 per cent Finance Commission to make its recommendations about
to 60.09 per cent) and 0.60 per cent (from 14.01 per cent vertical and horizontal revenue sharing and to suggest
to 13.41 per cent), respectively in the national population. improvements in intergovernmental fiscal relations. Perhaps
Sindh and Balochistan experienced an increase in their share this is the only such Award in history which was not
in the population by 2.17 per cent (from 20.45 per cent to announced, as not a single meeting of the members of the
22.62) and 0.57 per cent (from 3.31 per cent to 3.88 per cent), Commission was held until 1983. Therefore, the provisions
respectively. of the NFC 1974 Award continued on an ad hoc arrangement
Articles I 60 to I 65 of the Constitution of Pakistan, 1973 with a change in percentage shares of population of provinces
describe the role of the National Finance Commission, the in the national population as per the 1981 census, i.e. Punjab
role of federation and provinces' and ancillary matters. On 9 57.88 per cent, Sindh 23.29 per cent, NWFP 13.54 per cent,
February 1974 the NFC was constituted in pursuance of Article and Balochistan 5.30 per cent-see Table 13.10. The relative
160 of the new Constitution. The major changes this time shares of all provinces in the population increased with the
were inclusion of fewer taxes in the federal divisible pool, i.e. exception of Punjab. As Table 13.10 shows, the relative share
income and corporation tax, sales tax, and export duties. The of Punjab declined by 2.21 per cent (from 60.09 per cent to
vertical revenue sharing arrangement between federation and 57.88 per cent) and Sindh, NWFP, and Balochistan on the
provinces remained the same 20:80 (Federation:Provinces). other hand registered an increase of 0.67 per cent (from 22.62
While horizontal sharing was simplified and based on the per cent to 23.29 per cent), 0.13 per cent (from 13.41 per cent
latest available statistics on the share of the population of to 13.54 per cent), and 1.42 per cent (from 3.88 per cent to
the provinces, population was made the sole criterion for 5.30 per cent) compared to the earlier population census. The
distribution of divisible pool resources. This remained the recommendations of the Award were made effective from
sole basis for horizontal distribution up to the 2010 Award. 1 July 1983.

Table 13.10
Trends in Regional Distribution of Population among Federating Units of Pakistan

Census 1 Census 2 Census 3 Census 4 Census 5 Estimated Estimated Estimated

Rank* Provinces
1951 1962 1972 1981 1998 2005** 2010** 2013**
1st Punjab 63.57 62.24 60.09 57.88 57.36 56.78 56.36 56.11 I

I
2nd Sindh 18.72 20.45 22.62 23.29 23.71 24.23 24.54 24.69
3rd KPK 14.10 14.01 13.41 13.54 13.82 13.81 13.84 13.88
4th Balochistan 3.61 3.31 3.88 5.30 5.11 5.19 5.27 5.32
*Position of Provinces and other federating units of Pakistan with respect of share in total population in descending order (from highest to
the·lowest in vertical columns)
** Pakistan Economic Survey 2012-13
Source: Author's compilation from Census of Population (Islamabad: Population Census Organization, various issues).
I

Chapter 13 Fiscal Federalism in Pakistan 371

t All three dictators, Ayub, Zia, and Musharraf, had the On 23 July 1990 the President constituted the National
r privilege of instituting the National Finance Commission Finance Commission under Article 160 of the Constitution.
twice during their rule. On 25 July 1985 in pursuance of The Commission consisted of ten members initially. Later,
powers conferred upon him under Article 160, Zia constituted upon the advice of the newly elected Prime Minster, four new
another National Finance Commission. The terms ofreference non-statutory members (one from each province) replaced
for this Commission were the same as of the earlier Award. the existing ones. In addition to the recommended vertical and
Nine meetings were held and no consensus upon horizontal horizontal distribution, the mandate of the 1990 Commission
revenue distribution was arrived at by the provinces. The was to advise the President on the comprehensive mechanism
President declared the 1974 NFC Award to remain effective for the distribution of proceeds of natural resources (royalties
with the population shares of 1981 census being effective. on crude oil and surcharges on natural gas). Furthermore, the
In 1985 non-party-based general elections were held, Commission was asked to suggest a procedure of grant-in-aid
and Muhammad I<han Juneja was nominated as the tenth and made recommendations on the borrowing powers for the
Prime Minster of Pakistan. Later on the legislature approved federation and provinces.
the 8th Constitutional Amendment and legitimized all acts In order to rationalize further the regime of federalism
including the Martial Law of 1977. After the passage of this and to increase the size of the divisible pool, excise duties
amendment basic fundamental rights were restored and on tobacco, tobacco manufactures, and sugar were added to
Martial Law was lifted by Zia. After the investigation of the the existing stream of taxes comprising the divisible pooI
Ojhri Camp incident, Juneja made a statement on the floor of Another important development was to recognize the right
the House that the report of the findings of investigation on of provinces to profits and royalties arising out of the use of
the Ojhri Camp incident would be placed before the House. their indigenous resources, such as development surcharges
This raised serious concerns in the military leadership and on natural gas, profits on hydroelectricity; and royalty on
Zia dismissed Juneja on 29 May 1988. He announced fresh crude oil.
elections to be held within three months but no elections Using the principle of production basis, gas development
were held until his death in a plane crash near Bahawalpur surcharge was paid to the provinces after deduction of 2 per
on 17 August 1988. Following the death of Zia, General Aslam cent collection charges by the collecting agency-the federal
Baig was nominated as COAS and Chairman Senate Ghulam government. Net profit of hydro-electricity was paid to the
Ishaq Khan took charge as Caretaker President. The President provinces on the basis of the location principle. Royalty from
announced general elections to be held on 16 November crude oil was also paid to the provinces on the basis of the
1988 to elect 336 members of the National Assembly and production principle. This Award recommended royalty and
100 senators. Pakistan People's Party emerged victorious excise duties 011 natural gas to be paid to the provinces. This
and Benazir Bhutto took oath as the Prime Minster on 2 kind of revenue transfer system is called a 'straight transfer',
December 1988. On charges of corruption and nepotism, her meaning revenues arising out of indigenous resources are
government was dismissed by the President exercising his credited directly to provincial accounts by the collecting
powers under Article 58(2)b. The President then announced agency on the origin principle. Straight transfers increased
new elections and PML-N emerged as the victorious party the fiscal space for the relatively less-developed provinces
and formed the government. Prime Minster Mian Nawaz NWFP and Balochistan due to concentration of natural
Sharif took charge on 6 November 1990. resources in the these provinces.
In the 1990 Award, vertical and horizontal criteria were
13.2. 7 The National Finance Commission same as in the previous Award. Vertical sharing was 80:20
(Provinces:Federation) and horizontal sharing was based 011
Award 1990 the last available population census of 1981.
It is the constitutional responsibility of the President to The provision of grants for the revenue deficit of the sub-
constitute the National Finance Commission aft.er every five national governments in fact incentivized them to incur
years. However, this Commission was constituted sixteen huge expenditures and ignore own-source revenue efforts,
years after the NFC of 1974. Although the two Commissions relying primarily on federal transfers. The Award made the
of 1979 and 1983 were constituted, both failed to reach a provinces themselves responsible for the surpluses or deficits
consensus. Due to the long delay in the announcement of the by abolishing federal grants for provincial revenue deficits.
Award, revenue deficit grants were allocated to the provinces However, the Award legitimized fixed annual subvention/
by the Federation, especially in the late 1980s. This delay grants to the provinces-see Table 13 .11.
raised valid expectations amongst the provincial governments
that the financing of the provincial revenue deficit was 13.2.8 The National Finance Commission
guaranteed, which resulted in massive increase in recurring
expenditures of the provinces. Further, this delay aggravated Award 1997
a sense of deprivation amongst the three provinces Sindh, After the dismissal of the first Nawaz Sharif government
NWFP, and Balochistan due to Punjab enjoying a larger share in 1993, and after Benazir Bhutto had won the elections to
of the pie due to its relatively large share in the population become Prime Minister a second time in 1993, President
given that the divisible pool distribution continued from the Farooq Laghari instituted the National Finance Commission
1974 NFC Award population-based formula. on 23 July 1995 with the mandate to m·ake recommendations
on vertical and horizontal revenue sharing and in light of
372 Issues in Pakistan's Economy

Table 13.11 tax (GST) from 12.5 per cent to 15 per cent. The provinces
Fixed Subvention to the Provinces: NFC 1990 were guaranteed under the head of non-development grant,
transfer of an amount equal to 2.5 per cent (additional GST
Provinces Rs. in million Period revenue) on the basis of octroi estimates on the base year
Punjab 1000 3 years 1998.
Sindh 700 5 years On macroeconomic reforms, Pakistan was pursuing a
200 3 years
Structural Adjustment Programme of the IMF for rationalizing
KPK
the tariff regime and taxation structure to reduce the fiscal
Balochistan 100 3 years
deficit which resulted in reduction in revenues-also see
Source: Compiled from Report of National Finance Commission Chapter 17. Moreover, just after Pakistan tested its nuclear
devices, international sanctions were imposed coupled with
recession in the international and domestic economy, and
appraisal of earlier Awards. The Commission comprised of economic activities were hampered-see Chapter 18. As
the Federal Minister Finance as Chairman, four provincial a whole, provinces suffered the most because they had
ministers, four non-statutory members each from one agreed to a 45.2 per cent (from 80 per cent to 37.5 per cent)
province, advisor to the Prime Minister, and Federal Secretary reduction in their vertical share and horizontal sharing was
Finance. There were a couple of important developments in only based on the population criterion.
this Award.
First of all, the Award signalled the expansion in the
divisible pool by inclusion of all taxes including custom
13.2.9 The National Finance Commission
duties, which was not part of the pool in earlier Awards. Award 2006
The new divisible pool after expansion contained income 12 October 1999 witnessed the fourth regime military
and corporate taxes, wealth tax, capital value tax, sales tax, in Pakistan's history. COAS General Pervez Musharraf
custom duties, and excise duties (excluding excise duty on took charge as Chief Executive of the country. Under the
gas, charged at wellhead). Musharraf regime the President constituted the National
In every Award the vertical share was either retained, as in Finance Commission three times, since the first one on
the preceding Award, or increased substantially. On account 2 July 2000, but as no recommendations came forward, the
of vertical revenue sharing, this is the only Award in history President constituted the Commission again on 13 November
where the share of provinces was cut down by a huge 42.5 per 2003. Eleven meetings of the Commission were held within
cent compared to the earlier Award, i.e. from 80 per cent to two years but no criteria on vertical and horizontal sharing
37.5 per cent. Moreover, the divisible pool as a percentage of were agreed. The government's intention was to reform the
federal tax revenues was also decreased substantially by three existing system and establish a just and fair mechanism for
per cent (from 38 per cent to 35 per cent)-see Table 13.8. intergovernmental fiscal transfers in the country. Smaller
The argument of the federation was that the earlier Award provinces had many reservations on various matters of
vertically shared a higher share but with fewer number of national importance including the Kalabagh Dam, the water
taxes; but now that the vertical share had been decreased distribution formula by the Indus River System Authority
and the pie of the divisible pool expanded, the provinces (IRSA), and the National Finance Commission. The bone
would no longer be in loss. Furthermore, the distribution of of contention for not agreeing the formula was actually
straight transfers continued as per the established formula of the vertical sharing arrangement. The provinces demanded
the 1992 NFC Award. a minimum guaranteed share of 50. per cent in the federal
The allocation of the annual fixed subvention arrangement divisible pool due to which differences with the federation
bv the federation under the 1997 Award was Rs. 4,080 million could not be resolved.
a~d Rs. 3,320 million, for Balochistan and NWFP, respectively. On horizontal distribution, the three smalJer provinces
An annual increase of 11 per cent to the fixed subvention Sindh, NWFP, and Balochistan had varying arguments and
was proposed subject to further revision due to indexation reservations. Therefore, the NFC should have worked for
according to prevailing inflation in the future. a redress of the legacy of the preceding Awards which the
For the first time in Pakistan, the concept of matching Commission could not manage to do. Sindh's argument
grants against the sub-national fiscal effort was recommended was to make part of the allocation on the basis of revenue
by the Commission. The scope of the provincial fiscal effort collection and generation in which Sindh had absolute
was defined as an increase in the rate of provincial taxes, advantage, mainly on account of the port facility which
withdrawal of exemptions, imposition of new taxes, and gave Karachi/Sindh monopoly over collection of indirect
revision and updation in rates of user charges. Provincial taxes, such as the sales tax, FED on imports and custom
own-source revenues equal to or greater than 14.2 per cent duties-for further details see Chapter 23 on Karachi. NWFPs
growth subject to a maximum upper limit of Rs. 500 for and Balochistan's arguments were based on the poverty
Punjab and Rs. 100 million for Sindh, NWFP, and Balochistan and backwardness criteria with one argument specific to
was assured. Balochistan based on area, i.e. inverse population density.
Another important step by the federation in the 1997 However, Punjab was not ready to move an inch from its
Award was to abolish· the octroi zila tax. In lieu of the octroi position on population-based transfers.
tax, the federal government increased the rate of general sales
 Chapter 13 Fiscal Federalism in Pakistan 373

As a result, the President constituted the Commission PML-N. Asif Ali Zardari was elected as President of Pakistan
for a third time on 21 July 2005, but the difference on 6 September 2008, replacing General Musharraf.
still persisted between representatives of all the provinces.
Therefore, under article 160( 1) of the Constitution, the
President exercised his powers and a formal arrangement of 13.3 THE NATIONAL FINANCE
transfers was announced vide 'Distribution of Revenues and
Grants-in-Aid (Amendment) Order, 2006', President Order COMMISSION AWARD 2010
No. 1 of 2006.
Before the time frame of the NFC Award of 2006 would
The order was made applicable with effect from 1 July
have expired in 2011, President Zardari under Article
2007. Horizontal sharing continued on the population
160 of the Constitution of Pakistan 1973, constituted the
principle, perhaps because the military president, General
National Finance Commission on 24 July 2009 and assigned
Pervez Musharraf, did not want resentment from the largest
the mandate of rationalizing the present stream of fiscal
province whose representation in the population, the National
federalism in Pakistan. This was the first time since the separation
Assembly, and the military was dominant. However, the
of East Pakistan that the design of intergovernmental fiscal transfers
vertical sharing arrangements took into account the growing
was redefined and redressed. The most important move in this
needs of the provinces and increased the vertical share from
direction has been the structural shift towards multiple
37.5 per cent to 41.5 per cent in the first year of the Award,
criteria based on revenue distribution (see Table 13.7), rather
i.e. fiscal year 2007. In the second year an increase from 41.5
than on the basis of population alone, which was the basis
per cent to 42.5 per cent and from the third year to the fifth
of previous Awards-also see Tables 13.12 and 13.13. Most
an increase of 1.25 per cent was recommended; therefore,
surprisingly, Punjab gave up a portion of its share, 5.62 per
the proposed allocation for the fiscal year 2011 was 46.25 per
cent, and the redistributive effect was that Sindh gained 0.84
cent-see Table 13.8. These annual increments were made a
per cent, and NWFP 0.80 per cent; moreover, the special needs
feature of the Awards for the first time in Pakistan.
of Balochistan were considered and a significant addition of
The Revenue Order, 2006, revised the 116th distribution
3.98 per cent was made possible to its share-see Table 13.13.
of sales tax to the provinces to compensate for the octroi
Furthermore, the federation sacrificed more than 10 per cent
losses. The revised formula was based on collection (Punjab
of its share compared to the 2006 NFC Award and distributed
50.0 per cent, Sindh 37.5 per cent, NWFP 9.93 per cent,
it to the provinces-see Table 13.8. The province of Khyber
and Balochistan 5.22 per cent) and 1998 population share
Pakhtunkhwa (KPK)had been badly affected by the War on
(Punjab 57.36 per cent, Sindh 23.71 per cent, NWFP 13.82 per
Terror, and the present Award was supplemented by a special
cent, and Balochistan 5.11 per cent) on a 50:50 basis.
provision of assigning one per cent of the net proceeds of
Provisions of special grants by the federation to the
the divisible pool taxes to the KPK government to meet
provinces were incorporated into this Award. An amount of
) its additional expenses as a consequence of the war. Table
Rs. 27.5 billion was allocated for this purpose to be increased
13.13 shows that the net impact to the two provinces, Sindh
annually according to growth in taxes. The provisions of
and KPK, was nearly equal, which seems in opposition to
allocations for these grants were mainly judgmental and did
rationality, because both the provinces differ greatly in terms
not follow any scientific approach or equalization needs. The
of their socio-economic indicators, and therefore, the gains
share allocation was Punjab 11 per cent, Sindh 21 per cent,
may not be similar due to the large differences between the
NWFP 33 per cent, and Balochistan 35 per cent. However,
the relative shares were indicative that these transfers would
have created fiscal equalization, and an objective empirical
assessment would reinforce the same. Table 13.12
Fiscal year 2007 /8 brought much unforeseen and Net Effect of Multiple Criteria 2010 Compared to
unexpected turmoil and difficulties for Pakistan's economy Population-based Criterion
due to extreme political unrest and several economic events
in the international world. Some of these events were Horizontal
Horizontal Change in
Distribution
poor law and order, adverse supply shocks, sharp rise in Distribution Horizontal
Multiple Criteria
prices in oil, food and other non-food consumable items, Based on Shares
Provinces 2010
and a financial meltdown in the international market. Population Due to
(82% of 1998
The situation was coupled with political unrest in the 1998 NFC 2010
Population)
country which aggravated when the President imposed per cent
an Emergency on 3 November 2007 and the judges of the
Punjab 57.36 51.74 -5.62
Supreme Court were detained unlawfully. This spurred the
judges' restoration movement country-wide. Meanwhile, Sindh 23.71 24.55 +0.84
general elections were first called for 2007, but had to be KPK 13.82 14.62 +0.80
postponed until 2008 following the assassination of Benazir Balochistan 5.11 9.09 +3.98
Bhutto. The PPP emerged as the majority party and formed Total 100 100 0.00
the government in the centre, and in Sindh, NWFP, and
Source: Compiled from data from the Population Census 1998
Balochistan. The Punjab government was formed under
and NFC 2010.
374 Issues in Pakistan's Economy

two provinces. In the next sections, we discuss these multiple which highlights the importance of the availability of reliable,
criteria with some empirical analysis .. We will discuss the pros updated estimates. The NFC Award 2010 calculated the
and cons and the potential future agenda for fiscal federalism respective 82 per cent shares of provinces on the basis of their
reforms in Pakistan.-also see Boxes 13.1 and 13.2. share of population ih the population according to the fifth
census of 1998-see Table 13.10. (Punjab: 82 per cent of 57.36
13.3.1 Population Criteria = 47.04, Sindh 82 per cent of 23.71 = 19.44, KPK 82 per
cent of 13.82 = 11.33, and Balochistan 82 per cent of 5.11 =
Pakistan has been amongst the top ten most populous 4.19)-see Graph 13.1.
countries of the world. Though the inter-census growth rate Although the consensus on the multiple criteria
of population has been declining over the period in Pakistan recommended by the NFC Award 2010 is path-breaking
(see Table 13.14), the rate of growth is still higher than the and has changed the course of fiscal federalism in Pakistan,
average growth rate of South Asian and developing countries. nevertheless, the criterion of population has been given
As Table 13.14 shows, in the case of Sindh the overall extraordinary weightage, which could sacrifice the
population growth has decreased to 2.62 per cent from 4.06 equalization objectives of fiscal federal transfers. Before
per cent in 1951-61, 4.51 per cent in 1961-72, and 2.75 in 2010, Pakistan always practiced the exclusive population-
1972-81. based criterion to distribute divisible pool taxes, which in
For a social planner the situation is fairly complex: reality resulted in the dominance of Punjab on account
should dividing the pool of divisible resources be on a of its largest share in the population. This aggravated the
population basis as it has always been? If yes, then why sense of deprivation and economic injustice amongst the
should fiscal intervention not take into account the highly other provinces. The structural change in the formula of the
diverse population attributes of all federating units and their divisible pool, i.e. multiple criteria, is considerable progress
dynamics over time such as growth rates in rural and urban on the contemporary canvas of fiscal federalism in Pakistan.
regions, large and small cities? These are questions which The share of Punjab has substantially been redistributed
need to be asked. amongst the relatively less developed provinces and its
Two of the criteria, for the NFC Award 2010 are based on traditional dominance has been voluntarily sacrificed-see
population, i.e. population and inverse population density, Graphs 13.1 and 13.2, and Table 13.12 and Table 13.13.

Table 13.13
Horizontal Revenue Sharing: Provincial Share in NFC Awards 1971 to date

Provinces 1970 1974 ·1979 1990 1996 2006 2010 Change*

Punjab 56.50 60.25 57.97 57.88 57.88 57.36 51.74 -5.62
Sindh 23.50 22.50 23.24 23.28 23.28 23.71 24.55 +0.84
KPK 15.50 13.39 13.49 13.54 13.54 13.82 14.62 +0.80
Balochistan 4.500 3.860 5.300 5.300 5.300 5.110 9.090 +3.98
Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 0.00

*Due to multiple criteria Punjab has sacrificed its share and other three provinces gain net off. The difference is computed by subtracting
share allocated in 2006 from the share allocated under multiple criteria.
Source: Reports on National Finance Commission (various issues).

Table 13.14
Trends in Position of Federating Units of Pakistan-Annual Intercensal Population Growth Rates

1951-1961 1961-1972 1972-1981 1981-1998

Rank*
Overall Urban Rural Overall Urban Rural Overall Urban Rural Overall Urban Rural
1st s 4.06 6.79 2.71 B 4.51 4.28 4.55 B 7.09 7.21 7.21 K 2.75 3.47 2.62
2nd K 3.07 4.91 2.82 s 3.98 4.57 3.6 s 3.56 2.96 2.96 s 2.71 3.45 2.09
3rd p 2.92 5.12 2.4 p 2.77 3.93 2.43 K 3.33 3.21 3.21 p 2.55 3.31 2.24
4th B 2.23 5.46 1.7 K 2.69 3.36 2.59 p 2.75 2.23 2.23 B 2.48 4.81 1.93
PK 3.18 5.56 2.57 PK 3.04 4.13 2.7 PK 3.06 4.38 2.58 PK 2.61 3.45 2.25

Position of Provinces and other federating units of Pakistan with respect to inter census total population growth rates in descending order
(from highest to lowest in vertical columns).
S = Sindh, P= Punjab, K = Khyber Pakhtunkhwa, B = Balochistan and PK = Pakistan.
Source: Author compilation from Census of Population Various Issues (Islamabad: Population Census Organization, various issues).
 Chapter 13 Fiscal Federalism in Pakistan 375

Box 13.1 discussed and debated at the Council of Common Interests

(CII) and approved b_y the National Economic Council (NEC).
The New Fiscal Federalism The federal and provIncIal governments will have to formulate
their ~udgets within the parameters approved by the NEC.
lshrat Hussain examines the new fiscal federalism and writes:
Sanctions should be put in place for violations breaches
and deviations. However, the provinces should b~ allowed t~
. Most. of the pre- and post-budget seminars, TV shows and
exceed the NEC-approved parameters if they raise additional
d1scuss1ons, and public discourse this year focused exclusively
revenues from their own sources.
on the federal budget. Past traditions are hard to break but the
Second, a new fiscal responsibility law should be enacted
new realities in our face should wake us up.
by each pro~i~ce_ in which the limits for fiscal deficit/surplus,
The 7th NFC Award and the 18th amendment to the
reve_nue mob11tsat1on, and expenditure on development should
Constitution have brought about a fundamental structural
be imposed. If the allocation for the provinces from the
change in the fiscal affairs of Pakistan. The federal government
divisible pool rises or provinces make an extra tax effort the
ts no longer the main driver of fiscal policy. Power and
inc~emental resources should be earmarked for develop~ent
resources have shifted, rightly so, to the provinces. The
proJects or for education and health. Provinces have to
s~~r~ of the federal government in the net proceeds of the
generate budgetary surpluses in order to offset the deficit of
d1v1s1ble pool has come down to 42.5 per cent while that of
the federal government.
the provinces has gone up to 57.5 per cent. Adding straight
Third, the provincial governments should not be allowed
transfers, grants/subventions, and development loans to the
powers to borrow from the domestic capital markets or
provinces pushes this share further up.
financial institutions. Foreign loans for development projects
In the last four years, the total outlay of the provincial
and foreign grants should be channeled through the federal
governments has risen from almost Rs. 1,000 billion to
government and conform to the NEC-approved national plan
Rs. 1,800_ billion-an increase of 80 per cent. Almost 89 per
and annual budget. The advances of the SBP should be
cent of this amount has been financed by the federal transfers,
strictly used for smoothing cash flow problems rather than as
which have almost tripled from Rs. 520 billion to Rs. 1545
additional financing for the budget or non-budget expenditure.
billion. Only 11 per cent has been raised by the provincial
Fourth, responsibilities for education up to matric, primary
governments from their own revenues-tax and non-tax. In
healt~care, rural health centers, tehsil and district hospitals,
2007-08, the provinces' own contribution to the total outlay
drinking . water, sanitation and sewerage, agriculture, and
was 15 per cent.
community development should reside at the district level and
How ha~ this increase in federal transfers affected the pattern
should be administered by the elected local governments. The
of expenditures? The share of development expenditure in
provincial finance commissions should be revived to divide
total ex~enditure has declined from 34.5 per cent to 33.3 per
the revenues between the provincial and district governments.
cent while that of current expenditure has risen from 65.6 per
Ba?kward ~istricts and rural areas should be given higher
cent to 66.7 per cent.
we,ghtage ,n the allocation of resources.
I! was widely believed that as the provinces spend most of
Fifth, education, health, police, and the judiciary should be
!h~tr money on education, health, drinking water, agriculture &
taken out of the_ ~~rview of the national pay scales as they
IrngatIon, the ordinary citizen would benefit from this transfer
have created ng1d1t1es and distortions and reinforced income
of res<;>urces from the federal to the provincial governments.
disparities between the advanced and backward districts. A
Preliminary estimates show that this assumption has not
female science teacher employed at Mithi or Kandhkot should
proved to be true. Punjab has allocated only six per cent of
ear~ a higher salary than the one in Karachi or Hyderabad.
the total outlay while Khyber Pakhtunkhwa seven per cent
S1m1l~rly, doc!ors, nurses, and paramedics serving in remote
for health and education. Only Sindh has increased the
and 1naccessIble areas deserve much higher compensation
allocations this year.
than those living in cities.
The devolution process remains incomplete as the functions
Sixth, tax effort by the provinces has slackened after the 7th
authority, and resources have not been delegated to the district
NFC Award. Incentives have to be built in the 8th NFC Award
governments. As there is an administrative vacuum at the
by giving weightage to the tax effort by the provinces. Urban
district l_ev~I, most of the financial resources that were accruing immovable property tax, agriculture income tax, abiana, and
to the _districts are now retained by the provincial governments.
GST on services are some very obvious avenues for additional
Whtie the provinces are now quite flush with resources that
revenue mobilisation by the provinces. Rough estimates show
~re deri~ed from the divisible pool, the federal government
that,. if designed properly and implemented faithfully, the
is stu_ck In a difficult fiscal situation. As most of the rigid and provinces can raise at least two per cent of the GDP.
1nflex1ble expenditures such as debt servicing, defence, civil
International experience has shown that if fiscal federalism
~rmed fo~ces, and subsidies fall upon the federal government,
is not tackled in a responsible manner, it can create serious
,t faces f1nancIng problems in the face of a declining share
economic dislocations and disruptions. Argentina and Brazil
In the overall tax pool. The growing fiscal deficit cannot be had suffered from hyperinflation due to the fiscal profligacy of
brought under control because of the asymmetry in the
state governments. The institutional and legal arrangements
ass,gnr,:,ent of re~enue~ and location of responsibility for had to be redrawn to overcome this problem and since then
expenditure. The f1nancIng of the fiscal deficit by borrowing checks and balances have worked well. China had to rework
from the State Bank of Pakistan has kept inflation high. the federation-province tax arrangements, which have now
Macro-economic stability remains elusive, investor uncertainty provided adequate fiscal space to the federal government.
prevails, and growth is subdued. Presently, Spain is facing the consequences of fiscal excesses
We have to recognize the new realities of fiscal federalism of strong regional governments. Domestic and international
for Pakistan. Attention and policy objectives have to shift markets are punishing Spain by either withholding credit
from the federal to the provincial governments. Institutional ?r raising the price of credit to levels that may make Spain
arrangements of the past are no longer adequate to respond insolvent. We may be at the beginning of the path towards a
to the c~allenges of the future. New institutional arrangements similar precipice and ought to take preventive measures at this
and policy changes have to be put in place. What are these?
stage and retreat from this dangerous path.
First, the present practice of budget formulation by the
federal and provincial governments in isolation has to be Source: Husain, lshrat, The New Fiscal Federalism, The News,
replaced by an integrated budgetary framework prepared, Karachi, 25 June 2012
376 Issues in Pakistan's Economy

Box 13.2 a fundamental weakness in the formulation stage: the

A New Fiscal Order overlooking of the state of provincial capacities to absorb
the additional resources in a transparent and well-directed
manner, and the absence of a road map on how to build those
Sakib Sherani analyses the implications of the 7th NFC Award.
capacities before functions are transferred.
The critical issue now is how the country's overall fiscal
The seventh NFC Award and the passage of the 18th
situation post-NFC and the 18th Amendment can be salvaged,
Amendment have furthered provincial autonomy and the
and how the overall fiscal framework can be placed on a
process of devolution to an unprecedented degree.
structurally sounder footing in the post-devolution environment.
However, in meeting the spirit of the 1973 constitution, these
A number of recommendations to this end:
two seismic developments have added a layer of complexity
The 'architecture' of fiscal planning in the country needs
and challenge to both the governance and fiscal framework of
to change fundamentally in the light of the 18th Amendment.
the federation.
Essentially, five different government budgets (one centre
On paper, the envisaged quantum increase in the transfer
plus four provincial) need to be synchronised more ~han
of resources to the provinces under the seventh NFC Award,
ever before to yield one consolidated, workable overall fiscal
nearly doubling in size, with stepped-up increases to follow
framework. This should be done at the level of the Council of
in later years, was to be financed from two sources: the
Common Interests (CCI), as propounded by Dr lshrat Husain.
introduction of an integrated (i.e. with goods and services in
Once the CCI has endorsed the framework, any provincial
its ambit) and centrally collected value added tax (VAT) and
surplus targets would become binding on the provinces.
the transfer of expenditure obligations from the federal budget
Failure to do this prior to the formulation of the 2011-12 federal
to the provinces in line with the process of devolution of
and provincial budgets has resulted in the disconnect between
functions. The latter, however, was to occur after a lapse of one
the finance ministry where it programmed a consolidated
year to allow provinces to prepare, leaving the federal budget
budget surplus by the provinces equal to 0.7 per cent of GDP
under considerable strain during the interim period.
while the individual budgets of the provinces yielded a deficit.
In practice, the transfers under the NFC Award have kicked
In the interim, the federal and provincial governments
in without the launch of an integrated VAT (or any successor
may need to consider a standstill agreement to be applied
arrangement such as Reformed General Sales Tax, or even any
to the NFC transfers. This is important since servicing the
meaningful fiscal effort by provinces), and devolved functions
fiscal transfers to the provinces was contingent on additional
have been nominally transferred to the provinces without
resource mobilisation. While the introduction of VAT was
the expenditure obligations. Hence, instead of expenditures
explicitly discussed _in the NFC deliberations as a prerequisite
totalling Rs. 187bn that were to be transferred to provinces
for the framework to be viable, it was not made a formal,
under the devolution exercise (the original calculation worked
binding part of the NFC agreement. This was a mistake.
out at the time of NFC deliberations in 2009), according to the
However, contrary to popular perception, the provinces had
Ministry of Finance, provinces have agreed to take on only
Jived up to their commitment on the issue till the shenanigans
Rs. Sbn to Rs. 6bn on to their budgets for 2011-12. This leaves
of two top federal bureaucrats unravelled the trust deficit built
the federal budget to cope with an additional fiscal burden of
on the back of the NFC Award, and by default, made the
some 2.7 per cent of GDP at a time when it is trying to bring
integrated VAT unworkable, at least for Sindh.
some sanity to the fiscal framework.
Where the provinces have not lived up to their expectations
The combination of a lack of overall fiscal effort to meet
is in the level of their own fiscal effort. With virtually most
the increased resource transfers, and the lack of preparation
large tax bases domiciled in the provincial domain (such as
and enhancement of capacity by the provinces to take on the
agriculture, real estate and services), for tax collection by
expenditures as well as functions relating to devolved subjects,
provinces to total an abysmal 0.5 per cent of GDP is untenable.
unless managed properly, is a potential source of a permanent
Without a minimum threshold of provincial fiscal effort, the NFC
'structural' fiscal deficit.
transfers should be held in abeyance till certain benchmarks
Of equally great concern, however, is the potential impact
are achieved. The 'trigger' for NFC transfers to resume could
on service delivery. With provinces unwilling to finance key
be, for example, achievement of tax collection equal to one per
devolved functions such as education and health services,
cent of GDP by the provinces.
for example, and the federal budget unable to do so with its
Finally, since the provinces will be able to borrow
current constraints, the whole purpose of devolution could be
commercially after the passage of the 18th Amendment, it may
defeated by the potential for near-collapse of service delivery
become necessary to have provincial legislatures pass their
to the common citizen. At its most basic level, for example,
own Fiscal Responsibility and Debt Limitation laws to establish
the Rabbani commission does not appear to have taken into
the overall debt ceiling.
consideration the need for physical working facilities and
provision of housing for the thousands of employees required
to staff the devolved functions in the provinces.
Hence, in addition to an existential threat from the lack Source: http://www.columnspk.com/2011 /07/15/a-new-fiscal-
of fiscal effort, the whole devolution exercise suffered from order-by-sakib-sherani/ Accessed 3 July 2013.
 Chapter 13 Fiscal Federalism in Pakistan 377

Graph 13.1: Weightage of Population in the NFC 201 O Table 13.15

Incidence of Poverty in Pakistan
Horizontal Distribution on the basis of
82% of Population Share Population in million per cent of
Year Below Total
Total Population
47.04 Poverty line

D□
August 1947 35 21 60
19.44 October 1958 44 26 59
11.33 March 1969 56 22 40
4.19
D r:::=J July 1977 72 28 39
August 1988 97 16 17
Punjab Sindh KPK Balochistan
October 1999 131 47 36
Source: Based on NFC 2010 Award Distribution.
Source: Data compiled and tabulated from Burki, Shahid Javed,
Changing Perceptions and Altered Reality (Karachi:
Oxford University Press, 2005), 1--63.
Graph 13.2: Poverty and Backwardness
Horizontal Distribution on the basis of
10.3% of Poverty and Backwardness Share urban and rural poverty, separately. As a whole, Punjab, KPK,
2.86

-
2.39
-
2.41 - -
2 64
and Balochistan reflect 0.44 per cent, 8.67 per cent, and 3.05
per cent (see Table 13.16) lower incidence of poverty in rural
areas compared to urban areas. However, variance amongst
the large and small cities is simply not comparable.
Equalizing federal transfers to the provincial or sub-
national governments is primarily of a redistributive nature
and is meant to provide public goods to achieve the objectives
of reducing poverty, inter- and intra-regional disparities, and
Punjab Sindh KPK Balochistan providing social sector development generally. Sometimes,
targeted conditional matching grants are also provided for
Source: Based on NFC 2010 Award Distribution.
such objectives. Estimating the level of poverty and designing
the framework of fiscal transfers accordingly, is the need of
the time. As Graph 13.2 shows, the average poverty in all of
13.3.2 Poverty or Backwardness Criteria the provinces is almost at the same level, which is clearly not
Like many other developing countries, Pakistan has been the case as much research shows. The NFC Award should
suffering from poverty, unemployment, and inflation. Being have taken into account the conceptual segregation between
a poor country the NFC 2010 Award laid down 10.3 per cent rural and urban poverty and then, per capita equalization
of the total divisible pool to be distributed on the criterion of matching grants for poverty reduction should have been
poverty and backwardness. For targeting poverty, the federal sanctioned accordingly.
and provincial governments need to have fair and reliable
statistics on the poverty profile. The percentage of total 13.3.3 Revenue Collection and Generation
population living below the line of poverty (see Table 13.15)
after independence has declined considerably, by almost Criteria
10 per cent in 1969 and then by a greater magnitude of 23 Modern states are presumed to have an inbuilt responsibility
per cent up to 1998. The situation started worsening with for the welfare of their citizens. Redistribution of income and
poverty rising from 17 per cent to 36 per cent in eleven years. wealth have always been for important moral and economic
This kind of volatility' is a· major concern when preparing justice. It is a common problem in most of the developing
development policies. nations that revenues are lower than expenditures, accounting
Not only does the. incidence of poverty vary across the for fiscal deficits, as is the case of Pakistan.
federating units of Pakistan, but within the provinces Provision of public goods by provinces is mainly dependent
variance in urban and rural poverty and incidence in large on federal transfers in Pakistan. It is argued that a good
and small cities is substantially high. As Table 13 .16 shows, transfer system ought to take account of the fiscal capacity
the overall position of Pakistan, Punjab, and Sindh is almost to generate own-source revenue and reward fiscal effort
the same, i.e. 36.79 per cent, 35 per cent, and 36.27 per cent, proportionately. The present arrangement arrived at accounts
respectively. Furthermore, the two less, developed provinces for revenue generation and revenue collection of up to 5 per
KPK and Balochistan are at 41.71 per cent and 45.68 per cent, which is a weak incentive for those provinces which
cent. Lifestyle, standards of living, baskets of consumptions have substantial economic activity and revenue generation
and every other parameter is distinguished between the and collection. Out · of the 5 per cent share in revenue
urban and rural areas. Therefore, it is impera,tive to study collection and generation, 2.5 per cent is for Sindh, Punjab's
the nature, resulting problems, and countering strategies for share is 2.2 per cent, while KPK and Balochistan are 0.25 per
 -J
378 Issues in Pakistan's Economy '

Table 13.16

I
Predicted Poverty Incidence: 2010-11

Percentage of Population below the Poverty Line

Regions
Pakistan and Urban Areas Difference Difference
its Overall between large Rural between
Federating Units and small Areas Urban and
Overall Large Cities Small Cities
cities* Rural*
Pakistan 36.79 35.75 26.41 47.88 21.47 37.31 1.56
Punjab 35,00 35.30 27.60 43.44 15.84 34.86 -0.44
Sindh 36.27 32.36 23.07 54.96 31.89 39.92 7.56
Khyber PakhtunKhwa 41.71 48.90 45.20 50.97 5.77 40.23 -8.67
Balochistan 45.68 48.00 25.18 62.26 37.08 44.95 -3.05

*Calculation added by the author

l
Source: Jamal, Haroon, 'Predicting Sub National Poverty Incidence for Pakistan', Research Report 85 (Karachi: SPDC, May 2013).

cent and 0.05 per cent, respectively-see Graph 13.3. We will cent for each of the provinces during 2001-12. In the NFC
now discuss the revenue collection statistics of the federating Award 2006, Sindh's argument was based on its capacity of ll
units of Pakistan, and the major contribution sources of revenue collection and generation which had no competitor.
revenue to the system. However, due to an absence of consensus, no Award was
announced, and instead the President issued a revenue order.
Karachi ranks on top on the basis of average overall tax
collection in the past twelve years, with an average of 62. 7 per
Graph 13.3: Revenue Collection and Generation cent, followed by Lahore at 13.63 per cent, Rawalpindi at 8.33
Horizontal Distribution on the basis of per cent, Multan at 5.50 per cent, and Peshawar at 3.19 per
5% of Revenue Collection and Generation Share cent; the rest of the ten cities (Hyderabad, Quetta, Faisalabad,
Gujranwala, Abbottabad, Sialkot, Sukkur, Sargodha, and
Bahawalpur) individually lie below 3 per cent and jointly
account for 7.28 per cent of the overall tax collection. The
situation is quite obvious and often exploited for political
mileage for Karachi to be awarded provincial status or greater
fiscal autonomy-see Chapter 23. As a whole, the average
0.25
0.05 collection of taxes in Sindh over the last twelve years, 2001-
c:::::J = 12, shows 95.83 per cent collection from Karachi and 2.09 per
Punjab Sindh KPK Balochistan cent and 2.08 per cent from Hyderabad and Sukkur.
More recently in 2011-12 the joint share of the top five

I
Source: Based on NFC 201 O Award Distribution. cities (Karachi, Lahore, Rawalpindi, Multan, and Peshawar)
accumulated to 92.08 per cent and the next ten cities' share
just 7.9? per cent. We will now discuss the components of
tax collection in detail. The overall taxes are broadly classified
13.3.4 Tax Collection and Distribution into two categories, direct and indirect taxes. Direct taxes
across Federating Units of Pakistan include Income and Corporation Tax, Withholding Tax,
On average, the two developed provinces of Pakistan, Sindh Workers' Welfare Fund (WWF), Workers' Profit Participation
and Punjab, make a significant contribution amounting to Fund (WPPF), Capital Vallie Tax (CVI), and Corporate Asset

I
96.35 per cent of the tax collection and generation, while Tax (CAT). The 18th Amendment to the Constitution has
the contribution of the two less-developed provinces, KPK devolved CVT on immovable properties to the provinces.
and Balochistan, is 3.65 per cent on average for 2001-12. Indirect taxes include custom duties, sales tax on domestic
Table 13 .1 7 shows the dominance of Sindh over the other and imports, and FED on domestic and imports. Pakistan's
provinces, but this is strictly not comparable due to its ta,xation structure is highly dependent on indirect taxes.
monopoly over port resources which facilitates superiority in The average position of provinces in direct tax collection
collection of indirect taxes such as custom sales tax, and FED is almost the same, with Sindh being the highest with 64. 97
on imports. The average 2001-12 share of Sindh was 65.44 per cent, Punjab with 30.93 per cent, KPK with 3.24 per cent,
per cent, followed by Punjab at 29.84 per cent, KPKs at 3.38 and Balochistan with 0.86 per cent. Karachi dominates with
per cent, and Balochistan at 1.34 per cent, with a maximum an average 61.49 per cent, followed by Lahore, Rawalpindi,
of 71.78 per cent, 34.91 per cent, 5.42 per cent, and 2.07 per Multan and Peshawar with 17.33 per cent, 4.30 per cent,
J

~ Chapter 13 Fiscal Federalism in Pakistan 379

3.65 per cent, and 3.03 per cent, respectively. Indirect tax

!
z I'- I'- co co
'-: ((! co collection statistics are almost the same as for direct taxes,
~ (0 iri
N
ci
with Karachi dominating with an average 62.79 per cent,
followed by Lahore, Rawalpindi, Multan, and Peshawar.
co N I'- Sindh's absolute advantage due to its monopoly over port
~ I"; ai
"<t
'<t
iri
0
C\i resources can be observed in custom duty collection from
~ ;::: C')
a minimum of 78. 92 per cent in 2007/08 to a maximum
Q) of 94.73 per cent in 2001/02. On average, 2001-12 Sindh's
Cl) '<t '<t co '<t
<ll '<t co C') cq share in collection of custom was 84.21 per cent, followed
<ii iri
co
en C')
by Punjab with 12.43 per cent, KPK with 2.31 per cent, and
~
N

Balochistan with 1.05 per cent

t N
i
0
N

..,..
I'-
ci
I'-
co
..,..
co
N
co
((!
co
I";

ui
C
E
For sales tax collection on domestically produced goods,
Punjab has been contributing more than half of the sales
with a percentage share of 55.5 per cent followed by Sindh
with 40.20 per cent, and KPK and Balochistan with 2.91
'<t 0) co 0) :::l
~ ~ LO
iri
((! 0)
ci
0
0
per cent and 1.57 per cent. Karachi's average 2001-12 share
0 ;::: N
<ti was 35.63 per cent followed by Rawalpindi 's 23.49 per cent,
N 0
'E Lahore's 19.58 per cent and Multan's 10.19 per cent, where
0 Q)
co I'- 0) co > these four cities account for 88.89 per cent collection with the
J;0 I";
LO
..,..
C\i
co
ci -~ remaining larger cities contributing individually below 5 per
0 ;::: N ti
N Q)
;.:
cent and jointly 11.11 per cent.
0) .Q These patterns are reflected in other taxes as well. Although
LO 0) '<t
%
0
..,..
enco
'<t
i-..:
'<t
C\i
ai
ci
Q)
£ Sindh enjoys the largest share of the pie on account of revenue
0 N 0 ,..:_ generation and collection, which is evident from the case
N -C en
Q)
·- :::l presented above, the argument is that rewarding fiscal effort
co -en en
co to an extent of five per cent and poverty and backwardness
~
LO N I'- Q) · -
0) LO LO 0) .r::.. en
LO ci C\i ci Cl) :::l to almost more than double, i.e. 10.3 per cent, seems unfair
0
0 co C') :c .g
N
E <ll
and unjust and is a big incentive for not broadening the
0 >
.. tax base and raising own-source revenue by sub-national
I'- ~

..,..
~
I'- N - • 'O
'-: ai co '-:
<ll
Q) .0 governments in Pakistan. Therefore, rewarding fiscal effort
0 (0 "<t C\i 6<1l
0 C')
~ E should be linked to the per capita fiscal capacity of the
N Q) <ll
'O
~ -en province, rather than taking into account revenue collection
co o=
co co and generation only. Consider the example of India-see
~0
C') C')
Cl) -"'
0 I'- ~ C 0
C\i C') C') ·- 0 Table 13.18-where the tax effort has been rewarded to 10
0 co C') -g CD
N Q) ~ per cent in the 10th Finance Commission ( 1995-00) and 7.5
Ill 0 <ll
"iii LO gi ~ per cent in the 11th (2000-05) and 12th (2005-10). More
>,
9'<t co
..,.. co C')
..,.. C')
'O Q)
iii N <i: C :::l recently, in the 13th (2010-15) Finance Commission Award,
C 0 C\i C\i "<t ·- C
0 co C') C Q) the tax effort has been abolished and the weight for fiscal
,,
ct
C
N

'<t
0 >
·-
0 a:
Q)
discipline increased from 7.5 per cent to 17.5 per cent, which
G) 0
I co
co
LO
co
N
'<t
~
=0 'O0
Q) - we advocate in the NFC criteria for Pakistan.
F

l
C')
0 C') ci "<t 0 ~ Provincial budgets are dependent on federal government
ui 0 co C')
~ ~
C
N
- CD
transfers, and the way out is .to increase the investment share
0 ~cij in sub-national and national income apart from raising the
:;: C')
0 ~
()
~
9N N
N ;::: I'-
LO ~ ~u
- Q) tax-GDP ratio.
0 C') ci "<t N Q)
0 0 co C') ..,.. IL
I N 1-
0 ..,.. 0
G)
N g~ 13.3.5 Inverse Population Density Criteria
::s N <ll
C 9 LO I'-
'<t
N
C')
I'-
0 ~'O
One of the important features of development planning
>
G)
0 C\i
co
ci LO C\i Q) Q)

G) 0
N
C')
~£ is to take care of the area in which government _desires to
a: a> E
intervene. In a technical sense, the dynamics of an area, its
G) iu e
...ca ~
Cl
C 0
0
0)
C')
C\i
co
'<t
C')
ci
C')
N
'<t
LO
'<t
((!
c-
0
-g g
C
population, population density, i.e. persons living per square
kilometres area and the needs of the people, and how much
G) en .l!!
...
()
G)
N
<ll
.0 0
:::l it costs for the government to create per capita provision of
public goods, all matter. In a place where the population
Q,. C en <ll
Q) 0
G) en
Q) ~ o en
C -~
density is high, the provision of public goods per capita will
r-- ·;:
Ill 0
C .r::.
.0 :c0 ·5 O be more practical and useful for a larger number of people.
<ll 0 .r::.
....
• G) ' ·5
0
'O
C 'i': ~
c..
0
<ti a. "S However, a province like Balochistan where the distance
.a:
Mu i:i5
:::l
c.. ~ CD -<
0 ..
...- C
-"' Q)
from one city to the next and one village to the other is very
-G) ·>- C· ~
.0 0
-"'
C 'O <ll :::l high, providing public. goods arid services and maintaining
~n. a:
<ll ti
N
C ~
C')
.r::.
:;;: .a: 0
(/)
380 Issues in Pakistan's Economy

them would cost very much and in turn may not deliver the Graph 13.4: Inverse Population Density
same results as in dense areas. This does not mean that high
Horizontal Distribution on the basis of
population density areas have no problems for public service 2.7% of Inverse Population Density Share
delivery, and in Karachi or Lahore establishing an efficient
traffic network system is an extremely difficult task. 2.21
As Table 13.19 shows, the population density of Balochistan
is the lowest amongst all the provinces with 27 persons per
square kilometre, compared to Punjab (488), Sindh (313),
and KPK (333 ). There is no comparison of Balochistan
with the rest of the provinces; therefore, to compensate
Balochistan the inclusion of an inverse population density
criterion has been made part of the NFC 2010 Award-see
Graph 13.4.
=
0.12

Punjab
0.19
c:::::J
Sindh
0.18
c::::::::J

KPK
D
Balochistan

Source: Based on NFC 2010 Award Distribution.

Table 13.18
Criteria for Horizontal Distribution of Divisible Pool under the Indian Finance Commission (IFC), (Distribution in per cent)

Inverse Fiscal
Collection/ Backward- Income Index of Fiscal
IFC Period Population Per Capita Area Tax Effort Capacity
Contribution ness Distance Infrastructure Discipline
Income Distance
1st 1952-1957 80.0 20.0
2nd 1957-1962 90.0 10.0* -
3rd 1962-1967 80.0 20.0
4th 1966-1969 90.0 10.0
5th 1969-1974 90.0 10.0
6th 1974-1979 90.0 10.0
7th 1979--1984 90.0 10.0
8th 1984-1989 25.0 10.0 25.00 45.0
9th 1989--1995 22.5 10.0 11.25 11.25 45.0
10th 1995-2000 20.0 60.0 5.00 5.0 10.0
11th 2000-2005 10.0 62.5 7.50 5.0 7.50 7.50
12th 2005-2010 25.0 50.0 10.0 7.50 7.50
13th 2010-2015 25.0 10.0 17.5 47.5
*Collection
The weight for inverse per capita income .is calculated by multiplying the inverse per capita income by the population of the state.
Source: Table designed by author and statistics are compiled from reports of Indian Finance Commissions IFCs (1st-13th Finance
Commission).

Table 13.19
Population Density by Provinces/Regions: 1951-1998 Censuses Data

1951 1961 1972 1981 1998 2005* 2010* 2013*

Rank Provinces
Persons/Sq. Km
1st Punjab 100 124 183 230 358 418 461 488
2nd KPK 61 77 113 148 238 280 312 333
3rd Sindh 43 59 92 81 117 260 293 313
4th Balochistan 3 4 7 12 19 23 25 27
Total Pakistan 42 54 82 106 166 196 218 232
Source: Computed from Population Census various issues. .
*Computed from Pakistan Economic Survey 2012-13 (Islamabad: Ministry of Finance, Government of Pakistan).
 Chapter 13 Fiscal Federalism in Pakistan 381

13.4 SOME Issues RELATING TO of India, the average of the three richest states i.e. Goa,
Punjab, and Maharashtra was taken to compute the income
INTERGOVERNMENTAL FISCAL distance of other states, making the criterion more objective
and screening out the possibility of the outlier value being
TRANSFERS AND THE NFC 2010 selected, by taking average values.
AWARD As Table 13.20 shows, population is considered an important
factor when looking for fiscal policy options therefore, it has
been given adequate consideration by almost all the countries
13.4.1 Vertical Fiscal Imbalances in horizontal revenue sharing formulae. It is important to
note that Pakistan is on the top of the list when allocating
A fiscal imbalance is the mismatch between the revenue
share value against the population criterion.
and expenditures of a government. The literature on fiscal
The development gap criterion is like the income distance
federalism discusses two types of fiscal imbalances. Vertical
criterion of the Indian Finance Commission, the distance
fiscal imbalance is measured between two different levels
of sub-national governments iri terms of development from
(tiers) of government, i.e. national and sub-national,
the most developed sub-national government or the state.
while horizontal fiscal imbalance is measured between the
governments at the same level (tier).
Table 13.9 shows that vertical fiscal imbalance exhibits an
Table 13.20
almost consistent pattern over the period with the exception
Criteria of Horizontal Distribution among Sub-National
of the first Award after the fall of East Pakistan. The alarming
Governments
situation is that the provincial share in revenues declined from
a maximum of 14.2 per cent in 1972-75 to a minimum of 5. 7
Country Criteria per cent
per cent which substantiates the argument of the substitution
of federal transfers over own-source revenue efforts by sub- Population 65.0
Argentina Development gap 25.0
national governments in Pakistan. On the other side of the
Inverse population density 10.0
picture, the expenditure share of provincial government
touched a maximum of 54.4 per cent and decreased over Population 33.34
the period to a minimum of 25 per cent, although the Brazil Area 33.33
Per capita income 33.33
situation is not very encouraging. The way out of this
dilemma is to raise the provincial tax base and tax revenues. Population 70.0
Colombia
Equal Share 30.0

13.4.2 Multiple Criteria and the Way Forward Population 25.0

India Area 10.0
The term 'multiple criteria' seems of some value; however, 2010-2015 Fiscal discipline 17.5
is this what the NFC is destined for? Will the notion Fiscal capacity distance 45.5
of the present multiple criteria deliver? Does it need 100.0
Indonesia Collection
continuous objective assessment, monitoring, evaluation,
and incorporating of any change, if needed? Is it flexible Japan Collection 100.0
enough to integrate any other structural shift, if so desired, Malaysia Collection 100.0
by the relatively less-developed provinces? .Would the merits Population 50.0
of reducing the overriding population share be considered by Mexico
Collection 50.0
Punjab especially now when the PML-N has formed the new
Equality 40.0
government in the federation and in Punjab? Would it be Nigeria
Population 30.0
easy to consider other options for policy ambitions other than 2008
Social development factor 10.0
the present criteria? These are some of the questions we n~ed (Commission
Education 4.0
is analysing
to find the answer to in order to make a useful assessment. Health 3.0
options for
Table 13.17 reflects the case of horizontal distribution Water 3.0
revision in
of revenue between the Indian states. Up to the 7th Landmass/Terrain 10.0
2013.)
Indian Finance Commission Award, the situation was Internal Revenue Effort 10.0
almost uniform and the population criterion over-ruled Population 82.0
the possibility of making a space for any other parameter. Pakistan Poverty and backwardness 10.3
However, the post 8th IFC Award was the beginning of 2011-2015 Revenue collection and generation 05.0
an evolutionary process in the history of Indian fiscal Inverse population density 2.70
federalism. Income gape between rich and poor states was Population 70.0
given consideration up to between 45.0 per cent and 62.5 per Philippines Land area 20.0
cent. Rather than considering the poverty statistics, such as Equal share 10.0
head count, defining the poverty line, computing the average Source: The Reform of Inter governmental Fiscal Relations in
poverty of any state as a whole, the more useful measure of Developing and Emerging Market Economies, World
income distance was adapted. After the 10th ( 1995-2000) Bank, Policy and Research Series 23 (Washington DC:
and 11th (2000-2005) National Finance Commission Awards World Bank, 1994).
382 Issues in Pakistan's Economy

Pakistan has a long way to go to break the ice further. of national resources. Although in the case of Pa:\<.istan
A rationalized transfers system would definitely create the reward assigned to such discipline may not fetch the
distributive efficiency and allocative efficiency, apart from desired results in the short run however, this parameter
achieving the objective of fiscal equalization. can be a useful one in maintaining checks and balances on
provincial expenditures, especially when the higher amount
13.4.3 Sales Tax and Provinces of resources are devoted for provinces in vertical sharing (see
Table 13.8) and abolishment of the concurrent list leading to
Prior to the approval of the 7th NFC, the federal government devolution of more functional assignments to the provinces,
was collecting the sales tax, although the Constitution of especially after the 18th Amendment. The Pakistan Fiscal
1973 specified it to be the responsibility of the provinces-see Policy State~ent 2010/11, warns the provincial governments
Chapter 10. The sales tax has been recognized as a provincial as follows:
subject and provinces have been given legal authority to
collect it. It has been argued 13 that the provinces lack the The goal of fiscal decentralization envisioned
ability to implement any kind of crediting and refund under the 7th NFC Award cannot be achieved
mechanism in respect of the general sales tax (GST) on in true spirit unless the provinces exercise
services. Further claims and adjustments on intra-provincial fiscal discipline and maturity in their economic
transactions need to be addressed via mechanisms which management. Without effective management of
still need to be established. The assignment of the general the resources, the requisite fiscal space cannot
sales tax on services is not explicitly operational during the be reached that is necessary for investments in
social, economic, and industrial sectors. In this
lifetime of the current Award however, the revenue sharing context, the provincial governments in Pakistan
arrangements were based on the assumption of additional are required to employ additional resources in
revenues on account of GST on services collected by the an efficient and optimal way. The provincial
provinces. governments are also expected to reduce their
Ehtisham Ahmed 14 discusses the policy options to be excessive dependence on federal transfers and
considered for GST and argues that GST should be given mobilize their own resources as there is wide
entry to the divisible pool for reasons of efficiency and better room available to them to revise the tax lists and
performance. The second option that he advocates is the enhance-their revenue base, 15
Australian model that GST should be collected by the federal
government and returned back to the provinces under the The 13th Finance Commission of India is characterized by the
equalization grants system. The third is the Chinese model inclusion of a new parameter in the horizontal distribution
where the richer provinces may come forward to meet the criteria, i.e. fiscal capacity distance. The report on 13th IFC
equalization objective and share the GST with provinces with defines fiscal distance as the 'distance of a state's estimated
lower volume of transactions and lower revenue generation per capita revenue from the estimated per capita revenue of
capacity under GST. Haryana, thereby reached at per capita entitlement and after
multiplying tlie figure with population of the state the share
of state is arrived at'. This criterion may not work for Pakistan
13.4.4 Substitution of Fiscal -Effort by Sub- because per capita revenue from Sindh will have the highest
National Governments value and Punjab may be close to Sindh when comparing
Revenue collection by the federal government comprise·s nominal figures; however, in per· capita terms it will lie far
93 per cent of total tax collection whereas almost 6 per behind Sindh. It is difficult to compare the per capita revenue
cent and 1 per cent revenue is collected by the provincial of KPK and Balochistan with that of the highest one and
and local governments, respectively. One of the most then computing the shares for the purpose of the equalization
persistent problems in the history of fiscal federalism and objective.
tax administration in Pakistan is that provincial governments
create provision of public goods by employing of ~esources 13.4.5 Conditional versus Unconditional
acquired through federal transfers. The provincial governments Grants
as a whole substitute federal transfers for their own fiscal effort
and do not tax their residents. Although this act of fungibility The conditionality annexed with grants is debated extensively
(substitution of federal transfers for own fiscal effort) in purview of being at the cost of provincial autonomy. On
may lead sub-national governments to a greater political the other hand, unconditional grants ensure higher level of
advantage and benefit in terms of gaining votes in electoral discretion to be exercised by the provincial government. In
politics, at the same time this gives rise to fiscal indiscipline. the case of Pakistan, performance-based conditional grants
As Table 13.18 shows, fiscal discipline is an important feature should be encouraged, since these would help the federal
of the Indian horizontal distribution formula assigning a government to contain the -provincial revenue deficits. The
weightage of 7.5 per cent in the 11th and 12th Awards, and Medium Term Budgetary Framework of the Government of
17.5 per cent more recently in the 13th Award. Rewarding Sindh has also adopted the same methodology instead of
on the basis of fiscal discipline, restricts provinciaVsub- providing grants on the conventional incremental basis. The
national governments from incurring high budget deficits targeted performance indicators are set as the barometer of
and borrowing which in nirn promotes optimized allocation performance for continuance of grants.
 Chapter 13 Fiscal Federalism in Pakistan 383

Usman Mustufa 16 suggests that fiscal equalization needs to

be focused on for various grant programmes which balance
13.5 THE CAS~ OF FISCAL EQUALIZATION
the per capita fiscal capacity for which scientific calculations Hafiz Pasha and his colleagues 17 analysirlg the relative
are required for financial ability equalization. This can be per capita federal transfers-see Table 13.21 and 13.22-
achieved easily by commissioners in the tax system, and is a have shown that the magnitude of federal transfers to the
straight forward and less rigorous data exercise. Punjab has always been lower than its relative share irI the
population, while the case of Sindh appears to be the reverse.
13.4.6 Fiscal Federalism and Poverty The trend for Khyber Pakhtunkhwa is more variable,
· Reduction while the accruals of federal transfers to Balochistan
have been in a higher proportion compared to its relative
One outcome of intergovernmental fiscal transfers is meant population. Per capita transfers to the smaller and less-
the creation of horizontal fiscal equalization and irI reducirlg developed provirlces are high compared to those of large and
inter-regional disparities. The argument of advocating a relatively developed provinces, which means that t;he Award
more rational regime of fiscal federalism sounds more manages to compensate the smaller and less-developed
important if poverty reduction through effective provision of provinces. The structural change in the design of criteria-
pubic goods is a goal. A criterion where provinces are given based transfers brought about positive developments, such
representation just on the basis of population may not be that the divisible pool started to equalize resources between
able to work as well where there are multiple issues such as provinces. Relatively less-developed provinces were better off
those in the structure of fiscal federalism in Pakistan. What in terms of receiving a higher share of the pie. Divisible pool
if greater sub-national autonomy is awarded, as it has been transfers, total transfers; and special grants as a whole, with
done under the 18th Amendment and in the NFC Award the exception of straight transfers, have an equalizing effect
2010, and poverty does not fall? Below, we present the case in the present Award. ( See Tables 13.22 and 13.23)
for horizontal fiscal equalization which aims to analyse
different Awards as well as the .nature of grants and their
impact on horizontal fiscal equalization.
13.5.1 Fiscal Equalization Index (FEI)
In our case the concentration index is used to calculate
whether the NFC divisible pool transfers, straight transfers,

Table 13.21
Federal Transfers to the Provinces

1990-91 1991-92 1996-97 1997-98 2005--06 2007--08 2009-10 2010-11

Federal
Transfers Rs. in Billion
To The 33.8 65.8 139.4 131.7 316.0 506.7 718.3 1,068.7
Provinces
per cent
Punjab 55.3 45.1 51.3 47.0 47.1 47.3 47.2 46.7
Sindh 24.0 23.9 24.9 23.8 30.1 29.8 29.3 26.7
KPK 12.7 19.0 15.9 17.8 14.4 14.8 15.2 17.1
Balochistan 7.9 12.0 7.9 11.4 8.4 8.0 8.3 9.5
Pakistan 100.0 100-0 100.0 100.0 100.0 100.0 100-0 100.0

Source: Pasha, Hafiz et al. Fiscal Equalization among Provinces in NFC Awards (Lahore: BNU, Institute of Public Policy, 2010).

Table 13.22
Relative Per Capita Transfer by Province

Province 1990-91 1991-92 1996-97 1997-98 2005--06 2007-08 2009-10 2010-11

Punjab 0.953 0.778 0.884 0.810 0.821 0.824 0.822 0.815
Sindh 1.030 1.026 1.069 1.021 1.270 1.257 1.235 1.127
KPK 0.948 1.418 1.186 1.328 1.043 1.072 1.099 1.234
Balochistan 1.453 2.264 . 1.491 2.151 1.647 1.569 1.565 1.857
Pakistan 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
* . . _ per cent Share in Federal Transfers
Relative Per Capita Transfers - per cent Share in Population

Source: Pasha, Hafiz et al. Fiscal Equalization among Provinces in NFC Awards (Lahore: BNU, Institute of Public Policy, 2010).
384 Issues in Pakistan's Economy

Table 13.23 Stands where p stands for cumulative population share and
How Intergovernmental Fiscal Transfers have been t stands for cumulative share of provinces in transfers. The
Equalizing in Pakistan? concentration index is defined as twice the area between
the concentration curve, L(P), and the line of equality (the
Divisible line running from the bottom-left corner to the top-right).
Straight Special Total·
NFC Pool So, in the case where there is no income-related inequality,
Transfers Grants Transfers
Transfers the concentration index is zero. The convention is that the
NFC 1991 Neutral Yes No Yes index takes a negative \;'alue when the curve lies above the
NFC 1996 Neutral Yes Yes Yes line of equality, indicating disproportionate concentration of
NFC 2006 No No No No the NFC transfers variable among the poor, and a positive
NFC 2010 Yes No Yes Yes value when it lies below the line of equality. The negative FEI
means that the federal transfers to provinces are accruing
Source: Institute of Public Policy, State of the Economy Devolution to relatively poor provinces and positive FEJ means the
in Pakistan, Annual Report 2011 (Lahore: BNU, Institute of
contrary. To set the order in which the provinces are to be
Public Policy, 2010).
placed on the x axis, the development rankings of provinces
as discussed by Hafiz Pasha and his col!eagues 18 (see Table
13.24) are taken into consideration for the purpose of
development grants, and non-development grants are
concentrated in the relatively developed Sindh and Punjab computing a Fiscal Equalization Index using the idea of
or in 'underdeveloped KPK and Balochistan. The negative determining concentration by means of coordinate geometry.
magnitude of the index refers to equalization and the The percentages of population shares for the purpose of
positive, to the inverse. calculating the Fiscal Equalization Index with respect to
the divisible pool transfers are taken from NFC reports
and population censuses. We are computing the Fiscal
Figure 13.1: Lorenz Curve Equalization Index by adopting development ranking for the
data to be placed in defined order on the x-axis and y-axis.
The order that is followed in Figure 13.1 is Balochistan, KPK,
Cl)
~
L Table 13.24
Development Rankings of Provinces
~*
.C
en·-C
0.. ~
A
For development of the FEI, we need the ranking of provinces
(I) ~ in terms of level of development. Sindh appears as the most
> (I) developed province in almost all development indicators, with
~ 1ii
-
:::i
C
ca the exception of Human Development Index [HDI]. Also KPK and
E.::. B Balochistan interchange to occupy the third and the fourth rank in
:::i-
0 0
the development indicators. Therefore, the ranking of provinces in
~ ~ ascending order of development is Balochistan, KPK, Punjab and
Sindh.
ID :::
Development Ranking of Provinces
B K p s
p1 p2 p3 p4 lndicator(s) Punjab Sindh KPK Balochistan
Average Household II IV Ill
Cumulative share of Income
population in % Per Capita GDP 2 II Ill IV
Human Development 3 II Ill IV
Source: Figure designed by author Index
Deprivation Index 4 II IV Ill

The concentration index is defined with reference to Incidence of Poverty 5 II IV Ill

the concentration curve (PT), which graphs on the x-axis Vulnerability 6 II Ill IV
the cumulative percentage of the sample ranked by living
1. According to Household Income and Expenditure
standards, and beginning with the poorest; on the y-axis, 2. According to Bengali [2003)
the cumulative percentage of the NFC transfers variable 3. According to Hussain [2003] and Jamal [2007]
corresponding to each cumulative percentage of the 4. According to Jamal [2007]
distribution of the Jiving standard variable is shown. I
5. According to Asian Development Bank [2003]
6. According to Jamal [2007]
FBI= (pl t2 - P2 ti) + (P2 t3 - P3 tJ + ... +
Source: Pasha, Hafiz A et al. Fiscal Equalization in NFC Awards
(pn-1 tn - Pn fn-1)

1
(Lahore: BNU, Institute of Public Policy, 2010).
 Chapter 13 Fiscal Federalism in Pakistan 385

Punjab, and Sindh, from least developed to most developed, Table 13.26
and the FEI is hence calculated. Average Fiscal Equalization Indices during NFC Awards
As Table 13.25 shows, the average Fiscal Equalization post-1971
Index for the divisible pool transfers have been ·neutral
throughout and disequalizing to some extent in the 2006 Non
NFC Development Total Total
Award. It is imperative to note that after the inclusion of Development
Award Grants Grants Transfers*
various parameters to adapt multiple criteria, the divisible Grants
Period
pool transfers have started equalizing. For Development Ranking Figure-2
The overall average from 1973-2014 reveals that straight transfers 1973-1975 0.07 -0.42 -0.14 -0.09
are benefiting smaller provinces. The last two Awards (the 1976-1979 -0.07 -0.49 -0.35 -0.15
most developed as per development ranking), have been
1980-1983 -0.10 -0.57 -0.30 -0.12
disequalizing due to the concentration of the high share to
1984-1991 -0.03 -0.20 -0.16 -0.09
Sindh. Sindh, on account of gas development surcharge, is
presently enjoying a larger share in straight transfers. The 1992-1997 -0.07 0.25 0.05 -0.06
average straight transfers during 2011-14 to Sindh are 59.50 1998-2006 -0.14 -0.32 -0.27 -0.04
per cent of the total followed KPK, Balochistan by and Punjab 2007-2010 -0.14 -0.03 -0.04 0.00
with respective shares of 19.52 per cent, 12.95 per cent, and Average
-0.07 -0.25 -0.17 -0.08
8.04 per cent-see Table 13.2. 1973-2010
Except for the 1998, 2006, and 2010 Awards, the magnitude
*Total NFC transfers plus Total Grants.
of the concentration index has been over and above the Source: Author's calculations.
average value individually for all Awards-see Table 13.25.
Table 13.26 shows that the average Fiscal Equalization
Indices for non-development grants have performed better payment of arrears of hydro-electricity profits to KPK as non-
than the indices for development. Development and non- development grants, 19 and secondly, to capital expenditures
development grants have always been equalizing with the which are considered as developmental; hence, given that
exception of the 1973-75 Award period FEI = +0.07 and capital expenditure in the provinces is low, the volume of
1992-97 Award period FEI = +0.25. To sum up, the resources required for equalization is also low. 20
total grants have been equalizing throughout, but now the
magnitude of equalization is declining from a high of FEI =
13.5.2 Fiscal Equalization with the
-0.35 in 1976-79 to a lowest of FEI = -0.04 in the 2007-10
Award. The total transfers including NFC transfers (divisible Dominance of Indirect Taxes and
pool + straight transfers) and total grants (development Distribution of Resources in Real
plus non-development) have been equalizing but the extent Terms
of equalization is not encouraging, except in 1976-79 [FEI
= -0.15) and 1980-83 [FEI = -0.12]; however, the total Analysing the time-series of tax collection statistics during
transfers in the 2007-10 Award (Revenue Order) have a 1950-2012 reveals that the minimum proportion of direct
neutral effect. taxes was 12.7 per cent in composition of tax collection in
The higher magnitude of equalization of non-development 1951 with a corresponding maximum of indirect taxes of
grants compared to development may be due firstly, to the 87.3 per cent. Furthermore, the maximum proportion of
direct taxes was 39.6 per cent with a corresponding minimum
of indirect taxes 60.4 per cent in 2010. The anatomy of
Table 13.25 behaviour of progressive and regressive taxation over the
Average Fiscal Equalization Indices during NFC Awards period-see Table 13.27-reveals that the tax structure has
post-1971 been transformed from greater reliance on indirect to direct
taxation which is highly desirable since it is more equitable
Divisible Straight Total NFC and just. Even now, the tax mix is fairly distant from a
NFC Award Period
Pool Transfers* Transfers desirable one and focuses on indirect taxes whose incidence
1973-1975 0.00 -0.60 -0.07 is regressive in nature.
The present Government of PML-N increased the rate of
1976-1979 0.00 -0.82 -0.07
general sales tax from 16 per cent to 17 per cent in the budget
1980-1983 0.00 -0.56 -0.06
of 2013/14 despite severe disagreement from opposition
1984-1991 0.00 -0.57 -0.04
parties on the issue. The GST, obviously, is indirect and
1992-1997 0.00 -0.37 -0.08 regressive in nature and would lead to inflationary pressure
1998-2006 0.00 -0.03 -0.01 in general price levels in the country. Tax collection on
2007-2010 0.02 0.24 0.03 higher prices will definitely generate higher amount of taxes
2011-2014 -0.05 0.18 -0.05 increasing the size of the divisible pool to be redistributed.
Average 1973-2014 0.00 -0.32 -0.04 The point of argument is that an increase in GST may serve
the said purpose, but at the cost of fiscal equalization;
*will be referred in context of Concentration Index. which means that in real terms the federal transfers to the
Source: Author's calculations.
386 Issues in Pakistan's Economy

Table 13.27 of the world and improving on the human development front
Dynamics of Tax Mix as well. The position of Bangladesh although, has improved
a lot yet the tax mix of direct and indirect taxes was 28.I per
Fiscal Year Direct Taxes Indirect Taxes cent to 71.9 per cent in 2010.
1950/1 12.7 87.3 Agricultural taxation, although a very controversial and a
1960/1 23.0 77.0 politically charged issue in Pakistan, should now seriously
1970/1 19.0 81.0 be considered part of the agenda for future taxation reforms
to be included in the divisible pool-see Chapter 5. The
1980/1 20.7 79.3
Constitution of Pakistan, 1973, clearly defines agricultural
1900/1 18.0 82.0
income as a provincial subject, but it has never been subject
2000/1 31.8 68.2 to taxation due to structured feudal dominance amongst
2009/10 39.6 60.4 elected representatives in the Parliament of the country.
2010/11 38.7 61.3 Apart from the fiscal policy issue, it is also a rather grave
2011/12 39.2 60.8 concern with regard to the political economy of Pakistan.
Averages Although agricultural tax is a provincial subject and the ·
collected · proceeds would not form part of the divisible
1951/71 21.5 78.5
pool, the reduction in the substitution effect of federal
1971/91 17.5 82.5 transfers over the own-source revenue effort by the provincial
1991-2011 31.7 68.3 governments would clearly be observed in future. This course
1951-2012 24.1 75.9 of action would also determine the spirit of the provincial
Maxima 39.6 87.3 revenue effort and reduce the substitution effect as discussed
Minima 12.7 60.4 above-also see Box 13 .1.
·. There is no escape for the economic managers of the
Source: Calculated from Federal Board of Revenue Year Books
country except to realize and implement a comprehensive
Various Issues.
future agenda of broadening the tax net, i.e. tax-to-GDP ratio,
and reduce the burden of indirect taxes so that the effect of
provinces will decline with the increase in cost-push inflation real fiscal transfers to the provinces become more positive.
due to increase in regressive taxes, especially GST on goods.
Therefore, social planners should take into account the real
effect so that effective redistribution to the poor provinces 13.6 · THE 18TH AMENDMENT: THE WAY
and poor people of Pakistan may take place.
FORWARD TO DEVOLUTION?
· There has been a phenomenal change in the direct and
indirect tax mix of India-see Table 13.28. Up to I 995 the · The Constitution of 1973 restored parliamentary democracy in
situation was not encouraging and the mix reveals a ratio of Pakistan through the two houses: the lower house; National
27.3 per cent versus 72. 7 per cent dominance of indirect taxes. Assembly and the upper house, the Senate. Article 160 of
However, a look at the developments during the last decade the Constitution is about the National Finance Commission
and the present scenario reveal during that the mix has similar to Articles 144 and 118 of the Constitutions of 1962
been optimally improved by 42.7 per cent versus 57.3. More and 1956. However, the addition of Clause 3(A) of the
recently the situation shows the supremacy of direct taxes 18th Amendment has guaranteed a share for the provinces
over indirect ones. The resulting impact of this may be seen in not less than the share allocated to them in the previous
the Indian economy emerging as one of the largest economies Awards. Clause 3(B) directs the federal Finance Minister
and provincial Finance Ministers .to administer a post-
implementation review of the Award and present the report
Table 13.28 to the National Assembly bi-annually. ·
Composition of Tax Mix in Regional Countries Article 70(4) discusses the legislative powers of the Federal
Government and the Fourth Schedule to the Constitution
India Bangladesh mentfons the Federal Legislative List containing 67 subjects,
Years Direct Indirect Direct lnqirect 59 in Part I and 8 in Part II. The Concurrent List contained
Taxes Taxes Taxes Taxes 47 subjects. Unanimously, at the time of the Constitutional
1974-75 22.4 77.6 11.8 88.2 Accord of 1972 it was verbally agreed by all political parties
1984-85 19.1 80.9 14.8
that the Concurrent List would be abolished after ten years
85.2
of the· Constitution and the subjects shall stand devolved
1994-95 27.3 72.7 15.9 84.1
however, this did not happen. The List was abolished in
2004-05 42.7 57.3 19.5 80.5
the 18th Amendment and 40 out of 47 subjects have been
2009-10 59.5 40.5 28.1 71.9 transferred to the provinces-see Figure _13.2.
2012-13 51.5 48.5 Article 142 of the Constitution after the 18th Amendment
Source: Calculated from data of Handbook on Indian Economy gives Parliament the exclusive mandate for legislation in
published by Reserve Bank of India and Bangladesh respect of the Federal Legislative List. The Federal Legislative
Bureau of Statistics. List consists of two parts. Part I is the exclusive domain of
I
\

Chapter 13 Fiscal Federalism in Pakistan 387

Figure 13.2: Legislative and Actual Functional Responsibilities Pre- and Post- 18th Amendment
Actual Functional Legislative and
Legislative Functional
Functions and Allocation Pre 18th Actual Functional
Allocation
Services Amendment Allocation Post 18th
Pre 18th Amendment
1973-2010 Amendment

Defence
External affairs
Post and telegraph
Telephones
Radio and TV
Currency
Foreign exchange
Foreign aid
Institutes for research
Nuclear energy
Federal Federal
Ports and aerodromes
Government Government
Shipping
Air service
Stock exchange
Federal
National highway
Government
Geological surveys
Censuses
Meteorological surveys
Railways
Mineral oil and natural gas
Industries

Population planning
Electricity (except KESC)
Curriculum development
Syllabus planning
Centers of excellence
Federal / Provincial
Tourism
Government
Social welfare

Vocational/Technical training
Employment exchange
Historical sites & monuments

Law & order

J Federal / Provincial
Government
Provincial / Local
Government

Justice
Highways
Urban transport
Provincial
Secondary & higher education
Government
Agriculture extension Provincial
Distribution of inputs Government
Irrigation
Land reclamation

Curative health
Land development

J J
Primary education
Preventive health Provincial / Local Provincial / local
Farm-to-market roads Government Government
Local Water supply, drainage and sewerage
Government
Link roads
Intra-urban roads
Street lighting Local Local
Solid waste management Government Government
Fire fighting
Parks, playgrounds

Source: Table designed by the author from the Constitution of Pakistan, 1973 as amended to date.
388 Issues in Pakistan's Economy
l
the Federal Government and Part II comes under shared· The democratic government after the general elections of
responsibility. Matters pertaining to Part II are to be routed 2008 aimed to address the constitutional chaos after the 17th
through the Council of Common Interest. See Figure 13.2 Amendment and Legal Framework Orders. The 7th NFC and
for the functions/subjects which the Federal Government Aghaz-e-Huqooq-e-Balochistan package were in line with
had encroached upon, and over which the provinces were the government's resolve to reduce inter-regional disparities
not exercising their exclusive jurisdiction. These are now among the provinces. The 7th NFC introduced multiple
exclusively provincial subjects. This Amendment has granted criteria and Punjab was persuaded to sacrifice its share
provinces maximum provincial autonomy, which is why the voluntarily which was distributed to the three provinces. The
first day of the fiscal year proceeding the Amendment, I July 18th Amendment resolved the long outstanding demand of
201 I, was celebrated as the Provincial Autonomy Day. provincial autonomy by the provinces. Many experts believed
The provinces have been granted greater fiscal powers by that these moves would radically increase the vertical fiscal
deleting the under-mentioned five items from the Federal imbalance although it is at the same level as before the 7th
Legislative List I: state lotteries, duties regarding succession NFC-see Table 13.9.
of property, estate duty in respect to property, capital gains, Population was still an overriding consideration before
and general sales tax on services. the 7th NFC, or perhaps the Commission had been reluctant
By virtue of provisions embedded in the Constitution after to go for any new protocol, such as altogether changing
the Eighteenth Amendment, residual subjects are meant to ·the criteria. The shares of provinces were calculated on the
be provincial as is the case with the Government of India basis of the population of the 1998 census. The dynamics
Act, 1935, and the Constitutions of I 956 and 1973. However, of population statistics are changing from census to census
if the provinces' autonomy is not guaranteed and ensured, therefore, it is imperative to conduct the sixth census before
the possibility of jurisdictional conflicts between Federal and the constitution of the 8th NFC. Taking into account the
Provincial government does exist. poverty and backwardness of the provinces, a share of 10.3
per cent has been allocated on the basis of average poverty.
The Commission should have examined the shares of all
13.7 SUMMARY AND FURTHER READING the provinces which are nearly the same on the basis of
average poverty because the shares of all the provinces are
13.7.1 Summary almost equal. As we have discussed, in the case of poverty
in Pakistan, ther~'is a conceptual separation between rural
The analysis of fiscal and political federalism presented in and urban poverty. The share from revenue collection and
this chapter may not be exhaustive; yet it explores most generation was 5 per cent, which seems less of an incentive
of the important dimensions, emerging dynamics, critical for much revenue effort.
issues, and the agenda for reforms regarding federalism. The reform agenda for the future should take into
Without doubt, the change is visible, although more on consideration experiences of other developing countries. A
paper, and shows that there is still a long way to go. There comprehensive formula based on principles of equity and
are many important lessons in the story of federalism from efficiency, i.e. fiscal capacity distance, income distance,
pre-independence to the post-colonial era and further up fiscal responsibility, and per capita fiscal equalization and
the seventh National Finance Commission and Eighteenth performance-based conditional grants system may be worked
Amendment to the Constitution of Pakistan, 1973. As Table upon. Continued economic; and financial appraisal of the
13.6 shows, four of the Awards remained inconclusive and National Finance Commission Awards would bring further
the evolution of federalism recorded a history of ad-hocism. rationalization to the system of intergovernmental fiscal
From the Raisman Award to the 1970 Award, the structure transfers in Pakistan.
of horizontal sharing seems somehow consistent, based on The historical examination of legislative and actual
population and sales tax on a pre-assigned share on the functional assignments to various levels of governments in
basis of collection, i.e. origin principle. Post the 1970 Award,
Pakistan reveals that the federal government has always
horizontal sharing is based on the sole criterion of population dominated the two sub-national tiers. The subjects assigned
which resulted in the over-dominance of the Punjab due to its to the the federal government are national in scope and the
huge share in the national population. This has caused a deep cost and benefits can be better managed by the federation.
sense of deprivation amongst the less-developed provinces However, this does not mean that functional assignments
and has aggravated regional inequalities. for provinces be encroached upon by the federation. Since
The eleven years from 1979 to 1991 is the non-Award the provincial governments were not empowered, they have
period and adhoc arrangements were in place. Just after not had the opportunity or ability to develop this capacity.
that, the 1991 Award was announced under a democratic Further to our discussion on expenditure assignments, the
regime and the practice of revenue deficits bridging grants local governments in Pakistan could not evolve as strong
was introduced for the sub-national governments, resulting
institutions. The only elections of local bodies which Pakistani
in incentives for the provinces for non-rational spending federalism has experienced were under the umbrella of
and substitution of federal transfers for own-source revenue
military regimes, such as .the system of Basic Democracies,
generation. The 2006 Award proposed an annual increase in
the Local Bodies systen:i under Zia and, Musharraf's District
the vertical share of provincial governments but could not
Government~see Chapter 12. However, under Musharraf,
manifest any change in the horizontal__ sharing criteria.
 Chapter 13 Fiscal Federalism in Pakistan 389

for the first time in the history of Pakistan, the third tier 13.7.2. Further Readings
of government was granted much importance, as well
as financial, administrative, and governance powers. The Since the 18th Amendment and the Seventh National
development expenditure of local governments in Pakistan Finance Commission Awards are more recent developments,
increased substantially and even local governments in rural there has been little research on this subject. However, this
areas of the country managed to perform exceptionally well is going to be an area of much interest and concern over the
and showed fiscal responsibility by delivering effective and next few years. Moreover, there are already some essential
; efficient public goods. With the fall of the Musharraf system, papers and publications which are essential reading.
I

the local government system has been in complete abeyance, See, for example, Anwar Shah, Making Federalism Work-
which does not bode well for devolution in Pakistan. The 18th Constitutional Amendment, World Bank Policy Paper
A key issue regarding the NFC Award and the 18th Series on Pakistan PK 03/12 (Washington DC: world Bank,
Amendment which will need to be addressed at some stage November 2012); Katherine Adeney, 'A Step Towards
regards the need for provinces to increase their own resources Inclusive Federalism in Pakistan? The Politics of the 18th
for increasing expenditure on the social sectors on which Amendment', Publius: The Journal of Federalism, 2012; Aisha
they are expected to spend. At the moment, the provinces Ghaus-Pasha, 'Making Devolution Work in Pakistan', The
are happily reliant on transfers from the federal government, Lahore Journal.of Economics 17: SE, September 2012; Usman
while the federal government grows broke. If provinces raised Mustafa, Fiscal Federalism in Pakistan: The 7th National Finance
their own revenues, the federal government would have more Commission Award and Its Implications, Pakistan Institute of
resources for macroeconomic issues, rather than to bail out Development Economics Working Paper # 73 (Islamabad:
the provinces. PIDE 2011 ); Aisha Ghous-Pasha, Hafiz A. Pasha and Zubair
Asma, Horizontal Equalization among the Provinces in the NFC
Awards, (Lahore: Institute of Public Policy, Becaonhouse
National University, 2010); Social Policy and Development
Centre ( SPDC), Social Development in Pakistan-Devolution and
Social Development, Annual Review 2012 (Karachi: SPDC, 2012);
and, Institute of Public Policy, Fourth Annual Report: The State
of the Economy-Devolution in Pakistan (Lahore: Institute of
Public Policy, Beaconhouse National University, 2011).
390 Issues in Pakistan's Economy
l
NOTES
I. Asim Bashir Khan, Sindh Board of Investment, Government economic reforms in Pakistan announced by Prime Minister
of Sindh, Visiting Faculty, Shaheed Zulfikar Ali Bhutto Liaquat Ali Khan. The then Secretary Finance, Sir Jeremy
Institute of Science and Technology, SZABIST and student Raisman, was appointed to prepare the mechanism for
of Institute of Business Administration, IBA, Karachi has distribution of divisible pool resources. The recommendations
contributed to this chapter. He has done all the research of the Raisman Award were applicable with effect from
and most of the write-up, and my work has been limited to 1 April 1952. Later the Award was terminated by the Prime
organizing and editing Asim's contribution. Asim would like Minster and renamed as the National Finance Commission
to thank Professor D. K. Srivastava, Dean, Madras School Award.
of Economics, Chennai, India, for his intellectual input and 10. The individual federating units should be able to control
support for this Chapter. The authorship of this Chapter some of its own resources as desired.
should be clearly attributed to Khan, Asim Bashir, 'Fiscal 11. The One .Unit policy was announced on 22 November 1954.
Federalism in Pakistan: Emerging Dynamics, Issues and 12. Gilgit-Baltistan was given the status of the fifth province
Prospects', ( Chapter 13 ), in Zaidi, S Akbar, Issues in Pakistan's of Pakistan vide 'Gilgit-Baltistan Empowerment and Self
Economy: A Political Economy Perspective 3rd edition (Karachi: Governance Order, 2009' on 29 August 2009.
Oxford University Press, 2014). 13. Ahmad, Ehtisham The Political-Economy of Tax Reforms in
2. The 7th NFC Award was approved by the President of .Pakistan: The Ongoing Saga of the GST, 2010 Asia Research
Pakistan on 10 May 2010. Centre Working Paper# 33.
3. The Amendment was passed by National Assembly on 14. Ahmad, Ehtisham, 'Can the new Intergovernment~l Work
9 April 2010. in Pakistan? Learning from China', in Amjad, Rashid, and
4. Islam, Noorul, Making of a Nation, Bangladesh: An Economist's Shahid Javed Burki, (eds.), Pakistan: Moving the Economy
Tale (Dhaka: University Press Limited, 2003 ). Forward (Lahore: Lahore School of Economics, May 2013 ).
5. Sir Otto Ernst Niemeyer (1883-1971) was financial 15. Pakistan Fiscal Policy Statement, Ministry of Finance,
controller at HM Treasury and a Director at the Bank of Government of Pakistan (Islamabad: Ministry of Finance,
England. Govt. of Pakistan, 2010-11 ).
6. 'The Advocate' North Western Tasmania's only Newspaper, 16. Mustafa, Usman, Fiscal Federalism in Pakistan: The 7th National
Thursday September I 9, 1935. Finance Commission Award, PIDE Working Paper No. 73
7. 'The Advocate' North Western Tasniania's only Newspaper (Islamabad: PIDE, 2011 ).
Saturday 2 May 1936. 17. Pasha, Aisha Ghous, Pasha, Hafiz A. and Zubair Asma
8. Chapter 3, Article 246(C) of the Constitution of Pakistan, Horizontal Equalization among the Provinces in the NFC Awards
1973, lists the areas included in FATA as: tribal areas (Lahore: Institute of Public Policy, Beaconhouse National
adjoining Peshawar district, tribal areas adjoining Kohat University, 2010).
district, tribal areas adjoining Bannu district, tribal areas 18. Ibid.
adjoining Lakki Marwat District, tribal areas adjoining Dera 19. Hafiz Pasha, in correspondence with the author.
Ismail Khan district, tribal areas adjoining Tank District, 20. The view is of Dr M. Govinda Rao, Director, National Institute
Bajaur Agency, Orakzai Agency, Mohmand Agency, Khyber for Public Finance and Policy, New Delhi and Member,
Agency, Kurram Agency, North Waziristan Agency, and Fourteenth Finance Commission of India, expressed in
South Waziristan Agency. correspondence with the author.
9. The Raisman Programme formally known as the Raisman
Award was the succession of the ongoing programme of
 Part5

M © ITTl @it©l rt'J [p) © ~ ~ ©J

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CC©l~~it©l~ M©lrr~@it®
The two chapters in Part 5 of the book deal with the financial sector-banks and the
equity market-and with monetary policy, savings, and inflation. These chapters on
money and monetary policy examine the changing nature of the financial sector over
the last few decades and we see to what extent monetary policy has become market-
oriented following the financial sector reforms. The causes of persistent inflation
and low savings are also analysed. We show that the cause of inflation in Pakistan is
not excessive money creation, as is commonly believed, and that the reasons for low
savings can be found in arguments which suggest financial repression, insufficient
financial structures, cultural factors, and the presence of a huge illicit or black
economy.
 Financial and Capital Markets

Financial and capital markets in Pakistan have evolved from banks (MFBs) fall within legal ambit of [the)
a state of near nothingness in 194 7 to a situation today where State Barik of Pakistan while the rest of the
Pakistan's banking and financial sector plays a formidable financial institutions are monitored by other
role in economic development and is integrated with the rest authorities such as Securities and Exchange
Commission and Controller of Insurance. Under
of the world. From a handful of bank branches at the time
the Banking Companies Ordinance, 1962, the
of Partition, the financial sector has expanded exponentially, State Barik of Pakistan is fully authorised to
now having branches in every nook and corner of the country. regulate and supervise banks and development
Along with banks, development finance institutions and finance institutions. During the year 1997 some
other non-bank financial institutions played a leading role major amendments were made in the banking
in providing credit to industry, agriculture, housing, and laws, which gave autonomy to the State Bank in
other sectors (see Figure 14.1). A securities market has also the area of banking supervision. Under Section
emerged as a conduit for investment funds. Syed Liaquat Ali 40(A) of the said Ordinance it is the responsibi-
summarizes the main components of Pakistan's financial lity of the State Bank to systematically monitor
sector: the performance of every banking company to
ensure its compliance with the statutory criteria,
The financial sector in Pakistan comprises and banking rules & regulations. In every case
commercial banks, development finance in which the management of a barik is failing
institutions (DFis), microfinance banks (MFBs), to discharge its responsibility in accordance
non-banking finance companies (NBFCs) with the applicable statvtory criteria or banking
(leasing companies, investment banks, discount rules and regulations or is failing to protect
houses, housing finance companies,. venture the interests of the depositors or for advancing
capital companies, mutual funds), modarabas, loans and finance without due regard for the
stock exchange, and insurance companies. Under best interests of the bank or for reasons other
the prevalent legislative structure the supervisory than merit, the State Bank is empowered to take
responsibilities in case of banks, development necessary remedial steps.'
finance institutions (DFis), and microfinance

I Savers

Equity institutions I ~ Commercial banks} Government savings

institutions

Stock exchange : ICentral bank :

Investors I Specialized institutions I- ~

• Households
• Farmers
Government coffers
• Industry

Figure 14.1
The System of Financial Intermediation in Pakistan
 Chapter 14 Financial and Capital Markets 393

A modern and growing developing country is said to at the time of Partition. The banking and financial sector
require a modern and advanced financial sector. Similarly, suffered a similar fate due to Partition, and the areas which
a modern and advanced financial sector supposedly works became Pakistan were severely under-represented in terms of
best in an economy that is money and market oriented. banking and financial services.
Moreover, conventional wisdom holds that 'the development At Partition, Pakistan had no central bank or banking
of a vigorous domestic financial sector to channel domestic system. The Reserve Bank of India, which was legally
savings into high-return investment has been recognized common property for both India and Pakistan, continued to
as an important element of economic policy that seeks to operate as a currency and banking authority for Pakistan, and
generate economic growth .... In the development literature, had its operations directed and controlled from New Delhi
considerable emphasis has been placed on the development until June 1948. 5
of a sound commercial banking system based on a system of Prior to Partition, of the 99 scheduled banks listed on the
market-determined credit allocation' 2 (see Appendix 14.1 on Second Schedule of the Reserve Bank of India, only one had
the importance of the capital markets and the financial sector its office in Pakistan. 6 United India had 3,496 branches of
in Pakistan). The liberalization and deregulation that has taken scheduled banks, but only 631 were located in the areas
place in the economy since November 1990 had particular that were to become East and West Pakistan. The paid-up
significance for the financial sector. These reforms had been capital and reserves of these banks amounted to no more
aimed at removing the constraints within the financial sectors than 10 per cent of the total paid-up capital and revenues of
in order to make financial capital more easily accessible. This undivided India. These banks were small compared to their
chapter gives an account of the evolution of the financial counterparts in India, and their share of deposits, advances,
and capital markets in Pakistan and then examines some key and bills discounted was just one-tenth of the total. The
issues that affect the financial sector and, hence, the economy areas that were to become Pakistan had very few branches,
(see also Chapter 15 on the money market). and once Pakistan came into being, the number of branches

I
However, despite these generalizations and the arguments decreased further. Of the 631 branches before Partition, only
that Pakistan's financial sector supposedly plays a dynamic 213 were functioning when Pakistan came into being. The
role in economic development, some surprising truths paid-up capital and reserves decreased from 10 per cent of
discussed below must make us think about the over- undivided India to a mere 1.5 per cent after Partition.7 A year
emphasis given to formal financial institutions, particularly later, when the State Bank of Pakistan was established, the
the banking sector which this chapter deals with. We number of branches of scheduled banks had dwindled to only
examine the nature of banking and credit in an economy 195, of which only 65 existed in Pakistan. 8
which is very underdeveloped actually, despite all the claims The communal violence and subsequent migration that
made by economists and bankers about the importance of followed Partition had major repercussions for the financial
the formal financial sector. In a country where only 14 per sector. In the financial sector as well as in trade and commerce,
cent of Pakistanis are using a financial product or service it was the Hindus who controlled a large part of the industry
of a formal financial institution, such as savings, credit, in the areas that became Pakistan, especially in the more
insurance payments, and so on, and where 'the average developed region of the Punjab. The Hindus migrated to India
Pakistani household remains outside the formal financial en masse with all economic activity coming to a standstill.
system, saving at home and borrowing from family or friends With a large number of commercial banks ceasing to function,
in cases of dire need', 3 clearly, our analysis of Pakistan's sources of all types of credit for trade, commerce, and
banking sector and of the formal financial institutions must agriculture dried up. While informal moneylenders began to
be tempered with a great deal of caution about what the migrate to India, the closure of branches in the formal sector
formal financial sector can actually do. Moreover, as we have also implied the exodus of managerial and administrative
discussed in earlier chapters, the absence of funds available staff, who were mainly Hindu. Most banks were controlled
to the dynamic informal and small-scale sectors, must mean and owned by Hindus, and the services they rendered were
that credit is not being made available to those who need it no longer available after their head offices were transferred
urgently. to India. The only scheduled bank·that remained in Pakistan
was the Muslim-owned Australasia Bank, which was just
too small and ill-equipped to handle the business that was
14.1 THE DEVELOPMENT OF THE transacted by the migrating Indian bankers. The acute
shortage of skilled staff was another key factor in inhibiting
BANKING SECTOR 4 the evolution of even a basic system of banking. 9
14.1.1 The First Phase: 1947-74 The State Bank of Pakistan began operations on 1 July
1948 and became the sole note-issuing authority, but the
Although Pakistan gained political independence in August government of Pakistan at that time had no note printing
1947, it would be fair to say that the country's economic and press to print them on. The State Bank of Pakistan was faced
financial independence took many more years to acquire with the gigantic task of establishing a banking system after
(even today there is some debate over whether Pakistan's the collapse at its time of Partition.
economic and financial sectors are at all independent-see Despite the exodus of banks and the closure of Indian
Chapter 17). The nature of industrial development outlined banks at the time of Partition, the number of Indian
in earlier chapters shows how little developed industry was bank branches functioning after Partition was greater than

I
394 Issues in Pakistan's Economy

the number of non-Indian branches. The non-Indian (i.e. the branches licensing policy was not meant
foreign) banks were mainly confined to financing import to obstruct the growth of the banking system
and export trade. These banks were subject to control and but to foster it in the best national interest. In
guidance from their head offices in almost- all matters related 1966 the State Bank of Pakistan fixed quotas
for new branches for each bank every year, and
to financing. However, their impact can be seen from the fact
prescribing the ratios for city and urban and
that on 1 July 1948, of the total bank deposits of Rs. 1.1081 rural branches. The quota of each bank was
billion held in Pakistan, as much as 73 per cent was held determined on the basis of its financial position,
by foreign banks whose activities were largely confined to availability of trained personnel, soundness of
foreign trade. 10 its management, and its capacity to open and
In the first eighteen months of the operation of the State operate the new branches without an adverse
Bank of Pakistan, 51 new branches were opened in both East effect on its financiers. 15
and West Pakistan, of which 28 were Pakistani banks, 12
were Indian, 4 were exchange (i.e. foreign) banks, and 7 were In the early 1960s, licences were given to known business
opened by the newly formed National Bank of Pakistan, of magnates and parties which were deemed to be financially
which 6 were in East Pakistan. By December 1949, there were sound. This posed an interesting dilemma. Known business
35 scheduled banks in Pakistan, of which 4 were Pakistani, 23 magnates and sound parties were, by definition, those who
Indian, and 8 exchange banks. These banks had 109 branches already had wealth and were able to invest it. There was a
in West Pakistan and 83 in East Pakistan. Interestingly, risk, then, that a further concentration of economic power
though, of the 59 branches of Pakistani banks, only 7 Were would take place and a close nexus between industry and
in East Pakistan. Exchange banks were confined to the port banking would emerge. The official history of the State Bank
towns of Chittagong and Karachi, while some were granted of Pakistan examines this issue as follows:
permission to open branches at provincial headquarters if
there were European or other foreign firms that required The distribution of bank credit was a function
of various government policies including those
banking services, or had trade with foreign countries. The
covering the grant of permission for setting
role of the National Bank of Pakistan until June 1950 was up industry and import licensing. There was
restricted to financing jute operations. 11 no denying the fact that though emphasis
As the number of branches of the commercial banks seemed to be gradually shifting in favour of
expanded in the 1950s, these banks continued to mobilize the smaller parties, the bigger parties still
increasing domestic savings, which were then channelled enjoyed, by far, a predominant position. Bank
into the demand for credit in the economy. While most credit credit had necessarily to follow the overall
was used to finance foreign trade and commerce in the late pattern of public policy which had permitted the
1950s, commercial banks started playing an important role establishment of such undertakings .... It was
in supplying credit to domestic industries as well. Moreover, also agreed that big business was already placed
in favourable positions in the matter of credit
as time went on, Pakistani banks began to play an increasing
availability. Since banking business had become
role in financing economic development. In 1952, of the
a highly lucrative enterprise, big businesses were
total advances made to different sectors, 38 per cent were naturally motivated to exploit this opening.
by Pakistani banks, 22 per cent by Indian banks, and 40 per They also evinced interest in this activity as a
cent by foreign banks. In 1955, Pakistani banks supplied 59 great deal of influence went with the control of
per cent of credit advanced, 12 and by 1970 this had risen to banking institutions. 16
as much as 89 per cent. 13
Over the years, as the number of branches of banks began
to grow, the State Bank of Pakistan decided to set up a system 14.1.2 The Relationship between
of new branches under which a certain quota had to be
opened in regions designated by the State Bank. Commercial
Economic Growth and the
banks were asked to extend their areas of operation to regions Development of Banking
that were not particularly economically viable. As most There is a very close relationship between the nature and
industry and commerce, as well as agriculture production, extent of economic growth and the growth of the banking
was taking place in West Pakistan, it is not surprising that sector. The pattern and sizes of deposits, the types of credit
most of the new branches were opened in the western available, the locations of bank branches, etc. all influence
province. In 1963 there were 957 branches in both wings, the pattern of economic development in a country. This is
with the more populous eastern wing having less than 35 per more marked when a country is underdeveloped and in the
cent of bank branches. 14 The State Bank of Pakistan ordered earlier stages of development. Some observations regarding
commercial banks to open one branch in East Pakistan Pakistan's banking sector until the 1960s allow ample
for each branch they had in West Pakistan. The fears that reflection on the nature of Pakistan's economy and society in
the State Bank's policy of opening new branches in places the earlier years.
where there were no banks proved to be quite unsound and Not surprisingly, the demand for industrial credit in the
misplaced. However, within a year of their establishment, early years was quite low. There was very little industry to
most of the branches had become viable. According to the begin with, and hence little demand for credit. 'The demand
State Bank of Pakistan, for credit in the early years was not very large. . . . The

I
 Chapter 14 Financial and Capital Markets 395

r
affluent class during this period was more interested in following the Korean War boom and the favourable balance
commerce than in industry, as it could quickly multiply its of payments position on the foreign account. The next year,
riches in trade rather than in any other branch of economic 1952, deposits fell, as there was a reversal in the terms of
activity.' 17 These facts have been confirmed by our analysis in trade, a fall in export incomes, and an increasing amount
Part II of this book, particularly in Chapters 6 and 9. spent on imports. Between 1952 and 1954, deposits increased
In the period 1948-54, bank deposits grew by 61 per cent, again, mainly due to the reduced scale of commercial activity
a very high rate by any standard. It is interesting to observe and the beginning of the flotation of share capital of a
that this growth was very closely linked with that of the number of companies. 19
overall economy. Five broad reasons are given by the State In 1953, the financing of economic activity by banks was
Bank of Pakistan for this growth: highly focused on commercial activity, which received 48 per
cent of all advances made by banks in that year. This shows
1. The revival of economic activity across the country,
that commerce must have been quite profitable to consume
which had come to a sudden halt immediately following
such a large share of funds. The bulk of loans for commerce
Partition
were utilized in financing the wholesale and retail trade
2. The rehabilitation and consolidation of the banking sector
of the country. The dearth of industrial activity is reflected
3. The inflow of Muslim capital from other countries
in Table 14.1 and Figure 14.2, which shows that in 1953

r
following the birth of Muslim Pakistan
manufacturing received only 16 per cent of advances made;
4. The increase in development activity, especially in the
of this, one-third went for metal products and one-fifth
industrial sector, which resulted in the growth of money
for textiles. Not surprisingly, a greater share of credit was
incomes-especially in urban areas where banking
extended to West Pakistan than to East Pakistan (see also
facilities were better developed
Chapters 6 and 9).
5. A generally favourable balance of payments on the private
In the 1960s and 1970s, much of the pattern of credit
account. 18
disbursement changed, following the changes in the
Within this six-year period, bank deposits showed a trend that economy. As manufacturing progressed from the 1950s,
was closely in line with economic activity. For example, bank through the boom of the 1960s, so did the credit available
deposits increased in 1951 due to enhanced export earnirigs to the sector. In 1963, manufacturing received 37 per cent

Table 14.1
Scheduled Banks' Advances by Economic Group: 1953, 1963, 1972, 1977, 2000, and 2010 (Rs. m), percentages in

I parenthesis)

June June June June June June

Economic Groups Unit
1953 1963 1972 1977 2000 2010

Agriculture, forestry, fishing, and hunting Rs. m 94.8 232.7 1,156.8 4,632.5 97,444.6 165,974.2
% (18.4) (7.0) (9.3) (15.8) (18.7) (8.1)
Mining arid quarrying Rs. m 0.3 11.6 62.5 381.9 9,694.3 14,979.1
% (0.1) (0.4) (0.5) (1.3) (1.9) (0.7)
Manufacturing Rs. m 82.4 1,236.5 6,124.3 12,576.9 304,721.8 1,228,536.4
% (16.0) (37.4) (49.3) (42.9) (58.3) (60.2)
Construction Rs. m 7.9 90.5 149.9 698.7 5,934.3 65,825.6
% (1.5) (2.7) (1.2) (2.4) (1.1) (3.2)
Electricity, gas, water, and sanitary services Rs. m 1.1 7.3 68.8 101.3 3,749.2 209,776.8
% (0.2) (0.2) (0.6) (0.3) (0.7) (10.3)
Commerce Rs. m 217.0 1,315.7 3,182.8 6,146.1 78,169.5 220,443.9
% (42.2) 39.8 (25.6) (21.0) (15.0) (10.8)

Wholesale and retail trade Rs. m 1,228.6 2,981.0 5,723.4 31,380.4 120,150.7
% (37.1) (24.0) (19.5) (6.0) (5.9)
Transport, storage, and communication Rs. m 12.3 76.3 305.5 391.4 11,614.6 102,505.1
% (2.4) (2.3) (2.5) (1.3) (2.2) (5.0)

Services Rs. m 67.5 257.6 924.8 2,633.6 6,645.0 21,519.3

% (13.1) (7.8) (7.4) (9.0) (1.3) (1.1)

Employees and activities not adequately described Rs. m 31.3 79.9 457.6 1,720.3 4,352.4 11,084.7
% (6.1) (2.4) (3.7) (5.9) (0.8) (0.5)

Total Rs. m 514.6 3,308.1 12,433.0 29,282.7 522,325.7 2,040,645.1

Source: State Bank of Pakistan, Banking Statistics of Pakistan (Karachi: various issues).
396 Issues in Pakistan's Economy

Agriculture, forestry, bank accounts of Rs. 1 million and above. 20 On the other
fishing, and hunting hand, advances under Rs. 25,000 accounted for only 6 per
24% cent of the total credit. On the face of it, this pattern would
seem inequitable to most. However, given the distribution of
wealth in industry and the type of industry being implanted
in the 1950s and l 960s---essentially large scale-the pattern
Commerce of the disbursement of credit should not come as a surprise.
55% It is unlikely that economic growth of the level prevalent in
the 1960s could have taken place without the active role and
Manufacturing participation of the banking sector. This relationship was,
21% moreover, mutually beneficial.

. 1953 14.1.3 Nationalization in the 1970s

On the first day of 1974, the Bank Nationalization Ordinance
was promulgated, according to which the federal government
Agriculture, forestry, had exclusive rights of ownership, management, and control
fishing, and hunting of all banks in Pakistan. The shareholders of banks were
20% compensated for their holdings in the form of Federal Bonds
26%
repayable on par at any time within a period of fifteen
years. Although the banks were nationalized by the Bhutto
government in accord with the People's Party's manifesto
when the party had been in office for more than two years,
the roots of nationalization actually rest in the developments
in the economy and the banking sector in the 1960s, a fact
not very well known to most people.
Manufacturing
A number of malpractices in the banking sector had begun
54% to be identified, despite the success of the sector, as early
1977 as 1962. The State Bank was concerned that there was a
maldistribution of credit amongst the different segments
of the economy. The concentration of credit in a small class
Agriculture,
industry, fishing, of big borrowers was observed and given the role of the
and hunting private sector in industry and banking, the State Bank was
10% not legally empowered to bring about any change in the
ownership structure of commercial banks. Furthermore,
there was no legal obligation to earmark a percentage of
bank advances for the development of businesses other than
big businesses. The private sector, particularly those with
greater wealth and capital, flourished in the 1950s and 1960s,
and given the nature of developments, the close connection
between industry and banking was an inevitable outcome.
Manufacturing
78%
In July 1969, fourteen major banks in India were taken
into state ownership. This influenced the thinking amongst
2011
planners in Pakistan. Leading Pakistani economists in the
Planning Commission were impressed by the performance
Figure 14.2 of the Indian banks, and so favoured the nationalization of
Scheduled Banks' Advances by Economic Group banks in Pakistan as well. They argued that a reform of the
(% share) banking system was needed to carry out any meaningful
improvement in the structure of industry and the distribution
of income to achieve some measure of social justice. Even
of credit, while in 1972 it received almost half, with textiles foreign experts had begun to argue that the economy was
gaining the largest single share. Advances for commerce, in in bad shape and identified the banking system as being
relative terms, declined from 42 per cent of the total in 1953 responsib!e for many ills. 21
to 26 per cent in 1972. Essentially, as the economy grew Of the four largest banks in Pakistan, only one was state
throughout the 1960s, so did banks. Moreover, the pattern controlled, while the other three were owned by industrialist
of economic concentration that had emerged in industry families, viz. the Habibs, the Saigols, and the Adamjees. These
was soon reflected in the ownership of banks and in the four banks monopolized 75 per cent of total deposits and
distribution of bank credit. For example, on 31 March 1959, two-thirds of earning assets. The three private sector banks
63 per cent of the total bank credit was tied up in only 222 between them had half of the total deposits and earning
 Chapter 14 i=inancial and Capital Markets 397

assets. Apart· from the· top three private banks, there were open to political pressure and to misuse. In a number of
four others owned by the Dawoods, Fancys, Sheikhs, and Haji cases in the early years following nationalization, loans and
Habib. These seven private banks were owned by business advances were made on considerations not conforming to
houses and accounted for as much as 92 per cent of deposits professional standards. The high-risk (classified) advances
held by all local banks. 22 It is not at all surprising, then, of the banks grew · disproportionately in the total loans
that these family-owned banks promoted and patronized portfolio. The performance of banks came under severe
companies owned by them in the provision of credit. This sort criticism for growing inefficiency and deteriorating service
of collusion gave rise to a further concentration of wealth. standards, and for holding monopoly power which permitted
. However, the State Bank of Pakistan was quite realistic them to charge very high interest rates. Some socioeconomic
about these developments, stating quite rightly: objectives were met when nationalized banks were ordered
to open branches all across the country in every township
If import licences and industrial sanctions were that had a population of over 2,000 inhabitants. While this
mainly restricted to a few big parties, banks played a key role in bringing the extensive non-monetized
could not possibly refuse accommodation to economy into the more formal sector and may possibly have
them. In 'fact/under the ci~cumstances, banks'
encouraged .savings, there were some drawbacks too. Banks
failure to provide necessary credit to them
would have been detrimental to investment became overcrowded and overstaffed for political reasons.
and economic growth. Similarly, concentration They now had their branches iri streets and moha/las of
of credit in a few industries and commercial residential areas regardless of their ·deposit potential, and
cities was a corollary of the location of trade there were cases where branches of nationalized banks were
and industry that developed within the. broad located next to each other.. ( Some more issues regarding the
policy framework of the government. Given this role and performance of nationalized banks are discussed in
background, credit disbursement would have subsequent sections of this chapter.)
' followed the same pattern irrespective of the
type of ownership of banks. 23
14.1.4 Islamic Banking
The discussions at that time concerned remedial measures to In 1979, Pakistan embarked on an extensive process of
deal with the issues related to the banking system and were, Islamization, with the financial sector undergoing substantial
incidentally, quite independent,of whether banks remained changes in the process. Two months after coming to power,
in private hands or were nationalized. The State Bank of i~ September 1977,. General Zia ul-Haq had asked .the
Pakistan position towards ,nationalization was completely Council of Islamic Ideology (CII) to prepare the blueprint for
neutral. " an interest-free economic system in the light of Islamic
In September 1970, a State Bank report revealed that teachings. In its two m<).in reports, the CII recommended
only eighty-eight accounts in Pakistani banks had access to the immediate removal of interest 'rr~m some financial
as much as 25 per cent of total bank credit. Most of these institution~, with the intention of doing away with interest
account holders were directors .of the. banks themselves. 24 from all domestic financial transactions. , ,
Nevertheless the State Bank was unambiguously clear about In February 1979, the government announced .that it
such issues and argued that it was 'not correct to assume intended to remove interest from the economy in three years,
...( that the nationalization of banks per se could ensure a more and it began with the elimination of interest from the House
equitable distribution of banks' resources between people Building Finance Corporation, the National Investment
and regions. Some people held the view that bank credit was Trust, and the mutual funds of the Investment Corporation
not the cause of concentration of. economic power but the of Pakistan. From July that year, the· government ordered
,i result.' 25 In light of this background, banking re.forms were the nationalized commercial .banks to provide interest-free
undertaken in 1972 and were so wide-ranging in their scope loans to small farmers for meeting 'their seasonal agricultural
that people began to believ~ that the nationalization of ban~s financial requirements. This scheme was expanded to
in the country, which had appeared imminent, had been fishermen and co-operative societies in 1980.
pushed into the background. However, this was notthe case. in. January 1981, all five nationalized com~ercial banks set
Fourteen banks were nationalized, of which thirteen were up separate counters to accept non,interest-bearing profit
merged into five banks. The State Bank of Pakistan was and loss sharing deposits. From 1985 onwards, no bank
also nationalized; the official history of the State Bank of was· allowed to accept any interest-bearing deposits, except
Pakistan writes that 'this was perhaps the unique case in foreign currency deposits, which continued to earn fixed
the banking world where the central bank of the country interest rates, while all other.accounts shared in the profit or
was simultaneously nationalized along with the commercial loss earned by that bank. .
banks'. 26 Thirty-nine years after the event, of.the five banks, in addition to these steps, three Islamic modes of financing
four had been privatized. Although some of the more salient ~er~ launchei musharakah, murabaha, and mudarabah.
traits and consequences of nationalization are presented Musharakah means . 'ctecreasing participation:' a b9,nk
in more detail in other sections, some early ,developments participates as a financiai partner in a profitable project, on
provide an insight into the concerns that were emerging very the basis ·of an agreement by the other partner that the bank
soon after nationalization. will receive a certain part of the net profit actually realized,
There was concern that now that the powerful and and is entitled to retain the remaining part as may be agreed
lucrative banking sector was in government hands it was
400 Issues in Pakistan's Economy

Table 14.2
Branches and Deposits in Banks in Pakistan (including foreign banks): 1964-2010
(All figures are as of June of the relevarit yea!)

Savings Savings
f
Total no. Nominal Real accounts deposits
No. of % % % % •.

Year of deposits deposits• as% of as%of

branches change change change ,change
accounts
,, (Rs.m) (Rs. m) total nominal
accounts deposits

1964 1,298 '· -91,907,011 06,501.9 6,052.0

1971 3,418 7.82 07,275,719 . 140.20 15,593.2 10.35 11,120.0 5.35 78.06 35.32
1977 6,737 17.66 11,970,966 11.79 42,494.5 14.16 13,116.8 3.16 80.46 40.39
1985 7,120 --0.96 21,215,465 3.55 151,194.5 16.61 25,112.5 11.55 79.25 42.46
1990 7,404 2.07 24,323,793 -3.25 279,254.3 13.65 34,527.0 8.70 89.72 44.75
2003 7,194 -2.84 28,828,888 . 18.5 1,681,528 500· 75.0 · 56.97
2005 7,105 -1.24 26,984,619 -6.40 2,428,294.0 44.41 71.45 52.06
2010 9,096 28.02 26,575,854 -1.51 4,693,117.1 93.27 55.15 • 39.29

Source: State Bank of Pakistan,.Banking Statistics of Pakistan (Karachi: SBP, various years).

were implemented, the private sector began to piay a bigger also important to point out that while credit may be advanced
role in development. A major shift in emphasis in ·favour of f~)f investment purposes, it may. actually not be used for
the private sector is also reflected in the allocation of bank productive purposes, and, may. be used for speculative (on
advances to the private sector. Not surprisingly, textiles the foreign exchange. market) purposes or become part of
claimed about one-eighth of all advances in 1991 which grew capital flight. Throughout the 1990s, the case of bad loans,
to one-fifth by 2001 but fell again as the economy slowed or loans given not for the purposes for which they were
after 2008. See Box 14.2 on non-performing loans. . meant, caused a great deal -of pressure on the banking sector,
During the I 991-20 IO period, there was a srriall rise' in with many borrowers defaulting on their loans. As the State
government borrowing as showri in Chapters .IO and, I l, and Bank of Pakistan: Financial Sector Assessment 1990-2000'stated,
a large contraction in advances to the private sector. We have 'the government ownership of commercial banks resulted in
shown in earlier'chapters_and as we do in Part VI of this book political intervention into credit allocation and credit recovery
that in the 1990s, especially after 1996, the private sector decisions besides other institutional inefficiencies. As a
investment has not been very forthcoming, and perhaps that result, inflated loans increased sharply, financial institutions
is reflected in the credit advanced to the private sector. It is suffered loses, and quality of service plummeted.' 28

Box 14.2 The . position of DFls is .even more delicate than .Jhat
The Burden of Non~Performing.Loans of. commercial banks. Provisions against bad loans have
Ai1'' ;1d-trrii, ·.:tthn.rY.-'r: :st
,.,(J.",¾' t. , ~- :J increased from 0.1.per: cent of assets in 1980to 0.9:pericerit -t··
In 1997 ri'on-peliorrning loans are estimated to be worth Rs. 140 ?3
in_ 1991 .. 11 i.s estimaJed, that,..ab<;>ut R_s_. billion v-.;~s stuck, .
· ,billion,-raising significant problems for the portfolio of.banks. Lip in non-performing loans, representing 30 pe~ cent_ of the '
1. portfolio, l)s'. 6 billion °of which 'was in respect of cas~s· tti~t .. ,J
! ;Over,Jhe 1year,s,tl]!;!_,capital base.of NCBs has.been severely had been in litigation for more than one ·year. · · ..
, •'i l!.af!ec:tedsl?Yi~~e p9pr,quality._of .bank loans !)'lade primarily on The problem of debt'. recovery is riot simply a tectiriical
: ., 1 political ana .uneconomic grounds. As a result the single most issi.Je. Not only have political pressures affected the 'quality of . ;"j
;l:.,· . f9,rrni~~~iiiP.f,o~~m)~9i,~g!h.i1~~-~.~~:is·,th,e ~-eavy;bu~den ~f the loan portfolio of banks, they have 'also been instri.Jrrierital, •·· •
, ,; .~gl')sP,~~C\~i;t'll.fl~rle~nt,i,·!\~t.h.o,ugh,;r~~C,h_edyhng ,of l~ans, 1s in preventing banks to proceed against persistent defaulters·,··· •-i
:•n; c'.?,';lm_?Jiitp,e !?!~)(',~~yaQ?es,pf.;!'J~~s._c~,tegorize,~ .~s bad and have resisted ·attempts.· to improve· the ·.enforcement' •· ,
;, 13rq,90,1J,bif~J-e.~m-~-~re1 ~s.,, 5.~ .l?.i!li??;. A~. 45:~-billi,on of t~ese · mechanisms. ·>+
·.. ,cli:i_s·~rn.t?}<:l,Ya',~~~~d:~l~~~AR- .!tJ.lpriY.~!~Aeq9( J"ust. u~dElr
23 per.cent of the private sector's.classified debt pertain to
'. '' !1;J'jr,rt1.nn 1· :--~·d+!:.i,'\,i''f',,:'::IL- -l'•'l,,,l,\;,w'!',-'Jt~ ·;("'r•-.,_,:: ·.•.~-·{·· ,,:; : ,'
' ' I '
advances·
\\I,
under, mandatory,·
•I\ < ❖ <:},Yl>' ,,1·-; >" "'~·" ,..._,.,,,
targets ,and(-ff~;:~
'•ol:•'<<,:•i,'."i,!, . · i···:'''i·\i .•
,'"l!'ri1t~I .~"
concessional credit
, , ' t " ,' "(1 !: ~ : .
Source: .Haque, .. ,Nadeemul• and:. Shahid. :Kardar, /The f.
,,,
schemes'..ln
'•I' 1
1989 SBP estimated.that arouna 14.2 per cent of
t,._ . ..,;, ", ,:•:.. ,;1,:_.,:---•,-:1,,•.,,.H!lpf•:"~1r!'l'.~1,S"·~~·•'- '11.·,·o--!H:•---,:<'1:1 ""':-v··,' 'I ): Development of, l;inancial ,Markets' it'! •,Pakistan'., ·unpublished , , 1
the lending portfolio of _NCBs needed 1o·bEl provided against: mimeo, ,1993, 14-15. · · •,1,,L . ,1, ·
, { , ,, •·1·r ;_'-t';/? '""t ~ .-1'- , · '· · i,.
l
Chapter 14 Financial and Capital Markets 401

0 st co Ol
0 c,; CD ai
co
CD ci 14.1.7 Development Finance
N
Q)
C:
Institutions (DFls) and Non-Bank
:::,
---, Financial Institutions (NBFls)
I'- N co Ol I!) Development Finance Institutions (DFis) have,
0 a:i ci ci a:i a:i
0
N I'- historically, played an important part in financing
Q)
C:
development projects in many developing countries,
:::,
Q)
---, including Pakistan. However, over the years, as the
iii role of the state has receded from development,
..c:
Cf)
oi Ol 0 ... Ol CO C')
many of the state-owned DFis have been privatized
Ol r--: r--: CD ci C\i
* I'- C')
""
I Q)
or merged into other, more conventional commercial
C:
:::, banks. DFis used to provide long~term debt, and in
---,
1993/4 sanctioned loans worth Rs. 26 billion. The
I!) I!) st N ~ C')
practice until some years ago was that DFis acted as
co C\i CD C\i ci c:v; conduits for government funding, which was then
Ol co C')
Q) made available to users. In addition, credit from
C:
:::,
---, multilateral agencies, guaranteed by the government,
was utilized by DFis. DFis, which had some autonomy
previously, were eventually brought under the
regulatory control of the State Bank. Since DFis
were also highly controlled by the government, like
nationalized banks, DFis were been able to maintain
institutional autonomy. Political pressures, rather
than economic and financial expediency, had been
responsible for advancing loans, which resulted in a
significant loan arrears problem. Furthermore, given
the nature of the changes in Pakistan's economy, with
deregulation and liberalization on the one hand, and
C')O)L!)COI'- Ol• I!) co. C') 0C')L!).-COC0 0 st
with changes in the financial structure on the other,
. .
I!) co C') ci....: ai '<I' C\i CD c,; CD
"" '<I' ai ....: C\i co
l'-C')OlOst l'-OlOlCO ... I!) C') st C') C') I'- I!)
it is not surprising that DFis became more like banks,
COstCOC')Ol C\1- ,-_ co_ a> l'-NC\J.-OlC') st ...
and banks had to make long-term loans, thus eroding
~ <X)(O ~
:::,
I'- 0 ;i
C')
C') (1) C') ,....- ('.j
C') ...
- 0
N
the previously protected position of DFis. Many of the
---,
DFis have now been incorporated into banks.
I!) co co C') ...
Ol N co ...
I!) co I'- C') Ol co st N
'X? M The main constituents of the non-bank financial

....0
0
~ ci a:i r--: ai
I!) I!) C') N
0 0 ""
co co co I!)
co 0 st I'- N ... ......
u-i CD u-i u-i CD ai a:i ai C\i
Ol co st 0
co N co I'- co
ci CD
I!) 0 0 0 10
ui
... ... ...
co ~ Cl:!.
sector are leasing companies, mudarabahs, investment

C\I
Q)
C:
:::,
---,
... ... ...
-.i" <Xi 0) -.i"
co
C'"
C')
i C'"i C\i ...
-.i" C\i <Xi
'° ......
banks, and housing finance companies. Leasing
companies are a relatively new phenomenon in
"C
C Pakistan. However, leasing grew at a rate of about 70 per
111
cent during the 2000s. In 1990, the DFis, had a share
....0 - of 78.6 per cent of the assets of all non-bank financial
0
C\I institutions (NBFis); by 2000, this had fallen to 57 per
....a,- cent. Investment banks had increased their share in the
....a, same period from 1.8 per cent of total assets to 12 per
Lt) cent, and leasing companies assets increased from 4.7
CX)
per cent to 11 per cent. These three constituted 80 per
....
Cf)
a, Q)
(.)
Cl
C: -~ cent of total assets in the NBFI sector. DFis dominated
ECf) Q)
Cf)
considerably in terms of deposits ( 62 per cent of
-= ~ deposits of NBFis ), and in term of loans as well (72 per
.s
·c: cent). Investment banks and leasing companies were
ctl
Cf) the next biggest players. The State Bank's Financial
"O
C: Sector Assessment report reveals that the annual
ctl
growth rate in assets, deposits and loans for the NBFis
sector as a whole was substantial and positive-in
fact in double digits usually-for the period 1990-97;
from 1997/8, there was a sharp negative fall until data
is available 1999/2000. 29 The double-digit compound
annual growth rate for all three categories-assets,
loans, and deposits-fell after the May 1998 nuclear
tests, when deposits were withdrawn (or were not
402 Issues in Pakistan's Economy

forthcoming any longer), and capital ·flight took place and viability, technical feasibility, and financial profitability.
there were few borrowers at a time of numerous political and The· nationalized commercial banks (NCBs), which used
economic crises. Just as the overall economy shrank and was to ·constitute about 85 per cent of the banking system in
squeezed, so was the NBFis sector. See Box 14.3. Pakistan, were constrained by a management regime that
was very bureaucratic, and like all government departments,
14.1.8 Some Salient Issues in the Banking the banks were highly centralized, and initiative by middle
and lower-level executives was not particularly encouraged
Sector or appreciated.
Although most commercial banks have large ~sset bases, and Pakistani banks, since they formed a major part of the
for this reason there is great potential· for them to explore public sector, were not immune from political pressures to
further possibilities to develop medium- and long-term make loans for projects that did not satisfy the basic criteria
lending facilities, constraints in the present structure impede
this potential. While the asset base may be large, the large
holdings by banks of government securities cannot be lent
or borrowed against. Thus, banks could provide capital by
of financial soundness or viability. Local banks and DFis were
very often used to provide financial favours to politically
well connected individuals, thus often undermining all basic
banking principles (see Box 14.2). It is estimated that in
I
subscribing to corporate convertible commercial bonds/papers, 1997 'non-performing' loans made by the banking sector
and be more involved with DFis in consortium financing for accounted for around Rs. 140 billion, or almost 6 per cent of
projects, only if they had a freer hand in determining their GDP. This problem, which has its roots in political patronage
own portfolios unhindered by government directives. and corruption, was one of the main impediments to the
However, the constraints that banks face in term lending further privatization of banks. The State Bank of Pakistan
include their ability to mobilize medium- and long-term injected a large amount of capital into these NCBs to make
resources. At the moment, given the structure of tne banking them look more viable for privatization. Moreover, large scale
system, banks do not have large long-term resources. It . management change i~ all NCBs also helped tum around
is also believed, often incorrectly; that many commercial the performances of those banks which were eventually
banks, unlike DFis, do not have the expertise_ for making . privatized.
medium- and long-term loans on the basis of economic

Box 14.3 · Many industries .were· made operational, enormous jobs

· Development Finance Institutions in Pakistan were created both in the operational ahd service sectors and
: • . • . . ': • • :. , - ; !, . .
the country was.on the ~oad to econornic~~rid sociah>rogress.
Syed Liaquat Ali gives a brief history of DFls in Pakistan. However many DFls ran into problems stemming. basically
Historically DFls in Pakistan have common features; most of . from poor management and ex':8ssiy,_~': loans . without proper
them . were started· with seed money· from the Government ; d~e diligenc~: Unlik.~ the cases of cen,air;i cionimercial banks,
of Pakistan and support from the. 'International Financial neither· there were efforts to inject fresh equity or. soft loans into
institutions. State Bank of Pakistan has also played a pioneering ' problem DFls, nor there was a sericii.Js attempt to restructure .
role to structure these financial institutions and was in the past them.· The problem DFls, were merged into other DFls/
responsible for providing rupee lines of credit. ... commercial banks or were liquidated. · . ·
. . · . ·DFls were major channels• for routing development Pakistan, still a low income, developing country, badly needs
funds to the private manufacturing sector and achieving the the services and facilities offered by the DFls for achieving
desired soci_o-economic objectives, such as encouraging new socio-.economic objectives and well-being of the people,
entrepreneurs, promoting industries in less developed. areas, particularly in the underdeveloped areas.
. and wider diffusion of industrial ownership. In India, IDBI and ICICI were two premier DFls at a time when
-_Th~ DFls w~re also assisting the Government in screening we in_ Pakistan had DFls like PICIC and. NDFC. Unlike Pakistan;.
new development· projects, framing economic development the .role of these two institutions has been substantially'
plans or policies, rehabilitating sick,. or problem. projects, enlarged over the period. In order to further enforce their role,
admin.is~ering or supervising special ·1oans provided by the t~ supplement their low cost funding sources and enhance
gover11ment or foreign ' institutions, and participating in the their profitability ·they were granted licenses for commercial
promotion of other DFls for achieving related socioeconomic banking business. Both the institutions were restructured to
objectives. keep t~_em in line with changing market conditions. IDBI Bank
Besides promoting establishment of import-substitution and ICI_CI Bank are profitably financing infrastructure and other
industries, the DFls encouraged capital formaUon .by directly development projects in India whereas we have'allowed PICIC
investing or Underw'riting shares and debentures issued by the and NDFC to wither away:
local companies. They also assisted Pakistani entrepreneurs
in . obtaining suitable foreign iiwestnient, attracting .foreign·
investors ·in formation t>f joint ventures -with·;local partners Ali, Syed Liaquat, 'Development Financial Institutions', ·
and assisting in obtaining . technical/managerial ·advice for Supplement on DFls, Business Recorder, Karachi, 11 October
busi11esses and industrie~~ -}:'' ,. : · r' ,,,_;. · · -· 2011
 Chapter 14 Financial and Capital Markets 403

In a study conducted by the National Development Finance 16 and 17 on the Structural Adjustment Programme and its
Corporation (NDFC) in May 1993, a comparison of foreign implications for the financial sector).
and private sector banks was made with NCBs. (In 2003 Since the late- l 990s, there have been many changes in
there were twenty-four Pakistani scheduled banks and Pakistan's banking sector. Compared to the past when there
sixteen foreign banks operating in Pakistan.) It was found were five large NCBs, there is only one, the National Bank of
that between 1986 and 1991 the proportion of commercial Pakistan, which is large and fully government owned. There
banking assets owned by foreign banks grew from 6 per cent are now three specialized banks in the public sector which
to 14 per cent. In 1991, the three largest NCBs accounted for make long-term investment loans; there are three provincial
72 per cent of loans, 73 per cent of deposits, and only 33 per banks in the public sector; and there are 16 private banks.
cent of pre-tax profits. The three largest foreign banks used The number of foreign banks has fallen markedly, from 22 in
5.4 per cent of the sector's assets, 4.6 per cent of loans, and 1996 to only 7 in 2012. Many of the foreign banks have left
5.5 per cent of deposits to generate over 24 per cent of profits. Pakistan because of terrorist/security concerns and fears and
Total pre-tax profits earned by NCBs amounted to Rs. 2.2 because Pakistan's economy has not done well; especially
billion. on a paid-up capital of Rs. 6.4 billion, while foreign after the nuclear tests and the freeze on foreign currency
banks earned higher profits of Rs. 3.5 billion on a lower paid- accounts in 1998. Some of these foreign banks sold their local
·up capital of Rs. 3.3 billion. 30 assets to Pakistani private banks. In the Musharraf-Shaukat
There was a noticeable difference in efficiency and Aziz false boom of high liquidity following 9/11, after 2002
performance between state,owned nationalized commercial and until 2007, when the government began to project
banks and foreign banks. Foreign banks had shown the Pakistan as one of the new rising economies, foreign banks
highest growth rate in terms of deposits in 1996-99, with bought in to this sham, and new banks opened branches in
an annual growth of 31.4 per cent, compared to 12.7 per Pakistan. Once the shine had gone along with Musharraf and
cent for NCBs and 18.2 per cent for the privatized banks. his prime minister, and the global economic crisis set in, with
Furthermore, in the same period, foreign banks had been able Pakistan's economy slowing appreciably, many of the same
to control administrative costs, restricting their growth to foreign banks had to pack up and leave.
17.6 per cent, compared to 19.7 for nationalized and 18.3 per As we show above, in the mid- l 990s, the performance
cent for privatized banks. The gross revenues of foreign banks of foreign banks was far better than that of domestic,
had also grown at a much faster rate than the increase in particularly nationalized, banks, but there are reasons
costs. In the case of some domestic banks, the costs exceeded why this was not a fair comparison. Now with greater
growth in revenue. Administrative costs for NCBs had been competition, better administration and management, cleaner
2 per cent of total assets, compared with 0.85 per cent for portfolios, less political interference, and a host of other
foreign banks, while the rate of return on total assets for factors, the performance of private Pakistani banks is said
foreign banks ranged from 1 to 2.4 per cent, compared with to have improved considerably. It is quite possible that
only 0.1 to 0.3 per cent for local banks. 31 some of the Pakistani banks will be able to emulate the
Although the above comparisons clearly show that foreign standards set by some foreign banks. Moreover, with the
banks outperformed the local banks, particularly nationalized market determining credit allocation-as opposed to directed
banks, it is important to emphasize the difference in how credit-the nature and structure of banking in Pakistan is
they function. Foreign banks neither competed in the same undergoing considerable change. Directed credit, to the right
markets nor were subjected to the same degree of political sectors at the right time, has been a key factor in promoting
pressure to hire staff and advance/reschedule loans, as was growth and development in many countries, including East
the case for nationalized banks. Furthermore, NCBs were Asian countries. Even in Pakistan, certain sectors have been
forced to make advances to the agricultural sector, which given priority for credit at certain times. Now with the market
often results in an increase in the number of bad loans. Also, determining credit allocation,_ there is always a fear that
it is not surprising that foreign banks were more profitable non-productive areas-like. personal and consumer finance,
in terms of shareholders' equity, assets, and net spread on leasing, etc.-may attract larger loans and create financial
funds. Efficiency ratios revealed that the NCBs were the least bubbles. In the liquidity boom of the Musharraf-Aziz years
efficient. The maintenance of a large number of unprofitable of 2002-07 (see also Chapter 18), banks in Pakistan made
branches in order to provide banking services to rural areas huge profits and new banks opened up and were lured to the
necessitated the incurring of fixed operating costs that financial sector. Some traders from the stock market set up
were not particularly helpful in generating revenues for the their banks gaining licences from the State Bank once they
NCBs. Furthermore, other than the numerous problems and met the requirements. Many banks, even after the boom
hindrances highlighted above, which affected the emergence years of 2002-07, continued to make phenomenal profits.
and functioning of an efficient banking system, the issue of 2011 was considered to be the 'most profitable year in their
direct credit has been of particular concern to nationalized history', when 22 listed commercial banks had a combined
banks. These banks were directed by the government of profit of 84 per cent compared to 2010. 32 According to Farooq
Pakistan to 'provide credit to specific sectors and at specific Tirmizi; 'Part of the reason for the blow-out increase in the
times, irrespective of economic and financial considerations. sector's bottom line is simply the fact that the banks that
It is quite possible that the majority of these loans were bad were haemorrhaging losses last year are now turning profits.
loans with 2 low probability of being returned (see Chapters Yet, this is not the entirety of the. picture. Many banks have
I simply grown at a dramatic pace, and sometimes seeing their
404 Issues in Pakistan's Economy

Box 14.4 the private sector. The State Bank appears to be unhappy
The Profits and Losses of Pakistan's Banks: with this laziness on the part of the banks, going so far as
to say that 'the banks have ceased to function as financial
2012 intermediaries in the economy', in one of its most recent
Farooq Tirmizi writes: quarterly reports on the state of the national economy.
And in the most recent monetary policy announcement on
Is the party in the banking sector over or is it just getting
Friday, the central bank announced that it wants the banks to
started? While the State Bank of Pakistan recently took some
pay a higher minimum rate of return on the nearly 15 million
actions that most analysts view as having a negative impact
savings accounts in the country.
for the banks, for the most part, the record-breaking profits
So will this actually reduce the banking sector profitability?
look set to continue for the foreseeable future.
Most analysts believe that the effect will be marginal, and
The year 2011 has been an outstanding one for the banks.
more than offset by the fact that the bank will continue to
While the results are still being compiled for some, by most
have lower losses from bad loans. The party in the banking
accounts, the commercial banks in Pakistan closed out the
sector may not be sustainable, but it looks set to last for a
most profitable year in their history on 31 December 2011.
while longer.
The 22 listed commercial banks had a combined profitability
of Rs. 117.5 billion, up an astonishing 84 per cent compared
Source: Tirmizi, Farooq, The Bottom Line: Is the Banking
to 2010. Even when one excludes the banks that had losses
Sector's Record Streak About to Snap?', Express Tribune,
in the previous year, the banking sector's profitability is still
Karachi, 16 April 2012.
up a very respectable 27 per cent.
Part of the reason for the blow-out increase in the sector's
bottom line is simply the fact that the bank that were
Shahid Iqbal presents another aspect of the profits and
haemorrhaging losses last year are now turning profits. Yet
troubles of Pakistani banks. He writes:
this is not the entirety of the picture. Many banks have simply
grown at a dramatic pace, and sometimes seeing their profits Although the banking industry is in profit, a number of
double or triple. banks are in trouble and their existence is even under
Bank Alfalah, for instance, saw its profits rise by a massive threat. Banking sources said nine banks were still facing
262 per cent, while Meezan Bank saw its profits rise by over acute problem of raising deposit which kept them far from
105 per cent. Even Standard Chartered Bank saw its net reaching close to meet the minimum capital requirement
income increase by 54 per cent. So how did these banks set by the State Bank. These are mostly small and medium
do it? sized banks.
It does not appear to be an extraordinary increase in the Bankers said their problem had deepened over the past
sector's deposits, which grew by about 14.6 per cent last four years because a major chunk of deposits had been held
year, which is about on par with the growth rate during the by large local or foreign banks.
past decade. Nor does it appear to be an inordinate increase The banking industry showed handsome profits last year
in the banking spread-the difference between the interest and the first quarter results of this year were the same. Most
rate that banks charge their borrowers and the rate they of these profits were earned by five large banks and the
pay out to their depositors. For much of the year, the spread rest by foreign banks and some medium sized banks. 'The
hovered between 7.4 and 7.7 per cent, which is high but State Bank has adopted lenient attitude towards the paid-up
nowhere near record-breaking levels. capital requirement not attained by at least nine banks and
The real difference appears to have been the provisioning
for loan losses, for which the banks appear to have taken
most of their lumps in the preceding three years. Nearly
gave them space to either improve or merge with others,' a
senior banker said.
Banks were required to raise their MCR to Rs. 23 billion
1
every bank CEO who spoke to The Express Tribune spoke of which was slashed to only Rs. 10 billion. The banks are now
how 'clean' their balance sheet was, a euphemism for having required to raise their paid-up capital to Rs. 8 billion by 2011,
gotten rid of all of their bad loans. Rs. 9 billion by 2012 and Rs. 10 billion by 31 December 2013.
There are still many experts who believe that the banks The banking sector recently witnessed sudden movements
still have a lot to hide. The State Bank's relaxation of some regarding buying and purchasing activities. The HSBC, a
provisioning rules, particularly for some banks, appear to be foreign bank, wants to sell its Pakistan operations, while a
artificially inflating the bottom lines of many banks. Some fairly large local bank, Askari Bank, shows its inability to
have forthcoming about the weaknesses of their balance continue without strong backing. The State Bank has allowed
sheet. The Bank of Punjab, for instance, admits that it did not due diligence for these two banks. A few more banks are also
recognize losses of about Rs. 28 billion after it was granted eyeing options of sell-off or merger with others. Bankers of
an exemption from the central bank. small banks said economic situation and political insecurity
The real reason for the banking sector's lower losses on had diverted deposits towards a few large banks, while offers
bad loans may simply be that they have stopped making for much higher return by small and medium sized banks
them to the private sector. Nearly every bank reported a were not attracting depositors.
massive increase in its investments in treasury bonds- The glut of deposits in large banks resulted in poor return
effectively lending money to the federal government, risk- to depositors. The State Bank last month forced the banks
free-and weak growth, or even declines, in their lending to to pay minimum six per cent return on savings products.
 Chapter 14 Financial and Capital Markets 405

However, the problem of about nine banks remained banks have been curtailing their international operations as
unresolved and their effort to improve deposits and paid-up part of restructuring at home in the wake of financial crisis
capital have failed so far. Bankers said the banking industry's and now the debt crisis which trapped the entire European
attractive profits were not enough for foreign banks to stay Union. 'We are not doing banking like the foreign banks or
in Pakistan and wait for improvement in economy. Although competitive banks do in the financial sector. We earn by
foreign banks have been in profit, their size of profit is not investing in government papers which pay as high as 12 per
large enough to force to them continue to work for better cent,' said a senior official of a government-owned bank.
days.
The poor economic growth rate and energy crisis have
eroded hopes for quick recovery of economy, leaving no Source: Iqbal, Shahid, 'Banking Industry in Profit, but Some
option for competitive banks to remain in the field. Foreign Banks in Trouble', Dawn, Karachi, 13 May 2012.

profits double or triple' .33 One bank made a profit of 262 per the narrative described above after the privatization of the
cent! This has been the pattern for some years now. In 2010, banking sector in Pakistan, is that only 25 per cent of the
in just the first half of the year, the profits of commercial total bank deposits and 17 per cent of total borrowers live in
banks had increased by 33 per cent, with the top 5 banks rural areas. For a country which still relies on the agricultural
accounting for 80 per cent of the profits. Box 14.4 shows sector, only 15 per cent of farmers are reached by any of the
two sides of the story of profit, loss, and sustainability in the actors in the financial system, including commercial banks,
banking sector. agricultural banks, and other financial institutions. 36
While the state of the banking sector in Pakistan does Forty per c;ent of the population is excluded from access
have some unsettled issues, there have also been some to any type of financial services-formal or informal-a
innovations. Branchless banking, for example, and mobile situation that needs to be explained. One of the modern
banking, have been introduced, and the microfinance sector myths about most things about Pakistan is that religious
has seen the emergence of five microfinance banks, even belief is an impediment. However, the Access to Finance
though the microfinance field in Pakistan is still limited. Survey found that only 8.5 per cent of the population said
Nevertheless, some innovations in the banking sector seems that 'cultural' factors and religion were an impediment to
to have taken place in Pakistan, although there are still many their using financial services. As the Report says, 'religious
problems and issues which affect the sector-see Box 14.5 reasons such as issues with paying or receiving interest,
on small depositors. However, the biggest issue concerning bank mistrust, and issues of corruption are cited by only
the banking sector is the size and scale of the sector, an issue 2.5 per cent of the non-banked' .37 The informal financial
which cannot be ignored and to which we now discuss. market-which includes a vast array of actors including
friends and family, shopkeepers, the committee system, and
others-accounts for as much as 78 per cent of loans and
14.1 .9 Excluding the Majority: Limited
total borrowing, a figure which is far higher than in other
Access to Finance in Pakistan comparable countries. 'It is very common for poor people
The foregoing sections which deal with the banking sector in particular to borrow from relatives, friends, and other
discuss issues about its size, its role, and the trends therein. people with whom they have close relationships, especially
However, what is more important is the fact that while so for consumption smoothing.' 38 From data from the Survey, it
much importance is given to the formal financial sector, seems that almost everyone in Pakistan borrows, but a huge
actually a very small proportion of Pakistanis-only 14 per majority does so from the informal sector rather from formal
cent-interact in the formal sector and a huge majority, sector institutions. Of all those who borrow, 97 per cent also
probably compromising of many of the most vibrant and borrow informally, whether it is from shopkeepers (77.9 per
dynamic sectors in Pakistan, is actually excluded. Financial cent borrow from them), which is the most widespread form
deepening and the extent of the formal financial sector is of borrowing), and around 53.5 per cent borrow from friends
actually quite limited. 34 Some key features of Pakistan's and family. 39
financial sector and how it actually operates will place in As we have shown in Chapter 8, the small and medium
perspective the formal financial sector. enterprise sector and the informal sector play a key role
Around 14 per cent of Pakistanis have access to formal in economic development in Pakistan. Of the 3.2 million
finance, while 40 per cent have no financial access to either enterprises in Pakistan, about 3 million (93 per cent) are of
formal or informal financial systems. The 14 per cent figure this nature. Most of these are in the wholesale and retail
for Pakistan needs to be contrasted with other countries to trade and include restaurants and hotels (53 per cent of
r get perspective of its relevance. In Bangladesh, for example, this sector), and 27 per cent are other services, and with
• 32 per cent have access to formal financial institutions and
as many as 48 per cent do so in India, and 59 per cent in Sri
the manufacturing sector contributing the remaining 20
per cent of the small and medium-scale sector. Hence, these
Lanka. 35 Clearly, Pakistan is far behind these countries. What small units and enterprises constitute more than 90 per cent
is more interesting to note, although not unexpected, given of all private enterprises, employ nearly 78 per cent of the
406 Issues in Pakistan's Economy

. -~ .-.- ,,_ .. .
- -" ....
'
Box 14.5 offered by the largest banks surveyed, but these accounts only
Losing Small Depositors allowed twice monthly withdrawals without penalties, while the
low-income group prefers to access its funds at any time.
Rauf Nizamani argues that while the profits of the banking The large banks offering such accounts received the worst
sector may be growing, as we show, the incorporation of a marks for information and service from the 'mystery' shopper.
greater number of depositors is not taking place and small Although the private and foreign banks ranked better in terms
depositors are being lost to the banking sector. of service, they failed to inform the 'mystery' shopper about
BBA which all commercial banks are required to introduce
The State Bank of Pakistan has issued a series of instructions under the SBP directive.
to banks over time to facilitate small depositors but their Currently, the commercial banks do not seem to be geared or
number is declining despite increase in bank branches. inclined to serve the low-income groups. A look at geographical
The steps taken by the regulator to encourage depositors footprints and products confirms this. The banks' branch
include: network is not well-distributed in the country from the point of
view of providing services to the low income population. About
* Banks shall not refuse opening of accounts for prospective
75 per cent of the urban adult population has a bank account
clients who meet requirements laid down in Prudential
as against only 14 per cent of the rural adults.
Regulations, other instructions issued by the SBP from
The large footprints of big banks make them prime
time to time, and banks' own policies.
candidates for mobilizing savings from low income population.
* Services rendered by banks for the opening and
These institutions hold more small deposits compared to other
maintenance of regular savings accounts shall be free of
types of banks but need to do more. The relative ease with
charge.
which these banks can mobilize large volume of funds means
* There shall be no condition of maintaining a minimum they are flush with liquidity and have little incentive to pursue
balance for these accounts.
the small depositors. Breakdown of branch and deposit data
* No charges would be recovered by banks at the time of
shows that the five large banks account for 69 per cent of the
closing an account.
bank branches and 40 per cent of these are located in rural
* Banks shall not demand more than Rs. 100 as an initial
areas. The presence of these banks in rural areas is a legacy
amount for opening of regular savings account.
of bank nationalization era when it was mandatory to open two
* Banks shall pay profit invariably on Profit and Loss Sharing
branches in 'un-banked' areas for every branch established in
Accounts wit~out any condition of minimum balance.
a banked area.
However, it has been observed that in recent years the As four of the five largest banks have been privatized, they
number of account holders, in particular the number of small have rationalized their size, reduced staff, and closed down
depositors, has declined. branches. Over 700 branches were closed between 1997 and
Among other factors for this trend, the levy of service 2000, of which over 330 were located in un-banked areas. This
charges on deposit accounts is considered to be one of the follows an all too common pattern in the post-privatization of
main reasons. The banks have been paying higher rates financial institutions.
of return on deposits of larger amounts. This has, to some Rather than looking at improving the bottom line by
extent, increased the average rate of return on deposits but increasing revenues, the focus is on reducing costs and hence
the real beneficiaries have been big depositors. With a lower branches in unbanked areas are closed and staff retrenched.
rate of return, small depositors are being discouraged. The The consequence of such restructuring is that people in the
total number of accounts of Rs. 10,000 or less which were un-banked areas lose access to banking service and are
14.4 million on June 1999 reduced to only 9.3 million on 30 forced to more costly informal sources. A better strategy to ·
June 2004, showing a fall of 5.1 million accounts. This further prevent shrinking access would be to increase the revenues of
reduced to 7.8 million on 30 June 2007 and 4.1 million in these apparently unprofitable branches through pricing for the
December 2011. so-called un-banked areas. Access to credit is a much bigger
A 'mystery shopping expedition' conducted recently revealed issue than pricing for those excluded from the net of formal
that the minimum balances required to avoid penalty fees tend financial services. They bear high costs in the informal sector.
to be high. Moreover, although the initial deposit to open· an
account is substantially lower, banks usually demand Rs. 5000 Source: Nizamani, Rauf, 'Shrinking Numbers of Small Bank ·
(except for National Bank of Pakistan which demanded Depositors', Economic and Business Review, Dawn, Karachi,
Rs. 1000). An exception was the Basic Banking Account [BBAJ 13 August 2012.

non-agricultural labour force, and their contribution to GDP Finance Survey report, there are numerous business-unfriendly
is over 30 per cent. Yet, out of these 3 million, only around reasons why the small and medium sector is discriminated
7 per cent borrow from the financial sector and account for against. These include the 'legal framework (namely; the
only 16 per cent of total credit. These small and dynamic secured transactions regions and, to a lesser extent, the credit
firms and units finance 90 per cent of working capital and information structure) [which] limits the pool of potential
81 per cent of new investment from internal resources, applicants. Second, the bank products are not tailored to
retained earnings, and profit. 40 According· to the Access to SMEs, resembling instead corporate lending practices. Finally;
 Chapter 14 Financial and Capital Markets 407

banks do not have organizational structures and monitoring is even more embarrassing. On 13 August 2012, following
tools conducive to achieving high efficiency. SME demand- an unexpected lowering of the interest rate by the State
side factors, including limited SME accounting, budgeting, Bank of Pakistan, newspapers reported that the Karachi
and planning capacity further constrain the market' .41 If Stock Exchange Index 'surged' by 150 points to a 51-month
the most dynamic sector of Pakistan's economy is denied high, the highest closing level since 2 May 2008. The market
finances, something which Chapter 8 shows it desperately capitalization crossed $40 billion as a consequence. Since
needed, then a 'banking sector' such as Pakistan's is certainly August 2012, well into September 2013, the Karachi Stock
not doing something right. Moreover, as we saw in Chapter Exchange Index continued to break more records, reaching
6 earlier, once banks were nationalized by Bhutto in 1974, astonishing heights above 23,000. All this sounds quite
we saw a surge in financing of-and the subsequent growth fantastic given the exuberance of those who trade and deal
in-the small and medium sector. Something is not working with the stock market in Pakistan. But the very sober, indeed,
well in Pakistan's high-profit financial system. extremely sobering truth is that the Karachi Stock Exchange,
which became the worlds' best performing bourse in 2002
and 2008, had only 135,000 people actively investing in
14.2 THE EQUITIES MARKET shares! No matter how many headlines the Karachi Stock
Market index continues to make, it will affect a very small
If an evaluation of the banking sector reveals that despite number of players, 0.01 per cent of Pakistanis-see Box 14.6.
the claims of a dynamic and growing, as well as profitable, It has, of course, made many of those who traded-invested
industry, supposedly playing its role in economic development, is not the right word-in the share market very, very, rich;
the banking sector actually only reaches a· small fraction but this just goes to show the logic and practice of Pakistan's
of Pakistanis, and excludes key and dynamic sectors, the equity markets.
truth, despite the headlines, about Pakistan's equity sector

Box 14.6 He said that unlike other emerging markets, investments in

How Many People Invest in the Stock Market? Pakistan had been limited to a few large investors instead of
millions of small investors.
In the biggest stock market of the country, which made 'This is the reason why our stock market lacks the necessary
headlines by becoming the world's best performing bourse depth and breadth, which is imperative for an efficient market.'
in 2002 and 2008, merely 135,000 people, or less than 0.01 Waheed said that every stock market of the world had an
per cent of the population, actively invest in shares, a fund option for investors to take leveraged positions in the market as
manager revealed on Wednesday. these options provided the market with the necessary liquidity,
'If we compare this with around 30 million bank depositors in which was important for price discovery and unfettered entry
Pakistan, the Karachi Stock Exchange has not been successful and exit for investors.
to attract a substantial investor base,' said Dr Amjad Waheed, 'All the leverage products, which include margin financing,
Chief Executive Officer, NAFA Funds. margin trading, options, and futures should be available to
According to analysis, the investor base is more or less investors, so that they might choose the one that suits their
stagnant for the past decade despite the fact that the KSE-100 needs,' he said.
Index, they key barometer of the market activity, has jumped by Talking about the option being considered by the Karachi
more than ten times since 2001. It crossed the psychological Stock Exchange (KSE) and the Securities and Exchange
barrier of 15,000 points to make an all time high of 15,737 on Commission of Pakistan (SECP) of the margin trading product
20 April 2008. 'We aren't comparing ourselves with the in which the investor would put 25 per cent equity in the form of
developed markets like the USA where every third person cash, while the remaining 75 per cent would be provided by the
invests in stocks. Even India and Bangladesh have an investor financier and both the mark-to-market losses and concentration
base of 5 million and two million investors' respectively,' said margins would be collected in the form of cash, he said that
one analyst. this product would provide better protection relative to the CFS
Out of 270,000 investors in the stock market, gauged by the MK-II.
number of Unique Identification Number (UIN) in the Central Since the stock market crash of 2008, investors seem to
Depository Company (CDC), more than half are inactive, have lost interest in the Pakistani stock maket. Average daily
Waheed said. trading volumes have dropped sharply from around 212 million
Waheed said the risk (standard deviation) of the Pakistani shares in FY07 to around 162 million shares in FY10.
stock market, at 25 per cent, was much higher than other The capital gain tax (CGT) on the stock market has further
bourses in the region, which kept investors at bay. dampened the investors' sentiment, he said. 'The Pakistani
'Partly it is because of the economic, political, and security stock market has been in existence for over six decades.
leveraging and the speculative mindset of investors, who prefer Despite the fact that the number of investors is miserably low
short-term positions over long-term investments, are other and that this is because the confidence of masses in the stock
factors that make our market more risky than others.' investment could not be restored,' said Dr Amjad.
Source: Mirza, Javed, 'Less than 0.01 pc invests in stocks', The
News, Karachi, 5 August 201 O
408 Issues in Pakistan's Economy

Of the three stock exchanges in Pakistan, the Karachi and in Box 14.8. Subsequently, it touched the 15,000 level as
Stock Exchange (KSE) dominates, with more than 60 per well, for the first time .in 52 months, crossing 23,000 in 2013.
cent of trading. Stock market activity has grown substantially The boom of March 1994 was caused by the large public
over the last decade and the number of listed companies in offerings made around that time, including key companies
Karachi rose from 300 in 1986 to 775 in September 1996 such as Pakistan Telecommunications Corporation (PTC),
but fell to 689 in 2004 and to 589 in 2013. The State Bank Hub Power, Faysal Bank, Lucky Cement, Dhan Fibres, and
of Pakistan General Index of Share Prices, which was 100 in Ibrahim Fibres. Consequently, no fresh capital was left for
1990/1, rose to 290 in June l 994, registering a rise of 80 per secondary markets. Another factor that undoubtedly affected
cent since 1992/3. It fell considerably in the 1990s, especially the performance of the stock market was the law and order
after the nuclear tests in 1998 and then after 9/11; but then situation in Pakistan. In more recent years, the economic
rose again and was 139 at end June 2002. By 2012, the Index situation, political uncertainty, even US-Pakistan relations,
was ten times its l 995 value. The capitalized value of shares and other such factors have affected the performance of the
increased by 88 per cent in 1994 compared with 1992/3 and stock market. Furthermore, despite attempts to make the
was Rs. 404 billion in June 1994 but fell markedly throughout stock market an effective institution so as to raise funds for
the 1990s, until the boom in 2003 when market capitalization industry, much of the activity on the Karachi Stock Exchange
had reached Rs. 1346 billion by March 2004. The value in has been speculative (see John Maynard Keynes' somewhat
turnover of shares increased three-fold between July 1993 cynical views on the stock market in Appendix 14.3 ).
and June 1994 but then stabilized until,conce again, the stock Although efforts have been under way to reform it, the
market boom of 2003, when the turnover more than doubled stock market is not perceived by most investors to be either
in one year. When it came into existence in September 1947, efficient or fair. Insider trading, front running, cornering of
the Karachi Stock Exchange had 90 members, but only shares, and excessive speculation are perceived to be endemic.
5 companies listed, and it had a paid-up capital of Rs. 37 A Securities and Exchange Commission exists to provide
million. By September 1996, it had 200 members of which a better regulatory framework for overseeing the workings
150 were active, and the 775 listed companies had a listed of the markets. If the market is expected to work more
capital of Rs. 138. 7 billion and a market capitalization of efficiently, speedier implementation and efficient and timely
some Rs. 341.84 billion. All these numbers multiplielin the information need to be provided to investors, particularly
most recent, post-2012 boom. foreign investors. Better disclosure rules about the activities
Although the equity market seems to show phenomenal of corporations are also essential. Other concerns relate
growth, a number of particularities need to be pointed out. to the fact that investors do not have access to preference
While the Karachi Stock Exchange ranks amongst the top shares, a procedure discontinued in 1984. Aftab Ahmed Khan
Asian exchanges in terms of the number of listed companies, presents a large number of reasons why the stock market has
Pakistan has one of the smallest markets in terms of market not grown as many expected it to-see Box 14.9. (Also see
capitalization and trading volumes. Pakistani equities are Box 14.10 for quite a brilliant analysis undertaken by Asim
a mere 1.6 per cent of the total for emerging markets. The Khwaja and Atif Mian which shows how dealers on the
average daily volume of the Karachi Stock Exchange in Karachi Stock Market manipulate prices and profit).
2010/ll was 94.83 million shares, and the daily turnover As far as sources of equity are concerned, the bulk of the
fluctuates greatly. For instance, while it rose to 195.08 million shareholding is by the sponsors themselves (60--65 per cent),
on 13 August 2012, it was just 37.62 million in the previous individuals hold about 15-20 per cent, foreigners hold 3 per
trading session. In the calendar year 2011, the average daily cent, and the balance is held by institutions. On the other
volume of shares traded· fell to a thirteen-year low, of 79 hand, institutions such as NIT, ICP, and mudarabahs account
million shares, the lowest since 1998, giving an indication of for as much as 50 per cent of market volume, with individual
the extent of volatility in the stock market, perhaps reflecting investors and brokers accounting for almost all the rest.
trends in the economy as well as in politics. Only four new The stock market is also affected by the fact that the
offerings-IPOs-were floated in 2011, after six were offered settlement of shares involves a cumbersome procedure for
in 2010, not many by any account of measure. About 300 share transfers and registration, and the physical handling
equities are traded on an average day but trading in most of shares seriously affects trading volumes. Antiquated stock
shares is usually in insignificant volumes. Furthermore, practices favour the informed investor and are biased against
trading in shares of only the ten best blue-chip companies is the small investor. The risk of non-delivery and non-payment
estimated to account for over 30 per cent of turnover in terms and the high cost per transaction also restrict the access
of value. 42 of small investors to the market. The lack of transparency
The Karachi Stock Exchange (KSE) 100, having risen to a and credibility of information affects the development of a
very high 2661 in March 1994 when the market experienced modern financial system. It is also believed that a central
a boom, was then halved to a little over 1300 in November depository system is needed to eliminate the numerous
l 995. Moreover, for over a year after November l 995, the problems caused by the physical handling of securities.
index showed little movement. It fell to its lowest level in Despite shifting to electronic means of trade and regulation,
July 1998, at 765.74, following Pakistan's nuclear tests-see the Karachi Stock Exchange is still not considered to be a
Chapter 18. It subsequently rose to unprecedented levels, mature equities market.
breaking all previous records, when in April 2004 it crossed Conventional wisdom in Pakistan, in line with the extensive
5,620. Some of the reasons for this trend are given in Box 14.7 liberalization, deregulation, and privatization that has taken
 Chapter 14 Financial and Capital Markets 409

Box 14.7 reacted negatively while chemicals and pharmaceutical

Factors Behind the Fall in the KSE Index stocks felt little or no effect from the slide in the index.
One of the reasons why the chemical and pharmaceutical
The following extract is an analysis of the peaks and valleys of sector may have been immune to the bearish sentiments at
the KSE 100 index between 1991 and 1996. that time could be because of the nature of the shareholding
and history of good dividend payouts. The shares of
The KSE 100 index came into existence in November multinational pharmaceuticals are closely held by the parent
1991 and the amount of foreign money entering the market or by strong holders and, thus, are not the most active scrips
increased sharply in June 1991 after the enactment of the on the market while other stocks are more widely held and
Foreign Exchange Controls Act and other financial reforms may be in the possession of weak holders ready to sell in a
and liberalization programmes. If we take a look back at the panic in the face of adverse conditions instead of holding on
previous peaks and valleys of the KSE 100 index and the to the shares.
stock prices of selective index and blue-chip stocks, the poor The next important point is 22 March 1994 when the
conditions of the current market can be rationalized. index had reached the historic apex of 2661, a rise of 145%
The first peak was on 6 January 1992 when the index from the previous low of 24 April 1993. In the aftermath of
reached 1714. The market in 1991 was small and relatively elections held during October 1993 and the formation of a
inactive and thus many blue-chip stocks were undervalued. new government, there was an euphoria in the market as
However, with increasing activity from both local and foreign investors breathed a sigh of relief as political stability was
investors because of the reforms, the stock prices rose achieved. There was fresh capital injected into the market as
across the board, especially in the textile and modaraba both local and foreign investors entered the market in a big
sectors. The average daily turnover at this time was around way. The gains were phenomenal as most stocks rose 3 to 4
2.5 million and the market PE rose from 1Ox in November times their prices as of 24 April 1993.
1991 to 15x. The boom of 6 January 1992 reflects the results Also, many sectors such as synthetic and rayon and
of the introduction of financial reforms and liberalization cement had positive fundamentals which were looked upon
policies. With any boom, there is always a correction. favourably by most investors. The market PEx more than

I
After reaching 1714 in early 1992, the index dipped to 1084 doubled from the low point of 1993 to over 20. Also, average
on 24 April 1993, a correction of 37% within 15 months of the daily turnover doubled to 7.7 million shares. However, since
last peak. The circumstances surrounding this fall are mostly 22 March 1994, the index has been continuously declining
political due to the dismissal of the sitting government at that and has not surpassed the historic peak of 2661.
time. The reaction to the dismissal amongst investors and the
business community was negative and thus reflected in most
of the share prices. The market PE fell to below 1Ox and the Source: Sheikh Humayun Saghir, 'Factors Behind the Fall in
average daily turnover was 3.2 million shares. Share prices the KSE Index', DAWN, Advertising Supplement, 30 September
of banks, synthetics and rayon, and fuel and energy stocks 1996.

place in the financial sector and other areas of the economy, its strongest rally from around the July 2002 period, right
believes strongly that the stock exchange has a role to play through into early 2004, when it broke almost every record-
in industrialization and development (see, for example, turnover, volumes, index levels, etc.-which it was setting
Appendix 14.2). However, not only does this view ignore the at a regular period. There was a huge unprecedented stock
experience from other countries, as shown in Appendix 14.4, market boom in Pakistan, and the Karachi Stock Exchange
but it also does not adequately examine the recent trends was heralded as one of the best performing stock exchanges
in the securities market in Pakistan. With only a handful in the world in 2002/3 and again in 2008.
of companies' shares being traded regularly and despite While the index and turnovers did break many records,
the large number of shares ostensibly changing hands each some weaknesses in the capital market were accentuated
day, the role of the stock market is currently very limited in in the course of these giddy heights. The most noticeable
the context of Pakistan's growth strategies. Its role is almost was that of Initial Public Offerings (IPOs) which depict
entirely of a speculative nature, with many individuals making new company listings on the stock market. In the three-
and losing fortunes. However, given the worldwide wave of year period 1993-96 when the stock market was maturing,
interest in emerging markets and the mushrooming on the there were 147 new companies listed on the Karachi Stock
fund managers' map of potential and new stock markets, it is Exchange, 93 on the Lahore and 117 on the Islamabad Stock
probable that Pakistan's stock exchanges will continue to be Exchanges. However, in the next boom period after 1999
of interest to local and international investors. till 2003, only ten new IPOs were offered on the Karachi
After General Musharraf came to power in October 1999, Stock Exchange and even fewer on the Islamabad and
there was a huge surge in stock market indicators to a nearly Lahore exchanges. Clearly, one must question the irrational
3-year high in February 2000. However, after reaching this exuberance of investors on the Karachi Stock Exchange,
high, the Karachi Stock Exchange index started to fall again since it is unlikely that the fundamentals have improved that
and continued to fall through the 9/11 period. It started much-see Chapter 18.
410 Issues in Pakistan's Economy

Box 14.8 There is little magic and no secret. The KSE boomed
because there was too much expatriate money chasing a
KSE and Home Remittances
stagnant pool of capital stock (the number of companies
On 12 October 1999, the Karachi Stock Exchange's share listed on the KSE has gone down from 756 in 1999 to 700 in
index stood at 1,256.94 points. On 11 September 2001, it was 2003, while the accumulated listed capital has moved from
at 1,255.98 points. Rs. 223 billion to Rs. 304 billion over the same period). Foreign
On 11 September Osama bin Laden rolled his dice. A month investors have shown little or no interest in Pakistan. It has
later, President George W. Bush brought in the Patriot Act (the essentially been a technically driven rally.
US Senate passed the USA Patriot Act on 11 October 2001). The inflow picture may now be changing. Our three largest
The Act 'vests the Secretary of the Treasury with regulatory sources of expatriate inflow have been the US, the UAE, and
powers to combat corruption, foreign money laundering, close Saudi Arabia. In 2000-01, Pakistani-Americans sent back $134
our borders to foreign terrorists and to detain and remove million. The following year the inflow from the US went up to
those within our borders'. At the receiving end of the Act were $779 million, a wholesome 480 per cent. A year later, there
Pakistanis settled in the US and hundi operators out of the was another jump but a more moderate one; from $779 million
Middle East. Pakistanis settled in the US began sending their to $1,237 million or 59 per cent. In September 2002, Pakistan
savings back while hundi operators began losing business to got $124 million from Pakistani-Americans while in September
official banking channels. 2003 the same had declined to $97 million or a drop of more
In 1999-2000, Pakistani-Americans sent back a meagre than 21 per cent. In July-September 2002-3, inflow from the US
$80 million. Between July 2002 and February 2003 the was $330 million declining to $258 million in July-September
remittances from America amounted to a colossal $856 million, 2003-04; a drop of 22 per cent.
Remittances from Canada, Germany, Japan, Kuwait, Norway, Here's the record for the UAE in 2000-01, $190 million
Qatar, Saudi Arabia, Oman, the UAE, the UK, and the US put followed by $469 million and then the following year $837
together have gone up from $983 million in 1999-2000 to $4.2 million. In percentage terms the first increase amounted to 146
billion in 2002-03. per cent followed by a more moderate increase of 78 per cent.
On 11 September 2003, the KSE's 1000-share index sat In July-September 2002-03, the inflow from the UAE was $262
rather uncomfortably at 4,591.79 points, an appreciation of million declining to $146 million in July-September 2003-4;
more than 250 per cent since that fateful September day of a drop of 44 per cent (from Saudi Arabia, inflows have more
2001. That made the KSE, the best performing index on the or less followed past trends of between $350 million to $500
face of the planet. million).
The accompanying graph captures both the movement of The three conclusions that stand out are: first, the bubble
the index and the volume of home remittances over the last four at the KSE (and the property market) has an almost perfect
years (if we had a real estate price index its movements would correlation to home remittances; second, home remittances-
have probably traced home remittances as well). at least from the US-are a consequence of Osama and the
In October 1999, foreigners sold Rs. 410 million worth of Patriot Act; third, the overall volume of home remittances is
Pakistani shares and did not stop selling for at least two more tapering off.
years. The largest disinvestment of Pakistani shares by foreign
holders came in 2001 when they sold off Rs. 8,385 million worth Source: Farrukh Saleem, Economic and Business Review,
of Pakistani stocks. Dawn, Karachi, 27 October-2 November 2003.

Further, research by Fazal Hussain and Tariq Mahmood contribution that this investment will make to real economic
shows that the stock market is not a significant factor to growth, is largely cosmetic-also see Boxes 14.11 and 14.12.

I
influence aggregate demand in Pakistan, and nor can it be
'characterized as the leading indication of economic activity,',
as governments, such as the Musharraf-Aziz government 14.3 SUMMARY AND FURTHER READING
claimed whenever the stock market was doing well. Hussain
and Mahmood argue that the stock market logs economic 14.3.1 Summary
activity, and that 'individuals, institutions, and government The banking sector and the stock market form the focus of
should be aware of speculative bubbles. In the absence of this chapter, the first of two chapters on the financial and

I
other strong economic indicators, shooting up of stock prices monetary sector of the economy. We have shown how, from a
should be dealt with care'. 43 non-existent banking sector, the financial sector has emerged
Given the distorted nature of the Pakistan stock market, as a key component of the economy, but still excludes a
not reflecting in any way changes in 'fundamentals', it is a majority of the people. The history of banking shows that
far cry from the efficient markets hypothesis. The belief that industrialization and economic development are closely
the stock market in Pakistan is an indicator of economic linked with the development of the banking sector. We have
development and progress, and reflects government policy highlighted the numerous problems that afflict public sector
and initiative, is quite erroneous. For this reason, despite banks. The fact that nationalized commercial banks had an
the enthusiasm for 'investing' in the stock market, the infected portfolio equivalent to 6 per cent of GDP affects their
 Chapter 14 Financial and Capital Markets 411

Box 14.9 enterprises within a limited circle of relatives and friends.

The Weakness ofthe Stock Market Even when a company is listed on the stock exchange,
most of the shares are not available for public trading.
.. Pakistan's stock markets suffer from numerous problems. (e) A number of companies are reluctant to disclose
Some are identified here. information about their financial status. The disclosure
requirement has been instituted to protect the interests
The retarded growth of equities markets. in .the past has
of the investors.
been due to a variety of factors, of which the following are
However, since most of the private companies do not
.
.. significant:.
.. - . have to submit externally audited financial statements,
·(at Public .companies and public sector enterprises were they are better able to evade taxes in some way. The
not encouraged to.list on the stock exchange because public listed company is placed at a disadvantage
government interest rate and credit allocation policies relative to its competitors.
distorted the price structure of equity finance relative to (f) As a result of factors such as after-tax returns, risk, and
loans from financial institutions and other sources.;This liquidity, other inst.ruments offered higher yields and less
stimulated excessive reliance on debt financing and led risk than securities.
to high debt-equity ratios. (g) Investors have generally felt that the market can be
(b) Public .enterprises received funding directly from the rigged against anyone but the largest investors. There
government either through appropriations from the is trading on the basis of privileged information involving
national budget or at relative low interest rates from considerable unacceptable risk for the small investors.
state-controlled financial institutions. (h) Institutional investors such as investment companies,
· (c) The majority of private sector firms have tended to be unit trusts, pension funds, and insurance companies
relatively small and consequently their needs have have played a limited role in the development of the
tended to be modest, mainly confined to meeting share market. The active participation of institutional
working capital requirements. The firms have been able investors is critically important for the development of
·to generate the required finances from personal loans the equities market.
and their own contributions and retained earnings as (i) There is a lack of appropriate financial information
well as short-term loan facilities from commercial banks. regarding the stock market. Of all the financial markets,
(d) There is a strong concern among private company the stock market is the most difficult to comprehend.
owners regarding the dilution of ownership and control
of their firms. Most owners wish to keep the benefits. of Source: Khan, Aftab Ahmad, DAWN, Economic and Business
their entrepreneurship and control over the future of their Review, November 1994.

performance, and also has negative impacts on the rest of the 14.3.2 Further Reading
financial sector and on the economy.
Although there has been a scramble to establish stock Unfortunately, there is very little reading to recommend on
markets in most developing countries, the positive impact either the banking sector or the equities market in Pakistan,
of such investment is, for Pakistan, still a long way off. The because very little published material exists. On the financial
stock market is not seen as a mechanism to raise capital and sector, there is the excellent and informative history of the
we find no reflection in stock market behaviour of changes State Bank of Pakistan, published so far in three volumes
in 'fundamentals'. Rather, the stock market in Pakistan is by the Bank, and the book written by S. A. Meenai, (revised
more like a small club, where just a handful of companies and expanded by Javed A. Ansari) Money and Banking in
dominate the market, and just a few players call the shots. Pakistan (Karachi: Oxford University Press, 2001 ). The Journal
The claim that underdeveloped countries should develop of the Institute of Bankers in Pakistan contains analysis of and
stock markets at the expense of other sectors is questionable. articles on recent developments in the financial sector. The
Experience from other countries has shown that other means State Bank's Annual Report is also a good source about yearly
of raising revenue for economic development are perhaps developments. Newspapers often carry reports and analysis
better suited to the current needs of Pakistan. on a regular basis, and should be consulted frequently. The
State Bank's Pakistan: Financial Sector Assessment 1990-2000, is
also a useful volume which traces the history of the reforms
that were made that decade.
412 Issues in Pakistan's Economy

Box 14.10 unable to? A closer look at trading patterns of brokers reveals
Price Manipulation in the Karachi Stock some 'strange' and pervasive patterns, such as heavy and
rapid back and forth trading of a stock by the same pair of
Exchange brokers. Such trading patterns, coupled with the persistent
This extract from a brilliant paper by Asim Khwaja and Atif Mian anecdotal evidence from market observers, suggests that
brings out a factor which contests the claim that stock markets price manipulation by brokers is one of the primary suspects
in developing countries have much to do with 'fundamentals'. in explaining the return differential.
We indeed find strong direct evidence for such price
Most emerging economies have relatively young and weak
manipulation in the data. On days when the stock price is
market-based financial institutions such as stock markets.
relatively low, most of the trade-both buys and sells-is
The influential view is that in the presence of weak regulatory
done by brokers who act as principals in the stock, while
and contractual enforcement small investors are deterred
on high price days, most trade is done by outside traders.
from investing in the stock market. There are a couple of
Moreover, the characterization of trading days by who is
reasons suggested for this: First, poor corporate governance
buying and selling has strong predictive power for future
of firms leads to tunnelling and revenue hiding. Second,
returns. The pattern and direction of these predictive returns
outside investors stay out of the market for fear of being
match perfectly with a price manipulation model where
exploited by unscrupulous stock price manipulators and
brokers constantly take advantage of naive outside positive-
insider traders.
feedback traders: Weeks in which mostly principal brokers
This paper addresses this gap by analysing a unique data
buy and sell stocks to each other have low relative prices
set containing all daily trades of each broker in eve,y stock
followed by positive returns. This attracts the outside traders
trading on the Karachi Stock Exchange (KSE)-the main
to trade, which further boosts up the prices. However, by
stock exchange in Pakistan. The high level of disaggregation
the time prices have reached a relatively high point, most
in the data not only allows us to examine broker behaviour
principal brokers have sold out of the stock. At this point
in great detail and relate such behaviour to profitability, but
only the outside traders are left to trade among themselves.
also identify mechanisms through which brokers may be
The presence of mostly outside traders on both the buy
systematically beating the market. We provide compelling
and the sell side therefore predicts negative future returns.
evidence that price manipulation is one such mechanism.
As prices keep dropping, the principal brokers slowly buy
In fact we are able to isolate a particular price manipulation
back their stock at lower prices. The cycle then repeats itself
mech~nism through which brokers cheat the naive outside
with principal brokers once again raising prices by buying
investor: when prices are low, colluding brokers trade
and selling the stocks back and forth to one another. We
amongst themselves to artificially raise prices and attract
therefore argue that our finding is consistent with the price
naive positive-feedback traders. Once prices have risen, the
manipulation theory and cannot be attributed to broker
former exit leaving the latter to suffer the ensuing price fall.
ability, institutional features, or factors such as liquidity.
Anecdotal evidence suggests that such manipulation
The next question is how this return differential between
in stocks is carried out by brokers who primarily trade for
principal broker trades and outside trades in a stock varies
themselves in these stocks. We find that such behaviour
across firms of different types. Such an analysis can help us
is quite pervasive among brokers in our data set. There
understand what firms are more susceptible to manipulation
are a surprisingly large number of brokers who appear to
than others. We find that the return differential is smaller,
only trade for themselves and, while such a broker does
though still positive and significant, for stocks of larger firms,
not do so in all the stocks he trades in, almost all stocks
and firms with higher concentration of stock holdings. We
do have such 'principal' brokers. Our main finding is that
also see that for a given stock, a higher return differential
these principal brokers who trade primarily on their own
between principal broker and outsider trades is correlated
or for a few investors in a given stock earn significantly
with higher stock price volatility. This suggests that it is the
higher returns than those who act as intermediaries in that
manipulation of prices that leads stocks to have higher price
stock. The difference in returns is both statistically and
variability, and higher return differential at the same time.
economically highly significant. The annualized return on
Finally, while the higher profitability of trades by principal
trades done by principal brokers in a stock is 4 to 8 per cent
brokers is not due to inherent broker attributes, we do find
higher. We interpret this as the difference in profits between
that more 'able' brokers earn higher returns when they
brokers who trade directly for themselves in a stock, and the
decide to trade as a principal in a stock with ability defined as
outside investing public that trades through brokers acting
the average profitability of trades done by/through a broker
as intermediaries in that stock. The result does not depend
in all stocks.
on inherent broker attributes. We also test the robustness
of this result to different specifications and measures of the
'principalness' of a broker and find that the effect remains
significant and large. Source: Khwaja, Asim and Atif Mian, 'Price Manipulation and
The difference in profitability begs the question: What do 'Phantom' Markets: An in-depth exploration of a Stock Market',
principal brokers know or do that the outside traders are Mimeo, February 2003.
 Chapter 14 Financial and Capital Markets 413

Box 14.11 possible at this time because the country's capital market was
The Karachi Stock Exchange: Still Struggling volatile and the free-float of potential companies was on the
border of frontier and emerging markets with a decline possible
Despite Growth
at any time. However, Pakistan is still preparing its case and will
Shahid Shah evaluates the status of the Karachi Stock Exchange keep pursuing the matter, sources in the KSE said.
and despite phenomenal rises in the Index in 2012 and 2013, KSE Managing Director Nadeem Naqvi said that MSCl's
explains why the KSE still falls short of all significant measures criteria had nothing to do with politics and, even if that was so,
of achievement. MSCI had not communicated anything regarding Pakistan's
political situation to them.
The Karachi Stock Exchange is struggling to regain its glory
"I am disappointed that Pakistan was not included in the
days in international capital markets but the chances of such an
emerging market index from its current status of frontier markets
occurrence in the near future are slim, according to one stock
despite fulfilling all technical requirements," he said.
market official.
MSCI also believed that the newly formed government would
The KSE official, who requested anonymity, said that the stock likely tackle controversial issues on the political and economic
market was a member of an exclusive club of mid-tier markets fronts, which would negatively affect the stock market.
called emerging markets from 1994 onwards but lost the status
The downgrade in 2008 to the frontier markets index led
after the stock market crash in 2008 and was subsequently
to huge losses in liquidity and a decline in the free-float
downgraded to a lower tier of markets called frontier markets. capitalization, which subsequently led to a declining number of
Markets in this category typically suffer from multiple shares being traded and small investors abandoning the market
afflictions, such as low liquidity and political uncertainty, which altogether.
keep all but the most fearless investors away.
Karachi Stock Exchange achieved a major milestone when
In June this year, the United Arab Emirates and Qatar were KSE-100 Index crossed the psychological level of 15,000 for the
reclassified after index compiler MSCI said it would include first time in its history and peaked 15,737.32 on 20 April 2008.
the two countries in its emerging markets benchmark effective Moreover, the increase of 7.4 per cent in the first four months of
November 2014-a move that will boost investor sentiment and 2008 made it the best performer among major emerging markets.
attract foreign investment inflows into the region. However, record high inflation in the month of May 2008
Pakistan failed to qualify for a reclassification again in the led to an unexpected increase in interest rates by State Bank
latest annual review of the MSCI announced on 11 June despite of Pakistan which eventually resulted in a crash in July when
a rise of over 100% in the benchmark index of the Karachi Stock the KSE-100 benchmark index shed a third or more than 5,000
Exchange since the start of 2012. MSCI reviews the markets in points from an all-time high in April 2008. In December 2008,
June and November every year. Pakistan was removed from the list of emerging markets.
The MSCl's emerging markets index consist of 21 countries, All other emerging and developed markets including India
including China, South Korea, Brazil, India, and Taiwan, while (emerging), US (developed), and Europe (most of the countries
there are 25 countries in the frontier markets index. developed) were ahead of Pakistan on the basis of huge free-
There are numerous criteria against which the MSC! measures float market capitalization in their markets.
market accessibility in a given country before categorizing it in "When the free-float of companies is low in the market around
the emerging markets index. One of the requirements include 20 to 25 players can easily manipulate the market index," said
that the market aiming to be reclassified must contain at least a KSE official.
three companies which have a free-float capitalisation of $898 He went on to add that even public sector giants in the stock
million each. market such as Pakistan State Oil and Oil and Gas Development
The top nine companies in Pakistan's market contributed to Company Limited had very little free-float in the market. "Pakistan
a total market capitalisation of $5,259 million but their free-float Petroleum Limited participation is also very low," he said.
remained below the MSCI requirement. The average market Zafar Moti, a senior member of the KSE commenting on
capitalization of the top nine was around $584 million and the Pakistan's index status said though Pakistan's index downgrade
average around $175 million only. was not celebrated, it proved to be a blessing in disguise as
Pakistan's top nine companies included Oil and Gas foreign investment arrived in the KSE. "Foreign fund managers
Development Company Limited (OGDCL), MCB Bank Ltd, Fauji have priorities; some invest only in frontier markets while others
Fertilizer Co, Pakistan Oilfields, United Bank, Hub Power Co, in emerging or developed markets," he said. Moti said that
Pakistan Petroleum Limited, Engro Corporation, and National Pakistan held weight in the frontier market index, securing a
Bank of Pakistan. good share of investment by foreign fund managers.
The current weights of Qatar and UAE in the MSCI Frontier "On the other hand, it would face tough competition in the
Markets Index are 16.8% and 12.4% respectively, while emerging market index with a smaller share in the foreign
Pakistan's weight in the MSC! Frontier Markets Index is 4.94%. portfolio investment."
"There is no upper limit of weight in the index," said one official The KSE official also agreed that market was receiving more
of the KSE. foreign investment under frontier markets index but insisted
The MSCl's decision not to elevate Pakistan from the Frontier that the KSE members eagerly wanted to satisfy their egos
Markets Index to the Emerging Markets Index surprised many by moving in the emerging markets index, a status they had
stock analysts, who were anticipating an upgrade based on the successfully retained for almost 15 years.
country's improved liquidity and strong net foreign inflows.
According to one official, MSCI officials verbally communicated Shah, Shahid, "Emerging market status to remain elusive for
to KSE officials that an upgrade to emerging markets was not Pakistan', The News, Karachi, 28 June 2013.
414 Issues in Pakistan's Economy

Box 14.12 The black money amnesty also drew attention to the seamier
The Underbelly of Pakistan's Stock Market's side of the Karachi stock market. Interviews with regulators,
brokers, market officials, and analysts showed insider trading
'Extraordinary' Growth and other manipulations are routine. Regulators have been
largely ineffectual in controlling the shady practices.
Pakistan's chaotic financial heart is home to 18 million people,
The Securities and Exchange Commission of Pakistan (SECP)
Taliban bombers, contract killers-and one of the world's most
said it found 23 violations of securities laws that merited fines in
successful stock markets.
fiscal year 2011-12 (April/March). The market regulator sent
With 49 per cent returns in 2012, the Karachi Stock Exchange
warning letters in another 19 cases, it said in its annual report.
(KSE) was one of the five best performing markets in the world.
(www.secp.gov.pk/)
Now it is seeking a foreign partner to buy a stake and takeover
That's a drop in the bucket, says Ashraf Tiwana, dismissed as
management of a market that has risen three-fold over the past
head of SECP's legal department after years of clashes with his
four years.
bosses over fraud in the market. He has petitioned the Supreme
At least some of that performance came on the back of a
Court to replace the SECP chairman and commissioners.
government amnesty that allowed people holding undeclared
'There's a lot of fraud, a lot of market manipulation ... but not
assets or 'black money' to invest it freely in the market. And
enough action has been taken, especially not enough criminal
the relatively illiquid market has also been vulnerable to
action has been taken,' Tiwana told Reuters. 'They're just
manipulation.
passing small fines and giving out warning letters.'
But government officials say the market's success highlights
Regulators are too close to the market, Tiwana said. The
the economic potential of a country better known for spiraling
head of the stock exchange is a former broker and the two top
sectarian violence, the war against al Qaeda and the Taliban,
members of the SECP are former employees of Aqeel Karim
crippling power cuts, and entrenched corruption.
Dhedhi, founder of one of the country's biggest brokerage
The market's benchmark index continues to soar to record
houses.
highs-up 10.34 per cent year to date-fueled in part by
expectations May elections will mark Pakistan's first transfer
BIG DHEDHI
of power from one democratic government to another. For
foreigners, a 7.6 per cent depreciation of the Pakistani rupee Nicknamed 'Big Dhedhi' for his ability to move markets,
against the dollar in 2012 and another 1 per cent since the start Aqeel Karim Dhedhi heads one of Pakistan's largest domestic
of the year has offset some of those gains. conglomerates, the AKO Group (AKDC.KA).
'Pakistan has a lot to offer investors and this is our chance Lately, the well-known philanthropist and leading member of
to show it,' said Nadeem Naqvi, the KSE chairman. He plans to Pakistan's business establishment has been trying to fend off
embark on a series of roadshows for potential foreign partners arrest over allegations of insider trading.
that will take him to London, Frankfurt, and Hong Kong in the An SECP investigator accused traders, including Dhedhi's
coming months. brokerage, of buying shares in a state-run Sui Southern Gas
Many of the companies listed on the KSE offer double-digit Co (SUIS.KA) before an official announcement allowing the
returns, low stock prices, and resilient business models in company to raise its prices. In the weeks before Sui Southern's
this frontier market with a population of 180 million. The index announcement, the stock price jumped from Rs. 13.5 to Rs. 20,
still has an attractive price/earnings ratio of $8.50 despite the its biggest hike in five years.
soaring returns of the past few years. The National Accountability Bureau, the state-run anti-
Pakistan now has a 4 per cent weighting in the MSCI Frontiers corruption agency, called it a case of insider trading. But
Market Index and has become somewhat of a discovery for the SECP said its own confidential investigation showed no
foreign investors chasing new markets and yields. evidence of fraud. The SECP whistleblower in the case has been
suspended from her job for disclosing 'confidential information'.
THE SEAMIER SIDE Dhedhi strongly denied any wrongdoing and said he

l
purchased his gas stocks years before the announcement.
But the KSE's spectacular rise last year can at least be partly
There is nothing there. The (SECP) report totally cleared us,'
attributed to another factor entirely-the cleansing of 'black
said Dhedhi, a burly man wearing a traditional long cotton shirt
money'.
and baggy pants. 'I'm proud to say that in more than 40 years
The market took off last year just as a government decree was
of operating, we've never paid a penny in fines.'
finalized allowing people to buy stocks with no questions asked
Dhedhi says he often offers advice to government officials on
about the source of the cash. Average daily volume more than
financial policy. His business empire includes two equity funds
doubled last year to 173 million shares from 79 million in 2011.
that were among the best performing in Asia in 2012.
Authorities say the measure will bring undocumented funds
'The SECP has really started listening to the market,' Dhedhi
into the tax net in a country where few pay taxes. But some
said, a suited executive acting as translator.
critics decried it as a gift to corrupt officials and criminals
seeking to launder dirty cash.
'Politics and dirty money go hand in hand in Pakistan,' said REVOLVING DOOR
Dr lkramul Haq, a Supreme Court lawyer and a professor on Dhedhi remains under investigation. But even if regulators were
tax law. to find him guilty of insider trading, past practice shows he
'People want to be outside the regulatory framework and would likely get a slap on the wrist. The SECP's fines are almost
outside the tax net.'

J
 Chapter 14 Financial and Capital Markets 415

always a fraction above the amount of money made in the stock BLACK TO WHITE
manipulation, and sometimes even less.
The Karachi market's small size and lack of liquidity make it
In December, a broker was fined half the amount he made vulnerable to manipulation. Market capitalization is only $41.5
from trades that manipulated the share price of tobacco giant billion-the Bombay stock market's capitalization is more than
Philip Morris (PHIM.KA). In February, the SECP fined Pakistani 10 times higher at $578 billion.
brokerage BMA Capital $500,000-after it made $460,000 by Only a quarter of the shares are freely floated-about
misleading a foreign client. BMA Capital has appealed. 30 per cent of that is held by foreign funds and investors,
lmtiaz Haider, the SECP commissioner in charge of market including Franklin Templeton, Invesco Ltd, Goldman Sachs
regulation, acknowledged fines were largely symbolic. If they Asset Management, and Mackenzie Financial Corporation.
were too high, he said, brokers might not be willing to pay Since only 60 of KSE's 600 listed companies trade regularly,
them. Contesting fines in the congested court system could small trades can rapidly make a big difference in a company's
take years. share price.
'The purpose is more to name and shame,' Haider said in an Boosting volumes on the exchange was one of the intentions
interview. 'It causes them reputational damage.' behind Pakistani President Asif Ali Zardari's decree last April
Like KSE Chairman Nadeem Naqvi, Haider is a former turning black money into white.
employee of Dhedhi's. Both men denied any conflict of interest. It said no questions could be asked by the Federal Board of
'It's important to have people in charge who know the way Revenue about the source of funds invested in stocks till July
markets work,' Haider said. 'I've had lots of other jobs than just 2014. The investments become legally legitimate.
working for Dhedhi.' The pool of such funds is potentially huge. A report by the
The SECP can revoke licenses, impose hefty fines, or open United Nations Office on Drug and Crime projected the size of
criminal cases against offenders. But it almost never does. It Pakistan's informal or 'black' economy at $34 billion in 2010--11,
has launched only 10 criminal cases in the past five years-all one-fifth of the formal economy.
still held up in the judicial backlog. It has issued dozens of small The Paris-based Financial Action Task Force, which monitors
fines. money laundering, said the decree did not contravene Pakistan's
'We have great laws and regulations but they are not properly existing anti-money laundering legislation. But anecdotal
enforced,' said Khalid Mirza, a former SECP chief. 'The SECP is evidence suggests controls are lax.
just catching the small fish as far as I can see.' In one case shown to Reuters by a lawyer, a man invested
Naqvi, the KSE head, acknowledged his priority has been to $10 million buying stocks in a single transaction. His address: a
boost the market, not to crack down on it. Karachi slum notorious for Taliban infiltration
'My management style isn't confrontational because I want to
build confidence in the market,' he said.
Separating the commercial and the regulatory functions of
the market is one of the main reasons the KSE is looking for a
foreign partner. It has appointed Deutsche Bank as its advisor
on its quest to demutualize-a process that will separate those Source: Houeld, Katherine, 'Pakistan's booming market no
two functions. black and white matter', Reuters, 12 April 2013. http://in.reuters.
'Demutualisation is another step on the road to reform,' Naqvi com/article/2013/04/12/pakistan-stockmarket-corrected-update-
said. 'Right now we have a fairly robust system. But I'm not 1i-idlNDEE93B04R20130412
saying its foolproof.'
416 Issues in Pakistan's Economy

Appendix 14.1
to the issuing company that the entire new issue will be sold
The Nature and Significance of Capital at a set price, thus assuring the company of a fixed amount of
Markets and Commercial Banks' Role total proceeds from the new issue. ln addition to liquidity, the
secondary market provides a pool of investors to whom new
in their Development issues may be sold. Thus, while the primary market is necessary
Some salient issues in the capital market and financial sector in to provide issues of securities to be traded in the secondary
Pakistan are described in the following extract. market, the latter is essential for allowing the new issues to be
sold. Thus both markets are mutually re-enforcing.
The capital market includes the portion of the financial system
involved in (i) mobilization and intermediation of private Need for Capital Market Development in Pakistan
savings, and (ii) allocation of medium and long term financial So far Pakistan has raised a large portion of its investment
resources through a variety of debt and equity instruments of funds from national savings, which are routed through
both private and public sector investment. national financial institutions such as commercial banks
Capital markets play a crucial role in mobilizing domestic and non-bank financial institutions (NBFls) as well as
resources and channeling them efficiently to the most through national savings schemes (NSSs). These funds are
productive investments. The level of capital market supplemented by foreign savings in the form of ordinary and
development is thus an important determinant of a country's concessionary loans from multilateral financial institutions
level of savings, efficiency of investment and ultimately of its and bilateral agencies as well as commercial loans from
rate of economic growth. An efficient capital market can also foreign banks. A limited but growing amount of total national
provide a range of attractive opportunities to both domestic investment is funded through direct foreign investment.
and foreign individual and institutional investors. Furthermore funds are government guaranteed loans from
A developed capital market usually comprises savings development finance institutions (DFls) or domestic commercial
facilities, banking system, financial institutions for industry, banks to government indicated/sanctioned projects to private
primary and secondary markets where bonds and equities are sector and large scale public enterprises. Consequently, most
traded and issued, an underwriting system, and an official enterprises have an excessive dependence on debt financing
regulatory authority to supervise the market and protect the and have minimized equity financing. Excessive reliance
investors. on debt finance to fund capital intensive projects with low
lt should, however, be emphasized that an efficient capital returns has in many cases caused debt servicing problems.
market is not an end in itself, as the primary purpose of Over-reliance on debt has also resulted in unbalanced capital
capital market development is to strengthen the economy and structures, high debt/equity ratios and financial vulnerability
then thereby improve the standard of living of the people. to downturns in world and domestic economies.
Therefore, efficient capital markets complement and support Government policymakers and planners are aware that over
the productive activities of the economy. the next decade it will become difficult to (i) fund public
ln Pakistan the capital market consists of (i) a dominant development expenditure, especially for public enterprises,
non-securities market with well established commercial banks, through government budgetary allocations because of fiscal
development finance institutions {DFl), and specialized banks/ constraints; {ii) expect an increase in the flow of foreign
institutions for industry, agriculture, housing, and small commercial loans, because of mounting external debt servicing
business, as well as a variety of other smaller, younger, and problems; (iii) rely on increasing supply of external aid funds
marginally important non-bank financial institutions; and (ii) because of budgetary pressures in developed industrial
a rapidly developing securities market, with three organized countries. ln the foreseeable future, only foreign investment
stock exchanges but which in terms of tota 1 funds raised is less can fill a portion of the gap left by reduced external flows.
significant as compared to the non-securities market. ln the light of these structural, financial and attitudinal
The non-securities market provides medium and long changes, the achievement of a high rate of growth by
term equity and debt funds in negotiable form which are Pakistan will significantly depend on the development of
issued by corporations and governments or through financial domestic capital markets (i) to mobilize increased domestic
institutions, directly to individual and institutional investors resources to bridge the projected investment savings gap;
and then traded among different holders. and (ii) to efficiently allocate scare capital resources to the
The securities market for negotiable equity shares and long most productive investment projects. Moreover, without
term debt securities is typically divided into two parts. One fully developed equity markets, Pakistan will not be able
is the 'primary' market in which new issues of securities are to increase the availability of equity funding and move
made by companies and are bought by investors. The other towards more balanced capital structures. The development
is the 'secondary' market in which the existing securities are of capital market in Pakistan aside from easing the burden
traded through financial intermediaries, such as investment on government funds and mobilizing savings for productive
banks, brokers, dealers, and individual investors. These investment would also establish a platform for raising tax
institutions quite often provide or arrange for a commitment revenues in the future.
 Chapter 14 Financial and Capital Markets 417

Role of Commercial Banks in Capital Market i.e. the acquisition of long term liabilities on the basis of short
Commercial banks are the dominant financial institutions in term deposits. At present, commercial banks do not have large
the country. They are also playing an important capital market long term resources and the practice of borrowing short term
role by providing medium and long term loans for the purpose funds and lending a substantial portion of these on a long
of financing fixed investment. During 1994-95 the gross term basis carries the risk of liquidity.
disbursement of funds by commercial banks for this purpose Commercial banks also generally do not have adequate
amounted to Rs. 9,392 million. .institutional expertise for making medium and long term loans
Because of their large asset base, there is still considerable on the basis of projects' economic and financial viability and
scope for commercial banks to develop medium and long- technical feasibility. Moreover, since major commercial banks
term funding facilities. ln particular, commercial banks could (except foreign banks) till recently have been government
assist the corporate sector by subscribing to convertible owned, their management tends to be bureaucratic in style,
commercial bonds paper as well as guaranteeing these for with an emphasis on centralized decision making which
reputable and experienced entrepreneurs. They could also discourages management initiative. The commercial banks
increase their participatory activities with DFls in consortium have also been extensively exposed to political pressures for
financing for projects which have been professionally studied making loans to projects that do not satisfy the criterion of
and found to be economically and technically feasible. financial soundness or viability. Unfortunately, commercial
Commercial banks' involvement in term lending is, however, banks (and DFls) have been quite often used for conferring
a complex issue and its dimensions depend, among other unjustified favours on certain influential individuals.
things, on the ability of commercial banks to mobilize medium
and long-term resources, as well as on 'term transformation', Source: The News, 31 August 1996. •

Appendix 14.2

The Role of Capital Markets companies to raise money relatively quickly and encouraged
issues to realize the benefits of public listing.
Capital markets can play an important role in . economic That's the good news. The bad news is that .the equity
development. market still remains fairly illiquid when compared to other
countries in Asia. For instance, Pakistan has approximately
Industrial development is commonly believed to be the engine 1.5 million investors which compares rather poorly with 25
of economic growth. lf that is so, then its fuel must come million in lndia; and of the 1.5 million less than 5 per cent are
from the capital markets. Significant economic development really active. The ability of this small number of investors to
is not possible without the sustained availability of long- move the market is therefore significant. ln addition, only 20
term funds and long-term funds are really only available companies represent approximately 45 per cent of the KSE's
through the capital markets. We know that most people save. market capitalization and only about 15 per cent of issued
How much they save and how these savings get re-deployed shares are actively traded. These facts notwithstanding, the
determines the size and nature of a country's capital markets. trends are positive as more investors are entering the market
The capital markets, therefore, are simply a mechanism for and large equity holdings are being diluted.
repackaging financial flows. This repackaging can occur in the The debt market is a different story. Effectively, the only
form of debt or equity. Debt is repackaged as fixed income debt instruments are government bonds and treasury bills
instruments which offer a guaranteed return to the holder and and, together with the national saving schemes, they swamp
promise the return of principal at maturity. Equity is a much the debt securities market. Until recently, private sector
more fundamental form of investment where the investor debt securities were severely victimized by discriminatory
shares, to a greater degree, in the fortunes of the issuing tax treatment and other disincentives. The net result is that
company. Pakistan's financial backdrop is dominated by commercial
1t is no coincidence that economies which are more lending, either through commercial banks or development
developed than ours also have more sophisticated capital finance institutions.
markets. lt is also no coincidence that the savings rate in such This situation has prevented the develop.ment of a private
economies tends to be much higher than the savings rate in sector debt securities market in which individuals and
Pakistan. Given that our savings rate is pretty poor, are we institutions normally invest. Our system forces most investors
to conclude that our capital markets are doomed forever? to keep their money in bank deposits and other instruments
The answer is obviously no, but the daily transactions, the which may yield substantially less than the inflation rate.
level of the index, etc. have shown tremendous growth since Given the opportunity, perhaps these investors would rather
1989 and credit for this must go to the implementation of invest in securities of top quality private sector companies
sensible, liberal policies. There is also no denying that foreign where the yield for 5-year paper could be substantially more
investment beginning in 1991 activated and propelled the rewarding. Until our capital markets allow such instruments
local equity market. This allowed local companies and their to develop, we cannot place any significant reliance on them.
sponsors to finally extract embedded values. 1t also allowed
418 Issues in Pakistan's Economy

lt is inconceivable that Pakistan can achieve its ambitious in regulations support this belief. The psyche of our people
economic objectives without the growth of its capital markets implies that the equity market will probably remain larger than
not only in size but also in depth. When a company cannot the debt market for the foreseeable future. New products will
raise even US$50 million from its domestic capital markets in be introduced and the investor base is expected to broaden,
local currency, at affordable rates, then we have a problem. especially through the additional of mutual funds which will
Pakistan has begun to access the global capital markets for allow smaller investors a greater degree of protection. The
both equity and debt, but we cannot rely heavily on these equity market should continue to grow given privatization,
markets as they have limited appetite and are driven by profit the inherent growth in companies' earnings and the changed
opportunities in a stable environment that offers liquidity. attitude of issuers. With a debt market that is awakening,
Although we are moving towards improved stability and economic reforms that are irreversible and consistent between
liquidity, we are not there yet. governments, exciting developments are expected in the
Gloom and doom aside, it is our belief that there is a capital markets.
commitment on the part of all governments, past and present,
to support the growth of our capital markets. Recent changes Source: DAWN, Advertising Supplement, 28 December 1994.

Appendix 14.3
Thus the professional investor is forced to concern himself
Keynes on the Stock Market with the anticipation of impending changes, in the news or in
John Maynard Keynes questions the logic of the stock market and the atmosphere, of the kind by which experience shows that
how stocks are priced. the mass psychology of the market is most influenced. This is
the inevitable result of investment markets organized with a
A conventional valuation which is established as the outcome view to so called 'liquidity'. Of the maxims of orthodox finance
of the mass psychology of a large number of ignorant none, surely, is more anti-social than the fetish of liquidity, the
individuals is liable to change violently as the result of a doctrine that it is a positive virtue on the part of investment
sudden fluctuation of opinion due to factors which do not institutions to concentrate their resources upon the holding
really make much difference to the prospective yield; since of 'liquid' securities. 1t forgets that there is no such thing as
there will be no strong roots of conviction to hold it steady. liquidity of investment for the community as a whole. The
ln abnormal times in particular, when the hypothesis of an social object of skilled investment should be to defeat the dark
indefinite continuance of the existing state of affairs is less forces of time and ignorance which envelop our future. The
plausible than usual even though there are no express grounds actual, private object of the most skilled investment to-day
to anticipate a definite change, the market will be subject is 'to beat the gun', as the Americans so well express it, to
to waves of optimistic and pessimistic sentiment, which are outwit the crowd, and to pass the bad, or depreciating, half-
unreasoning and yet in a sense legitimate where no solid basis crown to the other fellow.
exists for a reasonable calculation. This battle of wits to anticipate the basis of conventional
But there is one feature in particular which deserves our valuation a few months hence, rather than the prospective
attention. lt might have been supposed that competition yield of an investment over a long term of years, does not
between expert professionals, possessing judgment and even require gulls amongst the public to feed the maws of
knowledge beyond that of the average private investor, the professional-it can be played by professionals amongst
would correct the vagaries of the ignorant individual left to themselves. Nor is it necessary that anyone should keep his
himself. lt happens, however, that the energies and skill of simple faith in the conventional basis of valuation having any
the professional investor and speculator are mainly occupied genuine long-term validity. For it is, so to speak, a game of
otherwise. For most of these persons are, in fact, largely Snap, of Old Maid, of Musical Chairs-a pastime in which he
concerned, not with making superior long-term forecasts of is victor who says Snap neither too soon nor too late, who
the probable yield of an investment over its whole life, but passes the Old Maid to his neighbour before the game is over,
with foreseeing changes in the conventional basis of valuation who secures a chair for himself when the music stops. These
a short time ahead of the general public. They are concerned, games can be played with zest and enjoyment, though all
not with what an investment is really worth to a man who the players know that it is the Old Maid which is circulating,
buys it 'for keeps', but with what the market will value it at, or that when the music stops some of the players will find
under the influence of mass psychology, three months or a themselves unseated.
year hence. Moreover, this behaviour is not the outcome of Or, to change the metaphor slightly, professional investment
a wrong-headed propensity. lt is an inevitable result of an may be likened to those newspaper competitions in which
investment market organized along the lines described. For the competitors have to pick out the six prettiest faces from
it is not sensible to pay 25 for an investment of which you a hundred photographs, the prize being awarded to the
believe the prospective yield to justify a value of 30, if you also competitor whose choice most nearly corresponds to the
believe that the market will value it at 20 three months hence. average preferences of the competitors as a whole; so that
 Chapter 14 Financial and Capital Markets 419

each competitor has to pick, not those faces which he himself of the state of confidence, namely, the confidence of the
finds prettiest, but those which he thinks likeliest to catch lending institutions towards those who seek to borrow from
the fancy of the other competitors, all of whom are looking them, sometimes described as the state of credit. A collapse
at the problem from the same point of view. lt is not a case in the price of equities, which has had disastrous reactions on
of choosing those which, to the best of one's judgement, are the marginal efficiency of capital, may have been due to the
really the prettiest, nor even those which average opinion weakening either of speculative confidence or of the state of
genuinely thinks the prettiest. We have reached the third credit. But whereas the weakening of either is enough to cause
degree where we devote our intelligences to anticipating what a collapse, recovery requires the revival of both. For whilst the
average opinion expects the average opinion to be. And there weakening of credit is sufficient to bring about a collapse, its
are some, 1 believe, who practise the fourth, fifth and higher strengthening, though a necessary condition of recovery, is
degrees. not a sufficient condition.
lf the reader interjects that there must surely be large profits These considerations should not lie beyond the purview
to be gained from the other players in the long run by a of the economist. But they must be relegated to their right
skilled individual who, unperturbed by the prevailing pastime, perspective. 1f l may be allowed to appropriate the term
continues to purchase investments on the best genuine long- speculation for the activity of forecasting the psychology of the
term expectations he can frame, he must be answered, first market, and the term enterprise for the activity of forecasting
of all, that there are, indeed, such serious-minded individuals the prospective yield of assets over their whole life, it is by
and that it makes a vast difference to an investment market no means always the case that speculation predominates
whether or not they predominate in their influence over the over enterprise. As the organization of investment markets
game-players. But we must also add that there are several improves, the risk of the predominance of speculation does,
factors which jeopardise the predominance of such individuals however, increase. ln one of the greatest investment markets
in modern investment markets. Investment based on genuine in the world, namely, New York, the influence of speculation
long-term expectation is so difficult to-day as to be scarcely (in the above sense) is enormous. Even outside the field
practicable. He who attempts it must surely lead much more of finance, Americans are apt to be unduly interested in
laborious days and run greater risks than he who tries to discovering what average opinion believes average opinion
guess better than the crowd how the crowd will behave; to be; and this national weakness finds its nemesis in the
and, given equal intelligence, he may make more disastrous stock market. lt is rare, one is told, for an American to invest,
mistakes. There is no dear evidence from experience that the as many Englishmen still do, 'for income'; and he will not
investment policy which is socially advantageous coincides readily purchase an investment except in the hope of capital
with that which is most profitable. lt needs more intelligence appreciation. This is only another way of saying that, when
to defeat the forces of time and our ignorance of the future he purchases an investment, the American is attaching his
than to beat the gun. Moreover, life is not long enough;- hopes, not so much to its prospective yield, as to a favourable
human nature desires quick results, there is a peculiar zest in change in the conventional basis of valuation, i.e. that he is,
making money quickly, and remoter gains are discounted by in the above sense, a speculator. Speculators may do no harm
the average man at a very high rate. The game of professional as bubbles on a steady stream of enterprise. But the position
investment is intolerably boring and over-exacting to anyone is serious when entt>rprise becomes the bubble on a, whirlpool
who is entirely exempt from the gambling instinct; whilst he of speculation. When. the capital development of a country
who has it must pay to this propensity the appropriate toll. becomes a by-product of the activities of a casino, the job is
Furthermore, an investor who proposes to ignore near-term likely to be ill-done. The measure of success attained by Wall
market fluctuations needs greater resources for safety and Street, regarded as an institution of which the proper social
must not operate on so large a scale, if at all, with borrowed purpose is to direct new investment into the most profitable
money-a further reason for the higher return from the channels in terms of future yield, cannot be claimed as one
pastime to a given stock of intelligence and resources. Finally of the outstanding triumphs of laissez-faire capitalism-which
it is the long-term investor, he who most promotes the public is not surprising, if l am right in thinking that the best brains
interest, who will in practice come in for most criticism, of Wall Street have been in fact directed towards a different
wherever investment funds are managed by committees or object.
boards or banks. For it is in the essence of his behaviour that These tendencies are a scarcely avoidable outcome of our
he should be eccentric, unconventional and rash in the eyes having successfully organized 'liquid' investment markets. lt is
of average opinion. lf he is successful, that will only confirm usually agreed that casinos should, in the public interest, be
the general belief in his rashness; and if in the short run he inaccessible and expensive. And perhaps the same is true of
is unsuccessful, which is very likely, he will not receive much Stock Exchanges. That the sins of the London Stock Exchange
mercy. Worldly wisdom teaches that it is better for reputation are less than those of Wall Street may be due, not so much
to fail conventionally than to succeed unconventionally. to differences in national character, as to the fact that to the
So far we have had chiefly in mind the state of confidence average Englishman Throgmorton Street is, compared with
of the speculator or speculative investor himself and may Wall Street to the average American, inaccessible and very
have seemed to be tacitly assuming that, if he himself is expensive. The jobber's 'turn', the high brokerage charges
satisfied with the prospects, he has unlimited command over and the heavy transfer tax payable to the Exchequer, which
money at the market rate of interest. This is, of course, not attend dealings on the London Stock Exchange, sufficiently
the case. Thus we must also take account of the other facet diminish the liquidity of the market (although the practice
420 Issues in Pakistan's Economy

of fortnightly accounts operates the other way) to rule out actual capital assets cannot be rendered sufficiently attractive
a large proportion of the transactions characteristic of Wall (especially to the man who does not manage the capital
Street. The introduction of a substantial Government transfer assets and knows very little about them), except by organizing
tax on all transactions might prove the most serviceable markets wherein these assets can be easily realised for money.
reform available, with a view to mitigating the predominance The only radical cure for the crises of confidence which
of speculation over enterprise in the United States. afflict the economic life of the modern world would be to
The spectacle of modern investment markets has sometimes allow the individual no choice between consuming his income
moved me towards the conclusion that to make the purchase and ordering the production of the specific capital-asset
of an investment permanent and indissoluble, like marriage, which, even though it be on precarious evidence, impresses
except by reason of death or other grave cause, might be him as the most promising investment available to him.
a useful remedy for our contemporary evils. For this would lt might be that, at times when he was more than usually
force the investor to direct his mind to the long-term assailed by doubts concerning the future, he would turn
prospects and to those only. But a little consideration of in his perplexity towards more consumption and less new
this expedient brings us up against a dilemma, and shows investment. But that would avoid the disastrous, cumulative
us how the liquidity of investment markets often facilitates, and far-reaching repercussions of its being open to him, when
though it sometimes impedes, the course of new investment. thus assailed by doubts, to spend his income neither on the
For the fact that each individual investor flatters himself one nor on the other.
that his commitment is 'liquid' (though this cannot be true Those who have emphasized the social dangers of the
for all investors collectively) calms his nerves and makes him hoarding of money have, of course, had something similar to
much more willing to run a risk. lf individual purchases of the above in mind. But they have overlooked the possibility
investments were rendered illiquid, this might seriously impede that the phenomenon can occur without any change, or at
new investment, so long as alternative ways in which to hold least any commensurate change, in the hoarding of money.
his savings are available to the individual. This is the dilemma.
So long as it is open to the individual to employ his wealth Source: Keynes, John Maynard, The General Theory (New York:
in hoarding or lending money, the alternative of purchasing Harbinger Books, 1964), 154-61.

Appendix 14.4
aspects of the institutional framework for the development
Should Developing Countries of these markets. According to Sudweeks, from 1971 to June
Encourage Stock Markets? 1988, 73 countries requested and received capital-market
assistance in various forms from the lFC's Capital Markets
Conventional wisdom suggests that all countries must have
Department. ln 50 of these countries assistance has been
active equity markets if they are to develop. lt is argued that
provided especially for the development of security markets.
these stock markets will provide scarce capital which can be used
Moreover, lFC's pioneering work in establishing the Emerging
for development. However, Professor Ajit Singh questions these
Markets Data Base (EMDB), which since 1975 has been
assumptions.
analysing records of a large number of third world companies
and providing basic information on many 'emerging' stock-
Today, however, as a part of a general trend towards
markets, has been widely acknowledged to be instrumental
liberalization, deregulation, privatization, the diminution of
in stimulating foreign investors' interest in these markets.
the role of the state and enhancement of that of the market,
The lFC in addition has assisted several countries with the
which for various reasons is sweeping the globe-the North
launching of the so called 'country funds' to attract foreign
and the South, and what remains of the East as well as
the West-an important feature of the development of the
financial sector in a large number of developing economies is
portfolio investment to developing-country stock-markets.
The Bretton Woods institutions justify their encouragement
of third world stoc~-markets not on ideological grounds but
1
the very fast growth of stock-markets in these countries. The
on the ground that stock-market expansion is partly a natural
establishment and expansion of these markets is favoured not
progression of the development of a country's financial sector
just by the Bretton Woods institutions, as one would expect,
as long-term economic growth proceeds. More importantly, it
but also by many heterodox economists as well as those from
is argued that the existing financial systems, which in many
the centrally planned economies.
countries have invariably involved government-directed and
The World Bank, particularly through its affiliate the
often subsidized credit to priority industries or firms, have
lnternational Finance Corporation (lFC), is actively involved in
proved to be unsuccessful. The Development Finance lnstitutes
fostering stock-market development in third world countries
(DFls) have been the main vehicles for providing long-term
and in assisting and encouraging them to open up to foreign
finance for industrial development in a number of countries.
portfolio investment. Specifically, the lFC provides technical
The DFls have been facing acute financial difficulties since
assistance to a large n"umber of countries on the legal,
the economic crisis of the third world began at the end of the
regulatory, and fiscal issues involved, as well as on other
 Chapter 14 Financial and Capital Markets 421

1970s and in the early 1980s. The World Development Report such information and to take a long-term view of firms'
for 1989, which focused on the financial sector, reported prospects-a perspective which is vital for industrialization in
that in a sample of 18 industrial DFls worldwide, on average developing economies.
nearly 50 per cent of their loans (by value) were in arrears, Notwithstanding these extremely important advantages
and accumulated arrears were equivalent to 17 per cent of of bank-based financial systems, it would be a mistake not
the portfolio value. For three of these institutions, loans to learn from the experience of the last two decades during
accounting for between 70 and 90 per cent of the portfolio which, in many developing countries, such systems have
values were in arrears. The situation may be worse than the performed far from adequately. ln a number of developing
numbers show, because the rescheduling of overdue loans countries experiencing a high degree of macroeconomic
and growing loan portfolios reduce arrears ratios. The Report instability bank-based finance has tended to degenerate
goes on to observe: The performance of agricultural DFls has into inflationary/inefficient finance. Experience suggests the
also been poor. Studies show default rates ranging from 30 following to be the most serious shortcomings of such systems
to 95 per cent for subsidized agricultural credit programmes. in the developing-country context:
ln general, the Report argued strongly against the myriad
a) 'crony capitalism', which finances schemes for particular
inefficiencies of these DFls and the bank-based interventionist
individuals and families with political connections, rather
financial systems; instead, it favoured a restructuring of these
than promoting long-term industrial development;
systems to make them more 'voluntary', fiscally neutral and to
bl industry-finance links of the bank-based type can
bring them as far as practicable under private ownership ....
in principle, and sometimes in practice, lead to
... Essentially, this paper suggests that it is arguable that
monopolistic positions in product markets and thwart
even in advanced countries with well-functioning markets
entry by new firms, thereby hindering efficient industrial
the stock markets are likely do more harm than good to the
development;
real economy. The supposed positive contributions of the
c) imprudent or inadequate government regulation of
stock markets (encouragement of savings, more efficient
banks has sometimes jeopardized the integrity of the
allocation of investment resources, the discipline of corporate
financial system as a whole (for example Chile, following
managements through competitive selection in the market
financial liberalization in the early 1980s).
for corporate control), ... do not materialize in practice. The
market for corporate control encourages large companies to Thus, although bank-based systems are much to be preferred
expand through takeovers, rather than seek organic growth in principle to the stock-market-based systems, developing
which promotes economic development. Moreover, it is not countries should pay particular attention to questions of
at all clear that the takeover selection process leads to the proper regulation and to the prevention of monopolistic abuse
survival of firms which are efficient at creating real wealth, by banks.
rather than being simply skilled in financial engineering. However, to be realistic, it must be recognized that stock-
There is evidence as well as strong analytical grounds for markets in developing countries are today a part of the new
believing that these and related negative features of the stock- economic landscape and, notwithstanding their dubious
markets (speculation, lack of long-term investor commitment merits in relation to economic development, they are there
to corporations, short-termism) may play a significant role in to stay. The question, therefore, arises how, if at all, can their
putting the stock-market dominated economies of the United negative features be contained? The analysis suggests that,
States and the United Kingdom at a competitive disadvantage from the perspective of economic development, an important
in relation to countries such as the Federal Republic of general policy principle for the least developed countries
Germany and Japan. These unfavourable aspects of the stock- should be to attempt to insulate as far as possible the real
market are likely to be particularly important in third world industrial economy from the influence of the stock market. ln
countries with undeveloped stock markets and high volatility this context, the following kinds of policy proposals require
of share prices. careful consideration by developing country governments.
To the extent that developing countries today have a First, they should examine schemes of taxation to reduce share
choice, they should attempt to foster bank-based financial turnover as was mooted by Keynes and has more recently
systems more along the lines of the 'follower' countries (Japan, been proposed by Tobin in relation to transactions on the
the Federal Republic and France) rather than to establish international currency markets.
and encourage stock-markets. Historically, these bank-based Secondly, the developing countries should be seriously
systems have a proven record of successfully promoting concerned about the effects of a prospective market for
industrial development in these countries. Moreover, as we corporate control. Since stock markets in these countries
have seen earlier, the modern theory of information provides are still in their infancy, most of them do not yet have an
strong theoretical reasons for banks to be on the whole more active market for corporate control (although some takeover
suitable vehicles for achieving these ends than the stock- bids on the lndian stock markets have been reported in the
market. The ordinary shareholder of a larger corporation has most recent period). However, as the stock markets become
neither the ability nor the incentive to obtain the necessary more mature and more firmly established, left to itself the
information (which is costly) to monitor management development of a corporate control market is an inevitable
activities, thus leading him or her to eschew 'commitment' evolution ... such a market greatly accentuates the negative
to the organization and to prefer liquidity. The banks, on the features of a stock market for economic development (e.g. by
other hand, have both the means and the incentive to collect encouraging short-termism). The developing countries should,
422 Issues in Pakistan's Economy

therefore, if at all possible, adopt the German-Japanese type possesses or is able to establish a German-Japanese-type
institutional arrangements to pre-empt the development of a financial system, such discipline would be supplemented by
market for corporate control of the kind which exists in the bank-monitoring of corporations.
Anglo-Saxon countries. However, if that is not feasible, these Reducing the negative aspects of the role of the stock-
countries would be wise to take steps to restrict the operations market would require a full exploration of the policy areas
of the market for corporate control. This may involve, for outlined above in relation to the specific circumstances of a
example, major changes in company law, reducing the role of particular country. Many of these policy issues are currently
shareholders and enhancing that of the stakeholders or the subjects of considerable debate in the advanced countries.
government in take-over situations. Their application and analysis in relation to developing-
Thirdly, to the extent that institutional investors, such as country stock-markets requires a separate paper in its own
pension funds, are public agencies, which appears to be the right.
case in many developing countries, the governments could
use them to maintain more orderly markets. Fourthly, and Source: From Singh, Ajit, 'The Stock Market and Economic
importantly, the governments should encourage product Development: Should Developing Countries Encourage Stock
market competition to discipline corporations rather than rely Markets?', UNCTAD Discussion Paper No. 49 (Geneva: UNCTAD,
on the stock-market for this purpose. lf a developing country October 1992), 1, 43-5.

NOTES
I. Ali, Syed Liaquat, 'Development Financial Institutions', 22. Ibid. 127.
Supplement on DFis, Business Recorder, Karachi, 11 October 23. Ibid., 129, emphasis added.
2011. 24. Ibid. 137.
2. Haque, Nadeemul and Shahid Kardar, 'The Development of 25. Ibid. 135.
Financial Markets in Pakistan', mimeo, 1993, 3. 26. Ibid. 143.
3. Nenova, Tatiana, Cecile Thioro Niang with Anjum Ahmad, 27. Meenai, S. A., Money and Banking in Pakistan (Karachi:
Bringing Finance to Pakistan's Poor: A Study on Access to Finance Oxford University Press, 1984), 251.
for the Underserved and Small Enterprises (Washington DC: 28. State Bank of Pakistan, Pakistan Financial Sector Assessment
World Bank, May 2009), ix. 1999-2000 (Karachi, 2002), 25.
4. For an extensive and comprehensive history of banking 29. State Bank of Pakistan, op. cit., 2002.
in Pakistan, see State Bank of Pakistan, History of the State 30. National Development Finance Corporation, Financial
Bank of Pakistan, 1948-60 (Karachi: State Bank of Pakistan, Liberalisatfon Series, Research Report (Karachi, 1993 ).
1992); and State Bank of Pakistan, History of the State Bank 31. Ibid.
of Pakistan, 1961-77 (Karachi: State Bank of Pakistan, I 994). 32. Tirmizi, Farooq, 'The Bottom Line: Is the Banking Sector's
This section and much of this chapter draw extensively from Record Streak About to Snap?', Express Tribune, Karachi,
both the SBP volumes. 16 April 2012.
5. State Bank of Pakistan, History of the State Bank of Pakistan, 33. Ibid.
1948-60 (Karachi: State Bank of Pakistan, 1992), 3. 34. This Section of this Chapter draws primarily from the
6. Ibid. IO. following excellent study: Nenova, Tatiana, Cecile Thioro
7. Ibid. ll8. Niang with Anjum Ahmad, Bringing Finance to Pakistan's
8. Ibid. Poor: A Study on Access to Finance for the Underserved and Small
9. Ibid. 127. Enterprises (Washington DC: World Bank, 2009). All the data
JO. Ibid. 130. and numbers are drawn from this source ..
l l. Ibid. 136-9. 35. Ibid. 1.
12. Ibid. 174. 36. Ibid. 10.
13. State Bank of Pakistan, History of the State Bank of Pakistan, 37. Ibid. 30.
1961-77 (Karachi: State Bank of Pakistan, 1994), 39. 38. Ibid. 49.
14. Ibid. 40. 39. Ibid. 31.
15. Ibid. 43. 40. All numbers are drawn from Ibid. 58.
16. Ibid. 53. 41. Ibid. 58.
17. State Bank of Pakistan, op. cit., 1992, 160. 42. Haque, Nadeemul and Shahid Kardar, op. cit., 1993, 22.
18. Ibid. 168. 43. Husain, Fazal and Tariq Mahmood, 'The Stock Market and
19. Ibid. 170. the Economy in Pakistan', The Pakistan Development Review,
20. Ibid. 187. vo1..40, No. 2, 2ooi, 114.
21. State Bank of Pakistan, op. cit., 1994, 127.

_j
 Monetary Policy, Savings,-
and Inflation
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Monetary policy is concerned with the regulation of the suggest? With double-digit inflation having been the norm
quantity, cost, and allocation of money and credit in the for much of the 1990s and again in the period 2008-12, this
economy. It is a mechanism that has serious implications chapter will assess the possible reasons for high inflation, and
for economic development, as it helps determine how and examine some of the theories presented by researchers which
where resources are to be allocated in the different sectors. may help explain why the inflation rate rose.
Monetary policy establishes how much can, and should, be
invested and where it should be invested; and by determining
the cost of money, monetary policy helps individuals to decide 15.1 MONETARY POLICY AND MONETARY
how much they want to save and how much to spend at a
particular moment of time. For many economists, inflation MANAGEMENT IN PAKISTAN1
is always and everywhere a monetary phenomenon, where
Since 1991, the financial sector has undergone a major
excessive monetary growth, beyond the rate commensurate
transformation. Much, in fact almost all, of the pre-1991
with a particular growth rate of the economy, will result in
measures that constituted monetary policy and the way
inflation. Hence, monetary policy, like fiscal· policy, is a key
monetary matters were managed have now been replaced by
determinant of the course an economy can take.
a different regime of management and policy.
In Pakistan as elsewhere, by definition, fiscal policy has
The impetus for the dramatic reforms in the financial sector
been the purview of the government, which has determined
like much else in Pakistan in recent years, is provided by th~
who it is going to tax, how much tax it is going to
World Bank and the International Monetary Fund (IMF).
impose, and how much and where it intends to spend.
Just as the Structural Adjustment Programmes (SAPs) since
Monetary policy in many countries has been kept distant
1988 have dramatically transformed the nature of Pakistan's
from the direct arena of government, and governments
economy, especially at a macro level, similar reforms under
have only established the basic rules and eventual targets
the Financial Sector Adjustment Loan (FSAL) and those
of monetary policy. The outcome and consequences of these
under the various Structural Adjustment Programmes have
rules and targets are then left to the market to determine.
also transformed the nature of Pakistan's financial, fiscal,
However, in Pakistan, monetary policy has been a much more
and monetary sectors. Essentially, there has been a marked
government-controlled and influenced tool than in many
transformation in the way monetary policy is conducted,
other countries. Interest rates have been predetermined and
from one that used to be heavily dependent on direct
strict sectoral credit targets defined, and the market has,
(government) involvement and controls, to one that has
until recently, not played an influential role. All this has
now ostensibly become based on indirect (market-based)
been changing in the last few years, and the government
methods. This has been done, as one observer argues, 'at
has begun to allow the market to determine some key
the urging of the IMF which now is the architect our
variables. This chapter will highlight those changes and will
economic, 1scal and monetary policies. The IMF has bee-ii
sh~w just how much the market now influences monetary
rrecommending fof~_<>Il!e~years now a sh'ilt to marw-°fiased
pohcy and where this is all leading to. As we saw in the last
mana~ment...of..monetarY.,polisy. as it views management
chapter, the State Bank of Pakistan was granted considerable
through quantitative methods with distaste; these, in its
autonomy to make decisions which concern it, including
judgement, result in inefficiency and the misallocation of
determining the rate of interest. However, some critics have
resources. 2 Before we analyse the nature of these changes, we
argued that despite this autonomy, political pressure and
need to look briefly at the way monetary policy was managed
other considerations undermine its role, ·and decisions are
in the pre-1991 period.
taken giving preference to non-technical factors-see Box
Before the 1991 financial sector reforms, the government's
15 .1. Appendix 15 .1 provides a chronology of reforms in the
debt management programme was considered to be a 'loosely
financial sector since 1990.
managed, highly unorganized system of on tap and ad hoc
Pakistan's savings rate has always been very low and
treasury bills, and readily refinanced non-marketable long
attempts at increasing it have always failed. This chapter will
term papers'. 3 In 1972, when the banking sector reforms were
try to examine the reasons why the savings rate is so low
undertaken, a National Credit Consultative Council (NCCC)
and what, if anything, can and should be done to increase
was established to determine the distribution of credit in the
that rate. Is inflation always and everywhere a monetary
economy and to improve and make credit available to those
phenomenon? What does the evidence from Pakistan
424 Issues in Pakistan's Economy

Box 15.1 and valid, but its policy decision with respect to the monetary
How Autonomous is the State Bank in Deciding policy is contrary to the analysis and wrong. There is thus an
obvious break in the link between the professional analysis
Monetary Policy? and the policy decision of the SBP. The only conclusion
Muhammad Yaqub provides an analysis of the surprising cut in that one can draw from this paradox is that the analysis is
the discount rate in Pakistan in August 2012, arguing that the done professionally but the decisions are made or dictated
State Bank of Pakistan has not shown its independence and politically.
has acted under pressure imposed by the government, with an The contradiction between the analysis and the policy
election approaching. conclusion confirms that the decision about its policy rate was
not made at the SBP, or at least at its professional level.
Notwithstanding the de facto surrender to the ministry of If the central bank of the country becomes a wilting partner
finance of its de jure authority to formulate and implement to inflation on political or expediency considerations, feels
the monetary policy, the State Bank of Pakistan (SBP) goes comfortable with double-digit inflation over a period of four
through the ritual of issuing a statement every two months, years, is indifferent towards the high rate of increase in money
pretending that it is in charge of the monetary policy. The ritual supply over a long period, and then reinforces these trends
has been performed once again and, based on the argument by lowering the policy rate on a flimsy basis, the only thing
of falling inflation and availability of the Coalition Support one can do is pray to God to have rainfall of dollars over the
Funds (CSF), the SBP came up with an alibi to announce the country to save it from economic disaster. Otherwise, the
lowering of the policy rate by 150 basis points to 10.5 per cent domestic excess demand will inevitably find its way into the
on 10 August. balance of payments and bring about a foreign exchange
It made no economic sense to reduce the policy rate in crisis faster than previously anticipated.
an overheated economy because of a temporary relief to The decision to lower the policy rate will be hailed by the
the budget provided by the windfall of the CSF or a likely- business community because it serves its vested interests and
to-reverse one-month relapse in inflation as recorded in the will be played up by the government to gain political mileage
official consumer price index. Had the government made out of it. However, it will hurt further the majority of the people
a bold effort to raise tax revenue and contain expenditure and the economy through rising prices and will have no
in order to bring the structural budget deficit under control, favourable impact on long-term investment, employment, and
there could be an expectation of a reduction in government growth which depend on a host of complex factors other than
borrowing from the banking system on a durable basis. In that the policy rate. More importantly it sadly proves that the SBP is
context, a lowering of the policy rate to help the private sector not in charge of its monetary policy or its current management
would have made sense. does not understand its role and responsibilities.
The information compendium shows that the economy For several years, the monetary outcome is basically being
has been flooded with money supply generated by excessive driven by the financing requirements of the public sector and
government bank borrowing in the last several years. In FY12 interest rates on government bank borrowing are decided on
alone, public-sector deficit (recorded properly) comes close to political and fiscal policy considerations in Islamabad, rather
about 1O per cent of the GDP and the bulk of it was financed by than on monetary policy considerations in Karachi. Thus, the
borrowing from the SBP and the commercial banks. It added expectation that, once statutorily autonomous, the SBP would
immensely to the already existing overhang of liquidity whose effectively take charge of the country's monetary policy has
impact will continue to be reflected in higher domestic prices, unfortunately not materialised. More importantly, by limiting
rise in imports, stagnation in exports, depletion of foreign the scope of the monetary policy to the announcement of the
exchange reserves, and depreciation of the exchange rate. policy rate determined arbitrarily, the SBP has trivialized the
What was required under the prevailing situation was an role of the monetary policy in macroeconomic management
effort on the part of the SBP to work off the overhang of and undermined the professional standing and statutory
liquidity. As the liquidity was being generated by excessive authority of the SBP as the central bank of the country.
government bank borrowing, the obvious policy conclusion is During 1994-97, legislation was passed to give autonomy
that the SBP should use its professional analysis and statutory to the SBP to regulate the banking system and to formulate
authority vested in it by the SBP Act to persuade/compel the and execute an independent monetary policy on professional
government to limit its borrowing from the banking system. basis without government interference. It was expected that
Without closing the flood gate of government bank borrowing, the legislative reforms will enable the SBP to become de facto
the SBP has lower the policy rate reducing the government's a truly independent central bank that was to ensure, inter alia,
cost of borrowing from the commercial banks and providing adequate flow of credit to the private sector at reasonable
an incentive for expansion in credit to the private sector. The interest rates, with the scope of government borrowing from
consequence will be acceleration in the rate of growth in the the banking system determined residually by the SBP on
net domestic assets of the banking system and addition to sound monetary policy considerations rather than arbitrarily
excess demand in the economy. by the ministry of finance, under fiscal policy compulsions or
Going through the policy statement one gets a contradictory because of the lobbying power of vested-interest groups.
and somewhat confusing message. The SBP analysis of the Faithful adherence to the legislation would have ensured a
underlying economic and financial situation is professional central role of the SBP in the formulation and implementation
of the monetary policy, including determination of the safe
 Chapter 15 Monetary Policy, Savings, and Inflation 425

limits of public-sector bank borrowing, adequate availability and/or heavy rainfall of bank credit were a solution of structural
of credit to the private sector and an appropriate control on unemployment and poverty, by now no country would have
money growth consistent with the inflation target. It also would those problems.
have compelled the goverr:iment to put its fiscal house in order The manipulation of the banking system and of the
through tax reforms and expenditure control. But it was not monetary policy for political ends is not the answer to the
to be. deep-rooted structural economic problems. There is a need
The laws have not been followed in practice either by the for the politicians to pause and ponder and launch a sound
government nor the SBP in the matter of the monetary policy- programme of structural economic reforms to take the country
even if those remain on the books, and, ironically, were even out of its economic quagmire. At the same time, the SBP
strengthened further by the present government to meet IMF should measure up to its de jure responsibilities and use
conditionality. But laws are as good as their implementation its professional expertise and legal authority to carry with it
and the focus of all the parties, including the IMF, should whichever government is in power to let the monetary policy
shift from proposing further amendments in banking laws to and the banking system function on sound professional
effective enforcement of the existing ones. footing to promote larger national interests.
The political leadership should realise that the shortcuts
that come to their minds to address the difficult economic
problems are usually the wrong cuts. If pump priming of an Source: Yaqub, Muhammad, 'Misusing the Monetary Policy',
underdeveloped economy through large-scale note printing The News, Karachi, 12 August 2012.

Box 15.2 originating in the external sector; and (v) expected changes
The Annual Credit Plan and Monetary Policy in net foreign assets. The State Bank, after the legislation
passed in February 1994, has been endowed with exclusive
Aftab Ahmad Khan explains how monetary expansion is powers to regulate the monetary and banking system.
determined each year. It now provides quantitative guidelines about the safe
limits of government borrowing and promptly advises
In Pakistan the framework of regulatory monetary policy is the government when these limits are exceeded. It also
provided by the Annual Credit Plan which is recommended reminds the provincial governments to stay within the limits
by the National Credit Consultative Council (NCCC), a of their ways and means advances. Notwithstanding these
body set up under the aegis of the State Bank of Pakistan additional powers, the State Bank cannot pursue a sound
with the following functions: (i) to review the overall credit monetary policy without the exercise of fiscal responsibility
situation in the country with specific reference to its region- by the Government. Fiscal operations of the government
wise and sector-wise distribution and concentration; (ii) are a dominant factor in determining the monetary outcome
to make recommendations to the government with regard in the country. It is not only through borrowing from the
to monetary and credit expansion within safe limits and banking system for budgetary support that government
distribution of credit among various sectors and regions in impacts on money supply but also indirectly through the
conformity with the socioeconomic objectives and priorities utilization of privatization proceeds, short term borrowings
and targets set out in the Annual Plan; (iii) to set out specific from abroad and credit creation for specialized schemes.
targets for (a) agricultural loans, and (b) small loans to be Pakistan's experience indicates that large fiscal deficits
provided by commercial banks; and (iv) to periodically lead to excessive monetary expansion and often result in
review the progress made in the implementation of its crowding out the private sector. In such situations the room
recommendations and, if necessary, modify or amend its for manoeuvre for the central bank tends to be restricted
previous recommendations in the light of the emerging to attempting to offset its inflationary impact by limiting the
situation. secondary expansion of credit. Fiscal and monetary policies
In determining the safe limits of monetary expansion have not only to be appropriate but mutually supportive.
during a particular year, NCCC takes into account: (i)
projected growth rate of Gross Domestic Product (GDP)
for the year; (ii) the estimated rate of monetization of Source: Khan, Aftab Ahmad, 'Recent Monetary Trends and
the economy; (iii) likely changes in the demand for cash Revised Credit Plan', The News, Business and Finance
balances; (iv) likely changes in prices including those Review, 16 March 1996.

areas that had, prior to the nationalization of banks, not devised each year, according to which the government would
been given appropriate amounts of credit. The NCCC became determine the extent of monetary expansion for the year,
the government's main, if not the only, source of managing and allocated credit to the various sectors of the economy. All
monetary policy. An Annual Credit Plan was-see Box 15.2- rates of return were administered by the government and all
426 Issues in Pakistan's Economy

institutions and players in the money market and in the rest reforms, and the financial sector and monetary policy were
of the economy had to accept the given rates and amounts of no exception ( see Chapters 16 and 17).
monetary expansion and credit. Ashfaque Hasan I<han, in particular, has been one of the
A captive market for Treasury Bills existed on 'tap' (on harshest critics of government financial and monetary policy
demand) and these bills were issued on an ad hoc basis as as it existed prior to the financial sector reforms. He has also
and when the government reql.lired. Commercial banks, most been one of the more vociferous proponents of market-based
of which were nationalized and government owned-hence reform of the financial sector.7 About the structure of the
the 'captive' market-were required to use their liquidity to financial sector aJ?-d the way it functioned between 1972 and
buy these bills at fixed rates of return. Unlike in the period 1991; he writes:
after 1991, the bills were redeemable at any time, making this
aspect of the money market 'inflexible and unstructured' .4 Prior to undertaking financial sector reforms the
Moreover, the government utilized the National Savings hallmark of Pakistan's financial sector has been
Schemes to raise its debt from instruments that had high the direct controls on interest rate movements,
domestic credit controls (bank specific credit
rates of return, causing funds to be moved out of the financial
ceilings and selective credit allocations), high
sector to these savings schemes. reserve requirements, segmented financial
The main mechanisms of monetary policy and management markets, the absence of well-developed securities
between 1972 and 1991 were the control of the volume, cost, markets, underdeveloped banking system, and
and allocation of credit commercial banks serving as captive institutions.
In particular, the policies of imposing ceilings
through the techniques of credit budgeting on interest rates accompanied by directed and
and credit ceilings rather than having recourse rational allocation of credit to 'priority' sectors
to traditional indirect methods of control, like at low rates have led to widespread 'financial
changes in the bank rate and open market repression' in. Pakistan. These policies are seen
operations. Aside from global and sectoral credit to impede financial 'deepening' which, in turn,
ceilings, the instruments used by this policy of weakens an important set of impulses to faster
directed credit control included budget subsidies, economic growth. 8
credit floors, refinancing facilities, together with
the imposition of cash reserves and liquidity Ashfaque Khan 9 and Javed Mahmood identify the following
requirements. 5 adverse effects of the policies that were adopted.
The fiscal requirements of the government, as elaborated in 1. There was an excess liquidity problem as banks, while
the budget each year, used to determine how the government accepting as many deposits as came their way, were not
would manage its credit and debt policy for the year. The able to lend them due to the credit ceilings imposed on
government used to borrow from the State Bank of Pakistan them. Of the amount that banks lent, a large proportion
by selling its ad hoc (on tap) Treasury Bills at a rate of return went in the form of directed credit to subsidized sectors at
of 0.5 per cent per annum. Commercial banks· 'had to invest unprofitable, low rates. Thirty per cent of the deposit base of
at least 30 per cent of their demand and time deposits in GOP banks was to be invested in low-yielding government debt
[Government of Pakistan] paper. The paper that they invested as part of the liquidity ratio and a minimum of 5 per cent
in was also available "on tap" and carried a low rate of return was to be kept in the form of a cash reserve requirement,
of 6 per cent per annum.' 6 which earned no interest. 'Given these 'captive' sources
If the role and objective of monetary policy is to maintain a of funds, the government could repress the interest rates
relatively stable economic environment such that investment payable on its borrowing from the commercial banks.
and growth take place at a regular pace, and there is price Thus, the combination of credit ceilings and low return on
stability, it would be fair to say that the dirigiste policies prior government debt reduced the returns on asset portfolios.
to 1991 worked fairly well. The government had pursued Furthermore, after meeting the credit ceilings a certain
an economic growth strategy by controlling interest rates, proportion of funds remained unutilized and were not
directing credit to priority sectors, and obtaining cheap earning any return which led to the emergence of an
credit from the banking sector for budgetary support. The excess liquidity problem. Consequently the banks were
growth rate in GDP averaged 4.8 per cent annually during the discouraged to. mobilize domest.ic savings through their
1970s, rising to 6.5 per cent across the 1980s. The inflation vast network of branches: 10
rate was more than 12 per cent on average in the 1970s, 2. Non-performing loans on political and uneconomic
but was due not to monetary mismanagement or excessive grounds affected the profitability of commercial (mainly
monetary expansion, but largely to factors not in the control nationalized) banks as they could not offer a high rate of
of the government, such as the quadrupling of the oil price return on deposits, hence discouraging these deposits ( see
and numerous crop failures (see Chapter 7 on the Bhutto Chapter 14).
period). During the 1980s, the inflation rate-despite very 3. Non-bank financial institutions (NBFis), which were not
high budget deficits, often in excess of 8 per cent of GDP- under the supervision of the SBP, were able to mobilize a
remained quite low, at an annual average of only 7.3 per larger amount of financial savings than banks and were
cent. Nevertheless, conventional wisdom in the 1990s went also able to override the credit ceilings, thus undermining
out of its way to deride almost all the policies prior to the the SBP's targets and plans.
 Chapter 15 Monetary Policy, Savings, and Inflation 427

4. Since interest rates on government savings instruments autonomy and accountability and allowing
were higher than those offered by commercial banks, the private banks to enter the market; and (vf)
'segmentation' of the financial market took place. This improve prudential regulations and supervision
disparity also created an anomaly in the interest rate of all financial institutions. 12
structure.
5. A disintermediation of the financial sector took place due One of the earlier measures taken as part of the reforms
to 4-above, as investors and savers shifted from banks to was the discontinuation of the system of credit ceilings after
the higher-interest National Savings Schemes. 1 July 1992. Bank credit was then regulated by changes in
6. The government of Pakistan's debt structure was of a the bank rate and the liquidity ratio, by setting a credit-
short-term maturity; requiring regular outflows and heavy deposit ratio (CDR)-see below-by setting maximum and
refunding (see Chapter 10). minimum lending rates, and most importantly; by a system _
7. As a result of the above structure, the government did of open market operations.
not have much control over the issuance of debt, since One of the principaLaims of the government on the
new issues were mainly demand driven. Moreover, since 'aav.ke of the IMf_and-Wol'kl.-Bank-has--beenJo_estabilsh"a-
the Treasury Bills were redeemable at any time, the rmarket-determint;!Lmo,n_ey_!TI_arkeJ, where instruments in
debt management programme became infl~xible and primary and secondary markets are trad~d to regµlat_e money,'"
unstructured. ---eredit;-and1he interest rate (see Box 15.3 ). The government
8. 'There was a lack of cash management control deriving started the auc:ticmirig"cifrreasury Bills in April 1988, but the
from the encashments feature on government of Pakistan amounts were very small and commercial banks with excess
debt. This led to an unpredictable and volatile pattern liquidity were ready buyers of the bills. The programme did
of encashment which complicated cash forecasting and not really have much of an impact on any of the important
reduced the government's ability to manage this cash variables in the money market. With a very low rate of return
balances.' 11 on Treasury Bills not reflecting the market rate, and a higher
It was this old structure with its numerous problems and return on National Savings Scheme instruments, it is not
consequences that came under attack by the IMF and the surprising that there were no takers of the Treasury Bills.
World Bank. These two organizations suggested a drastic In 1991, the government started a full-fledged system
restructuring and reorientation of the financial system, to of auctioning of government debt and allowed the rate of
replace it with a more market-oriented structure. The reforms return on Treasury Bills to rise from the unrealistic 6 per
were to: cent where it was fixed earlier, to a more realistic 13 per
cent. Other, long-term instruments in the shape of Federal
(i) remove distortions and segmentation of the Investment Bonds (FIBs) with a maturity of three, five, and
financial markets by creating a homogeneous ten years were introduced (see Box 15.4). With the removal
market for government debt instruments in of the credit ceilings and with higher rates of return, banks
which all individuals and institutions can became interested in these instruments. They also began to
participate; (ii) switch from an administer_ed encourage deposits as their ability to lend and invest was
interest rate setting to market based interest rate now dependent on the amount of depo·sits they were able to
determination by indicating a regular auction generate. Appendix 15.2 describes the main features of the
programme of government debt; (iii) allocate money market in Pakistan.
credit in response to market forces by gradually
eliminating the directed credit schemes ·and From the initial attempts of auctioning Treasury Bills in
abolishing the subsidized credit schemes; 1991 onwards, the State Bank of Pakistan now feels that
(iv) create and encourage the development of the auctioning of Treasury Bills is fully integrated with open
secondary market for government securities- market operations. From January 1995, according to the State
absolutely essential for the success for the auction Bank 'open market operations became the major instrument
programme of government debt; (v) strengthen of market based monetary management in the context of a
the health and competitiveness of the banking liberal CDR'P Instead of regulating the volume of money
system by recapitalizing and restructuring the through the allocation of credit and the manipulation
nationalized commercial banks, increasing their and limitation on how much banks should lend, the State

Box 15.3 secondary market has brokers, dealers, and banks which
The Primary and Secondary Markets buy the securities and then sell them to investors. The
secondary market is meant to provide liquidity and a pool of
The financial sector is composed of the money market and investors to whom new issues are re-sold.
capital markets, with primary and secondary dealers. Both markets are mutually reinforcing, as the primary
market is necessary to provide new issues of securities, and
The primary market consists of investment banks, brokers, the secondary market is essential for issues to be sold and
dealers, the State Bank of Pakistan, commercial banks, and to provide liquidity to the holders of the securities.
individual investors who conduct sales of new issues. The
428 Issues in Pakistan's Economy

Box 15.4 The purpose of their introduction was three-fold. Firstly, it

was to provide an outlet for provident funds which were not
Money Market Instruments
allowed to invest in Defence Savings Scheme and National
The following extract describes the nature of two money Savings Certificates. Secondly, it would establish a yield
market instruments: Treasury Bills and Federal Investment curve for Government of Pakistan debt which would reflect
Bonds. market risks, and, thirdly, it would provide the Government
of Pakistan with a sizeable stock of permanent debt. FIBs
Treasury Bills pay 13, 14, and 15 per cent p.a. on bills maturing in 3, 5 and
More familiarly known as T-Bills, these are negotiable, 1O years, respectively. Since returns on FIBs are taxable, this
non-interest bearing securities, with an original maturity of sort of rate structure reduces the net debt servicing burden
one year or less. In Pakistan, presently, the maturity is six to the Government of Pakistan without sharply reducing
months. They are issued by the SBP with a face value of the posted rate of return. The rate structure also allows
Rs. 100 and in minimum denominations of Rs. 1000 with provident funds to be invested in securities with returns
multiples thereafter. SBP now also can hold the bills in similar to those from NSS [National Saving Schemes] and
Book Entry Form known as the Subsidiary General Ledger DSC [Defence Saving Certificates], as well as establishes
Account (SGLA). a positively sloped yield curve which should encourage
The SBP invites bids for the sale of treasury bills every the term extension of debt. FIBs are auctioned every two
fortnight. Bidders are required to indicate a price at which months. These bills are issued at a face value of Rs. 100
they will buy the bills along with the quantity wanted. The and in multiples of Rs. 1000. As in the case of T-Bills,
auction is open to individuals, institutions, and corporations investors are required to quote a price at which they will be
including banks and DFls and the bids must be made to willing to buy the bonds. Separate bids are made for the
the SBP through one of the primary dealers. Successful purchase of bonds of different maturities and prices. (Upon
bidders are required to deposit the requisite amount, for the introduction of FIBs, SBP did not accept tenders at a
the settlement of the accepted tender, through their primary discount. The banks, especially the NCBs, were quite willing
dealers. Scheduled commercial banks are allowed to to accept a cut in their rates of return since FIBs presented
invest in treasury bills and these may be counted towards an excellent opportunity through which they could mop
their liquid asset requirements. T-Bills can be held in the up their excess liquidity. Shortly after, SBP imposed a
form of stock certificates, or as uncertificated bonds at the maximum limit upon holdings of FIBs regarding the NCBs.
SBP. Technically, T-Bills can also be traded on the stock This resulted in subsequent bids being placed at a discount
exchange. T-Bills are always issued at a discount from face or at par). Profit on FIBs is paid bi-annually from the date of
value, and the amount of the discounts is determined in issue, and a withholding tax is levied on any profits which
T-Bills auctions held by the SBP each time it issues new bills. might accrue from such an investment. Nevertheless, profits
At maturity, bills are redeemed by SBP for full face value. earned on investment in FIBs by charitable trusts are exempt
The investors thus earn a return because they receive more from payment of income tax. FIBs can also be traded on the
for the bills at maturity than they paid for them at issue. This stock exchange.
return is treated as ordinary interest income and is taxable.

Federal Investment Bonds (discontinued in June 1998

and replaced by Pakistan Investment Bonds PIBs) Source: Mahmood, Javed, 'Money Markets in Pakistan:
These bonds are negotiable long term Government of Concepts, Instruments and Operations', Journal of the Institute
Pakistan debt instruments of 3, 5, and 10 year maturities. of Bankers in Pakistan, vol. 58, no. 1, 1992, 39-42.

Bank has gradually moved towards an increasing use of limit and removed the cap entirely in March 1995. This
the market mechanism. The direction is one in whlch open step was considered to be an important move towards
market buying and selling of government securities, along making monetary and credit policy more market oriented as
with the determination of the interest rate, becomes the commercial banks can now charge any rate they want and
main instrument of monetary policy. Henceforth, the federal their clients agree to. The State Bank, however, still controls
government is supposed to raise funds at the market rates the lending rate for concessionary finance for exports, the
of return through the auctioning of government securities. sale and purchase of locally manufactured machinery, and
See Appendix 15.3 for a good account of the changes agricultural Joans to small farmers. In all other areas, each
implemented. bank can charge its own lending rate. The rationale for this
Another important measure taken under the aegis of move on the part of the State Bank, as it has been with
the reforms was the removal of the maximum lending rate almost all steps since 1992, is to allow the rate of return to
which banks used to charge their clients. Before 1995, the be determined by the supply and demand of loanable funds.
maximum lending rate that had been imposed by the State However, see the very interesting excerpt from the paper by
Bank of Pakistan, ranged from 17.5 to 22 per cent between Joseph Sliglitz and Andrew Weiss, on credit and the law of
I 993 and I 995. The State Bank decided not to impose any supply and demand (Box 15.5) and (Box 15.6).
 Chapter 15 Monetary Policy, Savings, and Inflation 429

Box 15.5 Similarly, as the interest rate and other terms of the
Credit and the Law of Supply and Demand contract change, the behavior of the borrower is likely to
change. For instance, raising the interest rate decreases
With the growing desire to let the market determine the price the return on projects which succeed. We show that higher
for credit, i.e. the interest rate, it is believed that the forces of interest rates induce firms to undertake projects with lower
supply and demand would allocate credit at an appropriate probabilities of success but higher payoffs when successful.
price. However, a pathbreaking article by Joseph Sliglitz and In a world with perfect and costless information, the
Andrew Weiss argues that, despite excess supply or demand bank would stipulate precisely all the actions which the
for credit, the interest rate will not automatically fall/rise to clear borrower could undertake (which might affect the return to
the market, and credit may in fact be rationed. the loan). However, the bank is not able to directly control
all the actions of the borrower; therefore, it will formulate the
Why is credit rationed? Perhaps the most basic tenet terms of the loan contract in a manner designed to induce
of economics is that market equilibrium entails supply
the borrower to take actions which are in the interest of the
equalling demand; that if demand should exceed supply,
bank, as well as to attract low-risk borrowers.
prices will rise, decreasing demand and/or increasing
For both these reasons, the expected return by the bank
supply until demand and supply are equated at the new may increase less rapidly than the interest rate; and, beyond
equilibrium price. So if prices do their job, rationing should
a point, may actually decrease.
not exist. However, credit rationing and unemployment do But the interest rate is not the only term of the contract
in fact. They seem to imply an excess demand for loanable which is important. The amount of the loan, and the amount
funds or an excess supply of workers. of collateral or equity the bank demands of loan applicants,
One method of 'explaining' these conditions associates will also affect both the behaviour of borrowers and the
them with short- or long-term disequilibrium. In the short term
distribution of borrowers. We show that increasing the
they are viewed as temporary disequilibrium phenomena; collateral requirements of lenders (beyond some point) may
that is, the economy has incurred an exogenous shock, decrease the returns to the bank, by either decreasing the
and for reasons not fully explained, there is some stickiness average degree of risk aversion of the pool of borrowers;
in the prices of labour or capital (wages and interest or in a multi-period model inducing individual investors to
rates) so that there is a transitional period during which undertake riskier projects.
rationing of jobs or credit occurs. On the other hand, long- Consequently, it may not be profitable to raise the interest
term unemployment (above some 'natural rate') or credit rate or collateral requirements when a bank has an excess
rationing is explained by governmental constraints such as demand for credit; instead, banks deny loans to borrowers
usury laws or minimum wage legislation. who are observationally indistinguishable from those who
In equilibrium a loan market may be characterized by receive loans.
credit rationing. Banks making loans are concerned about It is not our argument that credit rationing will always
the interest rate they receive on the loan, and the riskiness characterize capital markets, but rather that it may occur
of the loan. However, the interest rate a bank charges may under· not implausible assumptions concerning borrower
itself affect the riskiness of the pool of loans by either: 1) and lender behaviour....
sorting potential borrowers (the adverse selection effect); or We reserve the term credit rationing for circumstances
2) affecting the actions of borrowers (the incentive effect). in which either (a) among loan applicants who appear to
Both effects derive directly from the residual imperfect be identical some receive a loan and others do not, and
information which is present in loan markets after banks the rejected applications would not receive a loan even if
have evaluated loan applications. When the price (interest they offered to pay a higher interest rate; or {b) there are
rate) affects the nature of the transaction, it may not also identifiable groups of individuals in the population who,
clear the market. with a given supply of credit, are unable to obtain loans at
The adverse selection aspect of interest rates is a any interest rate, even though with a larger supply of credit,
consequence of different borrowers having different they would.
probabilities of repaying their loan. The expected return The law of supply and demand is not in fact a law,
to the bank obviously depends on the probability of nor should it be viewed as an assumption needed for
repayment, so the bank would like to be able to identify competitive analysis. It is rather a result generated by the
borrowers who are more likely to repay. It is difficult to underlying assumptions that prices have neither sorting nor
identify 'good borrowers', and to do so requires the bank to incentive effects. The usual result of economic theorizing:
use a variety of screening devices. The interest _rate which that prices clear markets, is model specific and is not a
an individual is willing to pay may act as one such screening general property of markets-unemployment and credit
device: those who are willing to pay high interest rates may, rationing are not phantasms.
on average, be worse risks; they are willing to borrow at
high interest rates because they perceive their probability
of repaying the loan to be low. As the interest rate rises, the Source: Sliglitz, J. E. and Andrew Weiss, 'Credit Rationing
average 'riskiness' of those who borrow increases, possibly in Markets with Imperfect Information', American Economic
lowering the bank's profits. Review, June 1981.
430 Issues in Pakistan's Economy

Box 15.6 condition for successful economic growth and development'.

Financial Liberalization and Some Possible Rather the experiences of the countries that have undertaken
financial reforms show that a stable macroeconomic
Consequences environment is an essential condition for the reforms
The United Nations Economic and Social Commission for Asia to function, as 'reforms carried out against an unstable
and the Pacific (UNESCAP) has criticized the imposition of macroeconomic background can make that instability worse'.
Structural Adjustment Programmes in the region. A liberalized system may lead to a socially unacceptable
Increased reliance on the market mechanism has not led to distribution of credit. Disadvantaged groups may not have
a complete resolution of market failures in the developing access to credits through regular channels for the following
countries, their zeal for financial sector reforms notwithstanding, reasons: (a) remote physical location; (b) rules on collateral
remarks the United Nations Economic and Social Commission which they cannot meet; (c) the small amount of credit they
for Asia and the Pacific (UNESCAP) in its recent report. apply for being inefficient for banks to handle; or (d) Interest
Such zeal might land them in greater macroeconomic rates beyond their means.
instability particularly through the opening up of capital These constraints have direct implications for the
markets, UNESCAP has warned, while characterizing these achievement of social goals and for income distribution,
as the 'new battlegrounds for savings' where market players UNESCAP points out.
'will become a new class of stateless legislators' and with the One consequence of a more market-based system is
power of the purse, they will check governments' ability to an increased exposure to various forms of instability. For
tax, spend, borrow or depreciate their debts through inflation. example, the new easier entry for financial institutions,
The degree to which the financial sector in a country including banks, provided for in the liberalization process
actually performs its functions is directly related to its level can lead to a proliferation of financial institutions. They may
of development. Giving an example of market failure, the accumulate unbalanced portfolios of assets and liabilities,
report points out that banking industry in the Third World is an unsustainable set of non-performing loans and so may
generally characterized by oligopolistic structure. Thus, for collapse-as in the Philippines.
example, the share of the four largest banks in the total assets Then there is the instability generated through the capital
of the banking system was as high as 60 to 65% in 1987 in markets. These markets are, however, well-known for booms
Indonesia, Malaysia, Taiwan, and Thailand. and busts largely unrelated to market fundamentals. Such
While discussing motivations behind designed and directed movements are often caused by speculative runs and recently
credit programmes, controlled interests rates, etc. the UN have tended to be exaggerated by the activities of investment
agency recalls that the existing or emerging banking and funds which make decisions based on computer programme
financial institutions in the private sector catered mostly for signals.
the needs of the urban sector, whereas most of economies In Thailand, for example, the sharp decline in December
of the region were traditionally rural-agricultural with small 1994 was imputed to have been started by sales by foreign
urban sectors. (In Pakistan, a big foreign bank with newly institutional investors but exaggerated by sales by local funds.
established branches in Pakistan persistently refuses to UNESCAP has, in this context, drawn the member countries'
accept agricultural assets as collateral and encourages attention to two issues of very grave nature:
opening of foreign currency accounts by offering credit at (a) Increasing recourse to currency substitution, whereby the
the concessional rate of 14%!) Hence, the establishment debts and savings in local currency in some developing
of specialized financial institutions and, in some cases, the countries are being replaced by debts and savings in
nationalization of commercial banks. foreign currency. This reduces the control of a Government
As the financial sector is closely interrelated with the real on its own money supply and the effectiveness of any
economy of a country (and with the conduct of its monetary changes it tries to induce; and
and fiscal policies), the report has stressed, 'its reform (b) How much of the expanded activity on stock markets
should ultimately have a positive impact on the real economy actually relates to new physical investment, rather than a
influencing, inter alia, the growth and structure of production churning of funds or a refinancing of existing debts.
and of trade'.
The mobilization and allocation of savings through the 'While this may be a temporary phenomenon as enterprises
financial systems are intermediate processes: Their role is and investors adapt to their new freedom and expanded
ideally to keep the costs of borrowing financial resources low menu of opportunities, it does call into question the impact
while encouraging, or at least not discouraging, savings. of financial reforms on the performance of the real economy
It is contended that this balancing act is best performed and the need to encourage direct foreign investment when
through a competitive market mechanism. However, the possible,' the report remarks.
report argues, this mechanism 'has limitations' as market In the process of globalization of financial sectors, it further
failures are not unusual in the finance area. observes that the degrees of freedom of smaller countries to
Apart from this, it adds, 'some new concerns have arisen make independent policy decisions are becoming severely
connected with increased inherent instability, more demanding restricted as both domestic and foreign concerns will react
forms of transparency, accountability, and supervision and a quickly to the signals given. Moreover, it adds, changing
more indirect and difficult conduct of monetary and exchange circumstances or policies of the m_ajor economies can create
rate policies'. large reactions in small economies irrespective of their own
Citing 'contradictory experiences' of Japan, South Korea, policies and position.
China, as well as South Asian countries, it wonders whether
financial liberalization 'is either a necessary or sufficient Source: DAWN, 21 May 1995.
 Chapter 15 Monetary Policy, Savings, and Inflation 431

As has been shown above, the system of credit ceilings was Although the auctioning system for Treasury Bills and
discontinued after July 1992 and replaced by a credit-deposit Federal Investment Bonds (FIBs )-the auctioning of FIBs
ratio (CDR), a ratio that the government has changed and was discontinued in 1998 and were replaced by Pakistan
liberalized over time. While the government claimed that this Investment Bonds (PIBs)-has come a long way since its
was an important step towards indirect methods, Ashfaque inceptipn in 1988 and a primary market for government
Khan argues correctly that 'qualitatively, a shift from credit debt has developed, the lack of a well-functioning secondary
ceilings to CDR does not make any difference, with the market has been a cause for concern. Since Treasury Bills
exception that the extension of credit is now linked with the and FIBs are non-redeemable before maturity, the secondary
deposit mobilization efforts of the commercial banks'. 13 The market should provide a market-based avenue of liquidity
CDR was not applicable to a number of sectors related to the for holders of these government securities. Moreover, 'if
government's directed credit programme, and moreover, it the period between the subsequent primary auctions is
applied only to commercial banks and not to NBFis. Ashfaque long enough, the secondary market also· provides a channel
I<han considered the shift from credit ceilings to CDR to be t.hrough which the buyers can have access to securities at all
'not in the spirit of financial liberalization, and therefore, times. In other words, the secondary market enables investors
needs to be gradually phased out' . 14 The credit deposit ratio to exchange securities for cash at any time they wish.' 17
was subsequently abolished on 30 September 1995. Ashfaque Khan 18 and Aftab Ahmad Khan 19 identify a
The abolition of the CDR was another important step on number of reasons why the secondary market has not
the road towards a fully market-based structure of credit developed:
availability in the economy. According to one analyst, by
1. A lack of trust between financial institutions and the
taking this measure, the 'State Bank of Pakistan has made
Ministry of Finance. The Ministry of Finance (MOF),
a decisive beginning towards lessening its dependence on
acting on behalf of the State Bank, 'is perceived to be
quantitative credit controls and placing reliance on market
fixing prices of securities in an arbitrary fashion in order
based instruments of monetary policy. [The] abolishment ...
to keep debt servicing costs low, thereby hindering the
will release an additional large bulk of amount for lending to
functioning of the markets, whereby the MOF suspects
the private sector .. .'. 15 Instead of regulating the volume of
that Primary Dealers are colluding and 'fixing' the interest
money through, amongst other mechanisms, the CDR, the
rates' .20
State Bank now makes more use of the market mechanism.
2. The government has taken arbitrary and inconsistent
As far as commercial banks are concerned, they will (at least
actions in accepting and rejecting bids, and it is believed
technically) be allowed to invest their entire portfolio after
that fiscal considerations, rather than monetary policy,
allowing for the liquidity ratio and other reserve requirements
have been determining the debt management strategy.
imposed by the State Bank. This measure should inject
3. There are a few very large and a number of small players
a large amount of credit into the market, possibly (if the
in the secondary market, who trade in a limited number
market is allowed to function) having a downward impact on
of securities.
the interest rate structure. While a lower rate of interest may
4. Other government paper, which is vastly superior to
have positive impacts on loans and investment, it may also
Treasury Bills and FIBs, in terms of rate of return and tax
result in an excessive expansion of credit, possibly affecting
exemptions, has reduced the attractiveness of the latter
inflation. One of the most noticeable impacts of this policy
two, and hence of the secondary market.
has, indeed, been the substantial lowering of interest rates
in Pakistan, which, in 2003, were at historic lows. With Banks are the main holders of Treasury Bills and FIBs for
financial sector liberalization and deepening and with such the following reasons:
low interest rates, consumer financing prospered immensely.
However, towards the end of the 2000s, the rate of interest Firstly, to fulfil the statutory requirements under
started to rise again, and touched around 16 per cent. the Banking Companies Rules to keep in their
A large number of reforms have taken place in tl1e financiai own portfolio Approved Government Securities
sector since I 992, as Appendix 15 .1 shows, and include the for maintaining the Statutory Liquidity Ratio
which is at present 35 per cent of demand
opening up of the banking sector to the private sector; the
and time liabilities of each banking company.
decontrol of interest rates from government intervention; Secondly, to earn a regular interest income on
much greater reliance on market forces to determine their investment in these two securities which
monetary policy; an improvement in the quality of financial accrue to them after every six months. Thirdly,
intermediation and an expansion of the financial sector; and to raise short-term funds against their I-Bills
an increase in financial institutions. The reforms have helped and FIBs holdings under Repo Contract from
banks to increase their profits, and a great deal of financial other Approved Dealers and also sometimes
deepening has also taken place. Nevertheless, there are at from their non-bank clients. Fourthly, when
least two areas where expected reforms have not taken place. the funds are not available in Interbank Call
Money Market and Repo Market, the banks
Interest rates, for all practical purposes, are still controlled
avail cash accommodation against their
by the government-see Box IS.I-and a secondary market, auctioned securities holdings from SBP under
supposedly a key factor in a well-functioning, market- the prescribed 3-Days Repo Facility. 21
oriented money market, has not developed fully.
432 Issues in Pakistan's Economy

The rate of return structure is as yet not truly reflective 15.2 MONEY SUPPLY AND MONETARY
of market conditions. Directed and concessionary credit
still form a considerable part of the total credit available EXPANSION
each year. This is despite the fact that the government of
Pakistan, in its Economic Survey for 1994/5, claimed that In Section 15.1, we saw how monetary policy and monetary
'the interest rate structure underwent changes so that it is management worked in Pakistan, and how they have evolved
ultimately determined by free market forces'. 22 According to over the years, especially since the early 1990s following
conventional wisdom, all sorts of direct controls on interest the financial sector reform programme. In this section, we
rate movements must be removed, and the market, left to will briefly look at the numbers and trends in monetary
itself, is supposed to set the right price of borrowing money. expansion and credit. This section will also help identify the
However, because of government intervention in the credit link between money supply and inflation, a theme discussed
market, different sets of rates of return exist, which do affect below. Tables 15.2-15.5 show different features and growth
the functioning of a (free) money market. In 1991, when the rates of important variables related to the monetary sector.
government started its open market operations by issuing Total monetary assets in an economy consist of currency in
debt in the form of Treasury Bills and FIBs, banks found FIBs circulation, which is the currency issued by the State Bank
very lucrative compared to other investment instruments. of Pakistan, minus the amount held as cash by the banking
(See Box 15.5, which presents· an extract from one of the sector. Adding demand deposits and other deposits with the
most quoted papers on credit rationing, and argues that the State Bank, we get the measure of money supply, or Ml. Table
free market may not automatically determine the best price 15.2 shows the trends in the basic components of Ml over
for credit, i.e. interest rate.) the last decade, as well as that for total monetary assets, M2.
Banks had accumulated a great deal of excess liquidity, Ml is constituted almost equally of currency in circulation
and a remunerative government-guaranteed investment in and demand deposits. M3, or broad money, includes M2
the form of the FIBs gave banks somewhere to put their idle (and therefore Ml as well), in addition to NDFC Bearer
funds. Also, after the end of the credit ceilings, banks were Certificates, deposits in National Saving Schemes and the
motivated to mobilize more deposits in order to be able to deposits of the Federal Bank of Cooperatives.
lend/invest more, as allowed by the CDR. In order to see the causes of the increase in monetary
One of the reasons why banks were encouraged to invest assets, we turn to Table 15.3. Domestic credit expanded a
in FIBs was to replace the government's short-term debt by a great deal between 1993 and 1998 with private sector credit
longer- and medium-term debt instrument. The government taking the lead after which it has slowed substantially.
also believed that these banks would develop a secondary Government sector borrowing for budgetary support from the
market and sell the instruments to the non-banking sector. banking sector has grown in leaps and bounds. The annual
This did not happen for the reasons listed above, but also changes in different definitions of money are shown in Table
because 'banks were building up FIB inventories simply for 15.4 and make an important contribution to the debate about
the purpose of earning a fixed interest income which was whether 'inflation is always and everywhere a monetary
payable every six months' .23 The government was then forced phenomenon' discussed later in this chapter.
to intervene and impose a ceiling on banks investing more Table 15.5 gives us some evidence about the process of
than 15 per cent of their liabilities in government paper of financial intermediation/disintermediation in the financial
more than one year's maturity. sector. fi.n the 1980s, there was a shift away from time
There has been a continuous differentiation in the rates deposils and towards National Saving Schemes as they
of return on government debt instruments, and ironically, in offered a far better rate of return. Consequently, there was
the past, the nominal and effective rates of return on short- a decline in the ratio of bank deposits to GDP, with demand
term government debt instruments have often been much and time deposits falling from 28. 7 per cent of GDP in 1986/7
higher than on long-term debt (see Table 15.1 ). This has been to 21.5 per cent in 1990/1. Time deposits (TD) fell from 36.1
a serious anomaly in the debt structure which should have per cent of monetary assets (M2) in 1985/6 to 25.3 per cent in
been based on long-term debt rather than on short-term six- 1989/90, as people started shifting their deposits from banks
month Treasury Bills ( see Chapters 10 and 11 ). S. A. Meenai to higher-interest-earning sources (Table 15.5). In this period
and Javed A. Ansari, in Money and Banking in Pakistan; present the rise in the Ml/M2 ratio also shows the presence of high
a severe criticism of the market-based monetary policy liquidity in the system, rising from 63.9 per cent in 1983/4 to
followed since 1988 in the era of financial liberalization. They 74.7 per cent in 1989/90)
argue that the State Bank has 'lost control over the financial
system', and that credit planning has become 'meaningless'.
They count 13 major problems that have arisen on account 15.3 INFLATION AND ITS CAUSES
of the liberalization since 1988 and are unabashedly critical
of the subservience of the State Bank and of all governments Pakistan's inflation rate over the years has been an enigma
since 1988. 24 to most analysts. It has historically been rather low ( see
Table 15.6). A mere 3.3 per cent across the 1960s, it rose to
11. 9 per cent on average in the 1970s, and fell again to an
average of 7.5 per cent in the 1980s. Only since the early
1990s did inflation become a matter of concern, but then
again it fell markedly at the end of the 1990s to around 3 per
 Chapter 15 Monetary Policy, Savings, and Inflation 433

Table 15.1
Pakistan: Selected Financial Instruments: Mid-1990s

Description Rate of return Tax advantage Source limits Comments

Foreign exchange instruments

Not more than Exempt from No questions Banks are obliged
Foreign Currency Accounts (FCAs): Time (3, 6, 24,
and 36 months) and demand deposits
LIBOR plus¾, f, ½1 wealth and income asked about to turn over foreign
points for time taxes source of foreign exchange to SBP in
denominated in foreign exchange in domestic
deposits with exchange exchange for PRs at
banks. Practically no limitations on who can own
maturities equal to/ rate prevailing that day.
I these accounts. No restrictions on transfer of
less than 1, 2, and 3 SBP provides partial
interest and capital overseas.
years, respectively. exchange risk cover.

Foreign Exchange Bearer Certificates (FEBCs): The amount payable Exempt from No questions Traded in secondary
Three-year rupee obligations of the federal in PR is 114.5%, wealth and income asked about market at a premium

'
I government that can only be purchased with
foreign exchange. Can be encashed at any time in
either PRs or foreign exchange at the prevailing
official rate. Practically no restrictions on overseas
transfers. Similar to a zero-coupon bond in the
sense that interest is paid at maturity or at time of
131% and 152% of
the face value after
one, two, and three
years. Interest not
prorated within a
year.
taxes source of foreign
exchange
(recently at 6.5%) as
a result of remaining
foreign exchange
restrictions. Both
residents and non-
residents can use
encashment for each completed one-year period. secondary market.

Dollar Bearer Certificates and Foreign Currency LIBOR plusf. Exempt from No questions
Bearer Certificates (DBCs and FCBCs). One-year wealth and income asked about
dollar and other currency (DM, yen, and sterling) taxes source of foreign
obligation of the federal government. Can be exchange
encashed in PRs and foreign exchange at
prevailing official exchange rate. No restrictions on
overseas transfers.

Selected rupee denominated instruments

Special Savings Certificates (SSCs): Three-year Interest on these Income from both Registered Until discontinued,
obligations (registered as well as bearer) of the instruments is paid Registered and Certificates are Khaas Savings
federal government introduced in February 1990 semi-annually and Bearer Certificates only open to Certificates constituted
They were introduced to replace the Khas must be drawn on is free of income purchase by the most important
Deposits Certificates/accounts that were due dates. Interest tax. Bearer individuals and source of non-bank
discontinued by the authorities on the same date. rates are 11.5% Certificates are also local bodies, but budgetary financing.
The certificates are issued under the auspices of and 12.5% p.a. for free of zakat, while there is no upper However, the Special
the Central Directorate of National Savings and first four payments for Registered limit on investment. Savings Certificates
marketed by scheduled banks, National Savings and 14% and 15% Certificates zakat is have not proven as
Centres, and post offices. There are many other p.a. for last two deductible for the popular, since their
types of savings scheme with characteristics payments for Bearer encashment year. return is somewhat
similar to the SSCs. and Registered lower and corporate
Certificates, bodies are excluded.
respectively.

Market Treasury Bills {TBs): Six-month obligations Rate of return of For personal No restrictions. Despite recent moves
of the federal government introduced in March most recent auctions income tax However, to make rates more
1991 to replace (together with FIBs (see below)) was in the order of purposes, income secondary market flexible, these rates
other instruments for bank financing (e.g. ad hoc 12% p.a. from TBs is taxed in TBs is still are controlled by the
and on-tap Treasury Bills) and non-bank financing at a flat 10% underdeveloped. government via the
of the budget. The rate of return is determined at withheld at source. binding credit/deposit
an auction held approximately every 25 days. TBs are exempt ratio.
from zakat.

Federal Investment Bonds (FIBs) are long-term Rates of return Same as TBs Same as TBs
(3-1 O years) obligations of the federal government have more or less
introduced to replace instruments that were being remained at their
discontinued. As for TBs, rates of return were to coupon rate, which
be determined at regularly scheduled auctions. 13% and 15% for
three- and ten-year
bonds, respectively.

Source: World Bank, Pakistan: Country Economic Memorandum FY93, Report No. 11590-Pak (Washington DC: World Bank, 1993).
434 Issues in Pakistan's Economy

cent in the early 2000s across until 2007/8, when it rose very
c_Q >, substantially to as much as 25.3 per cent in August 2008,
Q)~ '-io N N C') "<I" co N co
.E
c - Q)-...,....
0 ::i:.: 0 ~ I'- 0) 0 0 N N co CX) 0 averaging out at 21 per cent for the fiscal year 2008/9. The
::i:::i:C.:s, N N C':) C':) C':) C':) N N C':)

ui inflation rate was in double digits for almost the entire period
C') 0
ES >, 0)
0)
0) C') CX)
C') I'- co
"<I"
C')
0 co N "<I" 0
N "<I" C') "<I" I'-
C') I!) co 0 C')_
of the Pakistan People's Party government, which came in
N
~~~~o
.... 0 +,....
C') ~ a5
0 N C')
C') (0 0 0 (0
I!) 0 CX) 0 N co
to power in March 2008. Different theories of inflation (see
C:C::i:~t::.. I'- CX) 0) o_ N__ N__ "<I"_ l!l. "':. Appendix 15 .4) give different reasons for why inflation
~ ~ ~ ~ ~ ~

ui exists, but even though Pakistan's case does cause perplexity,

-"'
C there has been insufficient work on the reasons why prices
"'
.0
rise as they do.
vC".la:>NCOl'-l!l"</"CO
C') I'- I!) CX) I ! ) ~ I'- I!) I!) ~
~qqa:>_l!l.qv_~-~
C
0 Akhtar Hossain, examining historical trends, concludes
N l!l l!l N CX) 0 N v l'- E
0) 0 "</"NI'- N ~ l!l l!l
,.... ,.... C\I C\I,....,...,....,....
that 'in Pakistan, real money balances are found to contribute
"iii
0
C.
to an acceleration of inflation, while the bond-financed
Q)
"O government expenditure is found to have a negative effect
"O
,-....,...(').,...(Y')(O"Q"COCO C on the acceleration of inflation for 1961-88'. 25 After the
O)N~0C')a:>Nl!ll'-
Vl!ll'-a:>vl!l~vo "'"'
C high fiscal deficits of the late 1980s, however, high inflation
C\i'co~col'-·comor--:- 0
1!) 0) v CX) v ~ v ~ N
NNC')C')"</"l!ll!lCOI'- ~ was considered to be a key consequence of the irresponsible
·c:N policies of the government.
"'~ While Akhtar Hossain's analysis shows how money affects
CX)O)O)~~C')C')NCX) 0
C0C')0l!)C')-.;j"C')C')C')
l'-~01!)(')00-.;/"CX)
cii
C
inflation, the work by Jones and Khilji 26 and by Navqi et al. 27
a5 C'i a5 C'i C'i
l!lNvva:>vC':JCOl'-
o
co en · ~
0
argues that this is not the case, According to Naqvi et al.
C".lvvvvcol'-1'-a:> E
.l!l money supply does not exert changes in the
.5
£i price level. The very small size of the coefficient
C
Q) of the money supply variable and its statistical
v l!l a, l!l I'- l!l I'- l!l l!l
l!l00l'-O)~ml'-l'- E .c insignificance contradict the simplistic
LOLO.,...C\10).,...C")CO.,... C
cii c0
OONl'--NOO>l!)v"m
e, notion held by some people in Pakistan that
cooomovl'-1'-N E
.,... C\J C\I.,... C\I (Y') C") M V Cl inflation is a purely monetarist (or monetary!)
phenomenon. 28

So what is responsible for the double-digit inflation of the

1990s? Work by Hafiz Pasha, Aynul Hasan, and Ashfaque
Khan29 attempted to answer this question, as does the
publication by ABN AMRO Bank, partially reproduced in
Appendix 15 .4. What is interesting from this analysis of the
vl!lNml!ll!lC')CONN 1990s is that most of these very same reasons have been
- .£l 0l!ll!l"</"l'-a:>0CONl'-
32 ·oo £ a.. -.:::tCOCOO>('l'),--,..._,C\JlO.,...
responsible for the very high inflation rates since 2007/8.
@ g_ -~~"<I" ~l!)ml'-·~l!)~r--:-oco
LO-.:::to:::tt---r---..co,--C\1,--0)
re ai ,.... ,- .,... C") Pasha et al .. first examined all the reasons that have been
0
advanced by other scholars for the high inflation in recent
years. These include the following:
1. Increases in the price of food, raw materials, fuels, and
manufactured goods
2. Inflationary expectations
3. The growth of money supply in relation to GDP
e COl!l~l!lNNmNl'-m
OlO(J)('l').,...,--1.00>o:::tO>
l!l0l'-~vNmNa:>a:>
I!) I!) (0 r-:-
(0 (0 I'-- - C') a5
4. Increases in sales and excise taxes
ui 5. Currency depreciation and devaluation
'=- 6. Supply shocks like virus-induced reductions in cotton
....0
C\I
output and weather-induced lower wheat crops
4
a,
a,
7. Higher agricultural support prices
.... 8. Increases in the prices of utilities
9. Production losses due to power and infrastructural
bottlenecks
10. Increases in wages and salaries •
>,
ctl
11. Insufficiently tight financial policies, with high budget-
v co I'- CX) m
I!) 0 NN
"O m
m
mm m m m
mm m 0) m
0
0
0 o~
0 00
deficit financing.
Cl
C N N NN
_:i:: Q) Q) Q) Q) Q) Q) Q) Q) Q) Q)
Their work takes all these factors into consideration and
Cf) ~ C C C C C C C C C C
ctl 0 ::i ::i ::i ::i ::i ::i ::i ::i ::i ::i
_J 3: --, --, --, --, --, --, --, --, --, --, they then classify the key policy variables in their empirical
Table 15.3
Causative Factors for Changes in Monetary Assets: 1993-2012 (Rs. m) (Rs. million)

1993-4 1994-95 1995-96 1996-97 1997-98 1998-99 1999--00 2000--01 2001---02 2011/12

1. Public Sector 28,266 53,086 68,527 80,932 55,898 (74,824) 78,234 (46,731) 22,177 4,983,279

(i) Budgetary support 23,145 36,418 51,726 72,457 48,018 (75,194)cd 39,963c (32,315)c 14,313 4,636,345
(ii) Commodity operations 6,582 4,733 5,858 5,702 10,585 3,645 40,094. (12,508) 5,331 323,620
(iii) Use of privatization
proceeds by Govt./WAPDA 14,130 12,000 10,304 1,223 32,195

2. Credit to Non-Government
Sector (A+B+C) 39,866 69,538 63,428 61,879 84,237 119,214 26,042 69,193 18,994

(A) Credit to private sector 39,871 59,584 54,749a 61, 105b 76,321 84,144 18,080 56,367 52,969 3,516,164

(i) Commercial banks 39,682 46,954 51,938 63,166 65,131 69,279 15,198 54,667 44,867
(ii) Specialized banks 189 12,630 2,811 (2,061) 11,190 14,865 2,882 1,700 8,102

(B) Credit to Public Sector 0

::;-
0)
Enterprises (PSEs) (2,793) 5,924 6,142 1,972 8,633 16,176 7,600 20,560 (19,495) (24,075) "O
......
~
(C) Other financial institutions .......
CJl
(SBP credit to NBFls) 2,788 4,030 2,537 (1,198) (717) 18,894 362 (7,734) (14,480) 18,589

3. Counter-part funds 158 (76) (152) (119) 86 61 (22) 49 26 (498) s::

0

-...
::s
4. Other items (net) 6,309 (28,168) 21, 136a 5,153b 26,761 245d 14,456 30,862 (12,040) (862,318) CD
s:I)
5. Domestic credit '<
expansion (1 +2+3+4) 74,599 94,380 152,939 147,845 166,982 44,696 118,710 53,373 29,157 7,957,276 "O
2.
(11.57%) (13.12%) (18.80%) (15.29%) (14.98%) (3.49%) (8.95%) (3.69%) (1.95%) o·
~
6. Foreign assets (net) 33,409 26,957 (38,998) (33,288) (13,897) 29,529 1,375 72,654 206,168 370,961
en
s:I)
7. Monetary expansion (5+6) 108,008 121,337 113,941 114,557 153,085 74,225 120,085 126,027 235,324 8,328,236 ~-
::s
(18.14%) (17.25%) (13.82%) (12.20%) (14.53%) (6.15%) (9.38%) (9.00%) (15.42%) cc
ti)

a Adjusted for Rs. 5,278 million being mark-up debited to borrowers account s:I)
::s
a.
b Adjusted for Rs. 8,207 million being mark-up debited to borrowers account
C Adjusted for funds placed in Special Debt Repayment account --
::s
d Adjusted for Rs. 28.5 billion on account of Ad hoc Treasury Bills created to offset the government's losses due to the unification of exchange rate
Note: The composition of autonomous bodies has changed over the years. At present WAPDA, OGDC, KE, PTCL, PIA, and Pak Steel are included in the list of autonomous
bodies.
-s·
iii
::s
Source: State Bank of Pakistan, Annual Report (Karachi: SBP, various years). .i::,.
c.>
CJ1
436 Issues in Pakistan's Economy

Table 15.4
Money Supply (M1, M2, M3), 1980-2012 (Rs. Billion) (Rs. billion)

End Period Stocks Narrow Money % Monetary Assets % Broad Money %

(last working day basis) (MW Change (M2? Change (M3)a Change

1980/81 73.56 18.7 104.62 13.2 116.80 13.2

1981/82 80.93 10.0 116.51 11.4 133.87 14.4
1982/83 96.54 19.3 146.03 25.3 176.68 32.0
1983/84 103.45 7.2 163.27 11.8 206.90 17.1
1984/85 118.97 15.0 183.91 12.6 238.87 15.5
1985/86 134.83 13.3 211.11 14.8 277.63 16.2
1986/87 159.63 18.4 240.02 13.7 330.87 19.2
1987/88 185.08 15.9 269.51 12.3 392.67 18.7
1988/89 206.36 11.5 290.46 7.8 4~.19 10.1
1989/90 240.16 16.4 341.25 17.5 504.16 16.6
1990/91 265.14 10.4 400.64 17.4 569.40 12.9
1991/92 302.91 14.2 505.57 26.2 679.17 19.3
1992/93 327.82 8.2 595.39 17.8 777.37 14.4
1993/94 358.77 9.4 703.4 18.1 922.22 18.6
1994/95 423.14 17.9 824.73 17.2 1,083.73 17.5
1995/96 448.01 5.9 938.68 13.8 1,254.23 15.7
1996/97 443.55 (1.0) 1,053.23 12.2 1,435.48 14.5
1997/98 480.33 8.3 1,206.32 14.5 1,669.23 16.3
1998/99 643.04 33.9 1,280.55 6.2 1,921.47 15.1
1999/2000 739.03 14.9 1,400.63 9.4 2,137.19 11.7
2000/01 761.83 3.1 1,526.04 9.0 2,313.87 8.3
2001/02 876.84 15.1 1,761.37 15.4 2,640.94 14.1
2011/12 7,641.79

aoefinition of M1, M2 and M3 are given in the chapter on Money and Credit of the Economic Survey.
Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various years).

investigation into six demand management policies, as In addition, prices of utilities such as gas, electricity, and
follows: fuel are regulated by the government, and may rise, as
they have done in Pakistan, in order to be brought in line
1. Supply shocks. Wherever the total availability of a
with world prices under IMF and World Bank pressure.
commodity falls short of its long-run trend due to crop
failure, viruses, floods, etc. the price of this sector should 6. Expectations. How people expect the inflation rate to
rise. The government usually has no control over such behave in the future will have key consequences for how it
matters, especially in the short run. actually behaves. Once the expectations of a price rise are
built into the mindset of consumers, these expectations
2. Monetary policy. The classic 'quantity theory of money'
are often realized as consumers and producers build
states that as money increases, so will prices; also, a
monetized budget deficit will put further pressure on price in a price rise in their future formulations. It is also
(also see Appendix 15.4). more difficult for individuals to revise their expectations
downwards; this takes a much longer time than adjusting
3. Tax policy. A rise in, for example, sales taxes and excise expectations upwards.
duties is usually passed on to the consumers by producers.
4. External shocks. As prices abroad rise and as goods are The mechanism through which inflation is reflected in
the wholesale price index (WPI) can be seen in Figure 15.1.
imported into the country, inflation is often imported as
well, as these prices are usually a given for a small open The empirical simulation conducted by Hafiz Pasha et al.
economy Hke Pakistan. Moreover, devaluation and high produced the following results: the supply shock has the
tariffs also raise the domestic price of commodities. greatest negative effect on food prices (84.8 per cent), and
procurement prices for wheat are also highly significant;
5. Pricing policy. Procurement prices for agricultural products- sales taxes and excise duties affect manufactured products,
the prices at which the government buys wheat, cotton, and imported commodities influence raw material· prices
and sugar-are often different from market prices, as the by 50 per cent and manufactured prices by 30 per cent;
government may want to encourage the growing of certain the role of inflationary expectations is also very significant,
crops and offer higher prices to farmers and subsidize the causing prices to rise. More interestingly, the study found
cost to (mainly urban) consumers. Higher procurement that monetary supply, contrary to the conventional view, is
prices and/or lower subsidies will cause prices to increase. not translated into increasing overall inflation, essentially
 Chapter 15 Monetary Policy, Savings, and Inflation 437

Table 15.5 Table 15.6 (Panel a)

Key Indicators of Pakistan's Financial Development Historical WPI, CPI, and Sectoral Inflation Rates
(Per cent)
Years WPI CPI WPI WPI WPI WPI
General General Food Raw Manufac- Fuel
Year M2/GDP M1/M2 DD+ TD/M2 TD/M2 LRM
materials turing lube

1980-81 37.6 70.3 66.2 29.7 9.5

1960-1969 2.6 3.3 2.6 2.0 3.4 3.3
1981-82 35.9 69.5 67.2 30.5 7.1
1970-1979 13.5 11.9 13.4 12.9 11.7 17.8
1982-83 40.1 66.1 68.3 33.9 15.1
1980-1989 7.1 7.5 7.2 6.9 7.0 7.2
1983-84 38.9 63.4 67.7 36.6 12.6.
July to Jan.
1984-85 39.0 64.7 68.9 35.3 4.6
1994/5 18.9 n.a n.a n.a n.a n.a
1985-86 41.0 63.9 69.6 36.1 6.6
1986-87 41.9 66.5 68.4 33.5 5.7
1987-88 33.7 68.7 67.0 31.3 3.0
1988-89 37.7 72.6 65.3 29.0 2.6 (Panel b)
1989--90 39.9 70.0 65.6 29.6 3.3 Historical CPI, WPI, SPI, and GDP Deflator
1990-91 39.2 70.4 65.1 31.5 3.3
1991-92 41.7 66.2 69.3 31.6 5.0 Fiscal Consumer Wholesale Sensitive GDP
1992-93 44.4 59.9 71.2 34.6 1.8 Year Price Price Price Deflator
1993-94 44.7 55.1 73.0 35.9 9.9 Index Index Index
1994-95 43.8 51.0 73.3 36.0 10.2
1995-96 43.3 51.3 74.3 36.7 7.4 1990-91 12.66 11.73 12.59
1996-97 43.8 42.1 76.8 36.7 4.5 1991-92 10.58 9.84 10.54 10.07
1997-98 45.1 39.8 77.4 37.1 3.3 1992-93 9.83 7.36 10.71 8.89
1998-99 43.6 50.2 77.5 40.3 6.3 1993-94 11.27 16.40 11.79 12.47
1999-2000 44.5 52.8 74.6 39.2 5.0 1994-95 13.02 16.00 15.01 13.78
2000-01 44.6 49.9 75.4 40.0 7.9 1995-96 10.79 11.10 10.71 8.28
2001-02 48.5 49.8 75.4 41.3 16.8 1996-97 11.80 13.01 12.45 14.63
1997-98 7.81 6.58 7.35 6.55
TD = Time Deposits. 1998-99 5.74 6.35 6.44 5.85
DD = Demand Deposits. 1999-00 3.58 1.77 1.83 2.78
Source: Government of Pakistan, Pakistan Economic Survey 2000-01 4.41 6.21 4.84 6.72
(Islamabad: various years). 2001-02 3.54 2.08 3.37 2.49
2002-03 3.10 5.57 3.58 4.42
2003-04 4.57 7.91 6.83 7.74
because monetary expansion does not have a significant 2004-05 9.28 6.75 11.55 7.02
2005-06 7.92. 10.10 7.02 10.49
impact on food prices, which form 51 per cent of the
2006-07 7.77 6.94 10.82 7.70
Wholesale Price Index. This finding contradicts the view 16.64 16.81 16.21
2007-08 12.00
popularized by the IMF and World Bank, and repeated 2008-09 17.03 18.93 21.14 20.00
verbatim by the government of Pakistan. In addition, another 2009--10 10.10 13.85 12.93 12.43
popularly held view, that the floods and commodity shortages 2010-11 13.66 21.25 16.57 18.21
of cotton and wheat in 1992/3 may have caused double-digit 2011-12p 10.84 11.24 6.72 9.68
inflation, was not borne out by their study.
In summary then, f@r Hafiz Pasha et al. the key factor P Provisional July 2011 to April 2012
explaining the inflation rate in Pakistan in the mid-l 990s Note: (I) Base year has been changed to 2007-08 figures 2008-09
is neither demand management policy nor supply shocks, to 2011-12 are on 2007-08 base
but interestingly enough, procurement prices, particularly Note: (II) WPI, CPI, and SPI Base Year= 1990-91 series have
that of wheat, and the administered prices of fuel, gas, and been converted into Base Year 2000-01.
(111) GDP Deflater is with 1999-2000 = 100 as base year.
electricity. 30 In addition, an increase in indirect taxes helps to
aggravate the situation. The authors argue that many of these Source: Government of Pakistan, Pakistan Economic Survey
measures which have caused the relatively high inflation (Islamabad: various years).
of recent years are a key constituent of the IMF and World
Bank Structural Adjustment Programmes. However, Part VI
of this book in which the Structural Adjustment Programme there was substantial devaluation of the Pakistani rupee
is discussed in detail, shows that one of the key targets of the throughout the 1990s. From a rate of Rs. 25 to one US dollar
programme was a fall in the inflation rate, not its increase. in the early 1990s, one US dollar was being exchanged for
While the inflation rate was particularly high during the around Rs. 60 in 2001 (after which it fell again), and this
1990s, for reasons that have been identified by Pasha, et al. it may have also had an impact of pass-through inflation.
fell to very low levels after 1998/9. In addition to the factors The reasons why the inflation rate started to fall. after 1998
that have been identified above-the rise in administered are related to the considerable slowing down of aggregate
prices particularly of utilities and of procurement prices- demand following the nuclear tests, General Musharraf's
438 Issues in Pakistan's Economy

Wholesale
price index
I
I I I
I Wholesale I· Wholesale Wholesale Wholesale price Wholesale price
I price index (food) - price index
(raw material)
price index
(manufacture)
- index (fuel and
lubricants)
index (building
material)
I I
y Administered
prices I
I
I I
Wheat ISupply shock I Monetary Tax policy External Role of
production
price policy
I policy shock I I price shock I I price shock I I expectations I

I
Cotton Sugarcane
procurement price procurement price
policy policy

Figure 15.1
Schematic Diagram Explaining Causes of Inflation in Pakistan

Source: Pasha, Hafiz et al. 'What Explains the Current High Rate of Inflation in Pakistan?', Pakistan Development Review, vol. 34, no. 4,
1995.

coup and 9/11-see Chapter 18-when the overall growth have moved largely upwards, settling somewhere above $100
rate also contracted sharply and while not formally in a or thereabouts. The consequences of a rise in petroleum
recession, little investment or growth took place after 1998. .prices are not difficult to understand, and while the global
The period since 2007/8 is marked for its unprecedented and recession caused a serious downturn in Europe and the US, it
chronic inflation rates. From having been a low-inflation resulted in prices rising globally. In Pakistan, not surprisingly,
country, as was the rest of South Asia, Pakistan became the high oil prices resulted in inflation being passed on
not just a double-digit inflation country, but one where the .to the consumers, but there was also a strong element
inflation rate seemed to be stuck near 20 per cent annually. By of mismanagement involved caused by domestic political
all accounts, this level of inflation as well as its persistence, factors. In Pakistan in 2012, oil prices were deregulated with
was a new and more recent occurrence In Pakistan. · domestic prices being adjusted by the government every two
If one examines the full tenure of the Pakistan People's weeks, with plans to allow even more frequent adjustments.
Party government since March 2008 as discussed more fully However, in 2007 once a Caretaker government was in place
in Chapter 18, the factor which stands out most, is that for in Pakistan, with General Pervez Musharraf as President
almost every month of its tenure, inflation was in double- hoping that the political parties he had supported would win
digits. There are a number of reasons, many extraneous to the the anticipated January 2008 elections, the international oil
handling of the economy by the government, which caused price rises were not passed on to the Pakistani consumers,
prices to be stuck at such high levels. A number of events as they should have been, in fear of a negative reaction by
took place in the period 2008-12, which have had an impact the voters. The Musharraf-backed and supported Caretaker
on Pakistan's economy and also on the price level and help us government refused to pass on the prices and maintained
explain the persistent levels of high inflation. They also give an artificial lid on domestic prices. Once the elections had
rise to a critique of the notion that inflation is always and been held in Febru;lry 2008 and a new government sworn
everywhere caused by monetary policy, questioning the core in, these prices could no longer be held back, and thus began
of the monetarists' logic. the more natural policy of passing on international oil price
In early 2007 the price of a barrel of oil was $60, but rose rises to domestic consumers. With oil at its historic highs and
to $92 by October of that year. Prices for oil rose in early having been at persistent highs sirice 2008, domestic prices of
2008 to set a record high on 29 February 2008 of $103.05: petroleum have also risen to their highest ever. This has been
They rose again in March breaking many records and finally one of the most important factors of inflation in Pakistan
touched $141.7 on 27 June and there were predictions that since 2008.
the international price of oil could reach $170 by the end of While the price of oil has risen in the past, the oil price rise
that summer. However, by the end of October 2008, prices this time resulted in the global diversion of food stuff from
had fallen to between $60-70, and in the years after 2009, consumption to the production of biofuels to compete with
I
I Chapter 15 Monetary Policy, Savings, ·and Inflation 439

t
I natural petroleum. This was one reason for food prices to
rise globally after 2008 as well. World food prices rose quite
20 per cent is common. This lack of savings is supposed to be
'one of the basic structural macroeconomic problems' 31 faced

I markedly in 2007 and 2008 and between 2006 and 2008

average world prices for rice rose by 217 per cent, wheat by
136 per cent, corn by 125 per cent and soybeans by 107 per
cent. In late April 2008 rice prices hit 24 cents (US) per US
pound, more than doubling the price in just seven months.
by the country. As Table 15.8 shows, savings are generated
mainly in the household and unincorporated private
enterprises sector, and government savings have been, for
the most part, either very low or negative, a situation which
changed when loss-making public enterprises had been sold
With lower production in some countries due to climate off, but continues now with still many loss-making public
change and other factors, food inflation resulted in prices enterprises requiring support from government finances.
rising globally. In Pakistan, as well, food inflation, along There are essentially two major schools of thought which

I
with the rise in petroleum prices, became the main drivers of explain why low levels of savings exist. The financial
domestic inflation. After the dramatic rises in both petroleum repression school argues that low or negative real interest
and food prices, both settled down, albeit to higher than pre- rates, which are often caused by arbitrarily set government
boom levels. ceilings on nominal interest rates, along with high and
An additional factor which resulted in domestic inflation in variable inflation rates 'are the major impediments to savings,
Pakistan was on account of the more than doubling of wheat financial deepening, capital formation, and growth' .32 This
and rice support prices paid to farmers. Farmers received a view seems to be the one favoured by the authorities in
huge bonus as these prices were converted to higher incomes, Pakistan, as much of Section 15.l shows. The solution, as has
but this affected the overall price of food commodities, been also implemented in Pakistan, is to place interest rates
affecting food prices. Not only does food have a large weight in a free market environment, so that they can find their own
in the calculation of the Consumer Price Index, but food 'equilibrium' levels. The financial structure school believes
prices also affect the poor and fixed income segments who that, especially in underdeveloped countries, low savings,
are unable to adjust their incomes to the rise in food prices. investment, and growth exist because of the lack of depth
Food prices are also politically very sensitive and governments and breadth in the financial sector, since financial assets,
often provide subsidies to keep food products accessible for markets, and institutions are few and not well developed.
consumers. In addition to these factors, floods in 2010 and Not surprisingly, according to this view, an extended network
2011, also affected the supply of foodstuffs locally, having an of financial institutions and the availability of different types
impact on food prices, and hence on the inflation rate overall. of assets and instruments are supposed to have a positive
Clearly, as we can see, since 2008 when the inflation rate impact on savings and investment.
was stuck at a double-digit level, a number of international Some evidence from Pakistan33 shows that both schools
factors had had made the domestic inflation what it was. of thought are supported. It is believed that an increase in
Money supply and monetary policy seem to be conspicuous the real interest rate will stimulate aggregate savings in
by their absence in this equation-see Box 15.7 and 15.8. Pakistan as people move out of non-financial assets and into
the financial sector, however, as we have shown in Chapter
14, those with access to financial services in Pakistan are
15.4 THE Low SAVINGS RATE very few compared to those who are excluded. Moreover,
as financial development takes place and more institutions
Table 15.7 shows that Pakistan's national savings rate during and instruments are made available, aggregate savings are
the 1970s was a mere 11.2 per cent, rising to 14.8 per cent, also supposed to increase. However, in 2004, as we show in
during the 1980s but then falling again to 13.8 per cent for earlier sections, both the interest rate and the rate of inflation
the 1990s, rising again in the boom of the 2000s, to settle at were very low and quite probably, the real rate of interest
10.7 per cent in 2011/12, perhaps the lowest of all time. Not was negative. While this induced people (mainly consumers)
surprisingly, even when it was somewhat higher, Pakistan's to borrow, it did inhibit savers who do not find financial
savings rate was considered to be a very low rate by the instruments lucrative forms of investment. This gives rise to
standards of comparable economies, where a rate of around speculation in the stock market and the real estate market,

Table 15.7
Savings as a percentage of GDP: 1970s-2012P

1970s* 1980s* 1990s* 2000s* 2010/11 2011/12p

National Savings 11.2 14.8 13.8 14.7 13.2 10.7

Foreign Savings 5.8 3.9 4.6 0.9 --0.1 1.8

Domestic Savings 7.4 7.7 14 16.1 13.3 8.9

*Average of Decade; P = Provisional

Source: Government of Pakistan, Pakistan Economic Survey (Islamabad: various issues).
 I
440 Issues in Pakistan's Economy

Box 15.7 But has the SBP been regulating the banking system in a
What Does Monetary Policy Do? manner to achieve 'fuller utilization of the country's productive
resources'?
Mohiuddin Aazim examines the role of monetary policy in In its monetary policy statement issued on 10 August the
Pakistan suggesting that it might have numerous objectives. SBP detailed the reasons for lowest-ever actual lending to
private sector businesses-Rs. 18.3bn only out of the total
An unusual thing happened last fiscal year. The private private sector credit of Rs. 235 billion, the bulk of which
sector businesses retired in the second half of the year about Rs. 121 bn went to non-bank finance companies.
79 per cent of the bank loans they had taken in the first six However, the SBP authorities did not find convenient to
months, and made no additional borrowing. explain this development in terms of demand-side issues and
On the other hand, over the same comparable period, credit merely pointed out that banks were rather more interested in
flow to non-bank finance institutions (NBFC) quadrupled, investing money in government papers. The nation expected
creating a big imbalance between lending to PSBs (private that the central bank should have informed what it had done
sector businesses) and NBFCs, both of which are part of the to correct the situation.
private sector. The cost of external financing has reduced in recent years
The State Bank of Pakistan (SBP) in its monetary policy as a percentage of overall operational cost of businesses
statement of 10 August came up with explanations. But the because of pricier energy inputs, imported inflation, and handy
fact that inflation remained in double digits in FY12 despite internal financing available to highly profitable enterprises.
a minimal share of private sector credit intake in overall Businessmen say that compared to 1990s when bank
money supply has regenerated some old debates. Is inflation borrowings of even the most efficient industries accounted
really a monetary phenomenon-a product of too much for at least one-fourth of the overall cost of business, such
money chasing too few goods? Is monetary policy focussed borrowings now merely make up 10-15 per cent of operational
on inflation-fighting losing importance? And, should central expenses. This means that by steering interest rates in one
banks leave inflation worries behind and support government direction or the other, the SBP influences a nominal change in
overspendings to spur economic growth? the cost of the goods and services produced by a company-
"These days even financial markets are telling us that we and by extension on cost-push inflation in the country.
should be focused on jobs and growth", wrote Paul Krugman "Keeping this in mind we are trying to remodel our
in one of his columns in New York Times in July this year. He monetary policy with a view to making it more responsive to
was referring to the fact that investors are now investing in US the ground realities," a senior central banker told Dawn when
treasuries at zero and even sub-zero rates and such low-cost asked what the SBP was doing to avoid harming industrial
borrowings could be well utilized for financing public sector growth in its fight against inflation. "Unlike central banks of
projects now to obtain a higher economic growth later on. advanced economies, our monetary policy is not built upon
A higher than estimated growth of 1. 7 per cent in US GDP the paradigm of inflation targeting. It rather aims at meeting the
in April-June proves that government borrowings from the dual objective of ensuring sufficient economic growth while
banking system actually pay off. keeping inflation under check."
In the last few years, Pakistan economy has expanded at a Central bankers generally agree that avoiding a deep cut
much slower rate than required to reduce poverty, feed, clothe in policy rate fearing faster growth in money creation and its
and provide medical care to 180 million people. impact on inflation has become a moot point even amongst
Instead of trying to accelerate economic growth through them. If net credit to private sector businesses went down to
liberal private sector lending, banks have largely remained just Rs. 18.3 billion or about two per cent of the Rs. 946 billion
averse to it with the result that industrial output has either worth of money supply (M2) the argument that availability of
declined (as in FY10) or has increased slightly above one per cheaper finance to businesses may push up prices, crumbles.
cent (as in FY11 and FY12). The monetary policy statement of 1O August does not
In a market-driven economy, a part of the capitalist world mention this fact very clearly, but as it highlights other
economic order, one can understand banks' failure in this factors responsible for inflation like prices of imported goods,
regard. But a bigger question is: has the domestic monetary excessive government borrowings, withdrawal of subsidies,
policy been of any help in ensuring larger private sector credit administered prices, energy crisis, etc. in detail, it is easy to
off-takes to enable businesses to enhance productivity? deduce what the SBP is actually pointing out.
The SBP has the statutory authority and obligation to do Even excessive government borrowing cannot be blamed
whatever it can "to regulate the monetary and credit system of for causing too much money· chasing too few goods
Pakistan and to foster its growth in the best national interest phenomenon "because, after all, government uses all the
with a view to securing monetary stability and fuller utilization money borrowed through PIBs, TBs or even national saving
of the country's productive resources." schemes either to repay domestic and foreign debts or to
The monetary policy is one key instrument to be employed finance its expenses. And financing of expenses, however
to obtain this statutory goal. Senior SBP officials claim they questionable they may be, plays a role in growth-and is
design the monetary policy keeping in view 'this somewhat quite important when exports are falling and industrial growth
very broad and unique objective' in mind. is stalled," says a former advisor of SBP. "Government's
overspending (which creates fiscal deficit) is basically what? It
is income for thousands of government contractors and sub-
 Chapter 15 Monetary Policy, Savings, and Inflation 441

contractors and tens of thousands of government employees examples of how banks and leasing companies can make
or for state-owned enterprises. All this, in turn, becomes part quick bucks if they lend for agricultural development.
of GDP." "If this is what it is, then why fear slashing interest rates?
Commercial bankers defend their overinvestment in It is not going to push up inflation. It will rather contain it by
government papers on the same ground. They say if banks improving supplies of goods. But, of course, it will reduce
stop lending to government when demand for private sector profitability of those who earn not by producing anything but
credit is low it would completely ruin the economy. Government by actually blocking credit-flows to productive sectors."
officials, however, have a different point of view. "Why can
banks and leasing companies not make money by doing more Source: Aazim, Mohiuddin, 'Remodelling the monetary
business in agriculture sector or with SMEs? Why are they policy', Dawn, Economic and Business Review, Karachi,
contended with earnings on bills and bonds?" questions an 3-9 September 2012. This is a slightly edited version of the
official of the Ministry of Food Security and Research, citing original.

where prices are pushed up. However, savings do not take that, as income increases, savings will also increase-this was
place. In the period 2008-12, when the inflation rate was in found to be a positive and significant relationship, and might
the high teens or even 20 per cent on an annual basis, and explain the rise in the savings rate in the Musharraf-Aziz
the rate of interest less than that, and the real rate of interest years of 1999-2008. The effect of the dependency ratio was
negative, there were few incentives to save. Saving will be a seen to be negative, but not very significant, implying that an
cost to those who want to hold on to money at a time of high increase in the dependency ratio would cause savings to fall,
inflation, given the lower interest rate. but not by very much. Zafar Iqbal, however, finds a strong
A number of studies have been conducted in Pakistan to negative effect of the dependency ratio on savings, showing
investigate why the savings rate is so low. Appendix 15.5 that 'as the rapidly growing share of dependants in the total
shows the effects of fourteen different variables on the population tends to consume more than they produce, there
savings rate. Work by Siddiqui and Siddiqui34 has shown is a consequent reduction in household savings'. 35 However,

Table 15.8
Capital Accounts of the Public and Private Sectors (Period Averages, % of GDP)

1970-1990 1970-1977 1978-1981 1982-1986 1987-1990

National savings 13.12 10.43 15.17 14.83 14.31

Public saving 1.12 0.42 2.30 1.74 0.55
Government saving 0.46 0.88 1.90 0.18 -1.46
Public enterprise saving 0.55 0.40 0.54 0.75 13.08
Private saving 12.00 10.01 12.87 13.09 13.75
Corporate saving 0.50 0.60 0.32 0.36 0.68
Household saving 11.50 9.41 12.55 12.73 13.08
Gross domestic investment 18.28 17.28 19.39 18.68 18.67
Public investment 9.94 9.10 11.33 10.30 9.79
Government investment 3.15 2.78 3.18 3.50 3.41
Household investment 0.73 0.64 0.90 0.90 0.49
Private investment 8.34 8.18 8.06 8.38 8.88
Corporate investment 0.74 0.86 0.46 0.48 1.11
Household investment 7.60 7.33 7.61 7.90 7.77

Saving - Investment (S-1) -5.16 -6.85 -4.23 -3.85 -4.37

Foreign capital inflow 5.16 6.85 4.23 3.85 4.37

Public sector 2.67 4.30 2.67 0.93 1.51
Private sector 2.49 2.50 1.56 2.92 2.86
Recorded 0.94 0.56 0.80 1.51 1.11
Unrecorded 1.55 1.94 0.76 1.41 1.75

Resource transfer to the public sector 6.15 4.32 6.36 7.63 7.73

Source: Naqvi, S. N. H. and Khwaja Sarmad, 'External Shocks and Domestic Adjustments: Pakistan's Case 1970-1990', mimeo,
University Grants Commission (Islamabad: OUP, 1997), 47.
442 Issues in Pakistan's Economy

Box 15.8 growth and inflation comes out very clearly even in this simple
Managing Easy Monetary Policy exercise. A 100-basis point decrease in policy rate increases
CPI by 0.24 percentage points but after a lag of 3 months.
Sajjad Akhtar analyses Pakistan's monetary policy: What are the observed transmission impacts on growth that
can be attributed to the easy monetary policy during 2001-05?
With two consecutive downward adjustments of policy A) Consumer credit is fairly sensitive to lower interest
rates, many see it as a beginning of an era of easy monetary rates. This type of credit was widely used to buy durables,
policy till the country is in an election mode. While the jury is and transport equipment, specifically automobiles and
still out whether the easing will fuel inflation more than it will two-wheelers in the 2001-08 era. Cheap credit generated
help growth, managing easy monetary policy implies that demand of these import intensive durables and did help
boost to growth outweighs the costs in terms of actual inflation local manufacturing and employment, but also increases the
and inflationary expectations. import bill. At the time, increased FDI did help to cushion
A stylistic overview of how SBP conducted the tightening the increasing import bill, but in times of falling FDI cheap
and easing cycle in the last ten years will help to assess how consumer credit spent on import intensive durables can
long or short were these cycles and the limits of these cycles. destabilize the already precarious BoP situation.
The last time the policy rate was 12 per cent was in June/July B) Housing is another sector that receives a boost from lower
2008, three years ago. It was 14 per cent in June 2001. In a interest rates. The forward linkages of a booming housing
matter of 18 months, it was brought down to 7.5 per cent. It sector in terms of pulling along another 14-17 sub-sectors
remained there for the next two and half years when in April in the manufacturing sector is well documented. However, it
2005 it was increased to 9.0 per cent. It took 4 years for SBP to is a resource-intensive sector, in terms of cement, iron and
raise it to 14 per cent by April 2009. Thus one can infer that in steel, wood, plastics, and glass. Thus in an environment of
the last 10 years, easing cycles were much shorter and faster higher, or at best, fluctuating world-wide raw material demand,
than the tightening cycles. any increase in domestic demand due to lower interest rates
Of course, in a two-way cause and effect environment, will translate faster into higher prices than rapid increase
inflationary trends and expectations, growth prospects, interest (punctured by energy shortages) in output. In the previous
rate parities, and the exchange rate also matter in determining easing interest-rate cycle, a stable exc;hange rate, low inflation,
the length and extent of these cycles. However, the length uninterrupted energy supply and stable international prices
of the cycles suggests that interest rate policy has remained helped to create a mini housing boom in the construction
pro-growth more than it has remained anti-inflationary, except related industries.
in the last 3 years under the IMF programme. Given that C) Three types of speculative unproductive investments
imported inflation and currency under pressure is likely to are lucrative for speculators in time of falling interest rates
transmit rapidly to local inflation, along with supply bottlenecks and are intimately linked to increased liquidity and credit
there is not enough room to emulate the previous easing cycle 'fungibility' in the economy. Property: Once there is enough
of 18 months unless SBP succumbs to political pressure. liquidity in the system at low interest rates, investment into
Does the previous easing cycle carry some lessons for property fuels a vicious cycle of speculation into property
promoting growth? Do lower interest rates raise growth and to and housing values, backed by a weak regulatory framework
what extent? If the impact is positive than what is the nature and and poor documentation. Increasing remittances are already
composition of growth? Does it promote exports, specifically sustaining the private property, housing and construction
of manufactured exports, or much maligned consumption activities (maybe not at the scale of earlier easing or to the
growth in durables and import intensive manufactures? extent the populist government would want to showcase)
The writer conducted a back of the envelope exercise and further easing of interest rates would create a boom-and-
and based on the last 5 years, macro data, it revealed that 1 bust cycle as witnessed during the 2001-2008. A caveat is in
percentage point (i.e. 100 basis point) decline in policy rate order here. The previous property boom was also somewhat
increases the annual growth rate in manufacturing by 0.20 supported by financial transfers due to war on terror, an
per cent and growth rate of GDP by 0.27 per cent. In case of internationally low interest rate environment, accompanied by
manufacturing, its historical performance was instrumental in excess international liquidity. Stocks: Investment in the stock
determining the positive impact of the interest rate, while the exchange in times of low interest is attractive on two counts.
GDP growth rate technically followed a random walk. It increases the differential between the interest rates on
Furthermore, it indicated that to achieve the manufacturing borrowed funds by speculators and the rate of return (capital
and GDP 2011-12 growth targets, lowering interest rates gains) on short-term investment. Secondly, it also improves the
by a further 200 and 100 basis points, can be conducive balance sheet of listed companies improving their P/E ratios.
(do not equate it with the word 'ensure') for achieving this To the extent that the rising stock market is able to attract
year's targets. Ideally, this is the extent to which the easing portfolio investment from foreign investors, it helps the foreign
cycle should go during the year, unless there is a compelling exchange reserves. Will the current easing cycle, speedup
favourable external and internal economic environment. the flow of portfolio investment as it did during mid decade
Since it is a back of the envelope exercise lending rates and took flight out in 2008? In spite of sovereign debt crisis
impact on growth rate should not be linearly extrapolated to in the West, the current easing cycle could boost portfolio
achieve an above target growth rate. The trade-off between investment, as rising prices increase the profitability of listed
companies, but the structural bottlenecks in the economy and
 Chapter 15 Monetary Policy, Savings, and Inflation 443

the elevated risks of depreciating currency do not favour a effectively managing an easy monetary policy. In other words
repeat of the 2002-2006 scenario. The foreign investor may it is the recorded/perceived versus the actual use of credit. Are
wait for another round of easing and the BoP situation by there checks in place that ensure synchronization of recorded
March 2012. Speculative Imports and inventory investment: with the actual use of credit? How does one ensure that
In times of weak exchange rate, and high domestic inflation, loan to agriculturists does not increase his capacity to hoard
low interest rates also encourage speculative imports. Thus wheat rather than buy inputs to bring additional land under
SBP needs to keep a watch on above normal short or medium cultivation? Sectoral classification of credit, however tight, can
term trends in imports, especially in case of consumer goods. blur the end-use purpose of loans. Loans to cement stockiest
Inventory investment is also attractive in times of low interest can be conveniently classified as loans to the construction
rates and high inflation, but can be instrumental in boosting industry. The 'fungibility' issue cannot be dismissed lightly
production if there is sufficient under capacity utilization in in this economy, where owners of floor-mills, cotton ginning
the manufacturing sector. But given the rigidities in agriculture operations, petrol pumps, fertilizer, steel, ghee, and sugar
production, inventory investment is likely to push prices rather stockists yield directly or indirectly considerable clout in the
than output. national and provincial assemblies. Unfortunately no central
A similar back of the envelope exercise linking growth in bank can ensure perfect synchronisation of millions of loan
exports to policy rate could not be conducted due to lack of accounts and the extent of 'dis-intermediation' is a function
data. However a dated work by the writer indicated that one of the presence of opportunities to make a quick return in the
per cent increase in incentive index (composed of customs market.
rebate and export refinance rates) only increased export by
0.7 per cent to the US, while it had no impact on exports to
Germany, Britain, and Japan. Source: Akhtar, Sajjad, 'Managing Easy Monetary Policy,
Lastly, the issue of 'fungibility' of easy credit in the Business Recorder, Karachi, 2 November 2011. The article has
transmission mechanism is a formidable challenge in been slightly edited from the original.

he also confirms the posltlve relationship between the to government being less enthusiastic about its resource
domestic real interest rate and household savings. Inflation generation efforts, the nation could increase its consumption
and the expectation of inflation in the future are negatively expenditure and/or liberalize imports and (b) to the
related to household savings: the expectation of higher extent that saving is determined by available investment
inflation in the future means that households will substitute opportunities, by crowding out domestic investment, foreign
future consumption by present consumption, lowering the portfolio investment could cause savings to fall'. 38 At a
savings rate. household level, Zafar Iqbal3 9 found that easily available
At a more macro level, Zafar Iqbal's results show that credit from banks discourages the efforts of households to
private capital outflows and the foreign interest rate have generate their own savings, a result also confirmed by N. H.
a 'strong negative' effect on household savings, 'which Naqvi and Khwaja Sarmad. 40 Khan et al. support Shabbir and
suggests that unfavourable circumstances, political unrest, Mahmood's findings by showing that a 1 per cent increase
and financial repression in Pakistan provoke people to in foreign capital inflows cuts national savings by 0.21 per
transfer their resources abroad to a safer place'. 36 This might cent. 'The negative impact of foreign capital inflows suggests
also explain the low savings rate in the 2008-12 period, when that for the most part, external assistance has been used for
all these factors affected Pakistan. Moreover, rising prices consumption purposes and that it has discouraged savings
are also a disincentive to save, especially when higher prices efforts by both the private and public sector, in Pakistan.' 41
are anticipated in the future. Export earnings, interestingly, To emphasize the complicated reasons for persistent low
have a strong positive effect on national savings, as exports savings, and the extent to which the conclusions of each
increase the propensity to save as compared to other sectors. researcher vary, we cite some of the results of Ashfaque Khan
One of the more interesting findings related to savings et al. For them, the most important factors affecting national
is that of Shabbir and Mahmood, who show that 'foreign savings were per capita income, the dependency ratio, the
financial inflows may discourage domestic public and/or real interest rate, and foreign capital inflows. They found that
private saving behaviour and resource mobilization effects' .37 as per capita income increased, due to either a slowdown in
The theory suggests that, if savings are low in a country and the population growth rate or a higher real GNP growth rate,
there is a resource gap between investment and savings, savings would rise. However, unlike the other studies cited,
foreign capital inflows can fill that gap, ostensibly increasing for I<han et al. 'the high dependency ratio caused by the rapid
growth. In Pakistan's case, we see that foreign aid impedes increase in population has been the most important factor
domestic savings growth and mobilization. Foreign capital causing the savings rate to remain depressed' .42
seems to substitute rather than augment domestic savings
on two accounts: '(a) foreign capital inflows would lead
 l
I

444 Issues in Pakistan's Economy

While there is some debate over why the savings rate in 15.5 SUMMARY AND FURTHER READING
Pakistan is so low, the consensus rests on a few points:
l. There is a strong correlation between household savings
15.5.1 Summary
and the real rate of return on financial assets, which means For some economists, money and monetary policy are the key
that the government's policy of keeping real interest rates determinants of economic activity. In Pakistan, until recently,
low-financial repression-has helped reduce the level of monetary policy was closely controlled by the government
domestic savings. However, as we have shown in Chapter and the market was almost non-existent when it came to
14, only a small, albeit perhaps prosperous, segment of determining the cost and allocation of money in the economy.
Pakistan uses formal financial institutions, as well as Since 1991 a more market-b~sed approach has been followed,
savings-see below. with the regular auction of Treasury Bills influencing, if not
2. The greater availability and ease of access to financial determining, the rate ofinterest. However, by all standards,
institutions, markets, and instruments should cause the the money market is still extremely underdeveloped in
savings rate to increase. Pakistan, and for some economists, this is one reason why the
economy has not functioned well.
3. Foreign capital inflows-foreign aid'-which were Money supply and its annual expansion are supposed to be
supposed to fill the savings-investment gap, have actually one of the key determinants of the price level in the economy.
had a negative impact on domestic savings and have not We have examined a large literature with respect to Pakistan
acted as a catalyst to increase national savings. and find that this is not the case. Inflation in Pakistan occurs
4. Similar results regarding household savings and the for numerous structural reasons, and because of the frequent
availability of bank credit have been observed. escalation in administered prices by government. In fact,
5. Inflation and uncertainty about the future-as has been there is almost no relationship between price levels and the
common in Pakistan-has been responsible for capital growth of money in the economy.
flight and greater consumption than is perhaps warranted. Pakistan's savings rate, currently of around 11 per cent
This must count as one of the more important factors for in 2011, down from 16.5 per cent of GDP in 2000/1, is also
the low savings rate specific to Pakistan. considered to be a key deterrent to economic expansion,
especially since most East Asian economies have savings rates
Other factors that may be responsible include cultural factors, almost double Pakistan's. One school of thought argues that
such as where savings in the form of assets, particularly gold savings are low due to financial repression, i.e. the market
and jewellery, substitute for financial savings, is very probable does not play the dominant role in the financial system,
in Pakistan. Due to the lack of awareness and use of banks, while another view ,argues that savings stay low because the
and with greater emphasis on savings in real assets, the real financial structure is undeveloped. We have examined a large
(as opposed to financial) savings rate in Pakistan is probably number of causative factors for the low savings rate, and
higher. Moreover, the presence of a very large informal find that neither the financial repression nor the financial
financial sector suggests that the official savings rate does not structure school provides an adequate explanation. Cultural
capture the entire amount of money actually saved. factors, too, may suggest why the financial savings rate is low.
Recent evidence from the Access to Finance Survey referred
to in Chapter 14 with regard to the savings rate are worth
quoting. 43 According to the Study, only half of the population 15.5.2 Further Reading
saves, whether in the formal or informal sector, and among The works listed in the Notes should provide sufficient
those who save, only 14.9 per cent of savers go to formal sources for those who want to examine the monetary sector
financial institutions, and around 63.6 per cent of Pakistanis and monetary policy in Pakistan. In addition, the Journal of the
save at home, in cash or jewellery, or in assets such as land Institute of Bankers in Pakistan and articles in the press should
and livestock. After the main category of savings at home, be consulted regularly for recent changes, along with the
the next most popular category in the informal sector is those State Bank of Pakistan's Annual Reports; also see The Pakistan
who save in 'committees' or bisees, around 25.7 per cent of Development Review for frequent analysis on these themes. The
those who save in the informal sector, followed by savings recently revised and expanded Money and Banking in Pakistan, l
with family and friends (6.7 per cent). 44 The main purpose of (Fifth Edition) by S. A. Meenai and Javed A. Ansari (Karachi:

I
savings is consumption smoothening, not investment. Oxford University Press, 2004 ), and the State Bank of
Pakistan's Pakistan: Financial Sector Assessment 1990-2002, are
highly recommended, the first of which is extremely critical
of the reforms that have taken place.
I
 Chapter 15 Monetary Policy, S_avings, and Inflation 445

Appendix 15.1

Financial Sector Reforms, 1990-2000

Date of
Area of Reform Reform description
Reform

Privatization
Amendment in the banks 1990 The Act was amended to pave the way for privatization of the nationalized
(Nationalization) Act 197 4 commercial banks (NCBs).
Privatization of NCBs April 1991 On 2 April 1991, 26 per cent shares of MCB were disinvested to the private sector.
Another 49 per cent shares were disinvested in two steps in February 1992 and
January 1993.
Sept. 1991 On 9 September 1991, 26 per cent shares of ABL were sold to the private sector. ln
August 1993, a further 25 per cent of its shares were sold to the private sector.
Opening of new banks Aug. 1991 Permission was granted to open 10 private domestic banks and licenses were granted
to 3 foreign banks to operate in Pakistan. ln later years, further 8 domestic and 3
foreign banks were established.
Scheduling of provincial Sept. 1994 Two provincial banks namely Bank of Punjab and Bank of Khyber were
banks scheduled.

Institutional Strengthening

Expansion in supervisory Jan. 1992 The government extended supervisory jurisdiction of the SBP to the NBFls
jurisdiction of SBP including leasing companies, investment banks, and housing finance companies, etc.
Issuance of prudential Jan. 1992 SBP issued prudential regulations for banks. These regulations covered
regulations for banks various aspects of operations of commercial banks and became mandatory wef
1 July 1992.
Amendment in Banking Feb. 1993 Section 27B was inserted to curtail disruptive union activities, and section 83A was
Companies Ordinance, inserted to make punishable dishonest removal or disposal of goods pledged as
1962 security for payment of debt or loan. Amendments also empowered SBP to frame
guidelines for facilitating recovery of bad and doubtful loans.
Grant of autonomy to Feb. 1994 · State Bank was granted autonomy in February 1994. lssuance of three more
the SBP ordinances on 21 January 1997, which were approved by the Parliament in May
1997, further strengthened this autonomy.
Credit ratings for NBFls April 1995 Effective 20 April 199 5, all NBFls were required to have themselves
Et banks June 2000 credit rated by a SBP approved rating agency. The same became applicable for all
commercial banks from June 2000.
Basel Accord Dec. 1997 Banks were instructed to apply the system of risk-weighted capital, in line with the
Basel Accord. From 31 December 1997, all banks were required to maintain capital
and unencumbered general reserves of not less than 80/o of their risk-weighted
assets.
Minimum paid-up capital Effective 31 December 1997, no banking company in Pakistan would carry on
business unless it has a minimum paid-up capital of Rs. 500 million. This minimum
paid up requirement for banks was doubled in December 2000 to Rs. 1,000 million
with half of the increase, i.e. upto Rs. 750 million to be achieved by December 2002.
CAMELS framework CAMELS framework was adopted to ascertain the performance of banks and NBFls
on the basis of off-site and on-site surveillance.
BASEL core principles Out of twenty-five core principles, SBP is compliant in fourteen, largely compliant in
eight, and materially non-compliant in three of these principles.
Equity support to UBL May 1998 ln terms of its bail-out package, the State Bank made equity support to UBL
and HBL amounting to Rs. 21 billion on 4 May 1998 and Rs. 9.7 billion to HBL on
27 June 1998.
446 Issues in Pakistan's Economy

Appendix 15.1 (contd.)

Date of
Area of Reform Reform description
Reform

Downsizing and 1997-98 Public sector banks and DFls were asked to prepare action plans for restructuring
restructuring of banks and downsizing of their organizations in order to reduce the financial intermediation
and DFls cost. Accordingly, through various incentive schemes from 1997 to 1999, work force
of these institutions was reduced from 99,954 to 81,079, while 815 loss-making
branches were dosed.
Establishment of Corporate Sept. 2000 The ClRC was established on p September 2000 to promote revitalization of the
Et lndustrial Restructuring economy by reviving sick industrial units. lt will take over the NPLs of NCBs and
Corporation (ClRC) DFls.

Non-Performing Loans
(NPLs)

Classification of loans Aug. 1992 Directives were issued to banks for provisioning and classification of NPLs. Loans
were to be' classified as other assets especially mentioned (OAEM), substandard,
doubtful or loss, depending on whether interest or principal is overdue. Provisioning
against substandard, doubtful and loss loan categories were required to be made at
the rate of 200/o, 500/o and 1000/o respectively.
Setting of loans recovery Nov. 1993 Banks were directed to lay down quarterly recovery targets as percentage of
targets the overdue obligation. They were also required to submit progress reports on
recovery in relation to targets set on quarterly basis. · ·
New loan recovery law Feb. 1997 ln order- to provide necessary legal framework to expedite the recovery of stuck-up
loans, two existing recovery laws, i.e. Banking Tribunal Ordinance, 1994 and Banking
Companies (Recovery of Loans) Ordinance, 1997 were repealed and replaced with a
new comprehensive law-Banking Companies (Recovery of Loans, Advances, Credits
and Finances) Act, 1997.
Establishment of banking Feb. 1997 The Federal Government established 34 banking courts to admit cases of loan
courts defaults below Rs. 30 million. For cases above Rs. 30 million; two judg~s from
Lahore High Court and one judge each from Sindh and Balochistan High Courts
were nominated to deal exclusively with such cases.
lncentive schemes for June 1997 SBP introduced two separate incentive schemes to provide opportunity to loan
loan defaulters Dec. 1997 defaulters to pay their overdue loans and to reschedule and regularize the remaining
amounts.

Debt Management Reforms

Setting up of Securities Dec. 1990 A Securities Department was set up in the SBP to launch an auction system of public
Department at SBP ·debt and .to develop a secondary market for government securities. ln July 1998, the
Foreign Exchange Dealing Room was setup. These two were merged and became the
Exchange Et Debt Management Department (EDMD) on 17 February 2000.
Auction system of Treasury March 1991 Realizing the disadvantages of the tap system and in order to develop an active
Bills money market, the government decided to introduce six-month Treasury Bills to be
sold through auctions.
National Savings Scheme Feb. 1990 Unfunded debt instruments like the Khas Deposit Certificates (KDCs) were replaced
(NSS) with three new instruments, which offered lower but still quite attractive rates of
return.
lntroducing of long-term March 1991 To cater for the need of a long-term market-based government paper, Federal
government paper lnvestment Bonds (F!Bs) were introduced with 3, 5, and 10 years maturities.
Rationalization of NSS May 1999 Rates on these schemes were cut down to reduce distortions in term structure of
interest rates.
 Chapter 15 Monetary Policy, Savings, and· Inflation 447

Appendix 15.1 (contd.)

Date of
Area of Reform Reform description
Reform

Bearer instruments Dec. 1999 From the mid 1980s till December 2000, Government issued various bearer
instruments such as FEBCs, SNFBs, BNFBs, and DBCs, etc. with the aim to raise
finance from the informal sector. However, the sale of these bearer instruments was
discontinued in December 1999.
Monetary Management
Measures

Statuary Cash Reserve Oct. 1991 Under section 36(1) of SBP Act, 1956, all scheduled banks in Pakistan were required
Requirement (CRR) to maintain a balance-return free-with SBP equivalent to 50/o of their demand and
time liabilities. Throughout the reform period CRR remained more or less constant at
50/o.
Averaging Mechanism Effective from 26 July 1997, banks were advised to maintain with SBP an average
of CRR balance ·of 50/o of its total time and demand liabilities in Pakistan, worked out on
weekly basis, provided that the amount of the balance should not at the close of
business on any day be less than 40/o of the total demand and time liabilities in
Pakistan.
Special Cash Deposits Oct. 1991 SCD as an instrument of monetary policy was introduced on 9 October 1991 when
(SDC) banks were asked to maintain 70/o of their outstanding credit in addition to CRR.
Unlike CRR, deposits under SCD are remunerated at certain percentage. This
requirement was dropped from 15 January 1992. Effective from 9 February 1995,
banl<s were directed to maintain a SCd of 1.5 per cent of their demand and time
liabilities. This requirement was further enhanced to 3.5 per cent from 11 December
1995. Effective from 1 July 1996, it was decided to dispense with this requirements.
Statuary Liquidity Jan. 1992 Effective from 1 January 1992, all NBFls had to maintain SLR @ 15 per cent
Requirement (SLR) for (varying from time to time).
NBFls
Discount window replaced Feb. 1992 After the introduction of a 3-Day Repo facility from 1 February 1992, it was felt
with 3-Day Repo Facility prudent to close the discount window from 15 February 1992.
System of credit ceiling Aug. 1992 System of credit ceilings was abolished from 1 August 1992 and replaced by a
replaced by credit deposit relatively flexible control through the fixing of CDR in each quarter. System of CDR
ratio (CDR) was also abolished on 30 September 1995 and replaced by a market-based
mechanism.
Statutory Liquidity Oct. 1993 This required the commercial banks to maintain a minimum amount under section 29
Requirement (SLR) of BCO, 1962, mainly in terms of eligible government papers in a certain ratio of··
for Banks their demand and time liabilities. As a part of liberalization of the financial system,
this ratio was gradually reduced from 450/o to 350/o in October 1993 and to 250/o in
May 1994. The ratio was further reduced to 200/o in May 1997, to 180/o in January
1998 and further to 150/o in June 1998.
Introduction of Open Jan. 1995 To exercise an effective indirect monetary policy, OMOs were introduced and now
Market Operations (OMOs) these constitue a major instrument of monetary policy.
Removal of caps on March 1995 As a major step towards marl<et-based monetary management, caps on maximum
maximum lending rates lending rates of banks and NBFls for trade related modes of financing were removed.
ln October 1995 ceilings on lending rates for project financing were also removed.
Cash Reserve Requirement Jan. 1996 All NBFls were required to maintain 1 per cent CRR in addition to the 15 per cent
(CRR) for NBFls SLR.
Removal of caps on July 1997 Caps on minimum lending rates of banl<s and NBFls for trade and project
minimum lending rates related modes of financing were removed.
Rationalization of 1990-2000 Lending rates on special financing schemes including locally manufactured
subsidized credit machinery and export finance schemes were gradually raised to eliminate the
element of subsidy.
448 Issues in Pakistan's Economy

Appendix 15.1 (contd.)

Date of
Area of Reform Reform description
Reform

Master Repo Nov. 1999 With a view to bring about operational improvements in the money market
transactions, strengthening the repurchase market and ensuring transparency, the
banks Et NBFls would enter into a Master Repo agreement before entering into a
repo transaction.

Exchange and Payment

Reforms

Permission to open foreign Jan. 1991 A comprehensive package of exchange and payments reforms was announced.
currency accounts (FCAs) Resident Pakistanis were allowed to hold FCAs with banks in Pakistan on the same
to resident Pakistanis basis as non-residents. Later in April, Charitable Trusts, Foundations, etc. were also
allowed to open FCAs in Pakistan.
Remittance of profit by Feb. 19'91 Authorized dealers designated by foreign companies were allowed to remit profits
foreign companies without specific SBP approval. Later in Feb. 1992, the government also abolished
ceiling on payment of royalty and technical fee to non-residents.
Current account made July 1994 Pak Rupee made convertible wef 1 July 1994 by accepting obligations of
convertible Article Vlll, sections 2,3 and 4 of lMF Article of Agreement.
Market-based exchange May 1999 Effective 22 July 1998, a dual exchange rate system was adopted. On
rate system 19 May 1999, this was replaced by a market-based exchange rate system given a
narrow band. The unofficial cap on the exchange rate was finally removed on
21 July 2000 to make it pure market-based.
Creation of Pakistan Aug. 1994 Pakistan Credit Rating Agency Limited (PACRA) was set up in 1994, by lFC in
Credit Rating Agency collaboration with Fitch-lBCA lnc., of UK and LSe while DCR-VlS Credit Rating Co.
(PACRA) and DCR-VlS Ltd. was set up in 1997 in association with Duff and Phelps Credit Rating Co to
Credit Rating Company improve transparency in the stock market.
Limited
Creation of Central Sept. 1997 To facilitate electronic transfer of stocks, Central Depository Company of
Depository Company Pakistan Limited was set up in collaboration with lFC, Citibank, other leading
(CDC) commercial banks and DFls. lt commenced its operations in Sept. 1997.
Establishment of Jan. 1999 SECP became operation from 1 January 1999 through SECP Act, 1997, replacing
Securities Et Exchange Corporate Law Authority (CLA).
Commission of Pakistan
(SECP)

Source: State Bank of Pakistan, Pakistan: Financial Sector Assessment 1990-2000 (Karachi: SBP, 2002), 147-152.
I
I Chapter 15 Monetary Policy, Savings, and Inflation 449

Appendix 15.2
!1

!
' The Money Market in Pakistan PlClC, and BEL are DFls, they are not allowed to play the call

I This excerpt introduces the money market in Pakistan.

The money market in Pakistan can be divided into two broad

segments. Firstly, there is the call money market where the
market. This way, SBP keeps the amount of short term funds
floating around to a manageable level. There are also reserve
requirements and credit ceilings imposed upon the NCBs and
other foreign banks, while the majority of the DFls have no
such restrictions. Hence, indirectly, the DFls such as NDFC and
banks lend cash to each other for very short periods of time. NlT play quite an important role in providing much needed
Secondly, there is the market in which the credit ceiling is short term liquidity to the banking sector.
traded. This is a peculiar feature of the Pakistani money
Trading in Credit Ceiling
market, and any explanation of it must be preceded by an
understanding of credit ceilings and their implications. The second segment of the money market is that of trading
in credit ceiling. The raison d'etre of trading in credit ceiling is
Overnight Funds the direct ceiling controls enforced by the SBP on the banking
The call market is basically an overnight market though seven- sector. ...
day call money trades are also conducted. Fund managers ... ln order to ensure that the aggregate credit expansion
faced with a shortage, or surplus, of cash can borrow, or lend, by commercial banks does not exceed the overall limit
at a market rate of return. Call money is literally 'on call'. This determined in the credit plan, the SBP allocates the private
means that, technically, a lending institution can terminate sector projections between all commercial banks in the form
a contract at any time and 'call' its money back. The debtor of individual ceilings. The ceiling for each bank is calculated
bank would be obliged to comply immediately with such a by a formula based on the bank's share of total deposits
request. The operative word here is 'technically' since generally in the system in the previous year, size of the capital fund,
no institution would withdraw from a lending agreement on foreign currency deposits, and the previous year's utilization.
ethical grounds. There would also be a cost involved in such To promote the flow of credit to priority sectors, SBP sets
a move. mandatory targets for the commercial banks in respect of
The price of funds is set by market demand and supply. loans to agriculture, business and industry, low cost housing,
For example, if there is a dearth of money in the market, and fixed investment. Should any bank fail to reach the targets
that is, the majority of financial institutions need funds, set for it, it becomes liable to penalty in the form of an interest
then lenders can get a high rate of interest on any loanable free deposit with SBP to the extent of the shortfall ....
funds that they may have; of course, if most institutions ... Ceiling trading takes place when banks market their
have excess liquidity, then call money rates would fall. The under or over-utilization of ceilings amongst themselves. At
major source of call market funds are the NCBs [nationalized the end of the week, a bank may find that it has not utilized
commercial banks]. Excess liquidity created by a vast deposit its full credit ceiling. SBP allows it to then sell that under-
base leads them to place substantial sums of money on the utilized amount to a bank which may have over-extended its
short term market very profitably. The major borrowers are credit limit. Trades are normally conducted on Thursday when
the foreign commercial banks. There are two reasons for this. each bank must submit its weekly report to the SBP. Each
First, they have a small deposit base and must fund their bank keeps a daily check on its credit disbursements, and,
everyday activities in some manner, and, secondly, the call barring any unforeseen withdrawals or infusions of funds,
market is a cheap source of funds. for them. Surrounded by can safely forecast its closing position. Consequently, a bank
SBP regulations, the foreign banks borrow short on the call reasonably secure in the knowledge that it will not exceed its
market and lend long, keeping a spread for themselves. They credit limit can conclude forward deals well before the end
continuously roll over their short money to finance their long of the week. Bids and offers are made on the basis of the
term assets. Call money transactions are normally conducted credit situation that week, and the rates charged depend upon
directly between banks, though, sometimes, intermediaries demand and supply. Just as in the call market, tight credit will
such as brokers are used. Settlement of trades is done in the result in higher interest rates charged on loans, while ready
following manner: Interest payments are made every month availability of funds implies the opposite. Ceiling trading
end, while principal is paid at the end of the specified period agreements are usually for anywhere from 15 to 90 days. As
contained in the call agreement. For example, if bank A lends a result, the rates prevailing in the market will obviously be
48-hour money to bank B, then B will repay the principal after higher than those for call money. (One way to look at it is
48 hours, and the interest incurred will be settled at the end of that call money rates are the bottom line, and money market
the month. lt can happen, however, that bank A does not call rates will never fall below call money rates). Just like the call
in its loan after 48 hours but, by mutual consent, allows B to market, funds are exchanged between banks by means of a
retain the funds under the existing terms. B will of course be promissory note. Similarly, settlement is also in two parts.
liable to render the additional interest accrued. Interest is paid monthly, and the principal is settled at the end
The SBP has a certain indirect regulatory role in the call of the contractual term through cheques drawn on the SBP.
market. lt does this by restricting the number of players. Hence, settlement is basically an accounting procedure for the
The only non-bank to participate in the market was NDLC State Bank ....
[National Development Leasing Company]. Although lDBP,
450 Issues in Pakistan's Economy

Other Short-Term Financing (Repo Market) banks were understandably disappointed. One way of getting
Call money and ceiling trading· are then the two main around this restriction. presented itself in the form of Repo
components of the Pakistan money market. There are, transactions. Say, for example, that Bank A bought more
however, certain other short-term financing methods that FlBs than it ought to have. However, it cannot show on its
fall somewhere between these two, but are still, none the books any holdings of securities in excess of the prescribed
less, within the confines of the money market. The majority 15 per cent for fear of being penalized by the SBP. lt can
of DFls are not allowed to participate in the call market but avoid such a penalty by engaging in a Repo transaction with
they do, however, play in the ceiling trading market. Since a DFl (say NDFC) for the excess amount. This would be a Sale
ceilings are not imposed on them, DFls, like NDFC, are .in a and Repurchase Agreement (SRA) whereby the bank would
position to assist scheduled banks in meeting their ceiling sell the HBs to the DFl and then buy them back after· the
requirements. What happens is that the DFl lends to the contractually agreed period of time. The interest component
scheduled bank's customers against the scheduled bank's would be built into the agreement. lt is important to note that
guarantee. ln effect, the DFl takes on to its book for a certain during the repo transaction the DFl does not actually own the
period of time, assets belonging to the scheduled bank and FlBs and has no right to sell them. lt is, in fact, taking the FlBs
charges a commission for the service. ln this way, the bank onto its books and holding them in safe keeping and charging
records the transaction as an off balance sheet item and a fee for this service. The bank meanwhile has a clear slate,
its credit ceiling requirements remain undisturbed. Shortly avoiding SBP penalties as well as earning the interest accrued
after the introduction of the system for auctioning public on these securities.
debt, on 26 February 1991, SBP decided. that the scheduled
banks may only hold 15 per cent of their 30 per cent liquid
asset requirement in the form of government issued Federal Source: Mahmood, Javed, 'Money Markets in Pakistan: Concepts,
lnvestment Bonds and Government of Pakistan Loans. Since lnstruments and Operations', Journal of the Institute of Bankers,
both these securities offered very attractive rates of return, Pakistan, vol. 58, no. 1, 1992, 27-32.

Appendix 15.3
The issue was reportedly discussed thoroughly in the light
Changes in Monetary Management in of the donors' pressure, about which the President and the
the 1990s Prime Minister also held detailed consultations and gave the
go-ahead signal for the new programme keeping in view the
lhtasham-ul-Haque writes about some of the changes that have
position of the economy.
been undertaken by the government under agreements with the
The decision might spark criticism by businessmen but
lMF and the World Bank.
officials said that the government had no option but to close
down the chapter of concessional lending schemes introduced
The State Bank of Pakistan will no longer introduce new
by the State Bank from time to time in the past.
concessional lending schemes, and the rates of return will be
liberalized, according to the latest Policy Framework Paper Liquidity Ratio
(PFP) of the Federal Government. The financial sector reform agenda of the updated Policy
The latest PFP has been prepared by the high government Framework Paper provides for strengthening prudential
authorities in collaboration with the World Bank and the lMF, regulation and supervision. Efforts will focus on greater
elaborating various new measures to be taken during 1994-5, implementation and expansion of the prudential guidelines
1995-6 and 1996-7. introduced in August l992 and on harmonization of conditions
lt has been decided that the State Bank's lending rate to facing market participants with regard to permissible activities
specialized financial institutions will be reviewed in order to and capital adequacy with a view to reaching international
reduce concessional elements of such lending. All necessary standards.
steps will be taken to reduce concessional schemes and ln addition, the level and appropriateness of the liquidity
mandatory credit. The State Bank has already eliminated ratio will be reviewed with the objectives of turning it fully
mandatory credit target for tobacco marketing; the share of into a prudential regulation. Steps will also be taken to
mandatory credit in total credit will be reduced, consistent improve the legal environment for loan recovery, minimize
with the objective of decreasing the concentration of credit. differential taxation of financial instruments and institutions,
ln this regard, the target for small business and industry will and enhance the prudential regulations of securities and
be eliminated in 1995-96. insurance markets through institution°building.
The rates on concessional credits were increased from 8 per The government has held out the assurance through the
cent in August 1993 to 13 per cent in November 1994. But PFP that financial sector reforms would continue to be at the
now the decision has been taken, and the World Bank and the forefront of the policy programme and will be facilitated by
lMF assured, that there would not be any new concessional the gains already achieved in the fiscal reform area.
lending schemes to be introduced.
 Chapter 15 Monetary Policy, Savings, and Inflation 451

The State Bank will continue to implement policies for the streamlining of the procedures for introducing new SROs
consolidation of the credit market, rationalization of the rate related to the tariff and tax concessions will be undertaken.
structure, reduction in impediments to a fully market-based Second, the government will review customs valuation
allocation of credit, and completion of the move towards procedures based on the Import Trade · Prices (Valuation
indirect methods of monetary control. Progress towards manual) with a view to moving towards an invoice-based
indirect monetary control will be pursued by increasing the system in accordance with GATT norms over a five-year period;
credit-deposit ratio and integration of the Treasury Bill barriers to imports will be liberalized further in 1995-96 by
auctions into the SBP's open market operations. Specifically, eliminating the procedural limits. Third, after the removal of
the credit-deposit ratio will be increased in quarterly steps a number of textile items in the context of agreement with
with a view to phasing it out completely by 1995-96. key trading partners, the Negative List will be reduced further
The decision has also been taken to strengthen operational in 1995-96 by eliminating items unrelated to health, safety,
modalities of the open market operations through better religious, and security reasons. Fourth, the export regime will
coordination between the Ministry of Finance and the State be further liberalized through the reduction in the number
Bank so that auction volumes for determining the basis of of -items subject to export quotas, the elimination of the
monetary policy considerations could be worked out. export development cess, and the progressive reduction in the
Moreover, the government will take steps to enlarge and number of export bans.
deepen the market for government securities with a view Also the government will continue to manage Pakistan's
to enhancing the transmission mechanism of the monetary exchange rate flexibility, with a view to maintaining the
policy. external. competitiveness of Pakistan's tradable goods
About foreign exchange and trade system reform, PFP says sector consistent while .containing inflationary pressures.
that the medium-term adjustment and reform programme The introduction of an upper limit on reverse money will
will include further liberalization of the trade regime. facilitate striking a more appropriate balance between these
Concurrently, with the tariff reform, this will be pursued two objectives. The government will keep under review the
in four areas between 1994-95 and 1996-97. First; the operation- and transparency of the exchange system and will
government will review and consolidate the existing Statutory discuss this issue further with the IMF during the next review
Regulation Orders (SROs) with a view to reducing exemptions under the ESAF and EFF arrangements.
from customs tariffs and rate dispersion of imports subject The SBP has withdrawn from forward foreign exchange
to exemptions under SROs will be reduced in two steps · cover operation on the trade account and private banks
and exemptions will be limited to essential items (basic have taken up this business. ln this regard, the State Bank
foodstuffs, medicines, fertilizer, and pesticides) by 1996-97 has also increased the limit on commercial banks' foreign
with the exception of existing contractual obligations and exchange holdings to facilitate their forward operations. As
for exemption with the tariff band for a limited number of · regards the forward cover fee for foreign currency accounts,
industries which need time for adjustment. the SBP recently increased it again from 4½ per cent to 4¼
per cent. The SBP intends to continue to review the scheme
No Concessional Schemes
in view of the BOP development and changes in national
There will be no addition to the concessional schemes and international rates of return. The Bank's withdrawal from
approved already nor any extension in their time frame. The the scheme, which is the ultimate objective, will depend on
time frame for eligibility will not go beyond June 1997 and the. speed of adjustment of the private market for forward
the concessions will not be for more than five years.• ln this exchange coverage and balance of payments developments.
context, the existing deletion programme will be time-bound
without prolongation and no new deletion schemes will be Source: DAWN, Economic and Business Review, 21-7 January
introduced. The reduction in the scope for SROs as well as 1995.

Appendix 15.4
interpreting inflation, namely: a) Monetarist Inflation Model;
Theories of Inflation b) Phillips Curve Model; arid c) Structural Model of Inflation.
Two different publications look at what causes inflation in The monetarist model developed by Milton Friedman and
Pakistan. empirically tested by Anna Schwartz simply asserted that
the prime factor explaining the current rate of secular price
Earlier theories on inflation relied heavily on cost-push and change is the past behaviour of money to output ratio.
demand-pull factors as the key components in explaining This is also the dictum of the popular 'Quantity Theory of
the behaviour of prices. However, in recent years, particularly Money' which, in Friedman's words, purports that 'inflation
during the decades of the seventies and eighties, when everywhere is a monetary phenomenon'.
acceleration of high inflation was observed, three other On the other hand, the Phillips curve model, which started
competing models became popular in the literature in as an empirical investigation by A. W. Phillips and was
subsequently formalized by Richard Lipsey, simply postulated
 452 Issues in Pakistan's Economy

that there exists a trade-off between price inflation and Source: Pasha, 1-lafiz, et al. 'What Explains the Current 1-ligh Rate
unemployment in the economy, at least in the short to medium of Inflation in Pakistan?', Pakistan Development Review, Vol. 34,
run. ln other words, an economy cannot simultaneously No. 4, 1995, 930-1. .
achieve lower inflation and unemployment rates.
Paul Streeten, Julio Olivera, William Baumol and Geoffrey
Economic Policies and Inflation
Maynard, and Willy van Rijckeghem promoted a 'structural'
approach to model inflation. Essentially, these authors argued Macroeconomic policies play a critical role in determining
that it is the differential rates in productivity growth, wages the rate of inflation. · For example, growth of the money
and elasticities of income and prices between the industrial supply in excess of the increase in real output results in an
and services sectors that determine the long-run trend of increase in the price level in order to clear the goods market.
rising prices. Similarly, lax fiscal policy contributes to demand pressure,
Although the above three theories made important thereby fuelling .inflation.· Finally, exchange rate depreciation,
contributions in understanding the · underlying behaviour by inducing a shift in expenditure away from internationally
of inflation, these models were, nevertheless, inadequate traded goods that become more expensive relative to non-
in explaining the complex dynamic phenomenon ·of rising traded goods, increases demand for domestic goods and
inflation particularly for third world countries. This is due factors of production. This, too, can have a significant impact
to the fact that many of the underlying assumptions in the on inflation.
above models may not hold for those economies. For instance, Of course, monetary, fiscal, and exchange rate policies
the instantaneously market (money and labour) clearing are interrelated. An expansionary fiscal stance, if financed
assumptions made in developing 'monetarist' and 'Phillips through government borrowing from the banking 5Ystem,
curve' models may be too restrictive for third world economies will be reflec_ted in. an acceleration in the domestic credit
because of the existence of structural rigidities and a large and· monetary aggregates. Moreover, lax monetary and fiscal
sparsely distributed monetized sector. Furthermore; because policies fuel demand, part of which will be reflected in
of surplus labour, particularly in the agricultural sector, the increased imports. Unless met with .exchange rate depreciation,
so called 'trade-off between inflation and unemployment such polices .can lead to lead to balance of payments (foreign
may not be pronounced. Therefore, in developing economies, exchange) difficu ]ties.
neither rapid monetary growth nor persistence of high Recent monetary developments suggest that there is a
unemployment independently is sufficient to explain the close relationship between key monetary aggregates and non-
phenomenon of chronic high inflation. food price inflation. While overall monetary assets growth
ln addition, it has also been argued that third world fluctuated; movements in domestic credit were considerably
economies with rapidly growing manufacturing sectors more pronounced. Following a decline in 1993/94, domestic
when encountered with supply rigidities, especially from the credit growth picked up sharply in late 1994 and continued
agriculture sector, can produce an incessant rise in relative to rise throughout 1995 and early 1996. Much of the
prices in the absence of corresponding matching increases in acceleration in credit was accounted for by the increase in
agricultural products. Such sectoral increases in relative prices government borrowing for budgetary support. ln other words,
due to ensuing 'structural rigidities' may easily be translated fiscal policy had a strong impact on credit expansion.
into a rising general price level thus producing high inflation. Reflecting developments in the credit aggregate, non-food
Criticizing the existing theories of inflation in third world inflation moderated in 1994 but picked up in 1995 and early
economies which attempt to explain the aggregate 'general 1996. Since lax fiscal discipline accounted for much of the
price level' in terms of other broad macro economic monetary pick up in credit growth, the acceleration of non-food prices
and demand and supply factors, Sukhamoy Chakravarty et al. can be attributed to ,fiscal policy. Moreover, the tightening of
noted: credit policy in 1993/94 took far longer to impact inflation
than the subsequent expansion in domestic credit growth,
Efforts have been thwarted so far by undue reliance on lending support to the view that inflation is considerably
analysis at the aggregate levels. lt must ... be recognized easier to spark than to stamp out.
that price increases cannot be readily attributed to factors, As regards exchange rate policy, changes in the rate of
influencing only supply, or only demand. Empirical depreciation of Pakistan's nominal effective exchange rate
investigation of the issues ... therefore, [is] not ea5Y at (NEER), a trade-weighted basket of currencies, were closely
the aggregate level. At a disaggregated (micro) level there linked to movements in non-food. price inflation during the
is perhaps more room for agreement as to policy actions. 1993/94 and 1994/95 fiscal years.
Since mid 1995, however, movements in the two variables
ln order to comprehend the factors explaining the behaviour have diverged. The pace of depreciation slowed while non-
of prices in third world countries it is, therefore,' imperative food prices accelerated. Although the devaluation of the rupee
to construct a framework which should not only be a hybrid in October temporarily restored the link between the two
of the above theories of inflation but, more importantly, the variables, the pace of depreciation of the rupee in nominal
analysis must be undertaken at much disaggregated sectoral effective terms has since slowed, mainly on account of the
level. • · · strength of the dollar against other major currencies. Over the
same period, non-food prices have continued to accelerate.

L___
 Chapter 15 Monetary Policy, Savings, and Inflation 453

Other Determinants of Inflation ln Pakistan, aside from some food items, most of the goods
Aside from macroeconomic policies, several other factors can for which prices are administered by the Government are in
potentially impact the overall price level in the economy. These the fuel and transport categories of the consumption basket.
include supply shocks, such as sharp swings in agricultural A comparison of changes in the fuel and transport sub-
production; adjustments in government-administered prices; indices of the CPI with other non-food goods sheds light on
movements in international prices; and the cyclical position the relation between administered-price and overall inflation.
of the economy. While movements in prices of administered goods have been
Of these factors, fluctuations in agricultural output appear reflected in changes in overall non-food inflation in recent
to be the most important determinant of overall inflation. The years, prices of non-food items other than fuel and transport
acceleration of prices in 1994/95 followed two consecutive have also moved in line with overall non-food inflation.
years of sluggish agricultural sector performance, and the Hence, even if administered price adjustments entirely account
moderation in inflation starting in late 1995 came after a for changes in fuel and transport prices, the deceleration
strong recovery in agricultural output. of other non-food prices in 1993/94 and the subsequent
However, this correlation is due entirely to the large weight acceleration is still left unexplained.
of food prices in the overall consumption basket. Indeed, Movements in world market prices, unless offset by
the observed correlation between non-food prices and exchange rate changes, can also impact the domestic price
agricultural sector performance in recent years suggests that level. ln Pakistan, however, movements in international prices
the impact of such supply shocks was limited to food prices. have generally not been related to changes in non-food price
For example, non-food prices decelerated in 1994/95, despite inflation in recent years. Throughout 1994, for example,
weak agricultural output, and accelerated in 1995/96 when import unit values accelerated sharply in dollar terms at a time
agricultural production rebounded. when non-food inflation was declining. After remaining at a
The impact of adjustments in government-administered high level for the first half of 1995, the increase in import unit
prices on overall inflation is difficult to interpret from the data. values moderated during late 1995, just as non-food prices
To a large· extent, such adjustments are unavoidable because, started to accelerate.
in the absence of the adjustments, the subsidy associated Finally, the cyclical position of the econo~y can affect
with the prevailing administered prices would give rise to an inflation. lf, for example, growth is in excess of the economy's
unsustainable financial imbalance for the Government. potential, factors of production would have to be utilized
Hence correlations between overall and administered price intensively, putting pressure on wages and prices. The recent
inflation can potentially be associated with a common acceleration in non-food prices in Pakistan, however, appears
underlying cause-the stance of macroeconomic policies. Lax not to be related to cyclical factors. After three years of growth
financial discipline, for example, intensifies demand pressure well below the economy's long-run trend level of 6-6.5 per
and raises inflation. At the same time, inflation magnifies the cent, present rates of employment and capacity utilization are
extent to which administered prices diverge from their true likely to be well below those consistent with full-employment.
market levels, necessitating the need for adjustments in the Source: ABN AMRO, Economic Bulletin: Inflation, Vol. 2, No. 4,
prices of administered goods. Karachi, 1996.

Appendix 15.5
effect. On the other hand, current consumption is derived
What Determines Savings? from current income through the income effect, resulting in
Here are fourteen factors that are supposed to affect savings. less savings. But the empirical evidence suggests that the real
interest rate is positively related with the savings rate. This
Income Variable
study hypothesises that an increase in the. rea 1 interest rate
Following both the Keynesian approach and the permanent provides an incentive to the household sector to save more.
income hypothesis it is hypothesised that the savings rate is With a relatively higher interest rate, the corporate sector also
positively related to the growth in national income because generates its own savings due to the higher cost of borrowing
more surplus income means a higher savings rate in the loans from domestic banking and non-banking institutions.
economy. The GDP growth rate and per capita income are
used alternatively as income variables in all the savings Domestic Credits
functions. Bank credits to the private sector are expected to have a
negative impact both on household and corporate savings.
Domestic Real Interest Rate lnstead of domestic bank credits to the public sector, total
The impact of the domestic real interest rate on domestic domestic transfers to the public sector from banking and
savings is a controversial issue among economists. On the one non-banking institutions are used in the analysis, assuming a
hand, it is argued that an increase in the real interest rate negative relationship between domestic transfers and public
tends to encourage domestic savings through the substitution
454 Issues in Pakistan's Economy

savings. ln fact, the availability of bank credits discourages the Workers' Remittances
efforts of institutional agents to enhance their own savings. Workers' remittances are expected to have a positive impact
Inflation Rate on household savings because a large part of remittances
are saved by the families of emigrants in Pakistan. A survey
lt is assumed that the expected inflation rate has a negative
done by Gillani and Amjad revealed that 35 to 40 per cent of
impact on household and corporate savings. Because of the
remittances were saved/invested by the families of emigrants
anticipation of a higher inflation rate in the future, people
in Pakistan.
substitute their future consumption for present consumption,
consequently saving less. Dependency Ratio
Foreign Interest Rate A well-known demographic variable, the dependency ratio,
is also included in the household saving function. The
A higher foreign interest rate may encourage people to
influence of the dependency ratio on household savings in
transfer their savings abroad, thereby reducing household and
developing countries has remained a controversial issue in
corporate savings. As regards public savings, a higher interest
the literature. [A number of scholars] have found a strong
rate on foreign debt means that the.burden of debt servicing
negative relationship between the dependency ratio and the
increases. Thus, foreign interest pushes the government to
saving rate. Counter to this, [others] have found no significant
raise its domestic resources, resulting in increased public
influence of the dependency ratio on domestic savings.
savings. The US prime rate is considered to be an appropriate
measure of the foreign interest rate. Net Foreign Capital Inflows
Export Earnings ln the economic literature, the relationship between
foreign capital inflows and domestic savings has received
The export sector is presumed to have an independent
considerable attention during the last three decades. lnitially,
impact on the propensity to save and is a critical source
the complementary approach was adopted. More recently,
of both private savings and government revenues. Export
the hypothesis has been put forward that an increase in
earnings allow the gross domestic product to rise by relieving
the foreign capital inflow exercises a depressing effect on
the foreign exchange constraints, consequently increasing
domestic savings. [ln our work we] focus on how the net
domestic savings. lt is also argued that the export sector
foreign capital inflow impacts on the private sector with
provides greater profits due to relatively higher prices in
reference to corporate savings. The justification of not
international markets. Therefore, the savings propensity for
including the foreign capital inflow in the household saving
export earnings may be higher than in the other sectors of
function is that Pakistan is an official borrower and most of
the economy.
its foreign loans come through official sources. The impact of
Terms of Trade net foreign capital to the public sector is also analysed in the
Harberger, Laursen, and Metzler, postulate that savings out public saving function.
of any given income falls with deterioration in the terms Profitability
of trade because a decline in export earnings means a fall
Profit is considered as a primary determinant of private
of current income and consequently reduction in domestic
corporate savings. Therefore; a positive impact of profitability
savings. On the other hand, Obstfeld argues that savings
on corporate savings is expected.
may increase with deterioration in the terms of trade because
the economy is forced to spend less· on imported goods to Real Wage Rate
maintain a target level of real wealth, thereby saving more. ln lt is hypothesised that a higher bias towards labour may be
this study, changes in the terms of trade are included in all the detrimental to corporate savings because an increase in real
saving functions to facilitate empirical examination of these wages in the large-sea le manufacturing sector raises the cost
controversial arguments. of production, consequently reducing profits. Thus, a negative
Private Capital Outflows correlation is expected between the real wage rate and the
corporate saving rate.
Private sector capital is like a migratory bird because when
the weather is not favourable, it simply moves on to safer Debt Servicing
pastures. ln Pakistan, nationalization measures and political A negative relationship b.etween public savings and debt
unrest in the country during the 1970s and 1980s discouraged servicing is expected, as every year 17 to 20 per cent of total
private sector economic activities, resulting in huge capital revenues are spent on debt servicing in Pakistan, which is
outflows from Pakistan. Moreover, capital flight resulted expected to be saved by the public sector.
in a reduction of available resources to finance domestic
investment, eventually leading to a decline in the rate of
capital formation. This phenomenon has adversely affected
the country's current and future growth and savings rates.
Capital outflows hurt not only private savings but also public
savings in Pakistan. Governmen't revenue collections have Source: lqbal, Zafar, 'lnstitutional Variation~ in Saving Behaviour
declined as a result of private capital outflows, and so have, in. Pakistan', Pakistan Development Review, Vol. 32, No. 4, 1993,
consequently, public savings. 1296-9 ..
 Chapter 15 Monetary Policy, Savings, and Inflation 455

NOTES

1. This section is based on Khan, Ashfaque H., 'Need and Scope 25. Hossain, Akhtar, 'The Monetarist versus the Neo-Keynesian
for Further Reforms in the Financial Sector in Pakistan', Views on the Acceleration of Inflation: Some Evidence
Journal of the Institute of Bankers, Pakistan, June 1995; and on from South Asian Countries (with Special Emphasis on
articles written in the press on monetary policy, in particular Pakistan)', Pakistan Development Review, vol. 29, no. 1, 1990,
those by Aftab Ahmad Khan and M. Imtiaz Ali. Other 25.
articles in the Journal of the Institute of Bankers, Pakistan have 26. Jones, J. D. and N. M. Khilji, 'Money, Growth, Inflation and
also been a useful source. Causality (Empirical Evidence for Pakistan 1973-1985 )',
2. Khan, Aftab Ahmad, DAWN, Economic and Business Review, Pakistan Development Review, vol. 27, no. 1, 1988.
1-7 April 1995. 27. Cited in Hossain, Akhtar, op. cit., 1990.
3. Mahmood, Javed, Journal of the Institute of Bankers, Pakistan, 28. Ibid. 27.
August 1993, 147. 29. Hafiz Pasha et al. 'What Explains the Current High Rate of
4. Ibid. Inflation in Pakistan? Pakistan Development Review, vol. 34.
5. Khan, Aftab Ahmad, 'New Monetary Policy Designed to no. 4, 1995.
Regulate Economy through Market Based Instruments', The 30. Ibid.
News, Business and Finance Review, 5 August 1995. 31. Naqvi, S. N. H. and Khwaja Sarmad, External Shocks and
6. Ibid. . Domestic Adjustment: Pakistan's Case 1970-1990, (UGC
7. Also see the State Bank of Pakistan's Pakistan: Financial Monograph Series in Economics) (Karachi: Oxford
Sector Assessment 1990-2002, (Karachi, 2002), for a critique of University Press, 1997), 46.
the pre-reform and pre-1988 financial system in Pakistan, 32. Ashfaque Hasan Khan et al. 'Financial Repression, Financial
and the propagation of the new, post-1988 reforms. Development and Structure of Savings in Pakistan', Pakistan
8. Khan, Ashfaque H., op. cit., 1995, 43. Development Review, vol. 27, no. 4, 1988, 701.
9. Ibid. 43-6. 33. Ibid.
10. Ibid. 44. 34. Siddiqui, Rehana and Rizwana Siddiqui, 'Household Saving
11. Mahmood, Javed, op. cit., 1993, 147. in Pakistan', Pakistan Development Review, vol. 32, no. 4, 1993,
12. Khan, Ashfaque, H., op. cit., 1995, 46. 1281-92.
13. State Bank of Pakistan, Annual Report, 1994-95, Karachi, 35. Iqbal, Zafar, 'Institutional Variations in Saving Behaviour in
1995. Pakistan', Pakistan Development Review, vol. 32, no. 4, 1993,
14. Khan, Ashfaque, H., op. cit., 1995, 49. 1300.
15. Ibid. 36. Ibid.
16. Ali, M. Imtiaz, The News, Business and Finance Review, 37. Shabbir, Tayeb and Azhar Mahmood, 'The Effects of Foreign
21 October 1995. Private Investment on Economic Growth in Pakistan',
17. Khan, Ashfaque, H., op. cit., 1995, 51. Pakistan Development Review, vol. 31, no. 4, 1992, 83 7.
18. Khan, Ashfaque, H., op. cit., 1995. 38. Ibid. 832.
19. Khan, Aftab Ahmad, The News, Business and Finance 39. Iqbal, Zafar, op. cit., 1993.
Review, 5 August 1995. 40. Naqvi, S. N. H. and Khwaja Sarmad, op. cit., 1993.
20. Ibid. 52. 41. Khan, Ashfaque Hasan, Lubna Hasan, and Afia Malik,
21. Ilyas, Muhammad, 'Auctioning of Government Securities', 'Dependency Ratios, Foreign Capital Inflows and the Rate
Journal of the Institute of Bankers in Pakistan, vol. 60, no. 1, of Savings in Pakistan', Pakistan Development Review, Vol. 31,
1994, 22-3. No. 4, 1992, 848-9.
22. Government of Pakistan, Pakistan Economic Survey 1994-95, 42. Ibid. 849.
Islamabad, 1995, 61. 43. Nenova, Tatiana, Cecile Thioro Niang with Anjum Ahmad,
23. Ilyas, M., op. cit., 1994, 20. Bringing Finance to Pakistan's Poor: A Study on Access to Finance
24. Meenai, S. A. and Javed A. Ansari, Money and Banking in for the Underserved and Small Enterprises (Washington DC:
Pakistan (Karachi: Oxford University Press, 2001 ). World Bank, 2009).
44. Ibid. 32.
 Part6

lM ®@c ~ □ ~ ® rr @1-~ □ ~ m ~
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From ESAFs to PRSPs to SBAs
-1988 to the present
The global processes of liberalization, privatization, and openness-broadly called 'neo-
liberalism' -have also swept Pakistan into their fold, and the Structural Adjustment
Programme,· now implemented in over a hundred countries, has been the mechanism
through which these policies are followed. The Structural Adjustment Programmes-
whether in the guise of Extended Fund Facility (EFF), Enhanced Structural Adjustment
Facility (ESAF), Poverty Reduction Growth Fund (PRGF) or the most recent Poverty
Reduction Strategy Papers (PRSPs) and Standby Arrangements (SBAs)-enforce extensive
changes in almost all sections of the economy, including issues of 'getting prices right',
lower fiscal deficits, more open trade, and a freer financial sector. Despite the continued
adherence of countries to Structural Adjustment Programmes, there is now extensive
evidence that most countries have suffered severely due to the programmes, while many
are far worse off now than they were before the programmes began. Similarly, in Pakistan,
research has shown that poverty, inequality, and unemplo¥ffient all increased on account
of the Structural Adjustment Programmes since 1988, and low growth and high inflation
became the outcome. The reasons for the Pakistani government's continued recourse to
IMF/World Bank 'assistance' lie in the fact that the ruling clique is unwilling to carry out
the essential and urgent reforms needed to redress critical shortcomings in the economy;
they find it far easier to borrow than, for example, to cut defence expenditure markedly
or carry out extensive and meaningful land reforms, or to raise taxes. The period since
1988 has changed much of the geopolitical balance around the globe. In the case of
Pakistan, the post-1988 period was the worst in the country's nearly six-decade history,
where there had been an unravelling of the growth of the 1980s, with poverty rising to
unprecedented levels, largely on account of following the policies of the IMF and the World
Bank. It was only events after 9/11 which rescued Pakistan's economy, albeit resulting in
further consequences, and created a false boom, which eventually collapsed. Moreover,
the Musharraf-Shaukat Aziz government became one of the most visible conduits of neo-
liberalism in Pakistan, even when it was not following an IMF Programme.
 Structural Adjustment Programmes:
Composition and Effects

There is a general belief amongst many students of, and other concerned segments of society have come to believe
within, developing countries that the International Monetary that their own governments have lost all sense of autonomy
Fund (IMF) and the World Bank, or the Washington and now merely follow dictation from the IMF and the World
Consensus, as their ideology. is called, dominate economic Bank. Many believe, in fact, that their own ministries of
policy across the world, especially in developing countries, finance are now quite redundant, having been replaced by the
and influence it to suit their own interests. In developing International Ministry of Finance-see Box 16.1. Although it
countries, politicians, academics, journalists, and numerous is true that these two agencies in Washington have exerted

Box 16.1 issue threats and then, at the last moment, the government
IMF Pressure and Conditionalities ... would come upwith nev,.,'pf91)1l~~s., •• :· · '
. · ·. This time, however; ,th1ngsis~em to have changed: the
This case fr6fn Kenya, is quite typic~I ~f t~e sort of ;nfluence arfd . . ., conditions for·the·~ew thiee~year,.$198mlMF loan are the
pressure ii,e IM~ puts on member countries. In fact, it sounds tciughest e~er imposed by ,the/und on any government.
00

almost identicaf to the, Pakistani case--: see. also Chapter 17. ,They contairi more than. 60. s~parate elements. The loan,
Prudent. economics and political virtue are not the most which will unlock a. further $300m from other donors and
marked characteristics of the Kenyan government. Yet if
President Daniel Arap Moi is to getthe' foreign aid that his
lenders, represent's a. virtual surrender of the country's
sovei'reignty.
drought-stricken country needs, he must convince, and keep The IMF is insisting, for a start, that the Kenyan parliament
on convincing/the IMF that his government is indeed on the : , must debate and pass a new 'corruption law. That, however,
path to both·. Atthe'end:of July, the·Fund agreed to resume disgu_ises the fact that the. details of the law have already
lending ·to . Kenya; but only on , extraordinarily stringent been prescribed by the; Fund regardless of parliament's
.. con~itions. · deliberations: Parliament must aiso pass a code of conduct
Like several other African countries, Kenya depends on which will rule,that all public officials, except for the president
two things: rain and aid. Both have dried up recently, and himself,. must declare their assets. The. government will
the country Is facing the worst. crisis in its history. It has have to draw up a daily balance sheet for inspection by IMF
not rained properly.for two years and· the dams are dry. In offlciais'. And a new team of Treasury officials will have direct
:· ! some areas people are dying from hunger, and many are ' financial control over other government departments.
'permanently impoverished by the loss of their livestock. 0 As a reward, Kenya will receive $18m immediately to help
Electricity and tap water are rationed, available only for a few • mitigate the :effects of the drought. After that, however, the
hqurs a day, and these hours, says the government, may be ·aid'._will be delivered in such thin slices that the slightest
cut further. Many factories and businesses are at a standstill.. ·.., •:deviance . from the programme will mean that it can be
'.The economy, ·which was:·once· buoyant, is now growing at stopped instantly. There will be no leeway. Kenya is being
just 1.4%. . . • . · treated .too firmly not just because of its own bad record, but
There has also been an aid drought. In 1997, Kenya's to show.other African governments that, if they too want aid,
·donors ·finally ran out of patience. with one of the most · they must rule their countries in a way the IMF approves of.
corrupt and careless governments in Africa. ThEi IMF abruptly · 'The presence of Richard Leakey, a white Kenyan
stopped paying out.a large loan that it had approved only a palaeontologist and wildlife expert, was a critical factor
, year earlier. Mr. Moi has long condoned grotesque ·levels of in the Fund's decision to restore aid. A year ago, Mr Moi
looting by his top politicians and civil servants. But for many gave him the job of cleaning up the government.· Speaking
years. donor countries and Kenya's government had been after the loan was approved,, Mr Leakey was anxious not
engaged in a complicated minuet. · to be seen as the Fund's hatchet man. He insists that the
Ttie government would make extravagant promises about conditions are a 'convergence' of policies between the IMF
reforming itself. The donors and the IMF would persuade and the government, and that the government is committed
themselves that these were. genuine. The aid would flow. to implementing them wholeheartedly.
But once the flow had.. started, the government would forget
• it. promises. The money would be stolen. The donors would Source: The l;conomist, London, 5 August 2000.
 Chapter 16 Structural Adjustment Programmes: Composition and Effects 459

the strongest external influence on underdeveloped countries high achievers in terms of growth were castigated for being
and their governments, it is important to realize that this poor performers on human indicators. This gave rise to other
sort of outside influence is not something new. While World Bank packages, such as Basic Needs and Redistribution
political pressure in its more covert forms has existed for With Growth. Growth was still important, but countries were
many decades-in fact, one can argue that since the time of advised to look after their poor and provide basic facilities for
colonialism it has always existed and has never quite gone them as well. The 1970s also saw huge amounts of dollars
away-economic ideas and packages have been exported being loaned to (mostly) Latin American countries, which
from Washington, at least since the formation of the World were intended to supplement their own efforts at raising
Bank and the IMF. The global dominance of the IMF was at capital for investment.
its peak in the 1980s and 1990s, perhaps even early into the After the debt crisis of the 1980s, and with deteriorating
twenty-first century, but there are signs that this dominance balance of payments positions and inflation in excess
may have waned a little in recent years. However, in countries of 10,000 per cent in many countries, the Washington
such as Pakistan, they have played a fundamental role in the agencies stepped in again to offer programmes and loans for
restructuring of the economy since the 1980s, and continue stabilization and structural adjustment. While Washington's
to have a major influence even today. Pakistan seems to be view in the past may have been more advisory and suggestive,
one of those few countries which continue to go back to the and somewhat covert in the era before the 1980s, with the
IMF every few years, just as it has, yet again, in September Structural Adjustment Programme it became much more
2013. involved, direct, aggressive, and overt than ever before. In
the 1980s, the IMF and World Bank became the driving
force at the global level, and facilitated and guided economic
16.1 THE DEVELOPMENT AND EXPORT OF restructuring in dozens of countries. Structural adjustment
has become the leading vehicle by which the official financial
DEVELOPMENT THINKING 1 institutions have gained access to policymakers and, through
conditionality, have been able to induce profound changes in
In the 1950s and l 960s, the model that was suggested and
development policy and economic structures.
developed by academics and government officials in the
In important ways, the 1960s and 1980s have many parallels.
USA focused almost entirely on growth. This model, where
Most important were the broad overall macroeconomic
the general aim was to increase growth in the economies perspectives, where growth mattered most, and issues of
of the relatively advanced underdeveloped countries-Latin
equity and welfare were somewhat secondary. Trickle-down
America and some Asian countries-rested on the premise
and functional inequality were revived under the Structural
that increased growth should be the fundamental focus
Adjustment Programmes. It came to be believed as it had
of all policy, and eventually the fruits of .growth would
been in the past, that 'economic growth, unencumbered by
'trickle down' to the population at large. The doctrine of ancillary concerns, remains the unquestioned imperative
'functional inequality' was promoted, where the general aim of development strategy and that the benefits derived from
of the policy was to focus on the already well-to-do and to
economic growth can best provide the means for addressing
increase their wealth, assuming that they had high saving
ancillary concerns, whatever they may be'. 2 However,
rates and would thus reinvest their incremental wealth (see
unlike in the 1960s, state intervention was to be minimized
Chapter 6 for the application of this philosophy to Pakistan
and protectionism became impermissible, although only
in the 1960s). Industrialization was the mechanism for this for underdeveloped countries. 3 The market was the new
enhanced growth, and underdeveloped countries began
institutfon that was to distribute the benefits of growth and/
to produce goods, particularly consumer and intermediate
or development.
goods, which they had imported earlier-this was the import
Strangely enough, while there are similarities between the
substituting industrialization phase, popular everywhere. l 960s and 1980s, the 1990s also seemed to resemble a stage
D'uring this phase of development, agriculture was neglected
in the 1970s. The incomplete success of the 1960s led to the
and the internal terms of trade were biased against it (again, Basic Needs approach, while in the 1990s, following the
Pakistan's experience, as shown in Chapters 6 and 8, is Structural Adjustment Programmes of the 1980s, concepts
most revealing). Urbanization increased and the process of like social action programmes, sustainable development,
'modernization' of the underdeveloped countries is .said to adjustment with a human face, and sustainable poverty
have begun. ·
reduction were introduced to address the incomplete success
Soon after, the detrimental policies towards agriculture were of the adjustment programmes of the 1980s. History does
corrected and, with the discovery of higher-yielding varieties seem to follow a strange sort of repetitive logic, albeit with
of grain, an agricultural Green Revolution began in countries significant innovations.
as diverse as Mexico, Pakistan, and the Philippines-often at While Washington's economic policies have influenced,
the insistence of US officials, where the Ford Foundation and if not dominated, much of what has happened in the
other agencies played a distinctive role. underdeveloped countries since most of them acquired
Towards the end of the 1960s, Washington discovered that (a misnomer) 'independence', the last few decades have
these policies of growth had caused as many problems as seen an active and much more involved presence. For this
they had sought to solve. Economic growth had indeed taken reason, we now turn to an examination of what constitutes
place, but development was not assuming a particularly a stabilization and Structural Adjustment Programme, and
pleasant trend. All the countries that were being praised as
460 Issues in Pakistan's Economy

then examine its subsequent effects. Before that, however, spending _nriori tie.s-had.-1.o.-Chan.ge._As a consequence,
it will be helpful to examine the genesis of the Structural Tnternal· investment ~c!...gig~_ exp_endiques b~gan to Tall.
Adjustment Programmes (see Appendix 16.1 for the In order to avert IJOlitical unrest, many~governments were
theoretical underpinnings of changes in thinking about compelled to ~-~~i~ current spe;;ding, especially for public
development, and Appendix 16.2 for the role of the IMF and sector employment, at the same time as having to cut
World Bank over the last few decades). capital sp·ending dramatically, particularly for infrastructure
maintenance and improvement.
The results of such a policy were obvious at the outset:
16.2 FROM STRUCTURAL ADJUSTMENT social expenditure fell in almost all those countries that
had accumulated debts. The results were noticeably harsh
LOANS TO STRUCTURAL ADJUSTMENT on the poorer sections of society, who were, possibly, the
PROGRAMMES4 main beneficiaries of public spending in the social sector.
It is important to point out that defence spending suffered
ln the 1970s, the IMF and World Bank used to play a smaller, significantly smaller cuts than did social expenditure and
though important, role in the economic development of investments. One reason for this was that, at least until the
many developing countries. They used to provide loans early and mid-1980s, many governments in the Third World
which were based on careful country analysis and had were ruled by military dictators or juntas, and any cut in
stringent conditions attached to them. The focus of the defence would have implied cuts in the privileges of the
IMF was essentially on improving the balance of payments rulers themselves.
problem, while the World Bank was more focused on specific The IMF's initial approach to loans under the structural
projects and sectors. World Bank loans were usually made adjustment umbrella had two essential components. Along
with projects in mind, rather than issues related to the with the World Bank, it emphasized the stabilization of
more general workings of the macroeconomy. By the mid- a country's macroeconomic situation by focusing on the
l 970s, commercial banks offering easy credit terms, often balance of payments. Loans were meant to minimize short-
on few or no preconditions, replaced the IMF as the main term pressure on capital. There was also some insistence
source of credit. The rise of western banks as credit providers on measures to cut domestic aggregate demand. Demand
took place following the huge oil price rises in 1972 and reduction was to be undertaken by drastic cutbacks in
1979, when oil-rich countries deposited their petrodollars public spending and, with the help of monetary policies,
in international banks. These dollars were then recycled the expansion of the money supply was to be restrained.
to developing countries, particularly to Latin American There was also a need to realign the domestic currency with
countries. The extent of this transformation was enormous: international markets. It was believed that in the era of
in 1971, 60 per cent of developing countries debt was owed to import substituting industrialization, the exchange rate was
official lenders, while in l 981 commercial banks constituted overvalued, since this made imports of machinery somewhat
as much as 70 per cent. cheaper. Many countries also had two exchange rates--one
This foreign money was lent on easy terms and had a for capital goods and the other for consumer goods. The
negative real rate of interest. It fuelled extensive, often cure for this was seen to be devaluation, after which it was
luxury, consumption in most dev~loping countries, where believed that the country's exports would become more
the elite benefited most. These developing countries had competitive and, since the prices of its imports would rise,
meanwhile accumulated substantial amounts of foreign debt. the volume of imports would decline. These changes were
While interest rates were low and commercial banks were meant to reduce.the pressure on foreign reserves, hopefully
ready to lend, governments in developing countries and in improving the balance of payments position.
the advanced countries were not very concerned about the The second component of the policy was designed to
accumulating debt. However, when US _interest rates rose to improve overall economic efficiency and promote growth
18 per cent to finance Ronald Reagan's largest peace-time objectives by reforming macroeconomic policy and
military build-up, Third World countries were forced to strengthening local institution0his was the main difference
increase their budgetary allocations to service the US dollar- between stabilization and adjustment. Stabilization,
denominated debt. While the cost of servicing outstanding in order to deal with the contractionary repercussions of

I
debt increased, commercial credit to the Third World became adjustment, required policy and institutional reforms on both
much tighter. In a matter of a few years, commercial loans a macroeconomic and sectoral level. The IMF continued to
were no longer available to finance development projects, give priority to short-term loan support to economies where
or to refinance the existing short-term debt obligations that the primary focus was demand constraint measures and
countries had incurred. currency valuationj[he World Bank focused on sectoral loans
By the early 1980s, the picture was very clear: almost and on restructuring economies through institutional and
without exception, developing countries were struggling to policy reform in the medium term to stimulate the medium-
repay the debts that they had so eagerly acquired during term supply response-See Box 16.2 on information and

I
the 1970s. At the same time, these countries had to absorb background on the IMF.
the financial losses caused by deteriorating terms of trade There was a major change from the mid-1980s, when the
and high import prices for oil. In order to repay part of their programmes of the World Bank and IMF began to become
debts or, more importantly, the huge interest, government more fused. Also, the distinction between stabilization and

1
 Chapter 16 Structural Adjustment Programmes: Composition and Effects 461

Box 16.2 and prospects. Its views are published twice each year in the
What is the International Monetary Fund? World Economic Outlook and the Global Financial Stability
Report. Technical assistance and training are offered-mostly
The International Monetary Fund-also known as the 'IMF' or free of charge-to help member countries strengthen their
the 'Fund'-was conceived, along with the World Bank, at a capacity to design and implement effective policies. Technical
United Nations conference convened in Bretton Woods, New assistance is offered in several areas, including fiscal policy,
Hampshire, U.S. in July 1944-this is why it is also known, monetary and exchange rate policies, banking and financial
with the World Bank, as one of the Bretton Woods Institutions system supervision and regulation, and statistics. In the event
(BWls). The 45 governments represented at that conference- that member countries do experience difficulties financing
all from developed countries, of course, many, like Britain and their balance of payments, the IMF is also a fund that can be
France, still colonial powers-sought to build a framework for tapped to help in recovery. Financial assistance is available
economic co-operation that would avoid a repetition of the to give member countries the breathing room they need to
disastrous economic policies that had contributed to the Great correct balance of payments problems. A policy programme
Depression of the 1930s. The International Monetary Fund supported by IMF financing is designed by the national
was created in 1945 to help promote the health of the world authorities in close co-operation with the IMF, and continued
economy. Headquartered in Washington DC, it is governed financial support is conditional on effective implementation of
by and accountable to the governments of the 184 countries this programme. The IMF is also actively working to reduce

t that make up its near-global membership. It has a staff of

approximately 2,680 from 141 countries, with total quotas of
around $300 billion, and outstanding loans against its name of
poverty in countries around the globe, independently and in
collaboration with the World Bank and other organizations.
The eight countries that constitute the G-8, together control
$107 billion to 56 countries, of which 38 are on concessional 48 per cent of IMF's voting power, with the US having 17.14
terms. In 2003, the IMF concluded surveillance consultations per cent of votes, Japan 6.23 per cent, Germany 6.11 per
with 136 countries, of which 96 voluntarily published their cent, France 5.05 per cent, and so on. The number of votes
staff reports. The IMF's resources are provided by its member is determined by contributions to the IMF, with the rich
countries, primarily through payment of quotas, which broadly and developed countries making larger contribution, and
reflect each country's economic size. The total amount of controlling greater votes to determine policy and to decide
quotas is the most important factor determining the IMF's which countries will get IMF loans and under what conditions.
lending capacity. The annual expenses of running the Fund
are met mainly by the difference between interest receipts Source: IMF web site.
(on outstanding loans) and interest payments (on quota
'deposits').
The winner of the 2001 Nobel Prize for Economics, Professor
Article I of the Articles of Agreement sets out the IMF's
Joseph Stiglitz, has been a critic of the IMF and the way it has
main responsibilities: promoting international monetary
addressed issues across the globe. He writes:
co-operation; facilitating the expansion and balanced growth

t of international trade; promoting exchange stability; assisting

in the establishment of a multilateral system of payments; and
ma~Qg its resources available (under adequate safeguards) to
In its original conception, then, the IMF was based on
a recognition that markets often did not work well-that
they could result in massive unemployment and might
members experiencing balance of payments difficulties. fail to make needed funds available to countries to help
them restore their economies. The IMF was founded on
IMF Activities the belief that there was a need for collective action at
More generally, the IMF is responsible fcir ensuring the stability the global level for economic stability, just as the United
of the international monetary and financial system-the system Nations had been founded on the belief that there was a
of international payments and exchange rates among national need for collective action at the global level for political
currencies that enables trade to take place between countries. stability. The IMF is a public institution, established with
The Fund seeks to promote economic stability and prevent money provided by taxpayers around the world. This is
crises; to help resolve crises when they do occur; and to important to remember because it does not report directly
promote growth and alleviate poverty. It employs three main to either the citizens who finance it or those whose lives
functions-surveillance, technical assistance, and lending- it affects. Rather, it reports to the ministries of finance
to meet these objectives. The IMF works to promote global and the central banks of the governments of the world.
growth and economic stability-and thereby prevent economic They assert their control through a complicated voting
crisis-by encouraging countries to adopt sound economic arrangement based largely on the economic power of
policies. Surveillance is the regular dialogue and policy advice the countries at the end of World War II. There have been
that the IMF offers to each of its members. Generally once a some minor adjustments since, but the major developed
year, the Fund conducts in-depth appraisals of each member countries run the show, with only one country, the United
country's economic situation. It discusses with the country's States, having effective veto. (In this sense, it is similar

l
authorities the policies that are most conducive to stable to he UN, where a historical anachronism determines
exchange rates and a growing and prosperous economy. The who holds the veto-the victorious powers of World War
IMF also combines information from individual consultations II-but at least there the veto power is shared among five
to form assessments of global and regional developments countries.)
462 Issues in Pakistan's Economy

Box 16.2 (continued) pushed despite the fact that there is no evidence showing
it spurs economic growth. In other cases, the economic
Over the years since its inception, the IMF has changed policies that evolved into the Washington Consensus
markedly. Founded on the belief that markets often and were introduced into developing countries were
worked badly, it now champions market supremacy with not appropriate for countries in the early stages of
ideological fervour. Founded on the belief that there is a development or early stages of transition.
need for international pressure on countries to have more To take just a few examples, most of the advanced
expansionary economic policies-such as increasing industrial countries-including the United States and
expenditures, reducing taxes, or lowering interest rates to Japan-have built their economies by wisely and
stimulate the economy-today the IMF typically provides selectively protecting some of their industries until they
funds only if countries engage in policies like cutting were strong enough to compete with foreign companies.
deficits, raising taxes, or raising interest rates that lead While blanket protectionism has often not worked for
to a contraction of the economy. Keynes would be rolling countries that have tried it, neither has rapid trade
over in his grave were he to see what has happened ·to liberalization. Forcing a developing country to open
his child. itself up to imported products that would compete with
The most dramatic change in these institutions occurred those produced by certain of its industries, industries
in the 1980s, the era when Ronald Reagan and Margaret that were dangerously vulnerable to competition from
Thatcher preached free market ideology in the United much stronger counterpart industries in other countries,
States and the United Kingdom. The IMF and the World can have disastrous consequences-socially and
Bank became the new missionary institutions, through economically. Jobs have systematically been destroyed-
which these ideas were pushed on the reluctant poor poor farmers in developing countries simply couldn't
countries that often badly needed their loans and grants. compete with the highly subsidized goods from Europe
The ministries of finance in poor countries were willing to and America-before the countries' industrial and
become converts, if necessary, to obtain the funds, though agricultural sectors were able to grow strong and create
the vast majority of government officials, and more to the new jobs. Even worse, the IMF's insistence on developing
point, people in these countries often remained skeptical. countries maintaining tight monetary policies has led to
... A half century after its founding, it is clear that the interest rates that would make job creation impossible
IMF has failed in its mission. It has not done what it was even in the best of circumstances. And because trade
supposed to do-provide funds for countries facing an liberalization occurred before safety nets were put into
economic downturn, to enable the country to restore place, those who lost their jobs were forced into poverty.
itself to close to full employment. In spite of the fact that Liberalization has thus, too often, not been followed by
our understanding of economic processes has increased the promised growth, but by increased misery. And even
enormously during the last fifty years, and in spite of IMF's those who have not lost their jobs have been hit by a
efforts during the past quarter century, crises around the heightened sense of insecurity.
world have been more frequent and (with the exception Capital controls are another example: European
of the Great Depression) deeper. By some reckonings, countries banned the free flow of capital until the
close to a hundred countries have faced crises. Worse, seventies. Some might say it's not fair to insist that
many of the policies that the IMF pushed, in particular, developing countries with a barely functioning bank
premature capital market liberalization, have contributed system risk opening their markets. But putting aside
to global instability. And once a country was in crisis, such notions of fairness, it's bad economics; the influx of
IMF funds and programmes not only failed to stabilize hot money into and out of the country that so frequently
the situation but in many cases actually made matters follows after capital market liberalization leaves havoc in
worse, especially for the poor. The IMF failed in its its wake. Small developing countries are like small boats.
original mission of promoting global stability; it has also Rapid capital market liberalization, in the manner pushed
been no more successful in the new missions that it has by the IMF, amounted to setting them off on a voyage on
undertaken, such as guiding the transition of countries a rough sea, before the holes in their hulls have been
from communism to a market economy. . . . . repaired, before the captain has received training, before
. . . The ideas and intentions behind the creation of life vests have been put on board. Even in the best of
the international economic institutions were good ones, circumstances, there was a high likelihood that they
yet they gradually evolved over the years to become would be overturned when they were hit broadside by a
something very different. The Keynesian orientation of big wave.
the IMF, which emphasized market failures and the role The application of mistaken economic theories would
for government in job creation, was replaced by the free not be such a problem if the end of first 9olonialism and
market mantra of the 1980s, part of a new 'Washington then communism had not given the IMF and the World
Consensus'-a consensus between the IMF, the World Bank the opportunity to greatly expand their respective
Bank and the US Treasury about the 'right' policies for original mandates, . to vastly extend their reach.. Today
developing countries-that signalled a radically different these institutions have become dominant players in the
approach to economic development and stabilization .... world economy. Not only countries seeking their help but
. . . The ideas that were developed to cope with also those seeking their 'seal of approval' so that they
problems arguably specific to Latin American counties, can better access international capital markets' and must
subsequently been deemed applicable to countries follow their economic prescriptions, prescriptions which
around the world. Capital market liberalization has been reflect their free market ideologies and theories.
 Chapter 16 Structural Adjustment Programmes: Composition and Effects 463

.,f
Box 16.2 (continued) governance: w~otdeddeswhaMhey do.The institutions are . I
dominated not just_by the wealthiest industrial countries but
The result for many; people has been poverty and for by commercial and financiat,.inte_rests in those countries.
mapy[,c9u~t~i~~,,s9c,i~t,,e~8:;P8li!,if.~I .9~ao_s_; lhe IMF has and th~!\P8,1.!cie~,,of.'!t~t institutions nat,urally:, reflect this.
'.IT1ade mistakes,('1i~l\,i:!h.~11 §!r~a~~it~ has, been involved in: The choice heads: tor these,,institutions symbolizes the
•d,~yel?g~e~t.?rl~i~d:!r~~~El';t'le~J·. ~~? 1\9 gou~tries. ,making institutions' problem: and' too often tias contributed .to their
... ___tt,e_transition. fr~m commtmi~r:T.1 _to _c,?pita,lism. Strt,!ftl!.r:aJ dysfunctio~'.y,{hlle_~l,rnb'st'auo!Jhe activiti~s of the IMF and
~~~.adjustment programmes did not bring sustained growth the World Bank today' are in the developing world (certainly.
, ,~· tt. even_, to those. like· Bolivia. that adhered to its strictures; .all.of their lending);they are led by representatives from the 1

in c,many . 'count.ries. excessive austerity stifled growth; industrialized nations· (By custom or tacit agreement the
. ___,_successful _ecor,omic_programmes require.extreme .care. in 'head of the IMF.is alw.ays a European, that of the World Bank
sequencing-the order in which reforms occur-and pacing: an American). They are chosen behind closed doors, and it
lf,-1for instance,,markets are opened up for competition too _has never even been viewed as_ a prerequisite that ttie head
,..;, rapidly...before strong financial institutions are established, 'should ha~e any experience in the ·developing world. The.,
Jhen jobs will be destroyed faster than new jobs are cr~ated. institutions.'are not representatives of the nations' they se~e ...
~e'':,:~1 . ;t}-~, "". , , , ·-~ .,.,-, , . , ,,
)r1many'countries. mistakes in ·sequencing and pacing led to
rising unemployment arid·increased poverty.
t'i,Underlying the problems of the IMF and the other Source: Joseph Sliglitz, Globalization and its Discontents
~. C [nternatiorial economic institutions is the problem. of (London: Allen carie. 2002). 12-19.

adjustment became narrower, and the Structural Adjustment aq.justment loan increased from an average of twenty-seven
Programmes of the late 1980s onwards had elements of iii 1985, t~ fifty-six in 1989. ·
both. There were also differences in the time span of loans. Since the l 980s, dozens of countries have made use of IMF
Earlier, stru~tural adjustment loans were for twelve to and World B.ank structural adjustment loans. In the. 1980s, as
eighteen months, but as institutional and policy reform much as $41 billion was made available to finance 258 loans,
became an increasingly important concern, the period of the arid aithough Africa received almost half of those loans, it
loans increased to between three and five years. Now, more was the Latin American countries as a whole which received
complex and stringent conditions were .also being attached the largest amount i_n this period (see Table 16.1 for more
to loans, which were much bigger in money terms than ever recent information). Since the economies of Latin America
before. The number of conditions attached to a structural are larger, they may have had recourse to fewer but much
larger loans (see Box 16.3 on the IMF's finances).

t '/;."I

-~• :.,B02S.,16.3zr adjusted measure for what it calls 'uncommitted usable

-:--,:rhe IME's Finances. resources'. These total 48 billion SDRs.
~{·,.;; i~".. J'i, ~'.«, ' ,'>I',
The usual way._ to top-up .the IMF's resources is to
,:i,.cw,ca'n the
IMF help all the· countries of the world facing an increase members' quotas, but this takes time. So in
"iP"- im'minentreconomic collapse? .. emergef!_cies there are other.potential sources of cash.
,;; t e: \?trr. ,,,{ Under a special agreement, the IMF can borrow up to 17
After committing $17.8 billion to rescue Mexico, how much billion SDRs from industrialized countries and another 1.5
.,money):loes ,the International Monetary l;und (IMF) ,have billion SDRs from Saudi Arabia. In extremis, it could sell
-- ·•·-1ett·in its· coffers? "The question ·sounds-simple: Bunhe ;.,.;s some of its 104m ounces of gold, which are probably worth
' answer is not. tor theVIMF·s financial structure is1fiendishly .around $39 billion ...
~com lex. :.• 'S t •• '~--· Th~ IMF has son,e liab_ilities too. Every one of its
;: p (' :: -;. ,,,:,::,c, ·f·i .~,:..;. - '"''t:, '·',<_;;'.;''; ,·_
For a start, its internal accounts are calculated in terms of members _is entitled to receive a portion of its quota (the

, '~' ,.t.
--~~p·e_ciaJ~d~~i~~frig~t~-(S~~~c:.~~ificial ~~,~~!:>,~fea.~~9,;,py.
·--::t~.·:~the·IME:and·madeoup'oh·weighted·basket·of theworld•s
t _,_ ,i "' . ,, ' ~~ •"'P'(~ ·\:it<:,\ •,,'' :t.,-., °4''-~ 'it\tt)!
•r~~ir~e .top cu(rencies::At:present;:one SOR i~'~?rth. $1. -~?_:-,, :~
..... · .gril,The,IMF.. stmain •sciur,peroft,capital iis. the,subscriptions;
1 1
so called·'reserve traiiche') with'ni5 questions asked ... The
•.. ·IMF 'm~st aii~v~ b~,)g.,a positionto h0~9.U.J,Ih·e.~e !ranches:
. ,which add up to around 29 biUion SDRs.-- •····· -..... •··· • •···
:;: ; The·realiiy; then, is that ifis almost impossible to calculatei.,,l~d
,,I 1. •li'!l.1:o'r~gu6ta's.•,iijthat! ·au~
itstmembers tpay,)A'tcountryis·, quota how much the Fun8·~•d:uld ~afely lend to ~'troubled'couhtry...
~; . .,~nH'~Mt~e lsizei:otiitsi~'d6nomy.' ,,The !total ramount of Nonetheless,' [amberto'oi~dttlii ltafian pririie ministertahc:I 1' r
'. / 1Affa'tt~·/~~1''.451billi6n-lfSDRs':l!But.;sinte' co,Jntries ~pay iafil'oldilMFhahd;<says-ttiatlits1fesources'tare1'nof1s'uiteci1toO rs
. uota. in'ftAeif"'6wn"rcurr~~ies:1-ana~many of dealing ?with the stabilizing· capital :flows. Oneft~ihg'is~ure;IO, '1,·
. ... vert1trl'e!tii't1MF•s"11iq(iicflfesources it could 'not cop~~tfi1m1h'y~fi::i'ofe"lM~xicoi:C~ )ib-~iO ~·l.i'•··r.)fCj! r
. • iro#fsbm~tte/~itlitffbrt~ it;iHei~' thij :· .. ~-.-;, ·" -?~·•·.:,·,;~_\!,I'~!':]~•;-:,
.J•.-;l'l-fh:,):~u!t P.tH v,;f ,,:~;~n)!.~;..:r;;~}~-r._i , .. , 1"'·: ::~··{ h
·~~f th~se liquid resources have already
."fcl'%••;lc~t'riiritef''ili"'iF6JbT~.·'th~ IMF ha~·an Sm.free: :rhe :·Ecoiiom/st1 1 Febrbary \995'. ,,._ 1 "•~' '
1
'•".~n- ;~!;:fl("~~•}1(.:. ,; :"~) 1:1<::,l'lnu ~flif:'~t::d :·~- ;~•t• 1• 1 '.•··· ~~.:. ,,, , • •
 470. Issues· in Pakistan's Economy

l
Box 16.5 in consultation- with civil society and external development •
partners-to describe a comprehensive economic, structural,
IMF's Lending Arrangements
and social policy framework that is being implemented to
IMF credit is made available under a variety of borrowing promote growth and reduce poverty in the country.
arrangements with different disbursement schedules and PRGF-supported programmes are framed around
maturities depending on the balance of payment needs of the comprehensive, country-owned Poverty Reduction Strategy 1
member. Papers (PRSPs), PRSPs are prepared by governments with
Stand-By Arrangements: The most common type of credit the active participation of civil society and other development
arrangement designed to provide short-term financial assistance. partners. PRSPs are then_ considered by the Executive Boards
Purchases under Stand-By Arrangements are repayable in 8 of the IMF and the World Bank as the basis for concessional
quarterly instalments 2¼-4 years aft~r 9isbursement under the lending from each institution and debt relief under the joint
expectation schedule, and 3¼-5 years after disbursement under Heavily Indebted Poor Countries (HIPC) Initiative. The targets
the obligation schedule. and policy conditions in a PRGF-supported programme are
Extended Arrangements provide credit for a longer period drawn directly from the country's PRSP.
since these arrangements ·usually require fundamental reforms As of September 2003, 77 low-income countries are eligible
which may need more time to put in place and take effect. for PRGF assistance. Eligibility is based principally on the IMF's ·•
Drawings under extended arrangements are repayable in 6 assessment of a country's per capita income, drawing on the
semi-annual instalments, 4¼-7 years after disbursement under cut-off point for eligibility to World Bank concessional lending
the expectation schedule, and in 12 semi-annual instalments (currently 2001 per capita gross national income of $875). Loans
41/z--10 years after disbursement under the obligation schedule. under the PRGF carry an annual interest rate of 0.5 per cent,
PRGF Arrangements: Concessional arrangements providing with repayments made semi-annually, beginning five-and-a-half
credit at an interest rate of½ of 1 per cent to eligible low-income years and ending 10 years after the disbursement. An eligible
members. The loans are repayable in 10 equal semi-annual country may normally borrow up to a maximum of 140 per
instalments 51/z--1 0 years after disbursement. cent of its IMF quota under a three-year arrangement, although i
The Supplemental Reserve Facility (SRF) provides financial this may be increased to 185 per cent of quota in exceptional
assistance to members experiencing exceptional balance of circumstances. In each case, the amount will depend on
payments difficulties due to short-term financing needs resulting the country's balance of payments need, the strength of its
from a sudden and disruptive loss of market confidence adjustment pr~gramme, and its previous and outstanding use
reflected in pressure on the capital account and the mem_bers' of IMF credit. The expected average access under the initial,
reserves. SRF resources are provided under Stand-By and three-year arrangement is 90 per cent of quota, and for second 1
Extended Arrangements and are repayable in 2 instalments time users of the facility, 65 per cent of quota over three years.
2-2½ years after disbursement under the expectation schedule,
and 21/z--3 years under the obligation. schedule. IMF-World Bank Co-operation
PRGF-supported programmes are designed to cover only areas
What is the Poverty Reduction and Growth Facility?
within the primary responsibility of the IMF, unless a particular
The IMF provides financial support through its concessional measure is judged to have a_ direct, critical macroeconomic
lending facility-the Poverty Reduction and Growth_· Facility impact. Areas typically covered by the IMF include advising on
(PRGF)-and through debt relief under the Heavily Indebted prudent macroeconomic policies and related structural reforms
Poor Countries (HIPC) Initiative. The Poverty Reduction and such as"exchange rate and tax policy, fiscal management,
Growth Facility (PRGF) is the IMF's low-interest lending facility for budget··execution, fiscal transparency, and tax and customs
poor countries. PRGF-supported programmes are underpinned administration. When appropriate, the IMF draws on World Bank '
• by comprehensive country-owned poverty reduction strategies. expertise in designing PRGF-supported programmes, and the
' The Poverty Reduction and Growth Facility (PRGF), was formerly staffs of the Fund and Bank cooperate closely on conditionality. 1
known as the Enhanced Structural Adjustment Facility (ESAF), The Bank staff takes the lead in advising the authorities in the
provides loans at a concessional interest rate to eligible, low- design of poverty reduction strategies in areas such as poverty
income members. PRSPs are a requirement for countries in assessments, monitoring, structural and sectoral issues, social
order to receive concessional assistance from the World Band issues, and costing priority poverty-reducing spending.
and the IMF (through the PRGF). ln addition, they are the basis
, for the provision of debt relief under the HIPC Initiative. How the PRGF is Financed
In September 1999, the IMF established the Poverty Reduction Concessional lending under the PRGF is administered by the
and Growth Facility (PRGF) to make the objectives of poverty IMF through th~ PRGF and Pf:lGF-HIPC Trusts. The PRGF Trust
reduction and growth more central to lending operations borrows resources from ce_ntral banks, governments, and official
in its poorest memb_er countries. A review of the PRGF institutions'.generally at mark·et:r~lated int~rest rates, and lends t
completed in 2002 confirmed that the design of the programmes them_ on a pass,through basis to PRGF-eligible countries. The 1
supported by PRGF lending have, in fact, become more difference between the market-related interest rate paid to PRGF
pro-poor and pro-growth. In most low-income countries, IMF Trust lenders and the rate"otint~rest of ().5
per pent per year paid
support is underpinned by Poverty Reduction Str~teg'y Papers by Js
the borrtiwing members 'tinanc~d by
:tcontributions from
(PRSP). These papers are_'prepared
~ . ~t
by
country authorities-
'
bilateral donors and the'iMF;s owh'reso~rCe$}' ·,· ,.,
.,i, r,,,,_ I _1, J:.. ;,
.'

L____ l
 Chapter 16 Structural Adjustment Programmes: Composition and Effects 471

Latin American countries offered relief for debt that had The neo-liberal thinking, and that accepted by the IMF
accumulated over the 1970s. However, the US agreed to in its stabilization and Structural Adjustment Programmes,
provide funds only if these countries agreed to deregulate makes the strong claim that openness and trade liberalization
and make major changes in their economies. The IMF have a positive outcome for growth. However, cross-sectional
conformed to the US position, and neo-liberal orthodoxy in and time series evidence does not support this claim and

'
economics became the only paradigm of any consequence. these empirical linkages are not observed. In fact, a study by
The Structural Adjustment Programmes discussed above Alan Hughes and Ajit Singh suggests that the most successful
are an important policy tool in the broader framework of countries in the 1970s and 1980s stayed far from the path

[ economic liberalism, and thus it is important to place them

in their proper context.
of laissez-faire and openness. 40 However, with increased
globalization and integration, it is possible that this pattern
Even a cursory examination of what constitutes economic may be changing.
liberalization will show its close parallels with the Structural The Structural Adjustment Programme finds its intellectual

I Adjustment Programme. For example, liberalization requires

trade openness, where there is an exposure of the domestic
goods market to the international economy. Financial
openness requires exposure of the domestic financial system
and policy roots in economic liberalization or, in fact, in neo-
liberalism. We saw earlier how the programmes have been
unable to address many of the issues they have targeted, and
the supposed beneficial results from liberalization have also
to world capital markets. Liberalization implies an outward been found to be questionable. Open economies with greater
orientation in which imports are to be liberalized and tariffs degrees of liberalization are not necessarily better performers
cut, devaluation of the local currency ought to take place, than closed economies. In fact, if anything, closed economies

I
and production should switch from import substituting to seem better suited to deal with slumps and crises in the
exportable goods and commodities. A central feature of the world markets as the 2008 economic crisis has shown. These
liberal orthodoxy is a reduction in the role of the government, observations lead to an important criticism of neoclassical
with minimal government restrictions and involvement thinking, economic liberalization, and especially Structural
in international trade in goods and asset markets, as well Adjustment Programmes, which is discussed in the next
as in domestic financial, commodity, and labour markets. section.
In essence, then, economic liberalization requires a policy
package to take the economy away from illiberalism towards 16.5.1 The Contextuality of Policy41
liberalism or, what is the same thing, towards laissez-faire,
or a free-market, pro-private sector economy. The case for A major criticism of economic liberalization and Structural
economic liberalization has rested upon the claim that all the Adjustment Programmes is that they are being offered as
above policy reforms contribute towards higher growth and a complete cure for a country's ills, regardless of the particular
reduced dependence of the economy. institutional arrangements or the historical background which may
The neoclassical position holds the view that financial exist. A 'general' theory and a 'general' prescription is applied
activity is necessary not only for the mobilization and unilaterally to any 'typical' developing country. What is
efficient allocation of resources, but also as a stabilizing force required, however, is a deeper understanding of the specific
in the economy. Hence, the recommendation to deregulate historical conditions and specific institutional .contexts of
and privatize the financial sector. Furthermore, this logic specific countries. Policy must take into account the historical
holds that the greater the openness of any country, the Jess and institutional contexts in which particular .policies will
its vulnerability to international economic fluctuations. (see operate. Neglect and misunderstanding of the particular
Box 16.6 for a very different view. circumstances of particular countries, and thus of which
The evidence from countries which have had more liberal policies are most feasible, are responsible for the failure of
and open economies shows that they have. not performed as many standard and conventional adjustment programmes
well as those which are considered closed and more controlled. that emphasize economic liberalization. The recognition of
For example, it has been seen, contrary to the ideology which historical and institutional factors specific to a country would
advocates openness, that open financial markets are more help us to examine more closely the special circumstances of
vulnerable to exogenous shocks. In a comparison of India each country and region, so that we can discover its particular
and China (closed) with Brazil and Mexico (open) there is strengths and weaknesses and chart a desirable direction for
evidence that the closed countries performed better during social change.
the world economic slowdown cif the 1980s than the ones Whether a policy can be implemented at all, whether
more closely integrated with the world economy. 39 India if implanted it will have the desired effect, and whether
and China had Jong followed the path of self-reliance and some policies will result in undesirable consequences may
import substituting industrialization and depended far less depend critically on the nature of economic institutions
on foreign debt. Until a few years ago they were not very open and the balance of political forces which exist in that
to foreign interests and they were able to cope with the world country. As specific institutional arrangements and the
economic recession precisely for this reason. By integrating nature of political involvement and organization are likely
with the international financial markets, most countries of to differ from country to country, it is likely that an abstract
Latin America suffered as their dependence for foreign funds generalist framework, such as that suggested by a Structural
had always been quite substantial. Adjustment Programme, may be less effective than a precise
and country-specific policy.
472 Issues in Pakistan's Economy

Box 16.6
Hot Money and its Consequences Source: Patnaik, Prabhat and C. P. Chandrasekhar, 'Indian
Economy Under "Structural Adjustment"', Economic and
What happens when money is highly mobile? Some answers: Political Weekly, vol. 30, no. 47, 1995, 3009-10.

When hot money flows occur, the recipient country has two Mexico is an old hand at IMF/World Bank Structural Adjust-
choices: either to maintain the exchange rate by adding ment Programmes and began restructuring its economy
to reserves or to prevent a swelling of reserves by letting under IMF guidelines from as early as 1976. The IMF and
the exchange rate appreciate. Any government wishing to World Bank have evaluated the performance of Mexico quite
prevent a gratuitous 'deindustrialization' of the economy favourably, for it closely followed the policy outlines, which
(and hence a gratuitous 'manufacture' of a current account are quite standard. There was considerable progress, as
deficit to accommodate hot money inflows) would of course per conditions, on the trade front with imports liberalized
prefer to prevent an exchange rate appreciation by adding and tariffs reduced. The real exchange rate was depreciated
to exchange reserves. And since these enhanced reserves substantially, some state-owned enterprises were privatized,
represent after all an additional command over resources, and food subsidies were removed. There was some progress
even hot money flows, it may be thought, can add to the in the financial sector with reductions in directed credit,
pace of capital formation if properly utilized. in credit subsidies, and importantly, in controls on foreign
The problem however is two-fold: the minor problem direct and portfolio investment. On 20 December 1994,
relates to the fact that using reserves built up with hot money the bubble burst and the Mexican bond and equity market
for undertaking investment implies in essence that the collapsed, having serious negative consequences for other
country is 'borrowing short to invest long' which exposes it to Latin American and emerging markets.
potential crises. But even if this is tackled by choosing short- The reasons why the bond and equity market collapsed
gestation, foreign-exchange-earning investment projects, in Mexico are now very clear. The government bungled a
there remains a major problem, namely, there has to be devaluation strategy which had been recommended and
an agency that must take the lead in stepping up capital was necessary. The inability of the government of Mexico
formation: and an economy under Fund-Bank thraldom to uphold its promise of allowing the peso to devalue by a
lacks such an agency. Since the state is increasingly maximum of 13 per cent resulted in an exodus by foreign
forced to withdraw from its investment role it cannot step investors from the stock market. The immediate response
up investment directly. Since the state cannot order private to this exit was a knee-jerk flotation which ended up with
investment, it can stimulate the latter only indirectly: but a devaluation of more than 35 per cent. The reason for the
the obvious indirect instrument, namely, the interest rate, first-announced devaluation was an attempt to come to grips
can scarcely be used for fear of frightening international with the burgeoning current· account deficit, then at 8 per
rentiers. And portfolio investment which typically stimulates cent of GDP, which was believed to be due to an overvalued
stock market booms makes speculation more attractive than exchange rate.
productive investment for the domestic capitalists. Finally, The essential characteristics of the Mexican economy
since 'market-friendliness' takes the form inter a/ia of trade during 1994 were as follows: an overvalued peso, an
liberalization which brings in MNC products to the local overdependence on short-term flows of foreign money, and
market, this fact tends to dampen the inducement to invest an over-expansionary monetary policy. Foreign investors
of domestic capitalists. held 70 per cent of Mexican peso-dominated bonds, and
The upshot is that foreign exchange reserves accumulate around 80 per cent of outstanding dollar-denominated
even as productive investment languishes. The reserve bonds, most of which were held by short-term investors.
accumulation, it may be thought, would give rise to a The involvement of foreign investors in Mexico since 1990
consumption-led boom. But, for reasons already discussed, has been substantial and they have snapped up more than
credit to finance such a boom is expensive. And even if it $55 billion worth of Mexican shares in the last four years.
does play a role, the boom would be a brief and evanescent Last June, the exposure of US banks in Mexico alone was
one, unit of domestic supply constraints begin to appear (at $17.2 billion.
which point reserves would start getting used up to augment The key issue here is Mexico's vulnerability and exposure to
supplies and the domestic multiplier effects of higher hot money from abroad. Literally overnight, foreign portfolio
consumption would disappear). What is even more likely, investors withdrew from the Mexican markets, leaving the
however, is that such consumption growth as occurs owing economy in potential ruin. The possible consequences of
to the effects of hot money inflows would, in a 'liberalized this move for Mexico are very high inflation, low growth due
trade' regime, leak out abroad without generating any to poor domestic demand and more expensive imports,
domestic growth. growing unemployment and poverty, and a severe lack
On the other hand, when hot money flows out, the very fact of confidence on the part of foreign investors. Despite the
that the reserves have shrunk in the event of higher domestic neo-classical doctrine supported by the IMF/World Bank of
consumption (or if the outflow is larger than the extant opening one's markets to international capital, there may be
reserves can sustain), the economy has to be deflated, and a some wisdom in proceeding cautiously and very carefully,
whole lot of measures, including handing over the country's rather than adhering to every demand made by Washington.
natural resources 'for a song' to international creditors, have
to be adopted, to cope with the foreign exchange crunch.
The net result is a process of gradual economic atrophy
together with 'denationalization' of assets and resources. Source: Zaidi, S. Akbar, own research.
 Chapter 16 Structural Adjustment Programmes: Composition and Effects 473
I
l
I
In sub-Saharan Africa, where the IMF/World Bank package
of stabilization and structural adjustment has been most
of assets. When domestic financial assets are close, or
perfect, substitutes for foreign financial assets, domestic

l
ambitiously imposed, the severely underdeveloped nature policymakers can exert influence over the effective stock or
of property rights has caused problems in identifying and price of those assets only to the extent that the domestic
working with the 'market'. 42 The emphasis on 'getting prices share is large compared to the world share. A large country
right', and on letting the market determine resource allocation, that dominates financial markets has control over its own
may not be feasible in countries where the market is small, prices, and other relevant targets. For a relatively small
does not exist, or is distorted by numerous imperfections. country, as are most underdeveloped countries, control over
Even the World Bank, in one of its more candid moments, domestic interest rates or money supply might be way off
'has openly accepted the fact that the scores of conditions target, having serious negative consequences for real targets
attached to structural adjustment loans may contribute little such as investment, growth, and inflation. 45 In the case of
to the ultimate success of individual adjustment packages floating and 'free' exchange rates, weaker countries may even
simply because they are too complex and do not correspond become more subject to the ill effects of international capital
to institutional conditions and managerial capacities in an flows or the judgements of investors, despite the fact that
adjusting country'. 43 The Bank has recently realized that domestic policies are sound, (see Box 16.7).
'frequently, the necessary markets or other institutions are Three important strands of the international economy have
not there, or they do not work well or as expected. Failure become quite predominant in the economic world since the
to take into account institutional characteristics specific l 990s. 46 There is a huge internationalization of capital, where
to the country can lead to poor advice. . . . The blanket wealth holders of any one country are now holding, directly
recommendation of generally accepted policies can be disastrous in or indirectly, much larger financial claims upon financial
particular circumstances.'44 assets of other countries than in the past. Secondly, the
Economic theory and observations from across countries average maturity of these claims has tended to decline over
show that the nature of current economic, social, and political time. Finally, the shortening of the maturity of these claims is
relationships is affected by the past economic history of that matched by a tremendous mobility of capital internationally.
country and by its political and institutional arrangements. Essentially then, there is a huge amount of 'hot' or 'near-
There is a 'path dependence' of economic variables and hot' money which can move in enormous quantities from
they are conditioned by their own past behaviour. The one country to another at very short notice (see Box 16.6).
effect of government policies in macroeconomic variables is Conditions in one country can result in the flight of capital
determined, somewhat, by the past behaviour of economic from another, even when the latter is doing well in economic
variables themselves, by economic policies, and by the terms. A rise in interest rates in the West can cause large sums
past and ingrained behaviour of economic institutions. of money to shift overnight, causing havoc in smaller, more
Governments cannot introduce successful institutional exposed, markets. Thus, attempts to control the domestic
arrangements, a key factor in economic liberalization and in economy can be made quite powerless due to factors well
the Structural Adjustment Programmes, unless the social and beyond a country's control. Clearly, the internationalization
political conditions conducive to such change exist-See Box of capital undermines the autonomy of national economic
16. 7 for how the East Asian crisis of 1997 was mishandled planning. Economic liberalization and Structural Adjustment
by the IMF. Programmes emphasize more openness and globalization of
economies. Beyond doubt, there are numerous contradictions
16.5.2 International Capital and the Loss inherent in such a policy, many of which have been identified
in this chapter.
of National Autonomy
The major consequence of economic liberalization, openness,
and globalization has been the extension, or incorporation, 16.6 SUMMARY AND FURTHER READING
of countries into the world economy. Under closed and
less liberal economic policies, the unit of analysis used to 16.6.1 Summary
be one's own nation, where economic policies and reform In this chapter we have taken a critical look at the Structural
within a country affected economic, political, and social Adjustment Programme and at the way the IMF and World
arrangements domestically. This has changed dramatically Bank have evolved into the most influential organizations
with the 'opening up' of the underdeveloped countries, in the world, determining economic policy and programmes
where events in different geographical and economic regions in dozens of countries across the globe. The chapter begins
now affect national economic performance. Countries have with a brief historical look at how economic development has
become more dependent on factors to which they are not evolved over the last fifty years, and at how economic policy
related or for which they are not responsible. The economic is now determined. A detailed section on the composition
'meltdown' of the Asian Tigers following the currency of the Structural Adjustment Programme examined the
mayhem in June 1997 is an illustration of how financial different sectors and issues that such programmes address.
openness and exposure to outside influences can, in one Since Structural Adjustment Programmes have been in
stroke, liquidate the gains made over a number of decades. operation for almost a quarter of a century, there is enough
Financial openness or globalization as a factor in economic evidence to examine their consequences and implications. A
policy means that there is international substitutability vast literature does that, and the general consensus seems to
474 Issues in Pakistan's Economy

Box 16.7 the World Bank's Asian Miracle study laid out the important
roles that the government had played. These were far from the
The East Asian Crisis and the IMF's Response
minimalist roles beloved of the Washington Consensus.
When the Thai baht collapsed on 2 July 1997, no one knew There were those, not just in the international financial
that this was the beginning of the greatest economic crisis institutions but in academia, who asked, was there really a
since the Great Depression-one that would spread from Asia miracle? 'All' that East Asia had done was to save heavily and
to Russia and Latin America and threaten the entire world. invest well! But this view of the 'miracle' misses the point. No
Currency speculation spread and hit Malaysia, South Korea, other set of countries around the world had managed to save
the Philippines, and Indonesia, and by the end of the year what at such rates and invest the funds well. Government policies
had started as an exchange rate disaster threatened to take played an important role in enabling the East Asian nations to
down many of the region's banks, stock markets, and even accomplish both things simultaneously.
entire economies. The crisis is over now, but countries such as When the crisis broke out, it was almost as if many of the
Indonesia will feel its effects for years. Unfortunately, the IMF region's critics were glad: their perspective had been vindicated.
policies imposed during this tumultuous time worsened the In a curious disjunction, while they were loath to credit the
situation. Since the IMF was founded precisely to avert and deal region's governments with any of the successes of the previous
with crises of this kind, the fact that it failed in so many ways quarter century, they were quick to blame the governments for
led to a major rethinking of its role, with many people in the the failings.
United States and abroad calling for an overhaul of many of the Whether one calls it a miracle or not is beside the point: the
Fund's policies and the institution itself. Indeed, in retrospect, increases in incomes and the reductions in poverty in East Asia
it became clear that the IMF policies not only exacerbated over the last three decades have been unprecedented. No one
the downturns but were partially responsible for the onset: visiting these countries can fail to marvel at the developmental
excessively rapid financial and capital market liberalization was transformation, the changes not only in the economy but also
probably the single most important cause of the crisis, though in society, reflected in every statistic imaginable. Thirty years
mistaken policies on the part of the countries themselves played ago, thousands of backbreaking rickshaws were pulled for

l
a role as well. Today the IMF acknowledges many, but not all, a pittance; today, they are only a tourist attraction, a photo
of its mistakes-its officials realize how dangerous, for instance, opportunity for the camera-snapping tourists flocking to the
excessively rapid capital market liberalization can be-but its region. The combination of high savings rates, government
change in views comes too late to help the countries afflicted. investment in education, and state-directed industrial policy all
The crisis took most observers by surprise. Not long before served to make the region an economic powerhouse. Growth
the crisis, even the IMF had forecast strong growth. Over the rates were phenomenal for decades and the standard of living
preceding three decades East Asia had not only grown faster rose enormously for tens of millions of people. The benefits of
and done better at reducing poverty than any other region of growth were shared widely. There were problems in the way
the world, developed or less developed, but it had also been the Asian economies developed, but overall, the governments
more stable. It has been spared the ups and downs that mark had devised a strategy that worked, a strategy which had but
all market economies. So impressive was its performance that one item in common with the Washington Consensus, trade
it was widely described as the 'East Asia Miracle'. Indeed, was important, but the emphasis was on promoting exports,
reportedly, so confident had the IMF been about the region that not removing impediments to imports. Trade was eventually
it assigned a loyal staff member as director for the region, as an liberalized, but only gradually, as new jobs were created in the
easy preretirement posting. export industries. While the Washington Consensus policies
When the crisis broke out, it was surprising to note how emphasized rapid financial and capital market liberalization, the
strongly the IMF and the U.S. Treasury seemed to criticize the East Asian countries liberalized only gradually-some of the
countries-according to the IMF, the Asian nations' institutions most successful, like China, still have a lorig way to go. While
were rotten, their governments corrupt and wholesale reform the Washington Consensus policies emphasized privatization,
was needed .... government at the national and local levels helped create
... How, if these countries' institutions were so rotten, had efficient enterprises that played a key role in the success of
they done so well for so long? The difference in perspectives, several of the countries. In the Washington Consensus view,
between what was known about the region and what the IMF industrial policies, in which governments try to shape the future
and the Treasury alleged, made little sense, until the debate that direction of the economy, are a mistake. But the East Asian
had raged over the East Asia. Miracle itself is recalled. The IMF governments took that as one of their central responsibilities.
and the World Bank had almost consciously avoided studying In particular, they believed that if they were to close the income
the region, though presumably, because of its success, it would gap between themselves and the more developed countries,
have seemed natural for them to turn to it for lessons for others. they had to close the knowledge and technology gap, so
It was only under pressure from the Japanese that the World they designed education and investment policies to do that.
Bank had undertaken the study of economic growth in East While the Washington Consensus policies paid little attention
Asia (the final report was titled The East Asian Miracle) and then to inequality, believing that such policies were important for
only after the Japanese had offered to pay for it. The reason was maintaining social cohesion, and that· social cohesion was
obvious: The countries had been successful not only in spite of necessary to. provide a climate favourable to investment and
the fact that they had not followed most of the dictates of the growth. Most broadly, while the Washington Consensus policies
Washington Consensus, but because they had not Though the emphasized a minimalist role for government, in East Asia,
experts' findings were toned down in the final published report, governments helped shape and direct markets ....
 Chapter 16 Structural Adjustment Programmes: Composition and Effects 475

Box 16.7 (continued) The IMF would claim that imposing these conditions was the
responsible thing to do. It was providing billions of dollars; it
... If the crises had a familiar pattern, so too did the IMF's had a responsibility to make sure not just that it was repaid but
responses: it provided huge amounts of money (the total bailout that the countries 'did the right thing' to restore their economic
packages, including support from G-7 countries, was $95 health. If structural problems had caused the macroeconomic
billion) so that the countries could sustain the exchange rate. It crisis, those problems had to be addressed. The breadth of the
thought that if the market believed that there was enough money conditions meant that the countries accepting Fund aid had to
in the coffers, there would be no point in attacking the currency, give up a large part of their economic sovereignty. Some of the
and thus 'confidence' would be restored. The money served objections to the IMF programmes was based on this, and the
another function: it enabled the countries to provide dollars to resulting undermining of democracy; and some were based
the firms that had borrowed from Western bankers to repay the on the fact that the conditions did not (and arguably were not
loans. It was thus, in part, a bailout to the international banks designed to) restore the economies' health. But, some of the
as much as it was a bailout to the country; the lenders did not conditions had nothing to do with the problem at hand.
have to face the full consequences of having made bad loans. The programmes-with all of their conditions and with all of
And in country after country in which the IMF money was used their money-failed. They were supposed to arrest the fall in
to sustain the exchange rate temporarily at an unsustainable the exchange rates; but these continued to fall, with hardly a
level, there was another consequence: rich people inside the flicker of recognition by the markets that the IMF had 'come
country took advantage of the opportunity to convert their to the rescue.' In each case, embarrassed by the failure of
money into dollars at the favourable exchange rate and whisk it its supposed medicine to work, the IMF charged the country
abroad. The most egregious example occurred in Russia, after with failing to take the necessary reforms seriously. In each
the IMF lent it money in July 1998. But this phenomenon, which case, it announced to the world that there were fundamental
is sometimes given the more neural sounding name of 'capital problems that had to be addressed before a true recovery could
flight,' also played a key role in the previous important crisis, in take place. Doing so was like crying fire in a crowded theatre:
Mexico during 1994-95. investors, more convinced by the diagnosis of the problems
The IMF combined the money with conditions, in a package than by the prescriptions, fled. Rather than restoring confidence
which was supposed to rectify the problems that caused the that would lead to an inflow of capital into the country, IMF
crisis. It is these other ingredients, as much as the money, that criticism exacerbated the stampede of capital out. Because of
are supposed to persuade markets to roll over their loans, and this, the perception throughout much of the developing world, is
to persuade speculators to look elsewhere for easy targets. The that the IMF itself had become a part of the countries' problem
ingredients typically include higher interest rates-in the case rather than part of the solution. Indeed, in several of the crisis
of East Asia, much, much higher interest rates-plus cutbacks countries, ordinary people as well as many government officials
in government spending and increases in taxes. They also and business people continue to refer to the economic and
include 'structural reforms,' that is, changes in the structure social storm that hit their nations simply as 'the IMF'-the way
of the economy which, it is believed, lies behind the country's one would say 'the plague' or 'the Great Depression.' History is
problems. In the case of East Asia, not only were conditions dated by 'before' and 'after' the IMF, just as countries that are
imposed that mandated hikes in interest rates and cutbacks devastated by an earthquake or some other natural disaster
in spending additional conditions required countries to make date events by 'before' or 'after' the earthquake ....
political as well as economic changes, major reforms, such as
increased openness and transparency and improved financial
market regulation, as well as minor reforms, like the abolition of Source: Joseph Stiglitz, Globalization and its Discontents
the clove monopoly in Indonesia. (London: Allen Lane, 2002). 89-97.

be that such programmes have very serious negative impacts literally overnight, has serious consequences for an economy
on growth, inflation, income distribution, the social sectors, that are beyond its control.
and poverty. In general, Structural Adjustment Programmes
have made matters far worse for countries that have followed 16.6.2 Further Reading
them. We have examined the philosophy that governs
such adjustment programmes, which is essentially one of This is an area where one can find a very large number of
liberalization, openness, and greater integration with the new books and articles, and cite endless references. With structural
economic world order, and we have found that not just the adjustment being "propagated by both the IMF and the World
adjustment programmes themselves, but also the thinking Bank, both organizations publish numerous reports and
behind them does not take account of specific factors and the publications, looking at policies, offering prescriptions, and
context of specific countries. With different sets of political examining case studies and much of the literature is easily
and institutional arrangements governing economic and available on the web. Some of the references listed in this
policy choices, the general policy rules of such programmes chapter are also very useful. The two special issues of the
often fail to take root in many countries. The prevalence of Pakistan Journal ofApplied Economics, vols. 10 and 11, published
highly liquid, hot money, which disappears from a country in 1994 and 1995, respectively, have some excellent articles
476 Issues in Pakistan's Economy .

on the subject which provide a general analysis as well as Two articles published by Prabhat Patnaik deserve special
specific case studies with reference to Pakistan. mention: 'International Capital and National Economic
David Reed's Structural Adjustment and the Environment Policy: A Critique of India's Reforms', Economic and Political
( Boulder, Colorado: Westview Press, 1992) is an excellent Weekly, vol. 29, no. 12, 1994, and with C. P. Chandrasekhar,
source, and V. Thomas et al. Restructuring Economies in Distress 'Indian Economy Under "Structural Adjustment"', Economic
(New York: Oxford University Press, 1991 ). The special and Political Weekly, vol. 30, no. 47, 1995. Also see Prabhat
volume 19 no. 12, of World Development, 1993, had some very Patnaik's The Retreat of Unfreedom: Essays on the Emerging World
good articles which look at the consequences of Structural Order (New Delhi: Tulika, 2003 ). The book by the winner
Adjustment Programmes across the globe. Tariq Banuri's of the Nobel Prize for Economics in 2001, Joseph Sliglitz
edited Economic Liberalization: No Panacea (Oxford: Clarendon entitled, Globalization and its Discontents (London: Allen Lane,
Press, 1991) is an outstanding book which looks at the policies 2002) is particularly relevant for anyone who wants to review
of liberalization and openness and contains some excellent how the IMF has acted in recent years. The websites of the
articles. The Economic and Political Weekly, a journal produced IMF and the World Bank also have a wealth of information
in India, continues to publish some well-researched articles which gives information about their numerous programmes.
on structural adjustment and should be reviewed regularly.

Appendix 16.1
Thus, this model, which was developed with the industrial
Changes in Thinking about countries in mind, placed emphasis on physical capital,
Development undifferentiated labour, and technical progress. ln early empirical
applications to high-income countries, accumulations of physical
During most of the latter half of the 20th century, the dominant
capital and labour accounted for only about 25 per cent of
view among development theorists and development assistance
historical growth. The balance ('residual') was attributed to
agencies was that people and countries were poor because
technical change. There were arguments over whether the
the countries did not have sufficient capital. Therefore, it was
technical change was 'embodied' in the physical capital or
argued, the path to economic growth and development was to
whether it was exogenous, 'autonomous,' or 'disembodied:
transfer capita 1 from the richer countries. lt is only recently that
This theory sat well with the prevailing approach to development
there has been a wider understanding that countries lack capital
assistance at a practical level, which was that countries were poor
and are poor because they are very unfriendly places for capital
because they lacked physical capital to go with their abundant
(both physical and human capital). lt is interesting, therefore, to
labour. Therefore, the principal role of development assistance
trace how thinking about the development process has changed
was to transfer financial capital from the richer countries to the
over the past 50 years, both in terms of economic theory and
poorer countries, where it would be transformed into physical
in terms of practice within development agencies. However, the
capital, largely in the form of public infrastructure. Technical
change has been a two-way process, with practical experience
change was to a large extent seen as being transferred as
being reflected in the development of theory, and theoretical
'embodied' in the physical capital. Thus there were arguments
developments reflected in changes in the forms of development
over the appropriateness of the technology transferred in this
assistance.
way. This approach to development probably received support
Early mainstream Western ideas about what was important
from the success of the Marshall Plan in the rapid recovery of
in the economic growth process were dominated by what has
western Europe after the devastation of the Second World War.
become known was the Solow-Swan neociassical model of
The Marshall Plan's success was essentially seen as the result of
growth (Solow, 1956). Briefly, this model assumes single output,
the successful transfer of capital to those countries.
produced using labour and capital in a constant-returns-to-scale
The next_ major change in thinking about the process of
technology with diminishing, and eventually exhausted, marginal
economic growth can be seen to grow out of the work of Becker
returns to each factor. The model predicts that long-run growth
(1964). Becker argued that all labour was not the same, that it was
rates of per capita income will equal the (assumed) exogenous
differentiated through education, training, and improvements in
rate of technica 1 progress. Changes in savings rates or government
health, and that household decisions about these investments. in
policies will affect the levels of steady-state output and capital
labour could be thought of in an economic framework of human
stock but will have no long-run effect on the growth rate. lf
capital. The insights from Becker's household consumption model
all countries experience the same rate of exogenous technical
were soon_ picked. up by the development assistance agencies
progress, they will all converge to a common growth rate over
in the form of projects on education. and health. Only later
time. Countries with different savings behaviour, institutions,
(Mankiw, Romer, and Weil, 1992) were the ideas captured in the
cultural norms, government policies, and so on may be expected
economic growth literature by showing that the predictions of the
to have different levels of steady-state income and different
neoclassical model attribute much less importance to the residual
capital-labour ratios, but their long-run growth rates would all be
if the definition .of capital is widened to include human capital.
anchored to the common rate of technical progress.
 Chapter 16 Structural Adjustment Programmes: Composition and Effects 477

ln the late 1970s there was another major change in a particular definition, distinct from the common use that is
development thinking which seems to have grown out of two indistinguishable from 'organizations: Haggard (1999) describes
pieces of empirical research. First, Krueger and Bhagwati's study the difference as follows:
of the rapid growth of the four 'East Asian Tigers' (see Krueger,
1978) highlighted the importance of policy, particularly openness Institutions refer to the formal and informal rules and
to international trade and investment. The corollary to their enforcement mechanisms that influence the behaviour of
research was that the import substitution policies that had been organizational and individuals in society. They include
carried on by most if not all poor countries were not favourable constitutions, laws and regulations, and contracts, as well
to long-term economic growth. There can be rapid income as trust, informal rules and social norms. Organizational are
growth in the early stages of an import substitution strategy as collective social actors, usually characterized by hierarchical
the protected firms expand in capturing the domestic market. patterns of internal authority, that pursue common interests.
However, being internationally uncompetitive, when they saturate Organizations operating in the public sphere include
the domestic market, income growth slows as the protected firms government bureaucracies, legislatures, political parties,
are unable to export. unions, interest groups, NGOs, and even firms in their political
The second major jolt to development thinking came from capacities. (p. 30).
the World Bank where an evaluation of the Bank's completed
projects showed that many of them were failures, particularly ln particular, de Soto (2000) has shown that 'getting the policies
in the poorest countries in sub-Saharan Africa. The conclusion right' (the focus of the Structural Adjustment Programmes) will
reached-most likely with the Krueger/Bhagwati research in be ineffective unless the institutions essential to the participation
mind-was that the projects were unsuccessful because the policy of all of an economy's income-earning assets (land, labour,
environment was unfavourable. Thus developed the concept of capital, and natural resources) are in place. Referring mainly to
the Structural Adjustment Programme and 'conditionality,' with land and other forms of fixed capital, he says:
the emphasis on changing the policy regime so that countries
were more open to trade and investment, both internally and Most people cannot participate in an expanded market
externally. The focus on 'getting the prices/policies right' was because they do not have access to a legal property rights
expanded to include macroeconomic policies (which were .the system that represents their assets in a manner that makes
focus of the lMF) as well as microeconomic policies (more the them widely transferable and fungible, that allows them to be
focus of the World Bank and the regional banks). Agreement on encumbered and permits their owners to be held accountable.
this approach to development assistance became known as the So long as the assets of the majority are not properly
'Washington Consensus: documented and tracked by a property bureaucracy, they are
The focus of development assistance on policies was reflected invisible and sterile in the marketplace. (210-11)
in the economic growth theory with the development of the so
called 'endogenous' growth models in the late 1980s and early Institutions are essentially the sets of rules that govern how a
1990s. ln these models, technical change is endogenous, an society behaves in particular areas of activity. As North (1990)
idea that appealed because it could help explain how countries describes them, they range from taboos, customs and traditions
could keep growing at faster rates over long periods, rather than in what are called traditional societies to formal, written
moving towards some static growth rate as in the neoclassical constitutions and laws governing economic, political and social
model. An alternative to expanding the capital stock in the behaviour in a more modem society. Institutions may be formal-
neoclassical model is to assume that there are externalities to such as a constitution or traffic laws-or they may be informal,
capital which can spill over to the whole economy and increasing such as voluntary codes of conduct of business or social groups.
returns to scale such as through 'learning by doing' (Romer, The set of rules making up an institution defines the incentives to
1986; Lucas, 1988) or research and development (Romer, 1990). which people will respond. According to North (1990) and Hayami
For example, in the differentiated-inputs model of Romer (1990) and Ruttan ( 1971 ), institutions change as the transaction costs
and Grossman and Helpman (1991 ), growth is faster the larger the of behaving in certain ways change. Transaction costs can be
scale of the research and development sector. Another implication seen to change as economies develop and technologies improve,
of external effects and increasing-returns models is that these and as political and social forces within a society change. So, for
effects justify government intervention, and such permanent example, reductions in transport costs-of information or goods-
changes in government policy can have permanent effects on can make certain behaviours more or less costly, and therefore
the growth rate. lead to a new form of institution. Or increased trust between
While the focus on the policy environment dominated individuals and groups can not only improve social cohesion but
development assistance efforts in the 1980s and 1990s, changes also lower the costs of transacting contracts.
in the paradigm were underway, stemming from North's (1973, North emphasized the cost of information in the development
1990) early focus on the important institutions of an economy. of institutions. The provision and communication of information
North's work has been given a more practical flavour with the is required to measure the attributes of a good or service in
writings of Olson (1996 and 2000) and de Soto (2000). The key economic exchange and to define and protect the rights that
idea of this work is that of the overriding importance for economic are exchanged. The more costly are the exchange and its
growth of the basic institutions-public and private, formal and enforcements, the higher are the transaction costs, and .the less
informal, and economic, social, and political-that determine likely is the institution to exist or to be effective.
how an economy functions. ln this literature, 'institutions' have
478 Issues in Pakistan's Economy

North (1990), Olson (1996) and de Soto (2000) have stressed When institutions are poorly defined or there are few formal
the overriding importance of property rights and contract institutions, economic activities are restricted to interpersonal
enforcement in economic growth. Well-defined and secure exchanges. ]n such cases, repeat activities and cultural
property rights and impartial enforcement of contracts between homogeneity facilitate self-enforcement. Transaction costs
parties are the basis for a market economy. lf individual rights may be low in such an environment, but transformation costs
to factors (land, labour, or capital) are ill-defined in legislation are high because the economy operates at a very low level
and all contracts made between parties to an economic exchange of specialization, via social networks, but contracts are still
are not impartially enforced by the judicial system-and therefore constrained by kinship ties. lt is clear, however, that firms or
both property rights and contracts are free from discretionaiy agents .in an environment of weak institutions cannot engage
intervention by politicians and bureaucrats-then the costs of in complex, long-term and multiple-contract exchanges with
transactions and the costs of transformation in production will effective enforcement as they do in industrial economies.
make economic activity infeasible or highly suboptimal. ln such A basic structure of property rights 'that encourages long-
circumstances, people will be reluctant to invest in fixed assets. term contracting appears essential for the creation of capital
The only businesses that will exist will be those that are 'footloose,' markets and growth. (105)
i.e. easily shifted to another location. Or private economic activity
will only be undertaken with some kind of government guarantee While there are many countries where the poor own assets
(such as joint ventures with government, where the government but have no excisable property rights, there are circumstances
will likely bear the business risks involved; or where higher where the poor do not have any access to potential income-
profits to cover the high transaction and transformation costs earning assets such as land or even education. ln these latter
are assured, such as through some form of import protection). ln circumstances there has to be some form of asset redistribution
such circumstances the economic activity may be largely illegal or asset creation.
and small-scale, and bribery of government officials frequent, as lt is not easy for a country to make the substantial changes
de Soto (1989) has shown. People will also be unwilling to invest in institutions or asset redistribution necessary to allow the poor
in education, or will only do so if they have prospects of moving •to participate in economic growth and development. The new
to another country where they will be able to earn and retain an institutions and land redistribution that established a basis for
income that justifies their investment. rapid income growth in Japan, Republic of Korea and Taipei, China
Olson (1996) and de Soto (2000) explain the large and growing was imposed by external forces. ln the People's Republic of China
gap in incomes between the rich countries and those poor and in Viet Nam, which experienced revolutions in agricultural
countries where incomes have grown very slowly, if at all, as productivity through the changeover from collectivization to
largely due to the absence of these basic institutions, not to the individual land rights (leasehold) and the liberalization of
lack of capital, some inherent deficiency in work ethic, or some agricultural markets, the transformations in institutions were
culturally-determined behaviour. Prior to its break-up the former introduced internally but were exceptional in their breadth and
Soviet Union had the highest per capita level of education in the speed. As North and Olson have argued, changing the status quo
world, as measured in terms of the level of schooling reached, may be very difficult or even impossible without such dramatic
and the highest per capita level of plant and machineiy. But it intervention, because the vested interests benefitting from the
remained a poor country. What it lacked was the institutions existing situation usually hold political power and therefore have
that allow entrepreneurship and innovation to flourish through no interest in change. The important question therefore is how
effective economic transformation and exchange. to stimulate change in such circumstances.
Olson ( 1996) demonstrates the critical importance of secure The 1990s has seen a large degree of attention given by the
property rights and impartial enforcement of contracts. He development community to 'governance.' This focus grew out
points out that if the key missing ingredient for development of the concerns of the World Bank and bilateral donors with
was capital, then the marginal productivity of capital would corruption in the governments of borrowing countries and the
be higher in poor countries than in rich countries, and private desire by non-political organization like the World Bank to be
capital would be trying to move from rich to poor countries. ln publicly critical about corruption. As interest in governance
fact, the movement is strongly in the other direction as we see has grown, the scope of its definition has broadened. Early
from estimates of 'capital flight.' Similarly, Olson argues that on, concerns about governance were mainly focused on the
institutions in the rich countries must be the missing ingredient accountability and transparency of government and the political
when an individual can migrate from a poor country to a high- process, and the effectiveness of the government's fiscal and
income country and soon thereafter earn an income that is many monetary policies.
times higher than in their home country and as high as or higher Economic theorists are incorporating the role of institutions
than the average income in the host country. The plane flight within the economic theory of growth and there is burgeoning
does not change migrants' skills and willingness to work as much empirical research on the relationship between institutional
as it places them in a more friendly environment for their labour development and economic growth (see Aron, 2000 for a
and capital (no doubt what applies to labour and capital also review). Development agencies are beginning to focus on
applies to technology). institutional issues. But there is not yet a full commitment to
Aron (2000) sums up the institutional constraints in poor the conclusions that are implicit in de Soto's work. ln other
countries as follows: words, if basic institutions for the creation of capital and full
participation of the whole society in economic activity are not
in place, investments in infrastructure, education, health, or
 Chapter 16 Structural Adjustment Programmes: Composition and Effects 479

economic reforms, or public sector reforms will not be effective, Therefore, in going about their business, particularly to ensure
and will likely only increase income in equality-favouring those economic growth in which all will participate, development
who already have access to factor markets. Building roads and agencies have to have a fundamental re-examination of the
bridges or undertaking agricultural research will not increase prospects of success fir their traditional forms of lending
incomes as much as they could if people do not have secure and aid. They have to examine whether there are appropriate
property rights to farm land; education and health improvement institutions in place so that investments have a good chance of
projects will not promote income growth for the poor unless being successful. They also have to evaluate the possibilities for
there is the generation of capital with which the healthier and assisting the creation and redistribution of income-earning assets
better educated labour force can work; privatization of public within a country so that the poor have the chance to participate
enterprises will be less than fully effective if there are not secure more fully in the growth process. To carry out this evaluation,
property rights to land and enforcement of contracts; laying off development assistance agencies have to be able to define more
public officials with redundancy packages could see them become dearly the constraints impeding participation by the poor and
the new entrepreneurial class but won't if they cannot gain secure place priorities on the removal of these constraints.
access to land and raise additional capital through securitization
of their assets; and trade and investment policy reform will see Source: Ronald Duncan and Stephen J. Pollard, 'A Conceptual
disappointing results in the form of supply responses unless there Framework for Designing a Country' Poverty Reduction Strategy',
is security of property rights and contracts and capital markets paper prepared for the Asia and Pacific Forum on Poverty:
are developed so that traders can raise capital and hedge their Reforming Policies and lnstitutions for Poverty Reduction
commodity and currency risks. (Manila: Asian Development Bank, February 2001).

Appendix 16.2
countries; and thirdly, the precise package of programmes
The Role of the IMF and the World Bank around this basic objective, reflecting as we shall see the
Professor Prabhat Patnaik and C. P. Chandrasekhar look at how changing nature of world capitalism.
the lMF and World Bank have come to intluence our economies The arguments, which of course were not mutually
in such a major way. exclusive, though different ones received emphasis at different
points of time, kept altering in the following manner: in the
Among radical economists there is a tendency to lump the late-1950s and the early 1960s there was a macro-argument
Fund and the Bank together as entities indistinguishable from that substantial unutilized capacity in the industrial sector
one another, and to think of them as having remained more or existed because of a scarcity of foreign exchange so that
less immutable over time. Nothing however could be further a combination of import liberalization and exchange rate
from the truth. There were significant differences· between devaluation would set up a virtuous circle of 'more imports-
the Fund and the Bank which have narrowed over time, more capacity utilization-more exports-still more imports'
and the reasons for this narrowing constitute an important and so on, which would unshackle the economy from the
element of contemporary political economy. And each of these dutches of dirigisme (which was predicated inter alia upon a
institutions has changed in crucial ways through time. recognition of demand constraints both in the external and
The Bank of course has always been opposed to any in the internal markets). This was the argument on the basis
attempts on the part of the third world countries to break of which the World Bank pushed the Indian government into
away through conscious design (which necessarily means adopting an import-liberalization-cum-devaluation package
conscious state intervention) from the pattern of international in 1966 with disastrous consequences.
division of labour inherited from the days of colonialism and ln the McNamara years the emphasis shifted to poverty.
semi-colonialism. lf such a break is to be achieved then it must But the concern for poverty did not express itself in terms
be achieved, according to its perception, entirely through the of any argument in favour of an egalitarian alteration in
mediation of the market forces, which means in particular asset or land distribution; it expressed itself in the argument
through the medilections of direct foreign investment. that the domestic intersectoral terms of trade were more
The Bank has remained absolutely faithful to this position unfavourable for agriculture vis-a-vis industry than the terms
of opposing state-intervention-sponsored industrialization, of trade prevailing in the world market, so that removing
despite the fact that historical evidence marshalled earlier trade restrictions and thereby preventing state-sponsored
by Gerschenkron and subsequently by many others shows industrialization would benefit the agricultural sector which
overwhelmingly that successful industrialization by late- is the repository of mass poverty. This argument was backed
industrializers has invariably depended upon active state up by another one, namely, since the inequality in urban
intervention. What has changed in the case of the Bank over income distribution was larger than that in rural income
time is: first, the specific argument on the basis of which it has distribution, a shift in income distribution from the urban
expressed its opposition to state-sponsored industrialization; to the rural sector, which means in effect from industry to
secondly, the precise tactics it has brought to bear in order agriculture, would have the effect of lowering overall income
to undermine state-sponsored industrialization in third world inequalities. This argument amounted yet again to an attack
480 Issues in Pakistan's Economy

on state-sponsored industrialization; the vacuousness of this and mm1mum percentage, credit disbursements for 'priority
argument lay inter alia in the fact that nearly 60 per cent of sectors' such as agriculture, etc.) and to integrate them more
the agriculture-dependent population in a country like India, closely instead with global financial markets. Together with
being net buyers of food grains in the market and belonging this went the Bank's demand for privatization not only of
to the poorest segment of society, would be actually harmed the financial domain where the public institutions held sway,
by a rise in food prices in terms of their wage-unit. but of public sector assets including of natural resources.
More recently the Bank has shifted to the well known The economic, as opposed to the ideological, argument for
micro-theoretic 'marketist' argument which focuses on the privatization was again utterly dubious: as a means of closing
allegedly interrelated phenomena of 'onward orientation', the fiscal deficit it was no different from money created
'price-distortion', and 'inefficiency'. Much has been written directly for the government's use; as a means of reducing the
on the vacuousness of this critique: 'outward orientation' government's interest burden it could work only under the
as manifested for example in successful export performance palpably impossible condition that the rate of return sacrificed
has been accompanied by highly state-interventionist neo- on the sold government assets was lower than the interest
merchantilist policies rather than any attempt to 'get prices rate on public debt (which is impossible because the market
right' in the conventional sense; the alleged 'inefficiency' would never buy assets at such low rates of return, and in
of dirigiste industrialization is established through dubious practice of course has insisted on obtaining public assets only
statistical exercises involving dubious concepts such as 'total at virtually throw-away prices); and as a means of introducing
factor productivity' (which is predicated upon the perennial 'entrepreneurship' it was of no use because the buyers were
absence of any demand constraint); there is complete silence either 't7y-by-night-operators', or, if reputable MNCs, had
on the role of the domestic investment effort in explaining more complex objectives (on which more later).
growth performance, notwithstanding the overwhelming This widening of the Bank's package, from simply rolling
evidence which exists on its importance, and so on. We shall back state-sponsored industrialization through a removal of
not dilate on this critique here; the point to note is that trade restrictions, government controls and the pre-eminence
the policy-package following from this critique is exactly of the public sector, to an integration of the domestic
the same as before, namely, to roll back state-sponsored economy to the operations of global finance, ret7ected a
industrialization. fundamental change that was taking place within world
Where the Bank did change was in two respects; the capitalism itself, namely, a tendency towards greatly increased
first relates to its tactics. ln the beginning, up until the t7uidity of finance across national boundaries, a tendency
end of the 1950s in the case of lndia, the Bank studiously in short towards a globalization of finance, which is very
avoided giving any loans for government programmes. ln different from, though often confused with, globalization of
the early 1960s it modified its stance to give loans for social production facilities.
infrastructure projects, but not for any public sector industrial This very tendency also explains the shift which was taking
undertakings. lt is only when the policy of boycott of public place in the position of the IMF as well. Earlier the lMF was
sector undertakings appeared to be counterproductive from exclusively concerned with 'stabilization'. The Polak model,
its point of view that it started financing investment in such for example, which provided the basis for the lMF's policy-
undertakings but with its own conditionalities, such as global prescriptions concentrated on a few macrolevel identities
tendering, specifying technological details and the scale of and made no attempts at modelling 'structural adjustment'.
plants, etc. This shift from 'boycotting' to 'infiltrating' the lts assumptions were questionable (e.g. the absence of any
public sector enabled it to exercise great leverage, to induct recognition of a demand constraint, the attribution of external
multinational corporations (MNCs) directly into the public payments problems exclusively to the government sector's
sector as collaborators, to undermine domestic technological deficit, and the general monetarist bias) but it provided the
self-reliance and indigenous technological capabilities, to tool-kit for a highly conservative financial institution whose
dictate pricing policies and acquire an indirect say on the sole concern, especially vis-a-vis third world countries, was to
government budget, and to set up 'networks' with bureaucrats recover its loans by imposing fiscal discipline upon the latter.
and managerial personnel of the public sector. Together with This ruthless conservatism drew the ire of the third world, and
this began the process of World Bank employees shifting indeed of radicals everywhere. But it was the conservatism
to key government positions, especially in the ministry of of a narrow-minded financier, not that of an ideologue of
finance, even as they were drawing pensions from the Bank, development frowning overtly upon any attempt to alter
or even as they kept open the option of moving back to the forcibly the colonial pattern of international division of
Bank. They provided a powerful lobby working in concert labour. The latter role was left by and large to the World Bank.
towards 'liberalization-cum-structural adjustment' (arguably, A major change took place between the two oil-shocks.
as mentioned earlier, pushing the country into a trap where While the recycling of resources to the third world, such as
these policies became inevitable). it was, was organized in the wake of the first oil-shock by
The other respect in which the Bank did change was in the IMF itself, the tremendous growth which took place in
its new insistence upon a range of financial sector reforms the role of the banks in the interim meant that by the time
whose overall objective again was to detach the domestic of the second oil-shock it was the banks _which were doing
financial institutions and the financial markets from their whatever recycling was to be done, and the lMF was called
integration into the domestic development effort (through, upon only to provide 'security cover' to the banks. This was
for example, low long-term interest rates, subsidized credit, the beginning of a process; from being a leading financier the
 Chapter 16 Structural Adjustment Programmes: Composition and Effects 481

lMF had got reduced to being a 'gendarme' of international terms of outlook, breaking down their earlier separateness, but
rentier interests. As a 'gendarme' then it had to insist that the this coming together has itself been promoted to a significant
countries, which were caught under its 'conditionalities' and extent by the vastly enhanced role of globalized finance. On
thereby became possible candidates for receiving funds from might even add that this ascendancy of globalized finance has
international rentiers, adopted a host of measures that were been responsible, inter alia, for keeping down willy-nilly what
to the liking of the rentiers, such as privatization of public Lenin would have called 'inter-imperialist rivalry': certainly as
assets, 'opening up' of financial markets, removal of exchange far as the third world is concerned, the governments of the
restrictions, convertibility of the currency on the current and advanced capitalist countries present a remarkably common
capital accounts, and so on, all of which amounted to an front and give more or less unanimous support to the
espousal of the kind of 'structural adjustment' which the structural adjustment measures being imposed by the Bretton
World Bank had also come around to. Woods institutions.
To sum up then, while the conservatism of the Bretton Woods
institutions has continued unabated, there have been major
changes in the precise texture of this conservatism reflecting Source: Patnaik, Prabhat and C. P. Chandrasekhar, 'lndian
changes which have been occurring in world capitalism. Not Economy Under "Structural Adjustment"', Economic and Political
only have the Fund and the Bank come closer together in Weekly, vol. 30, no. 47, 1995, 3002-4.

NOTES
1. This section and sections 16.2, 16.3, and 16.4 are drawn vol. 37, no. 2, 1990; V. Thomas et al. op. cit., 1991; World
from my paper, Zaidi, S. Akbar, 'The Structural Adjustment Bank, op. cit., 1990; World Bank, op. cit., 1992.
Programme and Pakistan: External Influence or Internal 7. Khan, Mohsin, S., op. cit., 1990, 222, emphasis added.
Acquiescence?', Pakistan Journal of Applied Economics, vol. 10, 8. V. Thomas et al. op. cit., 1991, 544.
nos. 1 and 2, 1994. 9. Ibid. 39.
2. Reed, David, Structural Adjustment and the Environment 10. Reed, David, op. cit., 1992, 24.
(Boulder, Colorado: Westview Press, 1992), 4. 11. V. Thomas et al. op. cit., 1991, 14.
3. While the emphasis of this new thinking has been on 12. Reed, David, op. cit., 1992, 32, emphasis added.
removing protectionism and making economies more open, 13. Ibid. 32.
most underdeveloped countries still face severe restrictions. 14. Ibid. 32.
Some 51 per cent of Pakistan's exports to the US, 53 per 15. Ibid. 37.
cent to the EU, and 11 per cent to Japan are subject to quota 16. G. K. Helleiner et al. 'IMF Adjustment Policies and
restrictions: see Nabi, Ijaz and Naved Hamid, 'Partnership Approaches and the Needs of Children', World Development,
in Pakistan', in Lele, M. and Ijaz Nabi (eds.), Transitions vol. 19, no. 12, 1991, 1825.
in Development: The Role of Aid and Commercial Flows ( San 17. Ibid. 1826; see also Stewart, Francis, 'The Many Faces of
Francisco: ICEG Press, 1991 ). However, one must add that, Adjustment', World Development, vol. 19, no. 12, 1991.
with the end of GATT and the birth of the World Trade 18. Hoeven, R. Van der, 'Adjustment with a Human Face:
Organization, international quotas are going to become Still Relevant or Overtaken by Events?', World Development,
minimal. vol. 19, no. 12, 1991, 1835.
4. This section is drawn from Zaidi, S. Akbar, op. cit., 1994 and 19. Veltmeyer, V., 'Liberalization and Structural Adjustment in
from Reed, David, op. cit., 1992. See Reed, David, op. cit., Latin America: In Search of an Alternative', Economic and
1992, for a more detailed historical account. Political Weekly, vol. 28, no. 39, 1993, 2082.
5. For more details see: V. Thomas et al. 1991; Restructuring 20. Ibid. 2083.
Economies in Distress, (New York: Oxford University Press, 21. Senses, F., 'Turkey's Stabilization and Structural Adjustment
1991 ); Ferreira, F., 'The World Bank and the Study of Programme in Retrospect and Prospect', The Developing
Stabilization and Structural Adjustment in LDCs', DEP No. Economies, vol. 29, no. 3, 1991, 26.
41, Development Economics Research Programme, STICERD, 22. Ibid. 226.
(London School of Economics, 1992); Reed, David, op. cit., 23. See also Stewart, Francis, op. cit., 1991; and Zuckerman, E.,
1992; World Bank, Pakistan: Growth Through Adjustment, 'The Social Cost of Adjustment', in Thomas, Vet al. op. cit.,
Report No. 7118-Pak (Washington DC, 1988); World Bank, 1991.
Pakistan: Medium-Term Economic Policy Adjustments, Report No. 24. See Reed, David, op. cit., 1992.
7591-Pak (Washington DC, 1989); World Bank, Adjustment 25. Patnaik, Prabhat and C. P. Chandrasekhar, 'Indian Economy
Lending Policies for Sustainable Growth, Policy and Research Under "Structural Adjustment'", Economic and Political
Studies No. 14, (Washington DC, 1990); and World Bank, Weekly, vol. 30, no. 47, 1995, 3007.
Adjustment Lending and Mobilization of Private and Public 26. Ibid. 3008.
Resources for Growth, Policy and Research Studies No. 22, 27. Stewart, Francis, op. cit., 1991, 1848, emphasis added.
(Washington DC, 1992). 28. Ibid., 1848, emphasis added.
6. Khan, Mohsin S., 'The Macroeconomic Effects of Fund- 29. Reed, David, op. cit., 1992, 9.
Supported Adjustment Programmes', IMF Staff Papers, 30. Ibid. 36.
31. Quoted in Stewart, Francis, op. cit., 1991, 1858.
482 Issues in Pakistan's Economy

32. de Tray, D., 'Comments', in V. Thomas et al. op. cit., 1991, 72, 41. See Banuri, Tariq, op. cit., 1991, especially chapters 1, 2,
emphasis added. and 6.
33. Ibid., 273, emphasis added. 42. Platteau, Jean-Philippe, 'Formalization and Privatization of
34. Reed, David, op. cit., 1992, 17. Land Rights in Sub-Saharan Africa: A Critique o~ Current
35. Ferreira, F., op. cit., 1992, 53. Orthodoxies and Structural Adjustment Programmes', DEP
36. Veltmeyer, V., op. cit., 1993, 2080. No. 34, Development Economics Research Programme, STICERD
37. Salop, J., 'Reducing Poverty; Spreading the Word', Finance (London School of Economics, 1992); and Institute of
and Development, December 1992, 3. Development Economics, 'The Political Analysis of Markets',
38. Parts of this section are drawn from Banuri, Tariq, Economic IDS Bulletin, vol. 24, no. 3, 1993.
Liberalization: No Panacea ( Oxford: Clarendon Press, 1991 ), 43. Reed, David, op. cit., 1992, 34, emphasis added.
which should be consulted for a more extensive elaboration. 44. V. Thomas et al. op. cit., 1991, 524, emphasis added.
39. See Hughes, Alan and Ajit Singh, 'The World Economic 45. See Zevin in Banuri, Tariq and Juliet Schor, Financial
Showdown and the Asian and Latin American Economies: Openness and Na(ional Autonomy (Delhi: Oxford University
A Comparative Analysis of Economic Structure, Policy and Press, 1992).
Performance', in Banuri, Tariq, op. cit., 1991. 46. See Patnaik, Prabhat, 'International Capital and National
40. Ibid. Economic Policy: A Critique of India's Reforms', Economic
and Political Weekly, vol. 29, no. 12, 1994.
 The IMF and Structural Adjustment
Programmes in Pakistan

It is fair to say that since 1988 Pakistan's economic policies, Z. A. Bhutto government was granted four stand-by loans
management, and performance have been highly influenced collectively worth SD R3 30 million. Howevei, as was argued in
by the country's adherence to the IMF/World Bank-sponsored the previous chapter, stabilization and Structural Adjustment
Structural Adjustment Programmes, and to neo-liberalism. It Programmes funded by the IMF did not play a critical role in
is also fair to say that during this period Pakistan's various the management of the economies of the developing countries
governments have had no independent or original economic before the mid- l 970s. Pakistan's experience also follows the
programme Clftheir own~most without exception, the policy. same general trend, where in twenty years since 1958 it had
measures undertaken by the various governments in power recourse to less than SD R460 million. In the case of Pakistan,
since the implementation of the 1988 programme follow very as in othe, developing countries, the nature and extent of the
closely the details in the Policy Framework Papers, which IMF involvement changed drastically in the 1980s.
outline steps that the government is to undertake after signing As the IMF's funding amount and pattern changed over
the Structural Adjustment Programme or, more recently the late f970s and 1980s, Pakistan entered into a long-term
in 2008 in the Stand-By Arrangement (SBA) document. Extended Fund Facility (EFF) in November 1980, under
The programmes and agreements and arrangements are so General Zia, for a period ofthree years. It was worth SDRl.27
minutely detailed th<!t the government has little need to be billion, three times the entire amount lent between,! 94 7 and
innovative, and merely follows steps that are incorporated 1980. This three-year agreement was cancelled after one year,
in the programme document, and such agreements and and a new agreement worth the undrawn amount for two
programmes are only terminated, as they have been in the years was signed the very next day. ~ second recourse to
past, wherrthe government in Pakistan is unable to fulfil a long-term agreement with the IMF, following which the
its o.J2ligations and commitment to the Fund. While the various governmeiits in Pakistan have very closely followed
period since 1988 can be termed 'economic management the programme, was signed by the interim government after
under Structural AdjustmentProgrammes', Pakistan has had the death of General Zia ul-Haq. In fact, it was literally the
re"?ci~rse to earlier programmes as well. However, there is a last day of the government when the agreement was signed,
very marked difference in the constitution and application of and the subsequently elected Prime Minister, Benazir Bhutto,
the programmes prior to, and post, 1988. The purpose of this took office the following day. Her (first) government then
chapter is to document and highlight the role that Structural ratified the already agreed programme, which ran from 28
Adjustment Programmes have play~d in Pakistan and the December 1988 to 27 December 1991. Analysts argued at the
impact of neo-liberalism, more broadly. As will become clear, time of Ms Bhutto taking office that her selection as Prime
profound and substantial changes have had to be made Minister was preconditioned on, amongst other things, the
in Pakistan's economy over the last few years in order to ratification of the programme. Following her ouster after
have more IMF/World Bank loans released. The chapter twenty months in office, the Nawaz Sharif government
also includes an evaluation based on the perceptions of the elected in 1990 was bound by the covenants of the agreement,
donors and implementers (the IMF and the World Bank) and had to follow it through.
themselves, and tries to assess the impact of the Structural There was a gap of almost two years before another
Adjustment Programmes on Pakistan's economy and society. agreement was signed in September 1993. Although this
was a one-year standby agreement, it is considered to be a
fgrerunner to the more extensive subsequent agreement,
17.1 H1STORY1 worth almost SDR one billion, signed in February 1994.
However, Pakistan's political history since 1993 will help put
Pakistan has had a long association with the IMF, and the the Structural Adjustment Programme in proper context. '
first time that the Government of Pakistan asked for a loan The firg_~awc!_Z Sharif government was dismissed on
was in I 958 (see Tables 17 .1 and 17 .2). This was a standby 18 July 1993, and another interim government was put
arrangement worth SDR25 million2 over a period of about together in Islamabad. It was headed by Moeen Qureshi,
ten months. However, the loan was cancelled prior to the a former World Bank staff member who had been settled
expiration date and the entire amount of the loan went in the United States for the previous thirty years. The
unused. Two more standby arrangements, both of a duration enhanced Structural Adjustment Programme was prepared
of on~ar, were made in 1965 and 1968 by the Ayub by his interim government, and by 30 August 1993, IMF
Khan government, worth more than SDR125 million. The and World Bank staff, representing both the IMF and the
484 Issues in Pakistan's Economy

Table 17.1
Pakistan: Transactions with the Fund from 01 May 1984 to 31 May 2012
(in SDRs) I
I

GRA GRA PRGT PRGT Total l

l
GRA PRGT Total Total
Year Disburse- Charges Disburse- Interest Charges/
Repurchases Repayments Disbursements Repayments
ments Paid ments Paid Interest Paid

2012 516,850,000 46,910,586 68,912,000 - 585,762,000 46,910,586

2011 111,675,655 - 172,284,000 172,284,000 111,675,655

2010 1,063,682,010 82,726,174 172,284,000 67,025 1,063,682,010 172,284,000 82,793,199

2009 2,101,935,000 4,740,000 38,778,797 - 141,619,000 3,455,930 2,101,935,000 146,359,000 42,234,727

2008 2,067,400,000 11,059,163 513,407 - 105,099,000 · 4,091,192 2,067,400,000 116,158,163 4,604,599

'
2007 18,956,664 1,574,553 78,920,000 4,516,324 97,876,664 6,090,877

2006 18,956,668 2,318,065 53,074,000 4,813,785 72,030,668 7,131,850

2005 - 110,831,668 4,164,520 53,074,000 5,063,772 - 163,905,668 9,228,292

2004 309,364,998 9,009,463 172,280,000 73,613,000 4,952,433 172,280,000 382,977,998 13,961,896

2003

2002

2001 315,000,000
351,725,002

167,390,835

80,810,834
16,654,997

27,223,896

37,676,953
344,560,000

258,420,000

86,160,000
68,559,000

34,440,000

56,292,000
3,878,683

2,688,228

3,052,643
344,560,000

258,420,000

401,160,000
420,284,002

201,830,835

137,102,834
20,533,680

29,912,124

40,729,596
I
2000 150,000,000 161,180,834 36,789,119 56,292,000 1,145,301 150,000,000 217,472,834 37,934,420

1999 409,580,000 107,600,834 29,581,593 37,910,000 64,740,000 2,574,964 447,490,000 172,340,834 32,156,557

1998 18,950,000 39,712,500 22,961,473 113)'30,000 76,482,000 2,607,224 132,680,000 116,194,500 25,568,697

1997 91,490,000 138,775,000 24,481,727 113,730,000 87,408,000 2,104,799 205,220,000 226,183,000 26,586,526

1996 107,160,000 166,975,000 25,132,196 54,630,000 3,593,734 107,160,000 221,605,000 28,725,930

1995 133,950,000 61,200,000 26,901,693 54,630,000 2,604,865 133,950,000 115,830,000 29,506,558

i
l
1994 123,200,000 34,142,500 23,500,566 172,200,000 10,926,000 1,097,738 295,400,000 45,068,500 24,598,304

1993 88,000,000 91,360,000 23,528,612 1,912,045 88,000,000 91,360,000 25,440,657

1992 189,550,000 116,060,837 23,100,480 1,912,048 189,550,000 116,060,837 25,012,528

'1
1991 122,400,000 71,656,567 24,974,639 109,260,000 887,310 2,075,937 231,660,000 72,543,877 27,050,576

1990 108,135,726 37,523,534 14,264,500 1,019,704 - 122,400,226 38,543,238

1989 194,480,000 143,135,726 42,024,129 273,150,000 26,273,000 459,942 467,630,000 169,408,726 42,484,071

1988 196,588,385 38,774,862 39,173,293 160,975 - 235,761,678 38,935,837

1987 - 280,288,384 54,821,518 45,753,294 483,824 - 326,041,678 55,305,342

1986 - 269,524,830 82,734,829 45,753,294 712,556 315,278,124 83,447,385

1985 - 149,194,719 112,970,224 31,488,794 929,442 - 180,683,513 .~ 13,899,666

1984 51,571,846 73,407,466 9,740,147 1,048,966 61,311,993 74,456,432

Source: http://www.imf.org/external/np/fin/tad/extrans 1.aspx?memberKey1 = 760&endDate =2012%2D07%2D01 &finposition _flag= YES

IMF Agreement 2008

 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 485

Table 17 .1 contd.
Pakistan: Financial Position in the Fund as of 31 May 2012

I Summary of IMF members' quota, reserve position, SOR holdings, outstanding credit, recent lending arrangements,
projected payments due to the IMF, and monthly historical transactions with the Fund. ·

I I. Membership Status: Joined: July 11, 1950

II. General Reserve Account

Quota
SDR Million
1,033.70
Article VIII

% Quota
100.00
Fund holdings of currency (exchange rate) 5,749.75 556.23
Reserve tranche position 0.12 0.01

Ill. SDR Department SDR Million %Allocation

Net cumulative allocation 988.56 100.00
Holdings 639.06 64.65

IV. Outstanding Purchase and Loans SDR Million % Quota

Stand-by arrangements 4,419.19 427.51
Emergency assistance 1 296.98 28.73
ECF arrangements 198.12 19.17

V. Latest Financial Arrangements2

Amount Drawn
Type Stand-By Date of arrangement Expiration Date .Amount Approved
SOR Million
Stand-By 24 November 2008 30 September 2011 7,235.90 4,936.04
ECF3 05 December 2001 5 December 2004 1,033.70 · 861.42
Stand-By 29 November 2001 30 September 2001 465.00 465.00

VI. Projected Payments to Fund

(SDR Million; based on existing use of resources and present holdings of SDRs)
2012 2013 2014 2015 . 2016
Principal 832.35 2,399.61 1,379.29 303.04
Charges 40.83 43.38 13.96 2.45 0.47
Total 873.17 2,442.99 1,393.25 305.49 0.47

VII. Implementation of HIPC Initiative: Not Applicable

VIII. Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable
IX. Implementation of Post-Catastrophe Debt Relief (PCDR): Not Applicable

Prepared by Finance Department, IMF

Source: http://www.imf.org/external/np/fin/tad/exfin2.aspx?memberkey1 =760&date1 Key=2012-05-31 International Monetary Fund

I NOTES

1. Emergency assistance may include ENDA, EPCA, and RFI.

2. • Formerly PRGF
3. When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be
shown in this section.
486 Issues in Pakistan's Economy

Table 17.2
IMF Arrangements with Pakistan (Standby, Extended, Structural Adjustment, and Enhanced Structural Adjustment
Arrangements)
Panel A
Date of
Date of Type of Amount agreed Amount drawn Undrawn balance
expiration or
arrangement arrangement (SDRm) (SDRm) (SDRm)
cancellation

8 Dec. 1958 Standby 22 Sept. 1969° 25.00 25.00 8 j,

16 Mar. 1965 Standby 16 Mar. 1966 37.50 37.50
17 Oct. 1968 Standby 16 Oct. 1969 75.00 75.00
18 May 1972 Standby 17 May 1973 100.00 84.00 16.00
11 Aug. 1973 Standby 10 Aug. 1974 75.00 75.00
11 Nov. 1974 Standby 10 Nov. 1975 75.00 75.00
9 Mar. 1977 Standby 8 Mar. 1978 80.00 80.00
24 Nov. 1980 EFF 1 Dec. 1981" 1,268.00 349.00 919.oo•
2 Dec. 1981 EFF 23 Nov. 1983 919.00 730.00 189.00
28 Dec. 1988 Standby 30 Nov. 1990b 273.15 194.48 78.67
28 Dec. 1988 SAF 27 Dec. 1991 382.41° 273.15 109.26
16 Sept. 1993 Standby 15 Sept. 1994 265.40 88.00 177.40
22 Feb. 1994 EFF 21 Feb. 1997 379.10 80.55 298.55d
22 Feb. 1994 ESAF 21 Feb. 1997 606.60 101.10 505.50d

•cancelled prior to expiration date.

bExtended from 27 March 1990 to 30 June 1990, and again to 30 November 1990.
0 Approved amount increased from SDR346.9m in March 1989.

dAs of 31 July 1994.

Source: Zaman, Arshad, 'The Government's Present Agreement with the IMF: Misgovernment or Folly?', Pakistan Journal of Applied Economics, vol. 11,
nos. 1 and 2, 1995, 81.

PanelB
Total Amount
To Run For
IMF Programme US$ million Completed/Delayed/Suspended
(Coverage)
Sanctioned Drawn
1. Structural Adjustment Facility (SAF) 1988-1991 (3 years) 516 516 Completed after delay of one year.
2. Stand-by Arrangement (SBA) 1988-1991- (3 years) 259 259 Completed after delay of one year.
3. Contingency & Compensatory 1991-1992 (one time) 171.6 171.6 One time facility in one tranche.
Financing Facility (CCFF)
4. Emergency Assistance 1992-1993 (one time) 262 262 One time drawn in one tranche.
5. Stand-by Arrangement (SlilA) 1993-1994 (1-1 ½ years) 377 125.5 Suspended in 1993.
6. Enhanced Structural Adjustment 1993-1996 (3 years) 849 290 Suspended after about a year plus.
Facility (ESAF)
7. Extended Fund Facility (EFF) 1993-1996 (3 years) •, 531 177 Suspended after about a year plus.
8. Stand-by Arrangement (SBA) 1995-1997 (1-1½years) 600 277 1. Programme suspended in March 1996.
216 150 2. Programme reactivated in Dec. 1996.
3. Again suspended in 1997.
9. Enhanced Structural Adjustment 1997-2000 (3 years) 935 310 Suspended in October 1997.
Faciliy (ESAF)
10. Extended Fund Facility (EFF) 1997-2000 (3 years) 623 77 Suspended in October 1997.
11. Enhanced Structural Adjustment 1998-2001 (3 years) 637 53 Suspended after nuclear test in May
Facility (ESAF). 1998 and reactivated in January 1999.
(Reactivation of 1997 programme) Again suspended in September 1999.
12. Extended Fund Facility (EFF). 1998-2001 (3 years) 557 77.6 Suspended after nuclear test in May
(Reactivation of 1997 programme) 1998 and reactivated in January 1999.
Again suspended in September 1999.
13, Contingency & Compensatory January 1999 495 495 Completed in one tranche drawn.
Financing Facility (CCFF) (one time)
14, Stand-by Arrangement November 2000- ·. First full programme to be completed.
September 2001
(ten months)
15, Poverty Reduction Growth December 2001- 1,300 Fulfilled and completed prior to
Facility (PRGF) December 2004 termination date.
(3 years)
16. Stand-by Arrangement November 2008- 7,600 Suspended in September 201 o,
December 201 0 aborted in 2011.
(August 2009)
(additional 3,200)
17. Extended Fund Facility September 2013- 6,640
September 2016 (3 years)

Source: State Bank of Pakistan, Annual Reports (Karachi: various issues).

r
Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 487

Government of Pakistan, had agreed to a Policy Framewm~k __ the SDR quota of Pakistan) over the perio<!_December 2001
Paper, which laid the basis of the more comprehensive three- to December 2004:';In fact, the government prided itself,
year programme of 1994\ A number of improprieties were for this large loan that came about only as a result of 'the
recorded in the process of forming the programme. As Arshad completion of SBA in September 2001 [which] was the first-
Zaman argues, since Moeen Qureshi was a· World Bank ever successfulconclusion to an IMF programme during the
member who had recently retired, his government's position last ten years'. 6 As it is, General Musharraf's government
was explained by his IMF and World Bank colleagues, who congratulated itself for completing ~ost conditionalities
acted in an informal capacity as advi?ers to the government well before the period of the agreement came to an end in
officials themselves. This, Arshad Zaman argues, 'is not only December 2004--see Appendix 17.1 for details on General
contrary to conflict of interest rules of the IMF/WB, but Musharraf's government's agreement with the IMF; see also
also raises important legal questions about the validity of Chapter 18, which presents more details of macroeconomic
the letter of intent signed by the subsequent government, developments over the period 1998-2013. -
if it can be established that the letter was drafted not by While the government of General Pervez Musharraf ( l 999-
government officials [as per procedure) but by staff members 2S)08) was correct in stating that in the past Pakistan was
of IMF/WB'. 3 There was so much overlapping of interests known as a 'one-tranche' country,. never fulfilling its entire
over the content of the programme that it became difficult programme or commitments to the IMF and the World
to see whether the Government of Pakistan was initiating Bank, this claim is only half true. It is true that in the past,
the programme based on its own particular needs and giwernments from 1988 to 1999 were hesitant and that
priorities, or whether the IMF and World Bank members, t!iere was incomplete governmental implementation of the
in their official and non-official capacities, were imposing tough and unpopular adjustment measures, nevertheless,
the programme. In the Board meeting of the IMF held in tpey did follow IMF/World Bank policies. The core poli_cy
February 1994, when Pakistan's loan came up for discussion measures-devaluation; price, exchange rate, interest
and was approved, one of the Executive Directors was quite rate, and trade liberalization; public enterprise reform;
pleased that the proposed programme initiated by the Moeen and subsidy ~~ithdrawal-which are integral to the so
Qureshi caretaker government was prepared with such 'close called 'reform' process enforced by the IMF and the World
cooperation of the Fund'. 4 Bank-were implemented by governments in this period,
The Moeen Qureshi government was given a standby however reluctant they may have been initially in carrying
lqan of SDR265.4 million in record time by the IMF on 16 out these policies, and however slowly · they may have
September 1993. For the second time, after her re-election, moyed in implementation. It is very difficult to sustain the
Ms Benazir Bhutto's government was handed a pre-prepared, view-emphasized by the government of General Pervez
detailed programme, which she was expected to endorse. Not Musharraf-that previous governments have refused to
only did her government endorse the 1993 programme, but implement the adjustment measures prescribed to them.
also, within four months, signed the tpree-year loan under.t~ It should be clear from the above account that there
Extended Fund Facility .(.)3l,F.)_and the Enhanced Structural are major political connotations to Structural Adjustment
Adjustment Fund (§§AF). Although this programme was Programmes in the context of Pakistan, something that is also
signed by the elected government of Benazir Bhutto, there confirmed by events after 9/11-see Chapter 18. A number of
is little doubt that the unelected Moeen Qureshi interim domestic and foreign_ interests and forces are also at work,
government was responsible for framing the programme and and one wonders how much autonomy the Government
getting it approved. Ms Bhutto's government rubber-stamped of Pakistan has had in the first place. The 1988 and 1993
an agreement in which, quite probably, her political future agreements, which have quite drastically changed the course
was at.stake. 5 _of Pakistan's economy, were agreed by for the most part (or,
Tbe first time a democratically elected government itself some believe, imposed on) unelected, interim governments.
took a loan from the IMF, was Nawaz Sharif's second It seems that the elected governments that followed the
government of 1997-99. As Panel B in Table 17.2 shows, Structural Adjustment Programmes may have been asked
there were four agreements, two ESAFs and two EFFs, but to give guarantees that they would not undo a programme
as in the past, all agreements were suspended or abrogated designed by someone else. A more detailed analysis of the
and were never fulfilled. In fact, as Panel B shows, none of political and other consequences is reserved for later, and
the governments since 1988-with the exception of Nawaz we turn to some details about Pakistan's 1988 and 1994
Sharif's second government which used a one tranche $495 programmes. 7 The latest agreement with the IMF, the 2008
million Contingency and Compensatory Financing Facility- Stand-By Agreement signed by the Pakistan People's Party_
completed its programmes and fulfilled the agreements. The government, is also discussed below. Furthermore, Chapter
only exception was General Musharraf's government, which. 18 presents additional details when we look at the broad
agreed to a Poverty Reduction and Growth Fund arrangement macroeconomic developments between 1998-2013.
worth US$1.3 billion (which is equivalent to 100 per cent of
488 Issues in Pakistan's Economy

f) contain the growth of domestic credit and

17.2 IMPLEMENTATION OF THE
money supply in line with the growth of
STRUCTURAL ADJUSTMENT 1!ominal GDP at the target rate of inflation,
with sufficient allowance for the desired
PROGRAMMES IN PAKISTAN: increase in net foreign assets; and
g) consistent with the macroeconomic adjust-
AN EXAMINATION OF THE 1988
PROGRAMME
ments, sustain real GDP growth at about
5.2 per cent in 1988-9 and at 5.5 per cent in
. .,
I 989-91. 9
In the first edition of Issues published in 1999 we provided a
very extensive table which appeared as Appendix 15.1, which There are three key areas under which the reforms detailed
gave details of the main features of the Structural Adjustment in Appendix 15.1 in the first edition were to take place: fisciil
P!3?gramme of 1988, signed between the Government of policy, foreign trade policy, and the financial sector. Since
Pakistan and the IMF. The reason why the table was these three broad areas were meant to help determine the
presented in such detail was to show how particular and impact on, say, agriculture, energy, or even transportation, a
specific a Structural Adjustment Programi'ue 7eally is. It goes little more detail of how the IMF and World Bank wanted to
into minute details on almost every account. For example, achieve their objectives, is warranted.
there are references to as mundane and apparently trivial Appendix 17 .1 in the current edition which gives some
concerns as telephone charges. It mentions and requires details of the later PRGF agreement also highlights similar
the deregulation of bus fares and the adjustment of power se_ctors and shows that the general direction of the programme
tariffs, gas prices charged to domestic household consumers, continues. One significant difference in the older programmes
water and sewerage tariffs, taxes, fees, and user charges and the most recent OI}e is the extent of monitoring and data
for roads, rail, ports, and _aviation. There are dozens of very rrquirements by the IMF from the Government of Pakistan, on
precise clinical interventions that a Structural Adjustment key indicators. In many cases the Pakistan government and
Programme is meant to undertake. Appendix 17.1 in the the State Bank of Pakistan, were required to submit data for
current edition, gives details of the most recent Poverty scrutiny to the IMF every week!
Reduction Growth Fund agreed to between the Government
of Pakistan and the IMF, which ran through the period· 17 .2.1 Fiscal Policy
December 2001 to December 2004. 8
With an attempt to decrease the fiscal deficit/GDP ratio in
Given the extensive details, one might lose sight of the larger
three years from 8 per cent to 4.8 per cent, major empha;is
issues and objectives of the 1988 programme. The programme
was placed on resource mobilization, with major tax measures
was supposed to improve financial internal and external
that were inteu""ded to increase the tax revenue elasticity. The
~ances, increase average savings rates-particularly in the
purpose here was to raise the t2,tal revenue/GDP ratio from
public and government sectors-and promote and encourage
17.6 per cent in 1988 to 20 per cent by 1991/2. The salient
pr_ivate sector investment and activity. In particular, the key'
features of the tax effort included the gradual extension
objectives of the 1988 Structural Adjustment Programme
of the sales tax on imports and domestically produced
over the three-year period, with their annual targets were as
goods, such that a general sales tax (GST) could have been
follows:
implemented by the end of the three-year programme. The
a) Reduce the overall budgetary deficit to 6.5 income tax system was also to be restructured so that there
per cent of the GDP in 1988-9, to 5.5 per was greater vertical equity. To increase revenues, steps were
cent in 1989-90, and further to 4.8 per cent outlined to increase prices and user charges for utilities
in I 990-1, a level that is sustainable over the such as electricity, natural gas, and water. The programme
medium term; also suggested increases in the charges for higher education
b) C<?ntain the rate of inflation to 10 per cent in and health. While these attempts at raising revenue were
1988-9 and reduce it gradually to 7 per cent identified, it was also decided to take measures that wou_ld
in I 989-90 and to 6.5 per cent in 1990-1; strengthen the tax administration and implementation of
c) reduce the external current account deficit to these reforms.
3.4 per cent of GDP in 1988-9, and further.to
2.8 per cent in 1989-90 and 2.6 per cent in Excessive government expenditure, particularly current
1990-1, a level judged sustaii;1able over the expenditµre, was also to be reduced from 26.2 per cent of GDP
longer term; to ~~per cent in the three-year programme. This w~-tci be
d) reduce the civilian external debt-service achieved. by reducing the growth of current expenditures, as
ratio from 27-28 per cent in 1986-8 to tYie well as by lowering and eliminating subsidies on fertilizers
sustainable level of less than 22 per cent by a.!!f!.r~vising the procurement prices of wheat. At the same
I 990-1; time, since emphasis had also been placed on providing
e) increase gross official foreigll' exchange and increasing funds to the social sector, the Structural
rs.serves from the equivalent of about three Adjustment Programme of 1988 envisaged an increase of
weeks of merchandise imports at end -1987-8
to a safer level of about seven weeks of Q.-4. per cent of GDP (from 7 to 7.4) for developmep.t
imports by I 990-1; exp£nditure. There was also a major attempt to tighten the
control over provincial expenditures, with a new federal/
 Chapter 17 The IM,:: and Structural Adjustment Programmes in Pakistan 489

provincial revenue-sharing agreement being worked out so control of the government. Directed credit schemes, which
that provincial government would make greater efforts to have been used extensively by the government to suit its
raise revenues. needs, were to be limited under the proposals in the 1988
Structural Adjustment Programme. It was believed that the
17 .2.2 Trade qeregulation of controls in the banking sector would provide
competition, which would then allow the establishment of
Significant reforms were earmarked for the trade sector, private banks unencumbered by government controls and
where it was hoped that all the non-tariff barriers would priorities. Capital markets were also to be encouraged to act
be replaced by tariffs. At the same time it was planned to as another source of capital/credit for firms. In this regard,
reduce the number· of banned commodities from 400 to the government was expected to promote private venture
about 80, leaving only those that were banned for religious capital firms and eliminate the official setting of share prices.
and security reasons, or under reciprocal or international In addition to these steps, lt!!_e 1988 Structural Adjustment
agreements. In essence, this step would have allowed the Programme proposed policies in the monetary sector, where
import of a very large number of items that were previously the government was expected to pursue cautious domestic
banned. While non-tariff barriers were to be reduced, there credit policies so that inflationary pressures were curtailed
was also to be a drastic reduction in the maximum tariff and perceived improvements in the balance of payments were
rate to 125 per cent in 1989/90 and to 100 per cent at the not jeopardized.\Monetary expansion was to be kept in line

,
f
.
end of the three-year programme. Tariffs were to be imposed
on a discriminatory basis depending on the degree and
stage of processing. Most tariff exemptions and concessions
with nominal GDP growth. Appendix 17.1 shows that the
general direction of these 'reforms' has been very similar all
through the 1990s, well into the current 2001-04 programme,
'I were to be removed, streamlining the entire tariff structure (also see Chapters 14 and 15 for an extensive review of these
.· on imports. It is clear that the emphasis of the Structural reforms).
Adjustment Programme of 1988, in the trade sector, was on
eiZtensively reducing tariffs so that imports could be made
cheaper. However, there was also an attempt to increase
exports, particularly higher-valued exports. In addition, with
17.3 WAS THE 1988 STRUCTURAL
deregulation and privatization being promoted, the private ADJUSTMENT PROGRAMME A
sector was to be permitted greater involvement in the export
SUCCESS? ACHIEVEMENTS AND
of rice and cotton, both of which were previously solely under
government control. In the latest agreement, the PRGF of FAILURES
2001, these policies have continued, deepening the.JeJogp_s
further-see Appendix 17.1. One can determine the success or failure of a programme in
conventional terms by identifying programme targets and
then examining whether those targets were met. This m·ethod
17.2.3 Financial Sector
implies that there was sufficient information, knowledge,
With the opening up of the economy, as controls were removed, and understanding at the time the original targets and
the financial sector was expected to play an imp2!~1!!!~:>le..l.1:1_ objectives were set, to highlight the problem areas and their
allocating resources, and in providing guidelines for other possible solutions. If the problems were identified correctly
macroeconomic targets. The 1988 Structural Adjustment and the programmes target them, we can determine success
Programme highlighted measures to improve .the efficiency or failure by the extent and degree of the deviation from
and profitability of the banking system and to increase their given targets. This is the methodology adopted by the
the autonomy and accountability of public sector financial IMF/World Bank, believing that its original framework, the
institutions, particularly the nationalized commercial banks. identification of issues, and the priority attached to them
Attempts were made in the programme to tighten prudential were correct. In this section we reproduce and summarize the
regulations and the supervision of the banking system. Debt assessment of the 1988 Structural Adjustment Programme by
recovery had been woefully inadequate in the past, and it the donors themselves. In Section 17.6 we question the entire
was recognized in the Structural Adjustment Programme basis of the Structural Adjustment Programme with respect
document that the legal framework for debt recovery needed to Pakistan. 10
to be strengthened. Since state-controlled nationalized banks The Structural Adjustment Programme was expected to
had been very dependent on state patronage, attempts were maintain a strong growth performance over the three-year
also made to increase the banks' own capital resources. period, of above 5.5 per cent GDP growth each year, relying
The programme also proposed the establishment of a credit mainly on increasing investment and improving efficiency
information bureau within the State Bank, allowing access • in investment. The deregulation of the economy, increased
to the private sector about priority areas. On the monetary competition from liberalized imports, the adjustment in
policy side, policies were to be undertaken to abolish negative administered prices, along with substantially better fiscal
real interest rates on concessional credit programmes, and effort were all cornerstones of the 1988 programme. A
efforts were to be made to free interest rates in the market for summary of the extent of the reforms actually implemented
medium- and long-term credit, making the interest rate more is presented as follows.
responsive to market conditions rather than bein'g under the
I
;.i.
'j_•
"l
490 Issues in Pakistan's Economy

17.3.1 Fiscal Policy per cent in 1988 to 90 per cent in 1992; progress in reducing
exemptions and tax concessions was somewhat limited;
The implementation of the adjustment programme as and revenues from trade taxes declined from 5.9 per cent
evaluated by the IMF/World Bank was weakest in the of GDP to 5.1 per cent. Furthermore, debt-GDP ratios failed
implementation of fiscal policy. )Most quantitative targets to improve despite rapid growth in GDP, and external debt
were not met (see Table 17.3). Tax revenues as a percentage increased from 44 per cent to 46.5 per cent of GDP. -
.of GDP remained stagnant. On the taxation front, the
following steps were taken: numerous income and wealth tax
exemptions were eliminated; there was a simplification and 17 .3.2 Trade and Balance of Payments
rationalization of the tax structure; major steps to improve There was a stepwise reduction in maximum tariff rates and
tax administration were attempted; despite a general sales an elimination of many non-tariff barriers (see Table 17.4).
tax, the number of taxpayers and sectoral coverage was low, Import licences were abolished except for products that were
with over 121 commodity categories exempt from the GST; prohibited. Improved incentives for exports were given, but
the maximum duty rate for imports was reduced from 225 it was also observed that trade liberalization encouraged the

Table 17.3
Summary of Public Finance:a 1988/9 to 1990/1 (% of GDP)

Item 1987/8 actual 1988/9 actual 1989/90 actual 1990/1 actual SAP target

Total revenues 18.4 18.9 19.5 16.5 20.8

Tax and non-tax revenues 17.3 18.1 18.5 15.5 19.7

Tax revenues 13.8 14.3 13.9 12.8 14.9
Direct 1.8 1.9 1.8 2.0 2.4
Indirect 12.0 12.4 12.1 10.8 12.5
Domestic 5.8 6.4 5.7 5.3 6.6
Excise 2.6 2.6 2.7 2.5 2.8
Sales tax 1.3 1.9 1.8 1.7 2.1
Surcharges 1.9 1.9 1.1 1.2 1.8
Custom duties 5.6 5.5 5.9 4.9 5.4
Import duties 5.1 4.9 5.3 4.5 5.0
Export duties 0.5 0.6 0.6 0.4 0.4
Othersb 0.6 0.5 0.5 0.5 0.5

Non-tax revenues 3,5 3.7 4.6 2.7 4.8

Surplus autonomous bodies 1.1 0.9 1.0 1.0 1.1

Total expenditures 26.9 26.6 26.1 25.2 25.6

Current 20.1 20.4 19.5 18.7 18.8
Federal 15.7 16.2 15.3 14.7 14.7
Defence 7.0 6.6 6.9 6.4 6.1
Interest payments 4.7 4.7 5.3 4.2 5.4
Subsidies 1.0 1.6 1.0 0.9 0.7
Otherc 3.1 3.2 2.2 3.2 2.5
Provincial 4.4 4.2 4.2 4.0 4.1
Development 6.8 6.3 6.6 6.5 6.8

Deficit -8.5 -7.7 -6.5 -8.7 -4.8

Deficit financing 8.5 7.7 6.5 8.7 4.8

External resources (net) 1.9 2.4 2.7 2.5 1.9
Domestic non-bank financing 4.6 4.9 4.5 2.0 2.5
Domestic bank financing 2.1 0.4 0.4 4.2 0.4
Borrowing outside budget 0.0 0.0 0.0 0.0 0.0
For memorandum
Public savings -1.7 -1.4 0.1 -2.3 2.0
Primary balance -3.8 -3.0 -1.2 -4.5 0.6

"Of the federal and provincial governments and certain a·utonomous bodies /y'JAPDA, OGDC, PTC, NHA, PTV, and NFCP).
blncluding additional revenue measures to be implemented in 1992/3.
c1ncludes unidentified expenditures.
Source: World Bank, Pakistan: Country Economic Memorandum FY93, Report No. 11590-Pak /y'Jashington: World Bank, 1993), 14.
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 491

Table 17.4
Changes in Trade Policy: 1987/8 to 1992/3: Non-Tariff Barriers

Items removed from•

Year Negative Restricted Maximumb Import lqra Licence

List List tarriff (%) surcharges (%) surcharge (%) fee(%)

1987/8 136 10 225

'
5 5 4
1988/9 169 51 125 6 5 5
1989/90 70 20 125 7 5 5
1990/1 97 43 95 10 5 6
1991/2 23 17 90 10 5 6
21 11 90 0 5 6

:Items ren:ioved are a mixture of numbers and categories and therefore are only a broad indication.
Automobiles and alcohol continue to carry tariffs up to 425%.
Source: World Bank, Pakistan: Country Economic Memorandum FY93, Report No. 11590-Pak (Washington: World Bank, 1993), 20.

import of goods and services. Exports increased sharply by the private sector was permissible on rupee deposits, and 40
11.6 per cent per annum in US dollar terms, and by 14.4 per per cent on foreign currency deposits.
cent by volume, mainly due to increased exports in cotton
manufactured products, synthetic textiles, leather products, 17 .3.4 Liberalization and Privatization
sports goods and other non-traditional manufactured goods;
A forceful programme for liberalizing the economy from
and the trAC1e.,.b~aI1~)~pr~d_ sig11ifjcantly from -6.6 per
government control was undertaken. The sanctioning of
cent of GDP to ~ e r cent.· There was deterioration in
private investment and import licensing was abolished. Other
the s~aj_,ces. bal~nce (f~om -3.6 per cent of GDP to -4.6),
regulatory restrictions, including registration of technical and
and a s~p,..,d:;.cline Jp_ workers' remittanc~s. Large foreign
foreign loan agreements, and procedures for employment of
exchange inflows due to liberalization of foreign currency
foreign workers were also abolished. Areas where previously
deposits took place, increasing by US$1.2 billion (2.4 per cent
only the government sector could invest, such as power
of GDP); the current accou_gt~deficit declined. Gross external
generation, commercial and investment banking, and air
reserves incre~sed_d_ue to _large_ private-capital. inflows .into
and sea transport were opened to the private sector. One-
foieig~ur!ency~deposits. There were noticeable increases in
hundred-and-five manufacturing units were 'put up for
foreign direct and foreign portfolio investment.
privatization. By November 1992, sixty-seven.had been sold,
with further steps taken to privatize the telecommunication
17.3.3 Financial Sector and gas sectors.
{._Resident Pakistanis were allowed to operate foreign currency
accounts which in 1998 turned out to be a complete disaster 17 .3.5 Other Areas
having very serious consequences\-see Chapter 18. Banking
Performance of the agricultural sector improved significantly
procedures were liberalized and banks were authorized
during the programme. Cotton, due to improved technology
to increase interest rates on these deposits above LIBOR.
and attractive incentives grew markedly, at 10.2 per cent
'Iyvo stat_e-QWIJ.e~_ banks, )\1uslim Commercial Bank and
per annum in volume terms. The performance of other
Allied Bank Limited, were sold to the private sector. Ten
sectors in the agricultural sector was not particularly strong.
new private sector commercial banks as well as eight new
Subsidies on pesticides, seeds, and agricultural machinery
investment banks were sanctioned. In the stock market, there
were eliminated. Formal control over the price of urea was
was a lib_eralization of regulatiQn~Jocdomesli.c_and foreign
lifted, and prices of phosphatic arid potash fertilizers were
in~stment generally, and foreign portfolio investment in
adjusted upwards.
partirul.ar; ·resulting-ii'Cincreased activity and capitalization
Industrial value added grew by 6.3 per cent during
in the stock market; and a liberalization of rules regarding
the Structural Adjustment Programme of 1988. Large
the pricing of new issues. In the monetary sector, a full-fledged
investments were undertaken _in all major energy sources.
auction of government debt was initiated; the rate of return
Cotton industries dominated, with output of cotton yarn
on six-month Treasury Bills rose gradually from 6 per cent to
increasing at an average annual rate of 15 per cent.
13 per cent; rates of return on concessionary lending schemes
.,..Private sector gross fixed capital formation expanded from
increased so as to remove the negative real interest rate in
7.7 per cent to 9.4 per cent of GDP. Domestic' savings grew
this area; bank deposits increased; and there was a gradual
from 10.5 per cent to 12.5 per cent of GDP. There was a sharp
narrowing of interest rate differentials between various
rise in savings held overseas by Pakistanis, which were then
financial instruments. Credit ceilings for individual banks
transferred and deposited in foreign currency deposits in the
were replaced by credit-deposit ratios: 35 per cent credit to
domestic banking sector.
 492 Issues in Pakistan's Economy

Energy prices increased by an average of 4 per cent in real the ke.I,..i!!dicato_r_s,a__11d.programme_targets for the Structural
terms. Telephone calls were subject to excise duty, earning Adjustment Programme of 1988. ·
substantial revenue. The World Bank's own opinion about the.programme is as
follows:

while performance during the adjustment

17.4 THE WoRLD BANK/IMF's
period has been s!!fillg,,,,in, GDI".,..and-export-,.,
OVERALL EVALUATION OF THE growth_and in structural reforms to encourage
private sector economic activity, itJias..,been,_,
1988 STRUCTURAL ADJUSTMENT .,..weake~ ~ i!5hieving a sustatued.reduction..in,.~~ ..
f!scal .deficit..,.i!,I!,Q,.lll.improring_external sector
PROGRAMME
qala~. ~he financial imbalances, especially
persistently large fiscal deficits, raise concern
The above sections have presented a list of reforms and targets
about their potential adverse effects on growth
that the 1988 Structural Adjustment Programme hoped to - performance. Similar concerns are also raised by
achieve. As we have seen, the Government of Pakistan has the lack oI significant improvement in poverty
implemented a large numb~cioi-n{°s-in different sectors and social sector indicators. 11
of theeconomy. T~ble 17.5 presents a'detailed summary list of

Table 17.5
Summary Key Indicators and Programme Targets: 1987/8 to 1991/2

Provisional Preliminary
Item 1987/8 1988/9 1989/90
1990/1 1991/2

• Growth and savings indicators

GDP (market price - growth rate) 7.6 5.0 4.5 5.5 7.8
GD.I/GDP 18.0 19.0 18.9 18.7 18.7
of which:
Private GFCF 7.7 8.3 8.9 8.9 9.4
Public GFCFa 8.8 9.0 8.3 8.2 7.7
GOS/GDP 10.5 11.6 11.7 12.4 12.2
GNS/GNP 13.6 14.1 14.2 14.3 15.7

Inflation indicators
CPI (% change) 6.3 10.4 6.1 12.7 9.6

Fiscal indicators
Total revenue/GDP 18.4 19.0 19.5 16.5 19.4
Tax revenue/GDP 13.8 14.4 13.9 12.8 13.7
Public savings/GDP -1.7 -1.4 0.1 -2.3 -0.3
Overall balance/GDP -8.5 -7.7 -6.5 -8.7 -7.5
Bank financing/GDP 20 0.4 0.4 4.2

Competitiveness indicators
REER (% change) -1.8 -8.2 -2.3 -2.7
Merchandise exports (growth in US$) 24.7 · 6.2 6.3 19.8 16.6

External indicators
Current accountb/GDP -4.4 -4.8 -4.7 -4.3 -3.1
Gross external reserves (weeks of imports) 3.0 3.0 4.0 3.3 5.6
1e>f:?l,public debt,JGDP 44.4 47.4 49.4 45.5 46.5
Public debt service ratiod 26.9 24.0 24.5 21.5 22.5

GDI = Gross Domestic Investment

GFCF = Gross Fixed Capital Formations
GDS = Gross Domestic Savings
GNS = Gross National Savings
REER = Real Effective Exchange Rate
8 Based on a wider coverage than the fiscal accounts

bNet of official transfers

"" c1ncludes deP.osit lia,bilities of the banking system but excludes mil1!_ary debt ·
dlnclud.es debt service payments of medium- to long-term debt and iriterestpayments on short-term guaranteed debt and deposit
liabilities of the banking system. As a percentage of exports of goods and services and remittances.
Source: World Bank, Pakistan: Country Economic Memorandum FY93, Report No. 11590-Pak, Washington, 1993, 35.
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 493

These conclusions, however, seem somewhat at odds with the that when and if things went wrong, it was because 2f poor
data available in Table 17.5. Four key indicators are believed management on the part of the government.
to reflect the state of the economy: GDP growth rates, the William McCleary argues that the Fun_-d and the Bank
budget deficit as a percentage of GDP, the current acc'aunt played a significant and positive role in the development
deficit/GDP ratio, and the inflation rate. Thus, even though of the economy during the 1980s. A leading exponent of
extensive reforms have taken place in most sectors, including Structural Adjustment Programmes, and a director at the
trade, liberalization, and the financial sector, if the above IMF, Mohsin Khan, seems to disagree. Khan argues that
four indicators do not show a significant improvement, it
w~uld be difficult to conclude that the programme has_ b_een · although there have been some attempts at
a success. Let us re-examine the case for the 1988 Structural liberalization, the evidence is far too tenuous to
Adjustment Programme with respect to the key indicators argue, as McCleary does, that the economy has
become more open and more outward oriented
identified above. ,
in the 1980s .... The changes that have been
Based on Table 17.5, it seems that GDP growth, the World made have been marginal, and it is doubtful
Bank claim notwithstanding, has managed just a 5.5 per cent whether those made in the 1980s have been any
annual increase at the end of the 1988 Structural Adjustment greater than those of the previous decade. 14
Programme. Gross domestic investment as a percentage of
GDP, which was supposed to increase, has increased only Recognizing that some targets had not been met-for
marginally, mainly because public gross fixed capital formation example, the savings/investment balances were significantly
has fallen. Gross domestic and gross national savings have, lower than those targeted under the 1988 programme;
however, shown a substantial increase. I11flatlgp, a key 1 ~ fiscal deficits persisted and were a ·source of financial
variable, is way off target in the final year of the programme,, instability; efforts at resource mobilization were not
as are all fiscal indicators, a fact even acknowledged by the successful; the structure of government expenditures did not
World Bank. The fourth key indicator, the current account improve significantly; and the balance of payments, despite
deficit, is also substantially off target. Thus, three of the four government reform, did not show particular progress-the
indicators that would provide a summary pqsition of the IMF and World Bank came up with yet another e~tended
achievements of the Structural Adjustment Programme are far Structural Adjustment Programme for Pakistan. This new
from the targeted figures. Clearly, on the conventional criteria laid Structural Adjustment Programme which began in 1993
down by the IMF and the World Bank, the 1988 Structural initially for one year, and then subsequently ran from 1994
Adjustment Programme, despite all the propaganda and tg_1997, had features that were quite similar..in principie to
fanfare, was not much of a success. the 1988 programme (see Appendix 15.2 in the first edition
The overall perception by the World Bank and IMF of their of this book). As a consequence, the Government of Pakistan
policies in Pakistan seems to be mixed. They feel that some based each of its policy decisions and managed the economy
positive developments had taken place, especially in the case almost precisely according to the 1994 programme.
of pricing policies, trade liberalization, export promotion and Much of the analysis by the World Bank and the IMF of
some public sector reform. Where governments had failed .is its 1988 Structural Adjustment Programme has been done
in lowering the budget deficit to preferred levels, diversifying at a macro level, and they did not really look at many of the
exports, cutting inflation, etc. William McCleary of the more critical micro issues. Now that Pakistan has undergone
World Bank argued that in the mid to late 1980s, Pakistan some extensive programmes, some Pakistani scholars have
experienced · e~aluated the impacts of ihe programmes at a somewhat
disaggregated level.
a period of rapid growth and inflows of migrant Work undertaken by Shahrukh Rafi Khan, who has
workers' remittances [which] had raised tested a number of hypotheses regarding the impact of the
standards of living broadly across the population.
Structural Adjustment Programme as applied to Pakistan.
Private investment played a leading role in this
expansion, and no longer was public investment His results show that, particularly on labour and the poor, the
in large scale industry viewed as the engine of impact has been severe. The general sales tax and subsequent
growth .... The economy became more outward inflation hurt the poor, and cuts in government hiring in
looking, flexible and market oriented. 12 order to release pressure on government expenditure are
likely to increase unemployment. The withdrawal of large
He continued that 'reforms in Pakistan have been sustained subsidies also has similar deleterious consequences. For S. R.
because of the government's incremental and flexible approach Khan, following the 1988 programme, 'the socioeconomic
and because continued strong economic performance· has conditions oflabour and the poor seem to have deteriorated'. 15
obviated the need for reversals'. 13 His overall view was that Similar results have also been found by studies which show
Pakistan's economy was doing well for itself, and then the that poverty, after having decreased in the 1970s and 1980s,
IMF intervened, after which it did somewliat better for a returned to Pakistan following .the IMF programmes.-see
few years. McCleary argued that, when Pakistan's economy Chapter 22. Low GDP growth, its sectoral distribution, lower
was doing well, it was because the conditions imposed on employment and real wages, and fiscal policy designed·
Pakistan were being followed and because the Government to cut public expenditures and social development were
of Pakistan was thinking like the IMF and the World _Bank. seen as the key caus_e£_ql_a_return to poverty in the 1990s.
He argues that the IMF/World Bank policies were sound and Similarly, A. R. Kemal found that unemployment increased,
 494 lssues in Pakistan's Economy

as did poverty and income inequality, on account of the 1988 . of an Extended Fund Facility (EFF) and an Enhanced
Structural Adjustment Programme. 16 The little research Structured Adjµstment Facility (ESAF). However, as Panel
published on the i_mpp.ct of the Structural Adjustment B in Table 17.2 shows, there ha;e been as many starts as
Programme in Pakistan seem·s to support the general s'fops to all there programmes. The Musharraf government
conclusions from studies from across the _globe-also see continued the tradition of taking loans from the IMF and
Chapter 18, and Chapter 22 on Poverty. bec~me, t!_J.e first goverµment to complete a programme in
(The 1994-7 programme was halted by the second Benazir its entirety. It is ·deaf that the IMF and the World Bank
Bhutto government in 1995 (see Box 17.1 ), but her government · \.l'ill .5ontinue to influence, government economic policy in
was forced t{1. g? -back some. rpenths later and agree to a _ Pakistan for some tiple to come. _
standby loan, on stricter terms.' The standby loan, too, was · · ·
discontinued as the. government :failed to fulfil important
conditions imposed 'by the iMF. After the dismissal of the 17.5 THE 2008 STAND-BY AGREEMENT
second Benazir Bhutto government in November 1996, the
second Nawaz Sharif government in March 1997 announced '
As we show in the precedi)lg sections, t~_oughout the
a large number of supply-side measures, such as cuts in l~0s,..._Pakistan_was. known as a one-tranche country,
inclilrtle tax and a liuge reduction in the maximum tariff wh.,.ere agreements signed between the IMF and the (many)
rate from 65 to 45 per cent, with a reduction in tariff slabs. governments of Pakistan, were often reneged upon or
Although the govsrnment insisted that it was undertaking_ cancelled by the Government .of Pakistan, usually after
, 'these measures 'on its own initiative', rather than on any receiving the first, or. a couple of tranches, of the many
· advice or co~pulsion from the IMF, the measures ;e~ed programmes agreed to. It was,.only_in~2000/01, w_he_g_the \ _,,
· 10 Qe from an IMF manual, and were very well received by first full programrr!e, a.Stand-By Arrangement of ten months
the IMF and World Bank. In October 1997, the Nawaz Sharif _, worth $495 mn, was completed. Subsequently, in 2001,
government signed yet another agreement with the IMF, the another agreement, a Poverty Reduction and Growth Faculty
first in some·years by an elected government. This third major (PRGF) arrangement of $i.3 bn, was agreed to and also
agreement •since _198&, worth USfl .6 ,b\l!ion, Y\'<!S,,cop.posed completed in 2004, this time even prior to the end-of-
- -
Box 17.1 \ All in all, the 1995-6 budget was perceived to be pro-
The IMF Shows its Displeasure industry and growth enhancing; encouraging the belief that
a number of the·targets would be met for a change. Most
'."ttempts by Pakistan's goveli[lment to show independence of all, many analysts perceived the budget to represent the
were not received well by the IMF. interests of Pakistan; rather.than th·e demands of the IMF.
The IMF was not at all pleased with this attempt by the
. It was in September 1993 that Moeen Qureshi's caretaker government to assert its independence, and the Fund froze
government signed a stand-by agreement with the IMF, ,, the remaining tranche of the ESAF [Extended <structural
and this served as a precursor to the very large agreement Adjustment Facility] in its last year of operation. It took less
. signed later by the -Benazir Bhutto government. Things than four months, however, for the government to make a
· -went rather well for the first two years of the programme • quick U-turn. It imposed more taxes, devalued the rupee,·
where, while targets went unmet, the general direction promised the IMF that it would agree to its ea~lier conditions
and pace of the so called 'reforms' seemed acceptable to and begged the Fund to rel,lume the aborted ESAF. Between
the IMJ:'. The fiscal deficit was brought down substantially, October and December 1995, top officials of the Government
as were tariffs, but again not by as much as the IMF had of Pakistan made numerous trips to Washington trying to
wanted. The deregulation, liberalisation, and privatization appease the IMF and to convince it of the sincerity of thei'r
agendas set by the IMF were also closely followed, and intentions in carrying out the rest of the programme. IMF
frequently renegotiated when any hitch .seemed to _occur. officials also visited Islamabad and finally; towards the end
Pakistan, in fact, was cited as a very good example of a of last year, yet another agreement ~as signed.
country successfully following the structural adjustment . The governmeritimmediately claimed victory and informed
programmes devised by the IMF. · the publii::}hat the IMF, by .agreeing to the new loan, had
But ·then came the 1995-6 budget in June last year. endorsed the policies of thi/Benazir Bhutto government and
Analysts, economists, and businessmen were surprised by had confirm~d thai'ttie economy was.doing well enough to
·, the fact that the 'government had, very unexpectedly, offered warrant a loan from the Fund. . . . .
a mild budget fa'r removed from the very strict one that was Moral of the tale: ttie government simply cannot defy the
widely anticipated. The ta'riff rate; for •example, was cut by IMF. And for.that, it has 0(11y itself to blame. ,
only five per cent; and not twenty as was expected, reducing
the maximum tariff rate to 65 per cent. New taxes to the tune ;
of only 16.3 million rupees were announced, and the target
for the budget deficit was set at fivt:1 per.cent of GDP. The IMF,
for its part, had insisted on a 4.5 per cent target.. Source:.Zaidi, S. Akbar, The Herald, March.1996.

,-
.
 Chapter 17 The IMF and Structural Adjustment Programmes-in Pakistan 495

programme:date. In ·a triumphant gesture, the incumbent the RGST) were not supported by coalition partners, and
government of General Musharraf swore never t? return 'to . always faced a difficll'lt passage in Pa~l!ament. '.['hings ,were
the IMF again, and proposed to continue the reform process made far worse wh~n . tw~ of the .coalition partners of
ori its own. ~· .. ' . · · the Government withdrew their ..support and Pakistan's
After numerous political and economic changes in the g0vernment became a minority governri)ent, in power largely
period 2004--08, the new PPP goverrtrrient in 2008 decided b~c:ause the main opposition party ....in, Parliament .. decided
to return to the IMF for a $7.6 bn Stand•By Arrangement, not to play J,Rrt~olitics- and remain ~ friendly opposition.
which was 1 increased in 2009 to $11.3 bn. The Stand-By All along, it looked even less.likely that the RGST would be
Arrangement was to come to an end in•Dece?nber 20iO, but approved by Parliament, with only the finority·government
the Government of Pakistan, in December 2010,.. ·requested supporting it. It was the enforcement of tl:).is RGST which was
that the Fund extend the Programme till September· 2011, the main.requirement of the'St\lfid,By Arrangement.
which meant that the final tranches ·to have been made The inability to impose the RGST reflects a larger problem
available in September 2010 following some far-reaching, in Pakistan's economy which affects the fiscar deficit, and
taxation proposals, were with.held. The Government of that is.-.the tax-to-GDP ratio and overall resource gendation
Pakistan had agreed to impose a Value Added Tax by July by various governments, issues which were- discussed in
2010 which would have meant the release of the· two detail in Chapter 10.'Pakistan's tax-to-GDP ratio is less than 9
final tranches and the conclusion of the third consecutive pet cent of GJ:?P, and the fiscal deficit at th'at time, was around
programme. The inability of the Government to· impose a 4.7 per cent ofGDI~'The perennial inabi1ity and unwillingness
VAT-like Reformed General Sales Tax (RGST), led to this by all govehlmenrs to raise revenue, has affected much •
extension and the Government subsequently promised t9 in the economy of Pakistan. The already limited.;_P.ublic
impose the RGST by July 2011, but once again reneged on its Sector Development Programme (the annual development.
promise, resulting in the IMF aborting the loan in late 201-i". expei-i.diture) fo;, ·
2010/11 announced in June 2010; was
It was not just that the VAT was not imposed by July 20·10 drastic.ally.cut folloyvin_g the floods .in_July.201 O_,soon aft;;:--the
as originally agreed, but other performance criteria related stqit of the fiscal year. With a large part of the PSDP dir:ected
to the State Bank of Pakistan borrowing and on the overall towards .flood relief, the.rt:. was little left for development.
fiscal deficit, were also breached. It was clear in July 2010 This probiem arose p,rimarily because government revenues
that the Pakistan People's Party government would need to were too Jew and because of large scale expenditures which
renegotiate its agreement with the IMF. However, in July and many considered wasteful. At that ti_me, there -were reported
August of 2010, the worst floods in Pakistan's history affected to be .73 ministers and advisors to the Federal Government
ciose to 12 per cent of Pakistan's population, greatly affectin~ alone, and less than 2 per cent of Pakistan's population paid
the economy broadly, but particularly affecting agricultural any income tax, in a country which has a mobile phone
crops and infrastructure in many parts of the country.. It teledensity of 70 per cent. Rough-estimates suggest that only
was very clear that while the damage to the economy Was ' one-third of the taxable p_opulation pay income tax, with the
quite severe-however, not as severe as the Prime Minister other two-thirds either exempt for some reason or the other,
Yousaf Raza Gilani had stated, damaging as much as 25 or choosing not to file their tax returns. The RGST was an
per cent of the GDP-resettlement, emergency assistance, attempt, which many economists considered to be'T1ighly
aw reconstruction, would all impose a heavy burden on unfair and unjust because it was an indirect tax and with so
an economy which was already coming to terms with the much tax avoidance, to raise revenue-also see Boxes 17.2
consequences of militancy and terrorism at a time when and 17.3.
there was also a global slowdown. The floods made matters Moreover, government borrowing from the central bank__
far worse and led to a sympathetic hearing on the part of the CQntinued to grow at a time_when the interest_ r·ate had alsow
IMF, where the imposition.of the RGST was postponed and ~en raised.to curb inflation, which had been in double digits_
short-term concessions were made to specific budget deficit foJ.~lmost three years. On account of.political and economic
targets, all eventually resulting in the extension of the Stand- problems at home-energy shortfalls had been marked since
By Arrangement., 3Q._Q.9~all growth indicators were)ower_ed. The GDP growth
While this extension gave the Government of Pakistan far rate originally set at 4.5 per cent for the fiscal year ~0!0/11,_
greater breathing space than it could have hoped for,ii also was reduced to _2,~er_cent, with lower agricultural and
highlighted numerous problems which the government had manufacturing output trends. .
been unable to address and highlighted structural weakness_es . Some economists feared that these conditions may have
in Pakistan's political economy. It has to be recognized led to the central bank having to print even more money
that Pakistan was at that time a weak, although emerging, and eventually to hyperinflation. One must remember,
democracy, which returned to electoral politics after nine years that Pakistan has had even higher deficits .in the past,
of military rule and praetorian democracy, only as recently aftfiough this created a s ~ s debt crisis in the 1990s.
as 2008. The incumbent government had been part of a _ Unfortunately, ttiere never was any clear focus or plan as
coalition government since March 2008, and had to deal with to how the government intended to address the revenue
numerous political, constitutional, and ·economic problems, s1l,ortfall problem.or the fiscal deficit issue at a time in 2011,
many of a very serious nature. The government deserves credit when the IMF was pressing upon the government to continue
for legislating on a number of critical areas despite being in a witnthe agreed SBA. A weakening position in Parliament at
coalition. However, key issues, such as taxation (particularly inar time and growing uncertainty in the political arena

. --·------------------
500 Issues in Pakistan's'Economy

Almost every expert has pleaded that for wasting borrowed of our rulers that they are not ready to live within their means,
money, the fault lies with Pakistan's ruling classes and not and are dependent on the IMF and the World Bank even for the
with the IMF or the World Bank. Had these conditions been purpose of bringing transparency and fiscal discipline.
implemented, Pakistan could have improved its financial The experts, pleading for more taxes, also ignore the fact
governance, but funds were ruthlessly squandered by the elite. that real problems are: the non-taxation of the rich and wasteful
On the one hand, this nation has become heavily indebted spending by the rulers. Under the existing inequitable system,
and on the other, all systems have been further destroyed with the burden of taxes is less on the rich and more on the poor.
unabated corruption, inefficiency, and incompetency. Taxes, in the nature of full and final discharge of liability, are
During the Musharraf-Shaukat era, economic managers withheld even from those who have incomes below the taxable
were constantly telling lies to the nation that the begging bowl threshold. These taxes cannot be termed ari 'income tax'.
had been broken and all ties with IMF and other foreign donors These are transaction taxes· or taxes on consumption. Being
were severed, whereas in reality, new loans for reforming tax, regressive in nature, such levies take a large· portion of the
banking, and the justice systems-just to mention a few-were income of the poor and a negligible part of the hefty income of
negotiated with unprecedented vigour. The democratically- the rich. These taxes make the rich richer, and the poor poorer.
elected government of the PPP also decided to follow the same
path. Their justification was that with the IMF loan, financial Source: This is a short, edited, excerpt from: Bukhari, Huzaima
discipline and transparency would come-the result after over and Haq, lkramul, 'Sorry IMF, we are incorrigible', Business
i!
three years is diametrically opposite. It is a shameful attitude Recorder, Karachi, 19 August 2011. I
I
- .. - j

\.
a brief history of Pakistan's dependence on 'external forces' Pakistan must count itself lucky to be amongst those
and on programmes and policies exported from abroad., This countries in the world that have always supported the
section also makes the strong case that perhaps Pakistan did Washington consensus, whatever that may happen to be at
not really need an IMF-sponsored Structural- Adjustment a particular time. An examination of the political processes
Programme, in the l 990s-or even later in 2008 or 2012/13- from the early years of Pakistan's existence shows that
see Box 17.6, and that the economic and structural conditions numerous important political and governmental decisions
that existed prior to the l 988 programme did not really were influenced, if not directed, by the relationship with
warrant such a programme. This section then tries to answer Washington. Events after II September 2001, and after
the perplexing question why, if the Structural Adjustment the US led war occupation of Iraq and Afghanistan, have
Programme was not really essential, was it accepted· in the shown Pakistan's complete subservience to US interests
first place-Also see Chapter 25 on the political economy of in the region. While Washington may not actually have
aid to Pakistan, which shows who actually benefits from aid manoeuvred the process of history as it has evolved in the
given to Pakistan. political arena in Pakistan, it has had a serious influente, for
geopolitical and other·reascins, over the outcome of events.
17.6.1 Pakistan's Dependence on Subtle pressure and suggestive decisions have changed the
course of history in Pakistan on more than one occasion, most
Washington, or are Governments recently,~ September ~001-see Chapters 18 and 25 ..
Autonomous? As earlier chapters have shown, foreign aid, particularly
To state that governments, particularly in underdeveloped from the US or sanctioned by it, has been.one of th~ source~
countries, are dependent on anci pressurized by events, of its growth and development. In the early Ayub period, aid
factors, agencies, and institutions outside the realm of the was_ considered -t~ -lie-an essential cause of the high rates of
government itself, is to state the obvious. Governments growth of, the economy, and after 1979 aid;both 'bilateral
are affected by happenings within their own geographical and multilateral; provided large funds for the economy,,From
domain, as well as by factors determined by outside interests the time of the India-Pakistan war in 1965 until the Soviet
many thousands of miles away. Foreign patronage of Third i!ll'.9-sion of Afgha11~Jgn, 'Pakistan remained in the United
World governments has often been the norm, where local States' political disfavour' .18 This meant that other multilateral
and indigenous sensitivities have been trampled upon and ageri:cies, too, were not enthusiastic about providing aid to
ignored by governments whose existence has depended on Pakistan in this period. Tl:it.first structural _e,g.ju$tmerit' loan
approval from abroad. The 1960s, 1970s, and 1980s, with under the IMF Extended Fund Facility was made avat!~qk
the likes of Pinochet, Somoza, the Shah of Iran, Zia, and to Pakistan in November 1980. Pakistan was advised to
Marcos, provide ample proof that most governments in the delink the rupee from the dollar, 'focus on efficient import
Third World werejrrm.~t~y, and depencfem on, 'external substitution, reduce government expenditures, establish
influences'. And to pe fair, nor was Washington responsible tax reforms' to increase domestic resource mobilization,
for this alone: PW~t..s of.the now extinct Soviet erppj_L~w~re encourage savings, institute price reforms, and push for
a!.fil.ru,l.ing.their.own.couniries with a ~everity t9at wrecked expori~led growtli' and privatization'. 19 The Zia regime,
t~g.societi_es.~• unlike those that have followed it, was selective in its choice
of poiicy options: the rupee was delinked and devalued
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 501

Box 17.6 In the current situation the economy can not afford further
How Important is'the IMF Assistance for pressure and it has to be first pulled out of the turmoil. In
recession, further tightening on the demand side either through
Pakistan? higher interest rate or through more taxes would counter the
Once the IMF had agreed to give Pakistan assistance of $7 .6 bn salutary impact of the IMF assistance. The government has
assistance to be disbursed over 23 months, some economists already reduced the volume of subsidies on its own. Now its
questioned why it was necessary to make use of this support, further reduction would forestall the healthy impact of a fall in
albeit they questioned some of the official justification of the international oil prices on the cost side. There should be no
loan and the manner in which policy was to be implemented. mad rush for privatization to avoid any possible loss in the sale
of national assets. Its possible fall out for poverty has also to
Pakistan is in a dire need of foreign financial assistance. be kept in view.
There is a sharp depletion in its foreign exchange reserves. There is no denying the fact that the economy is confronted
Rupee has depreciated 28 per cent. This is building enormous with numerous structural problems but all can not be tackled at
pressure on its public debt and reinforcing the inflationary a time lest the system further derails. The country is in a state of
trends. The manufacturing sector has recorded negative war as the president has rightly stated in his address to the UN
growth. The twin fiscal and trade deficits are presenting equally general assembly. This is itself a great challenge. To manage
bleak picture. a weak economy in such a situation is a terribly difficult task.
While the economy came under stress, the policymakers Moreover the leading coalition partner in the government is by
have been making hectic efforts to explore all possible sources its tradition considered pro-poor. The IMF assistance should
of aid. Finally they have succeeded in negotiating with the IMF not sabotage its programme.
a loan. Pakistan is its member and in the current situation it The IMF has committed $7.6 billion assistance to be disbursed
has the right to approach it while on the other hand it is also over 23 months. The country immediately needs more than this
a mandatory obligation of this institution to assist its member amount to replete its forex reserves at a level required to ensure
countries. More recently it has come to the rescue of some stability in rupee exchange rate, not withstanding its massive
other countries as well. Even in the past it has been assisting requirements for building dams, and expanding its social and
Pakistan on a number of occasions and on some occasions physical infrastructure. Despite being not too big amount this
there were some adverse fall outs of its programmes for the does carry a great symbolic importance in a holistic sense. This
economy, albeit debatable for its responsibility. will improve the country's ratings in the international financial
Debate is going on in the country on whether or not it is good market. Other multilateral and bilateral donors give tremendous
to have the IMF loan. My effort in this paper is to present as an weight to the IMF's assessment. Likewise would be the attitude
objective view of this assistance and to put forth suggestions to of the newly formed forum, the Friends of Democratic Pakistan.
make the IMF assistance productive. It is quite normal for the At the close of the 1990s, Pakistan, in consultation with its
IMF to attach some conditionalities with its loan and these often donors, launched the structural adjustment and stabilization
vary depending on the recipient country's specific situation. Its (SAS) programme which was a broad based effort to reform the
interest rate is often less than the market rate. whole economic edifice. Over the last almost two decades its
The conditionalities are in fact the reform measures which the implementation has continued. While it was half way through, it
IMF considers necessary to put the economy back on the track. was recognized that some goals have been partially achieved
These have already been negotiated in case of the said loan but the side effects appeared in slowing down the growth
but so far these have not been exposed to the general public. tempo and increase in poverty. The major flaw lays in time
Given our situation these could possibly be like the increase sequencing of the reforms measures. For example imports
in bank discount rate, elimination of subsidies, reduction in duties, the largest revenue spinner, were hugely slashed but
budgetary deficit and BoP imbalance, improvements in human the resultant loss could not be made up through consumption
development indicators, liberalisation of trade, privatization, based taxes. Partial success on fiscal side was achieved entirely
promotion of free enterprise, good governance, elimination due to reduction in government expenditure as a proportion of
of corruption, etc. Our long term development strategies of GDP. That took a heavy toll on budgetary allocations for social
different perspective plans and budget.-documents stipulate sectors like education and health. This has fed the scepticism
similar reforms. So far there is no contradiction in perception. about the current IMF assistance.
Moreover the country has already committed to these reforms Perhaps the greatest drawback of our policy formulation
as a member of the WTO. The problem is only of the time frame is that we don't develop a consensus through a public
and their sequencing. , debate. Therefore the ownership of the IMF programmes rests
The economy is in the grip of recession which is likely to temporarily with the government in time. Some time policies
worsen if the global financial meltdown further accentuates. and programmes fail because their pros and cons are not fully
thrashed out. Once a programme is being negotiated with the
The recent fall.In international oil and food prices has unleashed
prospects for some respite and that may work on the supply IMF, then it is the responsibility of the national authorities to
take all the stake holders into confidence. Simply to say that
side. But still there is a need for massive efforts to revive
the domestic production, particularly in commodity sectors. it is 'home grown' hardly enhances its credibility. The IMF has
no logistics to defend each programme in recipient member
The IMF support to be routed through the BoP, which would
eventually help improve the -investment level in the country. countries.
Scaling down the public sector development programme
would reduce the aggregate demand. Cement industry and
construction activities are often the first victim of it and this will Ahmad, Mushtaq, 'How important is the IMF assistance for
be having its adverse impact on employment situation. Pakistan?', The News, Karachi, 24 November 2008.
502 Issues in Pakistan's Economy

against the US dollar, farmgate prices were raised, and some We have shown repeatedly in previous chapters that the
import liberalization took place. To attract capital, a general overall growth performance of Pakistan has been good, if
assurance was also given to the private sector. On the other not quite remarkable. Even when the first major Structural
fronts, the · government was not particularly pushed to Adjustment Programme was started in the early 1980s, the
reform immediately. As Nabi and Hamid 20 argue, Zia was main economic indicators showed very decent trends (see
in a position to, and did, resist external pressure from the Table 17.6). Even after the onslaught of the 1988 programme,
IMF and World Bank: 'when the government can clearly see the economy continued to do quite well. Estimates show that
the value of particular economic policy changes, it is willing GDP grew by 5 per cent during 1988-90, while in 1991/2 it
to implement reforms. . . . Reforms that adversely affect grew by as much as •.7.7_pfI_fent. The growth rate in new
established interest groups or have broad negative political (officially accounted) private investment had been in excess
consequences are generally not undertaken despite external of 20 per cent per annum since 1988, and was as high as 30
pressure.' 21 In more recent times, it seems that governments per cent in 1991/2. Exports, meanwhile, grew by 20 per cent
are willing to do anything to adhere to the Washington in 1990/1 compared to the previous year, and by 15 per cent
consensus as events in Pakistan since September 2001 in 1991/2. All these indicators very strongly suggest that there
highlight (see below, and Box 17.7). had~been impressive growth, money was being genera.u;d-an~
fV_en the recorded official economy.(not counting the buoyant
17.6.2 Did Pakistan Need to Go to the IMF unofficial economy) had shown signs of immense prosperity.
Since the mid-1970s, the trend has been upwards, and most
in the 1990s? important indicators showed very healthy and positive signs
The general proposition put forward by the Fund/Bank staff even before the first Structural Adjustment Programme in
in order to convince governments that they ought to apply 1980 (see Table 17.6 ).
for structural adjustment loans is that their countries are It would therefore seem that Pakistan's economy was
ip a bad economic state. They are told that there are major in fairly good __ shape when the Structural Adjustment
structural problems, the balance of payments is in critical Programmes were initiated, and while it could have been
deficit, the budget deficit is high, inflation is rampant, and better, it had been functioning adequately without any so
I
the growth rate of the economy is too low and.unsustainable called assistance. A comparison with Bolivia, which agreed I
in the long run. - -

Box 17.7 governments. To make up for lost time,. disbursement from

Aid Linked to Fulfilling IMF Commitment donors in 1996-7 will be approximately $2.4 billion.
But not surprisingly, this time around foreign assistance is
The message from the World Bank's latest aid to Pakistan conditional on the contents of Pakistan's next budget and its
consortium meeting held in Paris on 23 and 24 April [1996) implementation. The government's request for aid can be
couldn't have been clearer: Islamabad will only get the $2.7 met if the policy reforms are adequate,' a World Bank official
billion in fresh funds it wants and needs if the 1996-7 national stressed. 'If we are satisfied with what we see in the budget,
budget to be published in June reflects the International there will be support for Pakistan. It could be $2.7 billion or it
Monetary Fund's prescriptions for structural reform. Any could be less.'
deviation from the path set out by the IMF, warned donors, Pakistan has told donors that it is working on a new
would prompt a cutback in foreign aid. Structural Adjustment Programme with the IMF, using the
The bank and other donors are looking for specific action recent $600 million standby arrangement as a 'stepping
on a number of fronts: the government is being asked to stone' to secure the wider-ranging deal. It has also cautioned
restructure expenditures, to continue restraint on defence against 'exaggerated expectations' of how rapidly the fiscal
spending, to use privatization proceeds to retire high-cost changes can be accomplished.
government debt and to take measures to broaden the tax 'We are confident that the IMF agenda can be met,' V. A.
base. Further trade reform is also viewed as a key aspect of Jafrey, the Prime Minister's Advisor on Finance, told Dawn.
the fiscal adjustment required. 'After last year's experience donors are making an explicit
A slowdown in implementing these reforms will mean link. They are saying that if you do as planned, you will get
less or perhaps even no aid. Unusually, the World Bank's the funds; if you deviate, the commitment might be lower. If
final communique does not mention Pakistan's request the reform process is slowed, then there will be a reduction
for $2.7 billion in aid. And in fact, for the first time, donors in commitment.'
have established a firm link between the government's The key features donors will be looking for include a
implementation of the IMF programme and the amount of reduction in the overall budget deficit, tax reform, a lowering
money that will be made available during the coming year. of import tariffs and an extension of the sales tax. They will
Donors are learning from experience. A total of $2.2 billion also be looking at our development spending. Donors do not
was pledged in foreign aid at the meeting in Paris last year. want the financial readjustment to be at the expense of the
But Pakistan's decision to slow the pace of key trade and important social service programmes,' V. A. Jafrey said.
tax reforms and the. subsequent cancellation of the IMF's
Enhanced Structural Adjustment Facility clearly jolted foreign Source: DAWN, 25 April 1996..
I Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 503

I
Table 17.6
Growth Rates in Pakistan: 1980-2003

Budget Current account

deficit as% Private deficit as% ·consumer
Year GDP of GDP Investment of GDP Price Index

I 1960s
(1)

6.8
(2) (3)

20.9
(4) (5)

3.8

I
1970s 4.8 17.0 12.3
1980$ 6.5 7.0 15.0 3.7 7.3
1990/1 5.6 8.7 19.2 4.8 12.7
1991/2 7.7 7.5 30.3 2.8 10.6
1992/3 2.3 7.9 13.4 7.1 9.8
1993/4 4.5 5.9 11.6 3.8 11.3
1994/5 5.1 5.6 8.5 4.0 13.0
1995/6 6.6 6.5 18.7 7.2 10.8
1996/7 1.7 6.4 19.6 6.2 11.8
1997/8 3.5 7.7 13.3 3.1 7.8
1998/9 4.2 6.1 -11.4 4.1 5.7
1999/2000 3.9 5.4 14.3 1.6 3.6
2000/1 1.8 4.3 7.2 0.7 4.4
2001/2 3.1 4.3 17.3 +1.9 3.5
2002/3 5.1 3.7 9.2 +3.8 3.1

CAD = Current account deficit.

PBD = Primary budget deficit (budget deficit minus interest payments.
Source:Government of Pakistan, Pakistan Economic SuNey (Islamabad: various years).

to accept a wide-ranging orthodox stabilization programme Finally, two interlinked issues need to be addressed. The

I
in 1985, may highlight the extent of the differences in trends IMF and World Bank agree that those countri~; that have
. between the two countries. In 1985 Bolivia had an inflation done well on their economic agendas have had· their own
rate of 11,000 per cent, a fiscal deficit in excess· of 30 per cent programmes before IMF or World Bankinvolvement. 23 Thailand
of GDP, and a GDP per capita that was 20 per cent less than in apd South Korea are two such cases where governments had
1980. Bolivia is an excellent example of a country which ought devised their own programmes and implemented them, a~d
to qualify for an IMF/World Bank Structural Adjustment only then went to the Fund. Pakistan also falls into this
t Programme. Numerous other· countries, especially in Latin
America, also suffered the fallout from the debt crisis and
caiegory: 'improvements in policies affecting stabilization
and efficiency had already begun to accelerate growth before the
were forced to go to Washington. Pa,_kistan did not need to go. 1979 shock, and policy reforms adopted since then helped to
The arguments in this section rest on the assertion that reconfirm the process' .24
Pakistan's economy, at the time of the initiation of the 1988 Reforms take place due to internal structural changes,
programme, was in relatively good shape and did not suffer which begin to change economic, institutional, and political
from the problems faced by most African and Latin American alliances and arrangements. The development of productive
countries, with rampant inflation, low or negative growth, forces in the economy influence the political and social
large external debts, etc. Stabilization was usually meant . structure of that country. To accommodate such changes,
for these countries, most of which were on 'the brink of, :-;.eforms are made to alleviate the transition. There is a logic in
economic crisis'. 22 Pakistan had never been in such a critical this dialectic, in which the economy, politics, society, culture,
position though, ironically, may have gotten there on account etc. are ..consistently transforming themselves independently
of following these programmes. Furthermore, some of the and each other collectively. In this chapter we argue that the
outcomes and effects of Structural Adjustment Programmes structural changes that have facilitated growth, development,
that had affected other countries, have not taken place in and the private sector in Pakistan _have evolved out of this
Pakistan, but c1fter following such 'reforms' things h_ave internal logic. See also Chapter 26, in which we argue that ·
gotten far worse, rather than better-see Chapters 18 and developments in the 1980s, with the emergence of a middle
22. The World Bank accepts that an 'investment lag' exists class, brought about ·changes in the economic structure of
in countries following adjustment programmes, and that the country.
quite often investment shows markedly negative trends. In Even the IMF and World Bank accept the premise that their
Pakistan this has not been the case, suggesting either that Structural Adjustment Programmes restructure a country's
the adjustment programme had been particularly successful political economy. 'The implicit purpose of adjustment is
or, as we have argued, that the economy was strong enough to diminish the influence of some social sectors or interest
to deal with such setbacks and did not ne_ed Fund-assi_s,tecl_ groups whose political and economic control has blocked
programmes. efficient use of a country's resources. At the same time,
504 Issues in Pakistan's Economy

adjustment programs stimulate the political and economic Studies are commissioned by the international financial
ascendance of other groups that can improve the country's institutions on issues that tend to justify the policies of the
competitiveness on international market~.' 25 Here we argue World Bank and the IMF. Resource mobilization, trade and
that these changes have also taken place in Pakistan, without !ariff reform, agricultural credit, studies on the informal
adherence to an IMF/World Bank-sponsored Structural sector, the need for capital markets, etc. are areas that have
Adjustment Programme. A major purpose of the Structural recently been interesting Washington. Hence a large number
Adjustment Programme is to create structural conditions of scholars and institutes are mobilized on these studies
t~ provide the impetus for enhanced growth. Institutional where the general guidelines have already been put down,
change, policies and politics take on a particular direction, and all that the researchers are asked to do is to supplement.
and then certain specific programmes and policies follow. On and justify the general arguments being recommended.
the basis of the discussion presented here, we suggest that Pakistan does not have its own agenda, nor do policymakers
Pakistan has evolved these structural conditions without a or even scholars think for themselves and devise their own
Structural Adjustment Programme. For this reason, too, it did arenas of research. Not only that, they fail to question the
not need a Structural Adjustment Programme. more general principles behind the research agendas set from
While Pakistan's economy. needs better management, afar. 28
reform, alignment, etc. the critical question is whether it . One Pakistani social scientist argues that 'the major reason
needs to run to the IMF every three years and accept the for [the Pakistani intelligentsia's] failure is that .ill.,.~ource of.
consequences of conditionality. Is it possible that the country inspiration and point of reference was not the objective study
can deal with its internal problems by itself? And if so, why of its own society, with whom it has progressively lost contact
dQ..e.s.,.each government of Pakistan run to the IMF for ~ore to become part of the first world'. 29 Another argues that:
stringent conditions, more loans, and much more debt?
Post-colonial governments continue with the
cultural agenda of colonialism (modernization
17.6.3 Why Does Pakistan Accept IMF and development). They also serve as economic
Programmes? agents of their principals. In this role, they
ensure, through 'liberal' economic policies, that
There seems to be very little or no debate about why certain
their charges do not compete with their principals
policies are being implemented in Pakistan. Why we have in global markets. They provide familiar and
to subscribe to an IMF/World Bank-sponsored programme hospitable institutional arrangements to foreign
is not discussed, at least not amongst academics, who one investments. Above all, they ensure that the
would think are equipped to do so. P_akistan is told to follow unsustainably large fl9ws of interest payments
certain guidelines, policies, and packages, and it complies, on foreign debt are remitted abroad, while
trying to show how it is possible to change an indicator here managing the levels of local discontent. 30
O! tl}£[e. Pakistani academics and economic managers seldom
question either the intentions of the programmes or the basic While this may be true in the case of some countries, it does
theory and philosophy behind the policies; they simply do not explain how other post-colonial states have managed to
what they are asked to. This has been the experience of the avoid problems of this nature. However, Pakistan would fit
IMF programmes in Pakistan. It is difficult to find academic this general model, since it has always been closely aligned
articles that actually question the need for a programme in the. with the West-see Chapter 25. Maybe it is its colonial
first place. There is no political debate either. There are, at hangover that has made it dependent on the decree from
best, a handful of scholars and journalists who question the elsewhere, 0hen political and economic managers only
repercussions of a Structural Adjustment Programme on the do what is good for the country when they are told. Or it
economic and human condition of the populace, and who say may be due to the fact that military rule has taken away
that, if we accept the programme, the 'people' will suffer, but the Pakistani intelligentsia's ability to create new ·ideas,
they too do not question the reasoning behind or the content and hence, Pakistan's academics and professionals are only·
of the programmes. One critic writes: 'we argue not against . good at following orders. These are questions that must be
the necessity of structural adjustment, but against the addressed.
adverse entailments of such adjustment'. 26 The question is: Although much of the criticism launched by academics
why not argue against structural adjustment? Does the author against the imposition of structural adjustment policies has
accept the need for such a programme and does he merely been directed against both the IMF and the World Bank, we
want to improve on it? Moreover, even the ultra-conservative argue that it is quite unfairto blame the IMF for the ills that
.Economist recognizes that 'many of its [the World Bank's] P..l<!gy~_Paki~'s economy. The IMF is justified in imposing
programmes designed to help the poor-called things like a1,1y..£_ondition when extending a loan. It must ensure that the_ \
"social dimensions of adjustment"-are safety nets, not ways money is returned, and for that purpose it must also make
of lifting people out of poverty'. 27 In countries where there surethat the money lent is used for a purpose which, in the ..
have been protests against IMF-sponsored prog~ammes, Fund's view, will improve the economy so that the countryis'
academics, NGOs, popular groups, and unions have played in a position to return the loan. As such, to castigate the IMF
critical roles. I~kl.stan.there seems to be limited opposition for imposing 'harsh' conditionalities is futile, for the problem
to !uch programmes (see Box 17.8). · lies elsewhere-see Boxes 17.9 and 17.10.
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 505

Box 17.8 balance of trade. In fact it has resulted in inflation since

Pakistani Non-Governmental Organizations imports are now more costly.
As part of Structural Adjustment, interest rates are now
(NGOs) Assess Pakistan's Experience with
to be market determined. Despite high interest rates, the
Structural Adjustment Programmes saving rate has remained low. Moreover, high rates of
interest have had a negative impact on the growth rate.
In March 1995, the World Summit for Social Development
The rich who are able to save are obviously benefited
was held in Copenhagen, Denmark. The United Nations was
by high interest rates. Moreover high interest rates are
the convenor and asked each member country participating
likely to result in a ballooning of the fiscal deficit. Interest
to produce its Country Report. A group of NGOs in Pakistan
payments amounted to one-fifth of total federal government
felt that Pakistan's Country Report failed to analyse critically
expenditure in 1991-92 or about four-fifths of the overall
the domestic impact of World Bank/IMF policies and, instead,
deficit of 78.65 billion in 1991-92.
unquestioningly promoted a market-based economy and
Accepting SAP means conceding autonomy in economic
growth model. In response to the Country Report, these NGOs
policy and a failure of leadership. Instead of living within
prepared 'An alternative NGO statement' which, in particular,
our means, it has extended the begging bowl. Those who
criticized the government's adherence to the Structural
have put the poor in this predicament are immune from the
Adjustment Programme. An excerpt from the alternative
negative repercussions of SAP. It is paradoxical that the poor
statement is presented below:
must count on the same leadership for humane social and
Since the onset of the medium term Structural Adjustment economic policies.
Programme (SAP) in 1987-88, the socio-economic conditions Responding to calls by the IMF and the World Bank
of the poor, particularly women, have markedly deteriorated. for financial discipline, the government froze wages while
· There appears to be a direct association between the jobs in the public sector were restricted as a result of a
implementation of the SAP under the supervision of the IMF ban on recruitment and the encouragement of an early
and the World Bank and a deterioration in the standard of retirement via the government's 'golden handshake'
living of the lower income classes. scheme. There has been no significant increase in jobs
The withdrawal of subsidies has hit the poor through through investment in the private sector. Even the much
price increases of essential commodities. Prior to the doubted official unemployment statistics show a marked
implementation of the SAP package, the bulk of subsidies increase in unemployment between 1987-88 and 1990-91
were on wheat, sugar, and edible oil which are important in various categories of the work force. Amongst the clerical,
components of the total consumption of the poor. Not sales, services, agriculture, production, and related workers
only have total subsidies declined but the share of wheat, categories, unemployment increased dramatically over the
sugar and edible oil in these subsidies has also declined period between 1987-88 and 1991. Unemployment has
sharply. This decline in subsidies was accompanied by an been accompanied by increasing inequality and poverty.
increase in the support price of wheat. In addition, the price The impact of Structural Adjustment is particularly
of kerosene and petrol rose by about fifty per cent between adverse for women since this economic model relies on the
1987-88 and 1990-91. Since food constitutes a much devaluation of labour in the formal and informal sectors so
larger share of the consumption basket of the poor than the as to lower production costs. Women workers are the most
rich, the dramatic increase in food prices has meant that harshly affected .by these programmes, as they constitute
Structural Adjustment has hit the poor much more than the the majority of home-based workers -and are the least
rich. Similarly, the increase in energy prices has placed a protected by sta\utory wage, security, and safety standards.
disproportionate burden on the poor. Major investment is needed in the productive sectors
The burden of taxation over the period between 1987-88 and infrastructure, with affirmative biases towards those
and 1990-91 has also been borne largely by the poor. Taxes areas which need to be nurtured for achieving equitable
on the poor increased by 10.3 per cent while those on the development. At the same time there needs to be a reduction
richest group declined by 4.3 per cent between 1987-88 in budgetary allocations to the defence establishment and
and 1990-91 . civil administration. Their share of the budget, along with the
As a part of Structural Adjustment, trade liberalization cost of overall debt servicing, are a huge and unacceptable
and exchange rate flexibility have been followed. The rupee burden on the nation's reso1,1rces.
devaluation, recommended by the IMF to promote exports
and reduce the trade defici_t, has brought no change in the Source: The Nation, 7 March 1995.

It is Pakistan's governments, past and present, that are .not been able or unwilling to take,immediate and important
responsible for the state of its economy. It is they who have steps itself-see Box 17.11.
signed agreements with the IMF, accepting the latter's Take, for .instance, two areas of critical concern: low
conditionalities and promising to take measures that are nQ!_ resource mobilization and excessively high expenditure.
always beneficial or popular. If a government is forced to go Clearly, it is not the IMF that is responsible for either of these
to the IMF, the lender of last resort, it is only because it has shortcomings, but rather the inability of V<!Tious governments
to tackle these structural concerns.
 l '

506 Issues in Pakistan's Economy

Box 17.9 per cent per annum, although the Indian central bank has
Is the IMF to Blame for Pakistan's Ills? already signalled a bias towards raising interest rates to
keep inflationary pressures at bay.
There is a widespread tendency in Pakistan and in other Pakistan had a fiscal and external current account deficit

I
developing countries to hold the IMF responsible for many of 8 per cent of GDP, an inflation rate of 25 per cent
problems in the economy. Are these the creation of the IMF? per annum, massive capital flight and vanishing foreign-
Are they excaerbated by the IMF? Meekal Ahmed, a former exchange reserves when it turned to the IMF. It is true '
IMF employee, looks at Pakistan's economic problems and that the economy has been brought into better balance
questions whether the IMF is responsible. since then. The external current account deficit has fallen, '
inflation has come down, there is fresh public and private
Apportioning all our economic ills to the IMF is the usual capital inflow, asset markets have stabilized, and, with
IMF-bashing that we enjoy. First, it is claimed that the IMF surging workers' remittances and IMF financing, our foreign
programme has increased poverty. I would have thought exchange reserves have been built up to more comfortable
that it was Pakistan's recent nightmarish experience with levels. But the nascent economic recovery we are witnessing
galloping inflation when the headline rate of inflation peaked is fragile and tentative and subject to downside risks.
at a staggering 25 per cent per annum that pushed millions The last thing Pakistan needs is a 'double-dip' economic
into poverty. The IMF programme has helped bring inflation downturn because we do something unwise and precipitate
down in Pakistan, not push it up, thereby helping people on the policy front. Any easing of macroeconomic policy
climb back out of poverty as prices stabilize and start to must therefore be done cautiously.
come down. In actual fact, whatever easing in policy that we have seen
Secondly, it is argued that high interest rates are hurting has made many economists uncomfortable. The IMF has
industry and employment. High interest rates are a very loosened our fiscal deficit target for this year by arguably
minor factor when compared to the crippling effects of more than can be judged to be prudent, and probably
power outages. It is difficult to separate out the effects of the will do so again next year. While some easing of the
two, and other factors such as the security situation and the fiscal stance is desirable so as to cushion the economy's
recent global recession, unless we undertake some sort of downturn and impart some demand stimulus, a too rapid
'factor analysis'. Nevertheless, having no power to run our easing not only harbours the risk of bringing inflation back
factories for up to 18 hours a day must be having serious with a vengeance just as we seem to have beaten it, but
economic consequences. Furthermore, it is not clear how will require interest rates to be pushed back up again to
high interest rates are. If we adjust for present inflation, a compensate both for the easing on the fiscal side and
'real' interest rate of around 2 per cent is not high. With to keep real interest rates in positive territory to control
inflation on the upside at present and threatening to rise, I demand, the ensuing flood of liquidity, and inflation. That
see no room to cut interest rates further at this time. would be the worst outcome of all.
Senior economist Naveed Anwar Khan's complaint is that There is a sensible and well-meaning suggestion to tie all
while the world is applying stimulus measures to help their future releases of IMF money to better governance in the
economies grow, Pakistan is doing the reverse under IMF recipient country. It may surprise many to learn that efforts
advice. This is disingenuous. The global economies, with the to do so in the past have been vehemently resisted by the
IMF, the high priests of fiscal rectitude prodding them along, developing countries themselves, including Pakistan, in the
are indeed implementing strong fiscal and monetary policy- IMF and World Bank Executive Board where such issues
easing measures because most of them have the room to some up for consideration and debate.
do so. India had, and probably still has, a current account
deficit of a little over 1 per cent of GDP with ample foreign
exchange reserves, including the gold it just purchased Source: Ahmed, Meekal, 'Blaming the IMF', The News, Karachi,
from the IMF. Inflation, while rising, is still low at around 4.7 20 January 2010.

The taxation structure in Pakistan is wrought with or unwillingness of the government to ensure an equitable,
numerous loopholes and exemptions, not to mention just, and extensive taxation structure ensures low resource
rampant corruption, ensuring that .a large part of taxable mobilization~This in turn results in a high fiscal deficit, with
income goes untaxed-see Chapter 10. Various quarters act its numerous repercussions. Another area where successive · 1
to 'preserve their vested interests by demanding and usually governments have chosen not to express concern is defence
acquiring exemptions in taxation. For example, there is as yet expenditure. With close to 3 per cent of GDP being spent on
no effective agricultural income tax in Pakistan, even though defence, little remains for development. In.fact, Pakistan must
21 per cent of GDP is contributed by the agricultural sector. be one of the very few countries in the world where annual
Most influential people, agriculturists as well as others, defence spending has exceeded development expenditure.
do not pay any tax at all, and only 1.5 million individuals Although the political economy of the state does not permit
out of a population of 180 million p'"ay- income tax. Surely,
many more than this 1 per cent of the population earn the
the government to tackle the issue of military spending, it is
certainly time to do so. ,.
J
minimum taxable 42,000 rupees per· month.1,J..h_e inability
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 507

Box 17.10 model. It depended on proceeds of privatization, remittances,

IMF Credit, Macroeconomic Stability, and financial assistance from the US in return of logistics that the
government provided as a frontline state in US-led war on
Growth Sustainability
terrorism and credit inflows from multilateral organizations to

l
M. S. Qazi examines the broad features of the 2008/9 IMF SBA strengthen external financial sector. Such a strategy created
and shows what it was expected to achive. Noticeable is that illusive macroeconomic stability and high economic growth
the loan was meant to have specific interventions as has been of around 7.0 per cent during FY-2004-07. The agriculture
shown in Appendix 17 .1, but as well as to, 'is to restore the and industrial sectors did not get the attention and investment
confidence of domestic and foreign investors which will help to they deserved. The strategy worked for sometime but hazards
improve the macroeconomic imbalances'. He also makes the inherent in it started showing earlier than expected.
claim that the PPP government had to go to the IMF because There were three very conspicuous consequences that
of the poor policies adopted by the Musharraf-Shaukat Aziz led the economy to the existing state of affairs. First, inflation
government of 2002-07. started -raising its head soon after stabilization and increase
in economic gro1,\lth. It had a steep increase to 8.0 per cent in
Pakistan is to get a $7.6 billion IMF credit facility under a 2005 from an average rate of increase of around 4.0 per cent
23-month Stand-by-Arrangement (SBA). An amount of $4.0 during previous three years when the government was busy
billion in credit is due during the current fiscal year to meet implementing IMF recipe under PRGF, till end December 2004
sovereign commitments and the remaining amount will be and growth rate was low, around 3.5 per cent. Two, supply side
disbursed during the next fiscal year. According to the IMF, of economy could not keep pace with demand and pressure
the credit is to restore the confidence of domestic and foreign on imports of finished goods and food products increased.
investors which will help to improve the macroeconomic It started aggravating trade deficit and balance of payment
imbalances by tightening the monetary and fiscal policies. It situation with the result, the latter that was surplus in 2004

' is also to protect and preserve social stability through a well

targeted and adequately funded social safety net.
On the sidelines it can also convince the Friends of Pakistan
started turning into deficit creating a very unpleasant situation
by the end of the last fiscal year. It reached $14.0 billion, 8.0
per cent of GDP. The added factor in such a huge current
Forum to work with Pakistan. The Forum, during its meeting deficit was an increase in the prices of oil and food items in
held on the 16 November this year, laid down a framework to the international market. Three, the monetary policy pursued
extend support for economic development, security, financial by SBP did not yield the desired result of containing inflation
stability, institution building, and energy sector development. because there was hardly any harmony between fiscal and
It will take its own time and modality to render effective monetary policies.
assistance which is needed immediately. This time the The most deplorable aspect of the growth and development
government and stakeholders need to resolve that the credit strategy followed during FY-2000-07 was that it did not
is meant for achieving a long-term objective of high and take measures to increase employment, ensure increase in
sustainable economic growth unlike past experiences which production in industrial and agriculture sectors, production and
only considered short-term objectives. supply of electricity to consumers at competitive price, boost
Some of the opinion makers in the country such as the exports, and develop infrastructure required for a sustainable
financial analysts, economists, and stakeholders are critical high economic growth. It also did not create efficient social
of the government's decision to opt for the IMF credit as it security networks to ensure financial support for the most
might scuttle growth and create more difficulties than resolving vulnerable segments of society from internal and external
them, primarily because of tough monetary and fiscal policies. shocks to the economy.
The government will be under obligation to reduce PSDP and In the meantime the adviser to the PM outlined a compre-
impose new taxes to generate at least Rs. 70 billion during the hensive and integrated strategy for economic growth and
current fiscal year. The financial adviser to the PM is emphatic development based on, (a) reducing non-development
that credit facilities are being availed more because of home expenditure and PSDP, in order to reduce fiscal deficit to 4.7 per
grown measures and less because of IMF conditionalities. He cent during current fiscal year, (b) creating harmony between
might be down playing IMF conditionalities but the fact remains monetary and fiscal policies, (c) increasing productivity
that the State Bank of Pakistan (SBP), had to hike the discount of industrial and agriculture sector on priority basis, (d)
rate by 2.0 per cent prior to the IMF agreeing to lend the credit. reducing trade deficit, current account deficit and (e) taxing the
The government will have to execute comprehensive agriculture sector, real estate and stocks (f) increasing the tax-
short, mid and long-term strategies of economic growth and to-GDP ratio from around 10.0 per cent to around 15.0 per cent
development where all stakeholders should be taken aboard. during next five years for achieving macro-economic stability
Is the government preparing for such an eventuality? and sustainable high economic growth.
The current economic crisis is the result of a misplaced The strategy suggested by adviser to the PM is a clear break
from policies of the past seven years. Their implementation
economic growth and development strategy pursued from
2003. Its pivotal points were to encourage public consumption, would need strong political will and acumen in governance and
boost growth, allow indiscrete import of food and consumable managing economy.

j items to meet increase in aggregate demand and enabling Qazi, M. S., 'IMF Credit, Macroeconomic Stability and Growth
the banking sector to make best use of excess liquidity by Sustainability', The Investor, The News, Karachi, December
facilitating consumer financing on a western consumption 2008 .
508 Issues in Pakistan's Economy

Box 17.11 for the country? The answer lies not in deficiency in policy
Pakistan and the IMF: Why Does the Relation- prescriptions but in motivating factors on both sides behind
these programms.
ship Endure? The governments knocked at the doors of the IMF in critical
Muhammad Yaqub, a former Governor of the State Bank of times not to reform the economy but to borrow from the
Pakistan, examines the long-term, and long-lasting relation- IMF, supplemented by additional lending/debt relief by other
ship between Pakistan and the IMF, and examines the reasons international financial institutions and bilateral sources, to meet
why both the IMF and Pakistan, despite so many failed pro- their immediate foreign exchange requirements. There was a
grammes, continue to engage with each other. He argues that lack of genuine commitment by successive governments to
despite more than a dozen programmes, all but one of which carry out the necessary policy reforms.
have been abandoned, the IMF programmes are primarily The real purpose, indeed, was to dodge the bullet and mark
'helpful once again in saving a government, but not in improv- time by relying on borrowing from the IMF. In implementing
ing the fundamentals of the economy'. the policy package, the easier policy actions were taken on
time, some of the targets and ceilings were met on paper only
The IMF has been off-and-on involved with Pakistan for through statistical manipulations engineered by bureaucrats,
more than thirty years. At present, Pakistan has no operational and when it came to hard policy choices either waivers were
arrangement with the IMF. However, it owes the IMF about $8 requested or programmes abandoned. Successive political
billion: $1.8 billion is due to be paid to the IMF in 2012, $3.9 leaders were thus able to save and sustain their governments
billion in 2013 and $2.1 billion in 2014. Thus, in the absence by borrowing from abroad without any genuine effort to
of a new arrangement, Pakistan will have to repay a total net undertake the needed difficult reforms.
amount of $7.8 billion to the IMF in a period of less than three The role and behaviour of the IMF was less clear and more
years. The foreign exchange reserves of the State Bank of intriguing. It appears that the IMF adopted its accommodative
Pakistan (SBP) at present amount to $11.8 billion. The country approach of granting waivers and agreeing on repetitive
is running an annual current-account deficit of around $5 arrangements in spite of the poor track record of implementation
billion, to be financed largely by drawdown of reserves. of policies for any or all of the following reasons:
It is obvious that any time in the next two-three years the First, the IMF played in the hands of its major shareholders
country will default in its payments to the IMF and/or other who used it to help sitting governments at critical .times to
creditors, in the absence of another borrowing arrangement keep them floating by using its clout in the IMF and thereby
with the IMF or substantial net lending by other foreign to promote their own security and other national objectives.
sources. If there is a run on reserves in anticipation of external Unlike the UN General Asse.mbly, the IMF has a weighted
debt default or to meet future import requirements, the SBP will voting system in which the US and its European allies have
exhaust its reserves earlier than indicated above. No wonder voting majority.
that there is again a talk in official circles of going back to the Second, the IMF wanted to remain engaged with the country
IMF for another borrowing arrangement in the foreseeable· to avoid the consequences for the international financial
future. organizations and for world financial markets of a debt default
The past borrowing arrangements made by various by a major debtor country of Asia. It may be recalled that major
governments with the IMF were based on a commitment by debt of Pakistan is owned to the IMF, the World Bank group
the governments to adopt certain economic policies to achieve and the Asian Development Bank.
balance of payments viability. Those policies were made by the Third, the IMF staff did not do its job properly and misled
IMF a part of its conditionality for disbursement of its loan, but its board in presenting the economic programme that met the
those were the policies willingly accepted for implementation board requirements but was based by the staff on unrealistic
by successive governments. The IMF staff presented those estimates relating to the budget, the balance of payments
policy programmes to its board, assuring it that those policies outlook and some other aspects of the economy.
will indeed work to improve the balance of payments during Viewing the IMF-Pakistan relations in the historical perspective
the programme period so that the country will be able to pay of more than thirty years, the most important conclusion that
back the loan to the IMF on due dates, and, after a stabilization emerges is that every government approached the IMF for
of the economy, will attain a higher rate of growth with relative financial help, after the economy has been mismanaged for
price stability and balance-of-payments viability. some time, only to avoid foreign exchange shortage, external
The ground reality is that the IMF programmes only bailed debt default and an economic crisis. They succeeded in
out particular governments in periods of crisis, and avoided getting external financial assistance and avoiding a crisis, but
international financial turmoil emanating from potential defaults, failed to undertake important economic reforms.
but the underlying state of the economy has gradually gone Given the past record of broken promises and abandoned
from bad to worse in all that period. The fundamental question programmes both the government and the IMF should
is as to why the economic policy programmes worked out with seriously revfew their track record for a more meaningful
the IMF have not led to an improvement in the economy and future arrangement that helps the country out of its deep-
strengthening of the balance of payments, and why is it that rooted problems, rather than bailing out a sitting government
the IMF and Pakistan have remained engaged with each other or avoiding turmoil in the international financial system. For the
in spite of the fact that their long association and successive sake of Pakistan, both should change their approach.
policy programmes have failed to produce any positive returns
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 509

The government does not need the IMF to diagnose and false promises should be replaced by a genuine effort to
Pakistan's problems and find the solutions. Any economist address the deep-rooted economic problems of the country. ·
of standing can formulate a correct policy package: control The IMF should accept for financial assistance a genuine
government expenditure, raise the tax/GDP ratio, reduce the programme developed and owned by the government to
budget deficit, dismantle the underground economy, eradicate stabilize the economy and promote a higher rate of growth
corruption, privatize or restructure public-sector corporatiens, with relative price stability and balance-of-payment viability,
free the SBP to conduct a prudent monetary policy to even if it is modest in its contents. It is better to support a
encourage private sector activities and control inflation, have programme that is owned by the country and implemented
an export-led growth strategy financed by mobilization of seriously than to impose an ambitious programme on paper
domestic savings, build strong economic institutions and that is likely to fall apart at the implementation stage.
ensure good governance. The SBP should be able to help the If a government is not committed to implementing its home-
government to cast its own home-grown program in the IMF grown programme with full ownership of policies, visits to the
mould, ensuring consistency, viability and balance-of-payment IMF headquarters and agreement on a programme paper with
sustainability, by using its macroeconomic framework that is the IMF may be helpful once again in saving a government, but
very similar to that of the IMF. not in improving the fundamentals of the economy.
A home-grown programme so developed to tackle the
y country's structural problems, keeping in view the financial
programming framework of the IMF, can be 'sold' to the IMF
I to galvanise the necessary external financial assistance by a
technically competent economic team. But statistical trickery
Source: Yaqub, Muhammad, 'Pakistan and the IMF', The
News, Karachi, 22 May 2012.

t Just these two examples highlight the fact that..xvhatever

n;iess .~a!<lstan:s_economy finds itself in is due not to the
meddling and interference of the IMF (although that does
consequences for those countries that have adhered to it,
this chapter has examined the specific case of Pakistan and
its experience. We started with an extensive and detailed
exacerbate the problem), but is largely of our own creation. overview of what the programme in~olv~·the case of
In order to ensure their extended survival, governments do Pakistan and with a history of the_IMF,'s involvement. It
not touch controversial issues such as agricultural income seems that Pakistan has .b_een @!bfi eager to seek IMF
tax and military spending. Instead, they rush to the IMF for assistance in recent yee!}, and. some~ writers have2,rn~ld · •
fi.pancial assistance, continuing to delay the day of reckoning. that the way these loans have been agreed to gives rise to
They acquire loans to meet their revenue gap, so that speculation that some non-economic factors may also have
unpleasant measures can be avoided. In all this, if the people been involved.
of Pakistan have a voice, it must be directed at criticizing the We examined the analysis made of the Structural
wrongdoings of their elected and unelected officials, not the Adjustment Programmes by the World Bank and the IMF
representatives of an international bureaucracy. By blaming themselves, and found that these two organizations were
the IMF, one is simply letting the government off the hook. not totally satisfied with the outcomes, as many targets
It is the government-the numerous that the country has ~ere missed. More importantly, independent re-;-a~·that
had-that is responsible for the state of Pakistan's economy - has been done on the impact of the programme shows, very
and it should be accountable to its people. Popular pressure clearly, that the repercussions have been severe for poverty,
should be directed towards demanding reforms that will employment, wages, and inequality. Moreover, some of the
improve the structure of the economy so that there is no outcomes of a Structural Adjustment Programme:like higher
need to borrow under harsh conditionalities. Whether it be growth and lower inflation, have not manifested themselves
agricultural income tax or land reforms, military spending in Pakistan, with growth being considerably lower and
or development expenditure, the government should be inflation higher than trend levels. In Chapter 22, we argue
forced by public opinion and public pressure to undertake the- that one of the main reasons why there has been such a
extensive reforms that are long overdue. Instead of blaming noticeable rise in poverty in Pakistan, has been due to the
the IMF, there is need to examine the "role of academics, adherence of such Structural Adjustment Programmes.
the intelligentsia, and government (see Appendix 17.2 for• We also analysed the political economy of the Structural
different ways of looking auge problems in the economy and Adjustment Programme and tried to examine why, if the
for alternative solutions). repercussions 0f the programmes are so negative, the
government of Pakistan runs to the IMF on the smallest
pretext. The answer, we suggest, lies in the way Pakistan's
17.7 SUMMARY AND FURTHER READING elites and its political settlement works. Pakistan has ~o.!_
even needed a Structural Adjustment Programme sponsored - ·
17.7.1 Summary by the IMF and the World Bank, yet finds recourse to their~
Having presented in Chapter 16 a general overview of the assistance. Because it is easier to acquire loans from such
Structural Adjustment Programme and its impact on and orgai°lizations than to implement far-reaching changes in .
51 o Issues in Pakistan's Economy

the economy, such as an agricultural income tax, a cut in..__ some very useful articles In particular, see: Zaman, Arshad,
defence expenditure, and the elimination of conspicuous • 'The Government's Present Agreement with the IMF:
consumption, the rulers in Pakistan make use of so called Misgovernment or Folly?', Pakistan Journal ofApplied Economics,
'aid and assistance', having very serious repercussions for the. vol. 11, nos. 1 and 2, 1995; Pakistan Journal of Applied ··
economy overall-also see Chapters 18, 22 and 25. Economics, vol. 11, nos. 1 and 2, 1995. Shahrukh Rafi Khan's
Do IMF and World Bank Policies Work? (London: Macmillan,
17.7.2 Further Reading 1999) is an excellent extensive evaluation of IMF and World
Bank policies in Pakistan, and for more recent analysis, see
The reading list provided in the previous chapter should be his 'Structural Adjustment and its Impact', in Zaidi, S. Akbar
consulted, since it contains a good general overview of the (ed.) Continuity and Change: Socio-Political and Institutional
Structural Adjustment Programmes. For Pakistan, the four Dynamics in Pakistan (Karachi: City Press, 2003). Also see the
World Bank reports are essential.: Pakistan: Growth Through articles in Shahrukh Rafi Khan's edited Fifty Years of Pakistan's
Adjustment, Report No. 7118-Pak (Washington DC: World Economy (Karachi: Oxford University Press, 1999). Numerous
Bank, 1988 ); Pakistan: Medium-term Economic Policy Adjustments, arti~les published in the Pakistan Development 'Review also
Report No. 7591-Pak (Washington DC: World Bank, 1989); present detailed evaluations and critiques of the impact of
Changes in Trade and Domestic Taxation for Reform of the Incentive structural adjustment in Pakistan and are recommended
and Fiscal Adjustment, Report No. 9828-Pak (Washington as they are an excellent source for material. A monograph
DC: World Bank, 1992) and Pakistan: Country Economic written by Imran Khalid-Khan for the Bank Information
Memorandum FY93, Report No. 11590-Pak (Washington DC: Center in Washington DC, is highly recommended: see,
World Bank, 1993 ). The IMF and World Bank web pages now 'Strategic Lending .on the Frontlines: The Case of Pakistan',
contain a huge amount of material which is updated regularly mimeo, (Washington DC: Bank Information Center, 2004).
and essential reading for anyone interested in these issues. The readings in Chapters 18 and 22 would also be very useful
In addition, the special issues of the Pakistan Journal for anyone interested in issues raised in this chapter.
of Applied Economics, vols. 10 and 11, 1994, 1995, contain

Appendix 17.1

Pakistan's Stand-By Agreement reflecting in part the impact of the global financial turmoil.
Given the target to increase gross official reserves to $8.6 billion
with the IMF to Access $7.6 Billion by end June 2009 (the level -prevailing at end June 2008), the
residual financing gap of $4.7 billion will be covered by drawing
November 2008 {subsequently on IMF resources. To further bolster confidence, the government
increased to $11.3 billion) is seeking additional financial support from donors.
The government's medium-term strategy seeks to
A. Macroeconomic outlook and policies
achieve high sustained growth and significantly reduce
The government's financial policies for the remainder
poverty, while ensuring external and fiscal sustainability.
of 2008/09 and for 2009/1 0 are aimed at stabilizing
Following the initial stabilization effort in 2008/09, real GDP
the macroeconomic situation and restoring investor
growth would increase to 5 per cent in 2009/10, and is projected
confidence. The government's program envisages a significant
to rise gradually to 6½-7 per cent a year by 2012/13, based
fiscal consolidation, and the SBP will tighten monetary policy
on a significant increase in investment and further progress in
to lower inflation and strengthen the international reserves
structural reforms. Average inflation is targeted to decline to
position. As a result of these policies, the 12-month inflation
13 per cent in 2009/ 10, and to 5 per cent by 2012/ 13. Prudent
rate is projected to decline to 20 per cent at end June 2009, even
demand management policies would contribute to a gradual
after taking into account the impact of significant increases in
decline in the external current account-deficit to 5.7 per cent of
administered energy prices. Real GDP growth would slow further
GDP in 2009/ 10, and further to 3.6 per cent of GDP by 2012/ 13.
to 3-3½ per cent in 2008/09 in response to the tightening
This, al~ng with the expected pickup in capital inflows, would
of macroeconomic policies and a deceleration of growth in
help increase gross international reserves to $14.5 billion (2.6
Pakistan's trading partners.
months of projected imports) by 2012/13, while reducing the
The tighter financial policies, higher disbursements from
external debt to 29 per cent of GDP. The external financing gap
IFls, lower commodity prices, and restored confidence are
for 2009/10, which is projected at $3.6 billion, will be covered
expected to contribute to a significant strengthening of the
by disbursements from the lMF and GDR proceeds. External
external position in 2008/09. Specifically, the external current
financing gaps will be fully eliminated by the end of the SBA.
account deficit is projected to narrow to $10.6 billion (6.5 per
cent of GDP) owing mainly to slower aggregate demand growth
B. Fiscal policy
and lower oil import prices. At the same time, the surplus in the
The fiscal deficit (excluding grants) is targeted to decline
financial account would decline to $6.2 billion, as an increase
to 4.2 per cen.t of GDP. (Rs. 562 billion) i_n 2008/09, from
in disbursements from lFls (to about $4 billion) would be more
7.4 per cent in 2007/08. This fiscal effort is necessary to
than offset by weaker FDl and portfolio flows relative to 2007/08,
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 511

help reduce the external current account deficit, move toward the government will prepare, by end March 2009, a strategy and
a sustainable fiscal position, and eliminate SBP financing of a time-bound action plan for the adoption of specific measures.
the government. To achieve the 2008/09 deficit target, the The first program review will assess progress in this area. The
government will increase tax revenue by 0.6 percentage points resources allocated to the short-term protection measures
of GDP and reduce non-interest current expenditure by about described above will be used for funding the newly designed
1½ percentage points of GDP, mainly through the elimination social safety net in 2009/10.
of oil subsidies by December 2008 and electricity subsidies by The government will prepare, by end March 2009,
June 2009. At the same time, domestically-financed development a plan for eliminating the inter-corporate circular debt
spending will be reduced by about 1 percentage point of GDP within the fiscal deficit target. The plan will clearly identify all
through better project prioritization. elements of circular debt, including (i) the identification of all
The government has already implemented a number of debts owed and due among the corporations, duly reconciled;
measures consistent with the rnvisaged fiscal adjustment (ii) the determination of the validity of the claims; (iii) a schedule
in 2008/09. Specifically, petroleum prices have been adjusted by which respective entities will discharge their liabilities to each
three times since June 2008,. which has led to the complete other; and (iv) a time frame during which the Federal Adjuster will
elimination of petroleum subsidies. At the same time, electricity use his powers to make adjustments, in case of failure, to adhere
tariffs were adjusted by an average cif 18 per cent effective to the approved schedule.
5 September 2008. ln addition, steps have been taken to slow The targeted reduction in the fiscal deficit in 2008/09 will
the pace of development spending, the research and development help eliminate SBP financing of the budget. The government
subsidy for the textile industry has been fully eliminated, wheat is committed to limiting SBP financing of the budget to zero on
procurement prices have been raised to international ·1evels, and a cumulative basis during 1 October 2008-30 June 2009. During
the general sales tax (GST) rate has been raised by one percentage this period, the fiscal deficit will be fully financed by available
point to 16 per cent .. external disbursements (which have already been committed), the
The government plans to take additional fiscal measures acceleration of the privatization process, the issuance of treasury
in 2008/09. As noted above, electricity tariff differential bills, and other domestic financing instruments, including
subsidies will be fully eliminated by end June 2009. To achieve Pakistan lnvestment Bonds, ljara Sukuk, and National Savings
this objective, the average base tariff will be further increased Scheme (NSS) instruments.
during 2008/09 according to a schedule to be agreed with the A further reduction in the fiscal deficit to 3.3 per cent
World Bank by end December 2008 (structural benchmark), and of GDP is envisaged for 2009/10. The fiscal effort will be
the government will use fuel and other surcharges, as necessary. facilitated by the full-year effect of the elimination of energy
The implementation of the electricity tariff increases will be subsidies by end-2008/09 and declining interest payments,
followed up in the context of the program reviews. On the following large bullet payments in the three-year period ending
revenue side, further steps will be taken during the remainder in 2009/10.
of the fiscal year to strengthen tax enforcement. Moreover, fuel Consistent with the government's objective of
prices will continue to be adjusted to pass through changes in substantially increasing tax revenue, a number of tax policy
international prices. and administration measures are envisaged during the
An expanded and effective social safety net constitutes program period. Specifically, an integrated tax administration
an integral part of the authorities' ·program. ln this regard, organization on a functional basis will be established at the
several measures are envisaged to protect vulnerable groups Federal Board of Revenue (FBR) (integrating both the income
that might be adversely affected by inflation and the economic tax and sales tax administration). ln addition, audits will be
slowdown. The fiscal program for 2008/09 envisages an increase reintroduced as part of a risk-based audit strategy that will be
in social safety net spending of 0.6 percentage points of GDP, to implemented by end December 2008. A full description of the
0.9 per cent of GDP. To this end, the government has launched required reforms, together with an action plan will be provided
the Benazir lncome Support Program (BlSP), for which the to the lMF by end December 2008, following a planned seminar
budget already allocated Rs. 34 billion (0.3 per cent of GDP). to review tax policy and administration. As part of this process,
The design of the BlSP, in particular the targeting of transfers the government plans to harmonize the income tax and GST laws, ·
and the delivery mechanism, will be reviewed in the first half of including for tax administration purposes, and reduce exemptions
2009, in consultation with the World Bank. The government also for both taxes. To that end, it will submit legislative amendments
plans to expand social safety net spending by an additional 0.3 to parliament by end June 2009. ln addition, the excises on
per cent of GDP, for which further external assistance (mainly in tobacco will be increased in the context of the 2009/10.budget.
the form of grants) is being sought from donors. While a more Following the seminar in December 2008, the government
comprehensive and better-targeted social safety net is being will initiate a process to implement a full VAT with minimal
designed, these additional funds will be allocated to scale up exemptions, to be administered by the FBR. Draft legislation for
other existing programs, in particular cash transfers under the the VAT is expected to be ready for public debate by end-2009.
Bait-ul-Mal program. Also, part of the additional resources could The first program review will focus on the progress in developing
be used to cover larger than envisaged electricity subsidies for the government's tax reform agenda.
poor households. The government's fiscal consolidation efforts will
Putting in place a more comprehensive and well- continue over the medium term. The government's fiscal
targeted social safety net is a key priority under the framework assumes a further .reduction in the fiscal deficit to
program. To that end, in close cooperation with_the World Bank, 2-2½ per cent of GDP by 2012/13. Fiscal consolidation will be
512 Issues in Pakistan's Economy

supported by a strong tax effort, which will allow for higher • The treasury will provide the SBP with T-bills, as needed,
spending in infrastructure and the social sectors. Specifically, the to conduct its open market operations.
government is committed to increasing tax revenue by at least
3½ percentage points of GDP over the medium term as a result The SBP is committed to pursuing a flexible exchange
of measures to broaden the GST base, significantly reduce income rate policy. To that end, intervention in the foreign exchange
tax exemptions, and further improve tax enforcement. market (including the provision of foreign exchange for oil
The government will continue to press ahead with imports) will be aimed at meeting the program's reserve targets.
public financial management reforms,. in line with fiscal This primary objective will be facilitated by phasing out the SBP's
ROSC recommendations. lmmediate priority will be ·given provision of foreign exchange for oil imports according to .the
to completing the on-going gradual implementation of a following schedule:
single treasury account. This will involve the consolidation of
government funds in its account with the SBP, from which • Furnace oil-by 1 February 2009.
withdrawals will be made only when actual payments are due. • Diesel and other refined products-by 1 August 2009.
Existing funds held outside the SBP account will be transferred • Crude oil-by 1 February 2010.
by end June 2009. Furthermore, the coordination between the
Planning Commission, which manages the developmental budget, During the program period, the SBP intends to eliminate
and the Ministry of Finance will be strengthened in the context any exchange restriction subject to approval under Article
of the implementation of the medium-term budget framework. VIII of the IMF's Articles of Agreement. Specifically, the
exchange restriction on advance import payments against letters
C. Monetary policy, exchange rate policy, and financial of credit will be eliminated by end January 2010, subject to a
sector issues marked improvement in the balance of payments position. No
The program envisages a significant tightening of monetary intensification of existing restrictions and no new exchange
policy. To that end, the SBP recently increased its discount rate restrictions or multiple currency practices will be introduced
by 200 basis points, to 15 per cent. Following this first step, during the program period.
interest rate policy will be sufficiently flexible to protect the The SBP will prepare a contingency plan to deal with
reserves position, bring down inflation, and allow the government problem private banks by end December 2008. The plan
to place T-bills and other securities with commercial banks and will contain criteria for SBP liquidity support, assessment of bank
non-banks in order to avoid further central bank financing of the problems, and intervention procedures. The SBP has already dealt
budget. A further increase in the discount rate will be considered with problem banks through mergers. Looking ahead, if there
at the time of the monetary policy statement scheduled for end are severe strains in the interbank market and interbank lending
January 2009. However, the discount rate will be raised earlier if guarantees appear necessary, these guarantees will be provided in
the actual reserves for end November and end December 2008 limited amounts only to solvent banks.
fall short of the program monthly floors on the SBP's net foreign To enhance the effectiveness of SBP enforcement
assets. ln addition, if the volume of T-bills placed in the auction powers, necessary amendments to the Banking
scheduled for 19 November falls short of the announced target, Companies Ordinance will be submitted to Parliament by
understandings will be reached with Fund staff on corrective end June 2009. These amendments will strengthen the SBP's
measures in order to meet the program targets. ability to (i) change management in banks; (ii) impose losses on
The conduct of monetary policy will be facilitated shareholders by writing down their capital; (iii) intervene and take
by significant improvements in liquidity management, ownership of banks; (iv) appoint administrators to operate banks;
including by improving the forecasting of the government's and (v) restructure banks.
cash flow position. As part of these efforts, the SBP and The legal provisions relating to the operational
the Ministry of Finance have agreed on quarterly volumes of independence of the SBP will be reviewed. These provisions
treasury bill placements consistent with zero SBP financing of will be strengthened based on the recommendations of an
the budget during 1 October 2008-30 June 2009. The SBP has interagency committee that will be established by mid-November
issued an auction calendar for November-December 2008 on 2008, and taking into account technical recommendations from
1 November 2008, and in the future will issue a calendar every the IMF. The second program review will focus on specific details
quarter one month in advance. ln addition, the SBP will review regarding required legislative changes in this area.
the current procedures for liquidity management, and will adopt The government believes that market confidence will
and publicize a transparent liquidity management framework by improve significantly once the Fund-supported program
end July 2009 as part of its Monetary Policy Statement. This is approved and the international reserves position is
framework will contain the following key elements: strengthened. Therefore, it does not intend to remove the
current floor on stock prices until after the program is in place.
• The announcement of an explicit corridor for money ln any event, the timing and terms under which the floor on
market interest rates: the SBP's reverse repo rate will be stock prices will be removed, including any use of public funds
the ceiling, and a standing repo facility to absorb excess to support the stock market, will be decided after reaching
liquidity from commercial banks will serve as the floor of understandings with Fund staff.
the proposed explicit corridor;
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 513

Table 1. Pakistan: Quantitative Targets, December 2008-June 201 o

Outst. Stock Prog. Prog. Prog.
end Sept. end Dec. end Mar. end June
2008 2008 2009 2009
Floor on net foreign assets of the SBP* (stock, in millions of U.S. dollars) 3,953 1,165 671 2,782
Ceiling on net domestic assets of the SBP* (stock, in billions of Pakistani
1,250 1,346 1,412 1,314
rupees)
Ceiling on net government borrowing from SBP* (stock, in billions of Pakistani
1,227 1,274 1,274 1,181
rupees)
Ceiling on overall budget deficit* (cumulative flow, in billions of Pakistani
142 261 405 562
rupees)
Ceiling on outstanding stock of short-term public and publicly guaranteed
515 1,500 1,500 1,500
external debt* (in millions of U.S. dollars)
Cumulative ceiling on contracting of nonconcessional medium- and long-
term public and publicly guaranteed external debt* (in millions of U.S. 9,500 9,500 9,500 9,500
dollars) 1/
Accumulation of external payments arrears (continuous performance criterion
0 0 0 0
during the program period)* (in millions of U.S. dollars)
Continuous ceiling on SBP's foreign currency swaps and forward sales* (in
1,900 2,750 2,750 2,750
millions of U.S. dollars)
Memorandum items:
Net external program financing (in millions of U.S. dollars) -53 137 918 2,503
External project grants (in millions of U.S. dollars) 39 95 180
Foreign Exchange cash reserve requirement (CRR, ind. special CRR) deposits
832 832 832 832
in SBP (in millions of U.S. dollars)
Weekly cash reserve requirement ratios (in percentage points) Rupee deposits
9 5 5 5
(less than one year maturity)
Rupee deposits (more than one year maturity) 0 0 0 0
Foreign currency deposits CRR 5 5 5 5
Foreign currency deposits special CRR 15 15 15 15

Notes:
* denotes performance citeria.
1/ Excludes lMF.

Prior actions (implemented before Board consideration Benchmarks

of the program) A contingency plan for handling problem private banks will be
The SBP's discount rate was increased by 200 basis points. finalized by end December 2008.
Electricity tariffs were increased by an average 18 per cent A full description of required reforms in the area of tax
effective 5 September 2008. administration, including an action plan for harmonizing the GST
The SBP and the government agreed on quarterly volumes of and income tax administration will be finalized by end December
treasury bills to be issued, and published the expected volume for 2008.
the remainder of the second quarter of 2008/09. ln close collaboration with the World Bank, the government
will finalize the schedule for further electricity tariff adjustments
, Performance criteria during 2008/09, by end December 2008, with a view to
Amendments to the banking legislation will be submitted to eliminating tariff differential subsidies by end June 2009.
Parliament by end June 2009 to enhance the effectiveness of SBP The SBP's provision of foreign exchange for furnace oil will be
enforcement powers in the area of banking supervision. eliminated by 1 February 2009.
The government will submit, by end June 2009, draft ln close collaboration· with the World Bank, the government
legislative amendments to parliament to harmonize the income will develop a strategy and a time-bound action plan, by end
tax and GST laws, including for tax administration purposes, and March 2009, for the adoption of specific measures to strengthen
to reduce exemptions for both taxes. the social safety net and improve targeting to the poor.
514 Issues in Pakistan's Economy

The government will prepare a plan for eliminating the inter- • The SBP Table on outstanding stock of foreign currency
corporate circular debt by end March 2009. deposits, amended to include the classification of new FCA
The transition to a single treasury account will be completed according to the residency of the holder.
by end June 2009. • Daily data on exchange rates (interbank, retail market, and
Telegraphic Transfers for SBP purchases in the retail market),
PROGRAM REPORTING REQUIREMENTS SBP's sales and purchases in the foreign exchange markets,
The following information, including any revisions to historical swaps and forward outright sales, within two business days.
data, will be provided to the Middle East and Central Asia Depart- • Monthly data on the outstanding stock of the SBP's forward
ment of the lMF through the office of the Resident Representative foreign currency operations, including swaps and outright
of the lMF in Pakistan, within the time frame indicated: forward sales and purchases, within two weeks. The terms of
any new transactions (including rollover/renewal of existing
• Monthly provisional statements on federal tax and non-tax ones) will also be provided.
revenue, within one month. • Monthly data on the SBP's foreign exchange reserves, with
• Deposits into and withdrawals from the privatization details on the currencies, instruments, and institutions in
accounts for each quarter, within one month. Withdrawals which the reserves are held, within one month.
will be reported with the following breakdown (a) those • Monthly data on SBP direct or bridge loans to nationalized
which constitute budgetary use of privatization proceeds; (bl banks in the context of the restructuring and privatization
those which constitute costs of privatization; and (cl other operation, within four weeks.
(with explanation of the purpose of other withdrawals), as • Monthly data on any other quasi-fiscal operations undertaken
well as with the breakdown between domestic and external by the SBP, on behalf of the government.
privatization receipts. • Monthly data on SBP holding of discounted export finance
• Quarterly statements on budgetary capital receipts and credit under the export finance scheme, within one month.
disbursements, including repayments of bonds, recovery of • Monthly data on outstanding credit to agriculture under the
loans from provinces and 'others', within two months. Agriculture Mandatory Credit Targets, within one month.
• Monthly (unreconciled) provisional data on federal expenditure • The following data on external debt, within one month:
and net lending (with separate data on disbursements and (i) Quarterly stock of public- and publicly-guaranteed
repayments), within one month. external debt (including deferred payments arrangements),
• Quarterly statement on consolidated budgetary expenditure, by maturity (initial maturities of up to and including
with federal data approved by the Accountant General one year, and over one year), by creditor and by debtor
Pakistan Revenue (AGPR), within two months. (central government and publicly guaranteed);
• Quarterly numbers on expenditure on social programs. (ii) Quarterly contracting or guaranteeing of non-
• Quarterly data on the stock of domestic government debt, concessional medium- and long-term government debt;
broken down by instrument, within one month (Table 3). and
• Quarterly data on WAPDA receivables within one month. (iii) lnformation on any rescheduling on public- and publicly-
• Monthly data on Outstanding Audited Price Differential guaranteed debt reached with creditors.
Claims. • Quarterly data on external payments arrears on public and
• Monthly data on external budget financing, including (i) publicly guaranteed debt with details as in (i) of the preceding
loan-by-loan program disbursements in U.S. dollar terms and item within one month.
rupee terms converted at exchange rates prevailing at the • Copies of new orrevised ordinances/circulars regarding changes
time of each transaction; (ii) cumulative amortization in U.S. in: tax policy, tax administration, foreign exchange market
dollar terms and rupee terms converted at exchange rates regulations, and banking regulations no later than three days
prevailing at the time of each transaction; and (iii) cumulative after officia1 issuance, or notification that ordinances have
project loan disbursements in U.S. dollar terms and in rupees been posted on the Federal Board or Revenue (FBR) and SBP
converted at exchange rates prevailing at the time of each websites.
transaction. • Copies of official notification of changes in gas and electricity
• Monthly data on Banks' Budgetary Support (Table 1) within tariffs and any surcharges (automatic or structural) and in
one month. ex-refinery petroleum product prices as well as of gas and
• The following monthly monetary data on a last-Saturday basis petroleum surcharges/levies.
within two weeks: • Monthly data on the import parity prices as well as central
(i) monetary survey; depot prices of the six major oil products, within one month.
(ii) accounts of the SBP; . • Quarterly data on KESC and WAPDA loans and debt
(iii) consolidated accounts of the scheduled banks; outstanding, withi_n one month.
(iv) banks' lending to the government; • Upon the adoption of the plan for the elimination of inter-
(v) detailed table on net foreign assets (both for the SBP and corporate circular debt, monthly reports on inter-corporate
scheduled banks); circular debt will be reported within 1 month.
(vi) detailed table of scheduled banks' reserves with the SBP.
• The same tables as in the preceding item, but on an end- S.ource: Adapted from: Pakistan: Letter of Intent, Memorandum
month and end-quarter basis (last business day), both · at of Economic and Financial Policies, and Technical Memorandum
current and program exchange rates, within one month. of Understanding, lMF, 20 November 2008
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 515

Appendix 17 .2
all, through a development strategy which ensures economic
The Alternative to the IMF/World Bank advance with social stability.
Policies (i) The main form of direct regulation that we have in
mind is of course a mix of capital flow controls with a
Do underdeveloped countries like Pakistan and lndia have any
non-convertible currency. External pressures against such
alternative to lMF/World Bank dependence? Professor Prabhat
regulation would be strong; but a country the size of India
Patnaik and C. P. Chandrasekhar examine the 'possibilities:
can, if she so chooses, show sufficient resilience to stand
up to such pressures. After all even the current government,
What comes through clearly from the Indian experience with
committed as it is to structural adjustment, has not moved
structural adjustment is the dominant role of the process
towards full convertibility despite external pressures.
of globalization of finance. We have suggested earlier that
The real problem, it may be thought however, would
indeed the very design of the current package of structural
be of a different kind; globalization of finance is such a
adjustment bears the imprint of this process; and the sequel to
strong process that direct regulation may prove ineffective
the introduction of this package shows that the real mobility
in stemming illicit flows. But to believe that the existence of
witnessed is that of finance rather than that of capital-in-
regulations makes no difference to the behaviour of economic
production. But then if globalization of finance restricts the
agents is fallacious. And the effectiveness of regulations
possibility of intervention within a 'national' (or for that
l, matter any supranational but restricted) space by undermining
the concept of a 'control area', the question naturally arises:
depends upon the character, and hence the social basis, of the
state (a proposition which must not be confused with the view
that an authoritarian state regulates more effectively; indeed
can there be any sort of an alternative to the current set of
we argue the contrary). The alternative we have in mind is
policies? To say that an alternative presupposes international
not confined to merely having regulations by the extent state,
J co-ordination, and can no longer be based on a national,
or any kind of a spatially-restricted, response, a proposition
but encompasses, as well shall see, a change in the character
of the state.
which some radicals advance, is inadequate: it amounts de
(ii) Regulations, however, have to be backed by a sound
facto to conceding that a feasible alternative to the current
balance of payments position through a sound trade
set of policies does not exist. performance. A part of the key to such a sound trade
lt is our contentional however that a feasible alternative,
performance lies in the imposition of intelligently-devised
not just a desirable one, to the existing policies exists. We
import controls; at the same time, however, a sound
should draw a distinction here: obviously the East Asian and export performance is essential. While the importance of
the South-East Asian cases underscore the possibility of a
boosting exports is stressed by neoclassical economists,
successful, neomercantilist (and in that sense nationalist)
they never distinguish between primary commodity and
policy response in the contemporary environment. Hut those manufacturing exports. ln agriculture, as already mentioned,
cases are also marked by economies where the development of private investment is predicated upon public investment;
financial institutions and hence the possibility of integration
and if the latter cannot be augmented, either because the
with global finance are limited to start with. China's stock system is already agricultural-supply-constrained pace Kalecki
exchange is very recent in origin. Vietnam does not even have (and hence up against the inflationary barrier), or because
one to date, and even in avowedly capitalist East Asia financial the state is being made to withdraw from its inventing role,
interests have generally played second fiddle (except briefly in then an increase in agricultural exports necessarily means a
Japan). One cannot of course recreate those initial conditions lower profile of domestic availability, which has the effect of
(and other conditions conducive to neo-mercantilism) in both impoverishing the domestic working masses, as well as
India: apart from being unhistorical that is not even contracting the home market for manufactured goods.
necessarily desirable, since neo-mercantilist strategies have Manufacturing exports, however, as Kaldor had argued long
been associated with politically authoritarian structures. So, ago, are in an altogether different category. To the extent
in discussing an alternative we have to talk of a sui generis that investment decisions here are induced by larger capacity
alternative. And the question is: is it feasible? · utilization, larger exports provide both the inducement as
The fallacy in our view lies in believing that an undermining well as the material wherewithal (from the supply-side) for
of the 'control area' of the nation state is tantamount to an larger investment. Manufacturing exports in other words can
impossibility of intervention. What such undermining does provide the basis for a self-sustaining growth-process in a way
is to impose an important additional constraint upon the that agricultural exports (except under special circumstances)
nation-state; the nation state cannot certainly intervene in cannot. The history of colonial India provides ample evidence
the old way. lt can now intervene with some degree of success for this proposition: the last half-century of colonial rule saw
only if it takes this constraint into account. both a stagnant per capita agricultural output and a rise in
Specifically for economies like India this involves that the proportion of exports out of it, resulting in a sharp decline
the volatility of financial flows has to be kept under check in the per capita availability of foodgrains, from about 200
through a combination of: (i) direct regulations; (ii) an kg per year at the turn of the century to about 150 kg at
overall sound balance of payments (in relative terms, which independence.
is not synonymous with neomercantilism); (iii) and, above

j
516 Issues in Pakistan's Economy

An alternative development strategy therefore must earmarking of credit, and if even infrastructural development
specifically aim at increasing the exports of manufactured like power becomes the responsibility of the private sector,
goods. And this requires not 'getting prices right' in some especially foreign capital, with profitability being the main
neoclassical sense, but above all high rates of investment consideration, then there is no scope left for an improvement
which increase the flexibility of the economy's response to the in the conditions of the rural poor, or for rural development
changing international environment. The correlation between generally.
high investment ratios and high export growth rates in cross- 1t is not enough, however, that an alternative programme
country data relating to a host of underdeveloped countries exists; it is not even enough that one can identify in the
is strong. The direction of causation is always seen to lie from abstract the class forces that are potentially capable of
exports to investment; but a mutuality of causation is much providing the social support for the implementation of such
more plausible in which case it is not exports which need be an alternative programme. These forces must be concretely
the initial intervention variable but the investment ratio itself. ready for mobilization behind such an a_lternative. The
(iii) This brings us to the main issue, namely, the alternative concrete conditions for praxis in other words must exist; and
development trajectory. Any meaningful development strategy in our view these conditions are rapidly ripening in the lndian
for lndia, it seems to us, must aim to bring about an context.
immediate improvement in the living conditions of the The early euphoria generated by tack of a 7-8 per cent
working masses, especially in the rural sector, i.e. the modus growth rate after the 'marketist' economic .reforms has
operandi of the development strategy itself must be such an vanished; the belief that the so called withdrawal of the
improvement in their living standards. This is not merely an state would be followed by a less corrupt, less arbitrary, more
ethical proposition, but a practical necessity, both for the rule-governed order has also vanished. ln short the credibility
preservation of meaningful democratic structures, as well of the new policy-regime in the civil society at large has
as for arousing the kind of enthusiasm and participation suffered greatly. At the same time there are very strong
among the masses on the basis of which alone the structures and unmistakable pressures from below for a betterment in
of a more accountable state, a state capable of imposing living conditions, pressures that sometimes find outlets in
discipline upon the rich and the capitalists, can be built. Such the refracted form of 'lower caste' demands, and are often
an immediate improvement must have as its cornerstone an contained through so called 'populist' measures. The fact,
accelerated agricultural growth based on egalitarian land however, that even the ruling party which is committed
reforms. The East Asian example has shown the importance of to structural adjustment is forced to undertake these very
land reforms even for a neomercantilist strategy of economic 'populist' measures frowned upon by the Fund and the Bank,
nationalism: indeed it is important for any national economic is indicative of the pressures from below for an improvement
programme. The Chinese example has shown the vigour of in living conditions (which does not of course nullify the
an industrialization drive based on an expansion of mass observations about increasing poverty made earlier).
markets deriving from an accelerated agricultural growth. The only way these pressures can be met is if the basic
ln their specific context, at the present conjuncture, this classes, viz. the workers, both organized and unorganized, and
growth has been achieved through a break-up of communes the bulk of the peasantry, make the alternative programme
though on the basis of the groundwork, e.g. the destruction into their own. lf large DFl inflows are precluded, then the
of landlordism and the erection of water-management only means of improving the living conditions of the mass
systems, prepared earlier. ln lndia at the present conjuncture of the people is by tapping the existing reserves of the
accelerated and dispersed, i.e. not regionally concentrated, economy, i.e. by taking up the slack in agriculture through
agricultural growth requires the institution of land reforms. egalitarian land reforms as well as by more investment in rural
Together with land reforms of course a number of infrastructure, and by raising the domestic savings ratio as
complementary areas have to be dealt with such as irrigation the East Asians and South-East Asians have done. True, this
and water management, rural infrastructure, literacy, sanitation appropriation of an alternative programme would take time,
and drinking water, etc. All these would require considerable but the conditions for it are ripening.
investment, but investment that is best undertaken under the We shall end with two comments. An essential component
aegis of elected local-level bodies. The requirement therefore of any alternative programme over and above the mere nitty-
is also for a devolution of resources and decentralization of gritty of an economic strategy must be a strengthening of
planning. But the resources themselves have got to be raised democratic institutions and str1,1ctures. Only then would its
and there is no escape from heavier doses of direct taxation, appropriation by the basic classes be a productive and more
of property at any rate if not of incomes (though tax evasion durable one. ln other words what is essential is not a new
in the latter case has to be stopped through punitive action). bout of social engineering, but a genuine process of social
lt is here that the conflict between the strategy just advocated transformation which expands the dire.ct political intervention
and 'marketism' becomes apparent. lt is often argued by capacity of the basi.c classes. Much has been written on the
'marketists' that they are all for rural development. But if state-versus-market dichotomy, and much of it, as we have
tax concessions have to be doled out to entice capital to seen, is facile. lf the state is not sufficiently accountable to
stay in the country, if food prices have to be raised for the civil society, then it has to be made accountable; but this
surplus food producers (who happen to be the rural rich) cannot be ensured merely by a formal change in its character.
while food subsidies are cut, if all talk of land reforms is Such a formal change has to be accompanied by a substantive
eschewed, if financial reforms do away with any stem and expansion in the capacity for direct intervention on the part
 Chapter 17 The IMF and Structural Adjustment Programmes in Pakistan 517

of the very classes in whose favour the formal change in the mobilization, of ignoring the effect of this mobilization
character of the state is supposed to have occurred. Putting upon the ability to tackle the external constraints, in short
it differently, the state-versus-market debate is a red herring of ignoring the 'totality' of the situation which defines the
which sidetracks the real debate-greater or lesser democracy scope for praxis. lnto the constitution of this 'totality' what
for the broad masses of the people. enters is not only the changes occurring at the level of world
The second comment is the following: the fact that capitalism, but also the level of political mobilization of the
globalization of finance has made the pursuit of progressive masses domestically.
economic policies more difficult is obviously undeniable. But,
in focusing upon this phenomenon exclusively, we run the Source: Patnaik, Prabhat and C. P. Chandrasekhar, 'lndian
risk of missing the dialectics between the external and the Economy Under "Structural Adjustment"', Economic and Political
internal, of completely ignoring the possibility of domestic Weekly, vol. 30, no. 47, 1995, 3010-12.

NOTES
1. This section draws heavily on the paper by Arshad 14. Khan, Mohsin, S., 'Comments', in V. Thomas et al. op. cit.,
Zaman, 'The Government's Present Agreement with the 1991, 439.
IMF: Misgovernment or Folly?', Pakistan Journal of Applied 15. Khan, Shahrukh Rafi, 'Testing Hypotheses and Assessing
Economics, vol. 11, nos. 1 and 2, 1995. Impact of Structural Adjustment: The Case of Pakistan',
2. SDRs, or Special Drawing Rights, are the IMF's 'currency', Sustainable Development Policy Institute, Monograph
based upon a weighted basket of the main currencies in No. 6, Islamabad, 1997, 144. Also see Illian, Shahrukh Rafi,
world trade. This basket is supposed to ease the volatility in Do World Bank and IMF Policies Work? (London: Macmillan,
any single currency. 1999).
3. Zaman, Arshad, op. cit., 82, Footnote 8. 16. Kemal, A. R., 'Structural Adjustment, Employment, Income
4. Ibid. Distribution and Poverty,' Pakistan Development Review,
5. Ibid., and Zaidi, S. Akbar, 'The Structural Adjustment vol. 33, no. 4, 1994.
Programme and Pakistan: External Influence or Internal 17. See, Zaidi, S. Akbar, op. cit., 1994.
Acquiescence?', Pakistan Journal of Applied Economics, vol. 10, 18. Nabi, Ijaz and Naved Hamid, 'The Aid Partnership in
nos. 1 and 2, 1994. Pakistan', in Lele, M. and Ijaz Nabi, Transition in Development:
6. State Bank of Pakistan, Annual Report, 2001-02, Karachi, The Role of Aid and Commercial Flows (San Francisco: ICEG
2002, 168-9. Press, 1991 ), 53.
7. The 1993 loan, as has been argued, was a precursor to the 19. Ibid. 55.
extensive EFF/ESAF loans of 1994. For our analysis we refer 20. Ibid.
only to the 1994-7 period. 21. Ibid. 64.
8. Readers ate encouraged to study Appendices 15.1 and 15.2 22. Tybout, J. R., 'Industrial Performance: Some Stylized Facts',
in the second edition of this book to examine details of the in V. Thomas et al. op. cit., 1991, 157.
earlier agreements, and also to observe, that the new PRGF 23. V. Thomas et al. op. cit., 1991.
agreement is primarily a continuation and extension of the 24. McCleary, op. cit., 1991, 421, emphasis added.
earlier ESAFs of 1988 and 1994--see also Appendix 17.1. 25. Reed, David, Structural Adjustment and the Environment
9. See World Bank, Pakistan: Medium term Economic Policy (Boulder, Colorado: Westview Press, 1992), 39.
Adjustments, Report No. 7591-Pak (Washington DC, 1989), 26. Banuri, Tariq, 'Just Adjustment: Protecting the Vulnerable
31. and Promoting Growth', Pakistan Development Review, vol. 31,
10. This section is based on the World Bank's analysis of the no. 4, 1992, 681.
1988 Structural Adjustment Programme. See World Bank, 27. The Economist, London, 30 October 1993, 48.
Pakistan: Country Economic Memorandum FY93, Report. No. 28. See, Hasan, Arif, 'The Unresolved Conflict', DAWN, Magazine,
11590-Pak (Washington DC, 1993). 13 March 1992.
11. Ibid. 35. 29. Ibid.
12. McCleary, William, 'Pakistan: Structural· Adjustment and 30. Zaman, Arshad, 'Sustainable Development, Poverty and
Economic Growth', in V. Thomas et al. Restructuring Economies Policy Adjustments: Linkages and Levers of Change',
in Distress, (New York: Oxford University Press, 1991 ), 432. mimeo (Toronto: International Institute of Sustainable
13. Ibid. 433. Development, 1993 ), 7.

L
 Macroeconomic Developments:
1998-2013

This chapter examines Pakistan's macroeconomic develop- General Musharraf took over in October 1999, with a new
ments over the period 1998-2013, with a focus on three economic team based on bureaucrats and bankers from the
phases. The first phase covers the period 1998 to around World Bank, IMF, and Citibank. However, due to the nature
2004, (see Chapter 16 in Issues (Second Edition), from where· of non-economic developments in the period after 1998,
the discussion in this chapter is retained. The second phase, extraneous developments have also had a very significant
examined in Section 18.6, covers the period of the ~o_ng._ bearing on economic developments in Pakistan- see also
half of the General Musharraf-Shaukat Aziz government,_ Chapter 25.
from around 2004 to the beginning of 2008, with a comment Despite the fact that in each of these six years, there have
on the Caretaker government of November 2007 to March been one or two quite significant developments, this chapter
ioo8, which was still headed by General Pervez Musharraf as does not discuss each year separately. Rather, it looks at some
, President of Pakistan. Th<Uhir.Jl.phase, examined in Section of the important issues, processes and developments that
18.7, is the macroeconomic policy of the Pakistan People's have taken place in the economy on account of these events.
Party government, from 2008 to early 2013. We examine the impact of the 1988 nuclear tests, of 9/11
The first sentence of the Pakistan Economic Survey 1998-99 and its consequences, the debt crisis and debt rescheduling,
of the Government of Pakistan, released in June 1999, stated the increase .in foreign exchange reserves, and other issues
that 'the outgoing fiscal year 1998-99 has been the most .including t!ie question of stabilization and growth. However,
difficult and challenging year for Pakistan's economy'. 1 before we examine developments after 1998, it would be
The Annual Report of the State Bank of Pakistan for 1998- useful to quickly get an overview of the state of the economy
99, released in December 1999 under radically different prior to this period, particularly during the 1990s, and then \
circumstances, concurs and begins with almost exactly examine subsequent events in light of the earlier trends-
the same statement: 'The year 1998-99 was one of the see also Chapter 22 which looks in detail at Poverty, a
most difficult years in the history of Pakistan'. 2 Not only phenomenon which emerged so dramatically in the 1990s.
was the analysis of the past year in both these documents
interesting given the numerous political developments that
had taken place in Pakistan during the course of the fiscal 18.1 BEFORE AND AFTER MAY 1998
year (which ran from July 1998 to June 1999), but what
was even more interesting, was that in the space of the six Although both the State Bank of Pakistan Annual Report of
months in which these two reports were released (J.une.and 1998/99 and the Pakistan Economic Survey of the same year
De.cember), the government which was responsible for the believe that this year was one of the most 'difficult' in
first document (the Pakistan Economic Survey), had been Pakistan's history, it was certainly not one of the worst, in_
forcibly removed from office through a military coup, and terms of economic indicators. In fact, as Table 18.1 shows,
the second document (the State Bank Annual Report), was that in terms of GDP growth, 1998/99 was far better than the
produced by a completely different set of people. Yet both two previous years and the three subsequent years, although
reports concurred that the period 1998/99 was the 'most no one will deny that after 1998, the situation did deteriorate
difficult year_for.Pakistan'.s economy'. due to the developments of 1998. In fact, the growth rate for
Almost every year, during the six year period 1998-2004, 1998/99 was only marginally lower than the average for the
was critical and meaningful, if not dramatic, in the context preceding eight years 1990-98.
of political and economic developments within Pakistan Although the May 1998 nuclear tests did have major
and also internationally, which subsequently had a major consequences on the economy, as we discuss below, the
impact on the country-see Box 18.1. This chapter reviews economy prior to 1998, cannot be claimed to have been
the economic consequences of numerous such political and doing very much better. In fact, we argue in Chapters 16
diplomatic events. In the previous two chapters we examined and 17, and also in Chapter 22 on Poverty, that the ntnetiies
deyelopments in the economy in light of the IMF and World as a whole were the decade of under developing Pakistan,
~ank policy for Pakistan, and argued that for lhe most part, especially when compared to the 1980s. This, we argue, w;s
despite the numerous changes in governments since 1988, on account of the p2licies implemented on the advice of the
~hf economic policies were quite similar. In the period after I¥F and the World Bank, especially at a time when the debt
1998, the economic policy continued on the IMF/World Bank from the 1980s, had b~come quite severe. Not only were the
path, but was'further enforced and deepened, especially after. policies of the IMF and World Bank quite disastrous, but

_J
 Chapter 18 Macroeconomic Developments: 1998-2013 519

Box 18.1 war, with over a million troops placed on

1998-2004 Key Events the border in an eyeball-to-eyeball position.
South Asia, 'the most dangerous place in
These are mainly political developments and the economic the world', with the two nuclear powers
repercussions are discussed in the main chapter. threatening war, becomes a no-go-area for
foreigners and foreign investment. Tensions
May 1998 Both India and Pakistan test nuclear ease only in 2003.
devices. October 2002 General Elections held in Pakistan with a
February 1999 Prime Minister of India, Atal Behari Vajpayee Parliament emerging and electing a Prime
visits Pakistan and the Lahore Declaration is Minister; General Musharraf stays on as
signed. President on the basis of a controversial
Refere.ndum held in f.pril 2000 which
May/June 1999 The Kargil War takes place between India declared him President for five years.
and Pakistan.
March 2003 The US-led 'Coalition Forces' invade Iraq.
October 1999 The democratically elected government of Pakistan continues to play key role in the
Nawaz Sharif is dismissed by a military War against Terrorism.
coup led by General Pervez Musharraf
who proclaims himself Chief Executive of April 2003 Indian Prime Minister Vajpayee offers hand
Pakistan. Pakistan is ostracized for the mili- of friendship to Pakistan to resume tal_ks
tary coup and doing away with democracy. again.

April2000 General Pervez Musharraf holds a December 2003 The Seventeenth Amendment to the
referendum which is considered to be most Constitution of Pakistan (part of the
controversial by the local and international contentious Legal Framework Order)
media, which proclaims him President of passed by Parliament, and agreement
Pakistan for five years. reached with a section of the opposition
(the religious alliance, the Muttahida Majlis-
July 2000 General (now also President of Pakistan) e-Amal); General Musharraf's presidency
Pervez Musharraf visits India for the Agra endorsed by the House, while the
Summit with Indian Prime Minister; Summit opposition continues to question his right to
is a failure. be President.
'- 11 September The day the world changed', as two planes January 2004 The Twelfth SAARC Summit held in
2001 crash into the Twin Towers in New York. The Islamabad with the South Asia Free Trade
(us begins bombardment and subsequent f.greement (SAFTA) agreed to. India ·
occupation of Afghanistan and the Taliban and Pakistan agree to keep meeting and
government annihilated or captured. discussing issues and trying to establish
Pakistan becomes front line state again, this peace in South Asia.
time in the War Against Terror rather than
in the War against Communism and Soviet July 2004 Prime Minister Zafarullah Jamali resigns his
Expansionism, as it did in 1979. Pakistan post and a new Prime Minister instated. The
weicomed back into the community of hidden hand of the forces that be, continues
nations. to determine politics in Pakistan.

December 2001 Attack on· the Indian parliament in Delhi; September 2004 Finance Minister Shaukat Aziz elected
Pakistan and India engage in diplomatic Pakistan's Prime Minister.

the way they were implemented by different governments, Pakistan. The Japanese, for example, because of having
the timing, sequencing, and speed of the reforms, were also· experienced the outcome of nuclear lunacy, do not do
responsible for the poor performance of thf _d~caqe.._gf,.,tl),~- business with any country which conducts nuclear tests.
l 990s. Nevertheless, the May 1998 nuclear tests did have a As a consequence, the Japai:iese government (which, it
major significance for events but, as has happened so many must be emphasized, was Pakisran's largest.aid_dQOQLand
times in Pakistan's history, soon after, other events turned out important trading~.Q.i!Jtner) stopped all funding of projects
to be quite fortuitous for Pakistan, wJR!!l_g out _somewhat the and aid, both to India and to Pakistan. Other governments
• losses incurred as a consequence of the nuclear tests. also castigated Pakistan (more so than India, which was
Soon after the nuclear tests, the developed couritries, the also· in .the firing line) for µndertaking nuclear tests and
G-8, imposed a wide range of economic sanct~ons against cut aid and-..assistance on Which the Pakistani economy and
 (11
I\)
0

Table 18.1 ui
UI
C
Key Economic Indicators: 1990-2010 (D
UI

GDP Growth Agriculture Manufacturing

Growth
Inflation Fiscal Deficit Growth in
Population Remittances Fixed ::s
Year Rate in Total Below in US$ Investment "'CJ
Rate Growth Rate Growth Rate CPI % of GDP Exports C)
Investment Poverty Line million as% of GDP

-
~

1980s avg 6.5 5.4 8.2 7.2 7.1 8.5 17.32* 17.0 iii"
C)
1990/91 5.6 5.0 6.3 19.4 12.7 8.8 19.8 22.11 1,848 17.4 ::s~
UI
1991/92 7,7 9.5 8.1 26.2 10.6 7.5 14.6 1,467 18.5
m
C,
1992/93 2.1 -5.3 4.4 13.8 9.8 8.1 0.3 1,562 19.1 0
1993/94 4.4 5.2 17.9
::s
4.5 10.0 11.3 5.9 -1.4 1,445 0
1994/95 5.1 6.6 2.5 13.4 13.0 5.6 16.1 1,866 16.9 3
'<
1995/96 6.6 11.7 3.7 16.4 10.8 6.5 7.1 1,416 17.2
1996/97 1.7 0.1 --0.1 8.0 11.8 6.4 -2.6 31.00 1,409 16.2
1997/98 3.5 4.5 6.9 9.0 7.8 7.7 4.2 1,489 14.7
1998/99 4.2 1.9 4.1 -3.6 5.7 6.1 -10.7 1,061 13.9
1999/00 3.9 6.1 1.5 10.2 3.6 6.6 8.8 983 14.4
1990s avg 4.5 4,5 4.2 12.3 9.7 6.9 .15.6 26.6 1,455 16.7
2000/01 2.2 -2.7 8.2 5.5 4.4 5.2 9.1 32.60 1,086 13.9
2001/02 3.4 -0.1 5.0 0.4 3.5 5.2 2.3 2,389 13.1
2002/03 5.1 4.1 7.7 16.2 3.3 4.6 16.6 4,236 13.1
2003/04 7.5 2.4 14.0 14.4 4.9 3.7 10.3 3,872 15.3
2004/05 9.0 6.5 15.5 32.6 10.4 2.3 16.9 23** 4,169 17.5
2005/06 5.8 6.3 8.7 36.1 9.7 3.3 14.3 4,600 20.5
2006/07 6.8 4.1 8.3 15.7 10.2 3.1 3.2 5,494 20.9
2007/08 7.2 1.0 4.8 15.6 17.0 4.4 12.2 6,451 20.5
2008/09 3.6 4.0 -3.7 6.9 17.0 7.6 -7.2 7,811 17.4
2009/10 4.4 2.0 5.2 0.7 11.8 5.2 9.1 8,906 15.0
2000s avg 5.5 2.8 7.4 14.4 9.2 1.2 8.7 27.8 4,901 16.7
P = Provisional
From 2007--08 base year= 2007/08 = 100 for CPI Inflation
Source: ** 2002-05 Human Development in South Asia 2011.
Source: State !;lank of Pakistan, Hand Book on Pakistan's Economy 2010 (Karachi: SBP, 2010).

.,;e;e 2 • t =
 Chapter 18 Macroeconomic Developments: 1998-2013 521

government had become most dependent. The sanctions (ESAF) and the Extended Fund FacilityJ_J:lFF) programmes
imposed by the US President under the Glenn Amendment as well as new Official Development Assistance. On all
included the following: the termination of US foreign aid fronts, Pakistan was squeezed by the western donors and
programmes except for humanitarian assistance ancifood governments as a consequence of undertaking these nuclear
orother ag!.!9!!!11re commodities; the denial of export tests-see Box 18.2 on some estimates of what the nuclear
credits and guarantees by any US department or agency; the tests cost Pakistan.. The State Bank of Pakistan Annual Report
termination of sales of defence articles and defence services for 1997/98 summarized the issues as follows:
and termination of all military financing; the opposition
to the extension of any loan for financial or technical Developments in May, 1998 had a major impact
assistance by any international institution such as the on balance of payments, net foreign assets of the
Asian Development Baiir, the IMF, and the"°'World Bank; banking system, stock market and the exchange
rate. The nuclear blast by India immediately
and the prohibition to US banks from making any loans
affected the investors' confidence and the stock
to the Government of Pakistan. Not surprisingly, the IMF market declined, free market exchangerate
al.so suspended its Enhancecl Structural.~c_ljust_ment,Fac:Pl!Y. depreciated, and foreig~ cur:ency deposits were
I

t Box 18.2
What did the Nuclear Blasts/Sanctions Cost Us?
programs, will exacerbate the problem of the high proportion
(over 40%) of malnourished children in Pakistan. Almost
400,000 additional children could be adversely affected in
terms of their nutritional status. Lower income growth and
J We are now in a position to make a summary assessment of
a tight labour market will diminish the prospects for a rapid
that the nuclear blasts and sanctions have cost the people of
Pakistan, even after the apparent bail-out by the IMF and other improvement in the status of women.
multilateral agencies through enhanced external assistance Altogether, Pakistan will pay a significant price for the
and debt rescheduling. The table below gives the estimates of acquisition of nuclear capability in the face of international
the magnitudes of different costs. First, the average household sanctions. It will take time for confidence and growth
will lose Rs. 400 annually (at 198o-81 prices) in the short run momentum to be restored, even with the IMF program.
which will rise to about Rs. 1600 in the next five years. Almost Of course, it can legitimately be argued that this is the
Rs. 13 billion will be lost from the GDP in the short run and minimum price a nation is willing to pay for its national
over Rs. 40 billion by 2002-03. security and that Pakistan is today a stronger nation with
Employment opportunities are expected to be reduced greater international recognition. It is essential, however, to
by over half a million annually in the next five years. Almost recognize that, irrespective of the magnitude of costs, these
2 million more people could fall below the poverty line in the must be distributed equitably. The standard of living of poor
short run, with the number rising rapidly to over 5 million by people must decline the least, through resort to appropriate
2002-03. Rising food prices and lower incomes, along with macroeconomic policies and the development os social safety
contraction in preventive health services such as immunization nets.

SHORT RUN (First Year) LONG RUN (Fifth Year)

• Lower Gross Domestic Product • Lower Gross Domestic Product by

by Rs. 12 billion* Rs. 41 billion*
• Lower real per household income • Lower real per household Income
annually by Rs. 400* annually by Rs. 1600*
• Lower consumption expenditure • Lower consumption expenditure by
by Rs. 17 billion* Rs. 43 billion*
• Lower employment by 80,000 • Lower employment by 740,000
• 16,000 more educated unemployed • 200,000 more educated unemployed
• 2,000,000 more persons below • 5,000,000 more people below the
the poverty line poverty line
• 400,000 additional malnourished • 480,000 additional malnourished
children children

* valued at constant prices of 198Q-81

Source: Social Policy and Development Centre, Social Development in Pakistan: Annual Review 1999 (Karachi: Oxford
University Press, 1999), 58-59.
 522 Issues in Pakistan's Economy

withdrawn significantly during !l::::28_May trust that ha_d been accumulated over many,.ye~,..Wi!~St..
1998. Pakistan's response on 28 May 1998 to by this onc;,gesJw,e.-4
the Indian detonation, followed by economic It was probably this measure, more than any other,
sanctions by the United States, and a restraining which made the Nawaz Sharif's government very unpopular.
stance adopted by the G-7 countries with regard Perhaps his government overreacted and should have had
to the lending by the international financial
more confidence in its policies and promises, but it seems,
institutions, further contributed towards the
erosion of confidence and weakening of the after all, that the cupboard was bare. The government knew
b1:dget and the balance of payments. 3 that the actual level of foreign exchange reserves was much
lower than the $11 billion it should have had, and had the run
Nevertheless, one specific action by the Government of taken place, it would not have been able to meet its liabilities.
Pakistan was probably more responsible for starting a domino The consequence of imposing the freeze was such that in
effect than anything else. six weeks, at the end of the fiscal year in June, the stock
While the nuclear tests were bad enough, the freeze on market was down by 37.6 per cent, and more importantly,
Foreign Currency Accounts (FCAs) soon after made matters the free market exchange rate of the rupee, had depreciated
far worse and caused major problems. Since January .!_973, by 16.2 per cent and liquid foreign exchange reserves had
Pakistanis living overseas were allowed to open bank accounts declined to a mere $423 million, a fraction of the liabilities.
in Pakistan holding certain types of fc:>reign currencies. The ~ crisis of confidence had a particularly strong impact
purpose of this scheme was to allow the government to on' investors, both local and foreign, and with sanctions
capture some of the vast amount of foreign exchange earned i_!!!Qosrd, and credit ratings very low, the gen;al trend was
and held by the large number of Pakistanis working overseas. most unfavourable towards the economy. Following their
Iu_.l.991,_ even resident Pakistanis were allowed this privilege, earlier experience, it is improbable that a government which
and many bought dollars and other currencies and held has real, liquid, foreign exchange cash worth $12 billion,
them in Pakistani banks in Pakistan. Pakistan has a· large as the government in 2004 did, would promote a scheme
underground/black/illegal sector, and it is estimated that at such as that of allowing residents to open Foreign Currency
least 40-80 per cent of its GD~ equivalent is held in the black Accounts. More importantly, even if the government were to
economy. An additional assumption is that many Pakistanis announce such a scheme, it is improbable that there would be
have promoted capital flight keeping legal and illegal income many takers. Trust once lost, in this case even by the hands of
abroad. In order to address these issues and to attempt to an earlier government, is very difficult to _regain.
reverse capital flight, governments in Pakistan encouraged An observation that emerges from our evaluation of one of
resident Pakistanis to keep foreign currency at home. This led the most important interventions made by the Nawaz Sharif
to speculation on foreign currencies and to the 'dollarization' government in its second tenure, that of freezing FCAs, has
of the economy, where anyone who had any legal or ill-gotten interesting political economy implications. Table 18.1 shows
wealth, immediately purchased dollars and deposited them that high levels of poverty had already started emerging well
into their resident Foreign Currency Accounts FCAs. This before 1998; developments after May 1998, surprisingly, did
quest for dollars kept a constan.tpressure on the exchange not have a serious poverty-enhancing effect since poverty
rate, pushing it up to artificially high levels, causing the rupee levels from the mid 1990s more or less remained at that
to devalue which had numerous other repercussions on the level. Given the impact of the freeze on FCAs and other
economy. 4 The rates of return on fOJ;_~gn,i:llg:ency..,depo~ts developments in the economy,. their repercussions should
were ~ p t of_lnco!Jle,ja_E.a_I!9 zakat, ~md were 'considerably have acted on increasing poverty levels. The FCAs were held
higher than for rupee financial assets ... and this has been by well-to-do and middle class Pakistanis, not the poor. This
one of the most important factors leil.ding.to_.dollarizatiQ.n:l perhaps confirms the nature and existence of the dualistic
Add to this the high inflation prevalent in Pakistan at that (perhaps even, enclave) economy in Pakistan, where such a
time and steady depreciation of the rupee, and you have an drastic measure by the government, affected largely a section
asset which should have been secure and guaranteed higher of the better-off and the (negative) results did not filter
- returns than any other. Perhaps that is why, by May 1998 down to the entire population. For much of the 1990s, this
ar_ound $11 billion had been deposited into Pakistani banks - middle class had been the main supporter of Nawaz Sharif,
by resident and non-resident Pakistanis. and perhaps due to this one measure in which they were
The Indian nuclear tests were conducted on 11 May and hit hardest, they did not come to his defence when General
until 28 May when Pakistan conducted its own test, some Musharraf's coup took place 16 months later-see Chapter
foreign currency was withdrawn. Fearing a run on the rupee, 26 and 27.
and that Pakistanis would rush to w,ithdraw their deposits,
the government of Nawaz Sharif, put a freeze on withdrawals
not allowing the deposit holders to withdraw their own _18.2 11 SEPTEMBER 2001 : THE DAY THE
~(_::he government justified this action as follows: 'The
past experience had shown that in a period of uncertainty, WORLD CHANGED
foreign currency deposits begin to be withdrawn and it was After May 1998, when it became clear that Pakistan had
apprehe1:1ded that it could take place on a large scale and nuclear capability, a ·knowri secret since at least 1986,
sustained basis in the post 28 May period'. 6 This caused what
Pakistan, not so much India, became a pariah state. While

--
is for sure, Pakistan's greatest crisis of confidence, and all the

---
sanctions continued and as Table 18.1 shows, the economy
 Chapter 18 Macroeconomic Developments: 1998-2013 523

after 1998 slowed down, numerous developments in 1999 was also included in this category, so most US businesses
made th~t year one of the most remarkable in Pakistan's 57 and firms, treated Pakistanis aud-Xakis.tan with distrust,
year history-see Box 18.1. < if not with out and out suspicion. This meant that foreign
In February 1999, Indian Prime Minister Atal Behari investors would not be willing to invest in Pakistan nor even
Vajpayee made, what at that time was thought to be, an visit possible exporters and markets in the country. Travel
historic trip to Lahore and with the Prime Minister of advisories were issued which persuaded US and other western
Pakistan, Nawaz Sharif, signed the Lahore Declaration, businessmen not to visit places like Pakistan. Moreover, with
trying to take both countries, now open and acknowledged the US bombardment of Afghanistan in order to annihilate
nuclear states, towards the road to peace. Prospects of trade members ·of the Taliban regime, in which Pals.!g_an played
and better relations seemed to be on the horizon, but more a key role, Pakistan became the backyard of the US' war

[
importantly, 'there was a feeling that perhaps peace would against terror a11d its war in Afghanistan. Thebackla.sh of
become a priority for both nations. However, the peace this action was that many suspected al-Qaeda members and
process was quickly derailed by the Pakistan military's huge former Taliban members found refuge in Pakistan, causing
misadventure in Kargil, which cost both Pakistan and India Pakistan to be further blacklisted. By all accounts, Pakistan
not just many hundreds of lives, but also destroyed any hope was a 'no go' area for foreigners, particularly Americans,
for peace and wrecked the trust that had been buil!just a few whether they were donors or businessmen. In addition,
weeks earlier-for further reading see the chapters in Part IX many countries were no longer eager to deal with Pakistani
of this book. businessmen and as a consequence, industry suffered. 8 This
While the first half of 1999 consisted of these two extremes was .the ,first-and• mos Hmmedia te, consequence. on~P.akist;;;;_' s
of peace and war, in October 1999, the democratically elected economy. However, as Pakistan once again became a front- •
government of Nawaz Sharif was dismissed by General Pervez line state, circumstances changed once again, and this _yme
Musharraf in Pakistan's third coup. As it was, Pakista11 was very fortuitously.
being considered a rogue state for testing its nuclear devices, With the Government of Pakistan very quickly throwing in
the re-entry of the military into government after a lapse of its lot with the American's in their War Against Afghanistan,
eleven years, did not improve Pakistan's image at first. Some and in the all out ..W.ar Against Terror, the immediate
further sanctions wereJmposed on the country, and as Table -· negative costs and complications were those mentioned
18.1 shows, the economy was staggering. However, all that above, many of which continue to this day-see Chapter 25.
cha_gg~cj_after 9/11. Nevertheless, in the medium and longer term, there were
It was not just the twin towers in New York that crashed dramatic changes, particularly for the military government of
on 11 September 2001, but all financial markets across the General Musharraf. From being labelled a rogue Islamic state
world took a huge dive over the next few days. The western with nuclear pretensions, G~eral Musharraf was welcomed
capitalistic countries, who are so dependent on their stock back into the comity of civilized nations fighting the War_
markets for cash and as a symbol of the economic situation, Against Terror. Overnight, he became the darling of the West,
went further into a slump which had begun sometime at ;fth do~e~s of leaders and dignitaries from the developed
the turn of the new millennium. 9/11 and its contagion countries visiting him in Islamabad. Whi_le this ensured
effect pushed these markets and these economies further his political longevity at least for some time, the economic
into recession like conditions and it took around eighteen returns of siding with the Americans were unprecedented.
months to two years for the economies to gain some of their The first .thing .that.happened-in fact as early as on 23
lost ground. With the US economy dominating the new era- September 200l~wa1U.hatJ'resident George Bush waived
of w~rade and globalization, the slowdown in the US key sanctions against India and Pakistan.which had been
economy resulted in a worldwide slowing down and very imposed after the May !9JJLnuclear.tests. For P~kistan, the
sluggish growth. lifting of sanctions meant, most importantly, that the United
(Pakistan had enough political and economic problems States could now vote in favour of multilateral aid packages,
prior to 9/11_! The nuclear test related sanctions were still in paiti_cularly_ the Poverty Reduction and Growth Facility
place, democracy had been overthrown by a military coup, which. the government was negotiating with the IMF at that
Pakistan's debt burden was still huge_,;md as Table 18.1 time-see Box 18.3 which shows that just a few days prior to
shows, the downturn in the economy _h!°i<talready_setin.J).[ioL 9/11, the US government was not at all keen in supporting
~ll.: There were two sets of major factors related to 9/11, Pi:!!5.i_g_an's_i-equest for the IMF Poverty R~d_uctio~ a'nd~Growth
which were related to Pakist,m'.s economic.£utw:e. Facility; all those reservations evaporated after Pakistan's
The first set included issues which emerged as_ a res:eonse agreed to side with the uS.
to the world economic growth slowing down mqre generally. The biggest problem that had plagued Pakistan's
This meant that with world growth slowing down, so would government for many years since the profligate 1980s.
demand for world exports into the developed markets. under General Zia, _was that of excessive and growing d_ebt
Consumption and incomes fell in developed countries, and (both domestic, but particularly international) and annual·
so did imports from other countries. Moreover, there was a interest payments-see Section below. Pakistan's economy
sense of shock and in~ecurity, which meant that Americans w~s struggling under debt, equivalent to its GDP, with half
were less enthusiastic' to spend and were holding back. b~ing foreign debt. As a return for Pakistan's suppo:l't"to the
Second, there was a huge fear of Muslims, Islam, and people US in particular and the West in general, huge· amounts
, from other, particularly Middle Eastern, .countries. Pakistan cif debt were either written off, or rescheduled under very
524 Issues in Pakistan's Economy

Box 18.3 People close to the finance minister say that political
Political Factors and IMF Loans conditions have to be taken into account by the government
to satisfy the G-8 countries led by the United States. They say
This edited extract from an article by lhtasham ul Haque just that there might not be any difficulty iri getting the last tranche
two weeks before· 9/11, shows that numerous political factors of $130 million disbursed in June this year. 'But things could be ·
existed before the loan could have been approved. However, tougher when it would come to having PRGF', a source close
all that changed after 9/11. to Shaukat Aziz said. He also confirmed that the joint review of
the economy involving the World Bank simply,means that the
The joint review of the performance of the economy by IMF should not have to deal alone with Pakistani authorities.
the World Bank and the IMF is being conducted these days Sources in the local IMF office say that they do not see any
to assess whether Pakistan qualifies for new $2 to 2.5 billion problem in concluding a new loan agreement with Pakistan on
funding under the Poverty R~duction Growth Facility (PRGF) the basis of Islamabad's meeting the broad budgetary targets
after the expiry on 30 September, of the ongoing $596 million by the government. 'There were some revenue slippages but
Standby Arrangement (SBA). then the Musharraf. government ·enforced across the board
Why a joint review, when the new funding line is being general sales tax. Also, they succeeded.in some good extent
sought from the IMF .which according to finance minister to contain the fiscal deficit which make "their case pretty fine to
Shaukat Aziz, is by and large satisfied with the pace of reform have PRGF', he said. 'But we can not comment about political
except in case of revenue shortfalls that occurred in the last conditionalities which are apparently there'.
financial year? Representatives of the donor agencies in Pakistan .had reportedly been. given to understand by
Islamabad and the officials of the ministry of finance have Ms Rocca, specially to both the foreign minister and the
started conceding privately, that it might not,be that easy to finance minister, that full return of democracy to be run by
acquire a new funding line on relatively low interest rates from elected representatives, was a 'pre'condition; for a new
the IMF. They say that there 'is a set of political and economic financial package. At the same time the G'S countries expect
conditionalities'. that· has to be met by the government for that President Musharraf's plan to acquire more powers by
seeking the PRGF, which, if. not offered, could delay the over amending the Constltution should not undermine the authority
$3 billion dollar restructuring of debt by the Paris Club this year. of the Parliament. Pakistan was also asked to take into account
What had transpired between US Assistance Secretary the view of the Commonwealth countries about the return of
of State, Ms Christina Rocca and senior Pakistani officials, democracy in the country.
including the finance minister, when she visited Islamabad
recently? Pakistan is believed to have been told, in so many
words by Ms Rocca, that G-8 countries have their own point of
view in respect to lifting the remaining international sanctions Source: Economic and Business Review, Dawn, Karachi
against Pakistan and extending bilateral funding. 27 August-2 September 2001.

easy and comfortable conditions relieving the pressure on the dividends from Pakistan's support have been very high.
Pakistan's foreign exchange situation. In addition, the quota However, this is a very narrow, opportunistic view which has
for Pakistani exports to the US and the European Union had numerous other, consequences in the longer term-see
was increased to compensate for earlier cancelled orders Chapters 25 and 26. 9
and costs. Equally importantly, was the signal to the IMF
a,,!l_d_World Bank and numerous other-don;;;,-- t~ re-'e~ter
the field and begin supporting Pakistan,aga!ns !'or example, 18.3 WHAT HAPPENED TO THE DEBT
even USAID returned to Pakistan after nearly a decade, an
aid agency which had exited Pakistan once nuclear related CRISIS?
sanctions were enforced under the Pressler Amendment
Even a cursory reading of any government document or
in the early 1990s. Pakistan was no longer 'no go' territory,
.academic_study · by economists at any time during the
and as a consequence of Pakistan's role in the war against
1990s, immediately reveals that Pakistan was faced with a
terror and Afghanistan (and subsequently, in the US' war
'crippling', 'devastating' debt crisis _for the entire duration of
against Iraq, later in 2003) Pakistan's government was repaid
that. decade. Both external and domestic debt had reached
handsomely. An.9ther consequence was the huge increase
astronomical, unsustainable, levels, as had the budget deficit
in remittances, particularly from the US;~which-came-to
and· interest payments,. which continued to give rise to
Pa~st~_n,_in 2002/03_-see below. One needs to emph~size
further debt, both domestic and foreign. Add to this, the
that had the New York attack not taken place, it is quite
fact that the econoJDy was doing particularly poorly in terms
improbable that Pakistan would have been able to get out of the
of_jnvestment, growth and revenue generation, and~one
post-nuclear tests and post military coup scenario, both of which had
~an understand the I).ature of a real and growing economic
been damaging to the economy. If one takes the narrow view
crisis. The external debt and interest payments had reached
of looking merely at the short-term economic view, then
such astronomical proportions-see tables-that there was
 Chapter 18 Macroeconomic Developments: 1998-2013 525

a real fear that Pakistan would default on its international because of better management or were there other factors
commitments and be declared bankrupt, in addition to being involved? -..,, •
called a rogue or pariah state. However, in December 2001, Pakistan has been allowed to reschedule debt on numerous
but more specifically by 2002, the exter;al debt crisis had occasions in the past, as Table 18.4 shows. However, the
become, for the moment at least, forgotten and 'resolved', scale of rescheduling in more recent years, particularly in
and the Government of Pakistan had in fiscal year 2003/04 December 2001, largely as a payback to General Musharraf
even voluntarily retired $1.2 billion before its due date. How for his role backing the US in their war against Afghanistan,
did this dramatic turnaround take place? 10 was extraordinary-see Box 18.5.
In order to gauge the extent of the crisis and the gravity of In January 1999, following the foreign exchange problems
the situation, it is important to know the amount of external that had been initiated after Pakistan's nuclear tests and the
debt owed and interest payments being made each year. freeze on Foreign Currency Accounts and the refusal of many
Table 18.2 presents key ratioS..,A!l<Lci_at_c1_which __ give a clear donors to lend to Pakistan, the Nawaz Sharif government
p_kture. ( Since there has been a change in how external debt approached the Paris Club members to reschedule its public
is calculated by the State. Bank of Pakistan-see Box 18.4 and publicly guaranteed debt. The Paris Club agreed to
on the new calculations-Table 18.2 presents earlier data to reschedule some of the debt service payments due for the
get a picture of the extent of debt, while Table 18.3 presents period l January 1999 to 31 December 2000 in respect of the
data based on the new, now conventional and accepted, loans which were contracted prior to 30 September 1997.
definitions). Once the Paris Club agreed to reschedule the $2.744 billion
Table 18.2 shows that by 1998/99, external debt was more repayments, the government also was given some relief
than half the size of the GDP, and with domestic debt around from nog-Paris Club bilateral creditors, and ended up with
the same amount as well, Pakistan's total domestic and rescheduling worth $3.l billion in this period. It was the
external debt was greater than the size of the GDP. While return of the IMF t()Pakistan in the guise of yet another
f>aRistan was paying back around a third in export earnings agreement in January 1999, which allowed the rescheduling
in the form of debt servicing, it was still adding mi to the to proceed. At the end of the first consolidation period in
stock of overall total external debt. Clearly, this trend was December 2000, another round of rescheduling was sought
not particularly helpful towards Pakistan's economy, and is from sovereign and commercial creditors. With the new
one of the reasons for the very poor economic growth and Musharraf government in place, a Stand-By Agreement with_
SQ,cial_statistics_ during the l 990s. Our discussion in this the IMF was reached in November 2000, and in January
section is based on Table 18.3, which shows the new debt 2001, the Paris Club, and other bilateral and commercial
figures _developed.by .the.State.Bank of Pakistan as discussed creditors agreed to restructure debts worth $1.8 billion .
in Box 18.4. .-However, the earlier debt rescheduling was minuscule
Table 18.3 only endorses the view based on the earlier compared to the $12.5 billion that took place in December
table, perhaps more forcefully, that Pakistan's external debt 2001. Not only was this amount far larger than any such
crisis had become quite serious in the mid-l 990s.]he total rescheduling in the past, more importantly, it was the terms
external debt to GDP was the highest in the fateful year_ of this agreement which set it apart. As the State Bank
1998/99 after the nuclear tests and their repercussions, Annual Report states,
with Foreign Currency Accounts very substantial; the total
external liabilities to GDP ratio was also very high in that The Paris Club offered very generous terms;
year compared to earlier years. Most figures and ratios seem in contrast to the previous two rescheduling
to have peaked in 1998/99 after which there is a noticeable agreements that provided relief only in terms of
debt flows 11 (as per Houston terms), the existing
improvement. Did the reversal in the trends.come~abo!:!.t

Table 18.2
Pakistan's External Debt Outstanding and Servicing-(Old Format) ($ m)
,, .,. ~·'
V'
v" Debt Debt Servicing
Outstanding
Growth Annual Growth Servicing as as per cent
Total Debt Debt as
Rates Debt Rates per cent Foreign
Outstanding cent of
(in per cent) Servicing (in per cent) Export Exchange
GDP
Earnings Earnings

1993/94 24,482 11.0 3,612 22.7 47.6 54.0 33.4

1994/95 25,318 3:4 4,324 19.7 41.7 55.7 34.9
1995/96 27,094 7.0 4,347 0.5 44.3 52.3 33.9
1996/97 27,863 2.8 5,083 16.9 44.7 62.8 39.3
1997/98 '28,682 6.0 4,670 -8.1 48.4 55.4 34.9
1998/99 30,328 5.7 2,644 -43.,4 51.7 34.9 23.0

Source: State Bank of Pakistan, Annual Reports, various issues, Karachi.

526 Issues in Pakistan's Economy

Box 18.4
How are Pakistan's External Liabilities Calculated?

Pakistan's External Liabilities How much exactly is Pakistan's external debt? This question
End FY00 (US$ million) has evoked a great deal of speculation, conjecture, and wild
guesstimates in the press and elsewhere. The conflicting
I. Public & Publicly Guaranteed Debt 27,654 numbers that have been cited and the resulting confusion
A. Medium and Long term (> 1 year) 27,093
Paris Club 12,428
arises due to differences in coverage, and the categorization
Multilateral 10,767 and measurement of external debt. Minor differences also
Other Bilateral 639 arise from the use of varying rupee conversion rates. Some
Eurobonds* 610 commentators stop at public and publicly guaranteed
NHA Bonds 241
debts, while others include private non-guaranteed debt.
Military Debt* 958
Commercial Loans/Credits 1,100 Most, however, neglect obligations that have to be serviced
Others 350 and/or repaid in foreign exchange. The table provides a
B. Short term (s 1 year) 561 comprehensive and all-inclusive picture of Pakistan's foreign
IDB** 130 exchange obligation.
Other 431
As shown in the table Pakistan's total external debt
II. Private Non-guaranteed Debt 2,842 outstanding on 30 June 2000 was US$32. 7 billion or 53.8 per
A. Medium and Long term (> 1 year 2,842 cent of GDP. If other foreign exchange liabilities such as foreign
Private Loans/Credits 2,842 currency accounts are added, the total external liabilities rise
B. Shot term (s 1 year) 0
to US$37 .3 billion or 61.3 per cent of GDP. Debt servicing on
Ill. Central Bank Deposits 700 account of these liabilities amounted to US$7.8 billion or 95.9
per cent of the country's realized export earnings in FY00. As
IV. IMF 1,550 it was not possible to pay this amount fully and still meet the
economy's demand for imports, more than half the contractual
Total External Debt (I to IV) 32,746
debt servicing had to be rescheduled (Paris Club), restructured
V. Foreign Exchange Liabilities 4,558 (Eurobonds), partially paid (FE-45 deposits), or rolled-over
Foreign Currency Accounts 2,349 (central bank deposits and commercial financing of imports).
FE45 1,072 Contrary to popular perception, the rescheduling agreed by
FE 25 Deposits 977
Paris Club creditors for FY00 was only US$1.3 billion; relief on
Outside SBP 616
With SBP (FE 13) 361 the larger amount (US$2.6 billion) was obtained outside the
FE 31 (incremental) 300 framework of the Paris Club.
Special US$Bonds 1,297 Of the total amount falling due in FY00, US$3.7 billion was
National Debt Retirement Program 156 actually paid out of the country's foreign exchange earnings
Others Liabilities 756
Total External Liabilities (I to V)
and by drawing down liquid reserves. The amount eligible
External Liabilities Payable in Rupees 1,720 for rescheduling/rollover in FY01 is projected at US$2.2
Frozen FCAs 1,572 billion, which is 56.4 per cent lower than the US$3.9 billion
FEBC 109 rescheduled in FY00.
FCBC 36
DBC •, 3

* Provisional numbers Source: State Bank of Pakistan, Annual Report 1999-2000,

** Some of these loans are > 1 & 2 < 2 year maturity. Karachi, 2000, 16.

arrangement is applicable to the entire stock 68 per cent of the total rescheduled, will be repayable after
of US$12.5 billion of Pakistan's bilateral debt 35 years, with 15 years' grace period, and non-ODA debt is to
owed to the Paris Club creditors. Consequently, be repaid over a 25 years period, with a five year grace period
this provided an implied debt reduction without for other loans. Moreover, there has been a 're-profiling of
having ~ HI.PC_ [Heavily Indebted Poor Country] the debt in such a way that it takes into consideration the
status, w;htch is gelleragy <!.ssociated,_with Naples
terms 12 • country's capacity to pay' .13 This rescheduling allowed relief
·of between $2.0-2.8 billion annually in payments of debt
(see also Box 18.5) Basically, the entire bilateral debt of servicing on external debt during the years 2001-05 as Table
Consortium coun~ries has been rescheduled, and this 18.5 shows. 14 To put the icing on the cake, add to this the
rescheduling has been for a far longer period than in the fact that Pakistan has not just had debt rescheduling, but an
past; Official Development. Assistance. (ODA) debt, which is actual debt write-off by many friendly countries, and we have
 Table 18.3a
Selected External Debt and External Liabilities Indicators

Year TED $mn TEL $mn TED to GDP TED to EE TED to FEE TEL to GDP TEL to EE TEL to FEE DS/XGS % RES{TEL
1980/81 35.0 360.3
1984/85 39.2 486.1
1989/90 52.6 414.2
1994/95 47.7 371.4 232.9 61.4 479.0 300.3
1995/96 47.1 358.3 232.2 61.6 695.9 451.0
1996/97 48.4 372.6 233.4 68.0 523.3 327.7
1997/98 32,080 33,840 48.5 356.5 224.9 53.7 394.7 249.1 46.0 2.8
1998/99 32,864 36,600 57.4 446.4 298.9 66.4 517.0 346.2 29.7 4.4
1999/00 32,254 37,918 53.1 395.1 252.9 62.4 464.5 297.3 31.6 3.6
2000/01 32,144 37,159 54.9 360.0 224.3 63.6 416.2 259.3 32.7 5.6
2001/02 33,400 36,532 56.6 365.7 216.1 62.1 400.0 236.4 36.7 13.2
2002/03 33,352 35,474 48.5 364.7 171.8 51.6. 387.9 182.7 22.8 26.9
2003/04 33,307 35,258 36.7 29.9
2004/05 34,037 35,834 31.1 32.6 11.1 27.3 0
28.0 29.2 :::J"
2005/06 37,229 37,265 225.0 117.0 10.0 28.9 OJ
2006/07 40,324 27.3 28.2 233.0 122.0 9.2 33.2 "'O
2007/08 46, 1!31 27.1 28.2 226.0 124.0 8.6
co
....,
-'-
2008/09 5~,331 30.5 32.2 274.0 148.0 13.2 ex:,
2009/10 57,363 31.8 283.0 146.0
2010/11 61,844 s:
D)
Source: State Bank of Pakistan, Annual Report (Karachi: various issues). ..,
(')
I J
0.00 Debt Policy Statements 0
CD
The above indicators are called Debt Sustainability lndic~, now the format and valuation of these variables have been changed, therefore, the news format is provided below. (')
0
::::,
0
Table 18.3b 3
~ends in External Debt Sustaio!lbilltyJ,;idicato_r,~FV 00-FY 08 c;·
0
·, CD
' Interest Debt Debt Total Public EDL!Total
Year EDUGDP EDL/FEE ·, EDUFER STD/EDL
· Payments/FER Servicing/GDP Servicing/FER Debt/Revenues Public Debt ~
FY00 51.7 297.2 1,750.3 0.3 73.0 5.1 173.8 589 61.8 0
"C
FY 01 52.1 259.5 1,146.7 0.7 41.0 7.1 157.~ 631 67.6 3

-
FY02 50.9 236.8 571.0 0.5 16.7 8.6 98.8 562.4 62.5 CD
::::,
FY03 43.1 181.2 329.6 0.5 8.8 5.2 40.5 501.9 56.5 UI
FY 04 36.7 165.0 286.4 0.1 7.9 5.4 42.8 470.1 54.0 ....
(0
FY05 32.7 134.3 283.8 0.8 7.2 2.7 23.5 451.5 52.6 (0
FY06 29.4 121.6 286.8 0.5 7.2 2.5 23.7 389.4 51.8 00
FY07 28.1 124.1 267.5 0.1 7.3 2.1 19.7 370.9 51.0 ~
FY08 27.6 127.2 407.3 1.5 9.7 1.9 26.7 393.7 51.8 ....
0
w
EDL= External Debt and Liabilities
FEE= Foreign Exchange Earnings FER= Foreign Exchange Reserves STD=Short Term Debt (Tl
I\)
Source: Ministry of Finance, Debt Policy Statement 2008-2009 (Islamabad: Ministry of Finance, 2008). .....
528 Issues in Pakistan's Economy

Table 18.4 the acute vulnerability associated with its

Amount of Debt Rescheduling in Pakistan ($ m) [Pakistan's] account for much of the 1990s
has dissipated significantly. This appears to
233.766
be providing the catalyst for a significant
1971-73
reversal of the systemic outflows of private
1973/74 107.166
capital experienced in the previous decade. This
1974-78 650.0 phenomenon, in conjunction with substantially
1977/78 226.303 enhanced levels of official inflows . . . the
1980-82 232.0 restructuring of debt provid[ing] for reduction
1985-88 11.0 of at least 30 per cent in the net present value
1998/99 1987.63 of the eligible debt stock ... is expected to effect
1999/00 1241.70 a significant improvement in Pakistan's debt
2000/01 617.28 situation in the medium term. 19
December 2001 12,500.00
He adds that barring any significant unanticipated deviations*,
Source: Siddiqui, Rizwana and Rehana Siddiqui, 'Determinants 'Pakistan's external public debt will approach sustainable
of Debt Rescheduling iri Pakistan', The Pakistan Devel- levels by FY2007 [2006/07].' 20
opment Review, vol. 40, no. 4, Part II, 2001, 694. *Pakistan's external

an extraordinarily fortuitous situation based on Pakistan's

support for the US invasion of Afghanistan and its War on 18.4 THE GROWING FOREX RESERVES
Terror-see also Chapter 25. 15 . I
While Pakistan's debt situation improved considerably after
The political economy context of debt rescheduling is
9/11, so did the foreign exchange reserves. In 1999/2000
important to add with regard to the 'yery_generous~te_rms~
Pakistan's total forex reserves were $2'.77 billion, which
_offered after 9/11 to Pakistan. Arshad Zaman citing numerous
rose to $7.07 billion by the end of fiscal year 2_001/02, and
examples, and in particular this most recent one, argues that
by June 2003 were $11.48 billion, and expected to rise even
the availability of external credit-and hence further. Moreover, in 2003/04, the Government of Pakistan
the ability to incur external debt-has been was able to retire some of its foreign debt to the tune of $1
determined by the status of Pakistan's relations billion. While the substantial increase in foreign exchange
with the US. In general, the availability of loans reserves allowed Pakistan's international credit rating to
to the government has spiked due to regional improve, thus increasip.g further private and public inflo~s,
crises and has nose-dived due to domestic the most important consequence was the stabilization and
developments .... The availability of US military in fact, appreciation, of the Pakistani rupee .. In 2001/02 the
and economic loans has always had a multiple average US$/Pakistan Rupee rate was $1 equal to Rs. 61.43,
effect in including bilateral and multilateral which had improved to Rs. 58.50 by the end of the next
economic loans. 16
fiscal year. Moreover, the difference between the official and
market rates, which had always been higher, had more or less·
Another bureaucrat argued that 'the_ecopomjc_history of
• disappeared bringing both rates in line. Clearly, compared to a
various developing countries clearly shows_ that
the disbursements of external debts and grants by
the lending countries on bilateral and multilat~ral Table 18.5
·basis as well as rescheduling of debt are linked with Pakistan's External Debt and Liabilities Servicing
p(2!itical. .motives, economic expediencies and loan- (New Format)($ m)
related conditionalities' _17 Kazmi goes on and says that
Rescheduled/
'these rescheduling events and amounts can be linked with Year Actual paid
Rolled Over
non-economic considerations or major political events such
as change of political regimes', and adds that 'incidentally, 1999/00 3,756 4,081
military regimes in Pakistan have generally received above 2000/01 5,101 2,795
average external resource inflows as well as debt reliefs 2001/02 6,327 2,243
[sic]' _1s 2002/03 4,349 2,795
Despite this considerable rescheduling, it is important 2003/04 5,274 2,243
to emphasize that Pa~istan_was still _making substantial 2004/05 2,965 1,908
payments.in .the_form of debt servicing to its creditors, as 2005/06 3,110 1,300
Table 18.6 shows. In 2001/02, Pakistan paid as much as $6.3 2006/07 2,978 1,300
billion, equivalent to considerably more than half of export 2007/08 2,558 1,200
earnings-also see Chi!pter 11; Section 4 for more details on 2008/09 3,986 1,600
Pakistan's external and domestic debt. 2009/10 3,880 · 1,723
Sakib Sherani argued that due to the factors highlighted 2010/11 3,311 1,488
above ( also due to an increase· in foreign exchange reserves) -
Source: State Bank of Pakistan, Annual Report (Karachi: SBP,
various issues).
 Chapter 18 Macroeconomic Developments: 1998-2013 529

Box 18.5 The terms that have been applied to PC-Ill are as follows:
Paris Club Agreement 2001 • Official Development Assistance (ODA) loans-totalling
$8.8 billion-are to be repaid over 38 years with a 15-year
On 13 December 2001, 18 participating creditor countries from grace period, at an interest rate at least as favourable as the
the Paris Club approved Pakistan's third rescheduling deal original concessional rates applying to these loans;
since 1999 (referred to as 'PC-Ill' or Paris Club Ill). Under the • Non-ODA loans (comprising the balance) are to be repaid
agreement, in a major departure from the terms of previous over 23 years, with 5 years grace and progressive payments
rescheduling arrangements, the entire stock of pre-cut-of at the appropriate market rate.
external public debt owed by Pakistan to this group of bilateral In addition, substantial cash-flow relief has also been
a
creditors-amounting to $12.5 billion out of total outstanding provided by the Paris Club members during the period of
of $13.5 billion owed to the Paris Club as of 30 November- the current International Monetary Fund (IMF) program with
was made eligible for restructuring. In the past, the country Pakistan (FY2002--04), as follows:
was provided breathing space only with regard to debt service • maturing principal repayments of post cut-off date eligible
falling due within a specified time frame (i.e. a flow treatment). debt as well as the moratorium interest falling due between
· Hence, for the first time, Pakistan received both a stock and a 1 December 2001 and 30 June 2002 have been deferred for
flow rescheduling. a period of five years, including three years grace;
In accordance with the terms of the agreement (outlined • During the subsequent two years (FY2003--04), 20 per cent
below in this box), it has been estimated that the reduction in of interest accrued, including on the consolidated amounts,
the net present value (NPV) of Pakistan's debt stock owed to will be deferred.
the Paris Club, in terms of estimated current account earnings
All told, it is expected that the current agreement will
for FY2002, amounts to a minimum of 30 per cent. However,
generate an aggregate reduction in debt servicing over
· the actual reduction is sensitive to the interest rate, which
the FY2002--04 period of approximately $2.9 billion (net of
will be negotiated bilaterally. Given that the interest rates on
moratorium interest). Over the course of the next 15 years, the
the bilateral loans are likely to be lowered, the Government
Ministry of Finance, Government of Pakistan expects the total
believes that the net reduction in the debt stock may be to
reduction in debt servicing payments at between $8 billion
. the order of up to 45--50 per cent, in case of concessional
(base case) and $11 billion (if applicable interest rates are
treatment. If, however, the applicable rate of interest on
dropped by around 2 per cent).
these loans is not lowered significantly; at the minimum, the
reduction in the NPV of the stock of eligible debt will be 30 per Source: Sherani, Sakib, Escaping the Debt Trap: An Assessment
cent. This represents an important milestone in efforts to lower of Pakistan's External Debt Sustainability, Asian Development
the debt burden. Bank, Pakistan Resident Mission Working Paper Series No. 1,
(Islamabad: ADB, December 2002), 30.

Salient Features of Paris Club Restructuring

Debt Consolidation Repayment

Loan Group Interest rate Grace Maturity
restructured Date(s) Profile

Paris Club eligible Reschedule As of Nov. 2001 Original interest rate; 15 years 38 years Each payments
bilateral pre cut-off stock interest rates on Each semester
bilateral Japanese loans reduced
concessional loans to 2.4 per cent

Paris club eligible Reschedule As of Nov. 2001 Loan currency specific 5 years 23 years Paris club
bilateral pre cut-off stock CIRR rate.or provided
bilateral non- equivalent proxy repayment
concessional loans Profile

Paris club . Reschedule As of Nov. 2001 Original interest rate; 15 years 38 years Each payments
Concessional Pre. stock interest rates on each semester
Restructure debt Jan. Japanese loans reduced
1999 and Jan. 2001 to 2.4 per cent

Paris club Reschedule As of Nov. 2001 Loan currency specific 5 years 23 years Paris club
Non-Concessional stock CIRA rate of provided
PRO Jan. 1999 and equivalent proxy repaymenJ
Jan. 2001. Profile
530 Issues in Pakistan's Economy

--- . --- --.. - - - ••- m..- -----~~ •••------- - • ••y -U.. -- - ~•

Non-Paris club Reschedule As of Nov. 2001 Original interest 15 years 38 years Each payments
bilateral pre cut-off stock Rate Each semester
bilateral
concessional and
non-concessional

Cash-flow relief Defer 100 Dec. 2001 to Market rate 3 years 5 years ~-equal payments
maturities on post per cent June 2002 each semester
cut off dates Principal and
'interest

Cash-flow relief Capitalize 100 · Dec.2001 to Market rate 3 years 5 years -A equal payments
interest payments per cent interest June 2002 each semester
due on restructure
amounfs. Capitalize 20 July 2002 to Market rate 3 years 5,years 4 equal payments
· per cent interest June 2003 each, semester

Capitalize 20 July 2003 to Market rate. 3 years 5years_ 4 equal payments

per cent interest June 2004 each semester

Source: State Bank of Pakistan, Af!nua/ Report 2001-02 (Karachi: SBP, 2002), 147.

near_bankruptPakistan.in.L.9.9~ much had changed-see Traditionally, the Gulf States have been the main sources of
ilia Box 18.6. ·· -~ remittances into Pakistan. Saudi Arabia sent between 35--45
There were two or three factors which resulted in this per cent of the remittances in the 1990s, the UAE about 17
unprecedented growth in foreign exchange reserves, showing per cent in 1999/2000 and Kuwait 15 per cent in I 999/2000;
an increase of a quite phenomenal 120 per cent within one · Britain provided about eight per cent of total remittances,
year: between 2001/02 and 2002/03 State Bank of Pakistan and the US a maximum of 13 per cent in 1996/97, which had
~rves rose from $4.33 billion to $9.5.2 billion. 0~ 0c::..tg_r- begun to fall thereafter, and was 8. 75 per cent in 1999/2000.
had been an increaii'e in Pakistan's exports, crossing $ IO However, follu~ving 9/11 there was a dramatic gggge in both
billion for the first time ever in 2002/03. With a rebound of volume anl composition of remittances.
the global economy and a greater access to :S:usQpe_an .1u:1d_ In 2002/03, the Pakistanis in the US remitted US$-l. 723 7
UJ markets with quotas being-increased, it was likely that billion, which was fifteen times the amount sent from the US
this would happen and continue. A second important reason in 1999/2000, just three years ago! This trend of substantially
had been the State Bank's purchase-of foreign° currency increased remittances from the US had begun in 2001/02,
from the kerb market. The State Bank became one of the with $778 million sent, which was ten times higher than the
most important buyers of foreign exchange, and bought paltry $79 million sent in 1999/2000. In 2002/03, the US with
substantial amounts in the years since 1999/2000. However, this substantially increased absolute amount of remittances,
it has now ceased this practice and did· not buy any foreign now provided as much as 29.53 per cent of remittances to
currency in 2002/03 ( Thirdly, with debt rescheduling," interest '- the $4.236 billion total, the highest amount ever received
payme.nts had also been-reduced, ailowing the State Bank by Pakistan. Another significant development was that in
tohold on to and increase, its reserves. It is important to 2002/03, Saudi Arabia's contribution had fall~n markedly:
point out that the more r~liable and traditional forms of from providing almost half Pakistan's total in the past, Saudi
inflows, such as foreigr1 -direct investment, had ·absolutely no Arabia provided a mere 13 per cent.
signi.fitance on increasing foreign- exchange reserves, as they The reasons for this unprecedented amount sent by
have in many other countries. Perhaps this is a matter of Pakistanis from the US followed by -Pakistanis in the UAE
concern regarding the sustainability of the increase in foreign (20 per cent of total remittances in 2002/03 ), was a result
exchange reserves, especially if we consider '"the main cause purely of post-9/11 developments. The US government started
for the substantial increase, particularly in _those fiscal years.
,..Remittances
..... have been a reliable sou·rce ·of
exchange earnings for Pakistan since the late 1970s. In
foreign
scrutinizing accounts of Pakistanis and Muslims in the US,
investigating funding for al-Qaeda type organizations. In
order to avoid such investigations and in fear of their sa.vings,
---
the l.2§0s, particularly, remit;.~nces ro!.e to_ very substantial . many Pakistanis sent mon!yJ_o_ 13._kistan which they would
levels equivalent to around 7 or _8 per cent of GDP in single have preferred to keep in_the US. The same sort ofscrutiny had
years. Howe,ver, since the early 1990s, and after the first also begun in the UAE, and hence the increase in remittances
Gulf War and due to structural shifts in labour demand in f§m there. Moreover, the ir{formal foreign exchange transfer
the Gulf States, the main area from where Pakistan received mechanism, the hundi, which has been providing the main
remittances, remjttances fell substantially-see Table 18.1. share of remittances to Pakistan from -the Middle East,
 Table 18.6
Overall Reserves as per BOP
(million US Dollars) per cent Share

FY00 FY01 FY02 FY03 FY00 FY01 FY02 FY03

Opening balance 2,370 2,163 3,244 6,398

Inflows 16,835 20,020 22,228 25,327 100.0 100.0 100.0 100.0
Exports of goods ~- • 8,190 8,933 9,140 10,889 48.6 44.6 41.1 43.0
Export of services (excluding fnterest) ' 1,396 1,367 1,929 2,801 8.3 6.8 8.7 11.1
of which: UK for logistic support 0 0 300 847 0.0 0.0 15.6 30.02
Workers' remittances 983 1,087 2,390 4,237 5.8 5.4 10.8 16.7'
Kerb market purchases 1,634 2,157 1,376 0 9.7 10.8 6.2 0.0
.Foreign direct investment 1 473 286 366 585 2.8 1.4 1.6 2.3
0
Foreign portfolio investment 73 -140 -8 22 0.4 -0.7 0.0 0.1 :::J"
0)
Loan disbursements 1,588 2,740 2,910 2,392 9.4 13.7 13.1 9.4 "O
Privatization proceeds , 0 0 117 186 0.0 0.0 0.05 0.7 ro
~

Official grants,.,... 940 842 1,500 _.,

1,014 5.6 4.2 6.7 4.0 (X)
Other receipts 1,558 2,748 2,508 3,201 9.3 13.7 11.3 12.6
Outflows 17,042 18,939 19,074 20,058 100.0 100.0 100.0 100.0 s:
I»
Imports of goods 9,602 10,202 9,434 11,425 56.3 53.9 49.5 57.0
Imports of services (excluding interest) 2,160 2,332 2,214 2,733 12.7 12.3 11.6 13.6 ...0
0

Interest payments 1,352 1,369 1,111 974 7.9 7.2 4.9 (D

5.8
"
Amortization of official loans 1,174 1,202 967 1,228 6.9 6.3 5.1 6.1
0
0
::I
Profit and dividends 233 301 457 631 1.4 1.6 2.4 3.1 0
Purchase of crude oil 187 312 394 473 1.1 1.6 2.1 2.4 3
Principal repaid on private loans 591 512 584 646 3.5 2.7 3.1 3.2
c;·
Foreign exohange liabilities liquidated 494 1,940 3,590 1,192 2.9 10.2 18.8 5.9 C
(D
Swaps ' 0 866 441 235 0.0 44.6 12.3 19.7 <
(D
Other payments 1,249 769 323 756 7.3 4.1 1.7 3.8 0
Net inflows -207 1,081 3,154 5,269 "C
Gross reserves at end of period 2,163 3,244 6,398 11,667 3

-
(D
Sinking fund* 0 0 0 920 ::I
Net foreign exchange reserves v 2,163 3,244 6,398 10,747 !'!
..I,
(0
· * SBP has also built up a sinking. fund of US$920 million (SBP: US$730 million and commercial banks US$190 million) through the purchases of foreign currency lending from the (0
CC)
interbank market for extinguishing central banks deposits placed with SBP or prepayments of other expensive loans.
Source: State Bank of Pakistan, Annual Report 2002-2003 (Karachi: SBP, 2003), ·185. ~
0
..I,
w
U'I
w
..I,
 532 Issues in Pakistan's Eco~omy

Box 18.6 FY)) essentially reflects the impact of both, debt creating and
Foreign Exchange Reserves Accumulation: non-debt creating flows.
The orderly management of the forex market by the SBP
1999-2003 until FY01 and the uptrend in the foreign exchange reserves,
despite the floatation of the rupee on the interbank market,
The profile of Pakistan's liquid foreign currency reserves has
helped restore market confidence and allowed the central
witnessed substantial changes over the past five years; not -
bank to, once again, gradually liberalize the exchange rate
only has the level of the gross reserves risen substantially,
regime. It '!'as in this environment that the post-11 September
from the paltry 930 million by end June 1998 to the US$11. 7
accelerated remittances flows through the banking channels.
billion by end June 2003, the quality of the reserves is also
The sharp growth in workers' remittances through formal
considerably improved.
market during the last two years had led to an increase in its
During the 1990s, while private individuals were permitted
share of total inflows from a meagre 5.8 per cent in FY00 to
to maintain foreign currency accounts with commercial banks,
16.7 per cent in FY03. The increase in remittances is more
the latter were required to surrender the resulting forest
a change of route than an actual increase as is evident from
proceeds to the SBP, adding to the country's forex reserves (as
the changing shares of both the remittances and the kerb
well as increasing the claims on these reserves). Until FY98,
purchases in the overall inflows. The shares of the two when
the strong net inflow into the private accounts was one of the
combined are almost unchanged since FY00, reinforcing the
most significant contributors to the country's forex reserves.
view that the workers remittances are in face now flowing
However, since Pakistan's external account remained in
through the interbank market rather than the kerb market.
deficit, which in turn was financed by the SBP, the forex
In addition to the changes in workers remittances, the
reserves available to the latter rarely reached above US$1
substantial improvement in goods trade-especially the exports,
billion, despite substantial external borrowings. At the same
has led to a •sizable decline in the net outflows on this account.
time, the claims on the forex reserves, represented by the
Another important source of the accretion in forex reserves
growing stock of private accounts, also rose to over US$11
since FY01 has been the resumption of large borrowings and
billion by May 1998. In_ short, the entire stock of Pakistan's
grants. However, in contrast to the recent past: (1) the loans
forex reserves, until FY98 was, in net flows, effectively through
are on concessional terms, and (2) while significant, the share
the creation of debt and liabilities.
of these in total annual reserve accumulation is lower.
This changed in the immediate aftermath of the May 1998
Finally, there are two noticeable changes in forex outflows
N-test, which precipitated a financial crisis and a freeze
during FY02 and FY03. First, the share of interest payments
on withdrawals from existing private forex deposits. The
has been on the decline sharply, reflecting the effects of
consequent loss of confide·nce led to the sharply lower inflows
external debt management policies. Second, a significant
through deposits (from US$1_476 million in FY98 to US$322
portion of external liabilities has been terminated giving a
million in FY00) and a substantial reduction in remittances
permanent reprieve to a country.
(from US$1490 million in FY98 to US$983 million in FY00),
In effect, post-11 September the forex reserves have risen
even as international sanctions constrained access to IFI
iargely on the back of non-debt creating flows, and the claims
credit. Thus, the stabilization of forex reserves during FY99 and
on these reserves have also declined sharply. In other words,
FY00, essentially reflected demand management by the SBP in
the reserves have improved substantially in terms of both,
the formal market, as well as increased reliance on the informal
quantity and quality.
market (e.g. kerb market purchases, that were not undertaken
in prior years, totalled US$2165 million by FY00). Thus, the Source: State Bank of Pakistan, Annual Report 2002-2003
net increase in the country's forex reserves between FY98 and (Karachi: SBP, 2003), 184.

also came under scrutiny. To appear legal and to avoid

,
18.5 DID THE ECONOMY TURNAROUND?
complications with. the authorities, many Pakistanis sent
back money through the formal banking sector. Furthermore With growth rates at their highest levels since 1995/96-5.1
the State Bank of Pakistan and its commercial banks also per cent in 2002/03 and 7.5 per cem in 2003/04, the inflation
took additional measures to capture the hundi market and rate down to its lowest in almost fifteen years, the fiscal
since the differential between official and market exchange deficit at its lowest in almost two decades, with femittanc_es
rates had been largely eliminated, were able to divert some at their highest levels eyer,. with_ exports crossing the $10
funds away from the hundi market. ~evertheless, the main billion mark for the first time and showing signs of further
reason for this huge surge in remittances, were related to growth-the goverriment started claiming that the economy
post 9/11 developments)(Pakistan was one of many countries had rebounded, that there had been a 'turnaround' and that
a
. where there has been surge in foreign exchange reserves. the gciod times had returned. Ev:en the stock market soared
See Appendix 18.1 for an interesting argument. which to inconceivable levels,.' setting. new records every week.
explores this phenomenon with regard specifically to India, Pakistan was finally out of the rIBnous decade of the 1990s
but raises some generic issues of ~oncern, especially those · and set on course for growth and development, ~uch was the
rela_t~d to a moral hazard.) sentiment__.:._see Box 18.7 as one example of numerous such
., .
 Chapter 18 Macroeconomic· Developments: 1998-2013 533

Box 18.7 ago. Credit here must al.so be given to prudent economic
Pakistan's Economy: A New Turning Point management (which some may term as 'over cautious') which
certainly facilitated the turn around. But few would dispute that
Luck and good fortune have always played an important part in the critical factor has been 'old lady luck' which had deserted
determining the economic fate of most countries. And Pakistan us during most of the 1990s.
has had over the last fifty years its share of such fortuitous The real test of Pakistan's economic managers will come
tidings. now. As long as a country works under an IMF/World bank
The Korean boom in the early 1950s negated not only the adjustment program there is little room to manoeuvre. You
adverse effects of Pakistan not devaluing its currency when mostly follow that you are told to do whether it is fiscal or
Indian did in 1949, but the resulting rise in prices of raw monetary management of the economy. Now that there is an
materials generated the surpluses that financed Pakistan's opening in terms of both 'fiscal space' and a foreign reserve
initial industrial development. Large increases in foreign aid 'cushion'. How we use this to ignite growth and reduce
and loans bank rolled Pakistan's economic boom in the first poverty will be the yardstick on which the performance of our
half of the 1960s. The 'miracle' high yielding varieties of seeds economic managers will be judged.
of the 'green revolution' provided the much needed boost to Good economic management requires a feel, and good
a stagnant agricultural sector and the resulting increase in understanding, of the intricate dynamics of how the Pakistan
food gain production was able to fed and sustain a population economy functions and what makes it tick. It also requires
growth of over 3 per cent-amongst the highest in the world. drawing the right lessons from our recent economic record.
The large inflows of remittances from migrants to the middle- The situation which led to the freezing of foreign currency
East in the latter half of the 1970s and through the 1980s accounts and for which most Pakistanis abroad have still
provided the much needed foreign exchange to pay for .the not forgiven the government must never be recreated. The
three-fold increase in oil prices following the 1973 Gulf war 'dollarization' of the economy, which a premature open
and were perhaps the single most important factor in reducing convertibility of the rupee and foreign capital transfers did
poverty levels in the 1980s. immeasurable damage to the economy, not least in facilitating
Then came the 1990s and it appeared that 'lady luck' had flight of capital. Finally allowing economic decisions making
deserted us. Remittances fell. Out migration drastically slowed to be dictated by purely political expediency forced us into an
down. Agriculture production was hit by pest attacks on cotton economic situation and corrective adjustment program which
our major export earner. Drought and water shortages further will take many years to fully recover from.
ground the economy. The country faced a mounting foreign The people of Pakistan have suffered with great fortitude
and domestic debt. Poor economic management as political and patience the ill effects of a severe structural adjustment
considerations dictated unsound economic decisions made program, especially in the form of higher utility prices and
matters worse. Under these poor and deteriorating economic rising unemployment. The new economic scenario now
conditions Pakistan entered into an IMF/World bank supported provides an opportunity to 'reward' them for their patience. Let
structural adjustment program which left the country reeling me offer some suggestions:
with poverty levels doubling to over 30 per cent (for the first - use the stability of the foreign exchange rate as the
time higher than in India) and the economy grew in the 1990s fulcrum on which the recovery should rest. A stable
at half the 'Pakistani growth rate' of over 6 per cent of the foreign exchange rate generates investors confidence
earlier decades. both domestic and foreign and helps ward off inflationary
Then the unexpected happened. Foreign remittances which pressures.
had been around $1 billion over the past many years showed - do not be in a great hurry to 'sterilize' the increase
an upsurge in the past two years and dramatically increased in foreign exchange inflows including through retiring
to $4.3 billion in 2002-03, the result of tightening controls foreign debts.
on illegal transfers and scrutiny of foreign accounts in most Let the flows work themselves through the economy-even if
countries. Even if we assume that another $1 billion was earlier the first round effects are directed at increasing prices of real
entering the economy through un-official channels (as earlier estate and stocks-the second and. subsequent round effects
studies had indicated that around 57% of remittances came will stimulate growth in the 'real' economy'and stimulated new.
through official channels), the net increase in remittances investment to meet demand.
injected about $2.5 billion into the Pakistan economy. This - Do not be overzealous in either 'privatization' of public
amount is almost equal to the current annual development assets or in ··policing' the private and public sector. As
plan (ADP) of arounel Rs. 160 billion and around 3.5 per cent of re1;iards the fol'mer, cle~rly weight costs and benefits and
Pakistan's gro'Ss national product (GNP) of around $70 billion. alv,.ys rerryember the only real security a worker has in
But this was not·the only favourable 'ch;mge io Pakistan's this country is his job. As regards the latter it is important
economic fortune. Rescheduling and retirln>J of for.eign debts to remember that no 'economic boom' has blossomed in
~estimated present value of around $1~ billion), inyi:ease an atmosphere of fear.
1n export quotas mainly to the European Wnion and better
weather conditions have placed us in an ~conomic position
which few would have thought we would ~ few. ye~rs Source_: Rashid Amjad, in The Nation, Lahore, 6 October 2003.

'- I
'
-
 534 Issues in Pakistan's Economy

I
Box 18.8 releases resources for investment or consumption without
Policy Ol>tions: Helping or Hurting the Poor? future liabilities, while debt rescheduling transfers liabilities
to future generation. This liability can be neutralized if the
Reduction of ttte budget deficit, current account deficit, savings resources released are employed for the creation of income
deficit, or the rate of inflation are all laudable macroeconomic generating assets.
stabilization objectives. However, the way in which these The savings deficit can be lowered through an incre~se in
targets are achieved has different distributional implications. savings or decrease in investment·. The 'increase in savings
There exists a range of policy options to achieve given ends, can be employed to finance investment, which is likely to
some of whicn are pro-poor and others which are not. generate employment and income. To the extent that the
For example, raising revenues or reducing expenditures increased output is exported, there is a positive impact on the
can l9wer the budget deficit. Revenues can be raised through current account. A decrease in investment reduces output,
direct taxation or through indirect taxation: the former impacts employment and income. The contraction in output may also
the rich, while the latter largely impacts the poor. Expenditur~ impact adversely ori exports and on overall growth.
reduction can be attained through cuts in -current expenditure Inflation can be lowered through controlling cost-push
or through cuts in development expenditure. The former or demand-pull factors. The former involves intervening on
impacts on existing employment, while the latter impacts the supply side and reducing the cost of production, which
on employment generation. However, while development tends to enhance product competitiveness The latter involves
expenditure is likely to crate assets and a future stream of intervening on the demand side by curtailing both purchasing
income, current expenditure is likely to be consumptive. power and consumption. Where consumption levels are
Generally, labour productivity in employment, generated already below subsistence standards, further reductions can
through development expenditure, is likely to be higher in have adverse effects on nutrition and health, as well as on
employment generated through current expenditure. Thus, social stability.
while employment on account of development expenditure Two instances can be cited as to whether a policy response
may be pro~uctive. As such, switching expenditure from _in pro-poor or otherwise. The Pakistan economy faced a
current to development he1ds may increase employment and major challenge in the aftermath of the nuclear tests and
incomes, and re~uce poverty in the future. the ensuing sanctions. A series of policy responses were
The current account deficit can be lowered through changes .contemplated. Policymakers proved to be sensitive to the
in both the trade and non-trade related categories. With impacts on the poor and, while the poor were a target, the
respect to trade categories, the current account deficit may be negative effects were minimized. For example, in response to
reduced on account of higher export receipts or lower import the slide of the rupee in the foreign exchange market, a dual
payments. The changes may be the result of an increase in or multiple exchange rate regime was adopted during the
the value or volume of exports or a decrease in the value or peak period of the crisis. The move was not sanctioned by the
' volume of imports. IMF, but was risked nevertheless to protect consumer prices
Higher export receipts on account of higher value of exports of essential imports like petroleum oil and lubricants (POI-),
are likely to accrue more foreign exchange for the same pharmaceutical products, edible oils, pulses,· etc. In contrast
level of output, as well as enhancing incomes for exporters present day policymakers have tended to bow to international
and generating growth. Higher export volume is likely to creditor pressure and have followed an implicit policy of
generate more output and employment, leading to higher exchange rate depreciation without sufficient consideration of
income. Lower import volumes, at· Pakistan's current level the impact on essential commodity prices or accompanying
of development, are likely to be reflective of recessionary measures to protect the poor. An indicator of such insensitivity
tendencies,, i.e. a slowdown in economic activity, and impact is the slapping on of a sales tax on medicines.
'adversely on employment, income and growth.
With respect to non-trade categories, the current account
deficit may be reduced through lower debt servicing on Source: Social Policy and Development Centre, Growth,
account of debt retirement or write-offs or rescheduling. Lower Inequality and Poverty: Annual Review 2001 (Karachi: SPDC,
debt servicing on account of debts retirement or write-offs · 2002), 30.

articles appearing daily in the Pakistani press, and Box 18.8 account of the Paris Club rescheduling, it also meant that the
for a somewhat different perspective .. a
pressure on the economy, at least for few years, had been
There was no disagreement over the claim that the economy eased;. There was also no denying ~\UJ:!at this changt_
h-~ done far better. since 2000/0), than it had for many years. · had taken place on account of the developmeIJ.ts.glp]laliy
In fact, one could predict that it was very probable, that this af!.d particularly, in the region, on account of 9/11. What was
trend would continue into the next two or three years as questionable, however, was the claim that Pakistan was out
well. T~~ growth rate was likely to be above 5 per cent for the of the woods, headed for sustained development and growth.
next few years, exports would probably not fall below the $1 O -The reasons for this scepticism rested on a number of
billion mark, and with the substantial fisca~ space created on factors. One reason was that the reco_veI_Y that had taken
 Chapter 18 Macroeconomic Developments: 1998-2013 535

place in Pakistan, had taken place on the back of high president, the Caretaker ·governm_ent under Musharraf, took
remittances, "11vhich were likely to subside to much lower numerous poor decisions where politics trumped economics,
levels than those seen in the fiscal year 2002/03)This meant in an attempt to get Musharraf's King's Pany, the Pakistan·
that addition.al foreign exchange reserves were likely to have Muslim League Quaid-i-Azam, re-elected in a power sharing
lower rates of increase, since remittances were a key factor agreement with Benazir Bhu.t-to's Pakistan Peoplfs Party.
causing the increase, A second reason was that, once the Numerous deals were struck between both leaders to ensure
WTO regime took effect, with a quota-free· textile· world, a smooth .transition of so called 'liberal' forces, and the·
Pakistan would faced greater competition and would not be documents and evidence from that time nave-revealed how
allowed the privileged access granted after 9/11 to the US individuals from the UK government and from the United·
and to Europe. This may result in the growth rate of exports States, were involved to ensure such a coalition government-
slowing down and resulting. in a possible deterioration of th~ see Chapters 26 and 27 for the P2!itics o!._tb,e..!!_me and what
much improved current account balance. Besides, with 65 per such arrangements meant for the post Mushai;raf and post
cent of exports being textile-based, a more serious crisismay military transition: In this Section·, we look at how economic
have been overlooked by the increase i.n exports in 2002/03. decjsions were affected by political developments. 23 ·•
Poverty in Pakistan continued to be a major concern, In this chapter we l1ave shown there is little disagreement
with almost a third of the population below the poverty over the fact that the Pakistan's economy showed some
line. Unless GDP growth stayed above the 5.5 per cent level re_markable positive trends-iii thekei indicators during
for a number of years, it was improbable that Pakistan the 2002-07 period when General Pervez Musharraf was
would see any decrease i1_1 poverty levels. 'one of the main in power-see Figure 18.1. The single most important
problems facing Pakistan was that of job creation and poverty ilfubute..9f Pakistan's e~onomy throughout_the 1990s was
alleviation based on active private sector investment.':rhis its excessive and severe debt burden. In 2001/02, external
was particularly important because the P.Ublic sector has been debt was equivalent to 57 per cent of GDP, and domestic debt
withdrawing from productive activities and.had been:Cutting accounted for 43 per cent. Hence, the overall o~t~nding
down, as well as privatizing, its assets. The government ' debt was about the size of the GDP, with foreign debt
still insisted on further reducing the fiscal deficit to below se"i-vici~g alone, in 2001/02, equivalent to as much as 10
4 per cenl of GDP, restricting resources for development. per· cent of GDP. Pakistan was paying_a huge share -of
Moreover, 'in real terms, overall pri~ate fixed investment has its foreign exchange income each year as debt owed to
remained virtually stagnant for much of the_l 990~, while fonjgn institutions and countries, leaving little for domestic
fixed investment in large-scale manufacturing has exhibited c:l.evelopment. By 2006/07, domestic debt had fallen to 30 per
a secular declining trend during the period'. 21 Sherani cent of GDP, and foreign debt servicing was less than 5 per
continued, 'the failure to elicit an investment response from c,ent of GDP. On account of agreements reached with bilateral
the private sector despite a significant degree of structural· and multilateral donors following 9/11, huge amounts of
adjustment undertaken has been the weakest links in debt were either written off or rescheduled, allowing the
Pakistan's efforts to forge sustainable economic development. }1usharraf regime unprecedented fiscal space to play with
(h.s would be obvious, the low level of investment represents every year. It was the access to these funds and the fact that
a key constraining factor for the long-term prospects of the debt servicing had slowed down remarkably, allowing-foreign
economy'?; Table 18.1 shows thatinvestment between 2001- exchange earnings to accumulate, and that large amounts of
, '--
03 was only 13 per cent of GDP, far lower than earlier trends, multilateral and bilateral aid was made available, which was
and probably the lowest since the late 1950s.' , the key reason why the economy turned around so sharply.
There was a debate between those who felt that Pakistan's
economy was iliowing signs of a turnaround, and those Figure 18.1: Growth Rates 1999-2009
who cautioned against such optimism, since most of the
,l fundamentals were still weak. Critics argued that the.boom 12
or turnaround was _based on false foundations, and a
10
bubble had been created which was eventually going to
burst. Subsequent developments showed how artificial and 8
temporary.the so called.turnaround actually was. 6
4
2
18.6 MusHARRAF AND AFTER:
0
2004-2008 -2
Many of the issues raised in 2005 in the Second Edition of -4
1999-2002 2002..:.07
Issues, partially reproduced in Section 18.5, questioning the so
called 'turnaround', became more real towards the end of the □ GDP C Agriculture □ Manufacturing □ Servltes
Musharraf government's tenure, and later when Musharraf's
Caretaker government (November 2007 to March 2008) These factors allowed the growth rate to rise_to..2.per cent in
took over. Since Musharraf was still President of Pakistan, 2004/05, the highest in two decades, which followed a growth
although he gave up his uniform and became a civilian ~ate of 7.5 per cent in the previous year; the fiscal deficit was
536 Issues in Pakistan's Economy

near its lowest in almost two decades, remittances were at of the growth during ~J:!.i~period was, however, stimulated by
their highest levels ever, exports crossed the-$ 11 billion mark domestic demand while exports growth remained lacklustre
for the first time. The government claimed that the economy and although the growth of exports rose by 10.2 per cent,
had rebounded, that there had been a 'turnarou°iid' aii:d that the current account deficitl2006/07 rose to 5 per cent of GDP
good times of high growth and high human development compared to 4.4 per cent in the previous ·year. The strong
had returned. inflows in capital account more than offset the current
Following the 2002-07 period, it was believed by many, that account deficit and added to the stock of foreign exchange
Pakistan was finally out of the ruinous decade similar to the reserves which reached $16.7 billion at the end of the year.
1990s and was set on course for growth and development on The total foreign investment reached an all time high in the
its way to achieving extraordinary, and sustained, economic country's history and amounted to US$8.42 billion as against
prosperity. Despite exceptional and unanimous support from US$4.48 billion in 2005/06 and U~S$1:-67 billion in 2004/05.
the international diplomatic and donor community, with little Foreign direct investment (FDI)-an important component of
political opposition at home, and with uninterrupted stability foreign investment-amounted to US$5.l billion in 2006/07.
and control of government unlike the eleven changes of This strong surge in foreign investment was concentrated in·
government between 1985-99, these few years of remarkable four major sectors, i.e. telecommu;;-ication, energy, bankmg
growth, quickly unravelled. and finance and food"7i.nd beverages, and accounted for 80
The boom of the Musharraf years was built upon false per cent of the FDI inflows. The origin of FDI inflows w_as also
foundations, largely consumer-led growth and-investments concentrated among five major sources, namely, UAE, USA,
in the speculative-real estate and stock market-sectors, UK, China, and Netherlands·. Tllis strong performance of the •
with remittances and foreign aid driving this growth. What economy became unsustainable beyond 2006/07, because of
was missing was a long-term strategy and direction needed to the confluence of numerops political factors-see Chapter
guide this money being sent to Pakistan into more productive 27-and the economic factors discussed below.
sectors. Banks, awash with excess liquidity, were eager to The drying up of capital inflows and the withdrawal of
lend cheap money for consumption to the growing middle portfolio investment from the stock market, as a result
class, without perhaps taking cognizance of future repayment of political uncertainties and the deteriorating security
prospects,- This consume;led boom did signal activity in the situatiorl, after the intensification of the War- on Terror,
manufacturing sector with demand for cars, motorcycles, and further exacerbated the economic decline. As a result, rising
other items increasing, yet the large inflows helped create a fiscal and.current account imbalances necessitateil.adomestic
bubble, which eventually burst. stabilization programme withthe help of ari IMF Standby
The fiscal space that was created allowed the government Agreement (SBA). The SB_A of{7.5 billion was approved for
to provide the much needed infrastructure, and indeed roads one year by the Executive Board of the IMF on 24 ~ovember
were built and communication networks advanced, but these 2008, and was augmented to $11.3 billion and extended
developments were unable to keep pace with the increase in through to end-2010-see Section 18.7. However, the ~BA .
demand. The success of the consumer boom may have caught loan while helping the short.run stabilization of the economy
the government unawares in providing resources needed for increased the· external debt stos:!< and limited the room for
the demands of the middle classes with their consumption fiscal expansion, as had happened in the period after 2002.
needs. The best example of this is the h~g~ d~mand in ·the inability, or reluctance, to deal with the speculative
power consumption which emerged as a consequence in bubble that was emerging in the economy around 2007,
the high spurts of economic growth, which the government along with political activity and the subsequent rise in oil
was unable to meet, resulting in extensive shortages of ·and fuel prices, was a key factor which brought the economy
electricity affecting domestic manufacturing and industry. to a halt in 2008, with the growth rate of a mere 1.2 per
Persistent inflationary pressures and weak performance of cent per annum. Furthermore, the IMF stabilization package
key-sectors of the economy and emerging bottlenecks in resulted in considerable belt tightening and stabilization at
infrastructure particularly in the power sector, the surge in the cost of growth and employment. The fiscal crisis of the
global commodity prices, especially in oil prices, led not only state returned with debt increasing, and the fiscal space of
to an unprecedented rise in inflationary pressure bufalso the 2002-07 period was squeezed with the Public Sector
made the balance of payments position very vu_lnerab~e. The Development Programme being cut considerably.
downside impact of the boom years has been the evidence While many of the core economic indicators of the
of growing income inequality among the different income Musharraf period between 2002-07 did remarkably well,
groups. perhaps the greatest disappointment with the Musharraf
Pakistan's average real GDP growth rate during 2004-07 government, at least regarding the economy, was that it did
at over 7 per cent per annum, stimulated by monetary and not do enough and was caught up in a PR-Public Relations-
fiscal policies, was amongst the best recorded in recent 'image' game, citing numbers from the economy showing
decades. This welcome i~rovem~nt _in macroeconomic growing consumption and speculative investment. Another
performance was the result of a confluence of fortuitous · re"ason for the failure of the Musharraf government was the
circumsti!nces including a strong influx of external capital windfall which accrued on account of debt rescheduling-
fl~~- both private_ar!_d public and a benign international thus creating a huge fiscal space-was that not enough was
economic environment, along with favourable weather made of these fortuitous circumstances, and all these short-term
con-ditions contributingto high growth in agriculture. Much gains were squandered away in conspicuous consumption.
 Chapter 18 Macroeconomic Developments: 1998-2013 537

I
It was a rare opportunity for any government to have access international food prices had been rising along with the
to such possibilities and such riches,' but the Musharraf- price of oil, and this was causing inflationary pressure on
Shaukat Aziz government lqs_t the opportunity to transform :eakistan. The Caretaker government did not want to take

I
these possibilities to put.Pakistan on a long-term, high_:-_ any unpopular measures which would have improved the
growth, devek~pl!lent path. \ economy in the longer term, but would have cost them the
Musharraf's Caretaker government is remembered more election and the vote. The Pakistan Economic Survey in 2008,
for what it did not do, than for what it did, even in the few summarized many of the issues which had been avoided
weeks it was in office. '[he growth rate in 2007/08 was at 3.7 ~arlier and ,:Yere to)ater trouble the .new.government for
per cent, less than half just a year earlier, and while there were some years to come:
numerous factors which resulted in this_ fall, the role of the
Caretaker government was critical. For political reasons, 2007 Failure _to pass on the increases in the
had been a particularly ~nse year. Events such as the sacking international prices of oil and food to
of the Chief Justice of Pakistan by General Musharraf, led to domestic consumers severely affected current
.expenditures as the government continued to
the lawyers' movement. In the summer of 2007, the Pakistan
finance these increases through the budget,
army stormed the Lal Masjid in Islamabad killing scores, if with subsidies rising to an - unsustainable
not hundreds of students and teachers, as well as militants. level. A subsidized power tariff also added to
~s a consequence of the Lal Masjid attack and also because the slippages. The extra-ordinary increase in
of the continuing War on Terror, the security situation in development spending was not consistent with a
Pakistan began to deteriorate from 2007 onward_i) There was stable macroeconomic framework. The increase
also a political and popular movement against Musharraf, infiscal deficit coincided with a sharp decline
which led him to imp2se an Emergen_cy in November 20Q_7,, in the external financing flows. Consequently,
almost as severe as a Martial Law, where draconian measures the government was forced to rely on SEP for
curtailed voices of protest against an increasingly unpopular budgetary financing. Government borrowing
from the SEP has reached an all -time high, •
General-President. These political factors coincided with the
leading to excessive monetary expansion and
end of the tenure of the 2002 Parli·ament, which required thus becoming one of the principal sources of
elections to be held and a Caretaker government put in place inflationary build up in the country. In other
to oversee elections. However, in addition to all these factors, ~ords, financial indiscipline during· the year,
was the start of a growing international economic crisis, some mainly on account of political expediency,
aspects of which had emerged prior to 2007. ·· has already caused severe macroeconomic
Prices of international commodities, particularly oil and imbalances, for which, Pakistan is likely to
essential food crops, had begun to increase, with the price pay a heavy price in terms of deceleration in
of oil alone, increasing from $93 a barrel in the middle of growth and investment, and the associated rise
November when the Caretaker government took office, in poverty; the w_idening of currenf .account
deficit and the attendant_rise_in_puplic and
to $1 !0 by the middle of March when the new incoming
external debt; a loss•·of foreign exchange· reserves
government took over. Earlier, in ~}d-2007, the price of oil_ and the associated pressure on the exchange
was around $60 a barrel. The international price of oil almost rate, and most importantly, higher inflation and
doubled at a time when Pakistan was facing many_ political the acco~panying rise in interest rates. There is
disruptions and transitions in the critical nine-month no better way to explain the central importance
period. With Musharraf becoming increasingly unpopular of fiscal discipline in promoting growth and
and an election around the corner, his governments were investment. Fiscal year 2007---08 has reminded
interested in creating favourable conditions which would us clearly that even one year of fiscal indiscipline
have allowed his PML-Q to gain a majority in the elections is enough-to damage several years of efforts to
to be able to form a government with Benazir Bhutto's restore macroeconomic stability. 24
People's Party. This would have meant that the price of oH
. The nonpartisan Institute of Public Policy (IPP) in Lahore,
domestically, would not have been allowed to increase in line·
shared the same sentiment:
with international prices, ·a popular move, but with serious
negative consequences for the economy overall. While the As outlined in some detail in IP_Py_last Y!ar' s
international price of oil doubled between Jamiary 2007 and report, the worsening of economie balances
March 2008, it increased by only 9 per centJor-the,l'akistani had-already started in 2006 but gathered great
consumer. While both the Musharraf governments were momentum during 2007 and 2008. Oil prices
responsible for subsidizing this increase, it was the Caretaker continued to rise steeply, and international
government which faced sharper price rises and chose to put commodity price inflation spread to.grains and
political expediency first. · edibleoils. Indeed, 2007-08 wasthe worstyear ,.,.,...
The same sort of inaction was noticed with regard to the from the point of view d{ negative external
i:upee/dollar rate. Pakistan's rupee was almost tied to the shocks, precisely when Pakistan's political
situation was unravelling and initially a:t
US dollar, though not officially as such, but needed to be
least was thrown into total turmoil with the
devalued. Given the rise in oil imports and a deteriorating assassination of Mohtarma Benazir Bhutto, the
balance of payments situation, the Caretaker government head of PPP, at the end of 2007 ~eded economic
decided not to devalue the rupee/dollar parity. In addition, adjustments especially in energy prices were not
538 Issues in Pakistan's Economy

made. Tpe fiscal and monetary,policies remained

expansionary as Pervez Musharraf-Shaukat Aziz
government remained preoccupied with pushing
c~g,high inflation, and in the 60 months of power of the
PPP government, prices in Pakistan were in double digit for
a.l!!!<2_st fifty months! For many of the critics of the Pakistan
l
s_hort-term growth through large public spending People's Party, the performance of the economic teams since

I
in preparation of elections. ~while, the 2028, has been the worst iU: Pakistan·~ history-'-see Boi 18-:-9.
neglect of emerging structural problems in three
However, is this a fair assess.ment?
key sectors-energy, agriculture and exports-
began to hamper productivity, competition, and The. dominant narrative of most economists, at times also
growth~The lack of encrg'{investment and large of the PPP government itself, from 2008 onwards, was that
scale power shortages have seriously hurt the q~_e__ econ_.?my was in a sgte of __ g~ave crisis. Any number
economy, export growth has slowed and the long of economists and other analysts .writing in newspapers I
term agriculture growth rate appears to have consistently churned out articles stating that the economy

l
declined from 4 per cent to 2.5-3.0 per cent per was at its worst ever since Pakistan was created, tha~it.
annum. wason the brink of collapse, IE:cltdown, and m~ny rno~e
In the last few months of Prime Minister colourful diches which repeated the same theme. Even
Shaukat Aziz's tenure, the growing economic highly respected think tanks, which have produced some of
concerns were totally pushed aside as attention·
the ~est analysis on Pakistan's,economy, persisted with this
foc~sed entirely on. _the politi~al future ot
President Musharraf. Unfortunately the techno- theme. The Institute of Public Policy of the Beaconhouse
cratic caretaker government that came into National University, Lahore, in each of its five Annual Reports
office in late 2007, unlike some previous since 2008, reiterated this argument. In its 2008 Annual
caretaker governments, also took little decisive Report, Pakistan's economy wa~ seen at a 'critical juncture' ;26
action to stabilize the economic situation. An the 2009 Annual Report stated that 'Pakistan is currently
important opportunity was thus missed to start !~ced with a crisis that in ter;:;;-of{ts scope, reach and likely
the economic adjustment process even though consequences has no precedent ever in our exceptionally
fiscaLand balance of payments deficits had turbulent history cannot be disputed', 27 a_nd _the Report
";'id_ep.Ed, the enfrgy~bsidy ~ill was growing highlighted the cri~~ _on ma!ly__f!_onts. The 2010 Annual
and the inexorable rise in the international oil
Report was entitled 'Pulling Back from the Abyss', signifying
priceJ was continuing. 25
concern about where ~e economy ';YaS heading, highlighting
We now know that Musharraf's strategy to create numerous concerns and asking whether Pakistan was 'on
favourable conditions to win re-election failed, and the the edge of the abyss'; 28 the Fourth Annual Report of 2010,
analysis of the Musharraf government's economic policy was released at a time of 'gloom and turmoil', with the
also tells us, that it was a short-term growth strategy resting economy on the 'knife edge'; 29 and the Fifth Annual Report
on weak foundations. As we argue above, ·the biggest failure continued with the theme that 'Pakistan's economy remains
of the Musharraf regime's economic policies was the inability to use precarious' .30 Were all these economists correct in their
f~rtuitous circumstances to launch a long-term economic growth assessment of the economy? See Boxes 18.10 and-18.11 fo;'
trajectory and to transform Pakistan's economy. All those who views which question the crisis narrative.
consider the Musharraf years as successful in economic No matter what the eventual economic p~rformance of
terms, need to examine the huge potentialities which were the PPP government,· and whether they were responsible
missed despite the many opportunities which existed. Also, for or unable to deal with, the economic crises which some
for the most part, it was 9/l l which caused the short term economists felt had occurred, one cannot underestimate the
boom in Pakistan, not General Musharraf and Shaukat Aziz's nature of the issues which the PPP government inherited. - I
As we show in Section 18.6, the reluctance by both the 'i
economic strategies or policies-see also Chapter 25 and I
Appendix 18.3. Musharraf governments, especially in 2007 and early 2008,
to undertake essential decisions to address problems in the
·eco~omy, resulted in things deteriorating further. Oil price
rises and soaring food prices caused severe inflition in
18.7 THE PAKISTAN PEOPLE'S PARTY'S.
Pakistan jusi: as the PPP government was settling in~ a factor
ECONOMIC POLICIES 2008-2013: which ':Vas to afflict it for almost all its five years. The costs
and nature of political transition from a military government
BAD LUCK OR. BAD MANAGEMENT?
which had denied democracy for nine years, made matters
As we have argued, when the__Pakistan People's Party (PPP) far worse. A.9-d to.that the_huge)aw and order situation and
government came to power in 2008, it came in at a time when the deteriorating security condition on account of the War on
n.!!!.l}erous ~erious_ cris~s-both political and economic-were Terror, one has a situation which would have challe,ng1ed the
aJready signalling difficult times ahead, and therewere-niaiiy- best of administrations and governments. The Institute of
indications of t~gs _gettil}g fa_12Yorse: As if oil prices were Public_Poljcy Annual Report of 2009 is quite correct in stating
not already high enough, just four months after coming into that 'by the time the new democratically elected government
power, with the advent of democracy following nine years took office in March 2008, the macroeconomic situation
of military rule-itself a difficulnransition, ·as we have seen was becoming quite desperate'. 3f"This-was also Pakistan's
in I 970 and I 988-oil prices rose_ to $145.29 a barrel in July first rnajo"r coalitio~ gover~ii.t, with both the Pakistan
2008, the highest ever. There were also increased food prices People's Party· and N·awaz Sharif's Pakistan Muslim League
 Chapter 18 Macroeconomic Developments: 1998-2013 539

Box 18.9 The economic team kept the private sector at bay and
Evaluating the Performance of the PPP's never communicated with the people of Pakistan. The team,
particularly the captain, failed to muster the courage to prevent
Economic Management
the political leadership from taking fiscally irresponsible
decisions, such as raising the salaries of government servants
Ashfaque H. Khan and Zubair Mohammad examine the
by 50 per cent in one go at a financially distressed time
economic performance of the PPP government.
increasing the support price of wheat by more than 1oo pe;
cent, frequently bailing out rotten PSEs, doling out trillions of
I.
rupees as power-sector subsidy, spending money allocated
The finance minister faced serious criticism of his performance
!or the ~ear in just three months, adding project after project
by his cabinet colleagues in the federal cabinet meeting
In the list of the development programme by bypassing the
of October 31. Minister after minister, including the prime
parliamentary approval, and so on.
minister, criticised the finance minister for mishandling the
The economic team lacked the courage to call a spade a
economy, in particular the ~ituation .. The finance minister
s~ade. For example, the captain of the team acknowledges
responded to the criticism in equally terse language. Such an
privately that the new NFC Award was a disaster for the
episode in the cabinet is not uncommon. When the chips are
economy but lacked the courage to tell this to the political
down, blame-game is a common phenomenon in our society.
leadership. Only when he came under attack in the cabinet did
In responding to the criticism the finance minister at least
he do so. The team never warned the political leadership about
revealed the truth. He came down hard on the political
the ill-effect of the BISP and the power-sector subsidy.
leadership for the new NFC Award and launching of the
A fiscally irresponsible government, together with a weak,
B~n_a~ Income Support Programme (BISP). From his point
disjointed and non-serious economic team have damaged
of view, the NFC Award and the BISP are responsible for the
the economy to the core within five years. There is general
persistence of higher inflation in the country.
consensus at home and abroad that Pakistan's economy was
Is the finance minister solely responsible for severely
never in such dire straits since its inception.
damaging the economy? While the minister is to be blamed
After almost five years at the helm of affairs, the score card
for presiding over the economic destruction as captain of
of the government and its economic team is certainly dismal
the economic team, the political leadership cannot absolve
at best. Economic growth has slowed down to an average of
themselves from the destruction of the economy either. The
three per cent per annum, investment is down to a 60-year low,
political· leadership is to be blamed for not focusing on the
domestic savings have never been so low in the history of this
economy since they took charge of the country's affair. They
country, unemployment and poverty have risen, the budget
brought frequent changes in the economic team and hence
deficit has reached an all-time high (8.5 per cent of the GDP)
did not allow the appointees to work with confidence. The
last year and expected to attain a new height this year, and
members of the team they appointed were weak, disjointed,
public debt has more than doubled in the last five years.
with little understanding of the ground realities. The political
An external debt repayment crisis is knocking at the door,
leadership did not provide adequate support to its economic
the exchange rate appears to be in freefall, foreign exchange
~earn in undertaking difficult structural reforms, particularly
reserves are depleting fast, foreign investment has vanished
In the areas of taxation, expenditure, power sector subsidy
domestic investors are moving abroad and creating jobs i~
and social safety net programmes. They themselves failed to
other countries. Electricity and gas "shortages" have affected
maintain fiscal discipline, forcing the economic team to borrow
the lives of millions of Pakistani and hurt economic activity
recklessly to finance their unmet desire and needs.
In the country; the law and order situation has deteriorated
. It was the decision of the political leadership to criminally
and badly affected the country's economy, inflation persisted
increase the ~1:IPPo_rt P.!~~e of wheat without caring about food
at double-digits for 55 months in a row, PSEs are bleeding
prices and the poor of this country. It was also the decision
profusely, state institutions have -collapsed and the writ of the
of the political leadership to finalise the NFC Award without
government has vanished.
a~X. economic foundation._ This award has destroyed fiscal With economic destruction all around, the government and
discipline and sowed the seeds of perpetual macroeconomic
its economic team are least bothered. Tne media, civil society
crisis in the country. Pumping taxpayers' money in rotten public
and parliament appear to have lost interest. Those at the helm
service enterprises _(PSEs) to k~ep therri afloat, providi~g
of affairs are bent upon emptying the national exchequer
Rs. 1.5 trillion to the power sector to finance their corrupt
by March 2013. Those who can really make a difference in
practices and inefficiencies and borrowing in· dollar terms,
salvaging the economy have become silent spectators. Let the
converting them into rupee, and dropping them on 3.5 million
haemorrhaging of the economy continue. Let politics override
households were also the decisions of the political leadership.
economics. Let the ~eople of Pakistan continue to suffer.
On their part, the weak and disjointed economic team
simply failed to comprehend the economic challenges facing
the country. The laidback, lethargic and non-serious attitude
of the team further compounded the difficulties. The captain
of the team never bothered to include honest, efficient and
dedicated civil servants, nor professional economists fully Source: -Khan, Ashfaque Hasan, and Zubair Mohammad
aware of the ground realities in the team. . · 'Blame Game', The News, Karachi, 6 November 2012.

>.
_J
540 Issues in Pakistan's Economy

!l. sectors and infrastructure projects. There is no rocket science

In my last column, I briefly mentioned the dismal economic here-you either increase the revenue side or reduce the non-
performance of the present PPP government. After the article development expenditure or ideally a combination of both.

I
was published, many of my PPP friends called and challenged Budget deficit: Last fiscal year, the budget deficit was at an
the basis of describing the economic performance dismal. all-time high of approximately seven per cent but even more
Under what rationale they questioned thE; bad performance alarming is the forecast for the present fiscal year, which is
is not clear to me. The PPP's performance has not just been expected to see a budget deficit in the range of eight to nine

l
bad but dismally bad and I would call it the worst economic per cent. What does that mean for the economy? In terms of
performance by any government since our independence. actual rupees, it means a deficit of more than two trillion, which
The following macro-economic indicators will demonstrate will largely be filled in through borrowing from the central and
my point. commercial banks. It has adverse effects too. This will crowd
GDP growth: Average GDP growth during 2008-12 has out the private sector simply because the commercial banks
been 2.9 per cent. Never i,n our history has the growth for any would not have much to offer to the private sector and in any
four-year period been so low. Let us compare Pakistan's GDP case, it is much easier to lend to the government without taking
growth with other countries in the region during the same any risk. '
period, which were as follows: India 7.8 per cent, Bangladesh Investment-to-GDP ratio: In 2008, this was 23 per cent,
6.8 per cent, Sri Lanka 6.1 per cent and Pakistan 2.9 per cent. which has now come down to 12.5 per cent-the worst for
Most economists would agree that in order to progress and for more than 30 years. A 10 per cent drop in this ratio simply
people to survive above the poverty line in Pakistan, nothing means approximately 20 billion dollars in terms of lost
less than a six per cent sustainable growth rate is required. investment.
Inflation: Except for the last two to three months, inflation The numbers speak for themselves. All other indicators
has remained )n double digits during the entire period of this -> are also negative. Public debt has more than doubled in the
govern111ent. Looking at this from a historical perspective, last four years. State institutions such as Pepco, PIA, the
this has been the second worst period since 1947, as far as Railways and the Pakistan Steel are all making huge losses
inflation numbers go. Only once in our history we had a higher (around Rs. 400 billion every year). Pakistan is facing the worst
inflation over a four-year period and that was during the first energy crisis in its history and no improvement is evident. The
PPP government in 1972-77. Compared with us, India had privatization process is almost at a standstill.
single-digit inflation throughout much of the same period. The economic situation is grim, to say the least and there is
Pakistan's economic managers cannot complain of high oil . a general perception that the situation is unlikely to improve,
and other commodity prices for its high inflation numbers. since no structural reforms are planned and in any case, it is
T~-!o:GD_p r~tio: When the PPP came in power in 2008, too late to initiate any such reforms.
the tax-to-GDP I_i'!tLo ,Y'laS J0_per_c~ntand_\t]e_plan wasJQ, With such a miserable economic performance, any chance
increase it by.one per cent.eactyEt_a! s_o_that py 2013 it wouJd of the PPP being returned to power in the next election looks
be -a healthy 15 per (?ent. At present, the ratio is less than almost impossible.
ri,ir1e_p~~n_t, which would rank Pakistan among the worst
in the world. This helps explain why the present government Source: Mohammad, Zubair, 'The PPP's Terrible Economic
has been unable to deliver in terms of investment in social • Performance', Express Tribune, Karachi, 7 November 2012.

joining together, with General Musharraf, now retired, still need for strengthening incentives for agriculture
as President of Pakistan. and boldly increased the wheat support price.
These conditions were bad enough, with the current account Despite warnings, however, it did not
deficit 8.7 per cent of GDP in 2007/08 and the fi;cal deficit 7.6 recognize the seriousness of the foreign exchange
per cent, but added to this in 2008, was the global economic position and failed to develop a clear plan to
deal with rapidly declining foreign exchange
crisis followed by the international recession which continued
reserves. It seemed that for nearly six months,
well into 201_3. Faced with these rather severe challenges, April-September 2008, the government was
the new governm~nt had to take unpopular decisions. As the either in denial about the huge foreign exchange
Institute of P~blic Policy Annual Report argued, crisis it faced or unrealistically hopefui ·about
~ery large financial support it could receive
Undoubtedly the new government inherited from friendly governments notably, USA, Saudi
a most difficult economic situation. It Arabia, China, and Japan, to tide over its foreign
started the 'painful process of major energy exchange difficulties. 32
priq~ adjustment~ and scaling back of public
expenditures especially on development side
during April-June 2008. The Federal Budget for
Given the eco2-omic pro~lem~..beingJaced.by the economy
in 2008, particularly the fall in foreign exchange reserves and
_,
2008--09 clearly recognized the need for fiscal
the gr_owing balance of payments problems, the governjpent.
deficit reduction and indicated for.cefully that --
economic adjustments especially in energy prices in November 2008 turned to the IMF for a Stand-By
would continue. The Government also saw the Agreement eventually worth $11.6 billion-=-see Chapter 17.
 Chapter 18 Macroeconomic Developments: 1998-2013 541

Box 18.10 These are just three vocal and prominent voices who
Was the Economy Perpetually in Crisis from have been arguing that Pakistan's economy is heading
for disaster-never been this bad in 64 years, according
2008 Onwards?
to Ashfaque H Khan; chaos, paralysis and sinking, and a
train wreck, according to Maleeha Lodhi; economic freefall,
The dominant narrative of numerous writers since 2008, was
crisis and collapse, for Muhammad Yaqub----but there are
that Pakistan's economy was in crisis soon after the People's
· many others as well. Many of those who have been the
Party government came to power. This newspaper article
strongest critics of the present government's economic team
i examines this claim.
and its policies were the more important r-epresentatives of
the Musharraf regime. One who now writes an occasional
A number of writers, some well-trained economists, others
newspaper column, while criticizing the present regime, has
amateur and untrained at economics, have been writing regular
suffered a convenient case of amnesia, as he actively tries
articles in the press, including this newspaper, perhaps for the
to distance himself from many of the disastrous policies he

t last three or four years, arguing that Pakistan's economy is not

just in bad shape, but is in very serious trouble. Many of these
writers were senior, high profile and prominent vocal members
supervised under Musharraf. Most of those who have been
writing about such catastrophic happenings, not surprisingly,
do not belong to the incumbent government. In fact, one sees
of the Musharraf-Aziz government, while others belonged to
very partisanal voices in damning or defending Pakistan's
earlier governments.
economic record and performance over the last four years. So
One such write'r, Ashfaque H Khan, a key member of the

I
committed are some of these writers to show how disastrously
Musharraf economic team, wrote in this newspaper very
the present government is performing compared to the one
recently, that "there is a general consensus within and outside
they represented, that they tend to repeat and reproduce their
the country that the economy of Pakistan has never been in
arguments and arrtcles every few months-one of them does ·
such a bad shape since its inception in 1947. Pakistan has
a particularly poor cut-and-paste, rehash, job from previous
faced serious difficulties off and on over the last 64 years
articles. Is this simply a matter of ulterior motives and mal-
but has managed to sail through because of a. competent
intent, on the one hand, and blind faith or partisanal support
economic team and strong leadership. Now there is a general
and vested interests, on the other? Just how bad, then, is
view in the country that such leadership and economic
Pakistan's economy?
team are mis.sing today. It is for this reason that the people
The first piece of evidence ~hich counters all claims of
of Pakistan are nervous about the future outlook of the
doom, disaster, collapse, crisis, catastrophe, etc. which some
economy". Another contributor to. this newspaper, a former
writers have been making for the last three or so years, is
Governor of the State Bank of Pakistan, Muhammad Yaqub,
that the economy has not collapsed, and is nowhere ·near
wrote something very similar stating, that "there is a near-
catastrophe. This does no\ mean at all, that it is buoyant or
unanimous professional view· outside official circles that the
vibrant or that it is doing well. All that this means is that the
economy is in a very bad shape. ·Tne political leadership is
death of Pakistan's economy, announced repeatedly for many
unable or unwilling to understand the depth of the economic
years, has been greatly exaggerated. In fact, while the~e
troubles and is busy with its usual business, as if all is well,
writers continue to harp on the catastrophe chorus, the truth 1s
on the economic front. For public consumption, government
that this fiscal year, the economy is expected to do far better
representatives talk about becoming self-reliant or depending
than it did last year, better than many expected, despite all the
on trade rather than aid, without evolving a strategy to do
problems listed below. .
so." He also wrote, that "the real threat to the survival of the
Many of the indicators the doomsayers cite to make their
country was not from India, the US or from terrorism, but from
case are actually important economic indicators which can
an economic collapse that may be closer than people think if
be used to analyse the state of the economy. They are correct
certain policy actions are not taken".
in their analysis when they make the case, that inflation has
Maleeha Lodhi, another core member of the Musharraf
been in double digits for every month this goverq_ment has
decade, and by no means an economist, has ~lso written,
been in office, that the fiscal deficit is worsening and therefore,
that "unending political turmoil in the country has brought
so is debt. They are also not wrong when they point out that
the business of .government to a standstill. Nowhere is the
public sector enterprises are in poor state, or that a_ pow~r
paralysis more consequential than in its impact on a sinking
crisis continues to get worse, affecting investment. Again, their
economy. With political leaders' attention distracted from
argument that exports have not increased significantly and
governance, economic risks are multiplying. The downward
that the tax-to-GDP ratio has fallen. further, are also correct.
economic spiral is being reinforced by uncertainty and the
Other indicators are also cited to make the case that the
government's failure to address the challenge of structural
economy has,: or is on the verge of, collapse and dis~ster. Yet,
reform. Whatever the political outcome of the confrontation
despite pointing out these negative trends, the economy has
between the government and other state institutions, a
not collapsed. Not only that, alternative sets of indicators can
protracted stand off can accelerate the country's descent
also be shown which suggest that the economy is not as bad
into economic chaos." She also likened the economy to a
as many of these writers make it out to be. There are such
"runaway train hurtling towards derailment, with little to stop
trends in the economy, which show that certain sectors are
a train wreck".
doing much better than they have in the past. Rural incomes

I
. 542 Issues in Pakistan's Economy

seem to be going up, consumer goods are in wide demand, A criticisr:n of those who argue that Pakistan's economy is
banks have made very large profits in 2011 at a time when collapsing must not be seen as an endorsement or argument
the doomsayers were arguing that all was despair, and so on. in support of this government's economic policy. This
Some large banks had annual profits for 2011 ln excess of 57 government has failed miserably at providing a well-thought
per cent, while the domestic production of cars, jeeps and through economic policy. Its economic team is a complete
motorcycles had increased by more than 8 per cent in the last failure and there is little disagreement with the group of people
six months. These are not indicators of a train wreck or freefall. who criticise the government's economic programme. Yet,
There are other numbers as well which counter the sky-is- these critics need to re-read their own articles written over the
falling claim. Clearly, there is a major disconnect somewhere. last few years and to reassess their own biases and opinions. i
The critics of the government use six or seven key macro Their constant clamour of doom and collapse continues to
indicators to make their case for the collapse and catastrophe, be proven wrong, time and time again. They need to put their
train wreck, argument. Yet, there is much more to the real, political biases aside and examine how the economy works.
actually existing economy of Pakistan, than just the fiscal They have to be more honest in their assessment about
deficit or the current account. Unless they have a better
understanding of the micro and meso level of the economy,
why Pakistan avoids the sort of disastrous scenario which
is emphasized in every article written by them. Perhaps the
1
they will not realize why it is that Pakistan's economy seems non-formal and parallel economy offers the answer to these
to avoid complete collapse. In East Asia in 1997, soon after questions, perhaps the textbook analysis which they use does
the economic crisis, it became immediately visible that the not really capture real economic relationships and processes
economy had crashed badly. One can see the same in in Pakistan. Whatever it is, in order to answer just how bad
Greece and other countries even where there has been a soft Pakistan's economy really is, we· need a far better, much
downturn. One sees no empirical or even wide descriptive wider and, most importantly, more honest and unprejudiced .
evidence which shows anything similar in Pakistan. Why is analysis.
it that the poor numbers at the macro level are not being
reflected in any marked deterioration in the lives of most Source: Zaidi, S Akbar, 'Just How Bad is Pakistan's Economy?',
Pakistanis? The News on Sunday, Karachi, 25 March 2012.

The authors of the Second Annual Report of the Institute lfil_der the IMF programme. Although certain conditions
of Public Policy in 2009 argued, that 'possibly a recourse in agreements with the IMF-especially, the removal of.
to IMF could have been avoided if the caretakers and the ...... subsidies on utilities-clearly made the situation fir worse in
new government would have taken bold and urgent actions the immediate term. Due to the IMF Agreement, there was a
to restore confidence· among domestic and international • rise in the administered prices of petroleum products, power
investors. But it must also be stressed that an unexpected and of gas, all of which had a considerable additional impact
· further steep rise in the international prices of oil and on inflation.
the persistence of high other commodity import prices While macroeconomic indicators relating to the fiscal
notably wheat, palm oil, and fertilizers, made the external and external sectors did show an improvement since the
gap extremely Jarge .during April to September 2008 and adoption of the IMF programme, the performance of the real
basically unmanageable'. 33 It must also be remembered, th?t sector slowed down considerably. The real GDP growth for
a consortium of countries, most of whom were involved with 2008/09 was a mere 1.2 per cent compared with 3. 7 per cent
the US in the War of Terror, emerged to form a group called in 2007/08. The industrial sector witnessed negative growth,
th_e Friends of Pakistan, a group which was supposed to come while respectable growth in agriculture and the services
to Pakistan's assistance in terms of financial and economic sector rescued the GDP growth in 2008/09 from falling into
helpon account of the role played by Pakistan in the War on negative territory. The IMF Stand-By Agreement gave support
Terror. These Friends of Pakistan worked through the IMF to an economy which was faced with many challenges and
ratper than directly. Although large amounts of funds were some of the less troublesome aspects of the Agreement were
promised by these Friends, it seems that the IMF Stand-By adhered to by the PPP government. However,. when more
Agreement became available instead of the promised funds difficult measures had to be taken, such as the imposition of
from the Friends of Pakistan. a Value Added Tax in the guise of a Reformed General Sale; .
- It was recognized that the consequences of an IMF Tax (RGST), the agreement with the IMF had to be cancelled.
~ilization programme may slow cfowngrowth, as they have While there was a sense of stability due to the IMF
done in the past, and may affect poverty and employment in programme for the 2008-10 period, .the authors of the
the long term. One must concede the fact that the Pakistani Institute of Public Policy's Third Annual Report of 2010
government, once it chose not to undertake reforms, under conclude, that 'while the program has helped in containing
the worsenin."g. cir~umstances, may not have had a choice· aggregate demand through contractionary monetary ~rid
in having to tum to the IMF soon after taking office in fiscal policies and thereby limiting the demand-pull inflation,
.J\1fil:c_h 2008. The stability in th~ economy in 2009 was a the oppo~ite effect has been exerted through cost-p~sh

----••w
result of taking severe measures· to stabilize the econ9my
-
inflation, especially by the hike in energy prices'. 34 If there
 Chapter 18 Macroeconomic Development;: 1998-2013 543

Box 18.11 v Clearly, while one can argue that Pakistan is a special case
The Need for Reform and because of this is not doing so well, one can make the
same argument for many other countries which are performing
Just because one can make strong arguments that Pakistan's better than Pakistan. The 'special case' argument can be
economy is not as bad as many newsp~per columnists make used occasionally, but not forever, especially when other
it out to be does not mean that the economy is in good shape supposedly basket cases tend to outperform Pakistan. What
and does not need urgent and continuous reform. matters is how governments and leaders are able to respond
Even the best of economies requires reform and adjustment to and deal with any sort of crisis or situation having an impact
periodically. Even when economies are working well some on the economy.
degree of tweaking here and there ensures that they continue All. countries have some form of comparative advantage,
to perform well. Economies cannot-should not-be left on which could include mineral or natural resources, human

I
remote control. The Hidden Hand can destroy any successes capital, locational advantages and a host of special
created by government policy and can cause economies to circumstances. What matters is how these conditions are used
self-destruct. to one's advantage.
Economies need constant review and overview. They need There is no reason why Pakistan cannot have sustainable
reform whenever they are performing at sub-optimal levels high growth rates for prolonged periods of time if better use of
rather than before they reach the point where they begin to i~s umerous resources were made.
unravel. Pakistan's economy, while nowhere riear the brink, The key missing ingredient is government policy or reform~
is in need of major reform for it to be able to respond to course, there are tangible and substantive reasons why
numerous problems. Pakistan's incumbent government has failed miserably at
There are at least two ways of assessing how well-or increasing economic growth, but complacency, denial and
not-an economy is performing. One is to be able to estimate short-sightedness have played an important role.
some kind of potential growth and development path which One of the main features of the almost four years of this
the.economy ought to be on if all things were working well. government has been its inability to prioritise a number of tasks
In times of economic dysfunction and in the absence of which have required urgent responses. As a consequence, the
what could be called economic policy, if Pakistan's economy economy has suffered. Of course, some interventions by the
continues to deliver at least three to four per cent growth, it government have been well-focused and timely, such as raising
implies that with substantial government interest the growth purchasing prices of key crops and improving economic
rate could be markedly improved. ties with India, e!Jlphasizing the argument that with greater
If. with prolonged and excessive interruptions of power direction and focus many more thoughtful interventions could
supply, floods in two successive years, a hostile domestic have improved the economy substantially beyond its present
security environment, political instability and uncertainty, and low rate. Had reform taken place in 2008, despite the problems
a host of other factors, the economy still achieves in excess faced since then, Pakistan's economy would have performed
of three· per cent GDP growth rate per annum as is expected far better than it has.
this year there is no reason why the growth rate cannot be There is little doubt that Pakistan's economy has performed
doubled. poorly for some years now, and one reason for this is the
This is the main purpose and function of economic policy absence of reform. Numerous analysts have given long lists
and of the ability and quality of leadership, both economic and of what needs to be done with Pakistan's economy and it
political. The case can be made that Pakistan's economy is is not as if the government does not know. Reforms require
severely underperforming primarily because of the absence of leadership, vision and a plan. This government has shown that
government direction and policy. it does not have any of these and reform of the economy has
Another measure to assess how well an economy is not been a priority of the government.
performing is comparison with other, somewhat similar This remains the main reason why Pakistan's economy
countries. While India feels that it is doing well with its continues to muddle through, a few per cent growth rate here,
consistently high growth rates over prolonged periods, it some remittances and loans there and little more. Left to itself,
always asks the question why China is doing so much better. the economy will never reach anywhere near what could be its
India's growth rate has been over seven per cent for many potential. Without active engagement and reform, we should
years now, but economists feel that it can do much better, expect more muddling through for a long time to come.
largely because China does even better. Similarly, with so
many countries in the region doing so much better than
Pakistan, one can make the case that perhaps Pakistan ought Source: Zaidi, S. Akbar; 'Missing the Point', Dawn, Karachi, 9
to be doing much better as well. December 2011.

was any sign of stabilization, in 2010 another catastrophe · the country. Without a doubt, these were the most severe
hit Pakistan in the form of the worst floods in Pakistan's floods to hit Paki~tan since independence in 1947. The Indus
l?,istory. Over 20 million people ~ere .affected-more than River and its tributaries b'egan to overflow in late July 2010
the Asian tsunami'of 2004 and Kashmir earthquake in 2005 and. flooding continued through August. As the levels rose,
cqmbined-and at its height, flood waters covered a fifth of people were displac~d within provinces and sought refuge
 544 Issues in Pakistan's Economy

in the nearest large town. The floods wiped out villages- by its absence. In the first three years of the PPP government,' ·
nearly two million houses were damaged or destroyed- there had been four Finance Ministers, three Governors of
infrastructure, and agricultural land. By washing away the State Bank of Pakistan, and four Finance Secretaries,
roads, bridges, communication networks, powerhouses, and signalling a c_lear mismanagement and the absence of
lives.tock, this destruction devastated the livelihoods of rr'iany understanding to give the economy priority and direction.
· Pakistanis. And it is the relatively poor and farmers who, It is true that for muc;ti of its tenure, the Zardari presidenty
suffered the most. •Government of Pakistan estimates were and the PPP government were just trying to survive and
that the 'floods wiped out about 2 percentage points from the stay in office against conspiracies, threats and terrorism,
growth as well as inflicted a massive damage of $10 billion on and perhaps the lconomy never received the priority that
country's [sic) economic structure'. 35 Floods again, in 2011, it should have. \Even going to the IMF was a sorr of a
caused further damage, but far less than in 2010. strategy, where thegovernment felt that it would be easier to
As Table 18.1 shows, growth rates in Pakista1: fell from undertake some reform under the shadow of the IMF, rather
more than 6 per cent in the 2002-07 period, to half that than take full ownership for the reform process.'For the most
during the tenure of the PPP government which came part, while the PPP government will be remembered for
to power in 2008. Every singie indicator for the economy , many interventions in the political process and for a number
worsened in the years after 2008. The inflation rate remained of bold constitutional meiJ:sures-such as the Eighteenth
in double digits rising to 25 per cent at times, growth rates Amendment and the National Finance Commission Award-
fell, and the fiscal deficit rose, Foreign Direct Investment fell it will not be remembered for undertaking any reforms in the
considerably, as did the tax-to-GDP ratio. Critically, both the economy. .
total investment as a percentage of GDP was down to around Those who hammered the 'collapse-and-crisis' mantra
_12 per cent and the savings rate also fell to a mere 9.7 per were not wrong in citing mahy of the statistics they did, as we
cent in 2011/12, probably also the lowest ever. The narrative have shown above, where a!L~~y.statistics deteriorated in the
of the crisis mode, which was so dominant over the 2008-13 2Q08-13 period. Clearly, these indicators reveal ari economy
period must, surely, have been significant and of substance- which performed poorly. However, these economists-:--and
see Box 18.10. many non-economists ignored the numerous factors which
Yet, before we respond to the claim of the crisis narrative, let prevented a crisis situation from emerging.
us also list some of the severe problems the PPP government Two speculative reasons requiring much more rigorous
was facing. First, it inherited a huge burden of poor policies, analysis can only point towards addressing these issues. While
or the lack of decisions and polic~es, from the Musharraf ideas about the informal sector or the black or underground
and Caretaker governments. Second, the government after economy abound, there has been little research don'e on how
2008, fa_ced an international recession, extremely high oil Pakistan's wide social and economic networks allow families
and food prices, resulting in severe infla'tfon at home as well and individuals to live in worlds which are often not on the
as a deteriorating rupee. Pakistan faced the worst floods in economist's map. Similarly, what has also not been analysed
2010, and again in 201 I. There was also the costs of the War in recent years, is how remittances have allowed numerous
·on Terror, where not just the direct costs harmed Pakistan families to weather the storms created by the economist's
with terrorist attacks and insurgency in the country, but statistics of doom and gloom. Many economists fail to
also because Pakistan became an inhospitable place for understand how Pakistan's economy really works, and why it·
business. There was also a power crisis in the energy sector, continuously avoids any real crisis. They use a few select facts
where the consumer boom of the 2002-07 period lead to of data to make their point. The key question for economists
high consumption of energy resources, but little increase trying to understand Pakistan's economy, is not whether the
in the production of electricity. These economic problems economy was nearing crliapse,but ~hy it did not collapse, given
were compounded by the issue of political transition, from so many deleterious circumstances. While the oft-repeated
a military government to a democratic one, and with the cries of 'collapse and crises' now sound terribly repetitive
threat and fear of being dismissed by either the military or arid boring, what would make more interesting and relevant
the Superior Judiciary, the President, his Prime Ministers, analysis, is why and how Pakistan manages to avoid arf
and their Cabinet, had much to deal with and respond to. By ecorromic crisis. The truth is, we really don't know enough~
any sense of the imagination, the government after 2008 was -- - - - > •

not just challenged, but constantly under attack. Does this

a~solve it of responsibility for bringing the economy to the 18.8 SUMMARY ANo' FURTHER READING
level it did, or does one argue that despite these problems,
the fact that no real crisis emerged and the economy did not 18.8.1 Summary
collapse, suggest that one should give the PPP government
some credit? · · This chapter has highlighted events and developments on
Regardless of the scale of the.challenges.and.problems that Pakistan's political and economic map since 1998, and has
the PPP government had to face, th:ere is little denying the shown that the period since then, has had rather move~
fact that there was a great deal .of mismanagement by the t~an its share of drama, even in the case of a country like
e\onomic team in. handling the economic situation. At times, Pakistan, where drama and.· theatrical performances have
there was confusion which substituted for economic policy, been commonplace. Within this period, Pakistan has had
at others, the government's economic policy was conspicuous · a military coup, gone public on its nuclear capabilities and
 Chapter 18 Macroeconomic,Developments: 1998-2013 545

professed nuclear ambitions, been near to being declared a to_ the troubles of a democratic and political government
rogue. statt been even Qearer to being declared bankrupt, dealing with transition from nine years of military ~we:
almost ha ing gone to war with its neighbour, and having While these 'bad luck' factors, similar to those which Zulfikar
emerged a champion in the War on Terror, whether in Ali Bhutto's government faceoin l 9Ii-;7?, had an.impact on
Afghanist nor Iraq. And all this, within a few dozen months! the PPP governme,nt, one cannot absolve the government for
With th backdrop of domestic, regional and international taking pOO,! decisions ~nd for misha"ndling the economy. While
drama, Pa istan's economy has had two major disruptions there are many factors which led to the'poor performance of
! in trend. The first took place in the late 1990s after the economy under the Pakistan PeC>ple's.Party government,
the May 998 nuclear tests· and a free;;·-;:i; the ~oreign poor aq!Ilinist~ation and management, must top the list.
Currency ccounts resulting in a meltdown of the economy,
wjth a gr ve balance of payments and foreig'n exchange 18.8.2 Further Reading
crisis, bac ed wii:h a' serious crisis cif trust. Wliile.ecoiiomic
performan e throughout the 1990s. had been particularly Since the theme of this chapter is very topical, newspapers are
poor; even s towards the end of the de'cade only wors·ened a good source to re~d up on what all has been happening in
them. Nuc ear and democracy relat~d sanctions did not help t!:~ !Con.omy, as are frequent bu!l~tins and statements put' out
much eith r. ' . by the IMF, World_ Bank and the Asian Developinei-it Bank.
· . H;weve·; the world changed after that, and E?kistan Much of this and related material is now easily°·available o"'n
reaped much.reward from supporting the us War of Terror ~he wel:i. In addition, the annual Pakistan Economic Surveys
in Afghanistan and iraq-see also Chapter 25. S]J_ddenly, a are very' useful, but even more helpful are the revamped
pariah nuclear and undemocratic' nation was bJck in· the 4!}_nual Reports of the State Bank of Pakistan. These Annual
folds of international and global capital and now, once again, Reports, especially since 1999/2000, provide excellent insight,
a _member of the civilized world. Pakistan's ·reward was a and are also highly analytical and not just run-of-the-mill
debt write-off, debt rescheduling, more room for exports, · government publications. Papers published in The Pakistan
greater remitta11ces, and as a result, the econ~my started Development ,Review and, in particular, in the annual issue
picking up once·again.·However, the chapter does question which contains papers presented at the PIDE Conferences
the official celebrations that there had been a 'turnaround' are _useful _and should be consulted. Although there have not
in the economy'and that Pakistan's economy was on the path 1?een many books which examine the state of the economy
of robust growth. 36 Since much of the 'turriarourid' came m\der Musharraf or after, without doubt:-the best and most
on the back of fortuitous·external factors arid windfall gain, thorough analysis based on exten.sive empirical analysis,
it became dif[icult to conclude that the upturn had begun. c_gmes in the form of the Annual Reports of the Institute of
For any s~rious and particularly, sustainable, improvement Public Policy at the Beaconhouse N'ational "university in
to occur, far deeper institutional strengthening would have Lahore. Another eqµally good source is' the Fina{ Report of
be.en required; as we found out very soon after the fall of the. Panel of Economists:. Medium-term Development Imperatives
the Musha_rraf regime. It became clear towards the end of a~1 -~trategy for Pakista1:,, C?IDmission~d, and ~rod~ced by
the Musharraf regime, thar·growth and the economic boom the Planning Commission, Government of Pakistan, April
were built on weak structures, that little reform had taken 2010. The Pakistan Millerznium Development Goals Report 2010:
place, and that political decisions were more important D1;Ve:opme,~t Amidst 'Crisis (Islamabad: Planning Comihis;ioii.,
than economic ones. The PPP government in-2008 inherited Government of Pakistan, 2010) also contains some of the
numerous problems created by the Musharraf and Caretake·r material' which is covered in this Cliapter, although it
governments. Moreover, numerous external factors, such focuses on the"impact of the economy on the social sectors.
as the oil and food price rises, economic recession in the In addition, s~e some ~;celleni: analysis in: Rashid Anijad
and Shahid Javed Burki (eds), Pakistan: Moving.the E~~nomy
developed countries, the security situ_ation internally on
account of the War on Terror, and damaging floods, all ad(led Forward (Lahore: Lahore ·schoolof Econbinics: 20i3)..
1-i ,.,.,,. - - · . J':" ,_ .f"l· t .,,~ H - - ~-r

,1

.,

'\

i.: - - - - - - - -
 The Social Sectors I: International
Comparisons, Education, Population,
Urbanization, and Housing

Almost without exception, every publication, whether by flight from public institutions, resulting in poor services for
the government or by scholars and social scientists, laments the non-elite.
the state of the social sectors in Pakistan. The high growth This, and the next two chapters, will try to examine the
performance of nearly 5. per cent per annum over many existing conditions-the facts-and the issues in a number
decades, is acknowledged, but at· the same time, the rather of important constituents of the social sector. We will provide
dismal stat~ of the social sectors is also highlighted. The figures and show trends over time, examining the nature
arguments usually presented state that most governments and impact of those trends. Some attempt will be made
and the public sector have ignored the social sector and not ro- examine the nature of issues, problems, and successes
given it enough importance or resources. We will argue that in different areas. Chapters 19 and 20 present data and
despite the lip-service paid to the need to develop the social information about a number of social areas, followed by
sector, this situation continues a decade into the twenty- discussion of the salient features of these subsectors while
first century, with resources not substantially increased to Chapter 21 examines the health sector. A new section,
different components of the social sector. Nevertheless, the Part 8, has been added to the Third Edition of this book,
more interesting question is not how the social sector has with a chapter on Poverty and Inequality, which should be
continued to remain underdeveloped, but how, with such read along with Part 7. Chapter 22 deals with the growing
an underdeveloped social sector, and extremely low literacy and severe problem of poverty in Pakistan, along with the
rates, for example, the economy has shown such resilient _considerable debate over the extent of poverty in Pakistan,
growth. If the social sector is in as,bad a state as almost all while Chapter 23. highlights the extent of inequality, both
observers believe, how has the economy continued to grow at regional and inc9me, in Pakistan. In this chapter, we begin
an impressive rates? This leads to another question: can a less with a comparison of Pakistan's social sector indicators with
developed social sector,continue to produce high growth; or that of other countries, many of which are in the South Asian
has a time now came when growth will be highly dependent region.or have similar levels of development.
on1 human capital formation, as the New Growth theories
suggest?
Indeed, these are interesting and important questions, the 19.1 SOME INTERNATIONAL AND REGIONAL
answers to which may be diff1cult to find. While not being
able to explain how high economic growth. has coexisted COMP~RiSONS . ' ,
with very low social sector development, there is now a
It is probably not .very wise to compare countries. There are
growing consensus that this pattern may have been ·one of
too many specific factors-history, culture, governments,
the 'past, and that now there is an urgent need for a highly
institutions~which may influence events and consequences
skilled, educated, and healthy workforce and the population
in very special and specific ways. The context of each event
to 1 deal with open tracle barriers, new technology, and
or development must be recognized and appreciated. Often,
the maximization of all human potential, especially when
standards of a very alien kind are imposed across a general
govemme~lts speak of the youth bulge, or demographic
universe, which may result in numbers or results that are
dividend. This. view examines the record of countries like
not comparable. Even the so called scientific criteria are not
South. Korea and Taiwan, and more recently of Malaysia
insensitive to their social environment, and even simply
and Thailand, and argues that, without social development
counting and comparing 'obvious facts' can be hazardous.
economic growth and development can no longer take place.
Hence, there are numerous problems in taking a set of
While there is growing evidence that this may be the case,
indicators showing the state of the health of the economy
one must ask whether Pakistan's elite, bureaucrats, generals,
and comparing them acros·s countries. Nevertheless, these
and leaders have learnt any lessons from the Pacific Rim
comparisons continue to be made and there is a huge
and East Asian countries. Has there been any shift at all in
industry which chums out PhDs and tomes on indicators
approach towards the social sectors? Or has the old, tired
rhetoric, merely been repeated ad nauseam? Moreover, we comparing diverse nations and countries. We too, despite our
argue that one reason why Pakistan's social sectors are poor critidsm and concerns, continue that tradition in order to
is because the elite has set up its own private institutions, indicate some salient trends.
In this section, we examine Pakistan's performance in the
leaving the rest to the less affluent. There has been an elite
social sectors with that of other developing countries. While ,r,
i
 Chapter 19 The Social Sectors I 557

it is difficult to make comparisons across countries, it is Table 19.1 is not easy to interpret, indeed, if there were
possibly more difficult to find some countries across which any interpretations which could be made from it. There are
comparisons can be made. In our choice of countries-see no conclusions or hard overriding truths which emerge from
Table 19 .1-all eight countries belong to the World Bank's the table, simply observations open to conjecture. Table 19.1
classification of Low Income Countries, i.e. those with a per presents the pattern and trend of human ·development in
capita GNP of less than US$730 based on (993 data-this Pakistan during the 1990s, before examining trends in recent
year is chosen to see how well or badly countries performed years.
over two decades. The first row gives the GNP per capita for each of the eight
While the low income status may be the first criterion for countries in US dollars for 1993, followed by the second row
our selection of countries, there are some others as well. India, which shows the GNP per capita for 2011. These rates indicate
Bangladesh, and Sri Lanka share similar histories and belong the rate at which countries have grown over the 1993-2011
to South Asia, and are also grouped together in the South period. China's example is significant, where in just a few
Asian Association for Regional Cooperation ( SAARC), and years it increased its comparative and absolute· position:
hence, can have some valid grounds for comparison. China In 1980, China had a GNP per capita of $206 compared to
is included because it is a key player in the region, and used Pakistan's $285, and was one of the poorest countries in
to have a GNP per capita close to that of Pakistan's, and is the world. With a phenomenal 8.2 per cent average annual
cited by many as a country where communist led growth and growth rate over many decades, it improved its position
development in the past has resulted in an egalitarian social markedly. While China, Sri Lanka, Vietnam, India, and even
structure with extensive social development. The new China Bangladesh, had all substantially improved their per capita
with its liberal and open economic programme-like much of GNP values in the 1990s, Pakistan, Ghana, and Nigeria had
the rest of the region-also makes it worth observing. Ghana not. Rather than be part of the dynamic growth trends of
and Nigeria, while very different from the Asian countries East Asia which were being mirrored amongst countries of
are included because they have large populations (Nigeria), South Asia, Pakistan increasingly looked like a poor, underdeveloped,
and Ghana had a GNP per capita (in 1993) close to or equal African country in 2002. In the two decades 1993-2011,
to Pakistan's. Also, like the four South Asian countries, they Pakistan had the lowest increase in GNP per capita, by only
have both been under British Colonialism, and hence some 2.6 times, compared to China (10.1 times), even much lower
comparison is probably permissible. The outlier is Vietnam, than Bangladesh, India, and Ghana.
which is included because it is still a Socialist state (like The GNP per capita rank lists the position on the basis of
China), but has not had as many year's of capitalism as GNP per capita these countries have in the world; Vietnam
China; and despite having a per capita GNP of only 40 per was the fifth poorest country in the world with a GNP per
cent of Pakistan's (in 1993 ), has some very interesting and capita of only $170 in 1993, and Pakistan, with a GNP per
revealing social indicators. Possibly, GNP per capita, as is capita of $430 was the 31st poorest country out of the 132
often assumed, may not be the sole, or even the key, criterion then classified by the World Bank. It is interesting to note
for social development. Political commitment, structure, and from this comparison of ranks of GDP per capita in 1993 and
involvement may be equally, if not more, important. 2011, is that in line with improvements in absolute levels of
GDP per capita, those countries which have done well in 1993-

Table 19.1: International Comparisons of the Social Sectors

Pakistan Vietnam Bangladesh India Nigeria Ghana China S Lanka

GNP pc 1993 $ 430 170 220 300 300 430 490 600
GNP pc 2011 $ 1120 1270 780 1420 1280 1410 4940 2580
Increase in GNP pc 1993-2011 2.6 7.4 3.5 4.7 4.3 3.3 10.1 4.3
GNP pc rank 1993 * 31 5 12 20 21 30 33 39
GNP pc rank 2011 * 38 43 27 49 45 48 92 61
HDI rank 1993 ** 128 120 146 134 141 129 111 97
HDI rank 2012 146 127 144 136 153 135 101 92
Literacy rate 2001 44.0 92.7 40.6 58.0 65.4 72.7 85.8 91.9
2012 54.9 93.2 56.8 62.8 61.3 67.3 94.3 91.2
Female literacy 2001 28.8 90.9 30.8 46.4 57.7 64.5 92.5 89.3
GDI rank 2003 + 120 89 112 103 124 104 83 80
GDI rank 2012 123 48 111 132 NA 121 35 75
Poverty Index rank # 65 39 72 53 54 46 26 34

Notes: * The higher the rank, the better-the poorest country is ranked 1; ·** The lower the rank the better-the best country is ranked 1
and the worst 175; + Best ranked 1, worst 175; # Best ranked 1, worst 74.
Source: United Nations Developmer:,t Programme (UNDP) Human Development Report (New York: UNDP, various years); and The World
Bank, data.worldbank.org.
558 Issues in Pakistan's Economy

2011, have also done relatively better than other countries. In New Growth theories, where human capital formation is
While Vietnam was the fifth poorest country in 1993, it is an essential component and prerequisite for growth, literacy
now the 43rd poorest, showing considerable improvement, acts as an important proxy for many key ingredients. Also,
while Pakistan improved its rank only marginally. In contrast, with the need for more skills in the present electronic and
comparing China, India, and even Ghana's improvement, computer age, with increasing importance on competition
only Bangladesh did worse than Pakistan. and quality, education and literacy have become even more
While GNP per capita is a very simplistic and crude (yet important.
indicative) measure of social development, the Human Vietnam, with a GNP per capita about the same as
Development Index (HD!) is a larger and a broader composite Pakistan's, had education statistics which would put many
indicator which captures much more than just per capita developed high income economies to shame, as would Sri
income. The HDI contains three indicators: life expectancy, Lanka. All the four poorest countries in our sample based
representing a long and healthy life; educational attainment, on 1993 GNP per capita data, outperformed Pakistan very
representing knowledge; and real GDP (in purchasing power significantly. Even Bangladesh, which many in Pakistan saw
parity dollars), representing a decent standard of living. The as a country with few prospects, did far better than much
Human Development Index shows: wealthier Pakistan. Some 91 per cent of Vietnamese, and
91 per cent of Sri Lankan, women were literate, while only
How far a country has to travel to provide 29 per cent of Pakistani women could read or write. All Sri
these essential choices to all its people. It Lankan girls aged 5-9 were in school, while only half of
is not a measure of well-being. Nor is it a Pakistani girls were in school, and even Bangladesh had an
measure of happiness. Instead, it is a measure
impressive record in this area. Bangladesh and Pakistan were
of empowerment. It indicates that if people
have these three basic choices, they may be able again, the worst performers when it came to labour force
to gain access to other opportunities as well. participation by women: only 8 per cent of Bangladesh, and
The HDI, imperfect though it may be, is thus 13 per cent of Pakistani women, were in the labour force,
a viable alternative to GNP per capita, and it is compared to 4 7 per cent for a very poor, Vietnam.
increasingly being used to monitor the progress The gender-related development index (GDI). an index
of nations and of global society. 1 created by UNDP, measures the inequalities between men
and women capturing differences of life expectancy; adult
Thus, the HDI in Table 19.l for the selected countries, literacy; primary, secondary and tertiary enrolment rates;
unlike the GNP per capita, shows a reverse order: the and a standard of living. The GDI in Table 19.1 shows that
higher the number the worse the nature and extent of out of 175 countries in 2003, Pakistan and Nigeria performed
social development. Using the HDI, Pakistan's rank in 1993 the worst in our sample, while in Sri Lanka and China, the
was 128th out of 174 countries showing (a lack of) social gender difference between men and women was less severe.
development, but had fallen further to 146th position in Poverty indicators in Table 19.1 also show that the Human
2012, mirroring the worsening trend in per capita income. Poverty Index-which measures deprivations in terms of
In our sample, Sri Lanka in 1993, was the best of the eight vulnerability to early death, exclusion from the world of
countries selected (97th) and Bangladesh ( 146th) the worst; learning and knowledge as measured by literacy, and lack of
two decades later Sri Lanka still remains the best at 92nd access to basic health and water amenities-shows Pakistan
position, while Nigeria has become the worst in terms of HDI as one of the worst performers in the last third of the list of
ranking. Again, Pakistan had fallen by as many as eighteen 94. It also has a poverty rate, like Bangladesh and Nigeria,
positions down the HD! ladder between 1993 and 2012. where one-third of the population is below the national
Not only did Pakistan's social and human development poverty line.
worsen, but so did its comparative position with regard to It is difficult to reach any definite conclusions from the
other countries. In terms of HDI performance, the worst 45 myriad of data presented in Table 19.l. However, some
performers-from rank 142 to 186-were almost all African general observations can be made:
countries. In the lowest HDI category called Low Human
Development, of the 45 countries, only five were outside I. Pakistan's economic and social and human profile over the
of Africa. Pakistan at position 146, happened to be one of them. period 1993-2012, looked increasingly like that of African
Pakistan's human and social profile after the decades of countries, rather than that of South or East Asia.
Democracy and Structural Adjustment, looked more like that 2. All countries in our sample saw their per capita income
of poor African nations, rather than that of South Asian or rise in the 1993-2012 period, but Pakistan had the
Latin American states. Even Bangladesh and Bhutan had smallest rise.
better human and social statistics than Pakistan. Of the 186 3. Pakistan's literacy rate was abysmally low. All other
countries in 2012, the best five performers were: Norway, countries had better literacy rates.
Australia, United States, the Netherlands, and Germany. 4. Pakistan's performance is better in terms of health,
The next segment in Table 19.1 contains one of the most although with one of the highest population growth rates
important statistics cited for social development, that of in the world, problems may occur in the future.
literacy. Overall adult literacy (and importantly, female 5. Almost all indicators regarding women, showed Pakistan as
literacy) is considered to be a fairly good indicator which the worst performer, revealing excessive and unacceptable
reveals the true status of social development in any country. levels of gender discrimination.
 Chapter 19 The Social Sectors I 559

Although there are many contested explanations why better reflected its economic and social characteristics. The
this was the case, the decade of the 1990s was indeed the fact that this elevation to Medium Human Development
Lost Decade for Pakistan, with poor economic and social came at the beginnings of an uninterrupted four year period
development, not just in absolute terms, but compared to of economic boom beginning in 2002 with per capita income
many similar countries in the region and around the globe. almost doubling in this short period, implied that perhaps
The question, whether the economic turnaround between Pakistan's Human Development status and its ranking in
2002-07 resulted in any improvement of social and human 2004 ( 134/177) may have improved considerably since then.
development as well, is answered below. However, once the Musharraf government bubble burst-see
It seems then that despite having a high economic Chapter 18-Pakistan once again fell back in to the 'Low
growth performance for many years and outperforming Human Development' category.
other countries in the economic field, Pakistan's social In this section of the chapter, we consider some recent
development has been particularly poor. Even less developed trends in Pakistan's social development dealing largely
and poorer countries measured on an economic scale have with data from the UNDP's Human Development Reports
developed their social sector well ahead of Pakistan. From HDRs, where some international comparisons can be made
our evidence, one may surmise that economic growth, or and where Pakistan's social and economic progress since at
GNP per capita, may not be the most important ingredient for least the l 990s-when the HDR series was initiated-can be
social development, and that political will and commitment compared overtime using one consistent data set. Table 19.2
may be equally important. Pakistan's economic prosperity is presents a series for Pakistan's HDI and shows its trend for a
contrasted sharply with its poor social development. Some period of forty years.
facts, trends and issues are elaborated in subsequent sections. Table 19 .2 shows a number of statistics related to Pakistan's
In the next section, we examine the impact of the high economic and social performance over some decades. Firstly,
economic growth during the Musharraf government in the it shows that Pakistan's HDI value rose over the last three
period following 9/11, between 2002-07-see also Chapter 18 decades between 1975-2004 by 47 per cent. As a comparison,
for a more detailed analysis of macroeconomic developments during the same period, India's value rose by 48 per cent,
during this period. Bangladesh's by 53 per cent, and Nepal's by 76 per cent. In
the 177 country sample, most countries showed an increase
in the value of the HDI over this period, some at a faster
19.2 THE IMPACT OF ECONOMIC GROWTH pace, some slower. In Pakistan's case as well as many others,
the value first rises, but then due to some shocks, falls, but
2002-07 then rises again. Many of the poorer African countries in
the 1980s/90s depict this trend probably due to the two-
At some point between 2002 and 2004, Pakistan entered
fold crises, that of structural adjustment and HIV/AIDs.
the United Nations Development Programme's (UNDP)
Nevertheless, most developing countries show an overall
classification of those ninety or so countries which the

I
progress over these three decades and Pakistan's record is no
Human Development Report (HDR) classified as 'Medium
exception.
Human Development'. Since 1990, when the UNDP initiated
Between the period 1992-2004, Pakistan's rank fell from
its annual HDRs, Pakistan was consistently classified as one
128th in 1992 to 144th in 2001 and only recently improved,
of the forty or so countries in the 'Low Human Development'

'
I
category. (As a comparison, both India and Bangladesh too,
not surprisingly, were also originally considered in the Low
Human Development category, but both moved into the
Medium Human Development category well before Pakistan,
although Pakistan was still below as compared to where it
was in 1992. Per capita income in purchasing power parity
terms also fell sharply between 1992-2001, and rose again
after 2001. From being the 100th country on the basis of per

I
capita income in 1992, Pakistan's rank was 130th, or the 4 7th
towards the end of the 1990s). For many years, considered to poorest country in the world in 2004. However, in terms of
be a 'middle income country with low human development', the overall size of the economy, Pakistan is the 44th largest
perhaps Pakistan was now moving in to the category which
economy in the world.
ii

Table 19.2: Pakistan's Human Development Index 1975-2004

1975 1980 1985 1990 1992 1994 1995 2000 2001 2004 2012

HDI value 0.365 0.388 0.420 0.463 0.483 0.445 0.493 0.511 0.499 0.539 0.515
HDI rank 128/174 139/175 144/175 134/177 146/186

Per Capita (PC) 2225 2424*

2890 2154 1890
Income PPP$
PC Income Rank 100/174 120/175 137/175 - 130/177 148/186*

PC GDP$ 420 373 415 632 1120*

Source: UNDP, Human Development Report (New York: Oxford University Press, various issues).
* for 2011.
560 Issues in Pakistan's Economy

To summarize, Table 19.2 suggests that during the 1992- the same sort of trend in the social and human sectors.
2001 period, although there was an improvement in the In the 1977-2007 period, there does seem to be a trend in
HDI value by 12 per cent, other countries did far better than human development which is reflected in trends in economic
Pakistan (since its relative position-rank-deteriorated); growth. A key difference in the model and structure of the
Pakistan's per capita income fell as did its relative economic type of social development delivery in the pre- and post-
ranking in terms of per capita income. However, all ,these 1977 period relates to the extent of state involvement and
trends were reversed in the period 2001-04, when there had that of the privatization of services. Pakistan adopted a far
been considerable improvement. Moreover, given the fact more open and market-based delivery mechanism for social
that the period 2004-07 saw higher growth than in the past, services after. 1977, and perhaps that is why we see a closer
with per capita GDP reportedly having reached $847 by July relationship between growth and human development. In a
2006, one can safely assume that Pakistan's HDI value and market-based system in which the state plays a secondary
rank would both have appreciated even further. role, people's incomes will determine their access to health
and education services: private sector spending in health,
19.2.1 Finally on Track? for example, constitutes 76 per cent of total health sector
spending; at primary and secondary level education, one
What the evidence and data in the last section suggests, is would expect similar trends. Hence, if social sector provision
that the 1990s, the Decade of Democracy in Pakistan, was the is market-based, one would expect incomes to govern access
'Lost Decade' in terms of social and economic development- and hence, outcomes. This could be a possible reason why, in
or lack of it, and was the creation of underdevelopment, in the post-1977 period, one sees a closer relationship between
relative terms-and that it was General Musharraf who gave economic growth and human development.
back to Pakistan the high growth and development path to Linked with the argument above, perhaps, is the argument
which Pakistan had been accustomed for some years. Is this of the impact of development expenditure and public policy,
indeed the case? more broadly. In the 1971-77 period, there was active
Evidence from the period 1947-77 seems to show that intervention in the social sectors as well as increased spending,
the trajectory of economic growth was not translated into a despite low growth. It is probable that human development
corresponding trajectory for human and social development outcomes improved as a consequence in this dominantly
and, equally, low human and social development was public sector delivery mechanism. In the 1999-2005 period,
still able to support high levels of economic growth. In despite the fact that development expenditure was abysmally
fact, in the 1971-77 period, despite low growth, we were low, since private income~ were rising, the market-based
able to see considerable reorientation in the delivery and model was more responsive to people's incomes than to
expenditure on social development which must have led to development expenditure, resulting in improved human
a marked improvement in outcomes. Between 1977-88 high development indicators. This analysis shows that since
economic growth did cause an improvement in human and 1977, private incomes determine human development outcomes,
social development indicators, most noticeably in causing and increased development spending may not ensure better human
poverty to decline, yet this improvement in human and development. Even if this conclusion is partially correct, it
social development did not carry through to the 1990s has major repercussions on strategy for development in
and sustain the economic growth trend, and in fact, an Pakistan-see also Appendix 19. l.
economic slowdown resulted in a severe deterioration of If human development outcomes are increasingly
Human Development Indicators in that decade. Despite the determined by the pace of economic growth and the rise in
deterioration in human capital in the 1993-2002 period, the incomes, clearly, economic growth becomes critical for better
economy was able to pick up considerable speed following human and social development. Hence, if economic growth
9/11, a development which has led to an improvement in falters, so does the human condition. And herein lies the Achilles
indicators in human development-see also Chapter 18. heel of Pakistan's economic and social 'success' and where
The high growth/high human development in the 1977-88 international relations and the security dimension comes in
period was matched by high development expenditure, with a forceful manner.
the 1980s being the decade with the highest proportion Both in the 1980s under General Zia ul-Haq and under
of the GDP allocated to development. Similarly, the 1990s General Musharraf since 1999, international powers-
were the period when, as a consequence of poor economic primarily, if not exclusively, the United States, along with
growth and structural adjustment, a restricted fiscal space international donors-have been more than generous in
allowed only 4. 7 per cent of GDP to be spent on development. their support of military dictators in Pakistan when, on
More interestingly, in the early Musharraf period where, both occasions, Pakistan wa.s fighting the US war on its
as the economic slowdown from the 1990s continued, the Afghanistan border, as a frontline state. Under both military
development expenditure in the l 99~-2005 was a mere generals, Pakistan received financial and military aid, special
2.6 per cent, amongst the lowest ever. What do these often privileges and grants, and political support to perpetuate
contradictory and conflicting trends suggest? their undemocratic rule over the Pakistani people. Largely
The first main observation from our data and discussion on account of this support and financial aid, Pakistan's
suggests, that there are different patterns and processes at growth rates in these two eras-as they were under General
work in the period 1947-77 and 1977-2007. In the first, Ayub, another beneficiary of US largess-soared compared
economic growth (either high or low) did not seem to reflect to other periods-particularly the democratic ones. In the
 Chapter 19 The Social Sectors I 561

I War of Terror, General Musharraf, far more than General Zia,

benefited immensely from the geopolitical events following
9/11-see Chapters 18 and 25.
Pakistan's economic growth, and as a consequence, its
in all the provinces in the rural areas, the literacy rate for
women is still extremely low-see Table 19.4.
Data from the Social Policy and Development Centre's
( SPDC's) Annual Review for 2011/12 2 , shows that the Gross
human development improvement, is based on these weak Enrolment Rate (GER) at the primary level for the whole of
and fragile foundations. If Atlas were to shrug, or Musharraf Pakistan is currently around 92 per cent, having risen from 69

I
not toe the Bush line, it would have been improbable that the per cent in 1992/93. Given the fact that fewer girls than boys
growth seen in Pakistan in recent years would have continued go to school, it is encouraging to see that for girl's this rate
for much longer. As it is, the trends related to Pakistan's had gone up from 52 per cent in 1992/3 to 83 in 2011, while
economy suggested that the high growth of the 2002-07 that for boys had reached 100 per cent.
period slowed down, largely because Pakistan's recent growth Table 19.5 shows provincial data for the Net Primary
had been built on a spurt of excess liquidity, mainly in the Enrolment Rate which is age-specific, and here the situation
form of remittances and transfers, much of which fuelled an is worse than for the Gross Enrolment Rate. The Net

I artificial asset boom. As this 'boom' slowed down, the more Enrolment Rate (NER) had declined for boys, and risen
fundamental issues of an unmanageable current account slightly for girls although between 2002 and 2011 it has again
deficit and budget deficit, along with growing inflation, risen considerably for both-see also Section 19.2. The Punjab
emerged and began to undo the economic gains of the recent stands out where there had been a marked fall in the NER,
past. and even for the other provinces, the trends were not at all
In a market-based model of social development, with the favourable. Worse still, was the huge increase in dropout rates
state on the retreat, such a slowing down in the economy during the period 1996-2000, showing startling trends where
had a deleterious impact on social and human development very few children (and particularly, very few girls) completed
outcomes. In the context of Pakistan, we may have not seen their education even at primary level. The enrolment rate
the trend where increased human development increases at secondary school level since 1995 also shows worrying
economic growth-as in the East Asian model-hence only trends, particularly in the Punjab, although this has also now
high economic growth can support improving human capital. improved. Overall, the most promising trend seemed to be
Clearly, in the case of Pakistan, it is its international relations emerging in the NWFP, especially regarding boys.
and regional and global security issues which determine The SPDC Report put forward a number of explanations
human development outcomes through the linkages created for this overall downward trend. It showed that, for example,
by donor money and aid. Because of the precarious nature of average growth in real recurring expenditure on education in
the relationship between military dictatorship, compliance the period 1997-2002, fell in the Punjab and in the NWFP,
with US needs and demands in its War on Terror, and and grew in both Sindh and Balochistan, although it grew
economic growth, Pakistan's model of social and human at a slow pace since 1975! In terms of average growth in
development, is not one to be recommended for other provincial real development expenditure on education, in
countries-see Chapter 25. 1997-2002 it fell in all the provinces except Balochistan,
falling by 13.30 per cent in the Punjab and by nearly 19 per
cent in NWFP. In each of the four periods reviewed since
19.3 EDUCATION 1975, real development expenditure on education, had been
quite substantial. For Pakistan as a whole, during the period
19.3.1 Statistics 1997-2002 real education expenditure increased by only half
One of the most important statistics in the social sectors a per cent, while real development expenditure declined by
is the literacy rate, which acts as a proxy for a number of
other indicators as well, and is therefore also one of the
three indicators that form the Human Development Index. Table 19.3
Pakistan's literacy rate is still one of the lowest in the world, Literacy Rates in Pakistan: 1951-2011/12
and is worse than countries which have per capita GNP
equal to or close to Pakistan's level-see Table 19 .1 for a Year Total Male Female
comparison. While the literacy rate has risen four and a half
times since 1951 (Table 19.3), that for female literacy is still 1951 13.2 17.0 8.6
particularly poor. The repercussions of this are· discussed in 1961 18.4 26.9 8.2
the section on women in Chapter 20. Moreover, there is such 1972 21.7 30.2 11.6
1981 26.2 35.0 16.0
a marked regional and provincial differentiation that, just as
1990 34.9 45.1 20.9
in the case of doctors and the availability of health services; 59.0 35.4
1999/2000 47.1
it is futile to talk about a single literacy rate for the country. 2011/12 58.0 70.0 47.0
Table 19.4 shows the literacy rates from the 1972, 1981
and 1998 censuses, and indicates extensive regional disparity. Source: Banuri, Tariq et al. 'Human Resources Development',
While in Karachi the literacy rate was 55 per cent in 1981, it in Banuri, Tariq (ed.), Just Adjustment: Protecting the
was only 8.2 per cent in Balochistan. The rural literacy rate Vulnerable and Promoting Growth (Islamabad: UNICEF,
for women in Balochistan was less than 1 per cent, possibly 1992), 34; Government of Pakistan, Ministry of Finance,
the lowest in the world. Although it has risen in recent years, Pakistan Economic SuNey (Islamabad: various issues).
562 Issues in Pakistan's Economy

Table 19.4
Literacy Rates in Pakistan: 1972, 1981, 1998 (%)

Total Urban Rural

Both Both Both

Unit Male Female Male Female Male Female
sexes sexes sexes

Pakistan
2011 58.0 69.0 46.0
1998 43.9 54.8 32.0 63.1 70.0 55.2 33.6 46.4 20.1
1981 26.2 35.0 15.9 47.1 55.3 37.2 17.3 26.2 7.3
1972 21.7 30.2 11.6 41.5 49.9 30.9 14.3 22.6 4.9

NWFP/
Khyber Pakhtunkhwa
2011 50.0 68.0 33.0
1998 35.4 51.4 18.8 54.3 67.5 39.1 31.3 47.6 14.7
1981 14.3 22.7 4.9 32.1 42.8 18.8 10.9 18.7 2.5
1972 14.5 23.1 4.7 33.7 44.7 19.9 11.0 19.0 2.2

Punjab
2011 60.0 70.0 51.0
1998 46.6 57.2 35.1 64.5 70.9 57.2 37.9 50.4 24.8
1981 24.5 33.5 14.4 43.1 51.5 ·33.2 17.3 26.4 7.4
1972 20.7 29.1 10.7 38.9 47.8 28.0 14.7 22.9 5.2

Rest of Sindh
1998 33.4 45.00 20.4
1981 21.0 30.0 10.0 12.7 20.8 3.4
1972 22.5 32.6 10.0 17.6 27.5 5.8

Balochistan
2011 41.0 60.0 19.0
1998 24.8 34.0 14.1 46.9 58.1 33.1 17.5 25.7 7.9
1981 8.2 12.5 2.9 27.9 37.7 14.3 4.4 7.3 0.8
1972 10.1 14.8 4.2 32.3 42.4 19.2 5.6 9.2 1.2

Karachi
1998 67.49 71.1 62.9
1981 55.0 60.0 48.8
1972 51.2 55.8 45.0

Source: Population Censu Organization, Population Census Reports (Islamabad: various issues); for 2011, Social Policy and Development
Centre, Social Development in Pakistan: Annual Review 2011-12 (Karachi: SPDC, 2012), 152.

11 per cent. Another explanation for low enrolment rates in number of colleges has increased two-and-a-half times, the
Pakistan in the 1990s, could be the rise in poverty levels, with increase in the number of students has been six-fold. The
poverty rising from 17 per cent of the population in the late biggest increase in enrolment is in the universities, where
1980s, to around 33 per cent at the end of the 1990s. SPDC's the number of students has increased by thirty-two times
report shows, not surprisingly, that school enrolment rises since 1959, with a thirty-five-fold increase in the number
as income rises, and it is possible that the growth in poverty of universities. Hence, the pattern observable seems to
since the late 1980s, took its toll on educational attainment suggest that at all levels, while there has been an increase in
with fewer children being sent to school-see also Chapter the number of institutions, there has been an even greater
22 on Poverty. increase in enrolment. If this is due to the fact that many
Table 19.6, on the other hand, shows a phenomenal growth facilities run more than one school shift, then these ratios
in the number of educational institutions at all levels since show positive trends; if this is not the case, then what is
1959/60, and a similar trend in the number of students happening is that classrooms and schools are becoming
enrolled. Primary schools have increased by nine times in congested, which may be affecting standards.
the last 53 years, while primary school enrolment has gone Government expenditure on education has increased from
up ten-fold. In the case of professional colleges, while the around 1.4 per cent in the 1970s, to about 2.3 per cent in
' Chapter 19 The Social Sectors I 563

Table 19.5
Enrolment and Dropout Rates (%)

~
Net Primary Secondary Dropout Rates in Public
Enrolment Rates Enrolment Rates Sector Primary Schools
1991 1997 2002 2012 1995 2001 1996/7 1999/2000

l
Pakistan Male 49 46 46 60 35.9 33.1 41 51
Female 37 37 38 53 19.8 23.3 38 59
Punjab Male 56 45 47 62 39.5 32.3 41 53
Female 48 39 43 59 24.2 24.7 38 64
Sindh Male 43 51 46 57 26.8 30.7 46 53
Female 33 39 34 48 16.5 25.1 42 47
NWFP Male 46 42 48 57 41.7 45.2 26 39
Female 26 32 33 45 11.4 18.1 29 49
Balochistan Male 39 43 39 56 22.2 19.4 52 49
Female 20 27 24 35 7.2 12.3 30 41

Source: Social Policy and Development Centre, The State of Education, Annual Review 2002-03 (Karachi: SPDC, 2003), 9, 14, and 215. For
2011, Social Policy and Development Centre, Devolution and Social Development: Annual Review2011-12 (Karachi: SPDC, 2012), 154.

the 1990s, but fell to below 2 per cent of GDP in each of the government employees and to shape the mores
three years after 2000 and has remained at that level for and attitudes of the future elite by westernizing
many years (Table 19.7). The estimated private consumption their cultural pattern. These objectives were well
served by separating local-language-medium
expenditure on education between 1985 and 1991 increased
schools for the masses from exclusive English-
at a cumulative rate of 6.9 per cent in real terms,· or 3.8
medium educational institutions for the elite.
per cent on a per capita basis, and given the rise in private and by a disproportionate emphasis on a liberal
spending, must have increased further since. arts education. After Independence, compulsions
However, after the Eighteenth Amendment of 2010, when of economic and social development have

I
the responsibility of funding and outcomes was passed on changed the pattern of employment opportu-
to the provincial governments, one expects that the effort nities available in the country. The economy's
by different provincial governments will result in greater requirements for a large variety of skills and
spending on education. Moreover, it cannot be denied that knowledge at various levels are continuously
there has been a marked shift in preferences and usage from rising. At the same time, attainment of greater
I equity in income and access to income-earning
the public to the private sector, particularly at the primary
' opportunities are now major social goals. 3
I and secondary levels. It is incorrect to think that it is only

I
the rich and the elite who are consumers of private sector Although the structure of education, with its clear divide
education, for there are hundreds of institutions in the along class and linguistic lines, continues to persist, and in
private sector in low-income settlements catering to a large fact is reinforced in contemporary Pakistan, some attempts
number of consumers. Just as the rich want good education were made in the 1970s to change the nature and orientation
for their children, so do the middle and lower classes. The of the education system. In 1972, the Bhutto government
number of schools may have increased a great deal in the nationalized all private schools, prior to which much of the
last decades where education has become a highly profitable country's secondary and higher level education was in the
business catering to diverse needs, however, the absence of hands of the private sector, especially in the urban areas.
quality checks on the delivery and the results, does not allow While exact figures do not exist, in 1968 it was estimated
one to evaluate the nature of the 'education' being imported. that 11 per cent of schools and as many as 35 per cent of
It is clear that the numbers of those who enrol and even pass colleges were in the private sector. In 1972, the government
different tiers of schooling are all rising, but whether they nationalized 3,067 schools, 155 colleges, and 5 technical
are being educated according to any objective criterion, is institutes. A number of prestigious English-medium schools
less certain. were exempted from privatization, as were schools owned by
missionaries and charitable trusts. 4
19.3.2 The Issues The impact of nationalization was severe, for between 1972
Writing in 1984, Viqar Ahmad and Rashid Amjad argued, and 1979 the share of private schools fell. In 1976/7, only
that 1.5 per cent of all schools and 4.1 per cent of the colleges
remained in private hands. 5 After the ouster of the Bhutto
Before Independence, the main objectives of government, the Zia ul-Haq government reversed the policy
the education system as designed by the British of nationalizing schools. In 1979, it once again allowed the
were to train sufficient numbers of lower level private sec;tor to open new schools, and also permitted the
564 Issues in Pakistan's Economy

Ql
co co C') 0 N
Table 19.7
<ii I'- I'- 0 co
(/)
E I'- co
~
(0 (0 Expenditure on Education: 1972-2003
.::;
Q) cQl cf. (')
~

~ 0 en
-~ E
~ C')

. Q)
>
·1::
e C <ii
N
a>
0
I'-
0
in
co
co
(0
st
in
C')
C')
(0
co
0
co
q Years
Public
expenditure
Household
expenditure
:::J UJ ;si ~ ~ C\i 0 I'--
(% of consumption)
~ st co ~ ;;; (% of GNP)
~ ~

Q)
0 0 N C') (0 1972-1975 1.4 1.19
Q)
Ol ~
<ii I'- ~ co a> a>
E ~- 1975-1980 1.5 0.92
t1l (/)
-o
(/) 0 cf.
C')
~
""-
~
(0
(')
~

aj
1980-1985 1.5 1.04
2'.-8 1985-1990 2.3 1.22
t1l
E [ E
0
a>
0
N
st
I'-
I'-
co N 1998-2003 1.85
it t2
CX!.
~ ~
st
ID
st_
~
in
en
~ ~

(J) Source: Banuri, Tariq et al. 'Human Resources Development',

Cl)
·.;::;
'iii
in Banuri, Tariq (ed.), Just Adjustment: Protecting the
<ii st co a> N a> a>
ai Vulnerable and Promoting Growth (Islamabad: UNICEF,
·c> ;si ~ N N C')
~

1992, 36; for 1998-2003, Centre for Research on

::,
Poverty Reduction and Income Distribution (CRPRID),
Q)
<ii Pakistan Human Condition Report 2003 (Islamabad:
<ii E in (0 co co a>
C (/)
~
CRPRID, 2003), 197.
0 Q) cf.
'iii Ol
(/) 2
-2? 0
e
c..
(.)
E 0
st
C')
I'-
a>
a>
a>
a>
st
I'-
t2 C')
denationalization of some of the previously nationalized
schools.
Q)
<ii N C') a> co st At present, while data is hard to come by, it is estimated
~ -0 Q) (/)
E C') a> ~ co
as C
<ti
(.) Ql
Ol Q)
~ N C') that perhaps as many as 80 per cent of schools, especially
C u..
~ ·u 02 in urban areas, are in the private sector (see Table 19 .8).
(/) Q)
t
<( (/)
'0 (.)
As we keep emphasizing, it is important to point out that
GI E (0 a> C') N in
the private sector caters not only to the elite or the English-
()
GI t2
C\J
~
C')
C')
C')
st co N
a>
Gi speaking population of Pakistan, but also to the middle and
(/)
Q) lower middle classes, who appreciate the need for good
>< 2'.-- <ii in st co st 0 quality education. Even low income areas and katchi abadis
GI t1l ~
(/)
E C') C') co st st
C') N
(/)
!ti
~
Ql
-0
C
0 u.. in urban areas have a considerable share of private schools,
'0 0 -~
C
(/)
C (.) (.) simply because there is a demand for a minimum standard of
as 0 Ql 0 -~
Cl) > <ii 0 st ;;; in I'- perceived quality, which most government schools are unable
Gi
>
2 ;si 0
~
co
N N
N
I'-
st
(0
to provide. However, it must also be recognized that not all I
ti
~
'0
.s
Q)
C') I'- a> 0 0
private schools are of particularly good quality: one report
argues that the 'bulk of private schools provide a quality
I
1
(/)
<ii ;:::.

I
C 0 (0 C') 0 0
0 E N in a> 0 I'- q
~ 0 Q)
C\i ~
which is only marginally better than the average public
..c u.. ~

>, (.) ~
school. The major reason for the shortcomings of the majority
-
(/)
.0
..c a> I'- a> ~ 0 0 of the private sector is the lack of any regulations and controls
Ol
C
GI :i: E (0
q
st
N
I'-
st 0 0
a>
0
I'- of entry into the sector.' 6 The very poor quality of education
E t2 ~ C\i (') aj C\i aj

eC (/) Q)
co
~ N in both the private and public sectors has been blamed
upon: inappropriate curricula, poor quality of teachers and
w 0 <ii ;;; C')
N in
st
0
0
0
0 textbooks, improper teaching methods and techniques, and
'0 0
..c E N q ~- C') in q
C
as (.)
(/)
Ql
u.. ~ ~ (') aj
N the absence of a link between market demand and output
Ill Ql from the sector.7
C 'ti st 0 in a> 0 0
0 -0 E I'-
a>_
~
~
a>
N
C')
in
0
~
0
0
J. R. Behrman argues that issues of governance, limited
j ~ t2 ~ ~ ID aj en ~
~
accountability and responsiveness to clients, and particularly
'tii over-urbanization are key causes of the poor status of the
.5 Ql 0 0 in N 0 0
education sector in Pakistan. Moreover, political interference
iii
0 "' "iii
E
(0
N
a>
N
a>
in
N
st
0
C')
0
0
0
..c (') C\i aj 0C') ID I'-. makes matters worse. He writes:
C (.) cf. ~ ~ in in
0
iu "'c'.' st a> 0 0 0 Anecdotes suggest that there have been serious
:::,
<ti
E 0a> in
co
(0 co 0 0
problems in these dimensions of governance:
E ~ in ~ (0
'0
w
·c:
c.. t2 r--:-
~
ID
st
en
Lt)
st-
~
en
st
~-
in schooling quality often has been low; primary
~ ~ ~

U! 0 teacher appointments in a number of cases

a, ..
.,. GI
have been made by provincial Chief Ministers

I
N
or .Secretaries or by Members of Parliament
.! j
.0 :::,
i! z
~
;:::.
a>
~

c5'
co
a>
~

c5'
a>
0)
~
00 --0
~

~
(all of whom have heavy demands on them so
this patronage has diverted them from more
~ ~ ~ ~ N N
,
Chapter 19 The Social Sectors I 565

Table 19.8 Girls moving from primary to secondary schools in 1987 were
Distribution of Enrolment by School Type (%) 9 per cent less than boys, implying higher drop-out rates for
girls. 9 One reason for this has been lower school availability
Region Government Private and accessibility for girls. Whether or not a school is available
in the same or nearby village is claimed to account for one-
Rural Sindh 96.5 3.5 third of the large gender gap in schools. 10 While distance to
Rural NWFP 97.4 2.6 a school may not be critical for boys, for girls, and especially
Rural Balochistan 89.8 10.2 girls in rural areas, it makes a difference whether they
Rural North Punjab 92.3 7.7
attend school or not. Travelling time to school is a significant
Rural South Punjab 93.1 6.9
Small cities, towns 75.0 25.0 variable, especially for girls: the longer the time involved, the
Major cities 57.3 42.7 less likely it is that the girls will attend school.
High drop-out rates are a serious problem affecting the
Source: Behrman, J. R., 'Pakistan: Human Resource availability of an educated population. Drop-outs take place
Development and Economic Growth in the Next for a number of reasons: a low overall level of economic
Century', mimeo, 1995, 12. development; extensive and widespread poverty; the
existence of child labour, which means that the opportunity
cost of being in school is high; costly reading material and
important activities as well as having delayed stationery; poor motivation among parents to retain their
appointments and resulted often in poor fits children in school; a persistent (albeit declining) negative
between the appointments and the positions attitude towards formal education; and a general lack of
being filled); teacher absenteeism often has decent, cheap, and high-quality education.
been high in part because of the difficulty of
Many of these issues, such as high drop-out rates, the
monitoring what is happening in the villages;
physical capacities have been underused instead imbalance between boys' and girls' education, and the poor
of having multiple shifts; curriculum decisions quality of teachers and schools, exist in other underdeveloped
have been very centralized; centralized payment countries. The medium of instruction is also a matter of
systems sometimes have had substantial concern among educationists, planners, and politicians.
arrears (e.g. reportedly 46,000 teachers in the Should schooling be in English, Urdu, or the mother tongue
Punjab recently have had five-month Jags in or home language, and how should the differences be
remunerations); 'bricks and mortar' orientation marked? Rashid Amjad and Viqar Ahmad write:
has dominated even though staff and non-
salary current expenses often have been the The existence of elite English-medium schools
apparent bottlenecks; focus has been on formal side by side with national and regional-
public schooling, with little attention and languages-medium schools also creates equity
at times disincentives or strong regulations problems. Since command over the English
that do not seem related to education (e.g. language is still an asset in getting prized
provincial salary regulations for private government and non-government jobs, entry
schools) for informal education and private to such jobs becomes restricted to those lucky
education; new girls schools have been delayed enough to have access to the limited seats in
in becoming operational because of 'lengthy English-medium schools. It is interesting to
procedural requirements for sanctioning of new note that these schools were not nationalized
expenditures and teachers' posts'; monitoring in 1972. 11
and evaluation activities have not been carried
out despite commitments to do so. Changes in For a country which has been facing a crisis in the
a number of these dimensions of governance education sector, and given the emphasis put on education,
are underway or are being explored in various
discoveries at various times have been made at the presence
experiments underway, including some in
SAP [Social Action Programme). For example, of schools which exist only on paper and in name, but not
reportedly under SAP, at least at the higher levels on the ground, in reality. While we have discussed issues
of the governmental educational hierarchy, some about the quality of education in Pakistan, the presence of
accountability for funds received is replacing 'ghost schools', puts into some perspective, the problem of
the prior sense of entitlement without any need education-and of the social sectors, more broadly-into
to account for use .of resources. But substantial proper context. The problem of ghost schools shows not
governance problems remain. 8 just official corruption and embezzlement, but also that of
NGOs in the business. Clearly the claim that civil society is
Among the most distressing observations from the necessarily better at delivering social services, needs to be
education sector are the statistics that show the dismal tempered and more evidence made available for such clear
state of education amongst girls and women. There are large statements to be made-see·Boxes 19.1 and 19.2. Box 19.1
gender gaps in schooling, where the primary enrolment rate also highlights other aspects of Pakistan's education system,
for girls was 15 per cent below total enrolment rates in 1991, such as the availability of even basic resources necessary to
and 8 per cent below the total rates for secondary enrolment. teach children.
566 Issues in Pakistan's Economy

Box 19.1 2. Bakhtawar Mian writes:

Just How Many Ghost Schools Does Pakistan As many as 30,000 ghost schools exist in the country which
Have? draw regular funding from the public kitty, says a report
prepared by the Consumer Rights Commission of Pakistan.
These two excerpts from the same newspaper a few weeks
The report 'Using local government ordinance 2001 to
apart, signify the problem with data in Pakistan, and highlight
enhance transparency in education' talks of the lacunas in
the fact that we don't have data about schools, or about many
the education sector. It says that due to lack of transparency
other things, in the country.
and public monitoring, use of funds in the sector is not
equitable and need-based. Instead, it is mostly politicized,
1. Khawar Ghuman writes:
depriving the schools in relatively poor and backward areas
The first ever National Education Census (NEC) conducted of necessary facilities. Today, there are 22,755 schools
by the federal education ministry has come up with shocking (16. 75 per cent) without shelter, 61,383 (39 per cent) without
revelations like the existence of 12,737 ghost schools in the drinking water, 96,708 (62 per cent) without electricity,
country. Out of 164,579 government schools covered by the 76,312 (49 per cent) institutions without toilet facilities, and
census, 6.8 per cent lack buildings, 32.3 per cent are without 71,681 (46 per cent) schools have no boundary walls, the
drinking water, 56.4 per cent without electricity, 40.5 per cent survey notes.
without toilet, and 37.8 per cent without boundary walls. It targets the whole system and says that the evaluation
The findings of the census were shared with journalists by process is not transparent. In the past, students had been
Federal Minister for Education Lt-Gen (retired) Javed Ashraf able to pass examinations by giving bribes and managing
Qazi on Friday. The total number of educational institutions to get fake degrees and certificates. Administrators and
covered in the NEC was 245,682, 164,579 (67 per cent) in supervisors in districts have become corrupt and found to
public sector and 81,103 (33 per cent) in private sector. After extort bribes from teachers, students, and parents even
excluding ghost schools, and those which refused to share for resolving their legitimate concerns. 'The recruitment of
the information, the net- number of institutions which formed teachers and other staff is very often politicised which ends
the database of the census is 227,791. up in recruitment of incompetent and low-quality human
The minister said that some of the 12,737 ghost resources. Similarly, transfers of teachers are not done
schools 'exist only on paper, others have buildings but no on merit and correct need, but on the basis of informal
student or teacher. The largest number of non-functional connections and political influence.' Embezzlement of public
institutions-7,442 (58.5 per cent)-was found in Sindh, with funds is a major problem, but due to secrecy and lack of
4,126 refusing to provide information. public accountability, this corrupt practice could not be
Another finding is that only 1.4 per cent of government rooted out.
schools offer English as medium of instructions; 68.3 per As a whole, the survey paints a very disturbing picture
cent follow Urdu as medium of instruction and 22.4 per cent of the state of affairs in the education sector, saying it is
Sindhi medium. dismally disheartening, as a non-opaque and cumbersome
NEC data reveals that out of 26,809 urban blocks, 6,149 procedures, formal as well as informal, have allowed the
have schools and colleges, and out of 50,585 villages, abuse of powers to flourish in this sector. The present
10,908 have no institution. The overall enrolment in 227,791 procedures and rules do not provide much space for
institutions is recorded at 33.38 million with the teaching staff citizens to participate in the relevant planning or to play any
of 1.357 million. significant monitoring role in the sector. As a result, problems
of corruption, inefficiencies and irrational allocation of
resources pervade this vitally important field. The report
stresses on transparency in order to do away with the culture
Source: Ghumman, Khawar, '12,737 ghost schools in country: of secrecy in decision-making and actions and enable
census', Dawn, 7 October 2006. people to hold the government officials accountable for
what they do

Source: Mian, Bakhtawar, '30,000 ghost schools in country:

report', Dawn 17 April 2006.

19.3.3 Summarizing the Issues in demand has outstripped supply, hence the increasing role
of the private sector. Moreover, as consumers have become
Education
more quality conscious, the choice of type of education has
As government facilities have not been able to keep pace burgeoned. The private sector will continue to grow over the
with growing demand for educational services, especially at next few years. Recognizing this fact, the government should
the lower levels, the private sector and non-governmental encourage the growth of the private sector, but should also
organizations now play a critical role. Primary and secondary develop checks and balances to ensure an adequate standard
education has now developed into a large business where of facilities. Some components of the private sector in
 Chapter 19 The Social Sectors I 567

Box 19.2 serious problems. There are 13,094 schools under the SECS
Ghost Schools in Pakistan umbrella and more than half may be bogus. The NEF has to
outsource administrative checking of schools under SECS
In an editorial, The News highlighted some of the issues to local NGOs, who are themselves a part of the problem
concerning ghost schools in Pakistan. rather than part of the solution, as they generated their
own administrative costs and were as prone to corruption
If Pakistan had as many schools in reality as it does on
as any government agency. The thinking behind the BECS
paper there would be no crisis in the education sector, and
scheme was good-small community schools that are
we might be able to fulfil our constitutional commitment
home-based serving a minimum of thirty students and with
to free education for all. From the point of the 1947
teachers who were matriculate, intermediate or graduate.
Partition, education has never been prioritized and it still is
Some schools have been successful and have students up
not, with education budgets actually shrinking rather than
to class 3, and in general terms the model is satisfactory.
expanding to match the growth in population. And now
But the devil is in the detail, and for the scheme to have
we see the return of 'ghost schools' in the context of a
achieved its full potential rigorous monitoring was necessary
federal government education project-the Basic Education
from the outset. It appears that the capacity to monitor
Community Schools (SECS). Ghost schools exist on paper
adequately was either missing or below par, and the SECS
and never operate, but they have 'staff' and sometimes
schools are yet another good idea that foundered on the
buildings. The fictitious 'staff' are paper creatures and only
reefs of corruption and ineptitude. Yet again many of the
live on a balance sheet, their wages disappearing into an
allegations of corruption centre on a political appointee, and
assortment of corrupt pockets. Some 'staff' have fake CNIC
the reticence of the National Accountability Bureau (NAB) to
numbers. Vehicles have been misused and large sums of
pursue the case may well be because of its 'sensitivity' in
money illegally taken from bank accounts associated with
that powerful members of the ruling PPP would come under
the programme. The Planning Commission and the National
scrutiny. There is a genuine and continuing emergency in
Education Foundation (NEF) have alleged that there are
our education system. Some opine that it is 'too broke to fix'
more than 8,000 ghost schools in the SECS project and
and there is no disagreement that education at every level is
they are spread right across the country, including in the
in need of a major overhaul. Getting the SECS project back
federal capital. The project is large, over 8 billion rupees, but
on track would be a significant step in the right direction.
funding has now been stopped in the current fiscal year as
the irregularities and corruption has come to light.
There is some dispute about the actual number of ghosts
in our midst, but no dispute that the SECS programme has The News, Karachi, 21 July 2012.

education, while fulfilling an urgent need, have compromised years, it must be the expansion of facilities for girls. This
on standards, relevance, and quality. The government will will involve not just opening more schools for girls, but
have to ensure, through a well-devised monitoring process, attempts to increase the availability and quality of female
that minimal acceptable standards are maintained and teachers will have to be a central piece of any strategy for
enforced. However, this task, while important, cannot be left increasing and improving education for schools. Since the
to the government alone, and the private sector, community mobility of females is restricted by social. norms, potential
groups, and government will need to work jointly towards teachers will have to be found from local communities. If
common goals. adequate financial incentives are given to train such girls,
Although the government's role in the provision of it is likely that such schemes will be successful. In the
educational facilities in the recent past has been eclipsed by informal sector, the phenomenon of home schools should be
the private sector, the government continues to own and run encouraged. Such schools need funds, guidance, direction
a vast network of schools. The increase in numbers has often and supervision, something which could be provided through
meant falling standards and inadequate services provided to Education Foundations and even government support.
users. To ensure better quality from existing resources, local Data from studies on education show that the number of
community groups need to be involved in supervising the primary schools has increased over the last few years, as has
educational facilities. Participation, even control, by lower enrolment. Quality issues notwithstanding, the government
tiers of government and concerned actors must also become should be complimented for its efforts at increasing these
part of the educational strategy (see Chapter 20). numbers. Perhaps the time now has come to providefor these
One area where the government must continue its efforts primary school leavers at the next level. The strategy in the
at an increasing pace is that of girls' education. With very immediate future should shift from an emphasis on primary
low and inadequate female literacy and school participation schooling to one where secondary schools form an increasing
, rates, the development of facilities for girls cannot be left to component of the education programme, Moreover, there is
the private sector alone. If the government is to undertake an urgent need to·reform the curriculum in secondary schools
one major task in social development over the next few and to add subjects with a vocational angle.
 568 Issues in Pakistan's Economy

However, this line of argument acknowledges the failure Pakistan was one of the first countries in the world to initiate
and abdication of the public/government schooling system, a national family and population planning programme, and
particularly at the primary and secondary levels. If private did so as early as the 1950s. However, it seems that the
schools meet a need, they do so because they are perceived many population programmes that have been initiated
to be better than government schools. If private schools have, until recently, had only a limited impact on fertility,
are going to fill the quantity, access and even quality voids and that Pakistan's success rate has been poor compared
which exist, then the larger question about the role of the with other countries that started later. For the most part,
government in the provision of public goods, arises. If the free demographic targets have seldom been met, and the lack of
market, which is unregulated and profit-oriented, becomes political commitment is considered to be a key factor. Added
the norm in education, as it is at the lower tiers of education to this has been a lack of funding for the programmes, as

I
in Pakistan, then the role of government becomes merely to well as weak management to oversee and implement them.
provide poor quality education to those who cannot afford Moreover, changes in leadership, management, and focus
the private sector, i.e. regionally and economically deprived have been frequent, thus failing to give the programmes a
groups. This would further discriminate against the under- secure footing.
privileged groups, regions, and even against girls. Clearly, this Given the changing approaches of the political and
is not a preferred option, and there has to be an improvement technocratic leadership, population policy has also undergone
in the delivery of public sector education in Pakistan. frequent change. In the period 1965-73, the population
Education cannot be left to the market alone. programme relied 'mainly on the use of traditional midwives
(dais) to motivate the population, distribute contraceptives,
and refer clients for IUD insertions and sterilization'. 14 The
19.4 POPULATION WELFARE AND FAMILY Bhutto government in 1973 introduced a novel mechanism
called the 'continuous motivation system', which was meant
PLANNING: THE DEMOGRAPHIC to be implemented by well-trained couples rather than dais.
TRANSITION The population programme suffered its worst setback in 1977,
under the banner of the Islamization programme of General
19.4.1 The Evolution of the Population Zia ul-Haq, when it was discontinued for three years. In these
Welfare Programme three years, no motivational campaigns or field activities
were undertaken. After 1985, when democratic forces began
Pakistan, currently with a population of more than 180
to re-emerge and share power in government, the population
million, was the eighth most populous country in the world
welfare programmes-essentially a pseudonym for family
in 1995, but has now become the sixth most populated
planning-were once again restarted.
country in the world, overtaking Russia and Bangladesh.
In 1990, with the return to a more meaningful electoral
In the inter-censal period 1981-98, the population growth
order, and with the lame excuse that 'Islam is against family
rate was 2.69 per cent which was amongst the highest in
planning' finally out of the gamut of mainstream politics
the world. This high growth rate is surprising, considering
and out of issues of social development, the population
that before 1950 Pakistan's annual population growth rate
programme was strengthened substantially when a separate
was less than 2 per cent. The total fertility rate, 'the average
Ministry of Population Welfare was created and given the
number of children that would be born alive to a women
responsibility for all population matters. There was such a
during her lifetime, if she were to bear children at each age in
sea-change that 'during 1991, government undertook an
accord with prevailing age-specific fertility rates', 12 fell from
accelerated program and political support for family planning
between 6.3 and 6.5 in the 1970s, to 6.0 in 1984/5 and 5.4
was now more open. Government programs included steps
in 1990/1, 13 falling to 4.77 in 2000 which is still on the high
to expand service delivery and improve efficiency. The
side. Table 19. 9 gives some essential indicators regarding the
number of fixed and mobile sterilization units was expanded.
demographic transition of the country.

. Table 19.9
Trends in Demographic and Health Indicators: 1965-2002

1965 1970 1975 1980 1985 1990 2002

Total population (millions) 52.6 60.6 71.0 82.6 96.2 112.4 146
Population growth rate (%) 2.7 3.0 3.1 3.0 3.1 .3.1 2.69
Crude birth rate (per thousand) 48.0 47.6 47.4 47.1 45.1 41.6 30
Crude death rate (per thousand) 20.9 19.1 16.9 14.7 13.1 11.9 8
Total fertility rate (birth per woman) 7.0 7.0 7.0 7.0 6.5 5.8 4.77
Contraceptive prevalence rate
(% of females 15--49) n.a. n.a. 11.0 5.0 9.1 10.7 27.6

Source: World Bank, Staff Appraisal Report: Pakistan Population Welfare Program, Report No. 13611-Pak (Washington DC: World Bank,
1995), 56; for 2002, Government of Pakistan/UNFPA, Pakistan Population Assessment 2003 (Islamabad: GOP/UNFPA, 2003).
 Chapter 19 The Social Sectors I 569

Population education programs were enlarged and targeted Plan when the government itself cut its own initiative, and
better. Field supervision was strengthened and community was 40 per cent of the al1ocation in the Seventh Five-Year
involvement was sought.' 15 Plan ( 1988-93). The main source of funding was USAID,
Because the focus of the population planning organizations which provided as much as 87 per cent of total assistance
in the past had been primarily on the supply of contraceptives during the Seventh Five-Year Plan. After the departure of
irrespective of the demand for these products, the impact on USAID from Pakistan in 1993, foreign assistance covered
fertility was low, and the population growth rate remained about 25 per cent of the population programme expenditure,
high. By the time the Seventh Five-Year Plan was launched which remained about the same over the 1993-2004 period,
in 1988, a multi-sector population programme approach had showing that the government is the main player in the
been devised, consisting of three major components: provision of contraceptives. Since 1993, social marketing
organizations which promote and advertise contraceptives,
i) establishment of Family Welfare Centres to provide and have large amounts of donor funding, have played a
family planning services jointly with mother-child major role in popularising and making available, different
health care, motivation/education and community types of contraceptives. Donor funds in the population sector
development activities; increased from $15.5 million in 1990, to $28 mil1ion in 1999. 21
ii) provision of gynaecological and obstetric services and In recent years, and especially after devolution under
contraceptive surgery through reproductive health the Eighteenth Amendment, there does not seem to be a
service centres established in government and private concerted programme to address population planning by
sector hospitals; and the government. NGOs and the heavily subsidized private
iii) implementation of a Major Information, Education sector now take the lead in providing facilities for family
and Communication Program, which through mass planning. This is even though Pakistan's contraceptive usage
media, personal and group communication promotes rate in 2011 was only 27 per cent, while Sri Lanka's and
breastfeeding, maternal, and child care practices, India's was 68 arid 56 per cent, respectively. Both Iran and
nutrition of the growing child, responsible upbringing Turkey have a contraceptive usage rate of 73 per cent, and
of the child, late marriages and the status of women. 16 most Muslim countries have a higher contraceptive usage
rate than Pakistan's very low rate. This may also explain the
Just as the philosophy and emphasis have changed, so has fact that Pakistan has one of the highest population growth
the amount of funds al1ocated to population welfare projects. rates in the world, of 2.03, compared to 1.3 in India, 0.8 in
During the 1980s, expenditure on the population sector Sri Lanka, and 1.0 in Malaysia and Iran, all countries having
averaged 0.06 per cent of GNP and never exceeded 0.07 per considerably higher contraception prevalence rates.
cent. As a share of total public expenditure, expenditure on
population averaged 0.24 per cent during 1983-92, which 19.4.2 Knowledge and Usage
was less than 10 per cent of the total expenditure on health. 17
This, by any stretch of the imagination, is on the very low A 1995 World Bank report on population in Pakistan argues
side. As a World Bank report on population planning in that 'taken altogether, all of Pakistan's family planning
Pakistan concluded, 'chronic underfunding of the population effects make services available to less than a quarter of the
program has constrained its prospects for expanding outreach population. The Ministry of Population Welfare covers about
and improving service delivery' . 18 10-12 per cent of the population and other organizations
With the change in emphasis prior to the Seventh Five- another 13-15 per cent. Such low coverage is partly responsible
Year Plan, the government was, for once, willing to put its for the low contraceptive use. The number of clients per facility,
money into an area that it felt needed priority. The actual however, varies widely across and_ within provinces and
expenditure on the population sector during the Seventh between urban and rural areas.' 22 Although these numbers
Plan actual1y exceeded the Plan a11ocations, reflecting the may have improved, as we show above, they are still far worse
renewed and growing priority given to the population sector. than comparable countries. According to the estimates of the
The Eighth Five-Year Plan placed an even stronger emphasis Ministry of Population Welfare, the coverage is about 54 per
on the government's population programme, aim'ing to spend cent in urban areas, while it is only 5 per cent in rural areas.
Although some facilities do exist, they are widely spread and
0.15 per cent of GNP between 1995/6 and 1997/8. Although
a small figure in absolute terms, this is, nevertheless, double most offer very limited services. It has been calculated that
what the government had spent of late and was three times the average walking distance to a Family Welfare Clinic in the
the amount allocated under the Seventh Plan. 19 The World Punjab is about 9.3 km, while it is more than 100 km in parts
of Balochistan where, for all practical purposes, supply seems
Bank has observed that 'over the last few years, a consensus
quite restricted, especially since visits to the clinics involve
has been growing in Pakistan on the need to address the
considerable time and travel costs. Evidence shows that few
population issue seriously' .20 While discussing the funding
clients, rural or urban, are willing to travel more than 5 km
aspects of the population programme, it is also important
to a clinic and very few actual users travel more than 10
to emphasize that a large amount of the funds have often
km. In Pakistan, 'in both rural and urban areas, awareness
come from abroad as foreign aid, a component that has
and use of Family Welfare Clinics declines sharply with
varied considerably. Foreign aid contributed 19 per cent of
increasing distance from a Family Welfare Clinic'. 23 However,
funding to the population programme during the Fifth Five-
increased donor presence and NGOs have made access and .
Year Plan ( 1978-83 ), rising to 53 per cent during the Sixth
570 Issues in Pakistan's Economy

supply much easier, and NGOs have played a major role in especially those affecting women, such as female education,
supplying contraceptives. However, the government is the female labour force participation, and the infant mortality
most important source for supply of contraceptives, and until rate. Poverty, illiteracy, and women's low status in society all
government outreach increases and improves, the choice and combine to sustain the high levels of population growth in
use for family planning will be limited. Pakistan. Moreover, features such as location of residence-
Evidence about knowledge and use of family planning urban, large city, small town, rural, etc.-also affec:t the TFR
techniques in Pakistan has shown that a very high percentage (see Table 19.11). There is a marked fall.in the TFR in large
of married urban women (97 per cent), and an impressive 94 cities compared with the rural areas. Similarly. there is an
per cent of rural women are aware of some form of modern even more appreciable decline when one considers levels of
birth control (Table 19.10). Education plays an important education: with no education, the total fertility rate is 5.7
role: as the level of education among women increases, so and higher than the overall average of 5.4, while for those
does their knowledge about contraception. This is hardly a women who have secondary education, the total fertility rate
surprising result, since it is likely that women with more falls sharply to only 3.6. Education, it emerges, in study after
education have greater access to the media, which is a major study, is the single most critical determinant of most key social sector
source of information on family planning, and have access indicators, especially fertility related issues-see Chapter 20 on
to a wider social network in which information about family women for further discussion.
planning is likely to be available. Moreover, since better-
educated women are likely to marry better-educated men 19.4.3 Some Issues
as well, there are possibilities of more information being
available. One of the more surprising results from a large Delivery and Quality
survey conducted in Pakistan was that it was the NWFP, The quality of services available for family planning is
rather than Punjab as one would have expected, where the considered to be uneven, and often inadequate. Many
largest number of married women were aware of modern Family Welfare Clinics, like much of the public sector, work
contraceptive methods: 83.3 per cent of married women intermittently, are frequently closed, and have staff that are
in NWFP knew about contraceptives, compared with 79.9 often absent or inadequately trained. A study found that
per cent in the Punjab, 73.9 per cent in Sindh, and 36.5 per about one-fifth 'of these centres lacked examination facilities,
· cent in Balochistan. 24 However, despite this knowledge, the and many did not offer adequate privacy in examination
usage-Contraceptive Prevalence Rate-is still only 27 per and counselling areas' .25 It is not surprising, then, that the
cent, and has not improved in over a decade, which in India poor quality of service in government clinics deters and
is 56 per cent and in Bangladesh an impressive 58 per cent. discourages users. This is despite the fact that the demand
It is worth noting that Bangladesh had a annual population for family planning services in the country is quite high and
growth rate of 2.3 per cent in the 1970-90 decades. This has continues to go unmet. In rural areas where only 5 per cent
now fallen to only 1 per cent. ·
of married women had access to family planning services,
The total fertility rate (TFR), which has fallen over the virtually no outreach had been provided for women who may
last few decades, depends upon: the incidence of marriage, want to use family planning services and who 'have to cover
the age at marriage, the practice of breastfeeding, use of too great a cultural and physical distance to obtain them'. 26
contraception, and a number of socioeconomic variables,

Table 19.10
Fertility Rates and Contraceptive Knowledge, Att!tude, and Practice

Total Knowledge Both Current

fertiiity of husband use of
rate modern and wife any
15-49 contraception approve method
(%) (%) (%)
1995 2000 1995 2000 1995 2000

Residence
Urban 4.9 3.67 91 97.3 53 26 39.7
Rural 5.6 .5.40 71 93.9 24 6 21.7
Education
None 5.7 73 27 8
Primary 4.9 92 43 18
Secondary 3.6 95 70 38
Overall 5.4 77 34 12

Source: World Bank, Staff Appraisal Report: Pakistan Population Welfare Program, Report No. 13611-Pak (Washington DC: World Bank,
1995), 33; for 2000, Government of Pakistan/UNFPA, Pakistan Population Assessment 2003 (Islamabad: GOP/UNFPA, 2003).
 Chapter 19 The Social Sectors I 571

i
I Table 19.11
Fertility by Background Characteristics
most people, given the increasing cost of living, there may be
few choices regarding family size. In such circumstances, the
role of family planning should be to improve the provision
Total Mean no. of information and the supply of services and facilities. The
Background
fertility of CEB evidence suggests that there is growing knowledge and
characteristics
rate (women 40--49) awareness of family planning techniques and a recognition of
the need for such services. What is lacking is adequate supply.
Residence
Total urban 4.9 6.3
Major city 4.7 6.3 19.4.4 Pakistan's Demography: Dividend
Other urban 5.2 6.4 or Disaster? ·
Rural 5.6 6.4
Province Optimistic views about Pakistan's place in the-world, often
Punjab 5.4 6.3 those of the government in power, package and spin Pakistan's
Sindh 5.1 6.6 population and demographic transition in highly favourable
Karachi 5.0 7.1 terms. Statistics are marshalled which show that Pakistan has
NWFP 5.5 6.1 the world's sixth largest population, according to un'confirmed
Balochistan 5.8 5.7 and uncontested figures has the seventh largest diaspora as
Education level attended well as the ninth largest labour force. An assumption is made,
No education 5.7 6.5
based on the fact that the developed countries have rapidly
Primary 4.9 6.1
Middle 4.5 declining fertility and aging populations, that Pakistan's
5.3
Secondary 3.6 4.3 so-called, growing 'talent pool' might be able to play a bigger
Total 5.4 6.4 role to satisfy global demand for workers in the twenty-first
century and contribute to the well-being of Pakistan as well
CEB = Children ever born. as other parts of the world. There are huge assumptions made
Source: NIPS, Pakistan Demographic and Health Survey, in such optimistic scenarios and often hard realities affecting
-1990/1991, Islamabad, 1992, 41. Pakistan's economy, are overlooked.
Pakistan's Crude Birth Rate (CBR) peaked at about 45
in the late l 970s to early 1980s, around the time when the
demographic transition took off and decreased to 30 births
Economic Factors and Fewer Children per 1000 population by the year 2006. By 2050 it is expected
Much of the discussion in the earlier sections have focused to almost halve, at 16 births per 1000 population The Crude
on the technical aspects of family planning-the number Death Rate (CDR) in Pakistan declined from 24 deaths per
of facilities, the demand for services, etc. One of the most 1000 population in 1950 to approximately eight in the year
important determinants of having fewer children is the 2006. It is expected to continue to decline before increasing
household's economic constraints. It is becoming increasingly again, after the year 2045. This increase would be due to
difficult to afford large families nowadays, where the quality the changing age structure of the population, which would
of human resources matters just as much as the quantity. then have a bigger proportion of the elderly. The population
Many families are forced to opt for a smaller family due to growth rate was highest in the 1980s, according to some
economic constraints, which also effect larger families as estimates around 3.5 per cent per annum. This rate began
well. In addition, as much of the available information and to decline after the mid- l 980s, reaching a rate of two per
data suggest, that more education results in lower fertility cent per annum by the year 2006. It is estimated to be
rates and a greater use of birth control methods. Greater around 1.8 per cent presently-the Government of Pakistan
migration to urban areas is another factor that results in statistics state that it is 2.03 per cent. Low and high variants
smaller families, essentially because in larger cities, given the of population growth rates by the year 2050 show figures in
problems with employment, _housing, and access to services, the range of 1.26 and 0.25, respectively, as the fertility rate
it is not economically viable to have large families. also falls. The dependency ratio has also declined from 0.86
The status of women-their education, labour force to 0.75 over the last two decades.
participation, etc.-is a critical factor that also affects family Demographers looking at the age structure of Pakistan
planning. As we argue in Chapter 20, the status of women and the possible dividend which it might bring about, have
is also linked to economic development. Hence, as growth suggested that this dividend exists in the period 1990-2045,
or development takes place, women's contribution to the after which the opportunity to capitalize on the young age
economy increases and their status improves, with the likely structure will be lost. Economists believe that there is a
result of a fall in the population growth rate. three to four decade window available-with two decades
While cultural and social factors are also influenced by already lost-for providing employment to, and increasing
economic and social development, most changes in the the productivity of, the rapidly growing labour force, in order
population growth rate wi:W. come about once individuals and to improve and increase growth in the economy.
households recognize, or are forced to accept, the need for Pakistan's demographic transition projects a young
smaller families, essentially: on economic grounds. Smaller population, all in an age bracket which ought to promise
families mean better-educated and healthier families, and for a gainfully employed, and increasingly skilled, population
572 Issues in Pakistan's Economy

for some decades to come. With around 50 per cent of the This dire analysis leads to the discussion about the
population below 20 years of age and 60 per cent below 30, its quality of growth in Pakistan, and that of education and
workforce is growing at a faster rate than the total population. skill formation in the country. While the literacy. rate and
Pakistan's population is projected to reach a staggering 350 education enrolment rates have been rising, with a growing
million by 2050, almost double its present size, with the age middle class conscious of the gains from higher education,
structure showing a share to be occupied by the working age skill shortages are not uncommon in Pakistan. Moreover,
group progressively increasing. The urgent need to capitalize with growth being depressed and slow, a young and mobile
on this transition will affect Pakistan's future. member entering the workforce, particularly one who is
Estimates and calculations suggest that within the labour skilled, will seek any form of employment anywhere. This is
force, the number of persons in the young age group likely to create a further brain drain on Pakistan's economy,
(between 15 to 49 years) is projected to double from 96 since those who can migrate-the high-skilled job seekers-
million in the year 2010 to 181 million in 2050. At the same will do so. With other factors, such as political instability
time, the total labour force is projected to increase from 110 and the precarious law and order situation, the attraction for
million currently, to an estimated 235 million in 2050. Various young Pakistanis to stay on and work in the country works
esfimates indicate that around 3.1 million persons, out of against keeping the better-skilled population in Pakistan.
which as many as 2.1 million are young, will enter the labour While the quality of education is a varied mix, in the
force annually, and will continue to do so till 2050. Three rising urban middle class, there is a substantial and growing
million jobs wilJ need to be created every year to incorporate demand in Pakistan from stu_dents, parents, and employers,
the main component of the demographic dividend. Given for private quality higher education along with a willingness
existing trends in the economy, can one make capital from and capacity to pay relatively high tuition fees. There has
this available labour power? been a boom in private institutions seeking affiliations
Between 2008-13, Pakistan's GDP growth rate has been with foreign universities to ensure they offer information
around 3 per cent, and while it has had a five per cent plus and training that is of international standards. Some data
record over the last five decades, recent trend averages suggest suggests that there may be around 40 programmes running
a lowering growth rate trend. Government figures give an in affiliation with British universities at undergraduate and
unemployment figure of 5.6 per cent, a figure which has not graduate level in the private sector in Pakistan, with the UK
been found to be credible and has varied little even when providing the large part of this market. Quality education is
the GDP growth rate fell to 1.7 per cent in 2008/09. In fact, a high growth area in Pakistan, and the active recruitment
the unemployment rate claimed by the government, was the of Pakistani students in foreign universities, as visible
lowest since 1999, in 2008/09, when the economy grew by the through the large number of advertisements in newspapers,
slowest rate in more than two decades, giving an indication is indicative of this trend. Numbers of how many students
of the reliability of the statistics. The presence of a large- avail of these opportunities are difficult to acquire, and it is
perhaps as large as the size of the economy-undocumented even more difficult to assess how many Pakistani students
and informal economy, does mean that actual unemployment fail to return to Pakistan.
figures are hidden. Moreover, the phenomenon of disguised Although Pakistan has been at the forefront of the War
unemployment, common not just in the agricultural sector on Terror, and while fundamentalism and militancy have
which employs around 45 per cent of the labour force, is increased, it would be simplistic to equate the absence of
also manifest in the services sector, where jobs are created job prospects in the youth with growing Talibanization
to accommodate a gr_gwing population, compromising low and militancy. Nevertheless, it cannot be ignored that
productivity and output. unemployment and the dwindling of opportunities and faith
While economic growth and investment are the keys to in the future, despite the recognized 'Pakistani resilience',
accommodating the growing labour force, Pakistan's real do have repercussions which have a destabilizing effect on
investment rate has fallen from 13.1 per cent of GDP in society.. By all accounts, unless a growth strategy which
2010/11 to an even lower 12.5 per cent in 2011/12. Clearly, focuses on creating employment is put in place, Pakistan's
economic signs to absorb the youth bulge do not, for the hopeful demographic dividend will became a demographic nightmare.
present, look very optimistic. Not only does the GDP .growth A British Council report, Pakistan-the Next Generation,
rate need to rise to above 6 per cent to deal with the 33 per looking at Pakistan's demographic transition recently, saw
cent below the poverty line, but the growth strategy has Pakistan facing a 'frightening' demographic disaster, with
to be one which is not just of inclusive growth, but also young people 'deeply frustrated, profoundly religious and
actively creates jobs for the existing and new entrants in having little faith in democracy', warning of a demographic
the workforce, and will have to have a high employment disaster in the making. Although there is no prediction about
elasticity to rapidly absorb those who need work. A jobless Pakistan becoming a failed state with young militants ruling
growth phenomenon, prevalent in some countries over the the roost, the destabilizing political and ideological factors in
last decade, will not work for Pakistan's rising young labour the region could add fuel to a possible fire. While the absence
force. of economic opportunities and prospects is worrisome, it need
not give rise to a sense of panic, at least, for the moment.
 Chapter 19 The Social Sectors I 573

19.5 URBANIZATION AND HOUSING cent between 1981 and 1993, while Sindh and Balochistan
grew fastest in the 1970s. By 1993, about half the population
19.5.1 The Extent of Urbanization of Sindh lived in areas designated as urban, while 35 per cent
There has been a considerable growth in the urban population of the Punjab and 18 per cent each of Balochistan and the
of the country over the last six decades. In 1951, when the NWFP were considered urban populations. Some 56 per cent
first census was held, only 17.6 per cent of Pakistan's of the entire urban population of Pakistan lived in the Punjab,
population lived in urban areas; by 1981, this had increased 34 per cent in Sindh, 7 per cent in the NWFP, and 3 per
to 28.3 per cent and according to the last census of 1998, cent in Balochistan. The rise in the urban population during
was 32.5 per cent, although this figure has been disputed the 1980s also meant that five more cities-Gunjranwala,
by numerous people for it tends to under-report an accurate Multan, Rawalpindi, Peshawar, and Hyderabad-joined
Karachi, Lahore, and Faisalabad in the group of cities with
figure-see Appendix 19.2. In fact, an underlying theme
more than one million inhabitants. (See Appendix 16.2 in
in this book, which has a bearing on much contemporary
political economy, is that Pakistan is predominantly urban the first ( 1999) edition of this book, on the problems of urban
now, a fact which has numerous repercussions on politics, growth in Gunjranwala.)
Urban growth and particularly rural-urban migration are
social change, and on the economy of Pakistan-see Box 19.3
which looks at urban Punjab. normally attributed to push and pull factors. Push factors are
those which cause inhabitants to leave the rural areas, such as
Urban population growth results mainly from three factors.
declining agricultural growth and production, tractorization
Firstly, there is the 'natural' population increase, which is the
causing the displacement and eviction of farmers, and floods
growth in urban families themselves; secondly, urban areas
and natural calamities. The lure to urban areas depends on
expand and grow as areas previously considered rural are
the availability of jobs in industry and services, the desire for
transformed into urban areas, and thirdly, there is net rural to
better schooling and health facilities, aspirations to an urban
urban migration, adding to the existing numbers of residents
culture, and the 'bright lights' phenomenon.
in towns and cities.
In the 1980s in Pakistan, some of the reasons listed
Rural areas become urban as areas adjacent to urban
above had an important effect on the 4.8 per cent urban
centres, over a period of time, assume urban characteristics:
growth, most of which was due to rural immigration.
'(i) as a result of the overspill of urban activities and increases
Food production did not grow significantly in the 1980s,
in population density resulting from natural population
and the more than 3 per cent population increase in rural
growth and migrants settling in these peri-urban areas; and
areas was now facing slower output growth. There has
(ii) the growth of small rural centres which through increases
been increasing fragmentation of land holdings as the
in population density and broadening of functions gradually
population has grown, and mechanization has also affected
assume more urban characteristics, allowing them to be
rural migrants, displacing them from agricultural land. In
reclassified as urban over time' .27 This last point is essentially
the cities, the 1980s were a boom period, with a growing and
an administrative criterion that 'creates' urbanization-see
dynamic manufacturing sector, with the construction and
Appendix 19.2-Reza Ali on the phenomenon of the urban-
service industries also showing very positive trends. Not only
rural divide.
is migration affected by actual conditions, but even perceived
The urban sector has grown considerably since 1981, and
and expected conditions may cause migration to grow. For
the growth and dynamism in urban population and of the
instance, for each individual who actually finds an urban
urban economy was substantial in the 1980s compared with
the relative stagnation of the 1970s. By the administrative
criterion alone, between 1983 and 1991, 114 additional rural Table 19.12
settlements became urban as their population increased and Urban Population by Province(%)
they acquired the status of Town Committees. This growth
can be contrasted with that of the period 1972-81, when only 1998
1972 1981 1998
24 new administrative urban areas were created. adjusted 1
In the period 1972-81, the urban population growth rate
was 4.4 per cent per annum, which had increased to a growth Pakistan 25.4 28.3 32.5 36.2
rate of 4.8 per cent per annum between 1981 and 1993. Punjab 24.4 27.6 31.3 34.5
Interestingly, the urban population growth rate had been Sindh 40.4 43.3 48.8 51.6
declining in the inter-censal periods between 1951 and 1981, NWFP 14.3 15.0 16.9 25.4
Balochistan 16.4 15.6 23.9 26.7
and the rise since 1981 is distinguished by being against the
trend. The reasons for this are discussed later in this section.
Between 1972 and 1981, inter-censal urban population Note: (1) the '1998-adjusted' includes 361 rural areas with
more than 5000 inhabitants having urban-related
growth rate was 4.4 per cent per annum, the contribution
characteristics-see also Appendix 17 .3.
of rural transformation to annual urban population growth Source: Data for 1972, 1981, 1998 from Population Census
was about 8 per cent, while during 1981-92, about one-third Organization, Census Reports. For 1998 adjusted,
of urban population growth was attributed to rural-urban Arif, G.M., 'Urbanization in Pakistan: Trends, Growth
migration and spatial amalgamation. 28 and Evaluation of the 1998 Census', in Kemal, A. R
The provincial urban population growth rates in Table et al. (editors), Population of Pakistan: An Analysis of
19.12 reveal that the Punjab had the fastest growth of 4.9 per Population and Housing (Islamabad: PIDE, 2003).
574 Issues in Pakistan's Economy

Box 19.3 Punjab. Most of these locations, like Chichawatni, Kharian,

Wazirabad, Jauharabad, and Sadiqabad, are those that
Changing Urban Punjab
have seen mini population booms in the last two decades.
Umair Javed discusses issues related to Punjab's urbanization Similarly, private colleges guaranteeing 'market-based'
and to the rise of its middle classes. education in the English language (for a reasonable fee) are
now seen as functional alternatives to the less expensive,
Liaquatpur is a settlement of approximately 40,000 people, but more competitive public sector institutes. Mian Amir's
located half an hour away from Rahim Var Khan city. The Punjab Group of Colleges, with campuses in 13 districts for
town's economy is largely dependent on the retail/wholesale example, is one such flagship example.
sector, and on transport and storage businesses, which 20 years ago, the thought of a shawarma outlet, or a
in turn, are closely linked to its main produce market. The shopping mall, or even an IT college in some of these
town center houses a public sector degree college, three locations would've seemed preposterous. In 2012 however,
private commerce and information technology colleges, an these ideas are not only relevant, but businessmen are busy
English language training center, at least 2 gyms (for men), making millions off this new consumerist ethos.
3 beauty parlors, 1 snooker club, and what appears to be The other category of qualitative transformation has been
the indigenous version of a popular fast food chain. All of in the political sphere-specifically in terms of how people
this, obviously, is over and above the countless number of vote (patronage based or autonomous), the relevance
grocery and produce retailers, mobile phone vendors, arhtis, of primordial identity (clan, ethnicity, language), and the
and cloth merchants. emergence of new political actors. Like the Janus-faced
Based on what little of Punjab I've seen, there is nothing nature of capitalistic development elsewhere in the third
about Liaquatpur which distinguishes it from countless world, the vibrant consumerism of Punjab's new middle
other settlements located all over the province. Take a trip class hides a number of more sinister changes. For starters,
from Rawalpindi to Lahore on the N-5 and you'll encounter the linearity of modernization theory, which posits a change
Liaquatpurs of varying shapes and sizes after every 15 from traditional social organization to more individualized
minutes. Turn west towards Sargodha, and the landscape existence, has failed to materialize in any meaningful way,
might change, the dialect certainly becomes harsher, but the except maybe in some suburban parts of the biggest cities.
small town with its garish IT institute and commerce college In a bargain between the new and the old, hybrid forms
billboards maintains a ubiquitous presence. So much so, of social organization and interaction have emerged that
that a friend of mine who once left Lahore, for a weeklong use both economic and cultural means to form patronage
trip to discover the idyllic, untouched, and mostly imaginary networks. One such manifestation of this trend has been in
plains of rural Punjab, came back thoroughly disappointed. the vastly informal sector of secondary manufacturing and
On paper, Punjab's urbanization stands at approximately retail in Punjab, which relies on the fragmentation, co-option
30 per cent, which basically means that 3 out of every 10 and oppression of labour through a variety of economic
people live in areas that folks at the statistics bureau classify and cultural means. Labour agents, colloquially referred
as urban. This figure, according to urbanization experts like to as jobbers, use a variety of biraderi and clan-based ties
Reza Ali, is grossly underestimated thanks in part to the to market and sell. off unemployed, unskilled workers to
continued usage of outdated definitions and partly due to small-scale manufacturing concerns, and in some cases, to
a seemingly infinite inter-censal period. Hard distinctions, employers in the Gulf.
(never easy to develop), are now impossible to create as It is these small-scale businessmen, traders, transporters,
countless rural union councils (and there are around 2,486 and retailers that have emerged as a political force over the
of them) have developed urban pockets over the last 15 last 30 years-both as the backbone of the PML-N and as
years, and now stand contiguous with those classified as an independent 'civil society' formation. Collective groups
completely urban (978 by the end of last year). What's like the All Pakistan Anjuman-i-Tajiran (APAT) and All Punjab
harder to capture, and infinitely more interesting, is how the Transporters Association (APTA) have exerted their political
ethos of the province has changed from peasant proprietor influence on policy-making-most recently exemplified in
haven under the Raj-(the Punjabi peasant is a hardworking, their successful efforts to remove Form D from the Income
content subject who wants nothing more than an acre of Tax return document.
land and a fresh stream of water)-to an upwardly mobile, But perhaps nothing gives a better indication of the
rabidly consumerist market in more contemporary times. mix of cultural, political and economic changes than the
To account for more qualitative changes, it's easy to entrenchment of religious groups and movements throughout
divide them into two distinct (but not mutually exclusive) the province. Whether it's the popularity of the AI-Huda
categories. On one side, lies the development of new sub- movement within upper-middle class females of Lahore and
cultures in rural, peri-urban, and urban areas. Changing Rawalpindi, or the more class-cutting, revivalist appeal of
dietary preferences, and an association with what are the TableeghiJamaat, or even the militant interpretations of
perceived to be 'urban' trends like western dressing, mobile fundamentalist organizations, Islam has formed an almost
communication, and even educational choices, mark recent organic relationship with the process of transformation.
investment in towns across Punjab. Only a week ago, a Trader groups patronize religious organizations in return for
popular domestic fast-food chain based out of Lahore both divine favour, and worldly assistance during elections
advertised franchise opportunities in 26 locations across and public demonstrations. In parts of South Punjab, the
 Chapter 19 The Social Sectors I 575

. '
r ,Sipah e Sahaba Pakistan (SSF') cadre has found common ·that it masks a ntiniber of deeper, structural problems-
, '.cause with elements within the Seraiki province movement, such as ethno-linguistic tensions, militant fundamentalism,
,}' ,,,;.u,~ing <rellgious and linguistic denomination as another · 'and labour oppression'. It remains to be seen whether a
. :wedge'in a society already diJided along socio-economic corrective form of politics can emerge within the province,
: 31.i'nd hative (~uqa~i)-settler (abadkar) lines. which ultimately seeks to counter the more worrying aspects
\ "··Enhanced mo6iiify, communication, and outreach-all of of its transformation.
which are characteristics of rapid urbanization-serve as
:;catalysts in exacerbating socio-economic, religious, and
: • cult~ral differencesJWhile Punjab's emerging middle class Javed, Umair,' 'Urbanization and• its Discontents', The Friday
" booni remains a fascinating phenomenon, it is worth noting Times, Lahore, 15-21 June 2012.

sector job, many more wait in line and follow him, hoping The continuing meticulous work of Reza Ali, exammmg
to find a job at a later date. Although figures are not readily the spatial and geographical spread of Pakistan, questions the
available, urban unemployment is still not at the critical stage nature of 'urban' and 'rural', in the Pakistani context, well
where migration from rural areas would cease. As long as beyond his path-breaking 'Underestimating Urbanization?', 29
there is a belief that better jobs can be found in cities, rural- and has led to a further, more recent, interpretation of the
urban migration will continue. nature of 'urban' in Pakistan. 30 He shows, that the difference
It is not just the very large cities that have grown over the between urban/rural is largely a matter of definition, and many
last decade; the most dynamic have been the intermediate ad hoc definitions are used for a variety of purposes, _which
cities, especially in the Punjab. As in the 1960s following the are often inconsistent, non-comparable,. and incomplete.
Green Revolution, so in the 1980s, due to linkages with the Census officers, for census purposes usually define what
agricultural hinterland, but particularly due to remittances is 'urban' or metropolitan, with the 'residual' assumed to
received from the Middle East, investment in industry, be rural; governments, for policy and interventions use
construction, and services has been noticeable in the smaller definitions such as 'urban and 'rural' in Sindh for job quotas
towns and intermediate cities. It is inevitable that the growth to bring equity in government employment.
of cities will continue in Pakistan for many years to come, Since census taking began in British India in 1861, urban
and the majority of the country's population already live in population meant the de facto population of cities and towns.
areas designated as urban. Cities and towns included: (i) every municipality; (ii) all
Civil Lines not included in municipal limits; (iii) every
19.5.2 Rethinking Urban and Rural Cantonment; and (iv) every other continuous collection of
houses inhabited by not less than 5,000 persons, which the
While these trends suggest how and why urban spaces-cities- Provincial Superintendent may decide to treat as town for
have grown at the expense of the rural areas, a larger question census purposes. The essential difference between a rural and
which needs to be addressed is whether there is anymore an urban population was that the former was mainly engaged
urban-rural divide in Pakistan? Can one bifurcate large areas in agriculture and the latter in commerce, manufactures and
of Pakistan-with the possible exception of Balochistan-and other occupations. Thus a place having a population of 5,000 or
call these areas 'rural'? Is there not, as Reza Ali has argued so more would be considered a village if it did not possess urban
clearly in Appendix 19 .2, a continuum of cities into rural areas, characteristics. The 1981 census changed the definition to an
diminishing any hard classification between urban and rural? administrative criterion-that of status of local government,
More importantly, what does one mean by the term 'urban' thus the population living within the boundaries of all
or 'rural'? Is this related simply to agricultural production 'urban local councils' was designated as 'urban'. This 1981
compared to non-agricultural economic activity? If this were definition based on 'administrative definition', implied, that
a working definition, as we have argued in the Section on all places which would earlier have qualified as urban, would
Agriculture in Chapter 5, much of the so-called rural areas have been ignored, such that, in the 1951 census, of 235
constitute a large, if not dominant, share of non-agricultural urban places, 121 (51.5 per cent) did not have administrative
employment. Moreover, the services which were considered status; in the 1961 census, of 336 urban places, 219 (65.2 per
'urban' some decades ago-such as electricity, education, cent) did not have administrative status. By only considering
television, communications, transport, etc.-are now also administrative status in 1981, 72 urban places in 1972 were
visible in 'rural' areas. The fact that one million mobile phones considered rural in 1981, and in 1972 the urban population
are added on each month in Pakistan, must mean that even of 1.356 million living in these 72 urban places was declared
in so called 'rural' areas mobile phones are being purchased rural in 1981, thus not considering 5.7 per cent of the urban
and as such technology is available. Clearly, it is important to population. Other estimates, such as those conducted by
rethink such categories as 'urban' and 'rural', and understand Pakistan Institute for Development Economics (PIDE) for the
why we need such binaries. Perhaps other ways· of looking at 1998 census calculated, that 361 places were considered rural
well-worn concepts might help us in understanding issues and in the census which had a population of 5,000 or more and
those concepts much better. actually had urban characteristics better than many places considered
576 Issues in Pakistan's Economy

urban in the census; if their population is considered urban, the transport costs. Areas with ease of access or within commuting
PIDE study estimates this would add another 6 per cent to radius of a city may not be considered rural even if they are
the urban population. agricultural farms, and, towns outside the radius may be
This definition of administrative boundary also had other considered rural. Economic activities change systematically
obvious repercussions. City expansion is rapid while boundary with distance to city: proximity and remoteness. Lack of
revisions are infrequent, thus all new suburbs and peripheral an urban core and low overall population density impacts
growth is outside the boundary. In the 1998 census, Lahore's ability to diversify the economic base compared to cities. The
Defence Housing Authority (DHA), Lahore Development most extensively researched source of evidence for the claim
Authority (LDA) and other private schemes, were rural. By that proximity is good for productivity is from studies of
just considering the population within the administrative areas of dense economic activity: doubling of size increases
boundary of Lahore as urban, the sub-urban and peripheral productivity from 3-8 per cent-from a town of 50,000 to
population outside the boundary was considered rural. Not one of 5 million means a 50 per cent productivity increase.
surprisingly, the municipality population grew at 3. 14 per cent Further, this effect is larger in higher technology sectors.
p.a. while the surrounding 'rural' areas at 4.14 per cent p.a. Based on previous research, Reza Ali's work has identified
Clearly, definitions matter. On the one hand, 'rural' and some key spatial features which include the fact that
'urban' seem clear terms with contrasting images: isolated urban built-up areas have expanded well beyond city limits;
farms, tiny hamlets, cultivated fields, and villages, versus, new suburbs-schemes-have developed around cities; peri-
the thriving city, its skyscrapers, and slums. This may urban growth has gained in significance, grown substantially,
have been a simple way of defining 'urban' and rural' acquired 'urban characteristics'; ribbons of development
some centuries or even decades ago, but this dichotomy is between cities, towns, industrial satellites, along highways
comfortable but imprecise, and over-simplified. Life changes have grown and densified; in the more rural areas, densities
in a variety of dimensions along this route: from fields and are increasing along major road corridors; and, the population
intensive cultivation, villages and small market towns, to which has physically not moved to the cities, has adopted
larger towns, small cities and the cosmopolitan city. It is not urbanizm as a way of life, reflected in changing patterns of
a single homogenous activity-it is multi-functional and consumption and use of services. The cumulative effect of this
diverse. Categorizations are largely becom_ing irrelevant as people has been intense urbanization, city populations are much higher
live their lives in different ways rendering conventional definitions than what official data is prepared to reflect, and there is a
obsolete. The urban/rural divide appears as a gradient, rather than a connectivity and integration of services and manufacturing
dichotomy. There does not appear to be a natural dividing line access across city boundaries.
or break point between rural and urban areas. Many social,
cultural, economic and environmental issues are inadequately (C) Redefining and Estimating Urban and Rural
addressed by current approaches separating 'rural' and
'urban'. Behaviour and conditions change drastically along By defining, estimating and mapping urban and rural areas
the gradient, but there seems no compelling reason to and population in these areas, not the 'urban' and not the 'rural'
segment this into just these two categories population, Reza Ali redefines categories acknowledging that
The key features of the urban context have been defined as within these areas, there are town populations in the rural
proximity, density, diversity, dynamics and complexity. Two areas, and similarly, within the non-rural areas, there are
factors that stand out are population density, and an urban substantial village populations. Areas which can be called
core and proximity to the city. These can be said to be key 'rural', are areas with thin, scattered populations-low
indicators of agglomeration economies and rent. population density, and even 'higher density areas which do
not contain a town, i.e. an urban core. He uses population
density of 250 persons/sq.km or less, and an urban core, an
(a) Population Density absence of a town of 50,000 or more, regardless of density.
Population density is an important criterion for economic These definitions suggest the following: In the Punjab,
behaviour-to have a thick market, there must be a certain while the area is classified as 54 per cent 'urban', the
mass of people. Density is a proxy for market thickness. Dense population which is urban is actually 74 per cent. In Sindh,
proximity of a diverse pool of skills provides agglomeration the urban area is only 11 per cent, but the population is 53 per
benefits: drives agglomeration economies that are a defining cent urban, and in Khyber Pakhtunkhwa 15 per cent of the
feature of cities-transport, infrastructure, amenities also area in urban, with an urban population of 45 per cent living
bear on these economies, affects unit cost of investment- in this space. Balochistan which is 99 per cent rural in terms
fixed facility costs or higher mean travel cost to facility. of area, has an urb_an population-almost all in Quetta--of
Low density areas may be too small to support competition 12 per cent.
in product and service markets, leading to capture by local Using different definitions for urban, Reza Ali defines an
monopolies. urbanized area as one with a city core, it's suburbs, built-
up areas and linked surrounding areas, has a population of
(b) Urban Core and Proximity-distance to city 100,000 or more and a density of 500 persons/sq. km, overall.
This criteria is significantly higher than what is considered
The existence of an urban core and its proximity (or distance) urban in most of Europe, Oceania, the Americas, Africa, and
captures important determinants of economic ·opportunities
Asia, and higher than what the US census terms 'urban area'.
and constraints-a proxy for market access and lower
 Chapter 19 The Social Sectors I 577

Reza Ali makes the argument, that there is no reason to Figure 19.1: How Urban? How Rural?
restrict analysis to just two categories-urban and rural-and
(by Population Census 1998)
one can introduce the concept of an 'urbanizing area', which
is in area which does not meet the criteria of an urbanized Punjab-Saraiki Sindh
area as we have defined here, yet, it has both an urban core Rural

.:~% Urbanized Rural Urbanized

and an overall density higher than that for a rural area. Thus,
it's clearly not rural, but, it has not urbanized yet, hence
the term 'urbanizing'. Using population size, a minimum of
50,000, and a density overall 250 persons/sq km; and urban
47.1(,,~

Urbaniz~
13.1%
"GD Urban121ng
13.1%

/ -D~
core, 400 persons/sq km, Reza Ali defines his 'urbanizing Khyber Pakhtunkhwa Balochistan
area'. What he terms 'urbanizing' is considered urban in Urbanized Urbanizing
------- r--"':::111.57%
most of Europe, Oceania, Latin America and Africa-with I"" a...---·---....
exceptions. In the US, the census term 'urban cluster' comes
nearest. Graphs 19.I and 19.2 and Figure 19.I, redraft the Rur~
47.1%
.Urbanizing
11.57%
~ Rural
difference in categories for the different terms. 88.43%
This redefinition and remapping of the urban and the rural,
has led Reza Ali to argue, that Pakistan is evolving a system
of cities, and developing urban regions-connecting, linking, There are clear indications of a developing multi-polar
integrating trade, services, and manufacturing-and the urban, mega-region in central Punjab, which is Pakistan's
work force-within city core and suburbs, peri-urban areas, dominant sub-national economic and cultural space, with
satellites, small towns and neighbouring villages. This trend a chain of metropolitan regions, substantial urban centres,
is causing a co-movement of urbanization and informality, cities and towns. Reza Ali's seminal work shows that perhaps
and if one examines the relationship between poverty and 98 per cent of the Punjab lives within two hours of a city, 82
urbanization, we see that in urbanizing areas and surrounding per cent about one hour away. Although these are data from
rural areas-there are positive effects of transitioning out of the 1998 census and much has changed since then, it could
cropping and livestock with remittances growing, and there is be that Pakistan, or at least a very large part of it, is almost
no co-relation to out-migration being captured. completely urban in 2013-see Maps 19.1 and 19.2.

Graph 19.1: Comparing Urbanized and Urbanizing to Unadjusted

Urban in 1998 Census
100%~---------------------------
88.43%

80%+--------------------------t

54.94°
60% + - - - - - - - - - - - - - - - - - - - - - - - - - - t
47.08%·-··
I
39.65% 39.86%

17.35%
20%
7

0%+-_.L_.,___;._-'---~-'--~---'--...__-r-__._ _ _L___._....__,
Urbanized Urbanizing Rural
Cl Punjab D Sindh : : Khyber Pakhtunkhwa D Balochistan

Graph 19.2: Pakistan: How Urban? How Rural? - by Population 1998

BO%-.---7-3.-66_%_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __

70%.:...:----1
60%-:----1
50%-:----1 45.06%
40% -:- - -
31.30%i
30% --r--,
-=-:
I 23.90%
20%. 39.65%1 39.86%
I 11.57%
·-···,·-,'I...--
10% 17.35%1
;
0%.:..,__..L,-L-__:.--....L..-L-.._;.--....L..---'L........-'---
Punjab Sindh Khyber Pakhtunkhwa Balochistan
578 Issues in Pakistan's Economy

Map 19.1: Central Punjab Mega-Region

RGARH

Map 19.2
Pakistan: Where is Rural? Where
is Urban?

Urban Places Our Estimates

0 Less Than 50,000 0 Urban Area

CJ 50,000 to 99,999 0 Urbanizing Area

Rural Area

1 Million & above

Maps: courtesy of Reza Ali

 Chapter 19 The Social Sectors I 579

19.5.3 Housing in Cities 0)

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Development Authority) involve schemes that either are

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580 Issues in Pakistan's Economy

7. Framing and implementation of government policies. Since the official housing finance market in Pakistan is very small
the urban poor have no representation in the framing of compared to its potential and to comparable countries in
national policies, most policies-not only those related the region and in Asia. The most recent set of data, from
to housing-cater to the needs of the middle and upper December 2007, show that while the housing finance market
classes at the expense of the poor. Moreover, technocrats in Pakistan may have more than doubled in just two years,
and policymakers belong to the upper sections of society, from 2005, growing to Rs. 126 billion in 2007, it was still less
and do not have or wish to have a proper understanding than I per cent of GDP. 36 Moreover, since 2007 when there has
of the issues of the urban poor. been a significant slowdown in Pakistan's economic growth,
8. Powerless municipal corporations. Development authorities matched with a tight liquidity squeeze and a reluctance on
work in parallel to elected bodies like municipal the part of banks and housing finance companies to lend, it
corporations, and are not answerable to the corporation is clear that this proportion would have fallen to far less than
and hence to the people. The technocrats who constitute even this minuscule amount.
these authorities have to give in repeatedly to political The State Bank of Pakistan's assessment about these 'low
pressures and modify their programmes, making a numbers in housing finance', suggests that these trends have
mockery of the planning process. 'aggravated the housing shortage in the country', being partly
responsible for a housing shortage calculated at 4.3 million
Because of the failure of government programmes and housing units in 1998, estimated to have risen to around
policies regarding land and housing, the informal sector has 6 million units in 2005 and according to these projections,
emerged and consolidated itself over the years and has built it would be closer to the 9 million mark in 2009-10. 37 The
numerous institutions. It has been estimated that as much annual construction rate on the other hand, is supposed to
as 63 per cent of Karachi's annual housing needs are fulfilled be around 300,000, adding to a growing annual shortfall.
by the informal sector. 32 The informal sector does everything Nevertheless, despite these rather dismal sets of numbers,
that the formal and government sectors do not. It 'provides most people-according to some estimates as many as 80 per
land, with immediate possession, at affordable prices; cent of the population38-live in and own their own houses.
arranges for water supply to the townships it develops, and Clearly, there is far more at play than these official numbers
successfully lobbies with government agencies for acquiring reveal.
electricity and transport. In addition, the building component _-Over the last few decades, the role of the government in
yards in these areas provide materials on credit to the poor the housing sector has shifted from one that earlier used
and give technical advice on house building. All this is done to provide housing, to one now where it is essentially a
in defiance of government regulations.' 33 Moreover, the facilitator of housing facilities. This shift has led, even in the
informal sector has, unlike the formal sector, a great deal case of the government's share of housing in public sector
of appropriateness for low-income groups. For example, the programmes, to fall from around 10.9 per cent in the 1960s to
locations selected and developed by the informal sector are 5.9 per cent in the 1990s, and probably far lower today as the
often closer to the workplaces of the urban poor, or have role of government overall has declined. 39 The expanded role
adequate access through roads and transport. The allotment of the.private sector is now well recognized in official housing
procedure for plots is also simple, unlike the cumbersome red (and other) policies, and the National Housing Policy (NHP)
tape of the formal sector: 'there is no catering to corruption, of 2001, also emphasized this role. The NHP recognized
no visiting banks and fulfilling other formalities'. 34 that housing is linked, along with other issues, with that of
Arif Hasan, in his evaluation of the role of the formal and financing as well, and that is why the State Bank of Pakistan
informal sector in housing, concludes that attempts should also had a strong linkage with the NHP. There is recognition
not be inade to formalize the informal sector. He writes that that a key constraint to housing in Pakistan 'is the lack of
financing capacity of the poor, as well as a low penetration
it must be clearly understood that the formal of housing finance, especially in the poorest segments of the
sector planning and delivery mechanisms as
they are structured today cannot· serve the
°
population'. 4 Clearly, any desire to address the shortfall in
urban poor. It must also be understood that housing in Pakistan must be linked to financing needs as
the formalizing of the informal sector on the · well.
formal sector terms, can adversely affect the Financial sector reforms in the 1990s made it possible
informal sector operations and make it all the to start thinking about financing for the housing sector,
more difficult for the poor to acquire land for and that is one reason why the State Bank of Pakistan set
housing. 35 up a Housing Advisory Group 'to iron-out housing sector-
related issues which are critical to the promotion and
The inability and unwillingness of the formal public sector development of housing finance'. 41 While finance has been
in housing, as in other social sectors, has resulted in people a key constraint towards expanding the housing market in
having to turn to the informal or private sector. Pakistan, particularly for the low income segment, endemic
issues related to the legal and regulatory framework for
19.5.4 The Demand for Low Income housing finance, issues around land registration and titling,
and such other key constraints have been impediments as
Housing in Pakistan
well.
According to various sets of statistics available from the
Government of Pakistan and from the State Bank of Pakistan,
 Chapter 19 The Social Sectors I 581

t
Availability of Housing Finance in Pakistan practitioners, researchers and the private sector to more fully

I
r
Three studies supported by the State Bank of Pakistan which
deal with housing finance provide the following insights
related to issues regarding the housing sector, more broadly.
(Unfortunately, for our purposes these three studies focus on
the 'higher end of the income market' which they define as
understand the current and potential supply and demand for
financial services'.
The main findings of the Access to Finance Survey were
as follows:

• 89 per cent of Pakistanis, urban and rural, are unbanked,

'households earning more than Rs. 15,000 per month', and do
and only 38 per cent of these would like to open a bank
not deal with 'non-bankable households'). account.
Only 1 to 2 per cent of all housing transactions in Pakistan
• 56 per cent of the total adult population saves/invests
are processed through housing finance institutions; otherwise, either formally or informally; however, 53 per cent save
most housing finance comes from personal sources. Probably
informally while formal savers are only 3 per cent.
10 per cent is estimated to be the informal lending sector.
• 84 per cent of males and females, in urban and rural
These studies argue that the lack of finance is primarily a areas, are part of at least one 'committee' (bisee).
supply problem. In March 2008, private banks had a share of • Contrary to common expectations that money lenders
59 per cent of the financing advanced to the housing market,
r are the ever pervasive source of loans and credit in the
with public sector banks providing 13 per cent, Islamic banks

I
informal sector, overall, only 3 per cent people borrow
11 per cent, and the House Building Finance Corporation
from them, while 78 per cent borrow from the local
(HBFC) 13 per cent of the total amount made available. shopkeepers/grocery stores.
The average loan size of banks (excluding HBFC) was • 70 per cent of urban residents take loans from
around Rs. 2.82 million, with that of HBFC approximately shopkeepers; 55 per cent from family and friends, and
Rs. 90,000. The loan portfolio in this market revealed that the most borrow to purchase food.
highest proportion was comprised of outright purchase loans, • 80 per cent of urban households own their houses.
followed by construction loans and loans for the purpose of • Only five per cent of urban dwellers actually borrow

I
renovation. 42 money, either to purchase, build or renovate their
Other than the State Bank of Pakistan's studies and residence. 44
reports mentioned here, some independent studies have also
examined the housing finance sector. Uzma Hussain's _study Clearly, in both cases, those related to housing ( and, hence,
for the Pakistan Microfinance Network, which builds largely housing finance) as well as the financial sector more
on Sabbah Rahooja's thesis on Determinants of Housing generally, it is clear that most of the population-and not
I Demand across Income Groups in Pakistan (LUMS, 2007), just the low income sector-are 'outside' the formal sector
~ has the following findings which substantiate this study: net. Most individuals for their financial and housing-related
• housing microfinance generally supports home needs, work through the informal sector, either taking credit

I
improvement, although some smaller starter units also or making savings. For this reason, microfinance institutions
get their funding from this source; and microfinance banks have stepped in to capture some
• the bulk of most households build their unit of the market which has been informalized in the past. The
incrementally over 5-15 years; government and State Bank regulations in recent years, have
• and, incremental housing entails main potential for also encouraged the growth of microfinance institutions
funding; · over the last decade. Such institutions have made some
• short and medium-term loans should be the main interventions in the housing finance sector, as indicated
focus of finance providers. 43 above, but not only is the microfinance sector very small-
around 2 million clients-but the microfinance sector,
Issues in the Financial Sector with an Impact barring a few innovative schemes, is also in a nascent stage
of development.
on Housing Finance The quoted figure of eighty per cent 'ownership' of
Issues related to housing finance, whether for the formal housing in Pakistan is an ambiguous figure for at least two
sector or the informal, whether for the higher end of reasons. Firstly, we really do not know whether 80 per cent
the market or for the lower income segment, cannot be of households live in their own personal abodes-a highly
considered outside the larger financial market and the extent unlikely probability-or whether 80 per cent of the housing
of access to finance by the population at large. structures across Pakistan are owned by the household, family
The recent Access to Finance Study undertaken by a number or families, who live in them, a more plausible and likely
of international and local key actors in the field of finance in possibility. Furthermore, when policymakers or investors use
Pakistan on the request of the Ministry of Finance and the the 80 per cent figure to devise housing-related initiatives,
State Bank of Pakistan, conducted over 10,000 interviews- i.e . .when they try to assess whether there really would be any
questionnaires, interviews, focus group discussions (FGDs)- demand for housing at a time when 80 per cent of houses are
to assess the nature of finance in Pakistan. The purpose of the self-owned, there are further complications. Add to this the
study was, to monitor and measure 'levels of access to formal fact that some researchers question the figure of a 6-9 million
financial services that can assist in achieving goals of growth shortfall in houses, and we can see clearly, that there is really
and poverty alleviation in addition to helping policymakers, no lucid picture or understanding of the size of the housing
582 Issues in Pakistan's Economy

market in Pakistan. If we accept the most likely interpretation 19.7.2 Further Reading
of the 80 per cent 'ownership' explanation, that 80 per cent of
accommodation is owned by one of the family members who For a general overview of the social sectors and in order
live in it, then, clearly, there is demand for housing. to make comparisons over time and across countries, the
World Bank's annual World Development Report and UNDP's
Human Development Report are essential references. Ajaz
Aslam Qureishi's Development Planning in Pakistan (Lahore:
19. 7 SUMMARY AND FURTHER READING
Ferozsons, 1991) also has a number of articles on different
19.7.1 Summary aspects of the social sector. Tariq Banuri (ed.), Just Adjustment:
Protecting the Vulnerable and Promoting Growth (Karachi: Oxford
Despite high growth in the economy, the social sectors have
University Press, 1998) covers a large number of issues that
shown poor performance over the last 66 years. This, the first
affect the economy-in particular, the social sectors. To
of the three chapters on the social sectors, which has tried to
understand issues on housing, see Arif Hasan's Seven Reports
explain the factual position in education, population welfare,
on Housing (Karachi: OPP-RTI, 1992). See also Imtiaz Alvi's
and housing. The chapter began by comparing other countries
The Informal Sector in Urban Economy: Low Income Housing in
in the South Asian region, along with other underdeveloped
Lahore (Karachi: Oxford University Press, 1997); Hameeda
countries at similar levels of development. The evidence
Khuhro (ed.), Karachi: Megacity of Our Times (Karachi: Oxford
very clearly suggests that while Pakistan's economic growth
University Press, 1997); and S. Akbar Zaidi's, The New
performance in the past had been far better than these
Development Paradigm: Papers on Institutions, NGOs, Gender and
countries, its social development has been markedly poor. It
Local Government (Karachi: Oxford University Press, 1999).
seems that the high rate of growth in the economy has not
Recent books that look at some of the themes discussed
translated into better social indicators.
in this chapter include two by Arif Hasan: The Unplanned
A detailed evaluation of the education, population, and
Revolution (Karachi: City Press, 2002), and Understanding
housing sectors suggests a large number of common threads.
Karachi (Karachi: City Press, 2002 ).
In the education sector, private sector schools now dominate.
The Annual Review of the Social Policy and Development
Although there has been an increase in government facilities,
Centre in Karachi, and the annual Human Development in South
their quality has noticeably deteriorated, and a private sector
Asia reports of the Mahbub ul Haq Human Development Centre
in education, even one which addresses the needs of low-
in Islamabad, are essential reading for anyone interested in
income consumers, is thriving. Female literacy, probably
the social sectors of Pakistan. An article by William Easterly
the most important of all social sector indicators, is still
'Pakistan's Critical Constraint: Not the Financing Gap But
extremely poor, and fewer girls go to school than boys do,
the Social Gap' (Washington DC: Development Research
although this too might be changing as we show in Chapter
Group, World Bank, February 2001) is difficult to obtain but
20, with the former having higher drop-out rates than the
very useful and highly recommended. On the population and
latter. Education is now increasingly being seen as the key
the 1998 Census, see the edited volume by A. R. Kemal et al.
to economic development, as the experience from East Asia
Population of Pakistan: An Analysis of 1998 Population and Housing
suggests ( see Box 19 .4). Hence, this sector must receive
Census (Islamabad: PIDE/UNFPA, 2003 ).
high priority in years to come, and increasing the number of
For some excellent analysis on urban areas, see Mohammad
schools for girls, must be at the top of the agenda.
Abdul Qadeer, Pakistan: Social and Cultural Transformation in a
Pakistan was one of the first countries to launch a
Muslim Nation (New York: Routledge, 2006) especially Chapter
population welfare programme, yet it has had the highest
5. Also see his 'Ruralopolises: The Spatial Organization and
population growth rates in the world. Fortunately, though,
Residential Land Economy of High-density Rural Regions
this rate has fallen over the last few years. We argue that
in South Asia', Urban Studies, vol. 37, no. 3, 2000; and
economic factors might be the explanation for smaller
'Urbanization of Everybody: Institutional Imperatives and
families, as it becomes more difficult to afford larger ones. In
Social Transformation in Pakistan', Pakistan Development
addition, as the status of women improves and as more are
Review, vol. 38, no. 4, Part II, 1999.
educated women join the labour force, we are likely to see
lower population growth.
The proportion of the population in urban areas has
increased from 18 per cent in 1951 to anywhere between
60 and 70 per cent today. The urbanization phenomenon
is visually evident, and the number and size of small and
large towns have been growing. We have shown how the
urban population has adjusted to its situation, turning to the
informal and private sectors at an increasing rate. We also
question the notion of 'urban' and 'rural' as two binaries,
arguing that it might be better to see them as a continuum.
l Chapter 19 The Social Sectors I 583

r
Box 19.4 Asians, as the universities attempt to maintain an ethnic
Is Education the Key to Development? balance among their students.
Simply copying teaching methods may not compensate
Experience from East Asia suggests that education is perhaps for cultural advantages like a deep commitment by parents
the key to development. What can the rest of the world learn to education. In South Korea, Taiwan and Japan, many
from the classrooms of East Asia? children are sent to cramming schools in the evening to
supplement their daily lessons. Examinations dominate the
Many theories about East. Asian economic success are lives of the young far more than in the West. This may not
controversial. Economists argue about the importance make adolescence much fun, but it probably raises test
of industrial policy, cultural critics debate the existence scores.
of 'Asian values'. But one explanation commands almost The West is unlikely suddenly to acquire Asians' cultural
universal assent: an emphasis on education. traits, but it may still be able to learn from the tigers. The
The success that countries like South Korea and Taiwan most impressive characteristic of their education systems
make of educating their children is often held up as an is the belief that everyone can and should succeed. It is
example for poorer countries in South Asia and Africa. But expected in Taiwan, for example, that every child will achieve
international comparisons also regularly show that East a basic level of attainment by the age of 12. Classes in the
Asian children outperform their western counterparts when first three or four years are of mixed ability. Those who fall
tested on their knowledge of maths and science. In the 1995 behind are given special tuition in one-to-one catch-up
World Competitiveness Report, Singapore and Taiwan were classes. Primary schools tend to be much more alike in
rated first and third on the ability of their educational systems terms of the money spent on them, class sizes and exam
to meet 'the needs of a competitive economy'. results than in the West. The 'sink school' is not something
One of the most striking characteristics of countries like that exists in Taiwanese.
Taiwan, Singapore, and South Korea has been their emphasis Other factors may also contribute to the tigers' success.
on raising the educational standards of the whole population Their children work harder, with more days in the school
rather than an elite. Moreover, those developing countries year and more hours in the school day. Educational
that invested heavily in primary education have done much objectives are kept to a minimum and there is little debate
better economically than those that concentrated more on about the nature of subjects and much concentration on the
university education. In 1960, Pakistanis and South Koreans absorption of facts. A daily report on each child's progress is
were about as rich as each other. But whereas just 30% of supplied to parents and the head teacher randomly inspects
Pakistani children were enrolled in primary schools, 94% of children's homework to monitor their progress and the form
South Koreans were. By the mid-1980s, South Korea's GDP teacher's performance. Teachers enjoy considerable respect
per person was three times Pakistan's. Hard as it is to prove and prestige and are relatively well paid, compared with their
a direct connection, the figures are certainly suggestive. counterparts in the West.
But it is not just developing countries that are looking to
the East Asian tigers. In America and Britain in particular, East Looks West
education debates have recently been shaped by arguments The Asian example is beginning to influence educational
about what Asians are doing right and westerners are doing policy in the West. It has helped, for example, to bring
wrong. Tests of schoolchildren seem to show that the best regular tests and whole-class teaching back into fashion
of the West match the achievements of successful Asian in Britain. Ironically, though, some Asian educationalists
schoolchildren. The great weakness of the rich nations and are beginning to voice doubts about their own methods.
one of the reasons their test scores look so bad compared The strength of their educational system, with its emphasis
with the East Asians is that many more western children fail on discipline, facts and learning by rote, may also be its
at school. These, the failures, end up on the periphery of the weakness.
labour market and often on the welfare rolls. That the wages · Some more advanced Asian countries, like Japan and
of the unskilled in the West are falling steadily suggests that Taiwan, are worried that current ways of doing things are
the social and budgetary costs of educational failure are stifling creativity and inventiveness among their students
certain to increase. and that this may eventually carry an economic price.
Unlike South Asians and Latin Americans, Americans Manufacturing, with its emphasis on systems and teamwork,
and Britons cannot blame their relative failure on a lack rewards the kind of disciplined and fact filled students
of universal primary education. So some westerners are produced in the tigers. But what about the more creative
inclined to shrug their shoulders and say that East Asian service industries in which Asian countries currently lag
children are naturally more diligent or even more intelligent behind America-like software design or entertainment?
(a conclusion many Asian may quietly agree with). In any Yuan•Tseh Lee, who chairs a commission currently looking
event, the achievements of Asian children brought up in into education reform in Taiwan, is brutally critical of the
the West suggest that cultural explanations, such as family exam system and its inability to identify and encourage
support, may have a part to play. The success of Asian- original talent. Similarly, Professor Hiroyaki Yoshikawa, the
Americans in gaining admission to elite universities like president of Tokyo University, says that Japanese employers
Harvard and the University of California has been so marked are increasingly complaining that new graduates are unable
that it has provoked rows about discrimination against to think for themselves. He laments that students returning
584 Issues in Pakistan's Economy
I
J

from the West are at first full of enthusiasm and ideas, but a league table comparing the proportions of 20-24-year-olds
that this tends to be soon crushed by the Japanese system. in higher education, South Korea was tenth, Singapore 11th
Creativity and independence, however, are not qualities that and Taiwan 20th, with Canada and the United States leading
can be readily manufactured. A big shift may take decades. the ways. But change is on the way. Taiwan hopes to raise
Meanwhile, educational priorities in the more-established the share of its young who go to university from 18% now,
tigers are now moving towards higher education. Over 10% to 30% by 2000. As in the West, a huge university expansion
of American doctoral degrees in science and engineering is under way. As both East and West revamp their education
in 1990 went to students from Taiwan, China and South systems, lessons will flow in both directions.
Korea-a legitimate source of Asian pride, but also a
comment on the state of universities back home. In 1991, in Source: The Economist, 21 September 1996, 29-30.

Appendix 19.1
reversed soon after the imposition of Marti a1 Law in 1977.
The Changing Role of Planning in These domestic factors greatly weakened the planning
Pakistan machinery established in the late 1950s and strengthened in
the 1960.
Although planning by the public sector is no longer in vogue, and
The planning machinery inherited from the Ayub era has
the private sector now dominates much activity, especially in the
also been under pressure from the changing importance of
social sectors as we have just shown, planning in the public sector
foreign aid, the channelling of which was one of the principal
used to play a critical role in the past. Professor S. M. Naseem
objectives it was geared to achieve, if not its real raison d'etre.
presents an evaluation and history of the planning process in
The second and third five-year plans were largely financed
Pakistan, and identifies the changing role of government and the
through foreign aid. Aid financed investment in water,
private sector over the years.
power and transport and strengthened the infrastructural
During the past four decades, Pakistan has had a succession base-Tarbela and Mangla dams being the prime examples.
of seven Development Plans. The political and administrative lndustrial development also received a high priority and was
environment in which the various plans were implemented the largest recipient of project aid. ln addition, programme
·.1
have, however, changed considerably over time. The first aid was used to liberalize imports and augment the supply
three five-year plans were undertaken in the context of a of needed industrial inputs, which had a favourable effect
larger territorial boundary, which included the present day on industrial growth, through better utilization of industrial
Bangladesh. The second and third plans coincided with the capacity.
regime of President Ayub Khan in which a strong central lndeed, during the Third Plan period the essentiality of
government, assisted by a well organized bureaucracy and foreign aid to Pakistan's development was highlighted when
with minimal democratic support but strong Western foreign the country's foreign assistance programme was suddenly
aid programmes, laid the foundation of a planning machinery brought to a halt in 1965 as a result of the war with lndia.
that was then considered all-powerful. The superstructure of lmport liberalization schemes had to be reversed and import
planning inherited from the 1960s continued into the 1970s substitution in consumer goods became the main vehicle
and 1980s, but with considerably reduced influence and of growth. When aid was resumed, attention was shifted
eroded authority. to agriculture and since the mid-1960s, industrial progress
The erosion in the credibility and effectiveness of the has failed to gain the momentum it achieved in the early
planning machinery inherited from the second and third five- 1960s. The suspension of, or interruption in, aid, based on
year Plan period has been the result of many factors. The political considerations, was again repeated, albeit in different
separation of East Pakistan and the dissolution of One Unit contexts, in the 1970s and 1980s. This has rendered foreign
gave a new dimension to the regional problem in Pakistan, aid as a considerably less reliable basis for planning than in
which during the first two decades was primarily focused on the earlier phases of long- and medium-term planning in the
the disparity between East and West Pakistan. The minority country. Foreign assistance for structural adjustment reasons,
provinces, especially those of Balochistan and NWFP, which however, has become more important since the 1970s in the
had been relatively underdeveloped and where political parties wake of the oil price shocks and terms of trade deterioration.
opposed to that in the centre were voted into office, brought The emerging geopolitical changes in the world economy
the regional issues to the forefront. ln any event, planning have also dampened the climate for aid on which past
itself was relegated to a relatively less important role as successes in Pakistan's economic development were based.
political and ad hoc decision making became more important. Both the increasing demands for concessional assistance,
Many of the economic decisions taken by the People's Party's and its reduced supply, will force the country to choose
government were outside the planning framework and were either a deceleration of its growth rate or an increasing
motivated by its own ideological considerations and were reliance on commercial borrowings, or increased efforts for
 Chapter 19 The Social Sectors I 585

domestic resource mobilization. The first two options, dearly, the private sector. Many industrialists were tempted away to
are unacceptable in view of their implications for poverty the Gulf region where business opportunities were plentiful
alleviation and debt servicing, and therefore, the only real in the wake of the oil boom of the mid-1970s. Others found
option is the last one. This is an option which planners and real estate and other rent seeking endeavours, often obtained
policymakers have tried to their utmost to shy away from, through political patronage in an unstable environment, as a
partly because they have lost the authority to make such profitable avenue for investment. The underground economy

I
decisions. But if the option becomes unavoidable, as seems flourished and adversely affected the economy's productive
likely, it would require changes in the structure, as well as the potential, adding to the growing list of social problems such
policy thrust, of the present planning machinery. as drug abuse, urban crime, and ethnic strife.
While the main achievement of the planning machinery The reversal of the nationalization policies undertaken in
in Pakistan has been its considerable success in maintaining the 1970s has not been easy and despite the government's
relatively high growth rates of GDP, largely through attracting best efforts, private investment in the Fifth and Sixth Plans
large amounts of foreign resources, its record in attaining a has not grown rapidly or in the desired directions. During
balanced development, especially in the social sectors, and in the Fifth Plan, the result of the government's efforts to
mobilizing domestic resources, has been generally considered reduce the role of the public sector was manifested not in
deficient. Pakistan's development has been highly dependent any crowding-in of private investment, but in the decline
on the intlow of foreign resources, which have varied from of the investment ratio from 16 per cent to 13.4 per cent.
about half the level of total gross investment in the 1960s, to Private investment grew at 6.3 per cent per annum during the
a quarter in more recent times. The quantum of net aid tlows period. ln the Sixth Plan period, the growth rate of private
in recent years has fallen-largely as a result of increasing investment accelerated to 16.6 per cent through a variety of
requirements of debt servicing-but the dependence on gross policy initiatives to provide incentives to private investment,
aid inflows remains high. Much of the aid flows in recent years which included deregulation, disinvestment, improved credit
has been accompanied by a high degree of conditionality or facilities, rationalization of sanctioning procedures, as well
of external policy advice, decreasing the need for a strong as a reduction in tariff rates. However, private investment did
planning machinery capable of taking autonomous and not move into priority sectors identified by the Plan, such as
innovative initiatives at planned development. Not all policy production of capital goods, export-oriented industries, and
advice given by aid donors is necessarily bad and some has investment in backward regions. lt moved largely into highly
the distinct advantage of being otherwise disregarded as protected consumer goods and other import substituting
impractical or unpalatable, even when considered necessary. sectors, as well as into rent seeking non-productive activities.
Such advice can, to a limited extent, be considered a blessing A major problem facing the planners in the Eighth Plan will
in disguise as it enables the planners to take unpleasant be a dear delineation of the functions of the public sector
decisions. However, in general, external policy advice does and devising policies which would aim at increasing and
deprive the planners of making autonomous decisions about channelling private sector investment into priority areas of the
the long-term and medium-term objectives of the economy. economy, including physical and human infrastructure. Public
To what extent it is necessary or desirable to restore this policies, including public sector investment policies, will have
autonomy in a period in which the relative roles of domestic to be reoriented in order to create a supportive environment
and foreign resource mobilization must undergo a sea change for the private sector, and for acting as a catalyst for the
in favour of the former, is dearly a question that needs to be country's industrial restructuring. At the same time, it would
addressed in all earnestness in the Eighth Five-Year Plan. be necessary to keep in mind that the market does not always
Another consideration which has affected the role of pursue activities which may be considered socially desirable.
planning in Pakistan is the growing emphasis being laid on Can the private sector, for example, be relied upon to
increasing the role of the private sector, in both productive undertake investment to promote primary education or in rural
and infrastructure sectors. Pakistan's early industrialization health projects? The market mechanism is good at producing
was based on the heavy involvement of the public sector in things efficiently, but it does not always help in building
both industry and infrastructure. Lack of entrepreneurship, the economy's productive base. Does the encouragement of
the low capital base of domestic enterprises and their inability the private sector necessarily imply the abandonment of the
to undertake large and risky projects, as well as the need for government's role of redirecting resources according to plan
providing essential infrastructural support. for the nascent objectives? ln the Pakistani context, has the private sector
industrial sector, provided a powerful argument for such a broadly fulfilled the role that the planners had hoped it would
positive role of the public sector. Over time, however, the achieve? What policy measures, if any, need to be taken to
private sector overcame its 'shyness' and some of the public ensure a more coordinated role between the private arid public
sector industries were handed over to the private sector. sectors?
lmport controls, tariffs, and an overvalued exchange rate This is where the complementarity between planning and
encouraged the development of a private sector, which became the market mechanism needs to be brought about. Planning
increasingly powerful and oligopolistic in nature. By the end is a useful tool-and can still remain so-to identify to achieve
of the 1960s, fears of over-concentration of industrial power socially desirable goals. But it has to be supplemented by
gave rise to the phobia of twenty families. These perceived enabling economic agents-both private and public-to achieve
fears later led to large-scale nationalization of industries, these goals. ln the past Plans, while much attention was paid
banks and financial institutions, causing panic and fear in to achieving the goals and even in fixing the targets to be

I
586 Issues in Pakistan's Economy

achieved by public and private sectors, there was relatively prior distribution of income and assets. Thus, distributional
little attention paid to incentives to induce the private sector outcomes of the market mechanism may serve to reinforce
to invest in priority sectors. A strategic role of the government the status quo or even accentuate inequalities. Apart from its
and the planning machinery would be to correct, or avoid, ethical implications, such a strategy is politically infeasible as•
the likelihood of information failure by the public sector, i.e. was provided in Pakistan in the 1960s. Moreover, reaching the
the inability to assess the social value of any particular piece production possibilities frontier also does not say anything
of information of consequence to the country's development. about the sustainability of long term growth, because long
term growth entails pushing this frontier further outwards.
Source: S. M. Naseem, 'Major lssues for Consideration in As much of the recent literature in new growth theory has
Formulating Pakistan's Eighth Development Plan: A Preliminary highlighted, this frontier can best be moved through allocating
Appraisal', mimeo, July 1990. resources to sectors which generate positive externalities that
can be captured at a subsequent date.
From the above statement it stands to reason that planning
still has a significant role to play in the development
What is the role of planning in an era when the role of government process. Since planning through direct controls and severe
has been much maligned and the concept of planning seems to
distortions of prices has not worked because of unfavourable
be pushed off the agenda?
implications on efficiency, new mechanisms for allocating
The Ninth Five-Year Plan is being envisaged, and is to be resources into economically desirable sectors and to specially
launched at a juncture, when a virtual consensus has developed desirable groups will have to be sought. Thus the theme for
in favour of the market mechanism as a fundamental tool to future planning will have to be strategic intervention in areas
achieve efficient resource allocation across sectors, agents and and sectors which have the potential to generate positive
regions. This consensus has roots in the general disillusionment externalities, and greater growth, and where the benefits of
with Plan outcomes involving a substantial role of the public growth are more widely dispersed.
sector, both nationally and globally. Whether such externalities are captured and resources are
With this heavy reliance on markets to allocate resources, it actually diverted to intended beneficiaries will also depend
may legitimately be asked, whether a development planning critically on institutional reform. While planning mitigates
exercise has any role in the first place? lt is argued that perceived market failures, effective governance structures are
planning does have a role, albeit in a different form than has a necessary condition for reducing the scope of government
been conceived in the past, simply because the gap between failure. Thus, for effective development planning, economic
market determined results and socially desirable outcomes interventions have to be accompanied by institutional reform.
may still remain substantial. Desirable outcomes such as The need for such reforms has never been as obvious and
sustained growth and distributive justice are results which critical as it will be in the Ninth .Plan Period as we tum the
the market may not necessarily deliver. At best, allocation century.
of resources through the market takes an economy up to its
production possibilities frontier, but who the beneficiaries of Source: Social Policy and Development Centre, Ninth Five-Year
growth are will depend on relative resource endowments and Plan (1998-2003) lssues Paper, Karachi, 1996.

Appendix 19.2
are not captured. Leading Pakistani demographers and social
Underestimating Urbanization scientists (Dr M. S. Jillani, Sultan Hashmi, Dr Akthar Hasan Khan,
ln a path-breaking article, Reza Ali examines the urban/rural G. M. Arif and others) have commented upon, raised questions
divide making a convincing argument that Pakistan's urban or offered explanations for apparently low urban growth rates
population is severely under-reported. given higher projections made prior to the census by the Planning
Commission, M. S. Butt, Shahid Javed Burki and others. Some of
ln transitional societies, urbanization, and its key characteristics, these outstanding questions are addressed here.
are major determinants of the political process. Independence, the At the tum of this century, the population of what is the
historically significant areas of poverty and social deprivation and geographical area of Pakistan today, was 16.5 million. The
their commensurate societal structures, and, explicit economic urban population, 10 per cent of the total population, was
policies adopted by governments have contributed to the shaping growing at one-quarter of the overall growth rate of 1.6
of urban systems and hierarchies in Pakistan. per cent per annum. However, global forces such as the two
The differentials and variations in the sub-national context World Wars and the Great Depression of the 1930s and local
of urbanization, and its implications for participation of citizens economic pol,icies such as the development of canal irrigation
in the political process, need to be understood in a historical saw changes in this dispersion: by 1941 the population had
context. We argue here that although an analysis of inter-censal reached 28 million, 15 per cent of which was urban. Most
data would highlight major demographic trends in the national significant, however, was the fact that the urban population
context-and the 1998 census allows for an up to date analysis-a was growing at twice the overall growth rate and nearly three
number of important aspects of the current urban demography times that of the rural.
I Chapter 19 The Social Sectors I 587

I Independence brought the first major change in the

political economy of urbanization. At Independence in 1947,
discretion given to Census Commissioners on classifying an
area as urban was removed and standardization was brought

I
the population was almost 31 million of which about 5 million in for the 1981 census based on an administrative criterion
was urban. A number of subsequent urban regions, systems wherein only those areas were considered urban which were
and hierarchies that have developed can be traced back to municipalities, town committees and cantonment boards This
the nature of the in-migration and the settlement patterns has probably resulted in the under-estimation of the urban
of Muslim population that migrated to the new homeland. population. ln 1981, 1462 places with a population of 5000

I
r
ln what has been termed as the single largest movement of
population ever recorded in history, nearly 11 million people
left their homes. Pakistan's population in 1951 was 33.8
million of which 6.5 million were migrants to the country-
this represented 19.3 per cent of the national population,
or more were classified as rural; it is not possible to determine
how many of these would have been classified as urban under
the earlier definition.
Secondly, administrative boundaries were used in the 1998
census. This meant that people living outside the administrative
with the transfer of population resulting in a net gain of boundaries were not counted in the urban category. As city
over 1.8 million or 5.4 per cent. Moreover, the distribution of populations have extended outside these administrative
these migrants across the provinces was uneven: while NWFP boundaries, this has resulted in an under-estimation of some
recorded a net loss of population, Punjab had the greatest net magnitude. ln Lahore, public sector developments such as for
increase (26 per cent), second to that Sindh (19 per cent), and instance Johar Town, Sabzazar Housing Scheme, most private
then Balochistan. Moreover, significant numbers of migrants sector development, and, the Defence Housing Authority area
tended to head towards the urban areas: in 1951 while nearly were not included in the estimates for the population of
one-fifth of the population comprised Muslim 'refugees' from Lahore. Thus the proportion of the population living in the
India, they comprised 45 per cent of the urban population and rural areas of the Lahore district went up in 1998 compared
15.6 per cent of the rural; in Punjab, which had 5.3 million to 1981 with the 1981-98 annual growth rate for urban
migrants (or 81 per cent of the total), they comprised 46 per population being 3.2 per cent compared with 4 per cent for
cent of the city population and in Sindh made up 54 per cent the rural. Re-estimating the urban agglomeration would result
of the urban population. Lahore, which had been the largest in an almost 20 per cent increase-a difference of nearly one
city since census taking began under the British, was pushed million-in the urban population of Lahore.
into second place by Karachi in 1951. Thirdly, the phenomenon of peri-urban areas has gained in
The 1998 census reported Pakistan's urban population as significance. Settlements peripheral to the cities, capitalizing
42.458 million and is growing at a rate of 3.5 per cent p.a. upon their proximity, transport links, employment opportunities
For the period after Independence (1951-98), the national and access to urban services have grown substantially and
annual growth rate of Pakistan fluctuated from 2.4 per cent even acquired some 'urban characteristics' although they
in 1951-61 and 3.1 per cent in 1972-81 to 2.6 per cent in remain outside any institutional arrangement for provision of
1981-98. Urban areas grew significantly in this period from 6 basic civic services.
million in 1951 to 43 million in 1998: the urban population Fourthly, ribbons of development along highways, between
of Pakistan, as a percentage of total population, has gone up major urban centres and industrial satellite areas have
from approximately 18 per cent to over 32 per cent since 1951. developed, largely due to accessibility to transport links,
This increase has been fairly significant in all four provinces: availability of skills and services, and tax and tariff incentives.
in NWFP this has gone up from 11 per cent to 17 per cent, ln Karachi, this growth was linked to Nooriabad and Hub. ln
Punjab from 17.5 per cent to 31 per cent, in Sindh 30 per cent Lahore, Gujranwala and Sheikhupura, these developed along
to 50 per cent and Balochistan 12 per cent to 23 per cent. the Lahore-Gujranwala and Lahore-Sheikhupura roads. Similar
Between the censal period 1951-61 and 1961-72, the developments can also be seen along the other major cities
momentum of urbanization varied between the provinces. throughout the country. Review of occupational structure
Sindh experienced a higher urban growth rate-3.3 per cent show that people residing in rural areas in these districts
and 4.6 per cent respectively-than the national urban growth have a strong occupational interface with the urban areas. A
rate. However, for the period 1972-81 and 1981-98 the urban separate, but related, phenomenon is apparent in the more
growth rates in Sindh, Punjab and NWFP have been similar at rural context as well, where the population settlement pattern
around 3.5 per cent p.a. Although, each province experienced that has emerged shows a very high density of population
a difference in how their urban systems developed in this along the major road corridors. ln 1981, one of the least
period, with different provincial hierarchies, patterns of urban urbanized districts (12.3 per cent urban) of the Punjab,
development and urbanization trends, today the major issues Narowal, had 60 per cent of the population living within 4-km
and phenomena are common to all provinces. belts along the highways and in the towns. This has enabled
Firstly, is the issue of definition. Until 1972 the same easier access to higher level services in urban areas and will
definition and system for the classification of urban areas possibly play a significant role in the transformation of rural
was used. An area was regarded as urban if it had a minimum areas to urban.
of 5,000 inhabitants or had the administrative status of a The cumulative effect of these factors is evident in certain
municipal corporation, municipal committee, town committee urban districts/divisions. Intense urbanization, connectivity
or a cantonment board (regardless of population size). ln and integration of services and industries across city boundaries
addition, Census Commissioners had the discretion to consider and, contiguity of city boundaries have resulted in the
any area as urban that had 'urban characteristics'. The emergence of clearly identifiable urban regions. Some of these
 1
588 Issues in Pakistan's Economy

urban regions follow the classical pattern where urban systems There is an urgent need to recognize and understand the
comprising of peri-urban areas, satellites or small towns have significance, magnitude and nature of the phenomenon
formed around primary cities; Karachi, has an urban system of urbanization. The realization of political rights and
of well over 10 million, and, Hyderabad and Multan with 2.5 participation in the political process; the relationship of, and
million each. ln other cases, contiguous districts comprising responsibilities between, the citizen and the state and related
of major cities, medium sized and small towns, peri-urban institutional structures; the nature of break down of existing
areas and ribbons, have formed urban regions. Today the societal structures and the forging of new and complex
central Punjab urban region-Lahore, Sheikhupura, Faisalabad,
Gujranwala districts (and Chiniot tehsil, Jhang district)-have
a combined population of 19 million; this alone accounts for
over 250/o of the provincial population. This system includes
ones; the composition of the revenue base and criteria for
resource allocations and, the effect on the nature of poverty,
empowerment, gender, governance, culture and marginality-
by urbanization-is key to developing an understanding of the
I
three of Punjab's five one-million-plus cities and a number of politica 1 process.
medium and small towns. Different stages of this phenomenon Source: Ali, Reza, 'Underestimating Urbanization', in Zaidi,
are apparent in NWFP (Peshawar-Nowshera-Risalpur-Mardan) S. Akbar (ed.), Continuity and Change: Socio-political and
and in northern Punjab (Rawalpindi-Taxila-Wah). Institutional Dynamics in Pakistan (Karachi: City Press, 2003).

NOTES
l. UNDP, Human Development Report, 1995 (New York: Oxford Dynamics in Pakistan (Karachi: City Press, 2003 ), reproduced
University Press, 1995 ), 12. here as Appendix 19.2.
2. Social Policy and Development Centre, Annual Review 2011- 30. Reza Ali's presentation made in Lahore, entitled, 'Pakistan:
12: Devolution and Social Development (Karachi: SPDC, 2012). The Emerging Spatial Geography', 28 May 2013, on the
3. Ahmed, Viqar and Rashid Amjad, The Management .of basis of which this Section is based.
Pakistan's Economy, 1947-82 (Karachi: Oxford University 31. Hasan, Arif, Seven Reports on Housing (Karachi: OPP-RTI,
Press, 1984), 33. 1992).
4. Social Policy and Development Centre, User Charges in 22. Ibid. 183.
Education (Karachi: SPDC, 1994 ), 12. 33. Ibid. 24.
5. Ibid. 34. Ibid. 70.
6. Ibid. 14. 35. Ibid. 75.
7. Ibid. 36. State Bank of Pakistan, Quarterly Housing Finance Review
8. Behrman, J. R., 'Pakistan: Human Resource Development (Karachi: SBP, 2008), 5.
and Economic Growth into the Next Century', mimeo, 1995, 37. State Bank of Pakistan, Expanding Housing Finance System
8-9. in Pakistan: Strategy for Housing Finance Reforms in Pakistan
9. Ibid. 8. (Karachi: SBP, June 2008), i.
I 0. Ibid. I 3. 38. Nenove, Tatiana et al. Bringing Finance to Pakistan's Poor: A
11. Ahmed, Viqar and Rashid Amjad, op. cit., I 984, 34. Study on Access to Finance for the Underserved and Small Enterprises
12. UNDP, op. cit., 1995, 221. (Washington DC: World Bank, May 2009). Sabbah Rahooja
13. Government of Pakistan, op. cit., 1995, 32. finds empirical evidence of urban ownership of 71 per cent.
14. World Bank, Staff Appraisal Report: Pakistan Population Welfare See her Determinants of Housing Demand Across Income Groups
Program Project, Report No. 13611-Pak (Washington DC: in Pakistan, LUMS, October 2007, 41.
World Bank, 1995(b)), 11. 39. State Bank of Pakistan, Expanding Housing Finance System
15. Ibid. in Pakistan: Strategy for Housing Finance Reforms in Pakistan
16. Tariq Banuri et al. 'Human Resource .Development', in (Karachi: SBP, June 2008), i.
Banuri, Tariq (ed.), Just Adjustment: Protecting the Vulnerable 40. Ibid.
and Promoting Growth (Islamabad: UNICEF, 1992), 44. 41. Ibid. ii.
17. World Bank, op. cit., 1995(b), 11. · 42. These figures and trends are drawn from the following
18. Ibid. studies: State Bank of Pakistan, Expanding Housing Finance
19. Ibid. 12. System in Pakistan: Strategy for Housing Finance Reforms in
20. Ibid. 14. Pakistan (Karachi: SBP, June 2008); State Bank of Pakistan,
21. Government of Pakistan/UNFPA, Pakistan Population Housing Advisory Group, Recommendations for Nationwide
Assessment 2003 (Islamabad, 2003 ), 77. Provision of Housing Finance (Karachi: SBP, March 2007); and,
22. World Bank, op. cit., 9. State Bank of Pakistan, Housing Finance Reforms in Pakistan:
23. National Institute of Population Studies, Pakistan Demography Strategy for Strengthening the Real Estate Development Process
and Health Survey 1990/1991 (Islamabad: NIPS, 1992), 56. (Karachi: SBP, January 2007).
24. World Bank, op. cit., 1995(b), 9. 43. These insights a,re drawn from: Uzrria Hussain, Scoping
25. Ibid. 14. Study on Housing Microjinance in Pakistan: A Summary of
26. Ibid. Findings, Pakistan Microfinance Network (June 2008); and,
27. Asian Development Report, Pakistan Urban Sector Profile, 1993 Sabbah Rahooja, Determinants of Housing Demand Across Income
(Manila: ADB, 1993), 8. Groups in Pakistan, LUMS, October 2007.
28. Ibid. 9. 44. Nenove, Tatiana et al. Bringing Finance to Pakistan's Poor:
29. Ali, Reza, 'Underestimating Urbanization?', in Zaidi, S Akbar A Study on Access to Finance for the Underserved and Small
(ed.), Continuity and Change: Socio-Political and Institutional Enterprises (Washington DC: World Bank, May 2009).
r
The Social Sectors II: MDGs,
Gender, Environment, NGOs,
Institutions, and ., Governance

This chapter c~ntinues the discussion on the social sectors and 20.2 for Pakistan.' The most recent status of some of the
initiated in Chapter 19. In this chapter we examine the more important Goals for Pakistan's MDGs, are discussed
development and role of the Millennium Development below.
Goals, gender, environment, and·some other issues. Chapter ,
21 examines in detail the health sector and the health- In terms of achievements, the Fourth Pakistan
poverty nexus in Pakistan, making the strong case that Millennium Development Goals Report 2010, as Table
most outcomes and causes in the social sectors are highly 20.2 shows, with regard to Goal 1: Eradicating
Extreme Poverty and Hunger, stated, that 'with
inter-linked and inter-connected, especially as the chapter
declining economic growth and rising inflation,
on health-Chapter 21-shows, where the gender question
this has forced the removal of a large number of
in Pakistan, is linked with maternal mortality, the education subsidies, and it is probable that a larger number
of women, the total fertility rate, and a host of other related of people have fallen into poverty, which would
factors. have negatively impacted human development
- . and, consequently, the country's ability to
ach_ieve the Millennium Development Goals.
20.1 MILLENNIUM DEVELOPMENT GOALS Targets for the Medium Term Development
Framework (MTDF) 2009-10, have not been
·(MDGs) met in the three indicators for Goal 1, and it
does not look likely that the MDG target in
In the year 2000, at the start of the millennium, 189 2015, more than halving the poverty target in
developing , countries including Pakistan, adopted the five Y,ears, will be achieved. Low inflation, job
Millennium Declaration and pledged to 'spare no effort to creation and high growth are required to help
free our fellow men, women and children from the abject and in coming close to achieving the MDG 2015
targets'. 2
dehumanizing conditions of extreme poverty', as the central
Goal 2, Achieving Universal Primary Education,
focus of global development effo~ts for the first 15 years in
'focuses on three core indicators, (a) the net
this new millennium. The Millennium Development Goals primary enrolment ratio; (b) completion/survival
(MDGs) are supposed to be the centrepiece of development rate from grade· 1 to 5; and (c) the literacy rate.
efforts of the Government of Pakistan, and are meant to be ·The' riet enrolment at primary level remained
a means to check and assess movement towards targets and below 60 per cent until 2008-09 although there
goals set as part of the MDGs. Eighteen global targets and 48 has been marginal improvement in it over time.
indicators were adopted in 2000, which have been translated The MDG target of achieving 100 per cent net
into sixteen national targets and 37 indicators adopting enrolment ratio by 2015 requires an increase
Pakistan's specific conditions, priorities, data availability and of 40 percentage point in the next six years
compared 'to the 20 percentage point achieved
institutional capacity-see Table 20.1 for a list of the MDG
in the last ten years. The completion/survival
targets overall. rate of students enrolled in primary schools also
Many countries, including Pakistan, have faced serious presents a dismal scenario which implies that
challenges in the years since 2006, in meeting many of almost half of the students enrolled in primary
the MDG targets, stemming from a sudden melt-down sdiools do not complete their education. The
in the global 'economy in 2008, along with a sharp rise · interim target for 2009-10 was set at 80 per cent
in oil and food prices earlier -that year. Pakistan has been and could not be achieved. Pakistan's literacy
additionally handicapped by many serious political and rate .remains considerably short of the MDG
economic problems, both external and domestic, since . target of 88 per cent by 2015, although it had
2006/7, and include the consequences of an earthquake, marginally improved to 57 per cent by 2008-09.
The rate of increase needs to be more than
floods, the War on Terror, changes in government from a
double for the targets to be achieved. The female
military dictatorship to democracy, as well as an economic literacy rate, especially in rural areas, needs to
slowdown with GDP growth falling after 2007. It is in light be accelerated at a much higher rate since the
of these social, economic, and political circumstances since shortfall in it is much higher.' 3 It is clear, that
2006, that we examine the progress achieved in reaching the 'there seems to be considerable shortfall in
targets set for'the EightMDG Goals, as shown in Tables 20.1 achieving the MDG targets for Goal 2, even if

------------------ --- --··

592 Issues in Pakistan's Economy
7
f.

Table 20.2 Official List of Millennium Development Goals indicators:

(All indicators should be disaggregated by gender and urban/rural as far as possible).

Millennium Development Goals (MDGs)

Goals arid Targets ·
, Indicators for monitoring progress
(from the Millennium Declaration)
Goal 1: Eradicate extreme poverty· and hunger
Target 1.A: Halve, between 1990 and 2015, the proportion 1.1 Proportion of population below $1 (PPP) per day 1
a
of people whose income is less than one dollar day. 1.2 Poverty gap ratio
1.3 Share of poorest quintile in. national consumption.
Target 1.8: Achieve full and productive employment and 1.4 Growth rate of GDP per person employed
decent work for all, including women and young people. 1.5 Employment-to-population• ratio
1.6 Proportion of employed people living below $1 (PPP) per day
1.7 Proportion of own-account and contributing family workers in total
employment
Target 1.C: Halve, between 1990 and 2015, the proportion 1.8 Prevalence of underweight children under-five years of age
of people who suffer from·hunger. 1.9 Proportion of population below minimum level of dietary energy
consumption
Goal 2: Achieve universal primary education
Target 2.A: Ensure that, by 2015, children everywhere, 2.1 Net enrolment ratio in primary education
boys and girls alike, will be able to complete a full course 2.2 Proportion of pupils starting grade 1 who reach last grade of
of primary schooling. primary
2.3 Literacy rate of 15-24 year-olds, women and men
Goal 3: Promote gender equality and empower women
Target 3.A: Eliminate gender disparity in primary and 3.1 Ratios of girls to boys in primary, secondary and tertiary education
secondary education, preferably by 2005, and in all levels 3.2 Share of women in wage employment in the non-agricultural
of education no later than 2015. sector · .
3.3 Proportiori of seats held by women in' national parliament
Goal 4: Reduce child mortality
Target 4.A: Reduce by two-thirds, between 1990 and 2015, 4.1 Under-five mortality rate
the under-five mortality rate. 4.2 Infant mortality rate ..
4.3 Proportion of 1 year-old.children immunized against measles
Goal 5: Improve maternal health
Target 5.A: Reduce by three quarters, between·1990 and 5.1 Maternal mortality ratio
2015, the maternal mortality ratio. · 5.2 Proportioh of births attended by skilled health personnel
Target 5.8: Achieve, by 2015, universal access to 5.3 Contraceptive prevalence rate
reproductive health. 5.4 Adolescent birth rate
5.5 Antenata1··care coverage (at least one visit and at least four visits)
5.6 Unmet need for family planning '' ·
Goal 6: Combat HIV/AIDS, malaria and other diseases
Target 6.A: Halve halted by 2015 and begun to reverse the 6.1 HIV prevalence among population aged 15-24 years
spread of HIV/AIDS. 6.2 Condom use at last high-risk sex
6.3 Proportion of population aged 15-24 years with comprehensive
correct knowledge of HIV/AIDS
6.4 Ratio of school attendance of orphans to school attendance of
non-orphans aged 10-14 years
Target 6.8: Achieve, by 2010, ~niversal access to treatment 6.5 Proportion of population with advanced HIV infection with access
for HIV/AIDS for all those who need it. to antiretroviral drugs 1

Target 6.C: Have halted by 2015 and begun to reverse the

incidence of malaria and other major diseases.
6.6 Incidence and death rates associated with malaria
6.7 Proportion of children-under 5 sleeping under insecticide-treated
1
r
I

bednets
6.8 Proportion of chiidren under 5 with fever who are treated with
appropriate anti-malarial drugs
6.9 Incidence, prevalence and death rates associated with
tuberculosis "
6.1 0 Proportion of tuberculosis cases detected and cured under directly
observed treatment short course
Contd. on next page ...
 Chapter 20 The Social Sectors II 593

Table 20.2 contd ... Goals and Targets Indicators for monitoring progress
Goal 7: Ensure environmental sustainability
Target 7.A: Integrate the principles of sustainable 7 .1 Proportion, of land area covered by forest
development into country policies and programmes and 7.2 CO2 emissions, total, per capita and per $1 GDP (PPP)
reverse the loss of environmental resources. 7.3 Consumption of ozone-depleting substances
7.4 Proportion of fish stocks within safe biological limits
7.5 Proportion of total water resources used
Target 7.B: Reduce biodiversity loss, achieving, by 201 O, a 7.6 Proportion of terrestrial and marine areas protected
significant reduction in the rate of loss. 7.7 Proportion of species threatened with extinction
Target 7.C: Halve, by 2015, the proportion of people 7.8 Proportion of population using an improved drinking water source
without sustainable access to safe drinking water and 7.9 Proportion of population using an improved sanitation facility
basic sanitation.
Target 7.D: By 2020, to have achieved a significant improve- 7.10 Proportion of urban population living in slums 2
ment in the lives of at least 100 million slum dwellers
Goal 8: Develop a global partnership for development
Target 8.A: Develop further an open, rule-based, Some of the indicators listed below are monitored separately for the
predictable, non-discriminatory trading and financial least developed countries (LDCs), Africa, landlocked developing
system. countries and small island developing States.

Official development assistance (ODA)

Includes a commitment to good governance, development
and poverty reduction-both nationally and internationally 8.1 Net ODA, total and to the least developed countries, as
percentage of OECD/DAC donors' gross national income
Target 8.B: Address the special needs of the least 8.2 Proportion of total bilateral, sector-allocable ODA of OECD/DAC
developed countries. donors to basic social services (basic education, primary health
care, nutrition, safe water, and sanitation)
Includes: tariff and quota free access for the least 8.3 Proportion of bilateral official development assistance of OECD/
developed countries' exports; enhanced programme of DAC donors that is untied
debt relief for heavily indebted poor countries (HIPC) and 8.4 ODA received in landlocked developing countries as a proportion
cancellation of official bilateral debt; and more generous of their gross national incomes
ODA for countries committed to poverty reduction 8.5 ODA received in small island developing States as a proportion of
their gross national incomes

Market access
Target 8.C: Address the special needs of landlocked
8.6 Proportion of total developed country imports (by value and
developing countries and small island developing States
excluding arms) from developing countries and least developed
(through the Programme of Action for the Sustainable
countries, admitted free of duty
Development of Small Island Developing States and the
8.7 Average tariffs imposed by developed countries on agricultural
outcome of the twenty-second special session of the
products and textiles and clothing from developing countries
General Assembly).
8.8 Agricultural support estimate for OECD countries as a percentage
of their gross domestic product
8.9 Proportion of ODA provided to help build trade capacity
Target 8.D: Deal comprehensively with the debt problems Debt sustainability
of developing countries through national and international 8.1 O Total number of countries that have reached their HIPC decision
measures in order to make debt sustainable in the long points and number that have reached their HIPC completion
term. points (cumulative)
8.11 Debt relief committed under HIPC and MDRI Initiatives
8.12 Debt service as a percentage of exports of goods and services
Target 8.E: In cooperation with pharmaceutical companies, 8.13 Proportion of population with access to affordable essential drugs
provide access to affordable essential drugs in developing on a sustainable basis
countries
Target 8.F: In cooperation with the private sector, make 8.14 Fixed telephone lines per 100 inhabitants
available the benefits of new technologies, especially 8.15 Mobile cellular subscriptions per 100 inhabitants
information and communications 8.16 Internet users per 100 inhabitants
The Millennium Development Goals and targets are from the Millennium Declaration, signed by 189 countries, including 147 heads of
State and Government, in September 2000 (http://www.un.org/millennium/declaration/ares552e.htm) and from further agreement by
member states at the 2005 World Summit (Resolution adopted by the General Assembly - A/RES/60/1, http://www.un.org/Docs/journal/asp/
ws.asp?m-A/RES/60/1 ). The goals and targets are interrelated and should be seen as a whole. They represent a partnership between the
developed countries and the developing countries "to create an environment-at the national and global levels alike-which is conducive
to development and the elimination of poverty".

For monitoring country poverty trends, indicators based on national poverty lines should be used, where available.
2 The actual proportion of people living in slums is measured by a proxy, represented by the urban population living in households
with at least one of the four characteristics: (a) lack of access to improved water supply; (b) lack of access to improved sanitation;
(c) overcrowding (3 or more persons per room); and (d) dwellings made of non-durable material.
594 Issues in Pakistan's Economy

Box 20.1 of indicators, are to be achieved by the 2015 deadline. It can

MDGs 2012 Not Met be noted that three out of the four indicators on which progress
is slow, are related to MDG 3 (gender equality and women
As the discussion above shows, the last full Pakistan MDG empowerment). The remaining one relates to MDG 6: Combat
Report was published in 2010, and since then we only have HIV/AIDS malaria and other diseases.
press statmenets and summaries which evaluate the state MDGs lagging behind: This is the category of indicators
of the MDGs. Based on these announcements, it seems that where progress has been lagging behind and target, most
Pakistan is lagging in many of the MDG targets for 2012. likely, will not be achieved. Progress against a few indicators
under this category has been unidirectional. The head count
Out of the total 33 indicators, Pakistan's progress on 20 is poverty (caloric plus basic needs) in Pakistan has been
lagging behind, is slow on four, on track on three, off-track fluctuating. It increased from 26 per cent (baseline in 1990)
on one, while targets against five have been met, reveals the to 34 per cent in 2000-01 before declining to 22.3 per cent in
United Nation's Report on Millennium Development Goals 2005--06. In terms of $1.25 per day, according to World Bank,
(MDGs) 2012 on Tuesday. 21 per cent of the populations were living below this threshold
One of the indicators where situation has really worsened in 2007-08 against a target of 22.8 per cent by 2015. So if
in the past four years is the proportion of population below this yardstick is used, then Pakistan has already achieved the
minimum level of dietary energy consumption. This is the target.
core indicator for assessing the level of food insecurity in the Off-track MDGs: The following is the only indicator where
country. A number of reasons have contributed to the food the government of Pakistan has reported progress as 'off the
insecurity in the country. These include the two-digit inflation track'. This relates to the reduction in child mortality. At current
(and a much higher food inflation) over the last four years, in Pakistan, the number of deaths of children under one year of
which has significantly decreased the purchasing power of age per 1,000 live births is 75 against the target of 40.
the people, especially the poor. With 225,450 total estimated The IMR situation in Pakistan has not improved because
annual newborn deaths, each day 618 Pakistani newborns die. the highest proportion of IMR is of neonatal mortality and
Pakistan's MDGs situation: Pakistan has adopted 18 targets the neonatal mortality in Pakistan is increasing. According
and 41 indicators against which progress is measured. to UNICEF's situation analysis of children and women in
However, time series data against only 33 indicators is Pakistan, 'In 2009, Pakistan accounted for 6.9 per cent of
available. global newborn deaths and ranked third from the bottom (at
Three important targets on poverty, slums and water have 191 out of 193 countries) in terms of the number of newborn
been met three years ahead of 2015, says this year's report on deaths. The neonatal mortality rate has actually increased,
the MDGs, launched by UN Secretary-General Ban Ki-moon. from 49 per thousand live births in 2000-01 to 53 per thousand
Meeting the remaining targets, while challenging, is possible in 2007-08. With 225,450 total estimated annual newborn
but only if governments do not waiver from their commitments deaths, each day 618 Pakistani newborns die.'
made over a decade ago. Issues and constraints-summing up: A number of factors
The MDG 1: Eradicate extreme poverty and hunger. MDG 2: have contributed to the under-achievement against most of the
Achieve universal primary education. MDG 3: Gender equality MDGs, These include the slow economic growth of less than
and women empowerment. MDG 4: Reduce child mortality. 3.0 per cent over the last three to four years. With a labour
MDG 5: Improve maternal health. MDG 6: Combat HIV/AIDS, force increasing at a rate of 3.2 per cent, the slow economic
malaria and other diseases. MDG 7: Ensure environmental growth is not creating sufficient jobs for the new entrants
sustainability. MDG 8: Develop a global partnership for to the labour market. Besides poverty and unemployment
development. issues, the income inequality in the country has always been
MDGs achieved: On a total of five indicators, Pakistan is on the rise. The share of consumption of the lowest quintile
either ahead or has achieved the target. With regard to access is currently 9.6 per cent against 40.3 per cent for the highest
to improved water source, Pakistan has achieved the target quintile. There also exists widespread gender inequalities.
when three sources of improved water are taken into account: The share of women in wage employment is the slowest in
tap water, hand pumps and electric motor propelled water. South Asia and Pakistan is not an exception to it. Additionally
However, the Pakistan MDG report 201 O has not included the there are regional pockets where status of development is
'electric motor' in the category of improved water source, which worse than other areas. Notwithstanding these challenges,
makes the status at around 63 per cent against the 92 per cent there are a number of opportunities to build on. The New
(if water extracted through electric motor is included). Pakistan Economic Growth Framework shows the government's priority
has one of the highest ratios of women parliamentarians in the to put Pakistan on the path of sustained economic growth.
South Asia Region. The increase in the share of provinces in National Finance
MDGs on track: There are three indicators-one each for Commission Award and the 18th Constitutional Amendment
MDG 4, 6 and 7-where the progress is on track and the target for the decentralization of governance at the provincial level
could be met by 2015. will help the development partners to work more closely with
Slow progress on MDGs: Following are the indicators where the end beneficiaries.
there has been some progress but the progress rate is slow.
Additional efforts will be needed if the targets, in this category Source: The Daily Times, Lahore, 4 July 2012
 Chapter 20 The Social Sectors II 595

access to basic services, and on a pervasive 3. Primary school enrolment rates for girls are among the ten
gender bias in the access to economic resources lowest in the world.
which is the source of a severe intra-sex and 4. While the incidence of ill-health and premature death
intra-household income inequality. Women are among the poor of both sexes is very high in Pakistan,
married at an early age, have shorter lives, work
women and girls are worst affected.·
longer hours, remain mostly illiterate, and have
minimal opportunities for schooling, training 5. Pakistan's maternal mortality rate was the highest in
and gainful employment. Their low/secondary South Asia and greater than that in other Muslim
status precludes any significant decision-making countries, essentially due to birth-related problems. This
even in fertility control. 9 is compounded by the very high prevalence of babies with
low birth-weight-only three countries in the world had a
Table 20.3 highlights the problem and reinforces the higher percentage of such babies than Pakistan.
evidence that 'on virtually every socio-economic indicator, 6. Only 29 per cent of the labour force was constituted by
Pakistani women fare worse than their South Asian women, below the 33 per cent average for South Asian
counterparts and worse than women in other low income countries.
countries'_ Io Although, as we show below, many things
Table 20.3 also shows very clearly, that on every single account,
regarding the status of women in Pakistan are changing, the
women in Pakistan had a far worse economic and social
following observations can still be made about the status of
status, not just compared to men within the country, but also
women in Pakistan. I I
compared to women in the rest of South Asia. What is more
l. Pakistan had the lowest sex ratio in the world: in 1985 worrisome, is the fact that in terms of the Gender-related
there were 91 women for every 100 men, down from 93 in Development Index (GDI) things were getting far worse. In
1965. 1997, the GDI for Pakistan was 0.472, whichfell to 0.468 in
2. Life expectancy at birth for women was lower than for 2000. At the same time, for South Asia as a whole the GDI-
j men in Pakistan, making it one of only four countries in which is a measure similar to the Human Development Index
I the world where men live longer than women. (HDI) except that it adjusts the HDI for gender equality in
life expectancy, educational attainment and income-had

I
Table 20.3 improved. This shows that while the social and economic
Key Indicators Showing Women's Status in Pakistan position of women in Pakistan had not just deteriorated, the
and South Asia Pakistani woman was being left far behind the other women
of South Asia.
South Asia
Pakistan weighted
average 20.2.2 Some lssues 12
The social and economic benefits of educating girls and
Population as % of total women are very significant, and there is a plethora of
population 46 48 evidence that supports this findingI 3-see Table 20.4.
Literacy rate (%) 25 37 Mothers' education favourably impacts on children; educated
- as % of males 48 81 mothers increase the effectiveness of public health services
Primary net enrolment rate (%) 62 70
Labour force as % of
total labour force 29 33 Table 20.4
Adult female economic activity Educating Women
rate (as% of male) 40.3 52.4
Life expectancy rate 62.59 63.2 Fertility Rates and Educational Attainment of
-as% of male 99 105 Married Women
Gender-related development
Illiterate Primary Secondary Tertiary
index (GDI) 1997 0.472 0.511
2000 0.468 0.634
Gender-empowerment Urban 5.09 4.48 3.57 3.12
measure (GEM) 1997 0.176 0.236 Rural 4.63 4.00 3.21 3.23
Female real GDP
per capita (PPP $) 701 874 Infant Mortality Rates
-as% of male 29.7 39.3
Female percentage of No Education 89; Below Primary 80; Below Secondary 61 ;
out-of-school children Secondary and above 49.
at primary level 54 59
Immunization of Children Under Five
Source: Mahbub ul Haq, Human Development Centre, Human (Fully Immunized, %)
Development in South Asia 2000: The Gender Question
(Karachi: Oxford University Press, 2000), and Mahbub ul No Schooling 10; Primary 16; Secondary 21 ; Higher Secondary 26.
Haq, Human Development Centre, Human Development
in South Asia 2002, Agriculture and Rural Development Source: Social Policy and Development Centre, Annual Review
(Karachi: Oxford University Press, 2003). 2002-03: The State of Education (Karachi: SPDC, 2003).
596 Issues in Pakistan's Economy

and substitute for them when they are not available. There to meet women's health needs. Poverty and
are higher survival rates amongst children of educated purdah prevent many women from getting access
mothers, and such children are better nourished and often to the few health facilities that cater to them.
better educated as well. Moreover, educated women want to Cultural norms often prevent consultation with
male doctors and health staff when female staff
have fewer children and are more likely to use contraceptives
are not available, which further compounds
than uneducated women. 14 The cliche that if you educate a problems.17
woman, you educate not just her family but the entire nation
is, indeed, very true.
Since educating women has beneficial effects on the
There are supply and demand factors that explain why
household, by training and educating women about basic
female education is low in underdeveloped countries, and
health and medical issues, the rest of the family; particularly
Pakistan is no exception. The 'prevailing culture which
children, benefit. Better hygiene, sanitation, and nutritional
values women's reproductive capacities much more than
practices may emerge if women are taught about basic
their productive ones, inhibits investments in education'. 15
diseases-by any means a very cost effective method of
Early marriages, lack of opportunity for women in the labour
reducing health problems.
force, segregation between the sexes, and travelling long
Moreover, women have found a strong voice in the public
distances to schools also hamper girls' education. Moreover,
and political arena since 2000 under General Musharraf's
girls provide critical household help in assisting mothers in
District Government system. Although currently Pakistan
childcare, cooking, and fetching water and fuel wood, and
does not have an elected local government system, Afiya S.
hence the opportunity cost of going to school may at times
Zia and S. Akbar Zaidi point out the huge impact, even if for
be very high.
only eight years, the elected District Government system had
Despite these numerous constraints on demand for
on women. They argue:
education amongst girls and women, it is clear that much
has been changing in Pakistan and that, due to greater
urbanization and modernization, demand for education is The main consequence of former Gen.
Musharraf's devolution system has undoubtedly
growing. Incomes have gone up, and with higher incomes,
been the extraordinary entrance of women as
the desire and affordability of education, even for girls, elected and nominated public representatives
rises. There is a perceived need to educate girls, as it is at the lowest tier of government. With 33 per
recognized, especially in urban areas, that there are financial cent reserved seats for women at all levels in the
returns to education. Not only can educated girls get a job devolution system, 36,066 women councillors
and supplement the household's income, but the family were elected and nominated in the first round of
realizes that educated girls fetch better suitors, and hence local government elections in 2001. With the size
can marry into a better social class. In addition, better of the councils reduced in 2005, but still with
transport and communications have made it easier for the 33 per cent reserved seats for women, 24,528
girls to go to school, and mass media campaigns have women were elected to serve the public through
the local government system. In a society
also been helpful. Stereotypes on television, which is now
considered 'tribal', backward, conservative and
widely viewed even across remote areas, show girls and much worse, this entry of women as public
women as educated. Traditional values and mores have also representatives must stand out as the most
undergone considerable change, and female seclusion, while important outcome of the devolution reforms
still practised, has decreased-see Box 20.2. undertaken in Pakistan.
While demand may have increased, supply constraints have While cynics always point out that women in
adversely affected female education. The World Bank study Pakistan are largely tools in the hands of their
correctly identified a key cause of low female literacy and menfolk, one cannot be oblivious to the impact
education: 'a shortage of female teachers is the single most the public presence of thousands of women had
important constraint to raising enrolments at the primary on their, and their communities' lives. 18
level, especially in rural areas. Apart from the low public
expenditure which has created a shortage of girls schools and
female teachers, hiring and retaining female teachers in rural 20.2.3 Finding Some Options
areas is difficult.' 16 While there had been greater emphasis in
Although Appendix 20.1 provides a very different (in fact,
recent years on girls' education, essentially due to the Social
radical) examination of the causes and implications of
Action Programme, the situation is still far from satisfactory.
discrimination against women, some standard suggestions
In the case of health care, high fertility rates and closely
that may help on the margin can also be made. In terms
spaced and frequent pregnancies are the most serious cause of involvement in unremunerated work, paid employment,
of high maternal mortality and morbidity. Furthermore,
education, and in numerous other ways, the key to well-
according to the World Bank report on Pakistani women,
being rests on the development of the potential of women,
these are compounded by inadequate nutrition as part of the family and as individuals. While there have
(especially during pregnancy and breast been attempts at affirmative action to redress the balance
feeding), lack of clean water and sanitation in the past, much has been left wanting. Indeed, one of the
facilities, women's economic and domestic reasons why social development has been poor is the lack of
workload and the health care system's inability development specific to women.
 Chapter 20 The Social Sectors II 597

The attempts on the part of various governments to inform local, community-based organizations can fulfil an important
men and women about the rights of women is a very positive role and provide the non-school-going female population
first step towards empowering women. Publicity campaigns with basic education, and teach nutrition, and health skills,
about domestic violence and the rights of women, and on by setting up classes at a mohalla level for women who stay
gender discrimination, along with measures such as the at, or near, their homes. Nevertheless, one must emphasize
initiation of separate police stations for women, will help in the fact that the issues of discrimination which confront
building awareness and also in rectifying injustices. Other women in all spheres of the economy are based on structural,
programmes, such as the Prime Minister's programme of historical, and ingrained factors in society. One cannot
employment for women, especially in the health and education achieve much success, no matter how well intentioned,
sectors, are welcome developments. Moreover, continued unless the structural causes of discrimination are addressed
legislation to eliminate social injustices towards women, and (see Appendix 20.1). Moreover, there is an urgent need to
to enhance their status, should be encouraged. The measure repeal all anti-women and discriminatory laws such as the
to increase women's seats in Parliament and to reserve 33 per Hudood Ordinances, the Law of Evidence, the Qisas and
cent seats in local (district) government, is a radical and bold Diyat Laws, as well as enforce new laws on karo-kari and
measure which has allowed women far greater participation in honour killings and, importantly on rape, domestic violence,
public life. Setting up the National Commission on the Status and sexual harassment. See also Box 20.3 for how women's
of Women (NCSW) and other forums where issues specific to development in Pakistan has been modelled into a religious/
women and to society are discussed-and possibly redressed- Islamic context by prominent and generous donors, where
are welcome initiatives as well. the women's question is being framed not in light of women
In rural areas, women do not have many independent as individuals, but women as Muslims.
opportunities to find paid work, and their role revolves
around doing unpaid work for the family. This includes
tending to livestock, getting wood for fuel, collecting water, 20.3 THE ENVIRONMENT19
working on agricultural land, and a host of other economic
and household-related activities. However, experiences from While Pakistan's population is a little over 2 per cent of the
rural areas as diverse as those in Bangladesh and the entire world's population, its energy consumption was a mere
northern areas of Pakistan have shown that, given the right 0.29 per cent, i.e. less than even half of one per cent. This is
opportunities and incentives, women can set up income- not a surprising statistic, as much of the energy consumption
earning projects and supplement the family's income. takes place in the developed western nations of the globe, and
Moreover, this small step of independence will become a big while the majority of the population lives in underdeveloped
step towards empowerment and emancipation. countries, it is the minority, developed countries, that
A critical factor in promoting enterprise by women is the consume much more energy. The low-income countries use
availability of credit. In rural areas, women avail credit to buy energy of about 353 kg (oil equivalent) per capita, while the
livestock or poultry, which often produces a small marketable corresponding figure for high-income economies is 5,245 kg
surplus. In urban areas, the use of credit by women is more per capita. Pakistan's energy use of 209 kg per capita was well
diverse, as the money can be used to develop home schools or below the low-income country average, and lower than that
some small enterprise based in the home. So far, most of the for India (242). While Pakistan's energy use was lower than
credit available to women to set up small-scale projects has that of comparable countries, its average annual growth rate
come from non-governmental organizations (NGOs) or from of 6.8 per cent between 1980 and the 1990s, was higher than
international donors, while the government has not been an the average for low-income economies (5.4 per cent growth),
active player in this area. It is necessary to focus on the means and was amongst the highest for this category. 20
by which credit can be made readily available to women in Table 20.5 shows that Pakistan's energy consumption per
rural and urban areas. Different mechanisms for delivery capita of 7.42 gigajoules was about one-eighth as much energy
and accountability can be developed to ensure repayment. as was used globally per capita. Each Pakistani contributed
NGOs and the government can work closely together to 0.1 tonnes of carbon to the atmosphere, which was about
achieve these goals. In order to expand the outreach of credit one-twentieth of the per capita average contribution globally.
availability, the First Women's Bank should expand and Carbon monoxide emissions per capita were one-third of the
enlarge its branches across the country. Moreover, attempts global average, with the entire country providing less than 1
should be made to develop a system of Mobile Field Officers, per cent of the globe's share.
who can provide credit to women who are unable to come to Pakistan's deforestation was a minuscule proportion of
the larger cities. the deforestation taking place at a global level, and the rate
One of the most consistent and least controversial findings at which it was taking place in Pakistan was much slower
from the social sciences relates to the huge benefits that than the world rate of deforestation (see also Box 20.4). The
accrue from female education and literacy. No efforts should rate of loss of tropical forests was one-third as rapid as the
be spared in developing opportunities and facilities that global rate. Similarly, the loss of topsoil was also far slower
help in promoting these aims. While school-going girls than the world average. The IUCN report, in its evaluation of
can acquire some formal literacy and education, an older Pakistan's contribution to environmental problems, argued
generation has not been able to make use of the recently that 'it is clear that Pakistan is neither a major global
expanding opportunities to acquire formal education. Here, polluter nor a large consumer of resources. In fact, it has a
598 Issues in Pakistan's Economy

Box 20.2 out between the primary stage and the stage of professional
and university education, the numbers completing higher
Progress Made by Women in Pakistan
education is now much greater. Three quarter of a million girls
Shahid Javed Burki writes about how women in Pakistan have are now leaving the institutions of higher learning every year.
begun to make their presence felt in the job market and the In education, it is the numbers that make a revolution. Given
public sphere in Pakistan. the rate of increase in the number of girls attending these
institutions, it is not an exaggeration to suggest that by 2015
The term 'a quiet revolution' sounds like an oxymoron, a million girls will be ready every year to enter the modern
since revolutions normally produce a lot of noise. But when sectors of the economy. That has already begun to happen
something entirely unexpected happens that, too, can be called and here the statistics on participation in the workforce don't
a revolutionary event even if it is not noisy. That is precisely tell the complete story. Official statistics still indicate very low
what women in Pakistan are experiencing. A significant levels of women's participation in the workforce. According
number of them are leaving their homes and entering the to the official data, only 16 per cent of women were working
workforce. The numbers involved are large enough to make compared to 50 per cent of men. The rate of women's
a difference not only to the women's overall welfare, but it will participation in the workforce is higher in the countryside than
profoundly affect the way Pakistani society will function, the in urban areas-19 per cent as against eight per cent. But
way its economy will run and the manner in which its political these statistics don't paint the real picture. A lot of the work
order will evolve. This change is coming about as a result of that women do, either in the households or in the work place,
development in three major areas: education, employment, does not get recorded. This is not only the case for developing
and entrepreneurship. countries. The same happens in more developed economies
Let us begin with education. There is a widespread belief that keep a better record of what people do for living. In
that women are faring poorly in receiving education, That Pakistan, for instance, women are very actively engaged in
impression is correct to some extent. The overall rate of literacy the livestock sector but that goes mostly unnoticed in official
for women is low; much less than that for men which is also not accounting.
very high. Although the Government of Pakistan is a signatory There are a number of sectors in modern areas of the
to the Millennium Development Goals (MDG), the country is far economy where women now make up a significant part of the
from achieving them. Attaining universal literacy for both boys workforce. These include the traditional areas where educated
and girls by the year 2015 was one of the MDGs. With literacy women have been active for decades. These include teaching
rates standing at 70 per cent for boys and only 45 per cent for and medicine. However, more recently, as the number of
girls in 2010, Pakistan will miss these goals by a vast margin. women with high levels of skills increased, they have become
However, when speaking of a revolution, the reference is players in sectors such as banking, communications, law, and
to the growth rate in women's enrolments in institutions of politics. Women also now make up a significant proportion
higher learning. Here, the recent trends are extraordinary-in of the workforce in companies engaged in IT work. Some
fact revolutionary. It is interesting and puzzling that some of IT experts have estimated that in their sector, there are tens
the numbers used here to make this point have not appeared of thousands of women working in what they call 'cottage
in the country's discourse about economic and social issues. businesses'. These are women with good computer skills, who
Over the last 17 years, from 1993 to 2010, the number of girls are working from their homes undertaking small contractual
enrolled in primary education has increased from 3.7 million to work for members of their families or their friends who are
8.3 million. This implies a growth rate of 6.7 per cent a year, living and working abroad. Some estimates suggest that more
about two and half times the rate of increase in the number of than a billion dollars worth of work gets done in these informal
girls entering the primary school-going cohort. However, even establishments. These are, by large, one-person shops that
with this impressive rate of increase, it is worrying that girls still receive payments through informal transactions. However, it is
account for less than one half-the proportion was 44.3 per the entry of women in the entrepreneurial field where the real
cent in 2010-of the total number of children in school. revolution is occurring. I will take up that subject in this space
It is in higher education that girls have made a most next week.
spectacular advance. The numbers of girls attending what are
described as 'professional colleges' has increased in the same Source: Burki, Shahid Javed, 'A Quiet Revolution by Women in
17-year period, at a rate of eight per cent per annum. In 1993, Pakistan', Express Tribune, Karachi, 2 July 2012.
there were only 100,400 girls attending these institutions. Their
number increased to more than 261,000 in 2010. There are
now more girls in these institutions than boys. Their proportion In another article, Shahid Javed Burki continues the same
in the total population of these colleges has increased from 36 theme, and shows that 'it is in education that the Pakistani
per cent to 57 per cent in this period. women have made the most spectacular advance in the
It is attendance in the universities, though where the real country'.
revolution has occurred. There were less than 15,000 girls in
these institutions in 1993; their number increased to 436,000 It is in education that the Pakistani women have made the
in 2010. The proportion of girls is approaching the 50 per cent most spectacular advance in the country. The change noted
mark with the rate of growth in their numbers an impressive above has come about for the reasons that are not unique to
28 per cent a year. While a very large number of girls drop Pakistan. It is happening in other parts of South Asia as well.
 Chapter 20 The Social Sectors II 599

The state was failing to get the public sector to deliver the Some of the more impressive school systems in Pakistan
quality of education demanded by parents belonging to the started modestly with the founding-mother creating a facility
middle class. As the demand for spaces within the educational over which she could watch as her own children were being
system increased, the state came under growing pressures. taught. Some of these ventures were begun in the homes of the
More financial and human resources were required to take budding education-entrepreneurs. These modest institutions
in all the students knocking at the doors of the system. Most grew from the pre-school and kindergarten stage to the
South Asian states did not have the funds in the amounts primary stage and to the high school stage. In one case-in
needed, qualified teachers in the numbers desired, and the case of the school started by Mrs Kasuri-its development
textbooks of the quality parents demanded should be used to took it to the university stage. The Beaconhouse school
teach their children. One conclusion that was drawn was that system is said to be one of the world's largest: having received
the availability of finance in the needed amount would reform an infusion of a significant amount of foreign capital provided
public education. This turned out to be the wrong assumption by a private equity fund it has gone beyond Pakistan's borders
to make. and established-in some cases acquired-school systems
That additional finance alone won't solve the problem in Africa, the Far East, and Britain. The owners of this for-
was vividly illustrated by the embarrassment caused to the profit educational system have ploughed back some of their
World Bank by the spectacular failure of its large social accumulated earnings by giving a large donation for the
action programme, or SAP, in Pakistan. This multi-donor, establishment of a liberal arts university called Beaconhouse
multibillion dollar program was aimed at giving a major lift to National University. BNU, specializing in liberal arts, has
the educational sector in the country by increasing the rate of concentrated on the subjects that attracted women and for
enrollment for both boys and girls, by building new schools which there were growing markets. It is providing instruction in
in the rural areas so that children didn't have to walk long communications, IT, visual arts, architecture, and economics.
distances to attend classes, to provide better trained teachers, This one example provides a good illustration of how
and to improve the quality of instruction by using better women's advanced education and acquisition of modern skills
textbooks. The program's intentions were good but the reason have begun to change the social and political landscape. Well
for its almost total failure was its implementation. qualified women with right kinds of skills have decided not to
In the initial stages, the programme concentrated on the stay at home and build and care for their families. They are
province of Punjab. The education department in Lahore, increasingly becoming professionals and occupying high level
the provincial capital, had a poor reputation. It was under the positions. Some economists maintain that supply creates its
influence of the political forces that put pressure on its officials own demand and that has indeed happened in the case of
to employ their friends and relatives or to move those who were Pakistan with some significant changes in public policy. For
already working in the system to more desirable places. To use several decades after independence, Pakistan did not admit
a jargon of the time, the provincial education department was women into what were called the 'superior services'. These
focusing on 'postings and transfers' of teachers as its principal included the Civil Service of Pakistan and the Pakistan Foreign
function. An enormous growth in the availability of funds in the Service. That ban on the recruitment of women was lifted a
system because of the resources provided by the SAP led to couple of decades ago and now women have advanced to the
a sharp rise in the level of departmental corruption which was senior most echelons in both services. According to a paper
already high. The program because of these design failures written recently by a female diplomat, there are now more than
was eventually abandoned by the Bank and other members of a dozen women serving as ambassadors around the globe.
the donor community. It is, therefore, fair to conclude that even in a country
However, failed efforts such as these created an opportunity which is presently in a severe depressed condition, women's
for women with good education, with access to family funds, educational and work performance may offer one hope for
and with children of their own to step in and establish institutions a better future. By relegating women for so long to the back
which they would manage themselves. Their own children and benches, Pakistan was operating its economy with one hand
the children of their friends and relatives were their first batch tied to back. That hand has now been loosened and may
of students. Mona Kasuri from a well-established political and contribute to the country's revival.
business family was one of the pioneers in this area in Pakistan
and her performance is an excellent example of the marriage of Burki, Shahid Javed, 'Changing the Landscape', Express
entrepreneurship to the availability of opportunity. Tribune, Karachi, 8 July 2012.
600 Issues in Pakistan's Economy

Box 20.3 The subcontractors-the husbands-were strengthened at

the expense of the embroiderers themselves who received
Women's Development, NGOs, Donors, and
well below the minimum wage, while the power relations
Islam in husband-wife partnerships remained unaddressed and
Afiya Shehrbano Zia examines the interplay between donor traditions such as the veil were upheld instead of developing
funding, NGOs, academics and Islam in the context of or improving the market conditions for women's mobility. The
women's development in Pakistan after 9/11. informal sector was further entrenched under the banner of
cultural/religious sensitivity.
Collaboration between western academia and Pakistani The UK Department for International Development (DFID)
women at home and in the diaspora has established a body of took a more inclusive approach in its development initiative
donor-funded research with an exclusive focus on Islam. Will in the North Western Frontier Province of Pakistan during the
development policies based on such research lead to any kind rule of the religious political alliance, the Mutahida Majlis-e-
of liberation? Amal (MMA). As neophytes of electoral victory in 2003, the
Recourse to religion and a focus on faith-based MMA government in the NWFP imposed Shari'a legislation,
organizations as a point of entry for development initiatives has attempted to legalize gender apartheid, prevented women
gained momentum in recent years, with serious implications from voting in elections and even banned female mannequins.
for women's rights. The case of Pakistan provides ample Women's shelters and NGOs were shut down, accused of
illustration of these trends. In the 1980s, several women's being western-influenced mavericks. Nonetheless, the MMA
research and advocacy groups, such as Women Living under government accepted funding from DFID/Asian Development
Muslim Laws, engaged with Islamic frameworks to pursue Bank/World Bank on broader development projects to shake
a gender equality agenda. When post 9-11 propaganda off its own fundamentalist image. However, it refused to
targeted 'oppressed Muslim women' with blatant hypocrisy, negotiate on gender and development initiatives. This was a
this led to an academic turn in the direction of exploring, bargain acceptable to DFID.
rescuing, and in some cases reinventing the agency of Ironically, it is commonly recognized that the MMA suffered
veiled Muslim women, even in cases that signified pietistic subsequent electoral defeat due to the failed or limited
acceptance of discrimination. progress in achieving development objectives. Thus DFID
This new scholarship has matured into a full-blown project assisted the religious party in the name of development
to challenge and reject the ·viability of universal, liberal, and while the MMA was reversing women's rights, a compromise
indigenous secular feminist possibilities in Muslim-majority that was a clear failure in view of the electoral judgment that
countries as culturally inappropriate. This thinking permeates followed.
tangible development policies and projects across Pakistan, The Religions and Development Research Programme
as a celebrated confirmation of the pragmatic possibilities of (RaD) funded by DFID and carried out by the Universities of
development subsumed and framed by religion. Ironically, the Birmingham and Bath in the UK in collaboration with the Lahore
policy-directed research espousing this framework is often University of Management Sciences (Pakistan) has produced
shaped and directed by priorities and actors-such as foreign a number of Policy Briefs. A background paper on madrasah
consultants or academics-removed from the collective (religious seminaries) reform in Pakistan, like many others
developmental, political or activist paradigms of the country that inform the policy briefs, contains some contradictory and
itself. Pakistani development activists and feminists who act problematic suggestions. The brief advocates for 'support'
as subcontractors for these projects may find themselves in rather than reform of madrasahs. To my knowledge, there are
a bind, projecting a secular political identity whilst engaging no development or activist groups in Pakistan who agree with
in donor-funded development projects that reinforce the or are committed to this suggestion. The brief goes on to say
communitarian logic of religion. that, 'The State must win the trust of religious communities'.
Three examples of the policy direction of Anglo-American Given that the state has failed to win the trust of secular or
international development agencies, particularly DFID any other communities for that matter, it is unclear why it
and USAID, highlight the new directions of 'donor-driven should concentrate on religious communities. In fact, religio-
lslam'-development assistance that introduces a creeping political entities are the least trusted by the people if electoral
theocratization of formerly rights-based approaches to gender. performance is anything to go by. The electoral victory of the
In 2007, USAID completed a project in Pakistan called MMA in 2002 was widely discredited as being the result of the
Respecting the Veil. The purpose was to enable the financial bargain struck between the religious alliance and the army
empowerment of home-bound women while respecting their chief General Pervaiz Musharraf who had led a military coup
'veil'. The project comprised husband and wife teams. While and overthrown the democratically elected government in
the wives liaised with women embroiderers, husbands dealt 1999. Apart from atrophying the two largest democratic parties
with wholesalers and markets. The framework of this project by sending their leaders into exile and jailing many others,
can be explained by its acronym, AWESOME (Association General Musharraf recognized the madrasah-awarded
of Women Entrepreneurs in Small and Micro Enterprise). degrees of the MMA members as acceptable prerequi$ites
The 'success' indicators were the sales projections of USAID for contesting general elections. In return, the MMA did not
whereby the estimated incomes for rural embroiderers would challenge the legal cover extended by the Supreme Court
rise to Rs. 1600 per month by 2010 (the government- to allow the army chief to contest subsequent presidential
declared minimum wage in 2008 was Rs. 6000 per month). elections. These contrived and unusual circumstances allowed
 Chapter 20 The Social Sectors II 601

the first ever electoral success of a religious party in the The trouble is that such initiatives end up legitimising
country, commanding enough votes to form the provincial conservatism with the added complication that, very often,
government in the NWFP (now Khyber Pukhtunkhwa). FBOs use secular rather than faith-based strategies to meet
The policy brief goes on to suggest that reform should be their parochial ends. So how are faith-based organizations
funded by the government's educational budget since the defined as such in the first place?
Ulema doesn't trust western donors. Ulema is a vague umbrella The value of research per se is not at issue here.
term for an imagined clergy which has no constitutional nor However, when research begins to morph into projects
democratic legitimacy. The Council of Islamic Ideology (CII) is a targeting institutions, or into developmental or educational
constitutional government department that works in an advisory joint ventures between western governments and home
capacity only and with appointments made by the government. institutions, it presents a danger. There is no internal
The CII does not represent clergymen nor madrassa clergy. Its consensus within Muslim majority countries regarding a
members are not roving Ulema (although they are scholars of singular or even dominant religious or political identity. Muslim
Islam) and there is, therefore, no specific legal entity known women, including feminists, face very different identity issues
as 'the Ulema'. The CII has actively condemned violent and in the West when compared to Pakistan. Therefore, the
extremist politics by madrassas and their students. Upon strategies that may work for them within a pluralist, secular
consideration, most progressive groups would welcome this state such as the UK have very different implications when
streamlining since it is well known that many madaris are transposed to Islamic republics such as Pakistan. Thus when
covertly funded by Saudi sources and promote hard line Pakistani feminist researchers become implicated in projects
Wahabist agendas. Therefore, to be financially dependent that foreground religion in their home contexts, the secular
upon, and thus exclusively accountable to, the Government indigenous possibilities and spaces become more vulnerable,
of Pakistan would be a fitting recommendation in principle. and the results become self-defeating.
Except that, the same policy brief goes on to contradict itself by The contest of political identities has to be fought between
proposing that foreign donors should consider direct funding and amongst the radical and moderate, the conservative and
to the education boards of religious schools. These Wafaqs liberal, the religious and secular. These categories do not
(education boards representing the different schools of Islamic have fixed meanings or expressions and are not necessarily
jurisprudence) are the most conservative, exclusionary bodies binary alternatives, but what is certain is that more often
and are dominated, to the point of being held hostage, by than not these hold different connotations in diverse cultural
certain sects depending on the political patronage they receive contexts. In this respect, scholarship that is critical of Euro-
from provincial governments. Atlantic feminism is valuable, until it begins to claim religious
Furthermore, the DFID policy brief ignores the discriminatory identity as an immutable, valuable cultural resource to replace
history and adverse effects of the lslamization of mainstream secular feminist goals, or more minimally, a neutral or equitable
education in Pakistan: the long-term, detrimental impact of development agenda. When Pakistani liberal, secular feminists
such educational policies have been well documented. This is become implicated in such projects they gloss over the
even more paradoxical since development agencies such as potential conflict between their political and careerist agendas.
DFID have historically supported projects to purge religious- To some extent the growing academic interest in Islam
discriminatory content from mainstream curricula and helped is useful and may even help to boost the careers of
to reform textbooks. some academics/consultants who have jumped onto this
Other policy papers within the ambit of this DFID project, bandwagon. But it should not divert us from the very real
relate to a research study on Faith Based Organizations in political challenge presented by localised analysis, debate,
Pakistan. This study concludes that FBOs may or may not contestation, understanding, and struggle. No academic
be vehicles for equitable development. The study insists its consultant can engage on all these levels.
purpose was not to promote a greater or lesser role for religion The complex realities of the ways in which religious
in achieving development, and that its findings were primarily identities play out in Muslim majority countries often bear
meant to 'benefit poor people in developing countries'. little resemblance to the findings of the academic exercises
However, in the research findings quoted, there is no evidence mentioned above. Such research needs more rigorous scrutiny
supporting poverty-reduction objectives. If anything, the not just in terms of its methodology but also of its politics,
widespread practice of contracting the assistance of local before it starts informing policy and, more worryingly, starts to
religious leaders for distributing contraception and for other shape development interventions.
gender-related projects has resulted in the empowerment of
a traditionally discredited local clergy. In Balochistan, in an Source: Zia, Afiya Shehrbano, 'Donor-driven Islam?', Open
interview with the author, development activists agreed that Democracy, 21 January 2011. http://www.opendemocracy.
these amounted to 'Rent-A-Maulvi' projects. net/5050/afiya-shehrbano-zia/donor-driven-islam
 {"..,

602 Issues in Pakistan's Economy

Table 20.5
Resource Base and Degradation: World and Pakistan: Late 1980s

Pakistan's share Ratio of Pakistan

Resource World Pakistan
of global (%) to global

Land area (million hectares) 13,079 88.2 0.67

Population (millions) 51,624 109.7 2.12
Population density,
1989 (per 1000 hectares) 389 1,541 4
Projected population increase,
1990-2000 (millions) 1,000 40 4
GNP per capita, 1987 (US$) 3,100 350 1/9
Energy consumption (petajoules) 282,924 814 0.29
Energy per capita
(gigajoules/capita) 55 7.42 2/15
Increase in atmospheric concentrations 5,900 15 0.25
of greenhouse gases (million tonnes
of carbon)
Per capita addition to CO 2 1.7 0.1 1/7
flux (tonnes)
Carbon monoxide emissions
(million tonnes/year) 193.5 1.53 0.79 1/3
Per capita 0.037 0.013
SO2 emissions
(million tonnes/year) 155 0.632 0.4 1/5
Per capita 0.03 0.0058 1/5
Per capita additions to methane
flux (tonnes) 0.05 0.03 2/3
CFC production per capita,
1986 (kilograms) 0.2 0
Forest area (million hectares) 4,081.50 4.58 0.11
Deforestation (hectares/year) 20 million 7,000-9,000 0.082
Annual rate of deforestation (%) 0.48 0.15--0.197 1/3
Topsoil loss (million tonnes) 26,000 47 0.181
Soil loss (tonnes/hectares) 1.988 0.53 1/4
Crop land (million hectares) 1.475 20.4 1.4
Expenditure on pesticides
(US$ m/year) 18,500 100 0.54
Annual pesticide expenditure
per hectare crop land 12.54 4.9 2/5
(US$/hectare)
Average annual marine catch
(thousand tonnes) 78,955.2 333.7 0.42
Per capita annual catch
(kilograms/capita/year) 14 2.8 1/5

Source: IUCN, The Pakistan National Conservation Strategy (Karachi: IUCN, 1992), 10-11.

considerable unutilized quota of both the productive and available land is considered to be of 'very good' quality, while
assimilative capacities of global systems, insofar as such poor quality available land, fit for a few crops only, constituted
utilization is sustainable.' 21 However, as Table 20.6 shows, about 15 per cent. Good-quality forests and farmland were a
this is no reason for complacency, and there has been a minuscule proportion of all the land in Pakistan. Class VIII
deterioration in important environment-related indicators. was 'not capable of growing trees, shrubs or grasses either
Pakistan has less land under National Parks and is losing area because of a total absence of soils or because the soils that do
under Forest Cover. The extent of desertification in particular, exist cannot support productive plant growth'. 22 And as Table
has been severe, with more than half of Pakistan's land lost 20.6 shows, things are getting appreciably worse.
to desertification. Overall, agricultural land that was being used in Pakistan
Table 20. 7 and Figure 20.1 show the distribution of was being used at below its productive capacity, resulting
Pakistan's nine land capability classes. Cultivable land of in less than potential output. The factors that affect land
different grades capable of growing crops (classes I-IV) productivity included water erosion, wind erosion, salinity/
constitute only 21 per cent of total area; about a quarter of the sodicity, waterlogging, flooding, and loss of organic matter.
r Chapter 20 The Social Sectors II 603

Box 20.4 proposition. The extreme poverty and hardship of life in

Environmental Degradation these remote areas has meant that the local communities
have seized this opportunity to earn a substantial income in
Arif Hasan and Ameneh Azam Ali look at the reasons for a short space of time, by selling their trees to down-country
environmental degradation, the repercussions of deforestation, contractors ....
and industrial pollution. . . . Studies on Karachi have established that effluent

I
from tanneries contains a higher pollution load of oil than
The increase in the price of building timber is already
the oil industry itself. In addition, it contains chromium and
adversely affecting the quality of housing in the country
other toxic metal salts that are used in the tanning process,
and the scarcity and cost of fuel wood is becoming a major
such as chlorides and sulphates of sodium and potassium.
economic burden on low-income communities. As a result,
There is no on-site treatment of this effluent, not even the
gas cylinders are in great demand, even in rural areas, as
removal of suspended solids. The effluent from the cotton
their monthly cost is less than half that of fuel wood.
industry, though high in organic contents, is less noxious
One of the most visible, and perhaps the most significant,
but does contain traces of chromium and copper. The cotton
impacts of deforestation is soil erosion. The mountain
industries and tanneries are the most widespread industrial
regions where the majority of natural forests are located are
activity in Pakistan and are carried on through small, often
characterized by steep slopes, fragile and thin topsoil, and
informal units, in both the urban and rural areas ....
unstable geological conditions. When tree cover is removed,
... Apart from small industrial units which pollute water
there is nothing to stop the soil from being washed away
bodies, most cities also have larger formal sector units
by even mild rainfall. In addition, landslides and rock falls,
that do the same. In Multan, the Pak-Arab Fertilizer factory
which occur frequently in spring as a result of melting snow
releases highly polluted waste into the Multan canal, a
and ice, are exacerbated by the absence of tree cover. Vast
major irrigation and drinking water source for animals. The
areas of the Karakorams and Hindu Kush are naturally arid
effluent of 235 industries in Faisalabad is carried untreated
and barren, and little can be done to prevent or control soil
to the river by the main drain of the city. At Kala Shah Kaku
erosion in these areas. But the historically heavy silt load of
industrial estate in Lahore, the industrial effluent is also
the Indus, which flows through these mountains, is being carried untreated to the river Ravi through the Deg nullah ....
augmented now by large quantities of valuable topsoil
... In addition to industrial emissions, a major source
swept off the slopes of the foothills and lower mountains in
of pollution is from automobiles. Their number in Pakistan
the monsoon zone. This erosion has a dual impact on the
had increased from 575,558 in 1975 to over 1.654 million
environment: it leads to desertification of once-productive
in 1984. Since then, it is estimated that they have increased
upland areas, and silting-up of waterways in the plains,
overall by 30 per cent and are concentrated in about 8 major
making them more prone to flooding. In addition, there is cities of the country. Studies carried out on traffic policemen
increased silting-up of irrigation and hydro-electric systems, working in the more polluted areas of Karachi and other
lowering their efficiency and shortening their lifespans. studies on Lahore show that traffic emissions in these cities
The building of roads is probably the single biggest factor have become critical and are creating very serious health
contributing to rapid deforestation. Previously inaccessible problems for the residents.
mountain areas, like the Kohistan district of NWFP, have in
the last twenty years been connected to the plains by major Source: Hasan, Arif and Ameneh Azam Ali, Environmental
roads. Transportation facilities have made the logging of Repercussions of Development in Pakistan (Karachi: OPP-RTI,
these rich and ancient natural forests a viable commercial 1993), 40-9.

The greatest effect is by water erosion ( 17 per cent) followed

Table 20.6
by salinity (8.6) and wind erosion (7.6 per cent).
Changes in Selected Environmental Indicators 1990
In the industrial sector, air and water pollution result
and 2000
from industrial processes, and with extensive urban growth
1990 2000 resulting in an increase in mechanized vehicles, pollution
levels in cities have reached critical levels, especially in
Area Under National Parks
the more industrialized sectors of urban areas. To these
and Wildlife Sanctuaries 9 10.4 environmental effects of industrialization one can add the
(% of total land area) extent of 'encroachment by industrial units on farmland
Area affected by Desertification 39.57 55.14 and on the habitats of various plants and animal life'. 23 A
(% of total land area) survey that examined industrial waste pollution in Karachi,
Area Under Forest Cover 5.19 4.80 Multan, Faisalabad, Nowshera, and Peshawar found that
(% of total land area) a number of industries were 'discharging effluents with
high concentrations of pollutants varying from toxic metals
Source: Centre for Research on Poverty Reduction and Income and metal salts to bacteria, acids and salts'. 24 In Karachi,
Distribution, Pakistan Human Condition Report 2003 contaminated and heated sea water is sent back into the
(Islamabad: CRPRID, 2003), 241.
604 Issues in Pakistan's Economy
,
Table 20.7 creek after industrial use, affecting sea life and the marine
Land Capability Classifications ecological balance. Contamination by petroleum hydrocarbon
residues and chlorinated hydrocarbons is also common on
Production the sea coast in Karachi. Along with industrial emissions,
Land class Soil limitations
potential pollution from automobiles is also a major and growing
problem in cities (see Box 20.4).
Very good None for general Very high Like many other countries, in Pakistan environmental
agricultural land agriculture degradation and excessive rural and urban pollution are
II Good agricultural Minor High for general bordering on a near catastrophic situation, with growing
land agriculture concerns about ecological disasters, such as floods and
Ill Moderate Moderate Moderate for other environmental crises. The trend is one of substantially
agricultural land general crops increasing energy consumption, with .a negative impact on
the environment. Deforestation is destroying parts of the
IV Poor (marginal) Severe Low for a few
agricultural land crops only
Potohar region where timber is being cut at a far faster rate
than new trees are being planted. Salinity in much of Sindh
V Good forest or None/minor for High for forestry/
is destroying potentially good-quality agricultural land, and is
rangeland forestry/ range
also affecting rural housing. Both deforestation and salinity
rangeland development
are, and will continue to be, a serious potential threat to the
VI Moderate forest Moderate Moderate for rural sector. Industrial waste and emissions and pollution
or rangeland forestry/range from cars and other vehicles in cities will exacerbate the
development problem, especially since urban growth is going to continue
VII Poor forest or Severe Low for forestry/ and industrial and manufacturing output is likely to expand.
rangeland range In 1992 the Government of Pakistan adopted the National
development Conservation Strategy as an official policy document. The
VIII Non-agricultural Severe None for any policy had three explicit objectives: ( 1) conservation of natural
land type of resources, (2) sustainable development, and (3) improved
economic efficiency in the use and management of resources. Fourteen
agriculture programme areas were identified for priority treatment:

Source: IUCN, The Pakistan National ConseNation Strategy

1. Maintaining soils in croplands
(Karachi: IUCN, 1992), 22.
2. Increasing irrigation efficiency
3. Protecting watersheds
4. Supporting forestry and plantations
Figure 20.1
5. Restoring rangelands and improving livestock
Land Capability by Classes
6. Protecting water bodies and sustaining fisheries
IX 7. Conserving biodiversity
8. Increasing energy efficiency
9. Developing and employing renewable resources
10. Preventing/abating pollution
11. Managing urban wastes
VIII 12. Supporting institutions for common resources
13. Integrating population and environmental programmes
14. Preserving the cultural heritage

20.4 INSTITUTIONAL ISSUES IN THE SOCIAL

SECTOR
VII
Land class Land capability The cliche-ridden New .World Order is said to have had its
I Very good agricultural land beginnings in the mid- l 980s following Michael Gorbachev' s
II Good agricultural land perestroika in the Soviet Union, finding its crystallization with
Ill Moderate agricultural land the fall of the Berlin Wall in 1989. We are told that this is the
IV Marginal agricultural land triumph of the West and the End of History; the New Age is
V Good forest or rangeland one of the free man and woman, unencumbered by the state;
VI Moderate forest or rangeland and freedom of choice and action are now set to dominate
VII Poor forest or rangeland economic and political thinking. 25 This is the era where the
VIII Non-agricultural land neo-liberal synthesis has found its expression in economics
IX Unclassified
and politics. Market-friendliness, privatization, deregulation,
devolution and democracy are now the key cliches that form
Total area: 61.82 million hectares
l Chapter 20 The Social Sectors II 605

the mix (and fix) for societies which were hitherto deviant governance and government structures, huge centralized
from the norm adhered to in the West. With the demise of the machineries that were deemed competent and capable of
bipolar world, the unipolar world sees itself as an elongated delivering on promises to their people have floundered.
extension of the West to the non-West. The measuring- The new thinking has shifted away from the central and
rod for success and achievement is now the ability to ape federal gqvernment's role in developing the economy and
developed western countries in order to make development society, and has begun to incorporate the private sector and
'sustainable'. 26 Governance, democracy, and devolution form non-governmental organizations as important key actors
a critical union to make development sustainable, and are in development strategies. Furthermore, the need- for less
said to comprise the key prerequisites for progress. 27 bureaucracy, more efficient and timely delivery of services,
With the breakdown of the command economies of the and a closer and more direct access to the beneficiaries
former Soviet regime and its allies, devolution of control and of development-related projects have also been important
power has been seen as a particular means for increasing considerations in this shift in thinking and strategy-see
participation, and hence, progress. Today, in matters of Box 20.5.

Box 20.5 conclusion of whether market failures are pervasive, so that

Government Intervention, Planning, and the strong government interventions are warranted, or policy
failures predominate, so that almost all activities should
Market
be privatized and left to the market. The question pertains
J. R. Behrman discusses the reasons why, in a neoclassical to specific activities, in some of which the government
world, planning may still be necessary and why government may have comparative advantage and in others of which
intervention, rather than determination by the market, may be the private sector may have comparative advantage.
necessary. Responsible governmental stewardship must recognize the
differing comparative advantages of public versus private
Efficiency reasons for policies include market failures due to fulfilment of various activities, and not blindly reserve certain
externalities (that work other than through markets so private activities to one or the other.
incentives differ from social marginal costs), increasing If there are distributional reasons for governmental
returns to scale/public goods (for which private incentives interventions, two points merit emphasis. First, if a certain
are to produce less than socially desirable, with information group is to be favoured by policies, there remains the
a particularly important example), local monopolies, and question of what policies to utilize. Comparisons of the
missing and incomplete markets (including capital and expected costs and benefits need to be made, which
insurance markets for human resource investments). If there generally tends to point to policies that are higher in the
are efficiency reasons for considering policy interventions, efficiency policy hierarchy. For example, because society
alternative policies can be ordered in a 'policy hierarchy' has a commitment to improve the human resources of the
in descending order of the number of distortions that the poor does not mean that direct public provision of education
policies introduce. If policymakers had perfect and costless and health services is the best way to pursue that goal. In
information both for policy design and for subsequent some circumstances (but certainly not in all circumstances),
monitoring and enforcement, often there is a range of it may be more effective in terms of this commitment to
'price' (tax, subsidy) or 'quantitative' (regulations, central provide subsidies directly to the poor (perhaps tied to
directives) that could illicit the 'correct' outcomes. But in specific uses, such as schooling) and let them choose their
fact information is quite imperfect for policymakers and provider from among the private and public alternatives
implementers. That implies that there is a premium on more rather than channelling all such subsidies directly to public
transparent policies and policies that create incentives sector providers and thereby limiting the pressures on
for efficient behaviour and accountability, particularly if public sector providers to be more effective and limiting the
they cannot be closely monitored in a timely fashion. possible choices for the poor. Second, almost all policies
A major problem in the provision of social services in have distributional impacts, favouring some group or other,
Pakistan, for example, is thought to be the lack of client and not necessarily the poor by any means (in fact often not
orientation and low accountability, which in considerable the poor). Often among the groups that have the strongest
part reflects information problems in monitoring service vested interests in particular policies, moreover, may be
delivery and in assessing client demands. In an uncertain government employees. Therefore it is all the more important
world with asymmetrical information, there is a presumption that policies, whatever their rationale, be as transparent as
that price policies are likely to be more effective in many possible and subject to periodical review so that they do not
cases on these grounds than quantitative policies or the continue long after the problem to which they originally were
direct provision of government services. There also is a addressed has ·pa~sed simply because they have created a
presumption that more decentralized decisions are· more strong vested interest in the public or private sectors.
likely to be responsive to the nature of local conditions
than more centralized decisions, and that a broader sense Source: Behrman, J. R., 'Pakistan: Human Resource Develop-
of 'ownership' of activities is likely to increase efficiency. At ment and Economic Growth into the Next Century', mimeo,
issue is not a question of ideology regarding some general 8 May 1995, 3.
 606 Issues in Pakistan's Economy

Not only has there been a move away from government managerial issues, and issues of delivery, have ensured poor
control; there has also been a noticeable shift within progress. There is growing recognition of a need for change
government structures. Furthermore, the concept of in the way social development is delivered. Even official
government itself has changed. The control economies of government documents have started paying lip-service to
eastern Europe, and the military governments in much the need for administrative reforms: 'the effectiveness of
of the Third World, have been replaced by some form of planning and administration has progressively been eroded by
democratic regime. There is agreement now that strong the growing inability of government to effectively implement

l
centralized states are out of tune with .the reality on the its policies'. 29 The government believes that it has not been
ground, and thus there has been a growing demand for more able to make collective decisions in the past, a major reason
active participation, and hence, devolution. The controlling for which is
federal/central state has been forced to extend more powers
to smaller units at the provincial, district, and local level, so that all administrative, political and even i
as to enable these units to play an active role in providing scholarly attention has been focused on
welfare to the people. This has happened in Pakistan as well, bureaucratic and centralized forms of collective
decision making, with little attention towards
in numerous guises, either as military Jed devolution, or
representative decision making (as in the
then greater provincial autonomy and responsibility passed parliament, cooperative societies, district
on to the federating units-see Chapters 12 and 13 in Part councils), and downright hostility towards
IV. More autonomy has been granted to provincial and state participatory decision making arrangements.
governments, and local municipal government has also been This needs to be reversed. 30
expected to play an increasingly prominent role. While the
world climate has been the critical factor in causing this shift Moreover, the government believes that 'effective reform of
of emphasis, 28 the economic constraints faced by many, if local government institutions has to be at the core of any
not most, underdeveloped countries have helped accentuate development strategy aimed at the alleviation of poverty
this shift. or the development of the social sectors'. 31 Reforms that
Many developing country governments, including Pakistan, have been undertaken under the 18th Amendment in 2010,
find themselves in dire financial straits and are forced to are meant to address these shortfalls and transfer greater
reduce public expenditure to cut the budget deficit, and to responsibility and revenue on the federating units, the
restructure their economies. In fact, after 2008, this 'third provinces. See Chapters 12 and 13 for further details.
world' problem has also engulfed many countries in the As in the past, the commitment to the social sector is
developed West as well, such as Spain, Greece and Portugal. supposed to have 'transparent and accountable' government
The term 'structural adjustment' acts. as a metaphor for · as an important cornerstone. 'This transparency will entail
the state of the economy in most underdeveloped, as decentralization, better monitoring and accountability
well as in some advanced, developed countries. Budget of public institutions and greater involvement and
cuts-an essential ingredient of any Structural Adjustment strengthening of civil society instruments, primarily NGOs
Programme-have meant that central/federal governments [non-governmental organizations] and CBOs [community-
have had fewer funds to make available to lower echelons in based organizations] .' 32
the hierarchy. Thus, provincial and local governments that
were dependent on the state have now had to become more

l
disciplined financially, and have seen their grants and aid 20.5 GOVERNANCE, DECENTRALIZATION,
cut. It is this dual shift-a resource constraint faced by the
federal government, and the belief that more participation AND LOCAL LEVEL DELIVERY
and devolution of power and control leads to better, more
One of the key concepts to emerge in the present world
effective, and sustainable development-that has brought
climate is that of governance, a term applied particularly to
local governments, the private sector, and non-governmental
organizations into the foray of development planning.
underdeveloped countries. 33 While it is not the objective of I
this section to examine the epistemological, philosophical,
Pakistan, too, has been influenced by these changes in
thinking and perception taking place at a global level. While
the structural adjustment programme, with its multifaceted
or political genesis of this concept, some comments on the
concept will be useful to our discussion. 34
Governance has been described as 'an act or manner of
•
emphasis on privatization, deregulation, and liberalization,
governing, of exercising control or authority over actions of
· has been accepted wholesale by different governments
subjects, a system of regulations' 35 and 'reflects a judgement
in Pakistan, often without enquiry about the possible
repercussions (see Chapters 16 and 17), the institutional and on the quality of government'. 'It refers to a certain system
of politics and how this functions in relation to public
governance issues have yet to be tackled-and for obvious
reasons, we will argue. administration and law. Governance has also been used
Nevertheless, there is a growing debate about and to .focus specifically on development. Governance, in this
awareness of issues related to the delivery and functioning context; means the manner in which power is exercised in
of the social sector in Pakistan. There is a general belief that the management of a country's economic and social resources
social development has been poor, not because facilities have for development.' 36 Among the earlier public statements
been inadequate in number, but because organizational and on good governance is the 1989 World Bank report on
Africa, where the concept included the following features:
 Chapter 20 The Social Sectors II 607

'an efficient public service; an independent judicial system 20.5.1 Government and Development in
and legal framework to enforce contracts; ·the accountable
administration of public funds; . . . respect for the law
Pakistan
and human rights at all levels of government; a pluralistic While there may be differences of opm1on about what
institutional structure, and a free press'. 37 In later works, a constitutes the concept of governance-good or bad-there
clearer idea of the World Bank's understanding of the concept would be little disagreement over our claim that governance
emerges, where good governance is synonymous with sound has been noticeably poor in Pakistan. On this single count
development management. 38 alone, most conceptualizers of the term 'governance' would
M. Halfani and his associates, in their work on the agree. Public participation, or democracy, must surely be one
implications of governance for urban research in developing of the central tenets of any definition of good governance.
countries, state that governance is distinct from government Pakistan's political leaders have carefully done away with this
and 'refers to the relationship between civil society and the feature altogether.
state, between rulers and the ruled, the state and society, the Thirty-one of Pakistan's 65 years have been ruled formally
government and the governed'. 39 According to Tariq Banuri, by three military rulers at different junctures of its history.
the crisis of governance 'refers to an excessive degree of From 1947 to 1985, only one free and fair general election
centralization, overburdening, and rigidity of the government was held, and even then, Zulfikar Ali Bhutto's democracy
machinery; the absence of local participation which can would hardly be termed a model of good governance. 1985
provide the requisite attention to detail; the deterioration saw a military dictator hold a form of general election,
in the professionalism, competence and integrity of public where individuals rather than political parties were given the
functionaries; and the weakening of judicial and quasi- right to participate. Ironically, though, the three-year period
judicial institutions' .40 While it is clear even from this ( 1985-8) with Mohammad Khan Junejo as prime minister,
insufficient selection of definitions that 'the meaning of despite the domination and control of General Zia ul-Haq
governance depends on who is looking at the term and what as president, can be considered to have provided better
he/she is looking for', 41 there does seem to be a core body government and governance than the democratic regimes
of concern and focus. However, given the ambiguity and of Z. A. Bhutto, Benazir Bhutto, and Nawaz Sharif. General
ambivalence in the use of the term, good governance has also Pervez Musharraf's coup in October 1999, put an end to the
been used by pro-marketeers, wherever found expedient, to eleven year process of electioneering in Pakistan. He also
mean minimum government. followed General Zia's footsteps by becoming President while
In a sense, the term reflects within it almost all facets of he remained Chief of the Army Staff, and also held elections
civil society and government, and the relationship between in 2002, which were controlled and managed by the army
the two. Economic development needs to be examined from within. The lack of popular participation in Pakistan
with its social and cultural consequences. Governance also would suggest that the system of governance has been quite
encompasses the relationship between participation and poor.
development by governments. Furthermore; community With regard to the social sector and social development, it is
participation, the role of women, sustainable development, generally believed that the main obstacle to the achievement
and economic effects on the environment and consequently of comprehensive development in Pakistan has been the
on the population all form some part of the concept of crisis of governance. Giovanni Cornia writing some years ago,
governance. It is a huge term used to capture a large number defined this as the crisis
of ideas about political, social, and economic development.
Not only is governance about how governments function, of the government's ability to design and
implement policies, particularly policies which
but it is a multi-relational concept of society as a whole.
require targeting, selection or judgement. Such
One cannot argue that governments per se are inefficient
crisis manifests itself in the fact that over
and corrupt, and have no respect for the Jaw-though this is the years the GOP [Government of Pakistan]
true in most underdeveloped countries-without examining has become excessively centralized; that
the links with the nature of society in which government participatory institutions have eroded, and are
functions. We need to examine the level and structure of virtually non-existent today; that the hostility
economic development and of society, the historical and towards participatory institutions and local-
cultural traditions of particular societies, and the influence level democracy has led to the gradual erosion
of the government on civil society, before any concept of the self-confidence, the skills and the
of governance emerges. Furthermore, particular perceived system of grass-root institutions needed for
organizing collective action; that the breakdown
facets of good governance, such as community participation,
in professional standards, Jax supervision and
need not be 'good' or beneficial in all societies, regardless growing corruption of large sections of the
of specific social structures. Essentially then, even if there civil service (including those dealing with
is some general consensus about what constitutes (good) education, tax administration, law and order)
governance, these rules need not be universally applicable. and arbitrary procedures are causing a severe
With these remarks on what constitutes the varied concept crisis of legitimacy of government institutions
of governance, we examine the role that the.government has which are no longer perceived as acting in the
played in development in Pakistan. public interest. 42 ·
608 Issues in Pakistan's Economy

Having identified the problem, Cornia argued further that it local needs. In addition, decentralization allows
is imperative that reform of the state apparatus take place, for more genuine democratic control from the
even though such a reform will be 'painful and difficult', but beneficiaries of the services (through school
there is urgent need for greater 'participation of civil society boards, parent commissions, user associations,
etc.): such informal bodies should provide
in the design and execution of social sector activities'. 43 What
support to teachers and health workers, oversee
this requires is that institutional reform take place, so that basic the attendance to and quality of services, decide
functions of the state 'such as public security, fair judicial on the siting of new facilities, provide additional
recourse, enforcement of contracts, and so on, are actually resources, etc. 46
being fuffilled' .44
Along with institutional reform to bring about some The third key requirement for better governance, along
semblance of good governance, advocates of this line of with institutional reform and decentralization, is community
thinking also believe that better delivery of social services participation and democratic control.
requires decentralization: the hold and role of the central
government should be weakened, while the role of lower The case for a far greater reliance on the
tiers of government and other participants in the social communities, their local representative bodies
sector matrix should be increased. Asad Sayeed argues that and the NGOs in Pakistan is a strong one.
the centralization of the delivery mechanism is among the Greater reliance on community participation
and social mobilization in the design, delivery
most serious impediments to the provision of adequate
and monitoring of social activities ensures
social services. As an illustration of the excessive extent of in the first instance, a greater relevance of
centralization, he cites the example of the rural water supply these programmes to the actual needs of the
schemes (RWSS) and argues that: population, and a greater internalization of their
benefits by the poor and unreached. In addition,
in RWSS the provincial Public Health and community-based programmes generally employ
Engineering Departments (PHEDs) are less unnecessarily skill-intensive approaches and
responsible for not only the development of ensure greater overall efficiency. Community
water supply schemes but they also perform the participation also facilitates the mobilization of
function of O & M [operation and maintenance] additional cash resources and of other resources
and revenue collection. Originally established for in kind such as labour and locally available
the provision of urban water supply schemes, material which have a low opportunity cost but
the PHEDs have approached the problem of intrinsic productive value. And, finally, the active
rural water supply and management from the involvement of the community enhances the
standpoint of urban needs with the consequent sense of self-reliance and responsibility of people
urban bias in technology. Institutionally local and their ability to take care of their lives. 47
government and its related departments (such
as the LGRDD) [Local Government and Rural The fact that military governments have ruled Pakistan
Development Department] are designated to
directly for around half of'Pakistan's existence since 1947,
provide for RWSS. But because of the weak
financial and technical base of local government, and given the fact that the military is, by definition, an
this role has de facto been handed over to the hierarchical, centralized, command, institution, one also
PHEDs. With little interest in the collection sees government in Pakistan, to ultimately be controlled
of revenues (as their budget is not affected by by the military in its own image. Yet, to be fair, military
recovering revenues) monitoring of projects is governments have been the only forms of government in
weak. The RWSS case illustrates that in spite Pakistan to actively encourage local governments to function
of the mandate given to local government, its somewhat autonomously-see Chapter 12-although the
weak financial and technical base renders it military continues to hold on to all relevant aspects of
incapable of performing these tasks. Similarly, in administrative structure. Decentralization does take place,
other social sectors also, according to the Local
but is in constant tension with the centralized nature
Government Ordinance of 1979, local bodies
have the mandate to undertake development of the military. There is also a general impression, that
and O & M work for social sectors, but for the military forms of authoritarian governance 'work better', or
above reasons they have, by and large, abdicated at least more efficiently, than the messy form of democratic
this responsibility to provincial governments. 45 participation. This perception is probably not incorrect,
where the military form strides through in following orders
Giovanni Cornia believes that to break the hold of the and undertaking decisions without much consultation, with
federal/central governments, decentralization should take little opposition, and being 'efficient' and productive. A non-
place not just at the provincial level, but beyond, at the district consultative, top-down, authoritarian, development, process
and local/union level. His rationale for decentralization is that might sometimes have its advantages, when 'the people'
are given what someone in command or authority deems
the greater closeness of public admini_stration they need. However, increasingly in Pakistan, the model of
to the problems of society allows for faster and development has moved to one which is more participatory,
more relevant and efficient decisions concerning consultative and democratic.
 Chapter 20 The Social Sectors II 609

20.6 NGOs AND COMMUNITY 1. Welfare oriented, charitable or philanthropic organizations,

which provide social services mainly to the poor and
PARTICIPATION 48 underprivileged.
2. Grassroots development organizations, which work with
No one knows how many non-governmental organizations specific targeted communities for the development and
(NGOs) exist in Pakistan. Whatever their number, only a few economic and social uplift of the area or people; these are
of them are officially registered, and there are an unaccounted often service providers-or contactors, according to one
larger number of unregistered organizations which pose as view, see Box 20.6-substituting for government.
NGOs, providing some service or the other. Of those that are 3. An increasing number of NGOs not just of/for women,
registered, most are registered under the voluntary Social have now become advocacy-based, lobbying for different
Welfare Act, while the remainder are registered under the laws, provisions, etc. These include human rights groups,
Societies Registration Act, the Trust Act, the Companies Act, justice and consumer protection groups.
or the Charitable Endowment Act. 4. Women's NGOs, which specifically target and focus
Not surprisingly, given greater population densities and on issues related to the economic and social status
proximities, most NGOs are urban based with different of women. Activities of these NGOs are not restricted
focuses of locational and operative interest. Each NGO has its to the delivery of social services alone, and research,
own particular philosophy, priority, focus, area, and manner information, dissemination, legal advice and advocacy,
of interaction with its client population. Despite the very and other development issues are also on their agenda.
large number of NGOs in different regions in Pakistan, most
NGOs are highly localized-in fact, this is one of the key In the 1940s and 1950s, NGOs were mainly charitable
elements that distinguishes NGO activity from other types and philanthropic organizations, but since the 1970s, and
of intervention. There were fewer than two dozen NGOs especially in the 1980s, NGOs have 'stepped into welfare
that have a national coverage. Approximately 70 per cent of oriented roles as the state system increasingly failed to deliver.
the registered NGOs were in the Punjab, probably because After the seventies [the] shift has been towards development
of the higher level of urbanization in that province. Despite community based initiatives.' 49 Most NGOs receive financial
the preponderance of urban NGOs in Pakistan, it is probably support from community contributions, local donors and
some of the rural NGOs which have achieved international often receive funds from the government through the
fame for achievements in the past. The most well-known Social Welfare Departments of the provincial governments.
NGO in Pakistan is probably the Aga Khan Rural Support Increasingly though, funding from international donors has
Programme established in 1983 with work in the Northern become a major component of funds for NGOs.
Areas and Baltistan, and its off-shoots, the sixteen Rural Most NGOs in Pakistan are welfare oriented. They are
Support Programmes. usually operative at the level of neighbourhoods and 'are
There are essentially four types or categories of NGO involved in the provision of civic amenities such as basic
working in Pakistan. These are as follows: health, education, library facilities, vocational training,
youth programmes, credits, income-generating activities,

Box 20.6 In order to define civil society, it is a requirement that the

NGOs _and Civil Society organizations and actors of civil society not be controlled
by the institutions or actors of the state. This 'autonomous'
NGOs and civil society in Pakistan, are criticised for supporting requirement is a necessary condition to distinguish civil society
military, governments and for becoming contractors to from the state.
g?vernment. For some' more radical thinkers, the stricter requirement is
that civil society must stand against both state and market, and
,fThe term 'civil society' is a complicated term which means particularly against economic liberalism. For them the 'state,
· ·, ,diffifrent :things to different people and is used in different market and civil society are rival channels for the exercise of
.i'.";,:, c8ntelttf Ey'en jil the niore settled western societies, it has a power'. For other theorists, civil society must necessarily be
'"eahing: _late-20th century events have made the a democratising force. Howsoever one defines civil society
'ifitid}with'tiJii;sociefy actors and constituents, and its constituents, the Pakistani case offers interesting (and
'ti'ofthe/;~ealm. of civil society over a period contradictory) insights about the nature and form, and location, ·
t·~-.~.\\:,,:;;;:> /~,;-,;, : /-~' '.
s1of.the EasHmd the South, the location of
1
of civil society. It also shows the large number of contradictions
which constitute the political settlement thatis Pakistan.
-~!~\~fi~f its•,'.11~}i.~i~g' becomes· even more Despite the fact that General Musharraf in October 1999
her_e.,arefrd1ffer.ent•n,ot1ons_·and contexts· about overthre\\' an elected prime minister, albeit an incompetent
·is•}ribf;c:there is, at least some broad one, the'iargest arid most public support for him came from
ftl\'futf~trnecessarUy, be. Civil· society is the·socially.and culturally liberal and westernised sections of
. . ')a't'6~"~"6t~icfJ,~h'd'p~'rh~Ss preferably in opposition Pakistan's. elite, who embraced Musharraf as one of their own,
,•·. -~?~~r1:1~q~qfr'~d(sti~.6iwith, the 'st~te. which he very much was. Activists in the NGO movement in
'.V~-??~:: ·:,,,:... > ,;
61 O Issues in Pakistan's Economy

Pakistan were also vociferous in their support for Musharraf, two countries, an agenda which the westernised sections of
precisely because he was seen as a liberal and westernised man. Pakistani civil society endorse.
Some prominent members of the NGO movement who Moreover, the requirement that civil society be autonomous
had struggled for a democratic order in Pakistan when it of the state is also undone since many of these NGOs, are
was under General Zia ul-Haq, actually joined Musharraf's highly dependent on foreign donor state. It is the broader
cabinet. Employer's associations, trade bodies, women's westernised, 'liberal', modern (but in the case of Pakistan, non-
groups, and other such groupings which are all part of some democratic) vision, which western governments share with the
acceptable notion of civil society, also welcomed the coup elite and the westernised sections of those who constitute civil
because General Musharraf was seen as a modernising man. society in Pakistan-not with the Islamic elements or sections
Some intellectuals and peace and anti-nuclear activists also of civil society.
celebrated the arrival of a liberal head of state. The greatest opposition to the foreign presence in Iraq
Clearly, for the westernised sections of civil society and Afghanistan, and to Israel has come from the political
in Pakistan, the military general who had overthrown a and non-political sections of the 'Islamic' civil society. Unlike
democratically electeg prime minister, was Pakistan's latest their westernised Pakistani cousins, this is an anti-imperialist
saviour. Musharraf's earliest critics and opponents included, political grouping, which is also against the agenda of the
what for lack of a more appropriate term one can call, the World Bank, the IMF, and economic liberalism, something that
Islamic civil society, which did not like his liberalism and westernised civil society supports very enthusiastically. For
westernisation. Classical and western literature on civil society both, however, democracy is less important.
suggests that by being 'against the state' in some ways, Most definitions of civil society do not stretch themselves to
and especially by being against the autocratic undemocratic include film societies, debating clubs or puppet and theatre
state, civil society is necessarily on the side of some form of a festivals. Yet, because these entities have a political and
democratic dispensation. Not so in Pakistan. radical cultural presence in the context of an lslamicized (and
For civil society in Pakistan, whether of the westernising, violently so) society like Pakistan, they can be included in a
modernising kind, or of the more fundamentalist Islamic kind, non-western context as belonging to civil society.
the question has not been one of democracy versus non- Even such benign civil society organizations seek patronage
democratic norms, but of liberalism against perceived and from the chief of the army staff, who is also the president of
variously interpreted Islamic symbols and values. Unlike the Pakistan, to further their cause: General Musharraf was the
traditional notion of civil society, the pursuit of democratic chief guest at the inaugural and closing ceremony of a puppet
ideals is not a necessary and defining condition. Not only festival and a film festival, respectively, some months ago.
is this a fundamental difference, but so too is the necessary While these cultural preferences may be the redeeming feature
distinction of autonomy from the state, so integral to the of Pakistan's military coup maker, one should not forget that
meaning of civil society. Beethoven and Goethe were claimed as the cultural ancestors
If sections of civil society are expected to challenge the of a certain group of Germans not six decades ago.
state, in Pakistan, there are many who are the state's partners. One is not stating that Pakistan's experience is in any way
For instance, development groups which have emerged as unique, but one will argue that perhaps civil society ought
a result of government failure in Pakistan and have become to be defined by the conditions in which it exists so that
contractors in the form of NGOs in their own right, are often one can understand its functioning and politics better. While
co-opted by institutions of the state to become the latter's Pakistan's civil society is an outcome of its particular history
'advisers,' winning lucrative contracts and getting the publicity and the way its institutions and politics have evolved, it is,
they need to further their credentials. nevertheless, essential to apply some minimum acceptable
Human rights activists and advocacy groups, too, become norms of civil society behaviour, to be able to evaluate its role
partners with other stakeholders, particularly government, and and performance.
try to redress problems created by the very institutions of the In the context of Pakistan, one is likely to find that civil
state that they are now partnering. The essence of Pakistan's society (its western wing), aspires to only a few of the
politics-very broadly defined-is one of compromise not necessary requisites. For it, a westernised, socially and
confrontation, and of co-optation. Civil society in Pakistan is culturally liberal agenda, is far more important and preferable
very much part of that political tradition. than the messy indigenous politics essential for democracy.
Linked to this relationship with politics, and perhaps In fact, one of the main consequences of this ideology has
determining it, is the relationship of civil society and of been the depoliticization of public life in Pakistan. Under
NGOs with money, particularly donor funding. If, for example, such circumstances, where the main representatives of the
the most prominent and potentially radical civil society uncivil society are perceived to be westernised and socially
organizations in Pakistan receive funding from donors who and culturally liberal, where civil society actors work for the
have specific interests or agendas, the 'politicalness' of these emancipation of women and for human rights, and military
organizations gets muted. With the British and American generals support the same agenda, both civil society and
governments amongst the biggest donors of civil society in 'uncivil society' make consenting bedfellows.
Pakistan, one does not see much protest against them for their
role in the occupation of Iraq and Afghanistan. After all, these Source: Zaidi, S Akbar, 'Defining Civil Society', Dawn, Karachi,
governments are imposing their liberal social agenda on the 18 August 2006.
J

Chapter 20 The Social Sectors II 611

etc. Education and social community services are pnonty endogenous dynamic which is not immediately obvious to
areas of NGO activities'. 50 Development-oriented grassroots traditional development strategy' .53
organizations with specific and focused objectives, such as Community participation along with NGO-oriented activity
rural development, provision of urban water supply and now forms a critical component of the new conventional
sanitation, have emerged over the last thirty years or so, as wisdom of development. As Asad Sayeed argues:
have NGOs with a specific women's focus. The more general
advocacy-based organizations are the most recent, emerging It is now acknowledged across the board
in the early 1990s. Khawar Mumtaz identified the following that monitoring the efficiency of delivery
issues faced by the NGO sector in Pakistan: at the grass roots as well as several other
mediatory tasks can be best performed by non-
i) uneven quality of service; governmental organizations (NGOs). NGOs can
ii) limited attention to developing the indigenous capacity articulate the beneficiaries' needs to project
of the people; authorities, provide information about the
iii) weak structures and means to become self-sustaining; scheme to communities, organize community
based organizations to maximize their gains
iv) social welfare orientation;
from schemes, deliver services to less accessible
v) vague and limited objectives specific to immediate populations and serve as intermediaries to other
problems; NGOs. Government, on the other hand, can also
vi) inability to conceptualize for long term objectives; learn from alternative development strategies
vii) non-professional in outlook resulting in incompetent pursued by NGOs. 54
management of accounts, planning and budgeting;
viii) top-heavy structures, lacking in mid-level cadre of However, while there has been a growing consensus
professionals or trained support staff. Shortage of staff around the belief that NGOs, as an alternative 'development
was a major problem identified by NGOs; paradigm', offer an answer to state failure, NGO failure too
ix) almost all operate with limited budgets relying usually concerns academics and practitioners, and the NGO sector,
on community contribution or local donors; rather than being promoted wholesale, needs to be critically
x) absence of capacity to expand or absorb additional funds evaluated 55 ( see also Appendices 20.2 and 20.3 for concerns
xi) no systematic monitoring of activities by themselves or raised about community participation and NGO activity).
government; The Social Action Programme ( 1993-6, and 1997-
xii) weak coordination between NGOs; largely operating in 2002 ), with its emphasis on decentralization, community
an isolated manner. 51 participation, and NGO involvement, was not the first of
its kind to include such components. The 1978 'Health
Community development based on the principles of
For All by the year 2000' strategy, endorsed by almost all
community participation is seen as a key component of an
underdeveloped countries, also required these ingredients. 56
alternative strategy for social sector development. This view
Many of the issues pertinent to primary health care are
rests on the central premise that local communities are the
equally important to the Social Action Programme in Pakistan
best protectors of their own interests and hence should play a today. Appendix 20.2 explains how and why community
more active role in their own development. Tariq Banuri and participation and NGO-led development strategies do not
Moazzam Mahmood put the theoretical argument as follows: always work. Appendix 20.3 provides an intriguing look at
the NGO sector in Pakistan, indicating that what would have
Define a community on the basis of relative
been a useful channel for development has now become a
spatial proximity, like a village or an urban abadi.
This very largely also defines the community racket for making money and offering patronage 57-see also
in terms of common requirements for social Box 20.7.
services, like education, health, housing, Conventional wisdom and liberal politics (which,
water, sanitation, roads, energy needs, and the incidentally, are closely related) offer decentralization, local-
environment. It also defines the community in level delivery, and community participation as yet another
terms of basic classes, and therefore employment panacea for solving the problems of countries like Pakistan.
and income needs. If the community has a set of Adherents of the decentralization and community
common social service requirements, then the participation argument almost always overlook issues of political,
community's perception of the problem is the social, and economic power and differentiation. It is not possible
highest. If its perception of the problem is the
to conceive of communities without a degree of hierarchy,
highest, then the community's solution to the
problem will be the most relevant and useful although conventional wisdom consciously and repeatedly
under any given set of constraints. And the does exactly this. Patronage and power are equally present
community's response to the problem will also in all their manifestations at the 'local' level as at the
be the fastest. 52 higher level, and the platitudes offered by proponents of
participation seem rather hackneyed.
Having defined the community as the principal agent We conclude this chapter with some extracts from a paper
of change, the two authors maintain that the role of the by Jean Dreze and Haris Gazdar, based on their research in
community then becomes one of deciding 'what services to Uttar Pradesh in India. The similarities between Pakistan and
demand under a given set of constraints; it establishes a clear one province of 170 million people in India merely exemplify
responsibility with the community, and gives the system an
612 Issues in Pakistan's Economy

Box 20.7 Thus NGOs are multiplied fastest where State policies-
How Independent are NGOs? usually as part of an IMF/World Bank-directed policy-are
withdrawing basic services such as food, health care and
This is an extract from a report which critiqued NGOs as education. The greater the devastation wreaked by the policy,
political and developmental actors. the greater the proliferation of NGOs sponsored to help the
victims. (Indeed, before the US prepares to invade a country,
Not a spontaneous social phenomenon it funds and prepares leading NGOs to provide 'relief' after it
NGOs make out that they have spontaneously emerged from has rained destruction. Thus in the second half of 2002 NGOs
society, hence the earlier term 'voluntary agency' and the began cutting their spending on, and manpower deployed in,
now-favoured term 'civil society organization'. In fact, however, still-devastated Afghanistan-as part of their preparation to join
international funding agencies (from which smaller NGOs in the US caravan to Iraq.)
various countries in the third world receive their funds) depend 2. In the course of recruiting their manpower, the NGOs give
heavily on funds from government, corporate and institutional employment and a small share of the cream to certain local
sources. For example, according to the World Bank document persons. These persons might be locally influential persons,
'Report on Development: 2000-2001 ', more than 70 per cent whose influence and operations then benefit the NGO. Or they
of projects approved by the World Bank in 1999 included the might be vocal and restive persons, potential opponents of the
participation of NGOs and representatives of 'civil society'-a authorities, who are in effect bought over. In either case, NGO
single project aimed at bolstering NGOs over seven countries employment, although tiny in comparison with the levels of
cost $900 million. The Bank assigned two of its functionaries to unemployment in third world countries, serves as a network of
relations with NGOs and representatives of 'civil society'; that local political influence, stabilizing the existing order.
figure has grown to 80 today. As for governmental support, 3. In the field of people's movements, ·•activist' or 'advocacy'
another report puts funds to NGOs from advanced industrial NGOs help to redirect struggles of the people for basic change
countries other than the US at $2.3 billion in 1995; including from the path of confrontation to that of negotiation, preserving
the US, the figure would be much larger. As one writer puts it, the existing political frame. The World Bank explains in its
'These gigantic sums reveal the hoax of presenting the rapid 'Report on Development' (cited above) its political reasons for
growth of NGOs as a "social phenomenon".' promoting NGOs. It says: 'Social tensions and divisions can
Why do multinational corporations, the imperialist be eased by bringing political opponents together within the
governments and institutions such as the World Bank and the framework of formal and informal forums and by channelling
United Nations channel such funds to NGOs? their energies through political processes, rather than leaving
Indeed the extraordinary proliferation of NGOs serves confrontation as the only form of release.' Thus ever since
imperialism in a variety of ways. the early seventies Andhra Pradesh, a state with a strong
1. NGOs, especially those working to provide various tradition of revolutionary movements, has witnessed a massive
services-health, education, nutrition, rural development-act proliferation of NGOs, and is indeed among the states receiving
as a buffer between the State and people. Many States find the maximum foreign NGO funds today.
it useful to maintain the trappings of democracy even as NGOs bureaucratize people's movements. Traditionally,
they slash people's most basic survival requirements from people's movements are self-reliant: they have to raise their
their budgets. NGOs come to the rescue by acting as the own resources, and are led by representatives from among the
private contractors of the State, with the benefit that the State people. These representatives, to one extent or another, thus
is absolved of all responsibilities. People cannot demand have to be accountable to the people. By contrast, NGO-led
anything as a right from the NGOs: what they get from them movements, while claiming to represent the people, are led by
is 'charity'. officers of the NGOs, who are paid by funding agencies to carry
Till the 1980s, NGO activity was limited to 'developmental' on activity. Naturally, they are not accountable to the people,
activities-rural uplift, literacy, nutrition for women and children, nor can they be removed by them; so they are also free to act
small loans for self-employment, public health and so on; this without regard for people's opinions. On the other hand, NGOs
continues to be a major sphere of NGO activity. But in what are accountable to their funders, and cannot afford to stray
context are these ' developmental' activities taking place? beyond certain bounds. Minus foreign and government funding,
In the basic context of enormous, conscious suppression the entire NGO sector in most countries would collapse in a day.
of development. Under the guidance of the IMF and World Indeed, as NGOs proliferate and spread their wings,
Bank, successive governments slashed their expenditure on setting up funded adivasi organizations, dalit organizations,
rural development (including expenditure on agriculture, rural women's organizations, 'human rights' organizations, cultural
development, special areas programme, irrigation and flood organizations and organizations of unorganized labour, it is
control, village industry, energy, and transport). often NGOs that are the first to respond to any political or social
In comparison with this giant spending gap, the sums being issue-including 'globalization' and its harmful effects. Political
spent by NGOs in India are trivial. But, by their presence, the life itself is increasingly NGOized, that is, bureaucratized and
notion is conveyed all round that private organizations are alienated from popular presence and representation.
stepping in to fill the gap left by the State. This is doubly useful
to the rulers. The political propaganda of 'privatization' is
bolstered; and, as said before, people are unable to demand Source: Research Unit for Political Economy, The Economics
anything as their right. In effect, NGO activities help the State to and Politics of the World Social Forum: Lessons for the Struggle
whittle down even the existing meagre social claims that people against 'Globalization', Aspects of India's Economy, No 35,
have on the social product. Research (Mumbai: Unit for Political Economy, September2003).
I Chapter 20 The Social Sectors II 613

the fact that many of the problems faced by underdeveloped

countries are quite similar. They write:
20.7 SUMMARY AND FURTHER READING
20.7.1 Summary
given the current political links between the

I schooling establishment and the rural elite, Having examined the factual position and the salient issues
formal decentralization cannot be expected in a large group of areas which make up the social sector, we
to achieve very much unless it goes hand in have looked in this chapter at the overall institutional issues
hand with more active political mobilization of and issues of governance and delivery, as well as at MDGs
disadvantaged groups. 58 and gender. We have examined how, due to the failure of
Privileged groups (usually high caste conventional top-down approaches to development, usually
landlords) have exercised tight control on local led by the state, new approaches have evolved and been
government institutions, and use them to their implemented.

I
private advantage at the expense of public
Some non-traditional social sectors have been evaluated
needs. 59
in this <chapter, starting with gender inequality. All statistics
Decentralization was perceived as a
problematic issue from the very start. Those show that women fare far worse than men in an already
familiar with rural inequalities warned that underdeveloped social sector. This lack of development,
devolution of political power might well result which exists for historic reasons of patriarchy, class, and
in the enhanced tyranny of dominant elite power, continues even in the twenty-first century. However,
groups. As a matter of fact, it soon became clear development, no matter how conceived, cannot succeed
that political power at the village level remained unless there is equal participation by women. Women are,
with the propertied classes. Contrary to common in many ways, the core of economic activity in the country,
expectations based on an idealized view of though their contribution is neither recorded nor lauded.
harmonious village coexistence, the introduction
While incentives and changes in policy at the margin may
of new elected bodies Jed to exacerbated tensions
help in promoting economic and social sector development,
in the early years. 60
This system of patronage-based governance unless the cultural, historical, political, and social issues
is not simply a localized phenomenon, it has of gender discrimination are addressed, it is unlikely that
corrupted political institutions at all levels. women's emancipation will take place.
Leading political parties have played a critical The focus has now moved towards participation,
role in the development of this perverted system devolution, and NGOs. New ways of thinking had been
of governance. In these circumstances, it would ostensibly designed for Pakistan under the Social Action
be naive to expect state action to promote Programme, focusing on a handful of sectors, but promising
social opportunities on a wide basis, or the new delivery mechanisms. Although large amounts of money
electoral process to act as a sound instrument of were spent on the Social Action Programme, we now know
accountability. 61
that the programme was a failure. Moreover, the programme
imposed high financial costs on both federal and provincial
And finally,
governments. The community participation spirit and the
In the present political climate, it would be 'new way' of delivery were also lacking.
naive to expect the government to initiate major Much of this chapter has examined, in some detail, the
reorientation of development priorities on its alternative development paradigm-governance, decentrali-
own, or on the basis of bland expert advice. 62 zation, NGOs, local government, etc. We find that there is far
more hype and rhetoric than substance and reality to many
What this array of quotes from the paper by Jean Dreze and of the claims made by and about this so called alternative
Haris Gazdar highlights, is the reality that decentralization, paradigm. By ignoring issues of class, gender, and power,
community participation, local government, etc. are terms much of what constitutes the philosophy of the new thinking
and concepts which, rather than being promoted and is mere wishful thinking. While decentralization, delegation,
endorsed enthusiastically, need to be seen in light of relations of and more local government are possibly a better mechanism
power, patronage, class, and gender. While there are certainly for delivering development, enthusiasm needs to be tempered
numerous benefits from promoting development along the with some caution, and should take cognizance of the
lines that many academics and developmentalists suggest, contradictions existing even at the local level.
caution and open-mindedness are essential. Perhaps the
answer to many of Pakistan's problems are to be found, not
20.7.2 Further Reading
in NGO (civil) society, but in political praxis and greater
activism outside of donor funded projects-see Box 20.8 on On institutional issues, local government, and decentralization
the unlikely impact of devolution on women, and Box 20.9 see Banuri, Tariq (ed.), Just Adjustment: Protecting the Vulnerable
for a critique of the new fashion of community participation and Promoting Growth (Karachi: Oxford University Press,
and devolution. 1998 ); Zaidi, S. Akbar, 'Karachi: Prospects for the Future',
in Khuhro, Hameeda (ed.), Karachi: Megacity of Our Times
(Karachi: Oxford University Press, 1997); Zaidi, S. Akbar,
'NGO Failure and the Need to Bring Back the State', Journal of
 I
614 Issues in Pakistan's Economy
I
Box 20.8 her needs, counsel her, document the nature of the case
Women Suffer on Account of Devolution and refer her to the appropriate authorities. This enables a
quick, needs-based response. Other institutions, such as the
While devolution under the 18th Amendment is widely police, are only required to register cases and dar ul amans
celebrated in Pakistan for giving provinces more rights and simply offer shelter to court referred cases and are commonly
responsibilities, Afiya Shehrbano Zia shows how some women considered to function as "sub-jails". Edhi centres are charity
have inadvertently had to pay the price for the politics of the based rather than professional resolution centres; faith based
transfer of shelters for women, from the federal to the provincial private shelters have their own notion of destitute women or
governments. are not neutral in their approach to rehabilitation. Private/NGO
shelters are few and do not have the outreach or capacity as
A few months ago, the National Commission on the Status government institutions.'
of Women (NCSW), chaired by the seasoned women's/human Under the federal set-up, these centres have historically
rights activist, Anis Haroon, authorized an independent, nation- suffered the usual bureaucratic inefficiencies, such as late
wide study on the 26 Shaheed Benazir Bhutto Women's Centres release of funds, as well as no meaningful monitoring nor
(SBBWCs). Completed in October 2011, the unambiguous comprehensive in-depth evaluation. Some NGOs, such as
conclusion of this study was that the SBBWCs provide a crucial Rozan and AGHS/Dastak, have worked with the MoWD in
and invaluable service to women victims of gender-based improving the standard operating procedures at the centres.
violence. However, the real crisis came to a head after the devolution of
The study finds that 'such institutions need active and the Ministry of Women's Development in June 2011.
considerable support from all provincial governments, Devolution signalled the rude awakening over the dangers
women's rights groups, civil society and NGOs. While there of running women's policies as never-ending 'development
is considerable need to reform and integrate the existing schemes' rather than as permanent policy with regularised
centres with other services provided to women by provincial staff. Some critics observe that despite high moments, the
governments, closure of the centres is not an option'. MoWD ran for too long as a glorified NGO and from project
According to a newspaper report (Nov 14) and in direct to project. Since they were not permanent schemes, the
contradiction to the advice of the government's own SBBWCs in three provinces hung in limbo as governments
commission, many of these centres are now face impending attempted to absorb them into the provincial administrative
closure. It seems this government is intent on acting as its own set-ups. Punjab, meanwhile, refused to own the SBBWCs and
worst enemy and remains a victim of paralysis in decision- made a technically reasonable, if misguided, case over the
making. The centres have outstanding dues owed by the historically disinterested attitude of the federal government
federal government accumulated prior to the Devolution of the itself with regard to these centres.
Ministry of Women's Development (MoWD) in June 2011. This Interestingly, the women MPAs of the Punjab assembly have
has been exacerbated further due to the unwillingness of the supported and continue to lobby for the case of retaining the
provincial governments to release subsequent funds to ensure SBBWCs, despite disowning by the male leadership of their
the survival of the centres, post-devolution. provincial government. This is a remarkable show of political
The outright refusal of the Punjab government to 'own' maturity and autonomous women's politics. But they lack
the Punjab SBBWCs and now the impending closure of the support from other women, as well as lazy or disinterested
SBBWCs in Sindh, means the discontinuity of one of the few male colleagues.
social services that were still functioning, however imperfectly, After Punjab's refusal to take charge, the Ministry of
in the country.
The efforts of the minister at the Women's Development
Department in Balochistan and the lobbying of the manager
and staff in the Quetta centre have resulted in an admirable
resolution of the crisis in their province for the time being.
Human Rights in Islamabad has agreed to tide over the
Punjab centres until June 2012. But others are questioning
why such anti-women political decisions by the Punjab
government are being rescued and rewarded by the federal
government. Such exceptionalism does not bear well for
l
Khyber Pukhtunkhwa's fate hangs in the balance. The centres the future of provincial autonomy or for long-term political
have survived despite a variegated history. Set up first as harmony amongst provinces.
the Women's Crisis Centres (1997), these centres changed In many ways, these centres are examples of the kind of
ideologically when they were re-organized as Family Protection institution building that is often endorsed in theory by analysts
and Rehabilitation Centres under the Musharraf regime in in Pakistan. The administrative investment towards improving
2005. these centres has included a partnership with the private/
Contrary to the news report (Nov 14), these centres were not NGO sector, which has worked quite well in most cases. The
renamed the Shaheed Benazir Bhutto Women's Centres by the centres have survived and been supported by successive
Sindh government after devolution this year but in fact as soon governments who despite oppositional policies, have always
as the PPP government came into power in 2008. retained the centres in view of their services.
Since they now function only as a referral service, this The SBBWCs have also established strong community
has limited the possibilities of what these centres could linkages, especially during the period when the local
reasonably deliver. However, as the NCSW study shows government system was active and the nazim/councillors
through empirical and ethnographic evidence, these centres worked closely with them in rehabilitating women seeking
are 'crucial first-stop referral centres that identify the victim, resolution of their cases. Although a detailed cost-effective
 Chapter 20 The Social Sectors II 615

eval~~tion :has not been ?one, a cursory.calculaUon suggests The voices of the beneficiaries in this study show that
the centres offer a service that is more than cost-beneficial. women survivors are showing a preference to circumvent
.(the:'SBBWCs act as the first interface for walk-in or community mediation and approaching the state institutions
·referred victims of violence and those suffering post-traumatic directly, such as the courts or the SBBWCs. This is significant
~x~eritnces who need a ;very sensitive and responsive because it shows faith in the state.
ap~roach, rather than the m9re officious police response or The NCSW study also provides alternative models that
matter~pf-fact institutional response of dar ul amans. have evolved by way of the Panah shelter in Karachi and the
r;Also;:,,uie services thatthe SBBWCs offer, aim at resolution; lessons that can be imbibed from Oastak in Lahore or Mera
· not institutionalisation of victims. These centres offer immediate Ghar in Peshawar. The point is thatthese running .institutions
and independent legal laid rather than court-referred legal can be improved and upgraded by sharpening and even
0~ssistance, which i~ wha, dar ul amansdo. The myth that these · extending services through linkages with lady health workers,
.centres 'duplicate the ,work of the dar ul amans is something other dispute:resolution efforts and documentation of women
0'>,:;/ ,tthe Punjab government has to stop hiding behind. survivors' experiences. But to shut down this network is simply
For the usual critics, who. point out the proportionately low a sign of defeat and lack of commitment to women's issues.
number 'of,,,women who access such' services, the NCSW This is an. important electoral matter that the provincial
•i ~tudy would b~ educational. Women survivors of violence only governments can legitimately .exploit rather than succumb
:"''tend ·to approach such services when the male dominated to .short-term financia,I obstacles that are usually deliberately
1, , .comml!nity justice system fails them. They know tha( to created by disinterested and myopic male bureaucrats .
• / breach the community's norms and defy male determined
arrangements; such •as forced marriages, domestic and
r~productive exploitatio~ comes at a huge price and they can
· never go back. That's the kind of brave women who seeks the Zia, f,fiya Shehrbano, 'Shutting the Doors', The News, Karachi,
state's refuge. 21 November 2011.

International Development, vol. 11, no. 2, 1999; Zaidi, S. Akbar, Contextuality', Social Science and Medicine, vol. 43, no. 5, 1996,
The New Development Paradigm: Papers on Institutions, NGOs, presents a good summary of many of the issues concerning
Gender and Local Government (Karachi: Oxford University gender discrimination, and offers a radical •critique of the
Press, 1999); McCamey, Patricia, L. (ed.), Cities and Governance: most common arguments. The Mahbub ul Haq, Human
New Directions in Latin America, Asia and Africa (Toronto: Centre Development Centre's, Human Development in South Asia 2000:
for Urban and Community Studies, University of Toronto, The Gender Question (Karachi: Oxford University Press, 2000),
1996 ); McCamey, Patricia, L. (ed.), The Changing Nature of is an excellent and highly recommended publication which
Local Government in Developing Countries (Toronto: Centre for looks at women in Pakistan and compares them to those in
Urban and Community Studies, University of Toronto, 1996 ); the South Asian region. Tariq Banuri's edited Just Adjustment:
and Jean Dreze and Haris Gazdar, 'Uttar Pradesh: The Burden Protecting the Vulnerable and Promoting Growth (Karachi: Oxford
of Inertia' in Jean Dreze and Amartya Sen (eds.), Indian University Press, 1998), is also a useful reference for many of
Development: Selected Regional Perspectives (New Delhi: Oxford the issues in the social sector. See also S. Akbar Zaidi's The
University Press, 1996). New Development Paradigm: Papers on Institutions, NGOs, Gender
In addition, recent publications worth consulting include and Local Government, Oxford University Press, Karachi, 1999.
those cited in chapters 19-23 as many now implicitly On the environment, by far the best volume is the IUCN's
or explicitly talk about governance and institutional Pakistan National Conservation Strategy, Karachi, 1992, along
issues. Almost all publications of the World Bank, Asian with its ancillary volumes and documents. See also Arif
Development Bank, UN publications etc. carry analysis which Hasan's and Ameneh Azam Ali's Environmental Repercussions
have an institutional component. In the context of Pakistan, of D(velopment in Pakistan, OPP-RTI, Karachi, 1993. Shaheen
the following publications will be useful: S. Akbar Zaidi's, Rafi Khan and Shahrukh Rafi Khan's, 'Environment: Some
Transforming Urban Settlements (Karachi: City Press, 2000) Key Controversies', in Shahrukh Rafi Khan's edited, Fifty Years
on The Orangi Pilot Project; Arif Hasan's, The Unplanned of Pakistan's Economy, Oxford University Press, Karachi, 1999,
Revolution (Karachi: City Press, 2002); and Shahrukh Rafi should also be consulted. See also, Shahrukh Rafi Khan, Foqia
Khan's, Fifty Years of Pakistan's Economy (Karachi: Oxford Sadiq I<han, and Asim Sajjad Akhtar, Initiating Devolution
University Press, 1999). for Service Delivery in Pakistan: Ignoring the Power Structure
Given the diverse contents of this chapter, the Notes (Karachi: Oxford University Press, 2007); and Social Policy
provide the most appropriate reading for the different and Development Centre, Devolution and Social Development:
sections. However, the World Bank's Women in Pakistan: An Annual Review 2011-12 (Karachi: SPDC, 2012). An excellent
Economic and Social Strategy (Washington DC, 1989) is a useful recent critique on participation and on the so-called new
text on the extent of gender inequality in the country. The paradigm is Ghazala Mansuri and Vijayendra Rao's Localizing
paper by S. Akbar Zaidi, 'Gender Perspectives and Quality Development: Does Participation Work? (Washington DC: World
of Care in Underdeveloped Countries: Disease, Gender and Bank, 2013).
 J

616 Issues in Pakistan's Economy

Box 20.9 where 'fads, rather than analysis, tend to drive policy decisions
Civil Society's Failures on participatory development'.
They find that many of the problems which afflict government
S Akbar Zaidi argues that not all community participation or and market failure, also affect civil society initiatives, and that
civil society initiatives are a success. inducing civic empowerment may not be a better choice
than a market-based strategy or even one which strengthens
Economists know about what they call 'market failure' as the role of centralizing bureaucrats. Groups do not always
well as 'government failure', where neither institution in its work collectively, as one has assumed, there is a great deal
entirety, for a large number of well-recognized reasons, has of differentiation within such so called communities, where
been able to deliver development. Issues of coordination, differences of class, gender and status affect outcomes and
asymmetric information and inequality, are said to affect both lead to elite capture.
avenues of development. Such theoretical understanding and Their research shows that participants in civic activities 'tend
practical experience, gave rise to the need for 'civil society' to be wealthier, more educated, of higher social status, male,
to emerge and resolve such failures and offer itself as a and more politically connected than nonparticipants'. Given
developmental alternative, and a much better one than either. such existing divisions in all communities, they feel that there
Assumptions have been made that groups of people, is little 'evidence that induced participation builds long-lasting
ranging from village communities, urban neighbourhood cohesion, even at the community level', and many existing
councils, school associations, and water user groups, work for social divisions are actually reinforced. The poor benefit
the common interest of their collective members, benefitting less from participatory processes than do the better off and,
all. A sense of egalitarianism has seeped into the general despite their focus on poverty alleviation, 'community-based
framing of civil society's efforts to provide development, and development efforts have had a limited impact on income
this has given rise to a vast global movement of self-help, or poverty'.
NGO-led development models, where NGOs and CBOs have One of the assumptions of this participatory development,
replaced governments or become contractors for them. The whether of the NGO kind or of decentralization, is that it
surprising thing is that there has been very little empirical improves development outcomes and that there is likely to
evidence, until now, that is, which examines the contributions be equitable development. Looking at a wide spectrum of
of civil society to development, and the conventional wisdom initiatives, the authors find again, that decentralized projects
endorses the broad, feel good sentiment, that civil society lead to local capture by the elite and the better-off, and often
does good, a great deal of good, for communities, and that it is projects benefit the better-off than the poorer communities
a far better alternative to either the government or the market. for whom they were initially intended. Especially women
In a recent book produced by two economists at the and minorities, who are excluded anyway, continue to be
World Bank, the model of civil society development has been discriminated against in such so called participatory, localised,
empirically challenged. 1 Even though the World Bank has decentralized, developmental initiatives.
allocated $85 billion to local participatory development over What is not surprising is that civil society has failures
the last decade, there has been little detailed investigation as embedded in its developmental model just as much as
to whether this participatory model of development works well. government and markets do. What is surprising is that there
Ghazala Mansuri, a former graduate of.Karachi University, and has been little careful evaluation of civil society efforts and that
her colleague Vijayendra Rao in Washington, have looked they have been promoted by donors, aid-giving foundations,
at over 500 empirical studies of participatory development communities and even governments. One of the key findings
interventions, and their findings offer a loud wake-up call to all from this research is the not surprising finding, that repairing
civil society developmental enthusiasts. civic failures requires reducing social inequalities.
The wide-ranging notion of civil society needs to be The state, rather than the market or civil society, is perhaps
bifurcated into at least two broad categories, with advocacy- best equipped to address such inequalities and, importantly,
related, organic, participatory movements, such as those as we have seen around the globe, the state does not need
which overthrew military dictatorships or the Soviet regimes of to be democratic to do so. The evidence provided by these
the 1980s leading to widespread political arid social change, authors 'overwhelmingly suggests that effective community-
from what the authors call 'induced participatory interventions', based interventions have to be implemented in conjunction
which work largely for develeopmentalist outcomes and goals. with a responsive state'.
It is this latter, the so called NGO or community-based world, Source: Zaidi, S Akbar, 'Civil Society's Failures', Dawn, 20
which comes under careful scrutiny by the two economists, August 2013.

Localizing Development: Does Participation Work?

(Washington DC: World Bank, 2013).
,
Chapter 20 The Social Sectors II 617

Appendix 20.1
consciousness of both men and women and is viewed as a
The Gender Trap natural corollary of the biological differences between them.
The following article examines the reasons why women are Moreover, concepts of gender roles, desirable behaviour and
discriminated against and argues that most of the causes for appropriate expectations are learnt from a very early age, so
gender discrimination are structural and deep-rooted. The article much so that gender becomes an integral part of a person's
makes the point that marginal changes will be ineffective, and identity and gender roles are seen to lie at the centre of
that in order to address and reverse gender discrimination, people's cultural and religious heritage. As a result, in many
structural changes at the societal and economic level are essential. countries there is a 'culture against women' in which women
are socialized to sacrifice their health, survival chances and
There is little doubt that the position and status of women in life options.
almost all societies is far worse than that of men. Sexual and However, all these factors which affect women, their health
domestic violence, added to more subtle forms of oppression and quality of life need to be seen in a somewhat broader
and deprivation, are especially prevalent in underdeveloped context. The lack of access to resources, which is said to affect
countries. Higher morbidity and mortality rates, poor health, the status of women more adversely, is highly dependent on
low levels of education and literacy, and few opportunities for one's social and economic position. For instance, nutritional
gainful employment are among those factors which restrict deficiencies in women, which are significant in much of the
the development and fulfilment of the potential of women. third world, are highly skewed towards the poorer women
By any yardstick, the position of women is far worse than in these countries. 1t would be difficult to argue that class
that of men. differentiation does not determine disease and health patterns
Much blame has been heaped on men, or patriarchy, in any country, especially in underdeveloped countries where
for causing this system of inequality, and very little on the this differentiation is more acute. Rich women in even the
social, economic and political structures in which both men poorest of underdeveloped countries do not face most of the
and women live and co-exist. While numerous researchers problems highlighted by the research on gender and health.
and scholars-almost all of them women-have identified Not only are richer women better off by far in terms of
the extent of gender inequality in the third world, and have most social indicators than their poorer sisters, but they are
made suggestions for redressing these inequalities, their well- also far better off than poorer men. Within societies, one's
meaning recommendations have been largely ineffective. And position-whether male or female on the social and economic
this is to be expected, because unless the material conditions ladder-determines access to resources, and hence well-being.
and causes of gender inequality are evaluated and understood Moreover, across nations there is a great deal of evidence
most attempts at reform will fail. which suggests that countries with higher levels of economic
The evidence in support of the fact that women are development, industrialization and urbanization are more
discriminated against is extensive and indisputable. Numerous likely to experience greater gender equality. With increased
studies have shown that low levels of education and training, economic growth there is a likelihood that gender equality
poor health and nutritional status, and lack of access to will also increase.
resources affect the quality of life for women. The allocation There is no denying the fact that legal structures and
of resources at the household level also affects the nature and rules discriminate against women and need to be changed.
quality of women's health and their lives. At the same time, However, the political economy of legal systems ensures that
norms and customs such as female seclusion and the resulting archaic and discriminatory legal practices are maintained
lack of interaction with the outside world have also had a indefinitely. The economic and class composition of society
negative impact on the economic situation of women. protecting a particular configuration of property rights
ln addition, procreation with its consequences on the warrants a particular legal structure. More often than not,
well-being of women, is considered in many underdeveloped a change in those property rights structures creates changes
societies to be a social activity influenced by cultural norms in legal structures. As such, to expect that substantial legal
which encourage high fertility rates, a custom which no reforms will take place in society without a transformation
household desires unilaterally to break. High fertility, high of social, economic, property and political rights is a little
rates of illiteracy, a low share of paid employment and a high simplistic. Moreover, even when the laws do exist, social and
percentage of women working at home for no pay seem to economic structures intervene. For example, gender equality
coexist together, all aggravating the situation. in the legal right to own property does not guarantee gender
Work on the economic and social status of women in equality in actual ownership, nor does ownership guarantee
South Asia has shown that 'the gender gap in the ownership control. Also, traditions and customs continue to disregard
and control of property is the single most critical contributor laws, with many discriminatory and illegal practices being
to the gender gap in economic well-being, social status and sanctified by religion.
improvement' in countries where property rights are governed Such values and norms which create and justify gender
by laws usually influenced by religious mandate. ln many bias against women are the least likely to undergo change
countries, male domination has become culturally sanctioned via direct intervention. Ancient traditions and customs survive
and gender based subordination is reinforced by religious even major economic transformations and epochs, because
systems. This sort of thinking has become ingrained in the
618 Issues in Pakistan's Economy

they are so ingrained in the social and cultural fabric of equally. ln fact there may be more similarities between men
society. To challenge and question what are often defined as and women of similar social and economic backgrounds
religious guidelines is perceived as betrayal of one's religion, than between members of the same gender with significantly
community and culture. different social and economic positions. The dominant
When gender inequality is caused by values, norms, customs thinking addressing the issues of gender ignores the social
and religion, the process of change is made even more difficult and economic construct of differentiation, as well as the
and complicated. lf religion or custom are responsible for, similarities between the two genders.
say, the seclusion or exclusion of women from the public and Women's rights and the struggle for greater equality and
hence economic domain, no attempt to increase women's opportunities cannot take place outside the overall social
involvement in the public sphere will end the resulting gender and political matrix which constitutes that particular society
bias, unless the foundations of the discriminatory practices and defines their position in it. There can be no denying the
are uprooted. Within existing social, economic and property numerous examples of successful interventions that have
structures this will be unlikely. resulted in greater equality for women at a micro and project
The key argument being made here is that while gender level. But to effectively change the position of women in the
inequalities are substantial, they are a symptom of a social economic and social matrix, and to increase and improve their
and economic structure which produces or results in those status, what needs to be dealt with are the structures which
inequalities. Hence, any attempt to improve the status of cause the inequalities in the first place, be they economic or
women without questioning, challenging or changing the spiritual. Since men too are victims, though certainly to a
existing structure will be ineffective: lesser degree, of the structures of society, there is also a need
Feminists and women's groups strive for strategies to reduce to incorporate men and their role in changing the inequitable
gender inequality. They demand more equality and greater system which distributes resources inequitably.
control over their lives and devise opportunities and insist on Almost all evidence from studies related to health, education
policies that will improve their well-being and absolute and and economic development shows convincingly that women
relative status. But why must these initiatives be restricted to are the very central, if not the most critical, component of
women alone? Just as much as women want equality and the equation. While the western developed countries have
greater control over their lives, so do men, of all classes. But only recently discovered the role of women in development,
just as poorer women suffer from greater lack of control over little do they know that in underdeveloped countries women
their lives, so do poorer men. Thus, if control is dependent are never 'outside' development, for their very existence
on income, wealth, class or location in the social matrix, it is and survival and that of their family and often of the entire
unlikely that this control will be achieved without addressing country depends on their being 'in' development. This is
the material conditions which affect the extent of control. precisely why their role and position cannot be analysed and
Much of the well-meaning research on gender discrimination, examined separately and in isolation, without reference to,
and ways to address and reverse that discrimination, ignores and in conjunction with, men and the broader social structure
the existence of classes or social and economic differentiation. in which they coexist.
lt omits an analysis of power relations, power that is usually Feminist groups and women's activists have focused
though not exclusively articulated through an individual's exclusively on the role of women alone. Possibly, it is time to
or group's position in the social and economic hierarchy. bring both men and the social structure within the realm of
Not all women are equal and hence to speak about the analysis and practice. This at least is a minimum condition for
problems of 'women' obfuscates the extensive differentiation greater equality for all, women and men.
between different classes of women who are affected
differently by discrimination. Furthermore, the same structural
differentiation in society affects men of the poorer classes Source: Zaidi S. Akbar, The Herald, April 1996.
 Chapter 20 The Social Sectors II 619

Appendix 20.2
The case of the Dominican Republic is somewhat similar
Community Participation and NGOs: where a primary health care programme was also short lived,
Some Experiences from the Health as its development and dissolution formed part of US foreign
policy. Whitford argues that 'the Dominican institutionalization
Sector of primary health care succeeded in meeting political needs,
Community participation seems to be such an obvious choice as a even as it failed to raise health levels'. lts broader purpose was
vehicle for development-related projects. Why, then, does it fail? to counter 'Castro-rnmmunist' policies and not necessarily
Here are some reasons. one of attacking morbidity and mortality. As US foreign policy
particularly favoured the Dominican Republic, substantial
On the face of it, community participation seems · like assistance in the health sector came from USAlD, the World
a desirable component to any development policy and Bank, the Inter-American Development Bank, as well as
there is a growing belief that as long as the 'community' other health and development agencies. The result of the
is involved, development will be somewhat better and imposition of the primary health care scheme was that since
more effective. However, numerous experiences have shown it was a foreign model, it resulted in intensifying class, status
that the imposition of community participation on health and regional differences. Whitford believes that the model
structures has had disastrous consequences on the hea 1th for the Dominican primary health care system should 'have
programme and on the welfare of the. affected people. The been created in response to host country needs, abilities, and
1978 Alma Ata Declaration of Health for All by the year capabilities; it should not have come from a lender-country
2000 which emphasizes primary health care, also makes a formula'. ln the case of Nepal, where also due to the thinking
universal declaration for community participation which of the international agencies, Judith Justice has found that
forms a cornerstone of providing health for all. Both WHO the primary health care approach was 'accommodated' in the
and UNICEF, and now the World Bank, have consciously, and health care system, and the results were far from positive.
often aggressively, highlighted the need for the participation Also in Nepal, Linda Stone's work has shown liow the
of communities. This over-enthusiasm, often in disregard to focus on community participation 'appears to be an attempt
specific cultural, social and political conditions, has in many to promote the western cultural values of. equality and
cases caused the participatory approach to fail. self-reliance (values not shared by the local population),
Lynn Morgan in her study on primary health care [PHC] in while ignoring alternative values and perceptions of how
Costa Rica, one of the world's success stories in PHC, argues ·development might work in rural, non-Western societies of
that 'Costa Rica's experience with community participation in developing countries'. ln Nepal and other south and south-
health exemplifies the complexities and social contradictions east Asian countries, primary health programmes have been
that emerge when a small, economically dependent country ineffective 'because they were designed to meet the needs of
feels the need to adopt externally-sanctioned models when various health bureaucracies rather than the needs of local
structuring rural health services: She argues that 'participation villagers'. Antonio Ugalde has also reached similar conclusions
was a concept introduced by the US and promoted by foreign where he has shown how the concept of community
aid agencies to promote a western democratic political participation in Latin America is based on the needs, demands,
ideology' and the international agencies 'justified community insistence, and direction, of international organizations.
participation in health more because they wanted to reinforce Other than the problems with the imposition of community
the symbolic identification of 'health' with 'democracy' than participation in primary health care on the insistence of
because they knew that community participation would donors, there are numerous other problems within local
improve health'. WHO and other international agencies hierarchies which frequently subvert any possible gains to be
made community participation a pivotal strategy 'because it made by participation.
satisfied politico-ideological needs. The international agencies Community participation has been seen as a means of
needed a cooperative non-confrontative approach to address control and manipulation of the people, the supposed
issues of poverty and inequitable distribution of wealth.' The beneficiaries of the process of participation, by politicians,
community participation component in Costa Rica's rural bureaucrats and technocrats. Cultural concepts within
health programme lasted a mere four years, as officials quickly communities and of those who locally implement primary
realized how the objective had failed and let the successful health care and participation have been seen to make such
rural health programme continue without any forced . programmes dysfunctional. Urban trained professional workers
participation, which, in the first instance, had been included who are requested (or forced) to work in rural primary health
only on the insistence of international organizations following care settings are unable and/or unwilling to work in a system
Alma Ata in the period 1978-82. lnterestingly, Morgan argues which they are neither trained for, and nor particularly like;
that the international organizations themselves, discouraged their training has made them competent to work in urban
by the results of the exercise of participation, withdrew their hospital settings, not in the community. Conflict is seen to
insistence, but she argues, 'Costa Rica's willingness to comply emerge within and around community projects when the
with international mandates suggests that the government local social structure impinges on the proper functioning
would have continued to support community participation if of (democratic) community participating. Additionally,
the agencies had continued to deem it necessary.'
620 Issues in Pakistan's Economy

government bureaucrats are faced with a two-edged sword While numerous local voluntary groups and NGOs have
regarding community participation in development related proven effective in their attempts to improve the well-being
schemes: if a scheme works due to 'self-help' or on the of their reference group, many, especially those who have
community's combined effort, government is relieved of had to depend on foreign donors making often considerable
providing these services and can concentrate on a different contributions to the cause of their choice, have had to
set of priorities; however, if schemes continue to work and compromise to rules and concepts which are unworkable and/
more self-reliance, political consciousness and 'empowerment' or alien to the perceived beneficiaries' needs. Some NGOs
takes place, and people begin to get collectivized and demand have been set up by organizations like the Ford Foundation
better facilities, further pressure is put on the government to and USAlD and this has resulted in a relationship of severe
deliver. Similarly, the failure of community projects would dependence of local NGOs on external agencies.
mean to some members of government, that the people are One observer has argued that NGOs in some countries
still dependent on government and cannot manage without it; have been taken over by the elite: 'Expensive conferences are
the government would, however, have to cope with increased arranged all over the world on NGOs. Young men and women
demands on its resources. who look good and talk good are now seen in five star lobbies
talking participation with donors. Lengthy consulting reports
at highly inflated rates are prepared for NGOs by NGOs. The
Non-Governmental Organizations upper class has shown its alacrity yet again. They are taking
full advantage of the new and generous opportunity being
(NGOs) offered by the NGO.' Those NGOs which are dependent on
The recent mushrooming of all sorts of voluntary agencies foreign funding often have to provide reports which continue
and NGOs-one observer counted 700 'missionaries of to prolong their own existence. Since many foreign donors are
progress' and 50 donor agencies in Kahtmandu in 1986, not particularly familiar with local conditions, progress reports
including a maritime agency which was 'of the opinion that are often 'fudged' and fabricated to justify further funding.
landlocked Nepal ought to own a cargo vessel moored across Bratton argues that 'since all African NGOs rely heavily on
lndia, in Calcutta'-has reinforced the view that community donated funds, NGO leaders must cultivate more productive
participation is the key to progress and development. lt is relations with the organizations and individuals who provide
readily believed, especially by those working for and involved their resources'. With growing amounts of international
with NGOs, that the solutions to the problems of the poor aid and assistance being channelled through NGOs, the
in the Third World rest in the arms of these NGOs. Strong blossoming of the voluntary sector is bound to continue. And
claims have been made on behalf of NGOs, claims which as its role and presence grows, its interests will get further
range from those that suggest that NGOs are the truest forms entrenched.
of democracy, to those that they are responsible for a new Source: Zaidi, 5. Akbar, 'Planning in the Health Sector: For
development vision. Whom, by Whom?', Socia/ Science and Medicine, vol. 39, no. 9,
1994, 1389-91.

Appendix 20.3

NGOs for the Elite Young men from the elite would obtain the best of grooming
and education ·at home and coast into the academy. All they
Abdus Samad takes a rather critical look at. NGO culture in had to do was look good, talk good, and rule. No burden of
Pakistan: serving the people was placed on them. The government was
there to serve them and not the other way around.
The Pakistani elite has been a wonderful survivor in Pakistan. lt
By the late sixties, the lower classes had caught on and their
has adapted itself to changing incentives very well. No matter
young men, driven by ambition, and by the dint of effort,
what government is in power or what the new thinking of the
began to compete for the civil service. Local institutions,
expatriate expert, you can be sure that members of our elite
that groomed the elite, became accessible to all and the
will be drawn to money, funding and power as honeybees are
relatively poor and less privileged began to flock to them. The
to honey. This class has, through our brief history, shown itself
distinction between the ruler and the ruled was being eroded.
to be very agile in discovering the latest trend for acquiring
This was an easy matter to deal with. The upper classes
fame and fortune. The middle classes that attempt to ape
simply abandoned those institutions and started to send their
the elite, unfortunately, are always a little late in catching
children abroad. The result was fortunate for the upper classes
the trend and arrive largely after the elite has moved on. Or
in two respects. First, the polish added on by Oxbridge and
perhaps the elite moves on when. the lesser classes arrive.
the like, maintained the distinction between the high born
ln the fifties, the civil service was the only game in town. 1t
and the low born. Second, this distinction could be further
was the only way for any young man to achieve distinction,
sharpened by allowing the domestic institutions to fall into a
power and moderate wealth in the newly formed country.
state of rapid decline since the elite needed them no longer.
I
Chapter 20 The Social Sectors II 621

However, the onslaught of the lower classes for some form too much and was being forced by international agencies to
of power sharing or democratization could be resisted no curb its spendthrift ways. This meant that multinational jobs
longer. Succumbing to this, Bhutto, in 1973, proceeded to were relatively scarce now, bank loans were more difficult to
reform the civil service in a manner that ended the eliteness obtain, and selling worthless equipment to the government at
of the dub forever. The lower classes invaded the dub in large inflated prices was now more difficult.
numbers. As luck would have it, an opportunity again presented
The elite responded by abandoning the civil service. lt is itself to the elite. Donor agencies and the development-
interesting to observe that the socio-economic background, oriented 'thinkers' (henceforth DOT) had long relied on the
the education, as well as the extent of polish, of the average government for the development miracle. Frustrated with
recruit changed dramatically during this period. The elite the dismal performance over the years, they were seeking an
having abandoned the system allowed it again to deteriorate alternative approach but one that would still limit the role
rapidly. of the private sector (for the private sector and the DOT are
However, an alternative had to be found for the polished mutually hostile). The new approach that they thought up
and educated young men of the elite. Fortunately, the was based on the notion of 'participation' where citizens were
multinationals saw the opportunity as well as the tremendous only to be consulted in decision-making. Of course having
economic advantage of exploiting the powerbase of the elite consulted with the people, the government would continue to
and its princes. Thus, in the mid-seventies, we saw that the spend money on behalf of the people, awarding the contracts
elite children were employed by multinational companies. to its favourites.
Interestingly enough, the very same individuals who had been The modes of participation remained to be determined.
preparing almost their entire life for the big civil service exam, Since the average· DOT is suspicious of the private sector
suddenly forgo the exam and start beating a path to the and profit, he dreamed up the nearest equivalent to the
door of the BCCls, Citibanks, Banks of America, lCls etc. The government-a non-profit organization-as his basic unit
multinational, in turn, hires them, treats them in a manner for this participation. As the DOT desired, the NGO, like the
that is in keeping with their stature. Of course, these foreign government, is responsible to no one. So long as funding
firms exploited the contact base, elite position in society, as is available, the NGO can continue to do as it pleases with
well as the better education, of their new hirees from the elite absolutely no regard to private or social productivity.
classes for their own advantage in Pakistan. Consequently, we Pleased with this line of reasoning, the donor agencies
see unprecedented growth of these firms and their profits in encouraged rapid growth of the NGOs. Funding was easy
Pakistan during the seventies and eighties. and the educated upper classes cashed in. The living rooms
Meanwhile, during the roaring eighties, a new trend of almost every house in Gulberg, Defence and the Fs and
started setting in. The deterioration of the civil service and Gs [F and G sectors] of Islamabad were quickly converted to
the public sector had reached an advanced stage. Public NGOs. Once a donor is convinced, there is no looking back.
sector personnel became both corrupt and incompetent. The An NGO is born. lts health and growth is determined only by
government became virtually paralysed and had only one the glibness of its parent.
unabashed aim-to confer rents and benefits on the elite. The The decade of the NGOs is here. Expensive conferences are
truly well-connected member of the elite could safely use the arranged all over the world on NGOs. Young men and women
government institutions to his own advantage. The result: a) who look good and talk good are now seen in five star hotel
rent-seeking which earlier was in its infant stages now is a lobbies talking participation with donors. Lengthy consulting
growth industry, and b) white collar crime is now in fashion. reports at highly inflated rates are prepared on NGOs by NGOs.
Distributor/agents of foreign companies specialise in selling The upper classes have shown their alacrity yet again. They are
any and all equipment to the government at highly inflated taking full advantage of the new and generous opportunity
prices. Individuals from the elite classes now turn to obtaining being offered by the NGO. Like before, the bill for this high
loans from the nationalized financial institutions with every living by means of the NGOs will be paid for by the people
intention of not returning them. Scams such as finance of Pakistan when the loans of the donors, financing these
companies and the cooperatives are run with impunity and organizations, are called.
with absolutely no fear of retribution. To me the only remaining question of interest is: After the
Unfortunately, the roaring eighties came to an end. NGOs what will be the next goose that lays the golden eggs
BCCl was caught out. The phenomenal pace of growth of for the elite?
the multinational firm could not be maintained forever.
Petrodollars were gone and the bipolar world had made its
way into the history books. The government had borrowed Source: The News, Karachi, 18 July 1993.
622 Issues in Pakistan's Economy

NOTES
1. The last full MDG Report for Pakistan was completed in 1991); Banuri, Tariq (ed.), Just Adjustment: Protecting the
2010 and covered the period 2006-10. See, Centre for Vulnerable and Promoting Growth (Islamabad: UNICEF, 1992),
Poverty Reduction and Social Policy Development, Pakistan: (a).
Millennium Development Goals Report 2010 (Islamabad: 26. Zaman, Arshad, op. cit., 1993.
Planning Commission, Government of Pakistan, August - 27. Leftwich, A., 'Governance, Democracy and Development in
2010). Most of the discussion and the tables are drawn from the Third World', Third World Quarterly, vol. 14, no. 3, 1993.
this report. The final Report was completed and published 28. Zaidi, S. Akbar, op. cit., l 994(b); Zaman, Arshad, op. cit.,
by the Centre for Poverty Reduction and Social Policy 1993.
Development, with considerable input by this author. Some 29. Government of Pakistan, Planning Commission, Eighth Five
of the material used here in this Section, is drawn from Year Plan (1993-8): Approach Paper (Islamabad, 1991 ),(a), 9.
earlier drafts prepared for the Centre for Poverty Reduction 30. Ibid. 11.
and Social Policy Development, and all of it may not have 31. Ibid. 8.
found its way into· the final Report, although much did. 32. Sayeed, Asad, 'Social Sector Development and the Social
2. Ibid. Summit', mimeo (Karachi: Social Policy and Development
3. Ibid. Centre, 1996 ), 1.
4. Ibid. 33. See, Leftwich, A., op. cit.; 1993, and Zaidi, S. Akbar, _'Urban
5. Ibid. Local Governance in Pakistan', in Islam, Nazrul and M. M.
6. Ibid. I<han (eds.), Urban Governance in Bangladesh and Pakistan,
7. Ibid. Centre for Urban Studies ( Dhaka: University of Dhaka,
8. World Bank, Women in Pakistan: An Economic and Social 1997), (a).
Strategy (Washington DC: World Bank, 1989), (iii). 34. For an excellent summary and critique of governance, see
9. Cornia, Giovanni, 'Accelerating Human Development in Leftwich, op. cit. 1993.
Pakistan', in Banuri, Tariq (ed.), Just Adjustment: Protecting the 35. Khan, M. M., 'Governance: A Conceptual Framework',
Vulnerable and Promoting Growth (Islamabad: UNICEF, 1992 ), mimeo (Dhaka: Global Urban Research Initiative, Centre
101. for Urban Studies, Department of Geography, University of
10. World Bank, op. cit., 1989, (xiv). Dhaka, not dated), 1.
11. These observations are extracted from World Bank, op. 36. Ibid.
cit., 1989; World Bank, World Development Report 1995 ( New 37. Leftwich, A., op. cit., 1993, 610.
York: Oxford University Press, 1995); and UNDP, Human 38. World Bank, Governance and Development (Washington DC:
Development Report 1995 (New York: Oxford University Press, World Bank, 1992).
1995). 39. M. Halfani et al. 'Towards an Understanding of Governance:
12. See also Zaidi, S. Akbar, 'Gender Perspectives and Quality The Emergence of an Idea and its Implications for Urban
of Care in Underdeveloped Countries: Disease, Gender and Research in Developing Countries', mimeo, 1994, 4,
Contextuality', Social Science and Medicine, vol. 43, no. 5_, 1996. subsequently published in McCamey, Patricia, L., op. cit.,
13. Ibid. l 996(b).
14. World Bank, op. cit., 1989. 40. Banuri, Tariq, 'Just Adjustment: Protecting the Vulnerable
15. Ibid. 41. and Promoting Growth', Pakistan Development Review, vol. 31,
16. Ibid. no. 4, 1992(a), 685-6.
17. Ibid. 48. 41. Khan, M. M., op. cit., 1.
18. Zia, Afiya S. and S. Akbar Zaidt 'Democracy and Devolution, 42. Cornia, Giovanni, 'Accelerating Human Development in
Dawn, Karachi, http://archives.dawn.com/archives/30750 Pakistan', in Banuri, Tariq (ed.), Just Adjustment: Protecting the
19. This section makes extensive use of IUCN, The Pakistan Vulnerable and Promoting Growth (Islamabad: UNICEF, 1992 ),
National Conservation Strategy (Karachi, 1992), and Hasan, (b), 105.
Arif and Ameneh Azam Ali, Environmental Repercussions of 43. Ibid.
Development in Pakistan (Karachi: OPP-RTI, 1993). 44. Ibid.
20. World Bank, op. cit., 1995, 170. 45. Sayeed, Asad, op. cit., 1996, 13-14; see also Zaidi, S. Akbar,
21. IUCN, op. cit., 1992, 10. op. cit., 1996(b).
22. Ibid. 21. 46. Cornia, Giovanni, op. cit., 1992, 106.
23. Hasan Arif and Ameneh Azam Ali, op. cit., 1993, 47. 47. Ibid.
24. Ibid. 48. This section makes extensive use of Mumtaz, Khawar,
25. See, for example, Zaidi, S. Akbar, 'The Structural Adjustment 'NGOs in Pakistan: An Overview', in Banuri, Tariq, op. cit.
Programme and Pakistan: External Influence or Internal 1992(b). However, for a critique of NGO activities, see
Acquiescence?', Pakistan Journal of Applied Economics, vol. X, Zaidi, S. Akbar, 'NGO Failure and the Need to Bring Back
nos. I and 2, 1994(a); Zaidi, S. Akbar, 'Planning in the the State', Journal of International Development vol. II, no. 2,
Health Sector: For Whom, by Whom?', Social Science and 1999(a). Zaidi, S. Akbar, The New Development Paradigm:
Medicine, vol. 39, no. 9, 1994(b ); Zaman, Arshad, 'Sustainable Papers on Institutions, NGOs, Gender and Local Government
Development, Poverty and Policy Adjustments: Linkages (Karachi: Oxford University Press, 1999), (b).
and Levers for Change', mimeo (Canada: International 49. Mumtaz, Khawar, op. cit., 129.
Institute for Sustainable Development, 1993 ); Banuri, Tariq, 50. Ibid.
Economic Liberalization: No Panacea (Oxford: Clarendon Press, 51. Ibid. 134-5.
I Chapter 20 The Social Sectors II 623

52. Banuri, Tariq and Moazam Mahmood, 'Learning from 58. Dreze, Jean and Haris Gazdar, 'Uttar Pradesh: The Burden
Failure', in, Banuri, Tariq, op. cit., l 992(b ), 117-18. of Inertia', mimeo, 1996, 4 7. This paper was published in
53. Ibid. 118. ' . _Dreze, Jean and Amartya Sen (eds.) Indian Development:
54. Sayeed, Asad: op. cit., 1996, 19. Selected Regional Perspectives (New Delhi: Oxford University
55. · See Zaidi, s. Akbar, op. cit., l 996(b ); Zaidi, s. Akbar, op. cit., Press, 1997). ·
1999(a),'and Zaidi, S. Akbar, op. cit., 1999(b). · · - 59. Ibid. 67.
56. See Zaidi, S. Akbar, op. cit., l 994(b ). 60. Ibid.
57. See also Zaidi, S. Akbar, op. cit., l 996(b ), and Zaidi, S. Akbar, 61. Ibid. 71.
op. cit., l 999(b ). 62. Ibid. 84.
 I

626 Issues· in '.Pakistan's ·Economy

In the case of health services and health providers, there measures of the status of health of a population, but are in
has been a consistent increase in facilities at all levels as well turn, highly controversial indicators which are difficult to
as in health and medical personnel. All facility-to-population measure and calculate, 7
ratios, such as that of beds, doctors, etc. have improved over A better indicator (or indicators), perhaps, is one which
time. There has also been an increase in access to health looks at the incidence and prevalence of diseases amongst a
services for the whole population. However, public health population, which shows the morbidity and mortality profile
services are deemed inadequate by many Pakistanis, resulting of the population. However, estimates and observations of
in continuous low utilization of services. Barriers to access, such disease patterns are usually very poor and are constrained
such as socio-economic and cultural barriers, exist, which by the human and institutional capital of the country. In
restrict the use of services by key population cohorts. With poorer countries, which have greater communicable and
the mobility of women restricted in many regions of Pakistan, preventable diseases, the lack of adequate human skills and
women, who often require urgent care, are unable to get administrative and institutional structures to record, measure
access to health services even if the services are targeted and calculate such, disease patterns, makes analysis difficult.
towards them. Patriarchal, material and cultural factors are Moreover. ·to make such data available at a disaggregated
often a serious impediment to access for women. level-urban/rural, province, district, and importantly by
Access to health care in Pakistan is estimated to be gender, or by age profile-makes assessment and observation
available for a little over half the population which is even more precarious. Pakistan too, suffers from numerous
still better compared to other countries with similar levels of the data-related problems which affect other developing
of development. Although almost all of Pakistan's social countries, and hence one needs a great deal of caution and
development indicators are far worse than those of countries imagination, in analysing data related to the health sector.
at similar levels of development, in the case of the health Even where the data do exist. to hope to see many close
sector, Pakistan is marginally better off. Nevertheless, in an correlations and sample sets where poverty and ill health data
absolute sense, health access is quite limited and uneven are captured simultaneously,. is to be particularly optimistic.
by gender, class and region. Although 55 per cent of the For example, while there are data on poverty, which show
population has access to some form of health service-with that there is a strong correlation between illiteracy or the
immense variability in quality and with varying ability to level of education and the incidence of poverty, and while the
pay-the access to health services for maternal and child relationship between ill-health and diseases is likely to be
health facilities is further decreased to a mere thirty per equally obvious,'there is little data in the health sector which
cent. Added to this is the fact that while the government's would corroborate such a fact. 8
immunization drive has been one of the major success
stories of recent years; still only 57 per cent of children Disease Patterns
complete routine immunization and only forty per cent of
pregnant mothers are fully vaccinated against tetanus. The Table 21.2 reproduces data, which despite being almost
demographic profile for Pakistani women is such that 43 three decades old and despite the demographic and social
per cent of the women are younger than 15 and nearly 46 transition that has taken place, are still fairly indicative of
per cent are in the reproductive ages of 15-49, implying that the disease profile of Pakistanis. Probably the main difference
health services in the coming years will have to be focussed would -be that diseases related to the heart and circulatory
particularly on the young and on women, with reproductive system would have. grown manifold, but because they
health issues having to be brought to the fore. The existing represented such a small proportion, would still be relatively
health service structure is going to be severely challenged in few in absolute number. 9
the coming years with these demands and needs.

Table 21.2: Main Causes of Death in Pakistan

21.2.2 Examining Health Data
(in percentages)
Unlike the literacy rate or the primary enrolment rates, which
Nature of Disease Total Urban Rural
are indicative of the state of education in a country, there
is no indicator in the health sector which captures the full Infective and parasitic diseases 53.84 67.64 63.07
picture of the poor (or otherwise) state of the health status of Malaria 10.54 7.86 10.96
the population. Life expectancy at birth which, along with t'1e Congenital anomalies, birth injury, 8.49 7.03 8.79
literacy rate and the gross enrolment rate, is one of the four and perinatal mortality
indicators which constitutes the UN's. Human Development Tuberculosis 5.55 2.86 6.09
Index might, along with the Infant Mortality Rate (!MR), Dysentery and diarrhoea 2.51 2.88 2.44
constitute some sort of poor proxy for an indicator about the
Accidents, poisoning, violence 1.88 1.05 3.03
health,status of the population. However, while both might
suggest some indications about the status of the well-being Diseases of the heart and 1.79 3.92 1.35
of a population, neithe~ are indicators of ill-health or disease. circulatory system
Other indicators such as the Disability, Adjusted Life Years Source: Government of Pakistan, Fifth Five Year Plan, Islamabad,
(DALYs) lost or the Healthy Life Years of the population using 1978, cited in Zaidi, S Akbar, The Political Economy of
the burden of disease index, do provide alternative partial Health Care in Pakistan (Lahore: Vanguard, 1988), 55.
 Chapter 21 The Social Sectors Ill 627

In more recent years, the burden-of-disease data have maternal and perinatal diseases being the leading ailments
emerged as a proxy for ill-health and for the causes of illness in Pakistan. 10 The Healthy Life Years Lost analysis shows
and suggest that the distribution shown in Table 21.2, has that the main causes of death in Pakistan are respiratory
not changed very significantly. In the World Bank's 1998 tract infections, diarrhoea, tuberculosis and birth-related
publication, Pakistan: Toward a Health Sector Strategy, data diseases. I I A 1990 survey using the burden of disease methods,
for 1990 which shows the burden of disease per cent of 'showed that diarrhoea (40 per cent), lower respiratory tract
DALYs lost per year, shows that communicable diseases infection in children (36.8 per cent), tuberculosis (35.7 per
constitute 38.4 per cent of the DALYs, with maternal and cent), injuries (31.9 per cent) and hypertension (29.9 per
perinatal conditions constituting a further 12.5 per cent, and cent) were the six major factors of loss of healthy life years
non-communicable disease constituting 37.7 per cent-see in Pakistan in 1990' .12
Table 21.3. While some data are available for the population more
generally, data related to the ill-health of children are
Table 21.3: The Burden of Disease per cent of DALYs often easier to find. Many micro studies measuring disease
Lost per Year incidence are undertaken by researchers in the health and
medical faculty. The IMR and the Under-Five Mortality Rate
Nature of Disease Per cent are calculated frequently and published. With a falling but
Communicable Diseases 38.4 still unacceptably high Infant Mortality Rate, many of the
Water Supply and Sanitation Pollution contributing to 20 overall deaths in Pakistan take place in the under-five cohort.
infectious and parasitic diseases, largely tuberculosis, Of all the deaths reported in Pakistan, 'almost 39 per cent
diarrhoeal diseases, intestinal helminths and malaria occurred amongst children under the age of five, and 30 per
Air Pollution contributing Respiratory Infections 8 cent of them in children Jess than one year of age'_i 3 Data
Childhood Cluster 6.7 collected from public sector health providers from across
Pakistan show that 61.86 per cent of new cases of disease that
Ofum 3 were reported for children under the age of five, 'were the
Non-Communicable Diseases 37.7 diseases that were either communicable or easily preventable.
Cardiovascular 1O Acute respiratory infections (28.3 per cent), diarrhoea (14.7
Nutritional Endocrine 6 per cent) clinical malaria. (8.1 per cent), and dysentery (6.3
OOm ~
per cent) were the cause of the major complaints'_i 4 Data
for patients above the age of five follows a similar trend to
Maternal and Perinatal Conditions 12.5
that for children, although, not surprisingly, there was more
Perinatal 10 variation in the disease pattern for older patients: the major
Others 3 communicable diseases accounted for 42.8 per cent of the
Others 11 cases reported, with acute respiratory infections accounting
for 21.5 per cent, clinical malaria 7.7 per cent, and diarrhoea
Source: Centre for Research on Poverty Reduction and Income 6.4 per cent. Table 21.4 shows the distribution of disease for
Distribution, Pakistan Human Condition Report 2002
recent data.
(Islamabad: CRPRID 2002), 26. [This Table was adapted
from World Bank, Pakistan: Toward a Health Sector Despite huge problems with data related to the health
Strategy, World Bank, 1998] sector and particularly with regard to diseases, and despite
the different sources and methodologies of collecting data,
Other burden of disease analyses for Pakistan show that much of the disease pattern is more or less reproduced
communicable diseases constitute 49 per cent of the disease amongst studies in Pakistan. Table 21.5 below shows the
profile, while non-communicable diseases have risen to 41 ranking of the top ten causes of mortality and morbidity in
per cent, with diarrhoea, respiratory tract infections, and Pakistan.

Table 21.4: Distribution of Deaths by Communicable Diseases, by Gender and Location (%)

Diseases All areas Urban • Rural

M F M F M F
Typhoid Fever 5.35 7.97 3.68. 6.12 6.44 9.15
Diarrhoea 2.79 · 5.59 2.76 5.76 2.82 5.49
TB 3.65 5.59 3.68 5.04 3.62 5.95
Pneumonia 5.83 5.87 5:83 6.12 5.84 5.72
Jaundice 5.1 5.17 5.52 5.04 4.83 5.26
All other diseases found in children 13.24 12.03 11.66 10.43 14.29 13.04

Source: Mahbub ul Haq Human Development Centre, Human Development in South Asia 2004: The Health Challenge (Karachi: Oxford
University Press, 2005), 181.
628 Issues in Pakistan's Economy

Table 21.5: Leading Causes of Morbidity and in and around the health sector, as well as on poverty.
Mortality in Pakistan However, there are only a few studies which show the
relationship between poverty and ill-health, and the degree
Rank Premature Mortality Morbidity of the relationship is left to conjecture and inference. Before
1 Diarrhoea Hypertension we turn to such studies, we need to look at the regional
2 Lower Respiratory Tract Infection Injuries distribution of key statistics, wherever data permits, within
3 TB Eye Disease Pakistan. Table 21.7 provides provincial data for the IMR and
4 Rheumatic Heart Disease Malnutrition incidence of diarrhoea on children.
5 Chronic Liver Disease Birth Diseases
6 Congenital Malformation Congenital Malformation Table 21. 7: Regional Differences in Health-Related Data
7 Birth Diseases Dental Disease
8 lschemic Heart Disease lschemic Heart Disease Infant Mortality (per Incidence of Diarrhoea
9 Child Septicaemia Adult Female Anaemia 1,000 live births) Children Under Five (%)
10 Other Respiratory Mental Retardation Rural
Punjab 101.7 13.9
Source: Hyder, A. A. and R. H. Morrow, 'Applying Burden of
Sindh 102.7 8.7
Disease Methods in Developing Countries: A Case Study
of Pakistan', American Journal of Public Health, 90 (8), NWFP 58.7 15.6
2000, cited in Centre for Research on Poverty Reduction Balochistan 75.1 9.9
and Income Distribution, Pakistan Human Condition AJK 48.0 8.4
Report 2002 (Islamabad: CRPRID; 2002), 12. Northern Areas 94.3 15.4
FATA 52.2 11.3
The National Health Management Information System Urban
(NHMIS) data-base is based on utilization and disease Punjab 70.6 10.5
reports from government health facilities in all the districts in Sindh 67.1 11.7
Pakistan. Although the data-base excludes the huge private NWFP 62.0 11.7
sector, the range of health facilities from where data about Balochistan 120.6 10.7
diseases are acquired, are probably adequately representative AJK 63.2 12.8
of the disease profile of the population. The most recent data Northern Areas 66.2 22.0
that we have from the NHMIS is for 2003 and are shown in Source: World Bank, Pakistan Poverty Assessment (Islamabad:
Table 21.6. World Bank, 2002), 163.

Table 21.6: Incidence of Major Health Problems The National Health Survey of Pakistan, published in 1998,
Reported under the NHMIS 2003 although conducted between the period 1990-94, showed
Disease Incidence
that there was a high prevalence of ill-health amongst
Diarrhoea lncidence/10,000 644
women, where, in rural areas, 75 per cent of women over
Dysentery/10,000
the age of 25 years, suffered from 'fair and/or poor health',
359
ARl/10,000 2152
while 45 per cent of the men in the same age group had
Malaria/10,000
the same health status. 15 Amongst low income women in
767
TB/10,000
the age group above 45 years, 'as many as about 45 per
78
Cholera/100,000
cent suffer from poor health and over 80 per cent suffer
5
Meningitis/100,000
from poor to fair health' . 16 Another, more recent, survey
3
conducted by the National Human Development Report and
Polio/100,000 1
the Pakistan Institute of Development Economics (NHDR/
Measles/100,000 16
PIDE) in 2001 addressed a range of questions related to
Neonatal Tetanus/100,000
some aspect of poverty as well as relating poverty to some
Diphtheria/100,000
health related issues. The NHDR/PIDE data showed that 'on
Viral Hepatitis/100,000 57
average 65 per cent of the extremely poor were ill at the time
AIDS/100,000 0
of the survey and they had on average suffered from their
Source: National Health Management Information System Data- current illness for ninety-five days' . 17 This National Human
base, provided to the author, by NHMIS, July 2005. Development Report also quotes from data from the Pakistan
Integrated Household Survey (PIHS ), arguing that 'there is a
While there has been a health transition based on the strong correlation between income levels of household and
demographic, fertility and the residential (urban/rural) immunization rates. For example, 75 per cent of the children
changes that have taken place in Pakistan, the disease pattern in the upper income quintile were fully immunized as against
has also changed, although communicable diseases still only 25 per cent in the lowest income quintile' .18 The NHDR/
dominate the morbidity and mortality profile of Pakistanis, PIDE surveyed poor communities and found that as many
whether male or female, whether they live in urban or as 55 per cent of the poor were ill at the. time of the survey,
rural areas. Clearly, this pattern and structure of ill-health and had been ill for 27 days on average, with their current
has important repercussions on the nature of interventions illness. 19 · •
 Chapter 21 The Social Sectors Ill 629

21.2.3 Utilization of Health Facilities findings from the Survey show that: rural inhabitants rely
more on dispensers and paramedics than do urban dwellers;
The National Health Survey found that the average number women rely more on dispensers and paramedics than men
of contacts with a health care provider over the age of five do; and, despite a belief amongst many researchers, the
years was 5.4 visits a year. This includes providers of all types findings from the Survey reveal that traditional health care
and categories, viz. government doctors, private doctors, providers, such as hakims, homeopaths, faith healers, and
dispensers, paramedics, hakims, homeopaths, faith healers, medical stores, 'provide a very small proportion of care'--only
even medical stores and a 'few non-specified providers'. 20 three per cent of visits were made in this category. 26
Males in rural areas visit health/medical care providers on The National Health Survey reveals that economic status
average 4.7 times a year, compared to urban men who visit is clearly related with the type · of provider chosen for
5.4 times a year. There is absolutely no doubt that there is a health care, with a variation in rural and urban areas,
·great deal of gender bias and discrimination against women although many of the findings detract from conventional
in all walks of life and amongst all categories of social class wisdom. In rural areas, people belonging to the low economic
in Pakistan. However, one of the more persistent beliefs in status category, surprisingly, turn to government doctors
academia and amongst researchers in Pakistan in the social less frequently than do members of the 'middle' or 'high'
sciences regarding access to health/medical facilities by economic category, and men in the 'low' category in the
women, is proven to be wrong by evidence. Data shows that rural areas visit private doctors far more frequently than do
females tend to use the services of health care providers more than men in the high and medium economic groups, although
men, with their average of 5.8 visits being higher than the 4.9 in all three categories private doctors dominate. Amongst
visits by men. 21 While it is not surprising why this happens, women in the rural areas, those from the low category visit
this is a rather important statistic in understanding issues government doctors less frequently-as a proportion of all
about ill-health and well-being with regard to women in facilities visited-than do women in the middle and higher
Pakistan. 22 (It is also important to state, that the frequency of categories; for low economic status women in rural areas, the
visits has little to do with the quality of care received by either main providers are dispensers/paramedics: 43 per cent of all
men or women-see also below). visits. Of all the twelve categories-high/middle/low, urban/
· In terms of visits and economic and social category, the rural, male/female-in only the low economic category of
National Health Survey found that there was not a very rural women, do private doctors not dominate as main line
significant difference in the average number of visits and of care providers. Clearly, private doctors are the main health!
economic status. It found, that 'in urban areas the average medical care providers of all men and women, rural and urban,
number of annual visits to health care providers made by across almost every single economic category. 27 Another important
males and females of middle income status is only slightly finding is that even among the low economic status group,
higher than those who have higher or lower status. However, visits to traditional health care providers-such as hakims,
in rural areas, females and males of low economic status homeopaths, faith healers and medical stores-is very
make fewer visits to health care providers' than do those of infrequent. More interestingly, it is not women who frequent
higher status. 23 The Survey makes an important clarificatory 'traditional' health providers as is commonly believed, but
point regarding this evidence when it argues, that the highest level of utilization of such providers is amongst
the low economic status urban men.
those of low economic status are more likely to
describe themselves as having poor health on A 2002 World Bank study found that in the case of
many measures they have greater objective need. female health care data related to utilization, there was a
The lack of a relationship between economic strong correlation with income. For example, in the lowest
status and mean number of annual visits to expenditure quintile, only 11.9 per cent of rural women had
health care providers might be interpreted as a pre-natal consultation, while in urban areas the proportion
evidence for unmet needs for health care. 24 for the same category was 36.4 per cent; in the case of the
highest quintile, the figures were 31.9 per cent and 84.2 per
One of the most important, and in many ways, surprising, cent, respectively. 28 Similar trends were found with regard
statistic concerns the distribution of the utilization of health to deliveries at home and deliveries assisted by trained
facilities between private and public (government). Amongst personnel where, as income increased, fewer deliveries
the numerous categories of health/medical care providers occurred at home and a greater proportion of better-off
mentioned above, the use of and access to private doctors women had trained personnel present at the time of delivery.
constitute the largest proportion amongst all categories of Moreover, knowledge and use of contraception also increased
age, gender and location. ·The National Health Survey of with income, . and the number· of children fell as income
1990-94 shows that thirty-five per cent of the visits of rural increased.
females to health care providers are to private doctors; 25 in Many of the findings from the National Health Survey
all categories-urban/rural, male/female-private doctors regarding utilization and social and economic class, are
provide between 45 and 65 per cent of all care. Amongst rural supported by the evidence from the NHDR/PIDE survey. The
. men over the age of 65, private doctor visits constitute 46 per Survey shows that rather than going to homeopaths, hakims
cent of all visits, while for urban men, the proportion is 65 or even government hospitals and dispensaries, the poor
per cent. Across the entire population, government doctors 'predominantly go to private allopathic medical practitioners.
provide only 21 per cent of all health/medical care. Other This is reflective of the desire of the poor to get the best
630 Issues in Pakistan's Economy

Table 21.8: Type of Health Facility used by Economic Category

Allopathic Private Compounder or Community Health Homeopath,

Economic Status Govt. Hospital Govt. Dispensary
Medical Care Chemist Worker Hakim, Other
Extremely Poor 57.8 12.0 7.2 13.3 1.2 8.4
Poor 45.9 16.3 8.2 22.4 0.9 6.1
Non-Poor 64.4 8/9 8.9 15.6 2.2
Average 54.0 13.3 8.0 17.7 0.4 5.6
Source: Hussain, Akmal, Pakistan: National Human Development Report 2003 (Karachi: Oxford University Press, 2003), 70.

medical treatment for their loved ones'. 29 Table 21.8 shows Table 21.9: Health Expenditure in Pakistan: 1997, 2001

I
the utilization of health facilities by the poor, and shows that
even the 'extremely poor' prefer private health/medical care 1997 2001
providers over all others by a very significant proportion. Total health expenditure as % GDP 3.8 3.9
Perhaps what is more surprising is that 49.4 per cent of the General govt exped on health as % total 27.2 24.4
exped on health I'
extremely poor have to travel a distance of over six kilometres
to seek health/medical care, as compared to 29.5 per cent of Private exped on health as % total exped on 72.8 75.6
the poor category. Despite this severe constraint, in terms of health
time lost and money spent by those who as it is have very Per capita expenditure on health (public + 19 16
little, the extremely poor group spends far more on private private) US$
medical care than do the poor-see also Health Spending, Private per capita expenditure on health US$ 13.83 12.1
below. Source: World Health Organization, The World Health Report
2003: Shaping the Future (Geneva: WHO, 2003).
21.2.4 Health Spending and Health
Expenditure While these more general trends are quite alarming, perhaps
As a share of its GDP, total health expenditure for Pakistan one of the most significant indicators related to the health
is about 3.9 per cent, of which the government's share has sector is that private spending is as much as 76 per cent
not exceeded 0.86 per cent of GDP. Public expenditure in the of total spending, a factor that has some important policy
health sector in Pakistan has been around 0.7-0.8 per cent implications. 31 In terms of household spending on health,
of the GDP in the last 35 years, or around a mere 3.5 per data is difficult to come by. The NHDR/PIDE survey found
cent of total government expenditure. In fact, the Pakistan that in its category of 'extremely poor', they spent Rs. 1,885 on
Economic Survey 2004-05, shows that for 1995/96 and 1996/97, health related expenses, while those who were designated as
the government's share of expenditure on the health sector 'poor', spent Rs. 497, in both cases on their current illnesses. 32
was 0.8 per cent of GDP, which fell to 0.7 over the period The extremely poor were in their current illness for 95 days
1997-2002. However, this trend was further aggravated after and the poor for 56 days on average. Hence, the extremely
2002/03, where expenditure on health in the public sector poor were ill for much longer and were probably unable to
fell to a mere 0.6 per cent over the three years from 2002/03 to work while ill, but also spent almost four times as much as
2004/05. It is not just the fall in absolute allocations in the the poor in total; moreover, on a per day basis, the extremely
public sector to the health budget which is worrisome, but poor spent around Rs. 20 per day while ill on their treatment,
within the budget allocations to the health sector, the fact while the poor spent less than half, around Rs. 8.88. Added to
that as much as 60 per cent goes towards salaries, while the this, is the fact that almost half of the extremely poor had to
'remaining 40 per cent is consumed in financing maintenance travel more than six kilometres seeking health/medical care
work, procurements, up-gradations, and medicines, etc. while 30 per cent of the poor had to travel a similar distance.
Expenditure on medicines, in the budget of primary health Data available from 1985/86 to 2001/02 reveals that the
°
facilities, forms only 24 per cent of the budget' .3 Clearly, proportion of expenditure spent on health by households, as
this is a most alarming trend which is bound to have serious a proportion of their total expenditure, has almost doubled
consequences on the health outcomes of the population. In in this period-see Table 21.10. What is interesting from
line with this trend of falling government expenditure on the table is, that rural households have always spent more
health, has been the rise in the proportion of private health on health related expenditure as a proportion of their
spending in recent years. However, over the period 1997- total expenditure, than urban households. Moreover, the
2001, while the overall proportion of private health spending- proportionate expenditure on health has remained almost
which is almost exclusively out-of-pocket spending-as a the same in urban areas throughout the period 1985/86 to
share of total spending has risen, there has been a marked fall 1996/97, wh_ile the rural ho1,1sehold's share has risen in this
in per capita overall spending on health care in Pakistan-see period. In both cases, however, there is a large rise in the
Table 21.9. proportion in the years between 1996/97 and 1998/99.
 Chapter 21 The Social Sectors Ill 631

Table 21.10: Percentage Household Health Expenditure children and the rest of the household, improves at each
as a Proportion of Total Expenditure stage of increase in literacy and education. Contraception
use increases with education and the fertility rate also falls
Year Urban Rural
as education rises. As a consequence of these factors, health
1985-86 2.3 2.5 data also show a correlation between mother's level of
1986-87 2.4 2.6 education and infant mortality and there is evidence, 'that
1990-91 2.6 3.1 infants born to the least educated mothers have twice the risk
1992-93 2.4 3.1 of dying within the first year after birth compared to those
1993-94 2.5 3.1 born to more educated women'. 33 Regarding the malnutrition
1995-96 2.3 3.1 of children in the household, one finds similar sorts of
1996-97 2.4 3.1 relationships, where there is a '60 per cent more chance
1998-99 3.6 4.7 of finding malnutritioned [sic.] children in households
2001-02 4.7 4.7 where the mother is illiterate compared to households
Source: Government of Pakistan, Social Indicators of Pakistan where the mother has at least had high school education'. 34
2003 (Islamabad: Ministry of Health, GOP, 2004), 89. Clearly, mother's education and literacy is a very important health
intervention.
The rise in health expenditure can be attributed to a number While illiteracy and ill-health have a high correlation, so do
of factors. There has been an increase in health facilities, poverty and illiteracy, and hence, the poverty-ill-health nexus
both private and public, across Pakistan, and it could be that is further accentuated and reinforced through illiteracy.
now since people have better access and availability of health While the overall literacy rate in Pakistan is quite low, that
personnel and health facilities, they can now make use of for the poor compared to the non-poor is even worse. The
these facilities, having to spend more on health than on other overall literacy rate amongst the poor for both men and
expenditure heads. It is improbable that this increase is on women, was found to be 28 per cent, almost half the 49
account of a growth in income, since in the 1990s, there was a per cent for the non-poor. This figure is worse for poor rural
rise in poverty and a slowdown in economic growth, with the women, who have a literacy rate of only 9 per cent compared
rate of increase in the growth of per capita income slowing to the equally poor 21 per cent for non-poor rural women.
down. Perhaps greater awareness about health and medical These results have 'wide-ranging adverse implications, given
measures has led to an increase in spending on medical the importance of a mother's education for the educational
care. Since the consumer price index for medicines has been attainment and health of children'. 35 This pattern is, not
exactly the same as the general consumer price index, this surprisingly, replicated in the net primary enrolment rates,
proportionate increase is not due to a relative price effect. and like literacy, holds across the provinces and rural and
Whatever the reason, it is clear that households are now spending urban areas. Enrolment is particularly poor among female
more money on health as a proportion of their total expenditure than children in rural areas at 25 per cent, compared to 45 per
in the past. cent for the non-poor rural female children. 36 While these
statistics reveal specific education and skill related problems
with regard to poverty, where the poor are stuck in a poverty-
21.3 HEALTH OUTCOMES AND trap unable to acquire basic educational levels in order to
move out of poverty, the literacy/education-health-poverty
NON-MEDICAL INTERVENTIONS cycle is further accentuated and reinforced, leading to an
iterative poverty trap.
In the section above, we have looked largely at health/medical Many of the communicable and preventable diseases
related data and interventions which have an· impact on mentioned in the foregoing section are water-borne
health outcomes and on the health status of the population. diseases-diarrhoea and dysentery, in particular~and can be
However, as we mention above, health outcomes are affected eliminated if better quality and increased quantity of water
by, not just direct medical and health interventions, but by a is supplied. With better sanitation, other air-borne diseases
host of factors which have an indirect relationship to health can also be reduced. Moreover, treatment for diarrhoea in
outcomes. Interventions in the education sector, in housing, the form of oral rehydration salts, only helps to momentarily
access to water, etc. all have a significant influence- and partially mitigate the illness, and when children return
and in some cases, even stronger influence than health to their habitat, they are once again exposed to the same
interventions--on the health status of the population. Health, vectors which made them ill in the first place. If cleaner water
more than any other sector amongst the social services, and better sanitation facilities were provided, the causes of
requires a holistic approach in order to understand the problems and the illness would be either removed or reduced. All of those
constraints faced by that sector, and to find effective solutions. who are exposed to inadequate quality and quantity of water
In this brief section, we highlight some of these non-medical and poor sanitation conditions are exposed to disease and ill-
interventions and wherever data permit, relate them to health. Not surprisingly, the lack of both water and sanitation
income and poverty related data. affect the poor more than the non-poor, making the poor
One of the most important non-medical inputs towards even more vulnerable to disease.
better health, is women's (or more specifically, maternal) The poor have less access to safe water, sanitation and
literacy and education. Women's health and that of her drainage facilities compared to the rest of the population: 'as
632 Issues in Pakistan's Economy

much as 24 per cent of the poor rely on potentially unsafe which has an ill family member. If the poor, by definition,
sources for drinking water, compared to 19 per cent of the do not have enough funds to pay for health/medical care,
non-poor'. 37 Table 21.11 shows the access to water and they will have to first make the choice whether they are in a
sanitation facilities amongst the poor and non-poor. position to seek care. The data that we have about the choice
Other factors that affect communicable disease such as of health/medical care provider relates to those who actually
tuberculosis, for example, which is communicated through seek care; we do not have adequate data about those who are
air-borne vectors, include: unhygienic living conditions, even unable to be in a position where they can opt for one of
overcrowding and malnutrition, which lowers resistance to many medical care providers. The percentage of the poor who
the disease. Non-medical interventions can go a long way in are forced to live and work with a disease and do not access
reducing the incidence of this disease. any sort of health/medical care, is unknown.
A decision to acquire medical care, particularly amongst
the poor, depends on a number of factors. This will depend,
21.4 THE PooR AND THE Soc10- perhaps in the first instance, on whether a health/medical
care provider/facility is available and accessible. The need to
ECONOM1c IMPACT OF seek medical care will depend on who is ill-it is very possible
COMMUNICABLE DISEASES that the household or its head may, due to a shortage of
funds, decide not to seek medical care for certain (perhaps
The lack of adequate and reliable data limits any calculations very aged) members of the household; evidence does suggest
with any degree of certainty regarding the social and that women and girls are often lower in priority in developing
in particular, economic, costs at either the individual, countries compared to_ boys, when it comes to taking the
household or country level related to communicable and patient to a medical facility; in the priority ranking, it is very
preventable diseases. While broad. 'ball-park' figures do probable that the main income earner will have a higher
exist regarding the incidence and prevalence of disease, ranking than anyone else in poor households where not every
data from different sources often contradict that from other member of the household has the luxury of accessing health
sources. Moreover, the lack of socio-cultural studies which care and where choices have to be made. The cost of not
examine the cultural and social aspects and consequences acquiring care by the main earner is likely to be higher than
of certain diseases, also limit an evaluation of the non- those of acquiring care. The severity of the disease is likely to
economic impact of these diseases on those who suffer their be another factor which affects the decision to seek health
consequences. Nevertheless, making some assumptions, we care. Given the considerable expenses and costs incurred-
can try and make some general statements about the socio- both direct and indirect-in having to acquire medical/health
economic consequences of some diseases, trying to examine care for the poor, it is very probable that a decision to seek
implications for socio-cultural and religious stigma and care will be delayed, aggravating the disease. Moreover, for
human rights, particularly for vulnerable groups amongst the the reasons mentioned above, even diagnosis of the disease
poor. From the disease profile shown in Section 21.2 above, will be delayed and many amongst the poor may continue
the most widespread diseases which affect the population of to live with a disease without even knowing that they have
Pakistan, and in particular the poor, are communicable and contracted it. Delayed diagnosis at an advanced stage will
preventable diseases, such as diarrhoea/dysentery, respiratory only aggravate the disease and incur higher costs.
tract infections, malaria and tuberculosis; although it has a Once a decision has been made to acquire health care,
low incidence and low prevalence rate, but because of the economic implications arise since the care has to be paid for,
high social, economic and human costs associated with it, as does the cost of transportation, medicines and perhaps
HIV/AIDS also features in a list of critical diseases in the even hospitalization. If the poor do not have the income
context of Pakistan. to pay, they will have to either borrow or sell some of their
Given the high cost of care-see the next section-and the already negligible assets in order to be in a position to pay for
proportion of income to be spent on care, much of which goes the care. Either of these two decisions are likely to make their
towards private medical care even amongst the very poor, economic position worse. In fact, often a minor illness can
and depending on the severity of the illness and the ability push a household which is above the threshold of poverty,
to pay for the care, one can assume that the implications of into a state of poverty exacerbating the poverty-ill-health
acquiring medical care will be significant for the household relationship.

Table 21.11: Access to Drinking Water and Sanitation for the Poor and Non-Poor

Source of Drinking Water Drainage System Toilet

Outside Open Under- Open No In Outside
Piped
Closed Source ground Drain Drain House House
Poor 18.7 57.3 24.0 7.8 29.8 52.4 40.9 59.1
Non-Poor 28.2 53.1 18.6 17.2 34.3 48.5 61.0 39.0

Source: World Bank, Pakistan Poverty Assessment (Islamabad: World Bank, 2002), 36.
 Chapter 21 The Social Sectors Ill 633

One can perhaps make the claim, that issues related to non-disease related factors, and that it is not this particular
social relations, social capital and social networks, that exist condition which is responsible for their exclusion).
for poverty mitigation and help deal with poverty amongst This section maintains that the social networks and socio-
communities amongst the poor, are extended when it comes cultural patterns of relationships amongst the poor are fairly
to most, particularly non-contagious, illnesses. 38 Perhaps strong at the biradari and community level, and are carried in
it would not be wrong to suggest that the same or similar, to issues which relate to ill-health and well being. Extended
community-based and social networks work with regard to families and 'traditional' relationships of larger communities
dealing with poverty and illness amongst the poor. This is still exist in Pakistan and provide social support amongst
particularly likely with regard to maternal and child related members. Moreover, the concept of charity and community
illnesses, where a broad nexus of women of all ages in the support in Islam would also endorse such a view. In fact,
community may share support. With varying social ties one can argue that social exclusion which is based on illness
amongst communities, support might be forthcoming from and disease is not a matter of much concern, for the poor are
other members of the broadly defined community. Despite already fairly excluded from access to health and non-health
major changes in the social and cultural process in Pakistan, it opportunities and facilities. What is of far greater significance
would be fair to suggest that, for the most part, communities is the social exclusion of the poor and of women and religious
still have strong social ties and networks. However, where minorities, more generally, rather than the social exclusion
communities suffer equally-a likely assumption in the case faced by those who are ill. Having said this, however, one must
of poor communities facing many similar diseases-it might also add that while numerous smaller groups of support might
be difficult to find support when everyone is dealing with exist in multiple conditions and environments, social exclusion
illness in their own household. This might also be the case of the physically and mentally disabled, for example, is fairly
where the main earners of the household migrate and work commonplace in Pakistan. When disability or disease is more
away from home in alien environments. However, research visible and detectable (physical disability, for example), it is
related to, for example, migrant workers, has shown that possible that ostracism will take place. 39 On the other hand,
original kinship patterns from rural areas still exist in cities the 3 million tuberculosis sufferers in Pakistan, for example,
1
and Are often reinforced and reproduced there. Such patterns probably do not suffer from exclusion because their diseases
J perhaps transfer social networks and social capital from one go undetected except in acute cases, and many have little
location to another. Such social networks are probably quite choice but to continue with their lives living and working with
strong in Pakistan where they provide support of many kinds, a disease of which they may not even be aware of-and even if
including loans and credit: relatives and friends are the main they are aware of the disease, their poverty would force them
source of finances for all social groups and the persistence to continue living and working with their ailment.
and working of Rotating Savings and Credit Association The Mahbub ul Haq Human Development Centre Report,
(ROSCAS ), bear testimony to a strong system of social Human Development in South Asia 2004: The Health Challenge,
relations, social networks and social capital. perhaps best summarizes issues raised about exclusion and
While 'normal', less contagious, diseases might not account access as follows:
for any degree of the social exclusion of individuals and
households amongst the poor, partly because dealing with For almost all the indicators we have covered
disease and living with various stages and degrees of ill- so far there are clear differences in health
health is very much a part of the existence of the poor, it is outcomes based on gender, geographic location,
and income. So, it is not only the case that our
very possible that in the case of some diseases individuals achievements in [the] health sector are poor
and households are ostracized. Amongst the more common it is also the case that biases based on gender,
diseases, probably tuberculosis could be such a disease, location and income raise serious equity, fairness
as well as HIV/AIDS of which there is growing awareness and access issues. 40
due to extensive media campaigns. However, in order to be
ostracized, the nature of the disease has to be identified first. Clearly, the issue of exclusion and of access is not related
This means that diagnosis has to take place before a disease is primarily to disease and ill-health, but prior factors such
identified. As we argue above, this may not be the case with as gender, geographic location and social class, in a highly
regard to the poor who may not have their illness identified, segmented and social- and class-conscious Pakistan, only
and may continue working and living with the disease, emphasize the exclusion faced on account of disease and
despite the health hazard to the person themselves and to the illness.
wider community at large. Although less than 100,000 cases
of HIV/AIDS have been estimated in Pakistan, one can be
quite sure that patients with this condition, once diagnosed 21.5 THE lssuEs OF PRICE, CosT, AND
and identified, are likely to be ostracized from their larger
communities and will also face religious and social stigma. ACCESS TO TREATMENT
(However, since HIV/AIDS is more widespread amongst
Data for the cost of health and medical care in Pakistan is
certain groups-injectable drug users who share needles, in
imprecise and extremely scarce. If government price indices
particular-an alternate argument also exists which would
are to be believed, over the period 1990/1 to 2010/11, the price
suggest that many of the sufferers of HIV/AIDS are already
of medicare rose at a slower pace than the increase in the
excluded, socially, culturally and economically, on account of
general price index, the price rise in food and beverages and
-----------------------------------------1,
634 Issues in Pakistan's Economy

tobacco, apparel textile and footwear, house rent, fuel and case, i.e. averages for all conditions; similarly, unit costs per
lighting, transport and communication, household furniture inpatient admission were also calculated. The study calculated
and education. In the eleven groups which constitute the the actual unit costs for care as delivered in government
combined consumer price index, it is only 'recreation and health facilities, and estimates 'were also made of what those
entertainment' which rose at a slower pace than medicare. unit costs would be if a full course of treatment in accordance
The rise in the medicare price index over these twenty years with generally accepted professional standards was approved
has been by a factor of 4 compared to more than 5.2 times at government expense', and are referred to in the Report as
for the general consumer price index. Moreover, government 'normative' costs as opposed to actual costs incurred. 45
data show that the 'doctor clinic fee' over the same period, has Table 21.12 shows the estimated actual costs incurred for
risen by only 3 times. 41 Looking at data for the daily wages of curative outpatient services at different levels of government
skilled and unskilled workers in Pakistan's main cities, one health facility. In the 'fixed costs' category, which consumes
sees that the rise in wages between I 992-2004 was also in the the most amount of costs, labour accounts for 72 per cent of
range of 2.4-2. 7 times the 1992 wage, showing that there had fixed costs, followed by administration at 15 per cent and
been some deterioration in relative well-being due to prices buildings at 9 per cent; variable costs include the cost of
rising faster than incomes. 42 In the period 1999-2011, the medicines, laboratory tests and x-rays. Only those medicines
unskilled workers daily wage had increased about three-fold. supplied or tests conducted at the facility are included in
However, anecdotal and other survey data suggest that health these estimates. Normative variable costs are estimated on
and medical care have become far costlier for consumers and the basis of costs for medicines required to treat a typical
because of the high, double-digit, inflation since 2008, are case of a particular disease or condition, and based on the
now unaffordable for most people, particularly the poor. weighted incidence of disease found at each level of facility.
Since we do not know what proportion of the ill, and One of the main findings based on Table 21.12 is that
particularly of the poor, are unable to utilize health facilities at all four tiers of government health facilities, the actual
on account of the unaffordable actual and hidden costs expenditure per outpatient for variable inputs provided by
involved in purchasing and accessing health/medical care, the government-largely medicines-falls far short of what it
attempts at trying to estimate the extent of access to health/ would be needed for a full course of treatment. If we assume
medical care by the poor, must remain partial and speculative. that a patient using a government health facility is interested 1
All our estimates are based on the actual usage of medical/ in having his/her ailment cured and fully treated, s/he will
health facilities by different segments of the population. have to purchase the medicines in the market and will have
From the NHDR/PIDE survey cited above, we know that the to incur considerable personal out-of-pocket expenses even
'extremely poor' are ill for twice as long as the 'poor' and when health/medical consultations are 'free'. Even when
despite being poorer, spend around 3.8 times as much as the some form of diagnosis and consultation takes place without
poor on medical/health care. any actual costs incurred--or marginal direct costs such as
Unfortunately, there have been far too few studies which user fees or parchi fees-patients bear the full treatment costs
look at the cost of treatment of the main communicable for the disease.
diseases in Pakistan. One study conducted by Logan Brenzel
and S. Akbar Zaidi in 1996 as a background chapter to the 21.5.1 How Much Does it Costto Cure
World Bank's Health Sector Strategy calculated the costs of
curative care by the government at different tiers of public Tuberculosis? 46
health facility. 43 Another study examined the economic and The World Health Organization had identified sixteen key
social costs of tuberculosis and its treatment in Pakistan. 44 countries, where a lack of progress in combating tuberculosis
The Brenzel and Zaidi study calculated the cost of curative is threatening global TB control efforts. These sixteen
care for a number of illnesses which have a significant countries, which form the 'world's most worrisome TB
impact on the health status of the population. From the trouble spots' were those countries which had not moved
survey conducted for this study and from the data collected, quickly to adapt the DOTS strategy, and some of these
estimates were made of unit costs per curative outpatient governments had not taken WHO's Global TB Emergency of

Table 21.12: Estimated Unit Costs of Outpatient Health Care (in 1995-96 Rupees)

BHUs RHCs THQs DHQs

Fixed CostsNisit 43.0 54.0 35.0 25.0
Actual Variable CostsNisit
- Medicines 5.9 13.6 15.3 12.5
- Other Variable Costs 0 0.6 2.0 2.5
Total Actual CostsNisit 48.9 68.2 52.3 40.0
Normative Medicine CostsNisit 58.0 58.0 ,146.0 146.0
Normative Medicine Costs/Actual Medicine Costs 9.8 4.3 9.5 11.68

Source: World Bank, Pakistan: Health Sector Strategy, Report No 16695-PAK (Washington DC: World Bank, 1998), 24.
I
r
1993, seriously. Of these sixteen 'worrisome trouble spots';
eight countries were classified as middle and/or upper income
Chapter 21 The Social Sectors Ill

This cost calculated here is a crude, bare minimum, cost

that would be required to provide medication to cure each
635

countries and did have the financial means to address the TB infected person. It does not include a host of numerous
I
aggravating TB situation47 , while eight others belonged to the direct, indirect or opportunity costs related to the treatment.
low income group. Pakistan happened to be one of the latter For example, costs related to the supply and training of health
group of eight48 . service providers, the transportation of medicines, and the
While these sixteen countries have been singled out as provision of laboratories. If we assume that the DOTS method

r a group for their poor record to address the growing TB

emergency, WHO identified ten of these sixteen, which had
started using DOTS more recently, and hence there was a
is to be applied, we need to factor in the cost of community or
field workers. There are costs which the patient must bear on
his own, which include transportation, costs related to better
belief that many of these trouble spots may soon become food intake and better nutrition-an essential ingredient in
TB-control or TB-free, success stories, where TB could recovery from tuberculosis-and the costs borne if he is out
be effectively controlled, if not eliminated. Hence, there of work in the earlier phases when he is under treatment. All
were six countries of the world, where TB was rampant these costs together can be very substantial.
and yet little or no response by the government had been The Brenzel and Zaidi study calculated that if an out-
made to address this potential epidemic. Pakistan had the patient was treated for tuberculosis at a Rural Health Centre,
unfortunate distinction of being one of those six countries he would incur medication costs of between Rs. 43-Rs. 1,213.
where tuberculosis was a problem, but official response to At a Taluka/Tehsil Headquarter Hospital, drugs worth
address this issue has been largely insufficient49 . Rs. 511 would be prescribed to TB patients, and at a District
These very basic stylized facts, which rank Pakistan as one Headquarter Hospital, the out-patient drug costs per case
of the six worst performers in its efforts to tackle the TB crisis, would be Rs. 80. 54 These costs, based upon health centre
need to be contrasted with the performance of numerous records, were actual treatment costs for tuberculosis treated in
poorer countries which have begun to give TB eradication the out-patient department at each tier of the health delivery
high priority. Of the WHO's list of sixteen worst performers in system. In the case of tuberculosis, our results showed that it is
2004, Afghanistan, Myanmar and Sudan were all far poorer far more cost effective to treat an out-patient by administering
than Pakistan; and yet, had implemented DOTS and had him tests and drugs at a higher District Headquarter Hospital
started giving due emphasis to this problem. Other countries, level, rather than at the first contact of health service, such as
such as Bangladesh, Mongolia, Cambodia and Kenya, all a Rural Health Centre or Basic Health Unit. The reason for this
considerably poorer than Pakistan, were already on the road is probably due to economies of scale at the higher tier. Also,
to achieving some success in controlling tuberculosis. Even because of higher utilization rates for hospitals, the study
Malawi, the fifth poorest country in terms of GDP per capita, found that it was more cost-effective to provide outpatient
with a per capita only one-third of Pakistan's, had been cited services at higher levels of the health system-the unit cost
by WHO as a country where TB control was succeeding. decreased at higher levels within the system.
Around three million Pakistanis suffer from tuberculosis The normative costs that this study assumed for an out-
and approximately 250-300,000 new cases are added on patient treatment of tuberculosis, based upon medication and
every year; about 50,000 patients with tuberculosis die each diagnostics at a government health facility (which is free) was
year. Tuberculosis as a single disease accounts for 5 per cent Rs. 3,195. Of this Rs. 2,110 was the cost of medication for a
of the total burden of disease in Pakistan, and its importance tuberculosis case, while.Rs. 1,085 were for diagnostics, which
can only be emphasized by the fact that tuberculosis 'kills included microscopy and X-rays. The in-patient treatment
more women every year than all the cases of maternal mortality costs for tuberculosis were Rs. 3,871 at a Rural Health Centre,
combined' .50 Although the DOTS strategy was started in 1995, Rs. 4,236 at a Taluka Headquarter Hospital and Rs. 4,552
the coverage of DOTS at 45 per cent is the lowest in South at a District Headquarter Hospital. These in-patient costs
Asia, and the DOTS detection rate in Pakistan at only 13 included all costs related to service and care while the patient
per cent, was also the lowest in the region by a considerable was in hospital5 5 . The average length of stay per in-patient
margin. Pakistan also had the lowest treatment success rate for tuberculosis observed was 10.33 days at a Rural Health
in South Asia. 51 Centre, 9.39 days at a Taluka Headquarter Hospital and 6.12
In a study conducted in 2000, it was found that the costs days at a District Headquarter Hospital.
for medication during the course of a nine month regimen Estimates from the Bethania Hospital in Sialkot, a non-
for a patient with tuberculosis in Pakistan, work out to profit charitable hospital dealing with tuberculosis, have
approximately Rs. 13 per day, or Rs. 400 per month. 5~ A nine calculated the total cost (including hospitalization) for a TB
month medication course would have cost around Rs. 3,600 patient to be Rs. 5,863 ($130). This figure includes six sputum
(US$80) following the WHO-approved DOTS regimen. Five examinations, each at Rs. 18, sixty days hospitalization at
sputum microscopy tests, plus doctors fees, each at the rate of Rs. 50 a day, one X-ray cost, thirteen OPD visits to the doctor
Rs. 10 and say, Rs. 50 respectively, would have added another at Rs. 40 per visit, and medication worth Rs. 2,135 to cover
Rs. 300 if we assume that the patient makes five visits each the entire course of the treatment.
to the doctor and to the laboratory. Hence, we have a total While the cost of treatment of tuberculosis per case in
medication package of say, Rs. 4,000 or less than US$90 over Pakistan, seem to lie in the range of US$100-130, depending
a nine month period to cure one patient with tuberculosis in upon how and where treatment is undertaken, the costs
Pakistan. 53 for government administered care for TB seem to be higher
636 Issues in Pakistan's Economy

because these figures are more comprehensive as they those who contract tuberculosis each year will die from the
include fixed costs, doctor's salaries, etc. The private sector disease, is of serious concern. Moreover, tuberculosis is also a
treatment costs above, are for treatment cost only (medicine, contagious disease and hence, preventable.
diagnosis and consultant's fee, i.e. excluding hospitalization) The reason why tuberculosis persists and spreads and
costs. How do these costs compare with treatment costs in accounts for many deaths, may all lie in issues related
other countries? to poverty. The poor probably have a high incidence of
A comprehensive study on India 56 has calculated that the tuberculosis and it is they who need treatment most but
cost of treatment for a TB patient was US$0.40 per day, and do not have the minimum US$100 for treatment. While a
a consultant's fee ranges from US$0.50 to $7. Treatment in patient is unable to acquire treatment on account of costs, s/
the private sector for out-patient out of pocket costs would he lives with the disease probably passing it on to others as
be in the range US$110-140, if treatment was actually well. Since tuberculosis is a debilitating disease, productivity
undertaken. These costs do not include opportunity costs of active workers will also fall as the energy levels of those
or nutritional costs. The study also calculated costs prior to who suffer from it, falls. Moreover, tuberculosis has a higher
treatment: in the private sector the cost of diagnosis ranges incidence in the economically productive age group 15-29 (42
from $3-7 which is the cost of an X-ray and three sputum per cent of all cases are in this age bracket) and if the main
microscopy tests. In addition, there is the cost of treatment earner in a household is affected, one can assume that his/
prior to diagnosis, which the study calculated to be around her earning capacity will be also affected on account of the
$10-13. The average cost to the patient for diagnosis and the disease and the entire household dependent on this earner,
treatment preceding diagnosis was about $17 per case. will suffer. A poor household afflicted by tuberculosis is
Other studies have also tried to calculate the cost of likely to get stuck in a condition of perpetual poverty, despite
treatment of tuberculosis, but are strictly not comparable the fact that the cost of care is still relatively inexpensive.
since each study on each country is unique for what it The answer to the question of access to treatment in an
includes in its calculations of cost and for what it excludes. environment where around 32 per cent of the population is
The study by Katherine Floyd and her colleagues compared poor and where the poverty line was less than Rs. 750 per
the costs incurred for a DOTS regimen with that of a month per adult equivalence in 2000/01, 59 is self-evident: it is
conventional programme in rural South Africa 57 . While the not at all possible for anyone with income of this amount to
costs on a DOTS programme were about one-third that of a spend around Rs. 500 on the treatment of tuberculosis, and
conventionally delivered treatment programme, the DOTS even if their condition has been diagnosed, they do not really
package comes to about $741. The high cost in this is the cost have 'access' to health care. Clearly, the poor will continue
of hospital stay ($557) which is around 75 per cent of total to live and die with diseases like tuberculosis since they are
costs for the treatment-a day in hospital costs $27.80 for the excluded from the market and the government provides only
health system and $4 to the patient; in Malawi, a day in the a fraction of the cost of care to treat the disease.
hospital, in comparison, incurred only $2.09 in health system
costs. The cost of drugs even for the conventional treatment
is only $40, far less than those incurred in Pakistan. Sputum 21.6 THE IMPACT OF PUBLIC AND PRIVATE
costs were also comparable at $9. Saunderson's study on
rural Uganda, which included pre-diagnosis costs (as did PROVISION OF HEALTH CARE ON THE
the India study cited above) calculated that the costs to POOR
the health system would be around $90 per case, and to
the patient nearly $215. An alternative treatment design In some ways, a review and assessment of the impact of
package reduced patient costs substantially to only $80 which the public and private provision of health care on the poor
included pre-diagnosis costs. These costs also include the cost who seek care for communicable diseases, has already been
due to a loss of work, which many studies do not 58 . suggested by the data and discussion that has taken place in
Differences in methodology and data constraints limit any earlier sections. In this section we try to explore this issue
comparison between studies and countries and, at best, are further.
merely indicative. Moreover, cost-effectiveness studies and Perhaps the most surprising findings from data and
costs foregone either by the health system as a whole, the evidence are that those who seek health care in Pakistan,
government, or the patient, tell us nothing about the actual opt for the private sector rather than the public sector. More
quality of care being provided. surprising, is the fact that even the poor and 'extremely poor' prefer
This case study of the cost of care for tuberculosis needs private medical/health care to government provision of care. Clearly,
to be se('.n as representative of the broader problems related people are voting with their feet. This is despite the fact that
to issues of costs and prices of care, and hence of access. We all broad macro indicators about the provision of health care
learn a number of things from our analysis of tuberculosis in Pakistan have shown a considerable improvement in recent
which are indicative of more generic problems. Tuberculosis years and decades-see Table 21.13, although Table 21.13
is one of Pakistan's main diseases and causes a large number shows serious gaps in the provision of basic government
of deaths as well. However, it is a fairly simple disease in health services and facilities. Public health facilities are fairly
terms of treatment, largely requiring consistent treatment widely available in Pakistan, yet it seems that people who
in the form of medication, over a period of around nine require health care chose to avoid the public sector. Perhaps
months. However, the fact that as many as 15-20 per cent of what is even more surprising, is that the little documentation
 Chapter 21 The Social Sectors Ill 637

that is available suggests, that many of those who opt for A key explanation for why almost 75-80 per cent of the
private care also state that the quality of health/medical population, which includes the poor who access health/
care in the private sector is not particularly better than that medical facilities use private sector facilities, is said to be
provided in the resource-constrained public sector. 60 It must due to the long 'distance to government hospitals and the
also be recognized that this trend of moving from the public unavailability of medicines and public health providers';
sector in health to the private sector, is a phenomenon not other reasons are said to include 'uncooperative staff, inability
unique to Pakistan and is found to take place in many other of providers to treat complications and the unavailability of
developing countries as well as in South Asia. 61 doctors at these facilities'. 62 This trend towards the private
sector does not necessarily suggest that the private sector
Table 21.13: Public Health Facilities in Pakistan: 1990, provides good or better care than the public sector. In fact, the
2004 'number of traditional providers of healthcare [sic.] greatly
exceeds that of those with formal training, especially in rural
1990 2004 areas'. 63 (However, data presented above from the National
Hospitals 756 916 Health Survey suggests that very few people actually go to
Dispensaries 3795 4582 'traditional' providers and most go to private doctors). 64 As
BHUs, Sub-Health Centres 4213 5301 Table 21.15 shows, even for a recurring common problem
like diarrhoea, the most utilized health facilities are private
Maternity and Child Health Centres 1050 906
practitioners, even in rural areas. What is also worth observing
Rural Health Centres 459 552 from this table is the fact that a substantial proportion of
TB Centres 220 289 the rural inhabitants choose (or because they do not have
Total Beds 72997 99908 a choice, are forced to) not to seek consultation. In fact the
Population/Bed 1480 1540 proportion of those who 'choose' not to consult is greater than
Registered Doctors 52794 113206 those who actually go to government facilities; this could be,
as earlier tables show, due to the unavailability of any health/
Population/Doctor 2082 1359
medical care provider or facility in the area closest to them,
Registered Nurses 16948 48446 or another likely explanation would be that in the rural areas
Population/Nurse 6374 3175 people do not consider it important to seek treatment for as
common a problem-and particularly chronic amongst the
Source: Government of Pakistan, Pakistan Economic Survey
2004-05 (Islamabad: GOP, 2005), 91.
poor-as diarrhoea.

What is surprising from Table 21.14 is not so much that

rural areas do not have sufficient health/medical facilities 21.7 THE ROLE OF GOVERNMENT IN
in their vicinity, but that there are so many private facilities THE CONTROL OF COMMUNICABLE
and private sector health and medical personnel available.
Even in the very remote rural areas of Balochistan where DISEASES66
government facilities are not available, there are private
health facilities. Despite the growing number of public health A critical distinction and dividing line emerges between the
(government facilities)-Table 21.13-it is the private sector private and public sector when it comes to the provision of
preventive care and to the provision of immunization services,
which dominates, and the trend continues in favour of the
private sector rather than the public sector. and in the broader role of the control of communicable
diseases. The market-driven private for-profit sector, for

Table 21.14: Health Facilities in Rural Areas by Province: 2001

Percentage of rural households with facilities present in their village

Punjab Sindh NWFP Balochistan Pakistan
Govt Hospital 3 1 3 0 2
Govt Dispensary 11 16 11 19 12
Basic Health Unit 18 11 33 12 18
Lady Health Worker 80 36 44 21 62
Private Hospital 5 3 4
Private Dispensary 13 16 11 3 13
Private Practitioner 21 22 30 6 22
Compounder/Nurse 33 19 58 5 32
Hakim/Homeopath 41 16 34 0 33
Source: Source: Mahbub ul Haq Human Development Centre, Human Development in South Asia 2004: The Health Challenge (Karachi:
Oxford University Press, 2005), 189.
638 Issues in Pakistan's Economy

Table 21.15: Type of Practitioner Consulted for Diarrhoea Treatment (percentages) 65

Private Compounder/ Govt Hospital/ No one

Other
Practitioner Chemist Dispensary consulted

Urban 60 3 18 6 13
Rural 45 10 18 5 19

Source: Mahbub ul Haq Human Development Centre, Human Development in South Asia 2004: The Health Challenge (Karachi: Oxford
University Press, 2005), 189.

the most part, is not involved in preventive measures- start in TB and Malaria, with an enlargement of the
except, notably, family planning-and nor in the provision of HIV-AIDS programme.
immunization related services. Also, the privates sector is not • In order to address deficiencies in primary and
involved in the provision of non-medical related interventions secondary health care at the BHU/RHC level, trained
in the health sector, such as the provision of water and Lady Health Workers {LHWs) were to be utilized to
sanitation, except for some exceptions, where water is sold cover the un-served population at the primary, first
to the public particularly in urban areas where government con tact, level.
services have failed to reach the population (although this is • The Devolution Plan was to be used to improve quality
probably not a comparable case of private sector provision of of service and care provided by District Health Officers
services in the same sense in which medical care is provided); at the district level.
in the case of sanitation and sewerage facilities, government • In order to promote gender equity in the health sector,
failure has forced slum-dwellers to take matters into their reproductive health services were to be provided to
own hands through self-help and NGO-led initiatives. In the childbearing women at their doorstep. The Lady Health
more traditional meaning of the prevention of communicable Workers (LHWs) were to be instrumental in this goal.
diseases, the for-profit private sector is absent and the role • Nutrition supplements were to be provided to the
of the government is critical, both in making interventions target population.
and in laying down guidelines and policies. However, one • A greater link between the Teaching Hospitals and the
must emphasize that in 2012/13, after the implementation of district level health facilities was envisaged.
the devolved Eighteenth Amendment, many of the policies • Better regulation was to be devised for the private
initiated at the federal government level have either been medical sector to improve its standard and service.
passed on to the provinces, or terminated. In fact, there is • Greater awareness was to be created amongst the
considerable dispute about the ownership of such programmes public regarding public health issues.
by the provinces, some of which have been reluctant to take • The pharmaceutical sector was to be improved for
over formerly federal programmes. Moreover, many of the better quality of affordable drugs.
targets set by the Millennium Development Goals till 2015, • A Policy Analysis and Research Unit was to be set up in
have become benchmarks to be achieved-see Chapter 20 for the Ministry of Health.
more on the Millennium Development Goals set for Pakistan.
The Health Policy 2001 set targets and a time-frame for each
21.7.1 The National Health Policy 2001 of the key areas identified, with a ten-year focus. In May
2003, the Ministry of Health published its Progress on Agenda
The Ministry of Health, Government of Pakistan, in its
for Health Sector Reforms document. This document gave a
National Health Policy 2001: The Way Forward-An Agenda
detailed up-date on each of the ten areas, showing what all
for Health Sector Reform, released in December 2001, laid
had been achieved as well as details of which steps had been
down its vision and key features of the Health Policy.
taken to achieve targets, such as vaccines received, LHWs
The government's new policy was based on the following
trained, contraceptives distributed, as well as information on
essential features: health sector investments were to be how much had been spent in different areas and who had
seen as part of the government's Poverty Alleviation Plan;
supported that funding. In addition, the May 2003 document
primary and secondary sectors were to get priority attention
highlights some new initiatives and National Programmes
over tertiary care; and, good governance was to be a pillar on
which had been, or were in, the process of being initiated.
which quality care was to be achieved.
The core focus of the Government of Pakistan's Health
In light of these broad goals, ten specific areas of reform
and Population Welfare sector rested on the support to and
were identified along with their implementation modalities.
strengthening of, the LHWs programme, the EPI programme,
These ten areas focused on:
and the strengthening of institutions with linkages between
• The reduction of the widespread prevalence of
different tiers of services. 67
communicable diseases, which include the EPI
According to a recent study, despite the fact there had
cluster of childhood diseases, Tuberculosis, Malaria,
been some progress over the last three decades in the
Hepatitis-B, and HIV-AIDS. Much of this emphasis
reduction of infant and child mortality; the extension of
was to be through the National EPI immunization
immunization coverage and there has been an improvement
programmes, and new national programmes were to
in the nutritional status of children, 'Pakistan today stands
 Chapter 21 The Social Sectors Ill 639

amongst those countries with the worst record in terms Table 21.18: Immunization Coverage by Income Quintile
of infant and child health and does poorly on most of (per cent of Children 12-23 Months)
these indicators in comparison with other South Asian
neighbours' .68 In addition within Pakistan, gender inequalities Income Quintile Urban Rural
in the provision of health care persist, as do differences in First 28 18
rural/urban location, and 'income-based disparities remain Second 34 21
and contribute directly to the deaths of many infants and Third 40 21
children each year'. 69 Numerous vertical programmes-those
Fourth 44 27
programmes that were administered and controlled largely
by the Federal Government, unlike most other health sector Fifth 60 27
initiatives which were the responsibility of Provincial and Source: Mahbub ul Haq Human Development Centre, Human
District Governments-included the Extended Programme Development in South Asia 2004: The Health Challenge
of Immunization, Diarrhoeal Control Programme, Malaria (Karachi: Oxford University Press, 2005), 186.
Control Programme, National AIDS Control Programme,
National Tuberculosis Programme, and the Child Nutrition
Programme. programmes deal with the following seven diseases: pertussis,
tetanus, diphtheria, poliomyelitis, hepatitis B, measles and
tuberculosis. Tables 21.16-21.18, which show the most
21.7.2 The Extended Programme of important and largest government intervention in an
Immunization attempt to control communicable disease, reveal a number
Perhaps the best-known and most successful of interventions of important facts. They show that there has been a steady
regarding communicable diseases by the government is increase in immunization coverage across Pakistan, except
the Extended Programme of Immunization (EPI) started in Balochistan, where there had been a decline. In urban
in the late 1970s; Tables 21.16-21.18 show the trends in areas there had been a sharp increase of coverage, although
the immunization rates over the last few years. ·The EPI in rural areas the coverage has stagnated since 1995. And,
programmes was successful up to the early 1990s, but then as we keep showing elsewhere in this Chapter, income (or
from '1992 to 1995 the EPI coverage declined to 50 per cent poverty) has a considerable impact on health related factors:
due to lack of funds and withdrawal of donor support'. 70 Table 21.18 shows that children from higher income quintiles
The number of outreach centres, vaccinators, and other have higher immunization coverage compared to those from
EPI related staff and facilities, have remained 'more or less lower income groups, where there is a significant difference
the same as in 1995'. 71 The government's immunization in immunization rates with respect to income, in urban
areas. Moreover, the relationship between non-health related
factors also shows up in this context, where women who
Table 21.16: Trends in Immunization Coverage in have higher literacy rates, and who tend to come from better-
Pakistan: 1980-2000 (per cent of Children 12-23 Months) off households, have the ability to afford the best quality of
Year BCG DTP3 POL3 Measles care for their children, and also ensure that their children
are immunized. 72 The government's EPI targets for 2005
1980 6 2 2
included the complete eradication of poliomyelitis and the
1985 62 30 30 38 elimination of neo-natal tetanus, and a reduction of all the
1990 80 54 54 50 other diseases which are part of the EPI. 73
1995 73 58 58 47 Apart from the EPI programme which formed a key pillar
2000 67 61 61 56 in the government's preventive measures in the control of
communicable diseases, the Malaria Control Programme,
Source: Mahbub ul Haq Human Development Centre, Human
Development in South Asia 2004: The Health Challenge
the National AIDS Control Programme, the National ARI
(Karachi: Oxford University Press, 2005), 186.
Control Programme and ·the National Tuberculosis Control
Programme constituted, along with the Lady Health Workers
Table 21.17: Immunization Coverage by Locality programme, the package to control communicable di_seases
(per cent of Children 12-23 Months) in Pakistan.
The National AIDS Control Programme was established
Region 1995-96 1998-99 2001--02 for the prevention and control of the spread of HIV infection
Pakistan 45 49 53 in the country. By April 2003, the total number of reported
Urban areas 50 64 70 HIV cases was 1785 and of AIDS 235; however, the World
Rural areas 44 45 46 Health Orga'nization/UNAIDS estimated that there were
Punjab 47 55 57 a total of 70-80,000 HIV positive cases in Pakistan. 74 The
Sindh 44 38 45 rriain interventions regarding the programme relate to the
NWFP 39 54 57 design and delivery of a defined package of services to the
Balochistan 56 34 24 vulnerable groups; the package included 'primary health care,
access to adequate .information and education, prevention
Source: Mahbub ul Haq Human Development Centre, Human
Development in South Asia 2004: The Health Challenge
and treatment of Sexually Transmitted Infections (STis), skill
(Karachi: Oxford University Press, 2005), 186. development and provision of Voluntary Counseling [sic.]
640 Issues in Pakistan's Economy

and Testing facilities'. 75 AIDS patients require Anti-Retroviral donor and Government of Pakistan funding. These were:
Therapy (ART), which delays the occurrence of death by a few Primary Health, Primary Education, Rural Water Supply and
years. Estimates in Pakistan show that 10,000 of the 70,000 Sanitation, and Family Planning and Population Welfare. 80
(as per UN AIDS estimates) sufferers of AIDS require ART, but After the three year SAPP I concluded, the government and
only 100 (0.1 per cent) received this treatment in Pakistan as the donors decided to launch SAPP 2 for a further period
of June 2003. 76 The cost of the annual ART treatment in the
form of Anti-Retroviral Drugs (ARV) has been reduced from
US$15,000 to US$140; the Government of Pakistan had also
decided to provide free access of ARV to HIV/AIDS patients
at the end of 2004. 77 However, the May 2005 Annual Report
of three years, with more or less the same areas of focus.
However, SAPP 2 had included a component of the TB
programme.
Originally, SAPP 2 was supposed to include a national
tuberculosis programme 'jointly sponsored and financed
I
of the Director General Health, stated that 'currently there is no by the Federal Government and the provinces/areas, with
mechanism in place in the country for procurement of anti- a focus on switching to the WHO-recommended DOTS
retroviral drugs by the government'. 78 approach for the treatment of TB. However, it has proven
The five-year Roll-Back Malaria (RBM) Programme part difficult to find a formula for sharing the costs of the
of the broader Malaria Control Programme had, as its overall programme between the Federal Government and the
objective, to achieve the WHO global RBM target of fifty provinces/areas'. 81 The proposed programme proposal was
per cent reduction in the malaria burden by 2010. There are rejected by the multi-donor Appraisal Mission because the
500,000 cases of malaria annually, and the cost of the RBM proposal was 'too limited, as it mainly focuses on treatment'.
plan was US$4.l million, which focuses on 43 high-risk Instead, a small Technical-Assistance TB component was
districts in all the provinces of the country. 79 added on to SAPP 2. This component included the following
elements: '(i) the development of a comprehensive national
21.7.3 The National Tuberculosis Control strategy for TB . . . which would incorporate the DOTS
approach, but would also consider wider issues such as
Programme health education/communication aspects, and involvement
The National Tuberculosis Control Programme (NTP) was of private sector; (ii) the preparation of a project proposal
initiated in 1996, and was supposed to run for a period of five for a comprehensive project to implement the strategy, to
years from 1996-2001. The targets for tuberculosis control be submitted to interested donors for possible funding; and
were a cure rate of an overly ambitious 85 per cent, and a (iii) ... the development of a few pilot projects related to the
case detection rate once the 85 per cent target cure rate had introduction of the DOTS approach'. 82
been reached, of 70 per cent. The strategy was supposed In some ways, the SAPP 2 component incorporating TB
to provide DOTS for all sputum smear positive cases. The differed little from the 1995 National Tuberculosis Control
implementation of the NTP was meant to be phased across Programme. However, the cost of the SAPP 2 TB proposal
the five years, with a cumulative population coverage of was a mere $260,000 or less than one per cent of the earlier NTP!
8.5 per cent in the first year (which was to be 1996 in the More importantly, however, not only did the TB component
original programme), 17 per cent by 1997, 37 per cent by of SAPP 2 not improve or add to the 1995/96 NTP, but in
1998, 71 per cent by 1999 and complete coverage by the 1998 (when SAPP 2 commenced), five years after WHO's
year 2000. By the year 2000, the Programme was supposed Global Emergency, the Government of Pakistan was thinking
to have an integrated set up as part of the structure of the primarily of 'the preparation of a project proposal', and a 'few
general health services of the country, decentralized to each pilot projects related to DOTS'. Most of the emphasis of the TB
of the 118 districts. The focus of the TB Control Programme component in SAPP 2, consisted of holding a number of
was supposed to be DOTS, provided by the health facility workshops and producing a draft document for (yet another)
nearest to the patient's home. When a patient was unable National TB Control Policy. With the end of SAPP 2 and with
to attend a health facility, a community supervisor would the launch of the NTP, the Programme was now operational in
provide DOTS at the patient's home. The cost of the National 79 districts and Lady Health Workers were mainly utilized to
Tuberculosis Control Programme in 1996, was estimated to provide door-to-door services. The NTP had brought down its
be $31.2 million. This Programme and its cost, were critically ambitious targets to 70 per cent case detection, an 85 per cent
dependent upon the existing health care structure across cure rate and an ambitious 100 per cent coverage of DOTS all
Pakistan. However, even after the WHO Global Emergency over the country by 2005; a reduction in tuberculosis-related
had been declared in 1993, Pakistan's Ministry of Health still morbidity and mortality by half, was also one of the overall
had a long way to go in terms of operationalising its National objectives of the NTP. 83
Tuberculosis Control Programme, the guidelines for which
were ready, but were lying wasted. If this was not already bad 21.7.4 The Lady Health Workers
enough, at the end of 1997, the Government of Pakistan, yet
again, decided to address the problem of tuberculosis, from Programme
a national level. The Lady Health Workers Programme was conceived in 1993
A donor-funded Social Action Programme Project (SAPP) and launched in April 1994 by the Government of Pakistan
was supported by the Government of Pakistan which under the name 'The Prime Minister's Programme for Family
commenced in 1993 and was completed in 1996-97. In this Planning and Primary Health Care', which was later changed
SAPP Phase 1, four areas had been identified which received to 'The National Programme for Primary Health Care and
 Chapter 21 The Social Sectors Ill 641

Family Planning', now usually known as the Lady Health growth monitoring; lower rates of childhood diarrhoea;
Workers (LHW) Programme. The LHWs Programme had and, more positive attitudes to family planning. Amongst
as its objective the public financing and provision of basic the weaknesses of the Programme that had been identified,
community health services to all rural villages and poor were: unrealistic targets for the number of employed
urban areas in the country. The objectives in establishing the LHWs; insufficient funds; quality control; management and
programme included the following: to address the primary supervision issues; and continued government support and
health care problems of the community, providing promotive, sponsorship from senior level officials. The evaluation also
preventive, curative and rehabilitative services to which the revealed that the quality of care offered by LHWs was variable,
entire population had effective access; bring about community with 'up to half of LHWs displaying weaknesses in different
participation through creation of awareness, changing of aspects of their professional knowledge'. However, the most
attitudes, organization and mobilization of support; improve serious deficiency with the Programme was identified as the
the utilization of health facilities by bridging the gap between shortages of drugs and contraceptives, with fewer than a
the community and health services through LHWs; and, quarter LHWs receiving their full allocation of these items,
expand the family planning services availability in urban low undermining the credibility of the entire Programme.
income areas and rural areas. The Programme was seen as a There is a valid understanding amongst many that through
key intervention in reproductive health/family planning at a well-functioning LHW Programme, up to 70-80 million
the local level, was meant to be gender sensitive, where more people throughout Pakistan, most of them poor, would have
women were not just the clients but were also employed, access to better health services. Through the intervention
and also focused on children. The LHW Programme was seen of the LHWs, family planning use would increase, more
to be a multifaceted, multi-purpose programme addressing children would benefit from oral rehydration therapy and
many of Pakistan's primary and basic health issues. can be treated in their homes for acute respiratory infections;
Around 100,000 LHWs were employed in the programme women are also expected to receive better ante-natal health
and there had been an annual increase in recruitment over the care. This pro-women and especially, poor women, focus is
years. 17,000 were recruited in August 2001 to fill vacancies emphasized since the LHW Programme is perhaps the only
and to expand the programme. 11,000 women working opportunity many women have to access preventive and basic
in basic health in the Ministry of Health under different curative care without having to leave their homes. Contact
programmes-particularly Village-Based Family Planning with LHWs in the community is also expected to bring about
Workers-were transferred to the LHW programme, and greater awareness related to health education and about
the programme finds mention-in fact, it is a key pillar-of immunization and other child-related issues. The population
both the government's National Health Policy as well as the coverage of the Programme increased from 30 per cent in
Poverty Reduction Strategy Chapter. The LHW is considered 1999 to 48 per cent in 2006.
to be a 'strong' national programme, much of which has

I
been financed up till recently, with small amounts of donor
money. However, since fiscal year 2000/01, allocations to the 21.8 INTERVENING IN THE HEALTH-
LHW programme have been insufficient covering only salary
costs. This means that without donor support, LHWs would POVERTY NEXUS: THE WORLD
have minimal supplies of contraceptives and medicines and HEALTH ORGANIZATION COMMISSION
supervision standards would have suffered. Clearly, the LHW
programme would have been under threat had donor support ON MACROECONOMICS AND HEALTH
not been forthcoming.
In this and the next Section, we suggest ways of intervening
Both the National Health Policy and the health strategy
in the health-poverty nexus, where we attempt to look at the
mapped out in the Poverty Reduction Strategy Paper (PRSP),
perspective of both, achieving high and sustainable growth
identify the LHW Programme (LHWP) as 'the primary means
in Pakistan while addressing issues of poverty reduction in
in the public sector of promoting and delivering preventive
light of health constraints and opportunities. This is done in
and basic curative health services within the community'.
two parts where, in this Section, we look at the broad, more
It also has a strong pro-poor focus and is meant to address
generic, conclusions drawn f~om the influential Report of the
gender inequities in health as well. An external evaluation
World Health Organization's Commission on Macroeconomics
of the LHWP was able to find evidence that the Programme
and Health which examines the link between health, poverty
'has been able to supply a service to individuals and a large
and economic growth, and also identifies economic and
proportion of these individuals are poor. Above all the LHWP
financial implications and requirements of trying to break the
has been able to buck the international trend by providing
ill-health-poverty nexus. In Section 21.9, we look at the case
a service that has had impact on health outcomes' .84 The
of Pakistan where we try to examine issues and ideas which
evaluation identifies the impacts that the LHWP has had
incorporate some of the main ideas of the Commission's
which include: a large and positive impact of childhood
Report, but also force us to rethink much conventional
vaccination rates; a large and positive impact on reversible
wisdom.
methods of contraception especially in rural areas, and on all
The Commission on Macroeconomics and Health (CMH)
methods of modern contraception in rural areas; an increased
was established by the Director of the World Health
uptake of antenatal services; the increased provision of
Organization in January 2000 to assess the place of health in
iron tablets to pregnant women; increased levels of child

l
642 Issues in Pakistan's Economy

global economic development. The Commission, comprised diseases and reproductive health, which would also result in
a number of economists, policymakers and public health improvements in care for non-communicable diseases.
specialists, and submitted its findings in November 2001. With the Millennium Development Goals (MDGs) now
This section presents the key features of the Report of the an important target and objective for the entire world and
Commission. 85 for each country to achieve, the CMH Report questions the
The Report focused mainly on the 2.5 billion people who optimism of those who argue that it is just a matter of time
lived in low-income countries and examined their health and before the mortality rates in the low-income countries would
demographic profiles. This forty per cent of the population converge with those of the rich countries. The Commission
had far lower life expectancies and far higher age-adjusted Report argued that the existing and worsening burden of
mortality rates than the rest of the world, in some cases by disease in low-income countries would slow the economic
very significant extents. For most of these .countries and growth that is presumed to solve the health problems-
their governments, the most critical public health task was to there is a crude relationship which shows that as economic
reduce these high mortality rates, to control communicable growth takes place, the burden of disease changes and
diseases and to improve maternal and child health. In the diseases of poverty are done away with and replaced
these populations of low-income countries, the main causes by non-communicable diseases. Further evidence suggests
of avoidable death were HIV/AIDS, malaria, tuberculosis, that economic growth is very important and perhaps even
childhood infectious diseases, maternal and perinatal necessary, but is not sufficient and far from enough on its
conditions, micronutrient deficiencies, and tobacco-related own. The evidence for this is revealed by the fact that health
illnesses. Health specialists believed· that if these conditions indicators vary widely across the same income level. In 2002,
of disease and ill-health were control1ed along with enhanced the MDGs for infant mortality were lagging for 73 countries,
programmes of family planning, poor families-which make while 66 countries were far behind for meeting the MDGs for
up the bulk of these countries-would not only enjoy longer child mortality.
lives which are healthier and more productive, but they would In dealing with the specific issue of the ability of low-
also choose to have fewer children since they would realize income countries to afford to fund the health systems out
that their children would survive and they would invest far of their own resources, the Commission examined whether
more in the education and health of each child. Women .in these countries could eliminate wasteful spending in health
poorer countries and poorer communities are particularly and other areas, and found that while waste does exist and
vulnerable, having to bear the burden of diseases as well needs to be addressed, it is poverty which imposes a basic
as having to care for the family and in most cases, to earn financial constraint. Poor countries were required to improve
income, often as the sole earner. Many of these illnesses have health-sector management, review the tilt and emphasis of
a higher burden on the conditions of women and if they were existing health-sector programmes, and were expected to find
eliminated or reduced, the health and well-being of women ways and means to raise domestic resources specifically for
would also be considerably improved having numerous the health sector. The Commission believed that on average,
positive consequences on their own lives and those of their low- and middle-income countries must increase their health
family. Moreover, the close link between health, illness, outlays by 1 per cent of GNP by 2007, raising it a further
and the ability to work, suggests that the reduction in the 2 per cent by 2015 compared to existing levels. There was
incidence of these common and preventable diseases, would also a need to make public spending better targeted towards
translate into higher incomes, higher economic growth and the poor with priorities set on specific epidemiological
reduced population growth. and economic evidence. Proposals for prepaid community
Given the epidemiological profile of the low-income financing schemes replacing private-out-of-pocket spending
countries, it is not surprising that the Corrimission focused in some cases were also recommended. Nevertheless, there
mainly on communicable diseases and maternal and perinatal was the realization that in order to meet MDGs, there was
health. However, due to the demographic and epidemiological going to be a considerable resource gap in some cases, which
transition, non-communicable diseases (NCDs) are gaining only donors could fill.
further importance in poor and low-income countries, while While the Commission advocated greatly increased
for middle-income and growing countries, communicable investment in the health sector, it also stressed the need for
diseases cause fewer deaths than do non-communicable complementary additional investments in areas which have
diseases which have now become the highest priority for an important impact on poverty alleviation as well as on
health and policy interventions. Many of the common NCDs health. A more holistic approach related to poverty alleviation
such as cardiovascular disease, diabetes, mental illness and which included a focus on water, sanitation, education and
cancers, can be effectively addressed by relatively low-cost agricultural improvement, was supported because they all
interventions, especially using preventive actions relating to made significant contributions to the health sector and to
diet, smoking and lifestyle changes. The Commission Report health status. A .critical element of the core insight of the
argued that while it recognizes global trends and phenomena, Commission's Report was the central importance of public
each country needs to analyse its own health priorities health for poverty reduction and economic growth. Public
based on detailed and continually updated epidemiological investments in health had to be raised significantly before
evidence. The Report argued for an outcome-oriented health any impact on the health outcomes could be expected.
system where approaches were required to scale up the Another of the key findings of the Commission of
health system to provide interventions for ·coinmunicable Macroeconomics on Health of the WHO has been the
 Chapter 21 The Social Sectors Ill 643

compelling empirical findings and evidence, which most of development cannot be overemphasized. Health is a
people intuitively arrive upon, that better health for the cornerstone of economic growth and social development.
poor was not only an important goal in its own right, but While this relationship between health (or more
could act as a major catalyst for economic development and importantly, ill-health) poverty and underdevelopment is
poverty reduction. There is a close and intrinsically determined clear, the not so surprising finding is that poorer countries
relationship; which flows in all directions, between health, poverty with low-income and low-development, have far fewer
and economic development. This is a much researched and financial resources in general, and for the health sector, in
empirically founded relationship which shows that the particular. The Commission had also provided evidence that
poor are likely to be ill more often than the non-poor the level of spending oi;i health in low-income countries
and that on account of their poverty (and ill-health) the was insufficient to address the challenges that they face.
country's economic development would remain unfulfilled. A minimum level of financing needed to cover essential
At a personal/individual or household level, even if the interventions, including HIV/AIDS, of between US$30-40 per
poor were able to find work and earn some income, the capita was required, in contrast with actual levels of spending
fact that they were more than likely to be unhealthy and of the order of US$13 per person in the least developed
ill on account of their poverty, would hamper their ability countries and US$24 in other low-income countries. Clearly,
to work efficiently and thus they would get wages at below the ability to fund minimum required spending levels to cater
their potential and below their marginal productivity level. for a substantial and vulnerable population, is beyond the
Similarly, while the poor were likely to be ill, the chronically scope of many countries showing a very clear resource gap.
ill and those suffering from the main killer and debilitating The WHO Commission on Macroeconomics and Health
diseases in low-income countries like HIV/AIDS, malaria and argued that: 'we believe that it is feasible, on average, for low-
tuberculosis, were likely to be poor since, on account of their and middle-income countries to increase budgetary outlays
illness, they would not have the physical ability to get work for health by 1 per cent of GNP by 2007 and 2 per cent of GNP
or perform work adequately. by 2015'. It is important to emphasize that the WHO feels
In more macro terms, it is not surprising to find this high that at least an additional one per cent of GNP should be spent
correlation between poverty, ill-health and underdevelopment. on health over the next four years and another additional one
The poverty/disease nexus causes underdevelopment and per cent between 2007-15. By that account, Pakistan would
constrains economic growth. For economic growth to take need to increase its current health sector spending by 143 per
place and reach the potential of any country, it is necessary cent in the immediate case, and 285 per cent by 2015. The
that this nexus be broken, either by improvements in .health CMH Report suggested that on average developing countries
status of the people, particularly the poor, by better service need to spend US$23 per capita annually on the health sector.
delivery, better targeting and a host of other factors; or/and, Pakistan, spending US$16, would need to find an additional
poverty needs to be reduced and eliminated so that once out US$7 per person-,-about US$1 billion, from both private and
of poverty, individuals can have better health and play a far public sources-to reach that minimum target.
more productive role in economic development. Ideally, and On the face of it, this huge increase seems an impossibility
as the Commission on Macroeconomics and Health argues, given Pakistan's past history of having to balance its income
poverty reduction and health improvements should take and expenditure patterns. Pakistan's annual budget consists
place together and simultaneously: poor countries cannot largely of interest payments and military expenditure, with
afford and either/or. very little left over for development purposes. Hence, the
There are numerous direct and indirect costs associated quite dramatic fall of development expenditure over the
with ill-health, and include the loss of personal income years since the 1980s. However, as we argue elsewhere-
and national income, as well as under-investment in see Chapter IS-Pakistan's economic situation changed
children's education and reduction in the sources of resource dramatically after 9/11, largely because Pakistan received
mobilization. Continuing disease episodes of workers considerable concessions on its outstanding debt having an
adversely affect the productivity of firms, which increases impact on interest payments. Debt rescheduling, re-profiling
the costs of production. Evidence has shown that a healthy and debt write-off gave Pakistan an unprecedented room to
labour force, which is also better paid, improves the capacity manoeuvre and made resources available which would have
of the firm to compete in the international market. otherwise gone to repay loans. 86
The Commission on Macroeconomics and Health It was this 'fiscal space' that had been created which was
shows that poverty would be more effectively reduced if Pakistan's biggest window of opportunity and may have been
investment in other sectors was increased as well. The need the one major possibility and opportunity for Pakistan to
for complementary investments in education, water and redress its social sector deficit and fill the social sector gap.
sanitation and other sectors that will have an impact on In some ways, this new found fiscal space since 2003, was
health is clearly recognized in the Commission's Report, more than sufficient to plug the gaps in the social sector and
taking a more holistic approach to both poverty eradication increase spending as per WHO guidelines mentioned above.
and to improving the health profile. There is a. clear and It was clearly possible for the Government of Pakistan to
unambiguous impact of all effective and successful poverty- provide the additional 1 percentage point of GDP required
reduction efforts on health, while the role of health is for the health sector as per the CMH guidelines. This was
fundamental to the success of sustainable development inconceivable prior to 9/11 and if there was ever a need for a
efforts. The need to position health centrally to any efforts clear understanding in government of the urgency in meeting
644 Issues in Pakistan's Economy

the social deficit, this was perhaps the best opportunity options of interventions in the health-poverty nexus. It raises
to come Pakistan's way in many years. By wasting this the key question that given the close link between the two,
opportunity, the Musharraf-Shaukat Aziz government did whether interventions should come in the health sector or
a grave injustice to the people of Pakistan, particularly the under the more general rubric of poverty alleviation-see also
poor who make up one-third of the population. Since the Chapter 22. The most important points that emerge from the
windfall of 9/11, things have deteriorated further, in terms data and discussion from earlier sections, can perhaps best be
of fiscal space and government inability to spend. As we summarized as follows.
show in Chapter 10, the tax-to-GDP ratio and the increasing Almost four times as many people visit private health/
debt and interest payments, limit the amount available for medical practitioners than the government health facilities,
development, a figure which has fallen markedly over the a trend that has risen in recent years. Even the poor and the
last few decades. extremely poor, contrary to expectations, also overwhelmingly
Pakistan is faced with a crisis not just in the health sector, access private sector facilities, both in rural and urban areas.
but more broadly related to unacceptably high rates of poverty Clearly, the private sector dominates the medical/health
and growing rates of unemployment. Hence, every issue that sector structure and model in Pakistan. However, in the
is related to either health, poverty or development will have case of preventive care, the main responsibility Hes with the
an impact on each other. A poverty-reduction strategy which public sector and the for-profit private sector is restricted
is able to lower the poverty rate will have many externalities, primarily to curative care. There is a strong relationship
not least, improving the health status of the population. A between poverty and ill-health, where the poor tend to be ill
multisectoral policy is required to tackle all issues related to for longer and suffer a greater burden of disease related to
development, poverty and health care. communicable and preventable diseases. This relationship
While the tax-to-GDP ratio in Pakistan is amongst the between the disease profile and poverty is reinforced through
lowest in the world, we do not advocate a blanket tax on the relationship between poverty and non-medical factors that
the entire population even if it were to be used specifically have an impact on well-being. At the same time, non-medical
for the health sector since the burden of indirect taxes falls factors also have an impact on health and disease, showing
unequally on the poor. Instead, better tax management a close relationship between health, poverty and factors
and scrutiny can raise additional resources from existing such as education, water and sanitation, housing, etc. While
government revenue sources-see Chapter 10. Moreover, if there are regional and class disparities in the health sector,
taxes need to be raised so that the health sector budget can be women tend to suffer the greater brunt of these inequalities.
increased, it is far preferable to raise additional revenue from Moreover, many of the non-medical interventions that can
the rich and subsidize the poor. Increased direct taxation is improve health outcomes, are related to women. It is in these
one obvious way forward, as is the taxation of profit-making broad parameters in which intervening in the health-poverty
health services and facilities which abound in urban centres nexus needs to be rethought.
across Pakistan. Perhaps the most common intervention, which almost
Probably the most important precondition for Pakistan anyone who deals with the social sector in any developing
meeting its resource gap and filling its social sector gap country would suggest, is that proposed by the World
is the political commitment required from policymakers. Health Organization's Commission on the Macroeconomics
In order to provide additional resources for the health of Health as discussed in Section 21.8. An increase in
sector-without which it is not possible to accomplish funding to the health sector is presumed to be a minimum
the Millennium Development Goals-policymakers at the requirement for any improvement in health outcomes; the
federal and provincial levels need to be required to make assumption is that the funds being spent are just not enough
firm commitments for additional funding. The relationship and they ought to be increased. Along with this, there is also
between poverty, health, and underdevelopment needs a the recommendation made that there is far greater need for
deeper understanding by policymakers so that they realize better governance and administration related to delivery, i.e.
the urgency in addressing these problems. If the health issue that with the increased financial allocation, there should be
is not addressed soon, poverty will persist and will not fall better monitoring of that money and that there should be
to manageable levels and the high growth rates targeted greater participation by those who deliver and those who use
and required for development will not be forthcoming. health services, etc. All such recommendations are, perhaps
Policymakers need to be convinced that by increasing justified in a generic sense for almost all countries. The
spending on the health sector, development will increase and argument is that such interventions, even if they do not make
there will be greater welfare for the people. matters very much better, will probably not make matters
much worse.
If poverty is said to result in conditions that also give rise
21.9 RETHINKING INTERVENTION IN THE to ill-health and ill-health causes individuals and households
to persist in (or slide into) poverty, one needs to make
HEALTH-POVERTY NEXUS: HEALTH, an intervention in order to break this closely connected
OR POVERTY? relationship. It is necessary to assess whether poverty
alleviation interventions are more productive or whether
The concluding section of this chapter, makes a departure investing in health improvement mechanisms will bring
from the one prior to this and reconsiders possibilities and about better and faster returns, in terms of both, poverty
 Chapter 21 The Social Sectors Ill 645

reduction and improved health status. Moreover, there is a investments, such as immunization, health education, and
need to examine the nature of health outcomes based upon drinking water and sanitation facilities. The private sector
interventions in the health/medical side, compared to those providing curative care could do with far greater monitoring
based upon non-medical interventions. Given limited and of standards and quality. By spending far more on preventive
competing resources, there is a need to decide whether, for measures, the government would also be able to reduce
example, a Basic Health Unit needs to be set up near a village, many of the communicable diseases which afflict the poor,
or whether a school requires more rooms and teachers for improving their health and allowing them to move out of
girls, or whether the immediate goal would be to reduce poverty, and hence, reduce their need to seek assistance for
water-borne diseases such as diarrhoea and dysentery by medical care in the first case.
providing clean drinking water to a community. While all It is largely accepted that poverty breeds ill-health and
these interventions deal with the health sector alternatively, ill-health maintains and perpetuates poverty, and the
there might be valid arguments which emerge where poverty relationship between the two is far closer than that between
alleviation should be the main focus rather than health- say, education and poverty. 87 If indeed this is the case, then
related interventions. Arguments could be made which it is surprising that while there is considerable research and
suggest that there might be a need to develop an employment growing understanding about poverty in Pakistan, there is
programme, provide a food subsidy, provide microcredit, neither the recognition that the poverty-ill-health relationship
or develop a food-for-work programme in preference to deserves in government or academic circles, and perhaps
(perhaps costlier) health-related interventions. One would therefore, there is neither the data nor research undertaken
need to ask whether there was any point in constructing yet to understand issues critical in the health sector. As we show
another Basic Health Unit when not many of those who are in earlier sections, the data on disease and other aspects
ill will actually end up using it? Before such choices are made, of health care are incomplete, often incorrect, and highly
there is a need to undertake some research into the costs and insubstantial in order to clarify issues in order to intervene in
returns from a wide menu of options, and there is a need to the health sector precisely, cheaply and effectively.
) rethink many of the assumed solutions to chronic problems. One reason why there has not been any innovative
If the poverty-ill-health relationship is the main focus, then rethinking about health delivery and about ways of improving
there is a need to understand how and why it is created health outcomes independently and those related to poverty,
and thrives, and then examine where best to break this is because not enough data exists which would allow us to
relationship. Such choices will require considerable amount do so. For example, in a country where the private sector
of expertise and research where informed and cost-efficient dominates the health care model by a ratio of 4:1, there is
choices must be made. next to no reliable data regarding the private sector in health
Although the blanket recommendation to increase funding care. How then can one make plans for the health sector or
for the public health sector is made by all experts and given the close link between the two, for poverty alleviation?
politicians, the trend seen in Pakistan and elsewhere of If the entire discussion regarding reforms in the health sector
users moving away from the public sector to private sector is made around the small and diminishing public health/
health/medical care, might not be reversed despite increased medical sector, and all interventions relate to the sector
funding. Should the government under such circumstances, which has a minor role to play in health outcomes, it is
increase funding to the health sector-most of which goes on perhaps not surprising that Pakistan's health profile remains
salaries and is directed towards tertiary care--even when the as bad as it is.
poor prefer to seek care from the market? Perhaps increased In order to make policy decisions and interventions
funding at the margin would be highly cost-inefficient and regarding either poverty or ill-health in Pakistan, it is
it could be that funding may not be the main constraint high time that the close relationship between the two was
to greater utilization of health facilities. The little research acknowledged. Once this is recognized, it would then be
that has been undertaken on the health sector shows, that necessary to understand how both perpetuate or prolong
many people prefer to go to private doctors even when they each other and to disentangle the nature of the links and
know that the service provided will not be much better than relationships between the two. This would require far greater
that provided free of charge at government outlets. It is data and research which looked at the health sector and
quite possible that financial issues might not be the main brought it in line with the research on poverty and brought
constraint to increasing utilization, and an overhauling of health squarely into the poverty framework. Perhaps only
the governance system in the health.sector, resulting in better then can one make choices between health interventions
service to the clients, might be a more cost-effective choice, and/or poverty interventions, or between preventive health
though more difficult to implement. care and tertiary level care, between increased spending in
If an increase of funding in the health sector is not the public health sector or a restructuring of its governance
necessarily going to bring about improvements in the structure. In order to meet its Millennium Development Goals
utilization rate of health services, perhaps it would be better sooner rather than later, and to address many uncomplicated
to spend the existing and enhanced funds in different manner issues related to either poverty or to disease, it is imperative
altogether. If the private sector dominates in terms of curative that there is a major rethink regarding policy options. Until
care, it might be more useful that the government funds then, it is improbable that neither poverty, nor the ill-health
are spent primarily on preventive and non-medical related related to it, will be alleviated.

J
646 Issues in Pakistan's Economy

chapter shows, if the poor are more vulnerable to ill-health

21.10 SUMMARY AND FURTHER READING
and to disease, a focus on poverty alleviation would also help
in improving their health profile since both, poverty and
21.10.1 Summary health, are so closely tied. The chapter also makes the case
The main argument in this chapter is that health is a for research in the health sector which focuses on issues
multidimensional concern and should not be looked at of public health, since data constraints and the absence of
in isolation. The chapter makes the link between poverty health-related research are serious impediments to solutions
and health, demonstrating how so many issues related to issues related to the sector.
with poverty----or those related to ill-health-are actually
interlinked with each other. This is especially the case 21.10.2 Further Reading
with regard to women and girls where, education, literacy,
women's empowerment, and housing, all determine health As the chapter argues, there is insufficient research on

j
and poverty. By educating girls, for example, one increases the health sector in Pakistan, and hence, few publications.
their life-chances and improves their health and subsequently However, some publications worth studying include the
of their children. The same interventions also help women, following: Talib Lashari, Pakistan's National Health Policy:
and hence households, to get out of poverty. Quest for a Vision (Islamabad: The Network Publications,
2004); Mahbub ul Haq Human Development Centre, Human

l
Although demands are made to increase government
spending on the health sector, most of the expenditure in the Development in South Asia 2004: The Health Challenge (Karachi:
health sector takes place in the private sector, even amongst Oxford University Press, 2005 ); AG Tinker, Improving Women's
the poor. This is a reflection on the state and quality of Health, Human Development Network, Health, Nutrition
public sector health facilities and delivery, and as in many and Population Series, (Washington DC: World Bank, 1998);
other sectors, shows how government facilities have failed. World Bank, Pakistan: Towards a Health Sector Strategy, Report
While the private sector caters to the needs of a majority, No 16995-PAK (Washington DC: World Bank, 1998); S Akbar
as in education, it is not adequately monitored or regulated Zaidi, The Political Economy of Health Care in Pakistan (Lahore:
and quality control is lacking. There is a need to improve the Vanguard, 1988 ); and Sania Nish tar, Chocked Pipes: Reforming
quality of care provided by the government and major reform Pakistan's Mixed Health System (Karachi: Oxford University
in public sector health care is an urgent requirement. As the Press, 2010).

NOTES
1. This chapter is based on Zaidi, S. Akbar's, The Poverty-Health
Relationship in Pakistan, Pakistan Poverty Assessment Update,
6. It is worth pointing out that different data sources give
different sets of statistics regarding the very basic data. The
l
Background Paper Series, Background Paper 6 (Islamabad: data for Pakistan in this table differs from that shown in
Asian Development Bank, November 2005). other tables.
2. For a list and for reviews, see for example: Zaidi, S. Akbar, 7. The total burden of disease is defined as the loss of healthy
An Annotated Bibliography of Poverty in Pakistan (Islamabad: life in the form of premature deaths and disability due to all
UNDP, 1999); Naqvi, Zareen F, Review of Literature on Poverty episodes of disease and injuries occurring in a given year.
in Pakistan, mimeo (Islamabad: World Bank, 2000); and The total burden of disease in Pakistan is estimated by the
Arif, G. M., Poverty, Economic Growth and Inequality: A Review World Health Organization to be 350 Disability Adjusted Life
of Pakistan's Poverty Literature, mimeo (Islamabad: Asian Years (DALYs) per 1000 population per year.
Development Bank, 2005). 8. See Asian Development Bank, Poverty in Pakistan: Issues,
3. Note that in this Chapter, we focus on issues of the health Causes and Institutional Responses (Islamabad: ADB, 2002). In
sector and the relationship between ill-health and poverty a section entitled 'Characteristics of the Poor', numerous
and not with the large number of issues dealing with attributes of the poor are listed and some of the 'key
poverty- which have been addressed in detail in Chapter characteristics of the poor' include their education,
22. demography, assets and sources of income, dependence on
4. Amongst the more recent publications which examine the women's Jabour, and their vulnerability to environmental
health care system in Pakistan, see, Mahbub ul Haq Human degradation. It is noticeable that there are no health/disease
Development Centre (MHHDC), Human Development in South related characteristics mentioned which just accentuates
Asia 2004: The Health Challenge (Karachi: Oxford University the problem we have been talking about.
Press, 2005 ); Lashari, Talib, Pakistan's National Health Policy: 9. Although this table is almost three decades old, it is still one
Quest for a Vision (Islamabad: The Network Publications, of the better sources of data available. Current data of this
2004); and World Bank, Pakistan: Towards a Health Sector nature is no longer collected.
Strategy, Report No 16995-PAK (Washington DC/Islamabad: 10. Tinker, A.G., Improving Women's Health, Human Development
World Bank, 1998). Network, Health, Nutrition and Population Series
5. This data are drawn from different sets of UNDP and World (Washington DC: World Bank, 1998), cited in Mahbub
Bank data bases. ul. Haq Human Development Centre, Human Development
 Chapter 21 The Social Sectors Ill 647

in South Asia 2004: The Health Challenge (Karachi: Oxford 42. Ibid. 104.
University Press, 2005 ), 179. 43. Brenzel, Logan and S. Akbar Zaidi, Methods in the Cost
11. Mahbub ul Haq Human Development Centre, Human Study of Health Services in Pakistan, mimeo (Washington DC/
Development in South Asia 2004: The Health Challenge (Karachi: Islamabad: World Bank, 1996 ). The World Bank's Pakistan:
Oxford University Press, 2005 ), 180. Health Sector Strategy, Report No 16695-PAK (Washington DC:
12. Ibid. World Bank, 1998 ), makes extensive use of this study and is
13. Ibid. more easily accessible than the original study.
14. Ibid. 44. Zaidi, S. Akbar, 'Tuberculosis in Pakistan: Social, Economic
15. Pakistan Medical Research Council, National Health Survey and Policy Concerns', in Meulemans, Herman (ed.),
of Pakistan: Health Profile of the People of Pakistan, Islamabad, Tuberculosis in Pakistan: The Forgotten Plague (Leuven, Belgium:
1998, cited in Hussain, Akmal, Pakistan: National Human Acco, 2000).
Development Report 2003 (Karachi: Oxford University Press, 45. World Bank, Pakistan: Health Sector Strategy, Report No 16695-
2003 ), 19-20. PAK (Washington DC: World Bank, 1998), 23.
16. Cited in Hussain, Akmal, op. cit., 69. 46. The reason why we look at the case of tuberculosis in
17. Hussain, Akmal, op. cit., 20. some detail here, is because it is one of Pakistan's main
18. Ibid. diseases, afflicts a large number of people, is rather simple
19. Ibid. 69. (and relatively inexpensive) to treat, and because a larger
20. Pakistan Medical Research Council, National Health Survey number of non-clinical socio-economic studies have been
of Pakistan: Health Profile of the People of Pakistan, (Islamabad: conducted on tuberculosis than on most other diseases in
PMRC, 1998), 4. Pakistan. This section of the chapter is drawn from Zaidi,
21. Ibid. 4. S. Akbar, 'Tuberculosis in Pakistan: Social, Economic and
22. The reasons why women visit health/medical care Policy Concerns', in Meulemans, Herman (ed), Tuberculosis
practitioners more often than men relate to a number of in Pakistan: The Forgotten Plague (Leuven, Belgium: Acco,
factors. For one, reproductive health and child-bearing 2000).
issues result in increased contact for women than men; and, 47. These countries are Brazil, Indonesia, Iran, Mexico,
women also take children to health/medical facilities and Philippines, The Russian Federation, South Africa and
may they also consult during the same visit. See Ibid. 4. Thailand.
23. Ibid. 6. 48. These are Afghanistan, Ethiopia, India, Myanmar, Nigeria,
24. Ibid. Pakistan, Sudan and Nigeria. Of these eight low income
25. It is very probable that this proportion has increased very countries, Pakistan is the richest in terms of per capita GDP.
substantially over the last decade as the provision of doctors 49. These six are: Brazil, Ethiopia, India, Indonesia, Nigeria
has increased. and Pakistan; Source: World Health Organization, Global
26. Ibid. 10. Tuberculosis Programme, Internet Web Pages.
27. Ibid. 13. 50. National HMIS Cell, Government of Pakistan, Ministry of
28. World Bank, Pakistan Poverty Assessment (Islamabad: World Health, Tuberculosis in Pakistan Assessed Through National HMIS
Bank, 2002), 64. (Islamabad: October 2001 ), 4.
29. Hussain, Akmal, op. cit., 70. 51. MHHDC, op. cit., 2005, 30.
30. Mahbub ul Haq Human Development Centre, Human 52. See Zaidi, S. Akbar, op. cit., 2000, 66 passim. The Karachi
Development in South Asia 2004: The Health Challenge (Karachi: Anti-TB Association had calculated the cost of medication
Oxford University Press, 2005), 179. per day to be Rs.15 and Rs.4,500 ($100) for the full course
31. Perhaps what is even more surprising is that in India's case, of treatment. All prices are FY 2000 prices.
the proportion is even higher at 83 per cent; moreover, data 53. While the rupee costs would have increased, it would still
from India shows that 93 per cent of hospitals and 63 per probably be approximately accurate to suggest a figure in the
cent of hospital beds are in the private sector. The private range of $90-100 for tuberculosis medication. However, the
sector in India accounts for 82 per cent of all outpatient care per case total budget available for the national tuberculosis
at the all-India level and 56 per cent of all inpatient care. See programme in Pakistan is only US$27-see MHHDC, op cit.,
Ibid. 165. 2005, 30.
32. Hussain, Akmal, op. cit., 69. 54. The reason why these costs are low and why there is so
33. Asian Development Bank, op. cit., 25. much variation at different tiers is because these costs were
34. Ibid. actually incurred. Hence, these costs would be registered even
35. World Bank, op. cit., 36. if treatment was given for a week rather than for the full
36. Ibid. nine month course of treatment for tuberculosis.
37. Ibid. 55. The Brenzel and Zaidi study included health system costs.
38. See Arif, G. M., op. cit., and Gazdar, Haris, Scoping Paper: The 56. See Vikram Pathania et al. TB Patients and Private for-profit
Determinants and Drivers of Poverty Reduction in Rural Pakistan, HealthCare Providers in India, Global TB Programme (Geneva:
mimeo (Islamabad: Asian Development Bank, 2005). WHO, 1997).
39. Even in this case one can add that charity and other means 57. Katherine Floyd et al. 'Comparison of Cost Effectiveness
of social support might be available to those who are more of Directly Observed Treatment (DOT) and Conventionally
generally excluded. Delivered Treatment for Tuberculosis: Experience from
40. MHHDC, op. cit., 186. Rural South Africa', British Medical Journal, vol. 315, no. 29,
41. Government of Pakistan, Pakistan Economic Survey 2011-12 November 1997.
(Islamabad, 2005), 100.
648 Issues in Pakistan's Economy -

58. Saunderson, P. R., 'An Economic Evaluation of Alternative 74. Ibid. 9.

Programme Designs for Tuberculosis Control in Rural 75. Ibid. 10.
Uganda', Social Science and Medicine, vol. 40, no. 9, 1995. 76. MHHDC, op. cit., 111.
59. Government of Pakistan, Pakistan Economic Survey 2004-05 77. Ibid. 112.
(Islamabad, 2005), 40. 78. Government of Pakistan, Annual Report of the Director General

I
60. See MHHDC, op. cit., 2005. Health 2002-2003 (Islamabad: Ministry of Health, 2005 ), 10.
61. Ibid. 79. Ibid., and MHHDC, op. cit., 187.
62. MHHDC, op. cit. 188-9. 80. On Social Action Programme, see, Social Policy and
63. Ibid. 189. Development Centre, Review of the Social Action Programme:
64. It is very likely that the authors of the MHHDC Report, August 1997 (Karachi, 1997).
Human Development in South Asia 2004: The Health Challenge, 81. Appraisal Mission, Aide Memoire: Second Social Action Program
mean untrained, rather than 'traditional'-hakims, Project (Islamabad, 11 October 1997), V-31.
homeopaths, etc.-practitioners. 82. Ibid. V-32.
65. The rural total does not add up to 100; it is not clear where 83. See Zaidi, S Akbar, op. cit., 2000, and Government of
the missing numbers are. Pakistan, Annual Report of the Director General Health 2002-
66. Unless otherwise stated, much of this Section draws from 2003 (Islamabad: Ministry of Health, 2005).
the MHHDC Report, Human Development in South Asia 2004: 84. Oxford Policy Management, External Evaluation of the National
The Health Challenge, op. cit., 2005. This Report has a detailed Programme for Family Planning and Primary Health Care: Final
Chapter on Pakistan in which Government programmes are Report (Islamabad, 2002).
documented in detail. 85. This section is based on documents of the World Health
67. See Ministry of Health, National Health Policy 2001: The Organization (WHO) and in particular, WHO, Macroeconomics
Way Forward-Agenda for Health Sector Reforms (Islamabad, and Health: Investing in Health for Economic Development
December 2001 ), and Ministry of Health, Progress on Agenda (Geneva: World Health Organization, 2001 ).
for Health Sector Reforms (Islamabad, May 2003 ). 86. See: Zaidi, S Akbar, 'Pakistan's Economy After 9/11: Will
68. MHHDC, op. cit., 173. the End be Different this Time Around?' Occasional Paper No.
69. Ibid. 6 (Cambridge: Centre of South Asian Studies, University of
70. Ibid. 185. Cambridge, 2004).
71. Ibid. 87. An uneducated person will still be able to get a job to move
72. Ibid. 186. him out of poverty, but an ill person might not be able to
73. Government of Pakistan, Annual Report of the Director General overcome his debility to be in a position to acquire even
Health 2002-2003 (Islamabad: Ministry of Health, 2005 ). subsistence level funds.
 Part8

Poverty and
Inequality
Poverty still remains a highly controversial theme in Pakistan's economy. While we
know that poverty exists in Pakistan, the highly politicized and silly secrecy about
its extent and nature-the poverty numbers-makes it difficult to understand the
magnitude of that poverty. Fortunately, some scholars have been able to move beyond
the facile debate surrounding poverty in Pakistan, and have helped us understand how
and why it persists. Rural poverty continues to dominate while urban poverty may
have fallen over the last few years, and many scholars argue that unless wide-ranging
agrarian reforms-including land reforms-are undertaken, poverty will remain a
permanent problem in Pakistan.
Even if poverty falls, issues of regional and income inequality afflict many
Pakistanis and have political causes as well as consequences. The absence of a well-
functioning taxation system which taxes the large amounts of wealth and incomes of
many Pakistanis, allows the rich to get richer, and for inequality to persist. Those with
no or few assets and intermittent incomes will continue to be discriminated against
in the absence of active social intervention and public policy. With development
expenditure falling and with growth rates well below adequate levels, neither poverty
nor inequality will be eliminated.
 Poverty: Trends, Causes,
and Solutions

Towards the middle and late 1980s, there was ample Nor does the chapter make any comment on the methodology
evidence available to confirm the perception that there was employed in estimating poverty lines and trends, and nor
a continuous decline in poverty in Pakistan, for almost two does it get into the process of estimating and presenting new
decades, and at times quite dramatic a decline. However, numbers about poverty in Pakistan. 3
early in 1990s, there were some concerns which suggested What this chapter covers are the broad trends that have
that perhaps that decline had slowed down, or had even emerged in the incidence of poverty over the last fifty years,
been reversed. The question raised by researchers in the and attempting to explain these trends. 4 In particular, it
mid-1990s was whether poverty had returned to Pakistan, looks in greater detail at the three or four years in the mid-
a question which was answered in the affirmative by l 980s when poverty fell sharply and gives reasons for this
the wide recognition and consensus, that poverty was on reduction. This period is contrasted with that of the 1990s,
the increase, even though data was still lacking to make when poverty rose almost as dramatically as it fell. This
definite and precise claims. 1 Later, the availability of data contrast and explanation helps in understanding whether
and interpretations and analysis of macroeconomic trends poverty reduction in Pakistan took place under special
substantiated those earlier claims. Based on those trends, conditions and whether those conditions are likely to be
since the end of the 1990s, there was ample evidence replicated, an issue which also emerges with regard to the
that poverty continued to persist in Pakistan, and in fact, special conditions after 9/11 when poverty fell-see Chapters
worsened considerably since the mid-1980s. The question 18 and 25. In addition, we discuss the current nature and
which was asked at that time was whether poverty had causes of poverty in Pakistan, and a critical evaluation of
become a permanent feature of Pakistan's economic and government policies in redressing these poverty trends is also
social reality, notwithstanding attempts at poverty reduction. undertaken. Finally, in light of the causes by which poverty
While these questions were being asked at the end of the fell and the current efforts at poverty alleviation, we attempt
1990s, major developments took place in Pakistan's-and the an answer to the question: Can poverty in Pakistan ever be
region's-political economy, which had a profound effect on eliminated?
numerous factors, including poverty-see Chapters 18 and
25 for some of these developments. With regard to poverty,
the government of President General Pervez Musharraf 22.1 WHAT DOES POVERTY MEAN?
and Shaukat Aziz made the claim and presented ample
sets of data, which showed that poverty had fallen sharply, The Pakistan Human Condition Report prepared by the
throughout the decade of the 2000s, certainly up to 2007/8, now defunct Centre for Research on Poverty Reduction and
and may be even after that. There has been a vibrant and Income Distribution (CRPRID), a Planning Commission
polarized discussion about the poverty numbers from the unit, brought out a highly depressing picture of the nature
last decade, an issue which is also discussed in this chapter. of poverty in the country, focusing on the condition of
This chapter, based on a review of trends regarding poverty education, health and institutions. It showed that at least
incidence over the last five decades raises many issues on 6 million children between the ages of five to nine years
poverty in Pakistan. The emphasis will be on an examining were out of school; of the remaining 14 million children at
the reasons why income and poverty fell in the 1970s and that time, quality education was available to only a small
1980s, and why it began to rise in the 1990s, as well as a minority; about 55 per cent of the 10+ year age population,
review of the new debate in the 2000s. If we can explain was illiterate under a criterion of literacy which is not even
and understand the reasons for these trends, it would be basic under the UNESCO definition. Even with this sub-basic
helpful in answering our question, i.e. is poverty a permanent level ofliteracy, 80 million citizens were illiterate. If functional
phenomenon in Pakistan's economic and social life? At the literacy were the criterion, then the illiterate population
outset, it is important to clarify the scope of this chapter and, would be over 100 million. In addition, the participation rate
more importantly, to emphasize the areas it does not cover. at the university level was 3 per cent of the 17-23 year age
This chapter does not present a review of literature in the group compared to East Asia and Organization for Economic
conventional sense, identifying previous studies which have Co-operation and Development (OECD) countries, where
looked at some of the many aspects of poverty in Pakistan, this rate was over 30 per cent. There was, and continues to
simply because there have been a number of excellent and be, a huge gender gap in this sub-basic literacy along with a
detailed recent studies and reports which have done this. 2 rural-urban gap.
 Chapter 22 Poverty: Trends, Causes, and Solutions 651

In Balochistan the female literacy rate at that time was cent of the female adult population was illiterate, and the
9 per cent, while in Punjab, Sindh, and NWFP the male under five mortality rate ( a statistic which reveals a great deal
literacy rate was around 72 per cent; the mortality rates for about the quality of life) in Pakistan was the highest in South
infants, children and mothers, was high by regional and Asia, higher even than Bangladesh and Nepal.
world standards. Due to the very high maternal mortality Clearly, all standard indicators of social and economic
rate of 400 per 100,000 live births, the sex ratio in Pakistan exclusion and differentiation showed that poverty was quite
was 108 males to 100 females. For Balochistan, this ratio was severe in · Pakistan. Yet such definitions were extremely
115 males to 100 females-see Chapters 19 and 20 for more insufficient to capture broader meanings of poverty, which
recent numbers, as well as a discussion on the Millennium should include issues of justice, rights, participation and
Development Goal targets. equality, essentially all forms of social and economic
These basic indicators, based on a very broad and general exclusion, usually based on unequal material relations and
definition of poverty, would suggest that poverty was quite their manifestation of inequitable power. While in this
high in Pakistan at the end of the 1990s. This meaning of chapter we discuss largely issues related to economic and
poverty can be further delineated by looking at some key income poverty, the underlying themes of justice, equality and
deprivation statistics. For example, 45 per cent of Pakistan's power have to be understood and recognized. Box 22.1 gives
population does not have access to adequate health care, a brief definition of how poverty has been conceptualised in
while 40 per cent did not have adequate drinking water and Pakistan.
55 per cent were denied sanitation facilities. Seventy-five per

Box 22.1 official poverty line (OPL), there was no uniform methodology
Defining and Measuring Poverty, Poverty Lines, for estimating this. The Planning Commission decided that
the official poverty line for Pakistan will be estimated on
and Calories 2350 calories per adult equivalent per day. This is based
S. M. Naseem shows how the issue of measurement and on an adult equivalent intake of 2150 calories in the urban
the quantification of the poverty line has been central for areas and 2450 calories in the rural areas. The poverty line
researchers. Excerpts: for Pakistan for FY1999 on this basis has been defined at
Rs. 670 per capita per month. (11)
. . . A basic problem confronting all researchers is how . . . Although the statistical base of most studies has
to define poverty and whom to include in the category of been the Household Income and Expenditure Survey
the poor. Traditionally, poverty is defined in terms of some (HIES) data set-produced continually by the Federal
measure of monetary income considered adequate for Bureau of Statistics (FBS) since FY1964, and with greater
subsistence. However, income in monetary terms may frequency in the 1990s, the variations in the empirical
not be an adequate measurement of living conditions results have stemmed from both differences in the methods
of poor populations. Besides the known problems with of data processing and in the operational definition of
the measurement of household income, there is often a poverty. With the adoption of the OPL, it was expected
significant amount of non-monetary transactions, out-of-the- that controversies about poverty estimates, would tend
market transfers, access to public services, and production to diminish. Unfortunately, this has not happened and the
for self-consumption which may become more important official estimates have been questioned, both from within the
than straightforward income, as measured in standard Government and outside. (12)
household surveys. . .. The Planning Commission, after due deliberation and
Until recently, much of the work on poverty measurement consultation, notified in 2002 the official poverty line (OPL),
had been centred around the concept of income (or which was based on a threshold caloric intake requirement
consumption) poverty. Admittedly, this is a rather narrow of 2350 calories per adult equivalent per day. This dietary
concept and does not capture the multi-dimensionality intake requirement of 2350 calories translated through tthe
of the poverty syndrome. However, once one tries to Engel curve relationship into a poverty line of Rs. 673 per
move towards a more comprehensive treatment of poverty, capita per month in 1998-99 prices and was to be updated
both the conceptual and measurement problems become by the CPI for the year in which the HIES/PSLM was
more formidable and the tension between satisfactory conducted. This poverty line in caloric terms was broadly
conceptualisation and accurate measurement tends to consistent with those used by earlier studies, although
increase. (8) considerably higher than Naseem's (1973) and Ercelawn's
. . . The most commonly used standard for the (1988) in adult equivalent terms. (14-15)
measurement of income or consumption related poverty, . . . The main suspect of the Pakistan Poverty Puzzle is
involves calculating a poverty line (based on some minimum the elusive task of choosing an appropriate poverty line.
acceptable level of consumption) and estimating the Numerous attempts have been made to arrive at reasonable
proportion of population below that line. Until 2001, when poverty lines for Pakistan. The two approaches. used are
Pakistan's Planning Commission decided to establish an the calorific approach and the basic needs approach.
652 Issues in Pakistan's Economy

The former gives primacy to the need for providing a diet basic needs rather than on nutritional requirements alone.
fulfilling a specified calorific value considered necessary to However, while it is true that nutritional needs are not the
survive while the latter explicitly recognizes the importance only one that are important in determining the household
of a variety of other non-food needs such as housing, poverty status, it is difficult to refute that they are the most
health, education, transportation, clothing and other needs. important human needs at least in a poor country like
Although both the definitions have their advantages and Pakistan. Even in the calories based approach, there is an
downsides, the former is easier to calculate while the latter implicit arbitrariness in increasing the level of calorie intake
has the advantage of being more easily comprehensible. considered for survival. However, the long period of reduced
While it is possible to have a little less of housing, clothing, calorie intake can cause incapability or functioning.
or transportation services, it is much more difficult to Recent controversies about the varying estimates of
survive without food intake below the specified calorific poverty based on different poverty lines have raised
requirements, even though the body could adapt reduced serious questions about the sanctimony, uniqueness or
calorific intake in the short run-as marathon fasts-unto- infallibility of the concept [Krishnaji (2012)). The poverty line
death have shown. The two poverty lines generally do not corresponding to an attainable minimal bundle of goods and
differ a great deal in terms of monetary value at constant services for a normative subsistence level is at best a loose
prices. For instance, a poverty line of 2100 calories per concept and non-operational except in a very limited sense.
capita was valued at Rs. 31.4 per month in 1959-60 prices Since the question, 'who (an expert group, a public statutory
when inflated to reflect 1991-92 prices was valued at Rs. 15. body or an international organization) is to set the norms
(17-18) and how it has to be done' (in terms of the disaggregation
of commodities, regions and social groups) cannot be
answered to the satisfaction of all, any poverty line referring
Choice of Poverty Line
to a minimal bundle has to be subjective and arbitrary. It
A crucial step in poverty measurement is the choice of a is arbitrary, moreover, because in practice the normative
poverty line. A basic problem confronting all researchers minima are never clearly specified; indeed it is difficult to do
is how to define poverty and whom to include in the so even if we restrict ourselves to, say, food, clothing, shelter
category of poor. Traditionally, poverty defined in terms of and access to education and healthcare. Consequently,
some monetary measure of income considered adequate all procedures to derive a poverty line-however well-
for persistence. In recent years, the World Bank has intentioned and assiduous-are inevitably arbitrary, based
popularised the definition of poverty in terms of $1 per capita on questionable assumptions.
per day or in case of a more inclusive definition of poverty If the total household expenditure level at which a
of $2 per capita per day. Inevitably this is a rather simplistic specified calorie intake norm is satisfied in per capita
definition of poverty which ignores differences in nutritional terms is chosen as a basis for setting the poverty line, it is
requirements, housing standards, educational aspirations assumed that at that level other minima are also attained so
and other basic needs and rights of individuals. that households with expenditures below that level may be
In Pakistan, Naseem's definition of the rural poverty line regarded as poor [Haq and Bhatti (2001)). Other procedures
at a per capita expenditure of Rs. 250 per year (58.5 paisas relying wholly on expenditure data are equally artificial,
per day) at 1959-60 prices and for the urban poverty line at bearing little relation to the different dimensions of poverty.
per capita expenditure of Rs. 300 per year or 82 paisa's per Another element of arbitrariness arises when a base level
day at 1959-60 prices for rural areas and Rs. 375 per year at poverty line is adjusted upwards to allow for increases in
1959-60 prices was generally accepted by later researchers. prices from year to year [Anwar (2006)). It is not easy to
The rural poverty line was based on the Report on Agriculture construct price indices for different classes of consumers.
Workers in Pakistan which considered Rs. 300 per capita per Given the near impossibility of making operational the
month to be not much above the subsistence level. concept of a minimum subsistence level, it is no wonder that
Naseem in his later study for ILO [Naseem (1977)) the constructed poverty lines are subject to much criticism.
estimated the poverty line by using a calorie base approach (21-23)
to infer the consumption expenditure from a specified level
of calorie intake. This was done by regressing the amount Source: Naseem, S. M., A Review of Studies on Poverty in
of calories · per day on the amount of total expenditure Pakistan: Origin, Evolution, Thematic Content and Future
per person. Other authors have preferred a more direct Directions, History of PlDE Series-6 (Islamabad: Pakistan
estimation of the poverty line based on the satisfaction of Institute of Development Economics, 2012).

22.2 TRENDS IN POVERTY allowance determines that poverty line. 5 While comparison
between different sets of figures derived by different scholars
Most of the studies which estimate trends in poverty levels is quite problematic, t).1is has been the norm for most
and poverty incidence in Pakistan, use a headcount measure comparisons-see Appendix 22.1 on estimating poverty
under an arbitrarily defined poverty line. The poverty line lines. 6 Table 22.1 presents a number of sets of estimates of
itself is usually based upon the concept of consumption the extent of poverty across time, estimated by different
poverty, where a minimum daily recommended calorie studies.
 Chapter 22 Poverty: Trends, Causes, and Solutions 653

Table 22.1 For the moment, however, let us examine the trends in
Trends in Poverty poverty incidence rather than the scale and magnitude of
1A Proportion of Poor (Headcount %)
the incidence of poverty in Pakistan. 7 The Table confirms
the view that poverty first rose in the 1960s, after which it
Year Total Rural Urban saw a continuous decline until around 1987/88, after which,
for the most part, there was another rise in the incidence of
1963---64 40.24 38.94 44.53 poverty in the country. However, a study by Haris Gazdar,
1966---67 44.50 45.62 40.96 Stephen Howes and Salman Zaidi8 (which was one of the
1969-70 46.53 49.11 38.76 Background Papers on which the influential World Bank
1979 30.68 32.51 25.94 Pakistan Poverty Assessment Report of 1995 9 was based),
1984-85 24.47 25.87 21.17 along with the MHCHD/UNDP study, showed that the
1987-88 17.32 18.32 14.99
declining trend in poverty was seen to continue, albeit at
1990-91 22.11 23.59 18.64
1992-93
a slower pace, into the 1990s. Nevertheless, and problems
22.40 23.35 15.50
1996-97 31.00 32.00 27.00 of data and measurement notwithstanding, almost all of
1998-99 32.60 34.80 25.90 the then literature on poverty in Pakistan suggested that
there was a growing 'consensus' that poverty had increased
18 Incidence of Poverty (%) since the early, and most certainly, since the late, 1990s. IO
Moreover, despite different measurements and estimates,
Year Total Rural Urban there was almost complete agreement on the impressive
decline in poverty during the period 1969-70 to 1979, a
1975 35.5 49.8 19.0 drop of almost 16 percentage points over the decade, and an
1980 27.7 36.2 11.8
equally impressive fall of 13 percentage points in the next
1985 9.4 15.2 7.4
decade, until 1987/88. Moreover, in the 1980s, the period
1990 12.4 19.0 4.8
1995 14.7 23.1 2.6 1984/85 to 1987/88 showed a drop in poverty by more than 7
percentage points using Panel IA from Table 22.1, and almost
1C Proportion of Poor (Headcount %) 9 points as seen in Panel IC.
Another noticeable trend from Table 22.1 is the more or
Year Total Rural Urban less consistent fall in urban poverty throughout the last fifty
years. Although only 23 per cent of the population lived in
1984-85 46.0 49.3 38.2 cities in the early 1960s compared to more than sixty per cent
1987-88 37.4 40.2 30.7 today, this decline in urban poverty has continued even when
1990-91 34.0 36.9 28.0
there was a rise in rural poverty. However, the dramatic fall in
1993-94 28.6 33.4 17.2
poverty in the 1970s was attributed to the huge reductions in
1998-99 32.6 35.9 24.2
rural poverty which accounted for a much larger proportion
1D Proportion of Poor (Headcount %) of the population and of the poor. The data from Panel lB,
in fact, shows that poverty in urban areas in the mid- l 990s,
Year Total Rural Urban had virtually been eliminated. 11 Table 22.2 shows some of the
earliest work on poverty estimates in Pakistan, starting with
1986-87 26.9 29.4 24.5 Professor S M Naseem's seminal work in 1977. Table 22.3
1987-88 26.4 29.9 22.7 shows us a provincial distribution of poverty incidence in the
1990-91 23.3 26.2 18.0 1990s, while Box 22.3 shows us that even within provinces,
1992-93 20.3 22.5 16.8
in this case the Punjab, there is a great deal of differentiation,
1993-94 20.8 24.4 15.2
an issue which is discussed further in Chapter 23.
If we examine trends in income distribution, we observe
Source: 1A: Planning Commission, Government of Pakistan,
that during the 1960s when there was high growth and
Human Development and Poverty Reduction Strategy,
(Islamabad, April 1999), and Government of Pakistan,
poverty increased, the Gini coefficient fell from 0.355 to 0.33
Pakistan Economic Survey (Islamabad: various issues). improving the distribution of income for both urban and
1B: Social Policy and Development Centre, (Karachi: rural areas-see Table 22.4. 12 In the 1970s, there was again an
SPDC 1998); 1C: World Bank (Washington DC: WB, inverse relationship between poverty and income distribution,
2002); 10: MHCHD/UNDP (Karachi: OUP, 1999). with the latter improving and the former worsening. Both the
1980s and the 1990s saw poverty and income distribution
moving in the same direction, with poverty falling in the
The percentages presented in Table 22.1, and the numbers 1980s and income distribution improving; the decade of the
that they reveal, are critically important especially when i 990s had the opposite trends. Currently, income distribution
the Government of Pakistan acknowledged the fact that in based on the Gini coefficient was worse than what it was
2003/4, there were almost 50 million people ( 32 per cent of in the early l 960s. 13 Not only that, but the concentration of
the population) or 7.5 million households that fell below income has also worsened in recent years, with the income
the poverty line. After 2008 or so, there has been a huge share of the highest twenty per cent increasing over time,
controversy about the extent and proportion of the poor in with that of the lowest twenty per cent falling. Many people,
Pakistan, and there is no agreed estimate-see Box 22.2.
654 Issues in Pakistan's Economy

Box 22.2 of people living below the poverty line declined from 22.3 per
Intrigue and Accusation: The Debate over
Poverty Numbers during the Musharraf Years
cent in 2005-06 to 17.2 per cent in 2007-08. Both rural and
urban poverty also registered declines from 27 per cent to
20.6 per cent and 13.1 per cent to 10.1 per cent, respectively
l
S. M. Naseem writes about the allegations and disputes about during the period. These results were presented to the
poverty numbers in Pakistan in the 2000s and after. Excerpts: planning commission in March 2009-one year after the new
government took charge of state of affairs, causing it some
Recently, in a deja vu of earlier controversies, there has public relations unease in accepting that poverty had declined
been a heated debate on the poverty estimates comparing so rapidly during the Musharraf years.
the situation before and after the 2008 elections and the The Planning Commission demurred at these results and
end of the Musharraf regime. The Planning Commission's asked for their validation by the World Bank. The World
estimates based on this methodology showed that poverty Bank assigned two experts, Nobu Yoshida and Tomayuki
had increased from 30.6 per cent in 1998-99 to 32.1 per cent Sho, to undertake the validation exercise, who presented
in 2000-01. The CRPRID re-estimated the poverty incidence their findings to the Planning Commission on 29 May 2009,
for 2000-01 on the basis of a revised methodology as 34.6 per endorsing the CPRSPD estimates and recommending their
cent. Its estimates for 2004-05 showed that poverty incidence official release by the Government. While the Government ,
had declined to 23.9 per cent, indicating a ten percentage balked, World Bank released these poverty numbers through
point reduction in poverty during the first five years of its report titled 'Partnership Strategy' [World Bank (2010)],
Musharraf regime. In order to confirm the rather sharp decline dated 30 July 2010. The Report stated that 'Pakistan saw an
in the reported poverty figures, the Planning Commission hired impressive decline in poverty during 2001-02 to 2007-08; the
the services of Professor Nanak Kakwani of Australia for a third share of the population living in poverty halved, down from
party validation of the Centre's estimates. Professor Kakwani 34.5 per cent in 2001-02 to 17.2 per cent in 2007-08. Both
validated the estimates for 2000-01 and 2004-05 as well as urban and rural areas saw significant reductions.' The Report
the figures for 2005-06 which indicated a marginal decline attributed the decline in poverty to the 'growth in real per adult
to 22.3 per cent from 23.9 per cent in the previous year. The consumption expenditures and declining inequality during
World Bank was also invited by the government to validate 2005-06-2007-08. Key human development indicators of
the estimates and in its May 2008 report, the Bank endorsed educational attainment, health outcomes and unemployment
the CRPID/Planning Commission estimates. The CRPRID also rates corroborate these trends through 2007-08'.
estimated poverty incidence for 2007-08 using the HIES of that In contrast, the Panel of Economists headed by Dr Hafiz A.
year and found that the number of people below the poverty Pasha, had found in April 2008 that 35 to 40 per cent of the
line had declined by more than five percentage point to 7.2 per population was living below the poverty line in 2007-08-up
cent in 2007-08 compared to figures in 2005-06. from 22.3 per cent in 2005-06. The estimates were based on
The figure of 17.2 per cent for 2007-08, the last year of preliminary data for 2007-08 ....
the Musharraf regime also raised political eyebrows. The ... The absence of any firm survey data on consumption
new civilian government, elected in February 2008, asked expenditures since 2008-09 has been a serious handicap
the World Bank to send their expert to validate the estimates for analysts of poverty in Pakistan, as well as for international
of the Centre, as on the previous occasion. The World Bank organizations. To overcome this difficulty the HIES for the year
team again endorsed the CRPRID estimates by replicating the 2010-11 was completed in 2011 and its results were finalised
results from raw data of PSLM 2007-08 which, surprisingly last year. The Government had not released the survey results
gave exactly the same poverty estimates (17.15 per cent for till mid May 2012.
national, 10.1 per cent for urban and 20.6 per cent for rural
areas) as the results from HIES. Source: Naseem, S. M., A Review of Studies on Poverty in
By using the Pakistan Social and Living Standards Pakistan: Origin, Evolution, Thematic Content and Future
Measurement Survey (PSLM) for the year 2007-08, CPRSPD Directions, History of PIDE Series-6 (Islamabad: Pakistan
estimated poverty for 2007-08. They found that the number Institute of Development Economics, 2012), 15-17.

including economists, do not understand the relationship space created which allowed government to spend more,
between poverty and income inequality and often confuse the increasing private investment, even foreign aid which was
two. Box 22.4 throws some light on the issues. In Chapter 23, distributed in Pakistan, it was probable that poverty fell in
we discuss further issues of income inequality in Pakistan. Pakistan. Anecdotes and professional reports by economists
In the decade of the 2000s, a major controversy emerged argued that the high growth was resulting in lowering
with regard to poverty levels in the country. As we show growth, that the 'trickle down' phenomenon was at work.
in Chapter 18 on the macroeconomics of the Musharraf Nevertheless, the scale and extent of poverty reduction in
period and after, growth rates for the period 2002-7, were Pakistan was aggressively contested and debated, to · the
particularly high and despite accusations of a false, bubble extent, that since 2008, the government which came after the
boom, per capita incomes rose considerably in this period. Musharraf-Shaukat Aziz one, has ·refused to publicly declare
For many other reasons, such as higher remittances, the fiscal its own estimates of poverty In Pakistan in the absence of
 Chapter 22 Poverty: Trends, Causes, and Solutions 655

Table 22.2
Survey of Poverty Estimates

Poverty
1963/4 1969/70 1971/2 1978/9 1984/5 1987/8
line

Naseem (1977) (1959/60 Rs)/capita

Rural 250 43 36 19
300 61 60 58
Urban 300 55 35 25
375 70 59 63
Alauddin (1975) (1959/60 Rs)/capita
Rural 250 57 36 42
300 67 61 65
Urban 300 50 30 42
375 71 60 62
Naseem (1977) % of 2,100 cals RDA
95 72 68 74
92 54 46 55
90 45 36 43
Mujahid (1978) % of 2,100 cals RDA
Rural 250 27 35
300 40 48
Urban 300 36 29
375 52 46
lrfan and Amjad (1984) (1979/80 Rs)/capita
Rural 109 41 55 41
95 32 43 29

Krujik and Leeuwen (1978/80 Rs)/HH

Rural 700 73 51
Urban 700 50 30

Malik (1988) (1984/85 Rs)/capita

Rural 159 37 44 29 24
172 43 51 35 29
Urban 185 40 34 24 19
207 49 43 31 26

Ahmed and Allison (1990) (1979 Rs)/capita

Rural 100 25 20
Urban 110 20 16

Malik (1991) 2,550 cals RDA

Rural 21 16
Urban 11 7

Source: Kemal, A. R. and Moazam Mahmood, 'Poverty and Policy in Pakistan', in Banuri Tariq (ed.), Just Adjustment: Protecting the
Vulnerable and Promoting Growth (Islamabad: UNICEF, 1992), 51.

alternative data our understanding is that poverty fell very indicators of educational attainment, health
significantly in the Musharraf period, although income outcomes, and unemployment rates corroborate
distribution probably worsened. We concur with the World these trends through 2007/08. 14
Bank's assessment, where it states that:
These findings suggest that in 2007/8, poverty in Pakistan
Pakistan saw an impressive decline in poverty may have been at its lowest ever, at 17.8 per cent, with urban
during 2001/02-2007/08: the share of the poverty down to a mere 10 per cent of the population. Despite
population living in poverty halved, down the absence of official data since 2008, it is also safe to
from 34.5 per cent in 2001/02 to 17.2 per cent speculate that poverty must have risen over the period 2008
in 2007/08. Both urban and rural areas saw to 2013. The reasons for this are numerous, and include the
significant reductions. This progress was made high and persistent inflation in Pakistan, particularly food
possible by growth in real per adult consumption and fuel inflation which reduced purchasing power, a marked
expenditures and declining inequality during slowing down in the economy for numerous reasons, the
2005/06-2007/08. Key human development
656 Issues in Pakistan's Economy

Table 22.3 22.3 WHO ARE THE POOR AND WHERE

Poverty Trends by Province
Do THEY L1vE?
Province FY93 FY94 FY97 FY99 2011
Some of the salient features of poverty in Pakistan can be
Urban Areas 20.7 16.3 16.1 22.4 35.75 summarized as follows:
Punjab 22.0 18.1 16.9 25.5 35.30
Sindh 17.3 11.8 12.0 16.1 32.36 1. Rural areas have an unambiguously higher rate of poverty
NWFP 25.3 26.9 27.2 29.2 48.90 than urban areas for a wide range of poverty lines as Table
Balochistan 31.8 16.8 23.0 24.3 48.00 22.1 shows. The incidence of rural poverty is highest
among those who own no land and over 40 per cent of
Rural Areas 28.9 34.7 30.7 36.3 37.31 landless household are poor and together constituted 70
Punjab 26.5 33.9 28.3 36.0 34.86 per cent of the rural poor.
Sindh 29.5 31.8 19.6 34.7 39.92 2. As Table 22.3 shows, in 1999 rural NWFP had the highest
NWFP 37.0 40.0 43.4 44.9 40.23
head-count ratio (i.e. percentage of people considered
Balochistan 28.1 37.9 42.5 22.5 44.95
poor) with 45 per cent.
Overall 26.6 29.3 26.3 32.2 36.79 3. North Punjab has a smaller incidence of poverty than
Punjab 25.2 29.5 25.0 33.0 35.00 Sindh, which is better off than southern Punjab-see
Sindh 24.1 22.6 15.7 26.6 36.27 Table 22.3 and Box 22.3.
NWFP 35.5 38.1 41.2 42.6 41.71 4. Across the country as a whole, head-count ratios fell from
Balochistan 28.6 35.5 38.4 22.8 45.68 46 per cent in 1984/5, to 37.4 per cent in 1987/8, and to
34 per cent in 1990/1; between 1984/5 and 1987/8, the
Source: Asian Development Bank, Poverty in Pakistan: Causes head-count ratio fell by 18.6 per cent, while it fell by 9.1
and Institutional Responses (Islamabad: ADS, July 2002, per cent between 1987/8 and 1990/1. After the end of the·
12. For 2011: Jamal, Haroon, Predicting Sub-national 1980s there had been a marked increase in poverty.
Poverty Incidence for Pakistan, Research Report 85
5. The gender structure of income is significantly linked to
(Karachi: SPDC, 2013).
poverty, but household size and dependency ratios are
not.
consequences of the war on terrorism-see Chapter 25-and 6. The poor had the lowest earners per household; female-
the floods in 2010 and 2011, resulting In lower agricultural headed households, or households reliant on women's
output. However, to what extent poverty may have risen, is income, were likely to fall into poverty. The poor have a
completely unknown. See also Appendix 22.2. much higher proportion of female-headed households;

Box 22.3 the NWFP, while rural central Punjab had the same level of
Regional Pattern of Poverty in the Punjab poverty (35 per cent) as rural Sindh.
Important lessons can be drawn from this pattern. Northern
There is considerable diversity in the level of poverty in the Punjab, which has the lowest level of poverty in the country,
rural and urban areas within provinces as well, but only is agriculturally a poor region with the lowest cultivated area
the sample for the Punjab is large enough to generate per capita, and no irrigation. On the other hand, southern
poverty estimates for regions within the province. Punjab has Punjab, despite its highest cultivated area per capita and 100
been divided into three regions: Northern Punjab (including per cent irrigation, is one of the poorest regions in the country.
Islamabad, Rawalpindi division, and the district of Mianwali), One reason for this seemingly contradictory outcome is that
central Punjab (including Sargodha, Faisalabad, Gujranwala, rural areas in northern Punjab on the other hand, are closely
and Lahore divisions) and southern Punjab (including Multan, integrated with their urban centres, and have strong linkages
Dera Ghazi Khan, and Bahawalpur divisions). There are with the services sector. Also the people of the region have a
substantial differences in poverty levels in the three regions. long tradition of employment in the public sector, particularly
The incidence of poverty is consistently the lowest in northern in the armed forces, as well as in-country and overseas
Punjab and the highest in southern Punjab, both in the rural migration. In contrast southern Punjab is the least urbanized
and urban areas. In FY1999, urban poverty was the highest in region in the province, and mobility of local people in search of
the country in southern Punjab (35 per cent), and almost three jobs outside the region or overseas has traditionally also been
times more than in Northern Punjab. Urban areas in northern limited. It appears that, even more than agriculture production,
Punjab had the lowest level of poverty in the entire country, non-farm employment opportunities, urban-rural linkages,
while rural northern Punjab had the lowest level of poverty (29 agrarian structure and labour mobility, in which literacy can
per cent) among the rural areas of the country. Poverty in rural play an important role, are amongst the key determinants of
southern Punjab (39 per cent) was not significantly I.ewer than rural poverty in the country.

-- ____ j
r--
Chapter 22 Poverty: Trends, Causes, and Solutions 657

Table 22.4 this poverty is due to gender discrimination, the male-

Trends in the Gini Coefficient female income ratio being 17 in rural areas and 16 per
cent in urban areas.
Year Total Rural Urban 7. In the rural areas, the poor are predominantly share-
croppers. They own the least land, are the smallest
1963/64 0.355 0.348 0.368 landlords, and have not shifted to modern forms of lease
1966/67 0.351 0.314 0.388
contracting. The lack of asset ownership is both a cause
1968/69 0.328 0.293 0.370
of poverty-since assets generate income-as well as a
1969/70 0.330 0.295 0.361
1970/71 0.326 0.273 0.359 consequence of it-because ownership is the result of past
1971/72 0.344 0.309 0.381 investment. Rural poverty has a very strong link with unequal
1979 0.375 0.319 0.380 land ownership and the lack of access to land.
1984/85 0.428 0.345 0.379 8. In the urban areas, the poor have a low share of income
1985/86 0.355 0.330 0.354 from manufacturing, and earn most of their income from
1986/87 0.346 0.312 0.357 construction, or in the services sector.
1987/88 0.348 0.307 0.366 9. The poor earned only 29 per cent of their income from
1990/91 0.407 0.410 0.390 wage employment, compared to 38 and 32 per cent for
1992/93 0.390 0.367 0.384
the middle and upper income groups; the poor were also
1993/94 0.400 0.40 0.350
more dependent on gifts and remittances, making them
1996/97 0.400 0.41 0.380
1998/99 0.410 0.40 0.330 more dependent on others.
2001/2 0.411 0.357 0.439 10. The rural poor spent 80 per cent of their budgets on the
2004/5 0.407 0.347 0.428 four essentials-food, rent, energy and apparel-while
2010/11 0.410 0.380 0.411 the middle and upper income groups spent 74 and 66
per cent, respectively. Likewise, in urban areas, the poor
Source: MHCHD/UNDP, (Karachi: OUP, 1999, 85 for 1993/94, spent 82 per cent on these items, compared to 76 per cent
1996/97 and 1998/99; Government of Pakistan, Pakistan by the middle income group and 70 per cent by the upper
Economic Survey 2002-03, (Islamabad, 2003), 50. For income group. Both in relative and certainly in absolute
2001 /2, 2004/5, 2010/11, see Jamal Haroon, Pakistan terms, the poor have less to spend on other commodities,
Poverty Statistics, Research Report No. 84, SPDC, which include essentials like health and education.
Karachi, 2012.

Box 22.4 at the same pace, and they may even change in opposite
·. Are Poverty arid Inequality 'the Same Thing? directions. ·
A decrease in poverty is not always accompanied by a
,. Many people, even.academics, believe that if there is poverty decrease in inequality; it may in fact be accompanied by
, Jn a.country,. it:follows that there is inequality as well. There an increase in it. Conversely, an increase in poverty may be
· is an as~umption made by them which equates both. This is accompanied by a decrease in inequality overall, although
incorrect as.poverty andinequality are two distinct concepts. examples of this may be difficult to find in the contemporary
There can be a·great deal of wealth in one country with little world. The aim of policymakers concerned with social
poverty,'.,yet .. a great deal of inequality. Saudi Arabia is one welfare has in general been to bring about simultaneously
example of this. Similarly, countries which are very poor in a reduction in both poverty and inequality, although this has
income terms at least, can be less inequitable and more equal proved difficult to accomplish.
· · than· rlcti countries. Some of the earlier socialist states, such Jhe divergence of views regarding the relationship
as.Cuba;come to mind. Andre Beteille, one of India's leading between poverty and inequality is largely due to the fact that
sciciol~gist~~1~~ds some light on this issue below. there are different conceptions of poverty and different kinds
of inequality. There is a relative and an absolute concept of
'" ,,, .•TJ6,~1(;;nterested in social theory rather than social · poverty, and that there are many kinds of inequality besides
/:,,; ;0'polic'ffie6"ognize that the relationship between poverty and those of income and expenditure. Those who use an
. ;4: '',inequality'is neither clear nor direct. Poverty and inequality absolute concept of poverty find it easier to delink poverty
' ;}Jie:,analytibally, distinct c'oncepts. They vary independently and inequality, particularly when their concern is mainly with
,l;ff;•etcli~:otheft and it is misleading beyond a point to treat inequalities of income and expenditure. On the other hand,
., · arker of. the other. It is no argument to say those who adopt a relative concept of poverty tend to argue
is~a:·:highi inciaence •of poverty inequality thafthere is a close if not inextricable relationship between
spi'efili~1t5rr6ontrary examples may also inequality and poverty.
• ..•· . hEt•"stDdyof}both poverty and i~equality has
,:1~,~~eh, 1y;'~§s6ciated V.:ith. <1n,interest in economic and Source: Beteille, Andre, 'Poverty and Inequality', Economic
·. : ;,,sgciai"~~h'!Hge''.~s~t' poterty ,:g~a inequality do not change and Political Weekly, vol. 38, no. 42, 2003, 4456.
: ' ,," ~
 658 Issues in Pakistan's Economy

One reason why there are regional variations in poverty is increase in poverty during Pakistan's Development Decade.
that poverty depends greatly on natural and infrastructure In one of the very few papers that explain and analyse
endowments, on the distribution of resources within a (rather than merely document) poverty in the 1960s, M. Irfan
region, and on the structure of the economy. Institutional and Rashid Amjad, 17 provide an explanation for the rise in
structures and arrangements, and regional policy variables, rural poverty. The main argument raised by the authors, is
both in the private sector and due to public policy, also that the reason for high levels for poverty in the 1960s well
influence poverty. Issues specific to regional poverty are into the 1970s were to be found in the significant changes
discussed in Chapter 23. in the agrarian structure, especially the size distribution
of landholdings which were said to have had important
repercussions for the rural occupational distribution of
22.4 EXPLAINING THE TRENDS IN POVERTY households. New technology was a key factor, which allowed
large landowners to resume land previously rented-out for
1960-88 self cultivation. Tenant farmers were hence evicted, and
had either to operate smaller landholdings, or then join the
In much of the literature that has examined poverty trends
ranks of the landless labourers. Although there was greater
in Pakistan, a key concern has been the relationship between
agricultural growth on account of technological innovation,
economic growth and poverty. Although most authors have
at the same time, the conditions of those evicted did probably
argued and cautioned that there are no hard and fast rules
deteriorate. Increased mechanization led to a decrease in
which reveal an automatic, strong, correlation, poverty is
demand for labour which may have been one of the key reasons
seen to be closely linked to, if not determined by, economic
for the increase in poverty despite high growth in output.
growth. In fact, economic growth is considered to be an essential
Growth rates for GDP, agriculture and manufacturing in
prerequisite for poverty reduction. Almost every study examining
the 1960s, were two or three times greater than those of the
the relationship of economic growth on poverty alleviation
1950s, and substantial structural changes were made in the
has argued that 'economic growth is the foundation on which
economy in this decade. A GDP growth rate of almost 7 per
poverty reduction can be achieved', 15 and that 'economic
cent for a decade and nearly ten per cent for manufacturing
growth plays a dominant ·role in poverty alleviation and
(Table 22.6 ), were probably responsible for the fall in urban
without strong and sustained economic growth poverty
poverty during the 1960s. The mode of production and
alleviation is not possible' . 16 A broad trend in the incidence
relations of production were dramatically transformed in
of poverty can be gauged from Table 22.5 below, where trends
this decade, and although there was a substantial increase in
in economic growth and poverty are presented over the last
agricultural growth, it was the manufacturing sector that was
six decades. The table suggests, perhaps, that for the 1960s
responsible for the high growth rates in the economy and for
and 1970s, growth and poverty did not seem to have the
the lowering of urban poverty. 18
'correct' relationship, and only in the 1980s and 1990s, did
While growth, particularly in the manufacturing sector,
both move in the right, inverse, direction. In the decade of the
may have been the main cause for the reduction in poverty in
2000s, this trend re-emerged, where high growth and falling
urban areas in the 1960s, the reasons for the fall in poverty
poverty, were in sync. This important theme is developed later
in the 1970s are less directly related with growth, and hence
in this chapter, where the focus shifts from merely looking
are far more interesting and instructive, particularly when
JI, at growth, to emphasizing the context, nature and impact of
we later consider the more recent trends in poverty and their
that growth.
explanations. The 1970s, due mainly to political factors, were
Although urban poverty declined in the 1960s, it was a
the only years in the history of Pakistan, when the issues of
considerable rise in rural poverty which resulted in an overall
poverty and economic equality were prominent. 19

Table 22.5
Trends in Growth, Poverty, and Income Distribution

Decade Growth Poverty Income Distribution (Gini)

1950s Stagnated Persisted Unknown

1960s Rapid Increase Increased Improved
1970s Slow, Stagnated Declined Worsened
1980s Rapid Increase Declined Rapid deterioration, followed by
rapid improvement
1990s Substantial Decline Increased Considerably Worsened
2000--07 Rapid Increase Declined Probably Worsened
2008-13 Substantial Decline May have Increased Unknown
 Chapter 22 Poverty: Trends, Causes, and Solutions 659

Table 22.6 an additional $4.2 billion had been remitted to Pakistan from
Decade Wise Growth Rates (%) the Middle East.
This process which began in the 1970s, was to become the
Decade GDP Agriculture Manufacturing single biggest factor which resulted in the high growth rates
for the economy and, simultaneously, for poverty reduction,
1950s 3.1 1.6 8.8 in the decade of the 1980s 26 (see Table 22.6). A great deal
1960s 6.8 5.1 9.9
has been written on the Middle East phenomenon and its
1970s 4.8 2.4 5.5
1980s 6.5 5.4 8.2
impacts, 27 and in this section we look mainly at the broader
1990s 4.6 4.4 5.8 economic growth and poverty reducing mechanism, with
2000s 3.6 0.4 7.0 far more detail at the nature of that growth and on poverty
on account of remittances from the Middle East, in a later
Source: Government of Pakistan, Pakistan Economic Survey section. Moreover, since there are a large number of studies
(Islamabad: various issues). which look at trends in poverty in the 1980s and offer some
explanations for the reasons in its decline, 28 we present the
more important arguments in a somewhat summarized form
The much derided nationalization programme of the
below.
PPP government of 1972-77, may have been a key factor
The high growth rates of the 1960s were repeated in the
that provided and ensured employment guarantees to
1980s (Table 22.6 ), with the manufacturing sector leading
a vocal, predominantly urban, population. Public sector
overall economic growth, just as it did in the 1960s. It was
employment 'soared', 20 and the share of the social sectors
primarily these high growth rates in the economy which
in development plans increased substantially. In fact, when
were responsible for the fall in poverty for much of this
the PPP government was removed in 1977, development
decade. Income per capita in the 1980s rose by 3.2 per cent a
expenditure in 1976/7 was an extraordinary 11 per cent of
year, compared to the 3. 9 per cent rise recorded in the 1960s.
GDP, the highest ever in Pakistan's 65 year history. 21 Because
Development expenditure continued to be high for most of
of its political orientation, a number of important changes
the 1980s, as did spending on the social sectors, especially in
were enforced in the economic and social structure in
the period 1984-85 to 1987-88, when poverty fell markedly
Pakistan during the 1972-77 period, many having a positive
( see Table 22.1 )-this period is dealt with separately below
impact on poverty reduction, but perhaps not an immediate
because of the large reduction in poverty-see Table 22.7 and
impact on economic growth. 22
Chart 22.3 for trends in development expenditure. The trend
A number of policies which may have had an impact
of increasing public sector employment begun in the 1970s,
on poverty reducing measures included land reforms
continued well into the decade of the eighties; urban and
implemented in 1972; the nationalization of banks which
rural wages also showed signs of an increase in this period.
resulted in a growth of the number of branches by 45 per cent
Probably the most important contributor to growth and to
in five years, resulting in an eleven-fold expansion in credit to
poverty reduction in this period, was the amount of money
agriculture, with the network reaching even far flung remote remitted from the Middle East. In the decade of the 1980s, as
rural areas; as Parvez Tahir writes, 'for the first time, credit much as $23.1 billion were remitted to Pakistan, equivalent
was also directed towards small farmers, businesses and
to almost 10 per cent of GDP in 1982/3-see the implications
industries and low-cost housing through mandatory targets
of this in another section below.
for the banks'. 23 Self-employment and the small-scale sector Although the discussion above presents some of the more
were also encouraged by direct credit to small businesses and general arguments which help explain the fall in poverty in
industries by the nationalized commercial banks and by the the 1980s, it would be useful to look at some more detail at
overall economic and political environment which favoured the period 1984/5 to the end of the 1980s when, perhaps,
the small-scale industrial and services sector at the expense poverty fell the fastest in such a short period. There are many
of the large-scale industrial sector. Urban employment also specific causes for this reduction which throw light on issues
increased 'significantly' due to the booming construction
related to poverty reduction today.
sector as many ambitious public sector programmes were While remittances from the Middle East continued to
initiated; 24 urban wages also rose sharply in the mid-l 970s. play a critical role in terms of economic growth and poverty
While many of these programmes and initiatives may alleviation between 1984/5 and 1990, a number of other
have had employment enhancing and poverty reducing important indicators and trends in this short period stand
consequences, an additional factor which was to change the out: public expenditure in this period was above 26 per cent
face of Pakistan's economic and social structure, particularly of GDP in three of the four years, and was 26.7 per cent of
in the 1980s, had its origins in the mid- l 970s, and was to GDP in 1987/8, 'the highest ever in the country's history'; 29
have a significant impact on poverty reduction from 1975 the overall government deficit was on average 8.2 per cent
onwards up to the end of the 1980s, and again in the 2000s. of GDP, higher than the annual average of 7 per cent for the
This was the process of migration to the Middle East and the entire 1980s-see Table 22.7 and Chart 22.3.
beginning of the remittance economy. During the 1972-77 A key component of the development strategy in this
period alone, as many as 100,000 workers left Pakistan to period was the Juneja government's Five Point Programme,
work overseas, sending in $1.4 billion in this period, a sum launched in 1985/6, which had a high rural component.
greater than the oil import bill for the country (even after the The Programme focused on education, health, roads,
OPEC price rise) in the same period. 25 In the period 1977-80,
660 Issues in Pakistan's Economy

Table 22.7
GDP Growth, Developments, Defence, Debt, and Interest Payments 1961-2011 (% of GDP)

Year Development Defence Interest Payments Budget Deficit GDP Growth

as a% of GDP %

1961/2 10.7 5.7 1.1 9.0 6.0

1962/3 11.9 4.6 1.2 10.7 7.2
1963/4 11.8 5.0 1.3 9.7 6.5
1964/5 10.0 4.3 1.6 7.9 9.4
1965/6 9.1 9.7 0.2 12.2 7.6
1966/7 15.1 6.9 1.6 13.2 3.1
1967/8 12.7 6.0 1.7 11.0 6.8
1968/9 12.0 6.3 2.0 10.2 6.5
1969/70 12.3 6.3 2.1 12.3 9.8
1970/1 9.9 7.1 2.0 11.3 1.2
1971/2 4.4 7.4 2.9 10.7 2.3
1972/3 6.4 7.1 2.1 9.4 6.8
1973/4 6.8 6.0 2.5 9.0 7.5
1974/5 9.5 6.6 2.2 14.3 3.9
1975/6 10.5 6.7 2.5 14.7 3.3
1976/7 11.2 5.9 2.7 12.4 2.8
1977/8 10.5 5.8 2.4 11.0 7.7
1978/9 9.8 5.7 3.5 11.9 5.5
1979/80 10.3 6.0 2.3 7.6 7.3
1980/1 9.4 6.2 2.4 7.0 6.4
1981/2 9.1 6.4 2.6 6.9 7.6
1982/3 8.9 7.1 3.4 8.5 6.8
1983/4 7.5 7.2 3.7 7.4 4.0
1984/5 7.8 7.5 3.8 9.3 8.7
1985/6 8.5 7.6 4.1 9.6 6.4
1986/7 7.0 8.0 4.5 9.4 5.8
1987/8 7.8 7.8 5.3 10.5 6.4
1988/9 7.0 7.5 5.3 9.1 4.8
1989/90 7.2 8.1 6.1 9.2 4.6
1990/1 7.0 7.0 5.9 7.4 5.6
1991 /2 8.5 6.0 5.6 8.4 7.7
1992/3 6.4 6.4 6.3 9.0 2.3
1993/4 5.1 6.2 6.2 6.6 4.5
1994/5 4.9 5.5 5.6 6.3 4.1
1995/6 4.9 5.4 6.6 7.1 6.6
1996/7 3.8 5.4 6.9 7.0 1.7
1997/8 3.5 5.1 7.5 6.2 3.5
1998/9 3.6 5.2 7.8 6.5 4.2
1999/00 2.7 4.2 6.9 5.5 3.9
2000/1 2.3 3.3 6.0 4.2 2.0
2001/2 3.0 3.6 5.9 4.9 3.1
2002/3 2.8 3.5 4.6 3.9 4.7
2003/4 3.1 3.5 3.9 2.8 7.5
2004/5 3.7 3.5 3.4 3.5 9.0
2005/6 5.1 3.4 3.3 4.5 5.8
2006/7 5.3 3.0 4.5 6.1 6.8
2007/8 4.6 2.8 4.9 7.8 3.7
2008/9 4.0 2.7 5.3 5.6 1.7
2009/10 3.7 2.7 4.6 6.6 3.1
2010/11 3.0 2.6 4.2 6.5 3.0

Note: *General Pervez Musharraf's government carried out an accounting sleight-of-hand when it presented its first budget by
showing that it had reduced Defence Expenditure. The usual previous practice was that military pensions were part of the
Defence budget; however, this year this item was removed and placed under 'General Administration' thus reducing the
Defence budget. However, if one compares like with like and we include military pensions for this year, there was actually an
increase of eleven percent over the previous year's budget. In the years after 2000, military pensions are no longer included as
part of the Defence budget.
Source: Pakistan Economic SuNey (Islamabad: various years).
 Chapter 22 Poverty: Trends, Causes, and Solutions 661

Chart 22.1 : Poverty Trends Chart 22.2: Trends in Income Inequality

Population Living Below Poverty Line (%) 0.45 - , - - - - - - - - - - - - - - - - - - - -
45

---- -----
40
35 ... ----...
30
25
20
-............_
.
15 0.25
<t
10
"' °' ;:::: °'..... 00
"'00 ('>")

---"'00 ---°'N
00
5 ---
('>")
---.....0 °' ---.....00 ---00
I.{)

0 "'°' "'°' °' °' °' °'

°'
1991 2000 2001 2003 2005
--+- Total -0-- Rural -6:- Urban

Chart 22.3: Development, Defence, Debt, and Interest Payments as Percentage of GDP: 1961-2011
16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

-+-Development - - Defence .....,_Interest Payments ~Budget Deficit

electrification, water supply and sanitation, seven maria plot on rural infrastructure is said to have promoted employment
schemes for rural housing, all with a primarily rural focus. In and income opportunities for the rural poor, while some
addition, there was the Special Development Programme for urban schemes offered opportunities for the urban poor and
local development, education and housing, along with the unemployed. 31
Senators' and MNAs' (Member of the National Assembly) Moreover, even growth showed above average trends, with
Programmes, where elected representatives were allotted 6.8 per cent growth in GDP in this period, compared to the
large amounts of money to spend on development projects 6.45 average for the entire decade; with a bumper cotton
in their constituency. Expenditure by government on health crop of 8.6 million bales, growth in 1987/8 was led by an
(as a percentage of GDP) in this period was higher than the impressive 10 per cent growth in the manufacturing sector.
average 0. 7 per cent for the 1980s, rising to 1 per cent of GDP Along with impressive rates of growth and poverty reduction,
in 1987/8, amongst the highest allocations ever; similarly, this period also probably saw the largest falls in the Gini
expenditure on education in this period rose to an average coefficient suggesting that income inequality also improved;
of 2.3 per cent of GDP, higher than the 1.9 per cent average the Gini coefficient fell from 0.428 in 1984/5 (probably the
for the 1980s. The overall financial allocations for the Five highest ever), to 0.348 in 1987/8. Interestingly, the Five Point
Point Programme exceeded the Plan allocations by 18 per Programme was terminated with the dismissal of the Junejo
cent. There was a significant shift in resources 'towards government towards the end of the fiscal year 1987/8, in
rural areas as rural development utilized 48 per cent of the May 1988. Perhaps the culmination of this Programme helps
actual expenditure compared to the 32 per cent allocated explain the trends observed in the incidence of poverty after
originally in the Plan' .30 Moreover, this accelerated spending 1988, as shown in Table 22 .1.
662 Issues in Pakistan's Economy

to a high, 'unsustainable' fiscal deficit. Hence, a cut in the

22.5 POVERTY IN PAKISTAN: 1988- fiscal deficit is probably the most important component of
201332 the Structural Adjustment Programme. The World Bank
and the IMF advise countries undergoing adjustment to
The factors which led to poverty reduction in the eighties rationalize their tax structure, to impose a consumption
were, primarily, high growth rates helped by very significant oriented general sales or value-added tax, to impose taxes on
remittances, and an active and spendthrift public sector. Let us sectors of the economy currently exempted, and to remove all
examine the trends in these and other key influences on special privileges given to sectors of the economy in order to
poverty towards the end of the 1980s. encourage certain industries or sectors. On the expenditure
Just as the declining trends in poverty at the end of the side, a cut in government expenditure is critical in order
1980s coincide with the end of the Five Point Programme, to reduce the fiscal deficit, where privatization is promoted
they also, equally coincidentally, begin a slowing down so that the loss-making government departments and
or reversal, at the start of a comprehensive IMF funded institutions can be handed over to the private sector. While
Structural Adjustment Programme initiated in the fiscal year the emphasis in cutting government expenditure is usually on
1988/9, in December 1988. Although there has been criticism consumption expenditure, frequently countries are asked to
on the rationale for Pakistan undergoing such a programme cut overall spending which includes capital and development
when it did, it is important to describe the nature and expenditure. By hoping to raise revenue by imposing more
contents of such programmes. 33 • taxes, and by cutting 'wasteful' government expenditure,
One of the criticisms that has been directed against the countries are expected to reduce their fiscal deficit to more
IMF and the World Bank sponsored Structural Adjustment 'sustainable' levels. The removal of subsidies which, in most
Programmes, is that these programmes are usually too uniform underdeveloped countries are on food items, essential inputs
in nature and are implemented universally across countries, like fertilizer, or on utilities, is also an important plank of the
without taking due cognizance of particular histories, policy directed to reduce the fiscal deficit.
institutions, and structures, and that these programmes lack Regardless of the causes for inflation, monetary
context. A very general economic restructuring programme 'discipline', in the form of limiting monetary expansion to
designed for any or all countries in need of restructuring some preconceived quantum, is supposed to be part of the
has, at best, a few minor specificities which are spelt out in adjustment programme. The interest rate, at the same time,
the details of the programme for each country. Usually, these is supposed to be determined by the supply and demand
are a few specific targets or a set of numbers to be achieved for credit and money, i.e. by the market. Government
by the end of the programme period, and differentiate one intervention to determine the interest rate or to provide
country's programme from that of another. directed credit to key sectors and industries at subsidized
Structural Adjustment Programmes are meant for rates, is actively discouraged. Financial liberalization, with
economies in 'distress', often on the 'brink of disaster', less government control over the banking sector, with
having usually, though not exclusively, balance of payments far more competition, is expected by countries following
problems. The aim of the Structural Adjustment Programme agreements over the adjustment programme. Also, the
is to reduce the current account deficit, to lower inflation, preferential financial treatment to state owned enterprises
increase the growth rate in the economy and to cut the is to be eliminated, so that these enterprises become more
fiscal deficit. The mechanism to achieve these .goals is, by responsive to market signals.
now, fairly well known and standard. Countries are expected In essence then, the Structural Adjustment Programme is
to remove non-tariff barriers, replacing them with tariffs, supposed to be more market friendly, it is expected to promote
tariffs which are supposed to be lowered substantially across private sector initiatives and interests, remove distortions in
the adjustment period, so that cross-border 'distortions' are the economy by getting domestic and cross-border prices
removed by getting 'prices right'. On trade, in addition to right, and to open up the economy to foreign goods and
large reductions in tariffs, countries are expected to devalue competition from abroad as the process of globalization
their currencies so that domestic currencies better reflect proceeds. In addition, privatization should form an important
the true price of foreign currencies, where their demand and component of the programme, and the role and involvement
supply, rather than government intervention, determine that of the government in the economy and other sectors, should
price. Greater liberalization and openness, with more focus be minimized. The government's role should become one of
on exports, rather than on import substitution, form the key an 'enabler', rather than an implementer, as defined by this
ingredients of what goes for the trade sector 'reform' under philosophy.
the Structural Adjustment Programme. Having followed at four Structural Adjustment Programmes
Often the fiscal deficit is considered to be the mother (of the Extended Structural Adjustment Facility-ESAF-
of all evils, and the most significant and real cause of the variety) and numerous smaller programmes starting in 1988
distortions and problems that exist in the economy. In fact, and between 2004 when the economy improved after 9/11,
all the problems which determine the need for a Structural it would be important to examine some of the measures
Adjustment Programme, such as, high inflation, low growth, a taken by the different governments in power in Pakistan
high current account deficit, lower private sector investment, since 1988, and determine the consequences on key variables
crowding out and sundry problems are (incorrectly) attributed affecting poverty-see also Box·22.s..
I Chapter 22 Poverty: Trends, Causes, and Solutions 663

Box 22.5 leading to deterioration in the living conditions of the poor.

The IMF, Structural Adjustment, and Poverty in A combined effect of the public expenditure reduction and
trade liberalisation resulted in almost doubling the urban
Pakistan
unemployment rate from 4.58 per cent in 1987-88 to 8.19 per
In his extensive review of poverty studies, S. M. Naseem cent in 1990-91. In terms of poverty, the author's calculation
examines the impact of IMF policies on poverty in Pakistan. on the incidence of poverty between 1987-88 and 1990-91
These policies have all resulted in increased poverty in increased from 13.81 per cent to 17.26 per cent. Anwar, like
Pakistan. Kemal, emphasizes the need for targeted subsidies to help the
poor to overcome the adverse effects of structural adjustment
In Pakistan, the structural adjustment and stabilization programme.
programmes called for a reduction in fiscal deficit, a severe Another significant paper analysing the structural adjustment
restriction on the role of government, rationalization of tax programme during the period 1987-99 is that of Jamal
structure, removal of subsidies from consumption and (2003). The years chosen by the author for comparing the
production. These programmes however, had significantly effects of structural adjustment programme are 1987-88 to
adverse implications for employment, poverty and the 1998-99. The former year being the beginning of the structural
government. A pioneering paper on this issue was that of adjustment Programme and the latter being the year for which
A. R. Kemal. Kemal (1994) analysed the effects of Structural HIES results are available. The paper shows that in terms
Adjustment Programme on the reduction of development of the macroeconomic stabilization indicators, the structural
expenditures and the trends in income distribution and adjustment programme fails to achieve the major objectives.
poverty. Kemal concluded that although tariff rationalization, With the exception of the share of domestic saving and of
import liberalization, and certain other measures to promote private investment in the GDP, and the growth of total debt
efficiency were effective. However, the stabilization effort did services, other macroeconomic performance indicators did
not achieve much success. He found no positive correlation not show a significant improvement. On average, GDP growth
between fiscal deficit and inflation rate. Despite containing feel by approximately two percentage point primarily due to fall
the government costs by wage restrictions and contraction of in manufacturing growth from 9 per cent in the 1980s to 5 per
employment, non-development expenditure and fiscal deficit cent in the 1990s.
continued to increase. The employment situation further In terms of distributional measures, the Gini-coefficient for
worsened due to privatization. Pakistan rose from 0.34 in 1987-88 to 0.38 in 1988-89 while
On the other hand, the Structural Adjustment Programme the urban Gini-coefficient rose from 0.39 to 0.42 during the
was accompanied by rising inequality and poverty. "The Gini same period. A more glaring comparison between the share
coefficient increased from 0.34 to 0.41 and the incidence of of the lowest quintile which was about 9 per cent in fiscal 1998
poverty increased from 13 per cent in 1987-88 to 14 per cent compared to 44 per cent for the highest quintile. However, by
in 1990-91" according to Kemal's findings. Among the reasons 1988, the share of the lowest quintile has declined to 8 and that
was the rising income inequality, decline in employment, the of the highest quintile rose to 47 per cent. The situation in the
rise in the tax incidence of the poor relative to the rich and urban areas was more pronounced than that in the rural areas.
the adverse effect of the withdrawal of input subsidies on The poverty numbers presented in the paper show that the
the poor while the increase in support prices of agricultural head count ratio rose from about 24 per cent in 1987-88 to 30
goods benefitted mainly to rich surplus farmers while hurting per cent in the year 1998-99. Two other indicators of poverty
the small farmer and the alike. In conclusion, Kemal argued also show that the 'adjustment decade' (also termed as the
that structural adjustment programmes must be accompanied 'lost decade') was much harsher on the poor. The first indicator
with targeted welfare programmes. Another significant article is the rise of the proportion of food in total consumption in the
on Structural Adjustment is that of Talat Anwar. Anwar (1996) lowest quintile of population which rose from 41 per cent in
analyses Pakistan's growth performance in the late 1980s in 1987 to 45 per cent in 1999 or by about 4 per cent. However,
the context of a medium term structural adjustment programme the rise in shares of expenditure on health and education
within the framework of the IMF and the World Bank signed in were 63 per cent and 186 per cent respectively-reflecting
1988. After examining the contractionary characteristics of the increase in the component of private expenditures on
the IMF and the World Bank structural adjustment model, these services. The components of consumption expenditure
the author examines the macroeconomic performance of whose proportion has suffered heavy decline are durables,
the adjustment programme in Pakistan. Drawing upon the transportation, items for household and personal care and
research of Faiz Bilquees (1992) (also quoted by Kemal in the clothing.
preceding article) the author showed that poverty declined
from 32 per cent in 1987-88 to 30 per cent in 1990-91. The Source: Naseem, S. M., A Review of Studies on Poverty in
contraction of employment in public sector had adverse effect Pakistan: Origin, Evolution, Thematic Content and Future
on the labour market, pushing the real wages in agriculture Directions, History of PIDE Series-6 (Islamabad: Pakistan
and manufacturing sector in the first year of adjustment Institute of Development Economics, 2012), 31-4.
664 Issues in Pakistan's Economy

Although it is difficult to prove causality, some interesting 1991; in rural areas, the Gini coefficient increased from 0.307
observations on the economy between 1988 and 2004 help to 0.41 in the same period. 41 In addition not only was there
show how the economy performed after the initiation of the a cut in food subsidies of 22.4 per cent between 1991-95,42
Structural Adjustment Programme. Firstly, the overall growth there had been a cut in subsidies from 2 per cent of GDP
rate of GDP fell well below trend levels, and appreciably in 1988/9, down to only 0.5 per cent in 1996/7.43 Moreover,
below the average of the l 980s-see Table 22.6. In the sixteen the 'rationalized' tax structure had resulted in more indirect
years after the implementation of the programme, in only taxes, with a decline of 4.3 per cent of the tax burden on the
two of those sixteen years was growth in GDP more than rich, with an increase of the tax burden by 10.3 per cent on
the average six per cent observed since 1977; in two of those the poor. 44 The rate of unemployment which was 3.1 per cent
sixteen years, in 1992/3 and in 1996/7, the growth in GDP in 1987/8, had increased to around 5.4 per cent in 1997/8,
was 2.1 per cent and 1.7 per cent, respectively, the lowest with more than two million unemployed. The Government
in more than three decades. In the sixteen years after 1988, of Pakistan estimated that the extent of underemployment
inflation was in double digits in seven of those sixteen years, was around 20 per cent of the labour force, and that as many
while previously in the 40 years between 1947-87, inflation as 1.3 million persons would enter the job market each year
was in double digits on only seven occasions. Even the State adding to the pool of the unemployed, as at least half of these
Bank of Pakistan's Annual Report for 1996/7 admitted that 'cannot expect to find work at the present rate of labour
'almost all macroeconomic indicators showed that 1996-97 absorption'. 45 It feared that 'the problem of unemployment
was one of the most difficult and disappointing years in the may intensify further'. 46
economic history of the country'. 34 Another government It is important to emphasize that while these numbers
report accepts the fact that since the growth rate of real per show a very obvious downward trend between 1988 and 2004
capita income was about 1.3 per cent in the period 1991-98, when the Structural Adjustment Programme was introduced,
it 'has been very low to make any dent on poverty'. 35 we cannot prove that this was on account of the programme
At one stage manufacturing had been the leading sector alone, since there are numerous other factors which have
in the economy, with growth rates averaging 9.1 per cent also affected the economy since 1988. Nevertheless, given
between 1980-88; this rate fell to an average of 4. 9 per cent the dramatic changes that took place as a consequence of
for the period 1988-97, falling to a minus 0.1 per cent in the programme, commonsense suggests that it was more
1996/7, the lowest in the last thirty years and was 1.5 per than likely that the adjustment programme had a large
cent in 1999/00. As an obsession to cut the fiscal deficit, contribution to play in this downtrend. 47
public expenditure was cut, and development expenditure Every single indicator which had some poverty reducing
in particular, has borne this brunt. From a high of 9.3 per impact, such as economic growth, manufacturing sector
cent of GDP in 1980/1, development expenditure fell and growth, employment, public expenditure, development
in 1997/8, only a little over three per cent of GDP had been expenditure, remittances and subsidies, deteriorated over
allocated under this head; in 2000/1 this had fallen to 2.1 the 1998-2004 period. The impact on poverty should be
per cent only. Additionally, remittances, which had played equally clear. It is no surprise then, that poverty increased
such an important role in the 1970s and 1980s in alleviating in Pakistan, quite considerably in this period. However,
poverty, declined by about 41.8 per cent (in constant prices) as Chapter 18 on the post-9/11 Musharraf period shows,
between 1982/3 and 1995/6, 36 and in 1996/7, were the lowest Pakistan's economy saw an about-tum after around 2002
since 1978/9. or 2003, as a consequence of Pakistan's role in the war on
Public sector employment, historically an important anti- terrorism. While some of those factors and consequences are
poverty measure, had fallen, while wages decreased in real discussed in detail in Chapter 25, on war and aid, the impact
terms: real wages, which increased by 0. 7 per cent between on poverty was highly positive, as Box 22.6 above has also
1980-91, fell by 2 per cent between 1991-95; 37 public sector shown. The temporary boom in the period 2002/3-2007/8
employment is estimated to have fallen by ten per cent during certainly resulted in rising incomes as well as lowering
1990-93, and 43.2 per cent of workers previously employed in poverty, as has been shown above, but in the post-2008
public enterprises were laid off by their new employees. 38 period, a number of factors affecting the economy, suggest
Moreover, it has been seen that 'overall unemployment in that poverty has risen from the 17.2 per cent figure cited
occupations with a high incidence of the poor has dramatically above. The change in government in 2008, the economic
increased and real wages of skilled and unskilled labour slowdown domestically, economic recession globally, floods in
sharply declined. In addition, subsidies that were critical to 2010 and 2011, an IMF programme in 2009, the costs of the
the consumption pattern of the poor have been cut while war on terrorism, militancy and terrorism within Pakistan,
the burden of indirect taxes on the poorest income group rising food and fuel prices, and such serious shocks to the
has increased. Not surprisingly, there has been an increase Pakistani system and economy, are bound to have caused
in poverty and inequality, particularly in the rural areas'. 39 poverty to rise after 2008. However, since there is no data
Providing statistical evidence for these figures, A. R. Kemal, 40 available to quantify the increase, we really don't know
had shown that the share of wages in national income how much poverty has risen. There have also been some
fell from 32.3 per cent in 1987/8 to 30 per cent in 1990/1, positives as well after 2008, which might suggest that poverty
and personal income distribution which improved between might not have risen as much as it is feared. The two main
1979-88, worsened considerably between 1987-91, with the poverty mitigating factors are likely to be the increase in
overall Gini coefficient increasing from 0.35 in 1987 to 0.41 in support prices for wheat and rice, which have had a positive
 Chapter 22 Poverty: Trends, Causes, and Solutions 665

Box 22.6 intake per adult per day is applied on the micro data generated
Has Poverty Fallen Between 2008-12? by HIES.
The Federal Bureau of Statistics (FBS) carried out the HIES
Although data is lacking about poverty statistics and there 2010-11 from July 2010 to June 2011, in all four provinces,
are questions about the trend in poverty from around 2008 with total sample size of 16341 households including 6580
onwards, some newspaper reports have suggested that despite households from urban areas and 9752 from rural areas.
poor economic conditions, poverty may have continued to fall For poverty estimation, the official poverty line has been
after 2008. adjusted by inflating it with Consumer Price Index (CPI) data
Despite deterioration in the macroeconomic situation, the between the two survey period as in case of 2007-8 and
incidence of poverty declined by 4.8 per cent to 12.4 per 2010-11 the CPI stood at 52 per cent. The inflated poverty line
cent in 2010-11 against 17.2 per cent in 2007-08, according for 2010-11 is calculated at Rs. 1745 per adult equivalent per
to findings of a committee constituted by the Planning month compared to Rs. 1142 per adult per month for 2007-08.
Commission. The household expenditure data was also adjusted to get adult
A committee of experts established by the Planning and equivalent consumption expenditures.
Development Division under chairmanship of G. M. Arif of Discussing consumption behaviour of household in
the Pakistan Institute of Development Economics (PIDE) accordance with HIES 2010-11, the committee found that the
and comprising of other experts in its report disclosed that per capita monthly consumption of wheat slightly increased
inequality also improved in Pakistan in the wake of increased between 2007-8 and 2010-11. However, wheat consumption
consumption expenditures in the last five years among the in 2010-11 is lower than earlier periods 2000-1 , 2004-5
lowest quintile of income groups than in other quintiles. and 2005-6. Same is the case for rice consumption. The
The Planning and Development Division stopped the release consumption of pulses and vegetable increased but decline
of poverty findings on the pretext that how would government observed in milk consumption. There is no considerable
justify the lowest ever poverty level despite low growth, high difference between urban and rural areas in terms of per capita
inflation and unemployment in the country. consumption of different food items except that the decline in
According to poverty analysis done on the basis of data milk consumption is higher in rural areas than in urban areas,
obtained through Pakistan Social Living Standard Measurement the report said.
(PSLM) survey in 2010-11, overall poverty declined to 12.4 per The committee reports that the analysis of consumption
cent with urban poverty of 7.1 per cent and rural poverty of behaviour demonstrated an improvement in the wellbeing of
15.1 per cent. The level of poverty in 2007-08 was standing households that also reflected in the poverty statistics. With
at 17.2 per cent that was also not endorsed by the Planning poverty level of 12.4 per cent in 2010-11, this is ever lowest
Commission at that time under the PPP-led regime, with urban level of overall poverty in Pakistan. There is marked decline
poverty of 10 per cent and rural poverty of 20.6 per cent. in overall as well as urban and rural poverty during the last
The report of the committee stated that the major challenge, decade.
which the committee has not addressed, is how to explain these The overall poverty declined from more than one third 34 per
poverty and inequality trends in the wake of macroeconomic cent in 2000-1 to only 12.4 per cent in 2010-11. The decline
situation that prevailed during the last four years i.e. low was highest 10 percentage points between 2000-1 to 2004-5
growth, high inflation and unemployment. but the decline between 2005-6 and 2007-8 and between
The committee recommended that first the poverty estimates 2007-8 and 2010-11 was also substantial, 5.8 per cent and 4.8
may be validated using the same methodology by poverty per cent respectively.
experts, as was done in the past and second the Household G. M. Arif, head of the committee, when contacted on
Income Expenditure Survey (HIES) 2010-11 may be released Saturday said that they have proposed to the government to
to enable researchers and institutions in public and private conduct broader consultation on data as well as methodology
sectors to use it for poverty analysis so a healthy debate on to come up with facts on poverty trends in Pakistan.
poverty trends, methodology and quality of HIES data may be
generated.
According to the report, for poverty estimation in Pakistan, Source: Haider, Mehtab, 'Poverty Declined During Last Five
the official poverty line, based on threshold of 2350 calorie Years: Report', The News, Karachi, 22 July 2012.

impact on farmers' incomes, and the substantial increase of 22.6 POVERTY ALLEVIATION
remittances sent to Pakistan, around $12 billion in 2012. Both
factors have a considerable impact on poverty alleviation, but What emerges from the discussion above, is that poverty
given numerous other negative factors, it is not clear which alleviation has taken place via the mechanism. of economic
set of factors have a larger influence. Only research and hard growth, high remittances and active public policy, rather
data, if ever available to the public, will quantify the nature, than specific policy designed to alleviate poverty, i.e. poverty
extent and even direction of change from the mid-2000s-see alleviation schemes, as such. There have been some special
Box 22.6 and 22.7. development programmes, like the Junejo government's
666 Issues in Pakistan's Economy

Box 22.7 and 2010. In southern Punjab, the increase in poverty between
Rural Poverty Dynamics in Pakistan: 2012 2004 and 2010 is much larger than the decline between.2001
and 2004, thus showing a net increa;e in p·overty between
PIDE released its PIDE Viewpoint in October 2012, highlighting 2001 and 2010 period.
some keys aspects of rural poverty in Pakistan. Some excerpts: The key message from the above analysis is that, as in the
past, poverty during the last one decade has also fluctuated.
A close look at the data on poverty levels and trends This fluctuation has largely happened in rural areas of Sindh
in' Pakistan for the last five decades leads to two broad and southern Punjab ....
conclusions. First, poverty reduction has not been sustainable . . . The. movement out of poverty out-numbered the
rather it has fluctuated remarkably. Second, a large proportion movement. into poverty in 2001-04 period, but more people
of the population has been found around the poverty line, fell into poverty than those who escaped.poverty during the
and any micro and/or macro shock (positive or negative) has 2004-10 period .... The well-being level of rural population in
pushed it into poverty or pulled it out of it. ... 201 O is not worse off than their level in 2001, rather it can be
. . . Poverty reduction trends in the past show a high mobility considered modestly better off.. : .
of population into or out of poverty. This mobility suggests ... Chronic poverty is found higher in southern Punjab than
that a higher proportion of population experiences poverty in Sindh or in north/central Punjab, particularly the latter....
overtime than what the cross-sectional data might suggest. It ... moving into or out of poverty is relatively more common
also implies that a much smaller proportion of the population among households headed by less educated persons, and
experiences chronic poverty; that is remaining poor for a long having no ownership of land and livestock, suggesting the
period, relative to those poor who are enumerated on cross- structural nature of rural poverty in Pakistan. Shocks such as
sectional observations in a particular year.... inflation, flood, and drought have played a key role in the past
. . . In rural Punjab and Sindh, poverty decreased from 31.3 in poverty movements ....
per cent in 2001 to 24.1 per cent in 2004; but it increased ... moving into and.out of poverty is a common phenomenon
to 27 per cent in 201 o. By taking into account the data for in rural Pakistan. This movement directly depresses the desired
all provinces; which is available for 2001 and 201 O rounds, status of 'never-poor'. Rural poverty is more persistent in Sindh
the poverty has declined by 5 percentage points from 27.5 and southern Punjab than in north/central Punjab ... [L]ack
per cent in 2001 to 22.4 per cent in 2010. The change (or of assets (land and livestock), low human capital (education),
decline) in poverty levels between the 2001 and 2010 period is shocks (inflation, flood, drought etc.) and high dependency
therefore marginal at only 1.5 percentage points .... ratios are the major factors for the persistence of rural poverty
. . . A regional analysis' shows that in north/central Punjab, in Pakistan ....
poverty remained almost at the same level between 2001 and
2004 period while in southern Punjab and Sindh it first declined Source: PIDE, 'Rural Poverty Dynamics in Pakistan', PIDE
between 2001 and 2004 and then increased between 2004 Viewpoint, October 2012.

Five Point Programme, which had a focus on employment overlooked, is the mechanism through which remittances
generation and on infrastructure development, but again, act as a poverty alleviating device. 49 It has been argued that
not specifically with a poverty alleviation focus. It seems that 'large-scale migration to the Middle East became the single
poverty has been reduced in the past through other linkage most important economic event in Pakistan during the 1970s
mechanisms, rather than through a direct 'assault' on poverty and 1980s. No other occurrence had such a pervasive impact
itself. This has been the case even when poverty was at its on so many areas of Pakistan's economy and society'. 50 Most
greatest heights in the 1960s, when explicit poverty reducing of the migrants from Pakistan came from rural areas and
policies did not really exist. There does not seem to have been many 'thousands of rural Pakistani families participated
a conscious effort to alleviate poverty in the past, and most in the employment and remittances boom m
the Middle
of the reduction may have taken place primarily as a result East'. 51 More than two million people were sent abroad, out
of positive externalities. It is only of late, after around the of which at least 1.2 million were from rural areas. There
mid-1990s, when there had been a scare regarding poverty was widespread participation from the barani districts of
and direct attempts to reduce it had been devised. 48 However, the Punjab and the NWFP, which represented some of the
before we examine this strategy for poverty reduction it poorest districts of the country: 'in this sense, the Middle
might be worthwhile to consider in some detail, what may East migration had a certain redistribution aspect in that it
have been the best and most effective poverty alleviation provided at least temporarily exaggerated income streams to
mechanism in Pakistan, that of remittances, a factor which some areas where opportunities for productive employment
continues even till today. were extremely limited'. 52 Household incomes for a few
References to the role of Middle East remittances from 1975 years were ·seen to have been increased by anything between
to the end of the l 980s-and again in the late-2000s-in the two to four times. The sectors whose . growth of output
sections above, have accentuated the significance they had were affected most by the increased demand generated by
on growth and on poverty alleviation. However, what is often remittances, included the small-scale sector, construction,
 Chapter 22 Poverty: Trends, Causes, and Solutions 667

transport and communications and wholesale and retail • development of human resources and basic skills;
trade, especially in rural and peri-urban areas. Increases in • information needs for poverty policy;
incomes, especially for poorer families, resulted in increased • empowerment of women; and
expenditure on food, clothing and shelter. 53 Because of the • the issue of governance.
individual nature of decisions about consumption, savings
and investment, the developmental impact of remittances Earlier, a Working Group on Poverty Alleviation and the Task
resulted in 'diffused, decentralized modes of development'. 54 Force on Poverty Alleviation, included:
In comparison, 'official development expenditures reaching
individual villages in the less developed barani areas • setting up small-scale industrial sectors;
paled in comparison with income generated by migrants • national reconstruction corps;
themselves'. 55 It was not only the large number of migrants • setting up various training institutes;
and their families who benefitted, but local economies were • schemes for the eradication of child labour; and
also transformed in many ways, with local produce (milk, • setting up of Rural Support Organizations.
fruits, vegetables, etc.) being in greater demand as incomes
rose, which 'enhanced the impact of remittance spending On paper, at least, it seems that the objectives, intentions
locally, increasing incomes and employment opportunities for and approaches of the Poverty Reduction Strategy and
villagers not directly involved in migration'. 56 Many returning of the Task Force and the Working Groups, seem well
migrants opened shops and hotels, started taxi· services, meaning. However, examined at closer quarters, most, if
opened small workshops, all of which had similar results. not all, attempts were likely to fail or to fall far short of
There were visible aspects of change, such as 'increased any meaningful targets. There were three main criticisms
transportation, improved housing, high rural incomes, more which made such strategies somewhat less meaningful,
diversified village economies, decentralized decision making, in dealing with issues related to, firstly, macroeconomic
expanding availability of consumer goods, and so forth'. 57 objectives having an impact on employment, growth and
As Burki writing in 1988 argued, 'the reason why Pakistan public expenditure; secondly, issues of targeting; and finally,
seems to be relatively free of absolute poverty has less to do issues related to the nongovernmental organization sector
with deliberate government policy; it is more the result of and community participation.
remittances from the Middle East'. 58 The economic strategy of the government which
It was only in the late 1990s that the government actually announced these ambitious goals, continued to be that of
accepted the existence of poverty and acknowledged that structural adjustment. Almost every study that has critically
not only did it exist, but that it had increased over the examined the impact of such economic programmes, has
previous decade. With Task Forces and Working Groups set emphasized the negative impacts on growth, employment,
up to provide insight into the persistence of poverty, many public expenditure and on poverty-see Box 22.5. Even
programmes for the alleviation of poverty were announced, the World Bank ( 1995) which is a strong proponent of the
and even included as a 'strategy' in the Ninth Five-Year Plan. Structural Adjustment Programme, acknowledged that there
Unlike the previous non-strategy, where the government was were significant transitionary costs-however, how long
mainly involved in running the economy and in providing this transition is to continue and when, if ever, these trends
developmental expenditure and services, the later strategy improve, was never made clear. Even the Government of
was premised on a far more active and involved role for Pakistan accepted that there were very serious consequences
government in poverty alleviation. Government entered as an of following this policy:
active agent in the process of poverty alleviation. 59
The main components of the Human Development and Pakistan's economic reform agenda calls
Poverty Reduction Strategy included the following: 60 for major structural changes, the burden of
which has and is likely to fall largely on the
weaker segments of the population. In the past,
• substantial economic growth, at a fast pace, resulting in
rising unemployment, inflationary tendencies
an increase in per capita income; sustainable economic
and high cost of essential imports, all have
growth is to take place through infrastructure develop- had an adverse impact on the poor. Fiscal
ment, taxation reform, financial sector development, expediencies increasing reliance on the indirect
a restructuring of the manufacturing sector and an and regressive measures in taxation, continued
overhauling of the agrarian system; growth is to be labour decline in the ratio of PSDP (Public Sector
intensive and 'people friendly'; Development Programme) to GDP, privatization,
• to provide employment opportunities to counter the have also placed a significant proportion of the
recessionary trends and to provide employment for poverty transitional burden on the poor with increases in
reduction; unemployment .... One major area of concern
is to prevent poverty increases in the transition
• expand and improve the quality of social services;
period, particularly in view of declining public
• mobilization of support organizations, NGOs and sector expenditures and its negative impact on
partnerships with the private sector; employment generation. 61 ·
• community based participatory development programmes;
• a system of social safety nets; This analysis continued with an extensive list of the
• microcredit programmes for the poor; negative consequences of following the Structural Adjustment
668 Issues in Pakistan's Economy

Programme, and the realization that these policies gave rise a result of economic and social changes'. 69 Numerous
to the then 'current recessionary situation'. It argued that as cases were cited which suggested that the mechanism for
a consequence, there was an 'adverse impact on employment, social safety nets was seen as 'being both inefficient and
. increase in poverty and more importantly vulnerability of corrupt', and corruption, patronage, political influence and
those above the poverty line to the poverty trap, caused by pilferage, appeared to be widespread problems. Hence, 'in
a massive reduction of employment opportunities, reduction the current administrative climate and in the context of
in construction activity across the country and an overall high levels of popular scepticism and mistrust, developing
depression in economic activities'. 62 Having realized what strategies for sustainable social assistance programmes
had happened in the past, nevertheless, the government was cannot be separated from the issue of governance' .70 The
'committed to reduction of budget deficits and other stability high profile, much publicized, donor-funded Social Action
measures .... [L]imitations on the size of the development Programme, may have just helped in keeping the level in
programme and limitations on its pro-poor nature may government expenditure in a few social sectors at their
adversely impact the unemployment problem' 63 [sic.]. In previous levels despite overall fiscal cuts, but evaluations
light of these trends, a senior government official concluded, of it, have been extremely criticaF 1-see also Chaper 20
that 'in this environment, poverty as a concern cannot figure in the Second Edition where the Social Action Programme
prominently'. 64 was discussed at length. Institutional failure and issues of
Other writers found that although the slowdown in 'governance' have always been a key feature resulting in the
economic growth in the 1990s had serious consequences for poor quality of focused government intervention. Whether
poverty reduction, the subsequent economic agenda of the such new strategies, with government as an active agent,
government continued to be that of the earlier years, with the given existing governance structures, would be able to
opening up of the economy, reduction of subsidies and more overcome these structural constraints to better targeting in
privatization and liberalization. These so-called reforms, the future, is highly questionable. In fact, perhaps the now
'have not yielded tangible benefits in terms of growth or discontinued, general subsidy scheme--on wheat, fertilizer
poverty reduction', 65 and the context for poverty alleviation or and on other inputs-despite numerous problems, may have
elimination, was not as promising later as it was in the 1980s. been a better mechanism to address issues of poverty, rather
In order to address the problem of poverty, Shahid Javed than the many targeted schemes. 72
Burki, argued that the economy needed growth at 'twice the Although there is growing lip service paid to the role of
increase in population growth to make a serious difference 'community' participation and the role of NGOs, there is
in the incidence of poverty'. 66 A growth rate of between 6 also wide recognition that in the context of Pakistan, with
to 7 per cent each year for some years, at a consistent pace, the exception of a very few NGOs, most are not particularly
looked unlikely given trends in economic growth till the effective. Moreover, it is felt that even the few participatory
miraculous turnaround in around 2002 or 2003-see Chapter development NGOs which reach out to poor communities,
18 also. Given the experience since 1988, it seems that few 'do not necessarily reach the poorest within them'. 73 Even
of the major macroeconomic indicators affecting growth the government, which had begun promoting the role of
and poverty would have improved, making many of the NGOs, recognized that 'very few NGOs are working on
government's initiatives for its Poverty Reduction Strategy poverty alleviation, participatory development, gender equity
redundant. The so called transitionary period continued for and capacity building at the grassroots level. Very few
a fairly long time, until events after 9/11 changed Pakistan's of them have well-defined governance, transparent and
economy and much else. accountable structures. Large number of NGOs relies [sic]
Some of the initiatives proposed by the government at entirely on financial support from the government and
that time required effective targeting if any worthwhile international donors. Their survival as a sound financial
results were to be accomplished. Also part of the Strategy entity is questionable in the absence of sound financial
were social safety nets which were put in place in the support'. 74 Extensive evidence from the rural water supply
form of zakat, ushr, and the baitul maal, all of which and sanitation sector, which was one of the main components
required effective targeting. Moreover, the increased, direct, of the Social Action Programme, shows that NGOs were not
involvement of government in the lives of the poor, would yet capable of taking over government built water schemes,
also have required efficient delivery. The evidence available and the expectations that 'communities' and NGOs would
about the government's targeted schemes does not confer be able to do development, were highly exaggerated. 75 Yet
much confidence in such schemes. Findings have shown another pillar in the plank of the Poverty Reduction Strategy
that the system of ushr is 'moribund', and the system of came unstuck.
zakat 'is not working effectively'. 67 These social safety Microcredit schemes and the Rural Support Organizations
nets are said to have low benefits and their 'coverage is proposed under such poverty alleviation strategies, have
generally low and amounts disbursed do not constitute a also been criticized by Haris Gazdar. He argued that the
significant contribution to household budgets, and do not proper perspective on microcredit has not been recognized
provide a springboard to lift the poor out of poverty'. 68 As by the government in its strategy, where the poor need
Burki argued, despite these schemes, 'government support credit not so much for asset creation as the strategy sees
for the poor remains insignificant', and, 'the State in it, but for consumption smoothening and as an insurance
Pakistan has failed to erect a strong safety net that can against adverse shocks. He also questions the concept and
catch those people who fall into the trap of poverty as governance structures of Rural Support Organizations, and
 Chapter 22 Poverty: Trends, Causes, and Solutions 669

argued that these proposals 'fail to spell out adequately news and is being brought to the public's knowledge.
the governance structures in these organizations, their Moreover, even though there is some ambiguity about the
responsiveness and accountability to central and provincial precise nature of the definition of bonded labour, keeping

r governments, their relationship with existing "community

mobilization" initiatives, and their relationship with the
elected government' .76
a consistent definition over a period of time, evidence
suggests that the nature and the extent of bonded labour is
undergoing considerable change. This section of this chapter
This critical evaluation of this Poverty Reduction Strategy, examines the nature of bonded labour in Pakistan, using
seems to suggest that perhaps the poverty alleviation previously published studies, despite the substantial paucity
mechanisms of the 1970s and 1980s were far more productive of concrete data, to draw some inferences about the general
than the subsequent ideas generated by the government. characteristics of what one calls bonded labour.

r
Moreover, evidence from the 2002-08 period also suggests a Not only is there no consensus regarding the definition
resort to the earlier poverty alleviation strategy, of high growth of bonded labour amongst those who have researched the
in the economy, high remittances, and employment generation, theme, there is also no agreement on the occupations/
compared to direct interventions as mentioned above. professions in which it presumably exists. In terms of
i Conditional or unconditional cash transfer schemes, such severity and expanse, it seems that landless sharecroppers,
as the Benazir Income Support Programme (BISP) started particularly in southern Sindh and somewhat in southern
by the People's Party government which took office in 2008, Punjab, are the largest category and suffer the most, followed
are meant to reach millions of the poor, particularly women. by agricultural wage workers in these two regions, followed
Evidence from countries such as Mexico and Brazil, both of by brick kiln workers primarily in the Punjab and in NWFP.
which have had cash transfer programmes, or from India, These two categories probably make up the major proportion
where a rural employment guarantee scheme has been of an as yet unquantified and ill-defined category of bonded
existence for some years, show that targeted programmes labour. Carpet weaving and fisheries are probably the other
can work very effectively. There is as yet, little evidence from industries where bonded labour is said to exist, although
the BISP that it has helped alleviate poverty appreciably. It according to Anti-Slavery International, 'there are many
is clear that the Rs. 1,000 handed over to poor women raises other sectors of employment in which bonded labour has
their income and consumption, but given the double-digit been the norm rather than the exception'. 78
inflation, especially of food, since 2008 when the BISP was 'Bonded' labour can be of at least two kinds: workers who
started, the real amount which women receive now, is far are 'bonded' and have debt obligations to their employer
less in 2013 than what it was in 2008. The sum they receive where indebtedness actually defines the nature of their being
is not inflation-adjusted, and the benefit received by women, bonded; and under more so called traditional or tribal settings
would have fallen. Having said that, after receiving some where the nature of being bonded to the sardar or tribal leader
cash transfers, total income would have increased. However, does not necessarily incur debt, but may derive out of other
because as yet there is no hard evidence of the impact forms of dependence and bondage, such as loyalty, protection
of the BISP, it is not clear what purpose the scheme has or other cultural and social forms of allegiance. 79 Our interest
served except for a small increase in income received by the in this chapter is primarily with the former kind, i.e. debt
household. There is also anecdotal evidence of corruption and bondage.
mismanagement in the BISP. Pakistan's record over 55 years One can explain the nature of debt bondage as follows:
shows, that the best way to alleviate poverty is to have high 'instead of just seeking wages in exchange for their work,
growth which is well distributed by location-remittances poor people, in both rural and urban areas, take an advance
are well-distributed-and that jobs are created, perhaps from an employer, in money or in kind, and are obliged
through enhanced public sector spending. In the period to work for that employer until they have paid off their
2008-13, of these three, only remittances have shown signs debt. The loan, [is] known ... as peshgi'. 80 However, this
of growth and improvement-see also Box 22.8. relationship is not as simple or straightforward as the above
definition may imply. According to the Bonded Labour
System (Abolition) Act 1992, an advance (peshgi) becomes
22.7 POVERTY AND BONDED LABOUR a 'bonded debt' under which a bonded labourer is forced to
work for his employer/creditor, where the bonded labourer
It seems that 'bonded labour' has been around in Pakistan would '(i) render, by himself or through any member of his
for centuries, and is embedded and sanctified by traditional family ... labour or service to the creditor, or for the benefit
and cultural social and economic practices. Nevertheless, of the creditor, for a specified period or for an unspecified
despite its presumed historical presence, there is considerable period, whether without wages or for nominal wages, or (ii)
confusion over the term 'bonded' labour and for this reason, forfeit the freedom of employment or adopting other means
perhaps, there is almost no empirical evidence to support the of livelihood for a specified period or an unspecified period,
claims of the nature and extent, and even existence, of what is or (iii) forfeit the right to move freely from place to place, or
called bonded labour. Anecdotal evidence, based on different (iv) forfeit the right to appropriate or sell at market value any
perceptions of what bonded labour is-depending on the of his property or product of his labour of a member of his
researchers' definition, whether they take a tighter, stricter, family or any person dependent on him, (v) and includes the
definition, or a more general, economic and occupational system of forced, or partly forced labour under which a surety
term to define 'bonded' labour 77-is increasingly making for a debtor enters ... into an agreement with the creditor to
670 Issues in Pakistan's Economy

Box 22.a inlandless households is much higher at 31 per cent. In

The Causes of Poverty in Pakistan general, there seems to be a negative association between
the size of landholding and the incidence of poverty and
An extensive study conducted by Abid Burki and his colleagues this relationship holds more strongly in rural than in urban
at LUMS examining industrial policy and its spatial aspects, households. Similarly, incidence of poverty in rural livestock
also examined many factors which affect poverty in Pakistan. households is relatively much lower than non-livestock
Excerpts: households. Head education has the most powerful but
negative effect on poverty incidence in both urban and rural
I. The World Bank (2002) highlights the importance of a households. The incidence of poverty on households with
range of household characteristics that are found to be the illiterate head is 57 per cent, lowly and medium-educated
cause of poverty in Pakistan, which include, among others, head, 17 per cent and 19 per cent, respectively, and for
land and livestock assets, education of the household highly educated head poverty is only 5 per cent. A similar
head, size of the household and nature of employment of picture emerges from the urban and rural households.
household head. We use recent household data to verify Poverty incidence on large-sized households is 34 per cent
the influence of these factors on the incidence of poverty in compared with 16 per cent in medium-sized and 3 per
Pakistan. We explore the characteristics of poverty among cent in small-sized households in the national sample. The

l
households by using PSLM 2005-06 data. incidence in urban and rural households is a similar story.
In Table 5-1 we show the incidence of poverty on the Finally, the employment status of household head is also an
basis of these household attributes by taking data of both important determinant of urban and rural poverty. We can
urban and rural areas. The numbers in Table 5-1 illustrate see that the incidence of poverty is high in paid employees
that no land households are 68 per cent of the total, but and unpaid family workers as compared with self-employed
their incidence of poverty is highest at 23 per cent in
the full sample. However, the incidence of rural poverty
and unemployed household heads.... [329---31]
I
Table 5-1 Incidence of Poverty by Household Characteristics: 2005-06

Urban Rural Overall

Head Head Head
% of %of % of
count count count
popula- popula- popula-
poverty poverty poverty
tion tion tion
(%) (%) (%)

Poverty by household land ownership:

Household has no land 13.6 96.0 31.1 54.3 22.8 68.4
Household had subsistence land holding (1-12.5 acres) 20.6 3.3 22.8 39.0 22.7 27.0
Household has economical land holding (12.6-25 acres) 2.4 0.4 14.2 4.3 13.7 2.9
Household has large land holding (more than 25 acres) 0.0 0.3 13.1 2.4 12.3 1.7

Poverty by livestock ownership of household:

Livestock household (Yes= 1, no=0) 15.5 3.2 23.4 36.3 23.0 25.2
No livestock household (Yes=1, no=0) 13.7 96.8 28.7 63.7 22.1 74.8

Poverty by education of household head:

Illiterate head (no education) 26.3 32.4 33.0 56.8 31.5 48.6
Lowly educated head (1-5 years) 14.2 16.0 24.7 17.0 21.3 16.7
Medium educated head (6-10 years) 7.5 31.0 16.6 19.9 12.6 23.6
Highly educated head (more than 10 years) 3.0 20.6 8.1 6.3 4.9 11.1

Poverty by household size:

Small sized household (1-3 members) 1.3 4.7 3.9 4.7 3.0 4.7
Medium sized household (4-8 members) 7.3 58.8 20.2 53.3 15.6 55.2
Large sized household (more than 8 members) 25.8 36.5 37.6 42.0 34.0 40.2

Poverty by employment status of household head:

Unemployed 16.8 19.5 23.9 16.2 21.2 17.3
Self employed 12.8 32.2 22.2 50.9 19.9 44.6
Paid employee 13.0 48.1 35.5 32.0 25.7 37.4
Unpaid family worker 40.0 0.2 21.9 0.9 24.1 0.7

Note: Authors' calculations from PSLM-HIES 2005-6

l
 Chapter 22 Poverty: Trends, Causes, and Solutions 671

II. E·stimated coefficients indicate consistent negative family size consistently increases. poverty in our sample.
, '.·'impact of e.ducation of household head and ownership 'Relative to small-sized households (1 to 3 members),
. . of household assets (including land, livestock, farm the likelihood of poverty increases by 36 per cent for
),;,, :equipment and financialassets) on poverty. For instance, individuals coming from medium sized households (4 to
ttiere is unequivocal. evidence to show that poverty coexists 8 members) and to almost 59 per cent for individuals from
with illiteracy of heads of household and lack of asset large-sized households. In other words, scale economies
ownership. Our results show that the incidence of poverty often attributed to larger households do not exist in rural
dramatically falls with increase in education of hqusehold Pakistan. In the individual level control variables, the
' :head. The results in column (4) suggest that compared coefficient on age is significantly negative suggesting that
with illiterate heads, poverty falls ;by 8.9 per cent when younger population is more likely to be poor. Given that
head has one to five years of schooling, 15.5. per cent the majority of Pakistani population is young, this result
when heads has six to ten years of schooling and 25 per is alarming, The incidence of poverty on male and female
cent when head has more than secondary education. The population is roughly similar, except that males are 0.06
• probability of being poor progressively falls as household per cent less likely to be poor than females. Increase in
land wealth increases from subsistence landholding, to the number of days worked significantly decreases the
eco_nomical landholding. and then to large landholding. probability of poverty in our sample .... [342]
. Ownership of farm equipment is also negatively associated
with 'the· incidence of poverty in rural Pakistan. Livest_ock
.households are significar;itly less likely to be poor than non- Source: Burki, Abid et al. Industrial Policy, Its Spatial Aspects
livestock households. and Cluster Development in Pakistan: Volume 1 Analysis Report
In household level factors, the family size makes to the. Industrial Policy 2010 (Lahore: Lahore University of
the most significant difference on poverty. Increase in Management Sciences, 2010).

the effect that, in the event of failure of the debtor to repay According to an ActionAid study, haris were 50-60 per
the debt, he would render the bonded labour on behalf of the cent of the population of rural Sindh, which works out to a
debtor'. 81 population of around 8 million in Sindh alone, or perhaps
The main feature of the bonded labour system is that a between 0.8-1 million hari families which cultivate land
debt is owed, which gives rise to an exploitative and 'bonded' under sharecropping arrangements in the province. 84 The
nature of relationship between the creditor (in this case, PILER study on bonded labour which defines bondage
presumably the employer rather than a third party), where simply as 'the- imposition of unpaid or nominally paid
the employer can restrict the movement of the debtor, restrict compulsory labour for the landlord on his own farm or house
his right to work elsewhere, expropriate the employee's (begar) regardless of the size of the debt' 85 using upper and
output which the employer can sell in the open market and lower bounds, estimated between 1.8-6.8 million persons in
can get forced labour out of him until that time the debt is bonded sharecropping families across Pakistan. Given the lack
repaid. 82 The fact that the debt is seldom repaid and is passed of statistics and adequate data, either about overall debt or its
on from one generation to the next, is an equally important bonded nature, and large differences in definition, such huge
aspect of this relationship. discrepancies between different estimates are likely to arise.
Although the nature of debt bondage and of the bonded Nevertheless, if one was to consider even the lower end of the
labour system is not occupation-specific, it has been seen to PILER estimate, regardless of severity of bondage, we would
be severest in Pakistan under the sharecropping (hari) system account for five per cent of the current 40 million below the
and in the brick making industry. The sharecropping system poverty line in Pakistan.
in agriculture is based on, either a 50:50 or 25:75 sharing It is also necessary to highlight the fact that even if
system where tenants on the land of a landlord provide all sharecroppers were not formally bonded, a very great
certain inputs and share in the eventual crop produced. proportion are likely to be counted amongst the poorest of
Sharecropping still exists in lower Sindh and in southern the poor in the country and ought_ to be the beneficiary of a
Punjab. Although, according to one survey conducted in focused poverty eradication/alleviation programme. Indeed,
three districts in Sindh, 100 per cent of all rural/agricultural some observers would even argue that given the difficulty
households were in debt, 83 this does not mean that all were to either expressly define or, certainly, to quantify, bonded
in debt bondage or were bonded labour. It is important to labour, the real issue ought to be better and improved tenurial
emphasize the point that while the incidence of debt is arrangements which address the issue of poverty.
likely to be widespread amongst poor rural households and Almost all haris are indebted to landlords who control the
amongst haris, not all are bonded labour. Debt-related bonded labour of the hari in exchange for the loan. The landlord
labour requires many of the characteristics identified above, decides what crops are to be sown and the amount of land
particularly extra-economic coercion, and probably also some to be used for crop production. After a proportion of the
degree of violence. This issue is important as we proceed to loan has been deducted, the produce in the form of cash, or
show below. more usually crops, received by the hari is barely enough for
672 Issues in Pakistan's Economy

subsistence, so the hari is forced to borrow again from the PILER for their study, owners of brick kilns confirmed that
landlord each year or each crop-cycle. A large proportion of all workers took advances and loans and these were to be
haris are unable to survive from the produce of a year's crop adjusted against workers remuneration, and almost all brick
even if they do not have large amounts of debt outstanding, kiln families were found to be in debt to the employer. 89 The
and within six months need loans to be able to survive- Anti-Slavery International study stated that since the mid-
consumption loans-as well as for productive purposes as l 970s, 'bonded labour has been most notorious in the brick
input into the next crop. Usually, their only source of credit kiln industry. This has grown rapidly in recent decades, with
is the landlord to whom they are already indebted. Records brick kilns springing up in large numbers as towns have
for such loan transactions are almost never kept by the haris expanded' 90 yet, not surprisingly, gives no numbers.
who cannot read or write, and the extent of previous debt and We can conclude this section by re-emphasizing the point
the arrangement over inputs and outputs is decided almost that while there is perceived to be a significant problem
exclusively by the landlord. Moreover, until the loan is paid regarding bonded labour in Pakistan, we certainly do not
up, the hari is not allowed to seek employment elsewhere, know enough about either its extent or nature. Only rough
and is unfree, and hence, regardless of the size of the debt, guesstimates are available based on some logical premises.
the hari is in a debt-bondage situation. Perhaps because there is as yet little investigation and
The PILER Study argued that 'conditions of bondage are analysis about the issue other than newspaper reports, and
both a result and a sustenance of unequal economic and also because no agreed definition exists, we have a long
political power'. 86 As a result of this extra-economic coercion, way to go before we are in a position to critically assess the
which is often overlooked, if not totally ignored, due to the situation. Nevertheless, that does not mean that we overlook
attitude of the local level administration-police, justice, or ignore the issue, and in the interim, we need to make
officialdom-cases of the landlord or his employers resorting · the best of the tools we have. If the general presence of
to violence and rape, are not uncommon even when the sharecropping, especially in Sindh, is one of those tools which
original relationship may have been mainly one of a debt can help us identify the existence of bonded labour, then one
owed. Beatings and sexual abuse of women, are often heard must also say that sharecropping has been on the decline:
of, and many such landlords maintain private jails so that the does this suggest also, that bonded labour is on the decline?
indebted haris do not flee. Issues of poverty, more generally Also, the fact that some landlords have had to physically
need redressing, but perhaps equally importantly, do those restrain their haris/workers and even chain them as they work
of violence. One of the many reasons why the local district in the field, suggests that perhaps it is becoming easier for
administration turns a blind eye to the issue of violence of haris to escape from their oppressors and find freedom. Since
bonded haris, is that most such haris belong to religious and time-series data is not available, one does not know whether
ethnic minorities, many are migrants, and are considered bonded labour has increased or fallen. One set of researchers,
'marginal' to the mainstream and have less access to justice talking to freed haris in Sindh found that the freed haris felt
than even Muslim haris and landless sharecroppers. that the sta:te of poverty and of bondage had improved more
Many of the debts which sharecroppers face, have been recently compared to the past, and due to greater awareness
contracted by their forefathers and have been inherited. and the role of human rights groups, better opportunities
Estimates about the extent of the loans show, that on average were opening up. Moreover, if bonded labour is a special,
the loan in the NWFP was Rs. 32,000, and Rs. 16,000 in albeit perverse, consequence of sharecropping, one may need
Sindh. 87 Some studies show that hari families can survive on to address the issue of sharecropping as much as of bonded
their produce only for a few months each year and the average labour.
value of a crop a Sindhi hari receives is Rs. 1,200-1,500 per
month, which is generated only for three or four months.
Debt is an expected outcome given low income, past debt and 22.8 CAN POVERTY BE ELIMINATED IN
higher expenditure. Since landless haris seldom own assets,
they are not entitled to loans or credit from formal or even PAKISTAN?
informal sources, and hence have to turn to the landlord.
All signs suggest that the answer to this question is an
Clearly, given the tenurial relationship, lack of assets, primarily
unequivocal 'no'. In the situation which has persisted for
land and no credit line, it is not surprising that sharecroppers
the last few years, growth rates are significantly lower than
are indebted and many are bonded labourers.
those required to reduce poverty, and are likely to continue
Of the five studies referred to above on bonded labour,
to be below such levels for sometime into the future. Public
three deal explicitly with Sindh, hence their emphasis on
expenditure on development and the social sectors, which
sharecroppers. Only the PILER study and the one by Anti-
has made a nontrivial contribution to poverty reduction, has
Slavery International examine the case of other occupations
continued to decline and is less than one-third of what it
which give rise to bonded labour. The PILER study estimates
was in the early and mid-l 980s. Experience at targeting and
that the upper limit of bonded labour and their families in
brick kilns would be close to 1 million across Pakistan, 88 at micro level, focused, poverty alleviating initiatives, does
not restore much confidence in the government's ability to
although since there has been no survey, there is no way of
verifying this number. The study argues that like the case of address these issues efficiently and effectively, a fact which
haris, those bonded here also mainly belong to a religious the government itself concedes, if somewhat reluctantly.
minority, in this case, Christians. In the surveys conducted by With far greater donor dependence and reliance on funding
for structural adjustment and stabilization from the IMF
 Chapter 22 Poverty: Trends, Causes, and Solutions 673

and the World Bank, all indications suggest that the trends of the poor, both in proportional and absolute terms. In
which resulted in an increase in poverty and in the worsening addition, as we show above, according to some estimates,
of income inequality, are likely to continue and probably poverty is around 40 per cent of the population, nearly 75
be aggravated, 91 -see Boxes 22.5 and 22.9. The one highly million people, and hence, a further deterioration in the
positive factor in all this, is the growth in remittances, which economy will probably result in more being added to the pool
is bound to have a very strong positive effect on reducing of the poor.
poverty. However, one must also understand, that remittances Moreover, as a central theme of this chapter argues, it is
are supply-driven, and while they have been very high over not simply economic growth, even high economic growth,
the 2009-13 period, there is always a fear that they could also that determines poverty alleviation, but the nature and
fall. Nevertheless, at the moment, they remain a significant distributional impact of that growth (pace, remittances), which
silver lining on the poverty reduction platform. has specific poverty alleviating outcomes. It is also important
Even if, in an unlikely event, growth rates do somehow, to emphasize that while a number of researchers feel that
rise to the perceived poverty reducing level of at least six per the decade-long, near 7 per cent growth rates of the 1960s
cent per annum at some time in the future, and manage to be will be sufficient to bring about the conditions for poverty
sustained at that level for some years to come, what cannot alleviation, the structural nature of the economy now is radically
be overlooked is that the given stock of the poor is going to continue different from that of five decades ago and, hence, there are likely
to be added to, making it quite impossible to deal with the huge to be different outcomes. For example, the role of government
pool of the poor that emerges. Different assessments estimate in the provision of basic services has diminished considerably
that the poor are probably 30-35 per cent of the population, since the 1960s and now most services and utilities will
or between 55-65 million individuals. All observers feel that have to be bought from the market requiring, perhaps,
things are going to get far worse if ever they begin to show larger incomes. Also, at a macro level, with a far more closed
any signs of improvement, which will result in a rising pool economy then than now, increases in growth may have been

Box 22.9 seen by some as disappointing. For example, the World Health
Criticism-of PRSPs Organization argues that the potential of investment in health
as a driver of economic growth is not considered in the World
The most fundamental criticism of Poverty Reduction Strategies Bank's advisory documents for poverty reduction strategies
relate to the apparent immutability of macroeconomic (World Health Organization, 2001).
policy. The 'Washington Consensus', with its emphasis on The above two concerns are closely linked to a third, on
macroeconomic stability, removal of barriers to international the nature of public participation and civil society participation
trade, domestic liberalization, privatization and the search in· the production of Poverty Reduction Strategies. There
for market sol.utions in the provision of public goods remains is almost universal agreement that genuine and inclusive
. intact. Poverty reduction measures continue to be subordinate consultation is extremely difficult to achieve. This is clearly an
to th·ese overarching goals. The Strategies are necessary to important issue for the World Bank itself, which has developed
accessJMF/World Bank loans and credits, but the conditions a. large literature on participation in public decision-making
attached to these loans a~d credits remain largely unchanged processes that• predates the Poverty Reduction Strategy
•. (Brettoii'Woods; 1 P0rojectt2003). This has led to fears that initiative (see www.worldbank.org/participation). Yet even in
Po'7erty: Rebuction'. Strategies (and particularly interim advanced industrialized countries, where public consultation
strategies·, developed 'quickly in. order to gain access to is often limited to specific areas of policy and accountability is
credits)';"are·notocgenuinely country owned, but 'a new form confined to parliaments, there appear to be few clear models
of coridition~lity 'imposed by the Bratton Woods Institutions.' to follow.
(World Health Organization, 2001). These fears are underlined The Washington Consensus is not a formal document
by thEueality of the World Bank and IMF teams conducting or agreement, but rather a set of principles that appear to
. reviews of Poverty Reduction Strategies, and essentially acting have been informally agreed between the World Bank and
• .: as gatekeepers for access to international assistance (Marcus the IMF in the late 1980s as a framework for development
. .et al. 2002). . . aid, originally in Latin America, but later in other parts
i'~i:•''• ,ArbtB'~y·,key _concern expressed has been about the of the worid. The' principles included: fiscal discipline;
;~f i~eq~/:ft11;approacr of the Strategies, where measures in social redirection of public expenditure priorities towards
, ·rotection;
~ ~
health care and education are often delinked from
,.,.,,... "'(,""'"!,. ;, ,,.. .•,• : .•
health, education and infrastructure; tax reform; interest
economic;policies, and.little attempt is made to assess rate liberalization; competitive exchange rate; trade and
'IC!?;C io/!f' ;~· act' df:,p61icies .in one sector on outcomes in investment liberalization;· privatization, deregulation and
·r~oo2f;argu~·that in 23 interim and final secure property rights.
by.J~~rri~Ih.er~: i~ little.discussion of policies
;it-t.~J. ...N,'.l·""""· •. • ·1t • , ,
., oor'):iconomic growth. There ,s also little
0 .. . . -~J::-~:o1t1ble -'.~~gative impacts of liberalization Source: Gerry Redmond, 'Poverty Reduction. Strategies and
:f!1'.!\,~6~~rt'iii~ s:.:,a"rtd hciw:tcr"take compensate for these with Well-Being in Albania and Former Yugoslavia', Paper presented
r-tJg~I_;: 1;,i:)01:,rd';otff~~ie?licies. This orthodox approa~h is
0
at Democritus University, Greece, 2003.
674 Issues in Pakistan's Economy

consumed/reinvested in the country; now with a far greater phenomenon in Pakistan and might be reduced a little here
import component in the economy, some gains in incomes or there, but is likely to stay. The assumption for this outlook
may be Jost to the domestic economy. is that growth will not return to the six-plus levels of the
Of the 40 per cent of Pakistan's population that lives in 1980s or mid-2000s required for a consistent period to wipe
rural areas, nearly 35 per cent lives below the poverty line. out poverty, and that government interventions in the form of
This means that around 32 million Pakistanis in the rural tinkering with the economy with microcredit and other 'safety
areas live in poverty. The incidence of rural poverty is highest nets' such as the Benazir Income Support Programme, will
amongst those who own no land, and over 40 per cent of not be sufficient to eradicate poverty. The one effective means
landless households are poor and together constitute 70 per which could considerably reduce poverty in Pakistan, that of
cent of the rural poor. Clearly, rural poverty has a critical link with land and agrarian reforms, is an option which no government
land ownership and access to land. Without extensive land and is willing to seriously consider. With the government accepting
agrarian reforms, one cannot even think of alleviating, leave yet another IMF programme in September 2013, and with the
alone reducing, poverty in Pakistan; land reforms have to be the IMF immediately saying that growth rates will continue to be
prime instrument for reducing poverty. With land reforms not one low, we know that poverty is here to stay.
of the concerns of the government, poverty in Pakistan will
persist-See Box 22.10 and Appendix 22.3. 22.9.2 Further Reading
Perhaps the most important feature about_ poverty
alleviation in Pakistan is the absence of hard data and Perhaps there is no other area of research in Pakistan which
assessments about the extent, nature and distribution of has had the funding and exposure as much as Poverty
poverty. We actually do not know how poverty is behaving in the recent past. There is a huge amount of literature
and what directions it is moving in, or the rate of its change. available on Poverty, not just in Pakistan, but world-wide.
There is great speculation about the size of the poor, but In fact, it is correct to say that there is just too much
nothing quantifiable as 2013 comes to an end. available, looking at poverty from every angle imaginable-
poverty and the environment, poverty and trade, poverty and
women, and as many themes as one can think of. Moreover,
since international financial institutions and donors are so
22.9 SUMMARY AND FURTHER READING
involved in studying, understanding and funding poverty
22.9.1 Summary and its alJeviation, a large amount of data and information
is easily available on the internet. The web sites of the World
This chapter has shown that poverty increased dramatically
Bank, Asian Development Bank, IMF, and numerous smaller
in Pakistan in the period 1988-2004, with around 50 million
donors, have links to thousands of studies on poverty. For
Pakistanis Jiving below a subsistence poverty line. While
anyone who is interested in a detailed and serious study on
poverty is both an urban and rural phenomenon, the majority
poverty, its theoretical issues, problems with definition and
of the poor still live in rural areas and face asset-mainly
measurement, or any other aspects, these websites are worth
land-deprivation, not owning it or even having access
many visits and are essential for beginning any enquiry about
to it. Not only did poverty increase in Pakistan, but so did
the state of poverty, and for looking at comparative studies
inequality, with the Gini coefficient being worse than what it
as well.
was in the 1960s, which was considered by most to be highly
On Pakistan, most of the references cited in this chapter
inequitable. There are also regional trends which need to be
are easily available and should be consulted. The first place
examined independent of national and aggregated statistics,
to start should be S. Akbar Zaidi's An Annotated Bibliography on
something that is discussed in Chapter 23. However, while
Poverty in Pakistan (UNDP, Islamabad, 1999, http://un.org.pk/
there is great debate and disagreement about the possible
library/poverty/pov_biblio.htm and http://www.cosspak.org/
falJ in poverty after around 2003, all indicators suggest that it
data/bibliography_ on_ Poverty_Bibliography_by_ S._Akbar_
would have fallen at least till 2008, but must have increased
Zaidi.pdf) which has a summary of every single study on
after that. But by how much, we have no idea.
poverty undertaken in Pakistan from the 1960s to 1999;
The main argument in this chapte~ is that poverty rose
it is very useful in terms of an extensive literature review,
on account of government policy shifts towards the end
and since is available on the internet and easily accessible.
of the 1990s. Closely following a Structural Adjustment
Two papers by Haris Gazdar are essential to understand
Programme-although not always its details-the numerous
the numerous issues related to poverty in Pakistan and
governments since 1988 cut down development expenditure,
are highly recommended: Review of Pakistan Poverty Data
privatized industry, liberalized trade and the economy and
(Department for International Development, London, 6 April
financial markets, all at a pace and in sequence which had a
1998) and the more easily accessible, 'Poverty in Pakistan:
negative bearing on economic growth, and hence, on poverty.
A Review', in Shahrukh Rafi Khan's, Fifty Years of Pakistan's
Poverty felJ, particularly in the 1980s, on account of large
remittances, excessive spending in the public sector (i.e. not
Economy (Karachi: Oxford University Press, 1999). A recent
comprehensive report by Haris Gazdar looks at issues of
caring about the fiscal deficit), resulting in high growth. The
both poverty and inequality in Pakistan; see Policy Responses
fall in poverty in the mid-2000s, was on account of higher
growth and later, because of increasing remittances, and not
to Economic Inequality in Pakistan, Policy Brief 3 (Islamabad:
UNDP, April 2009). The 2012 review by the eminent Professor
because of targeted government interventions. This chapter
S. M. Naseem, is also essential reading because it is the most
concludes with the view that poverty is now a permanent
 Chapter 22 Poverty: Trends, Causes, and Solutions 675

Box 22.10 want far greater access to land and water and protection of
Poverty Reduction: Two Contrasting Views the natural resource base. The concentration of landholdings
is found to be impoverishing not just because it means that
This article which appeared in Dawn compares and contrasts the poor have few assets on which to depend on, but ultra-
two documents of the Government both of which suggest exploitation and abuse, a familiar feature of inequitable land
different measures to reduce poverty in Pakistan. distribution in rural Pakistan, is also rampant. Land was
seen by the poor as an important source of power, much of
For the last few years, as poverty has continued to persist it being misused.
with about a third of the population living below the poverty The poor, as a consequence, demand access to land
line, the Government of Pakistan has become an active as an income earning asset, and access to justice and
proponent of finding ways of alleviating or reducing poverty protection and security so that they can live relatively free
in the country. In this regard, two official documents-one lives. Clearly, only with active and extensive land reforms,
fully owned by the Ministry of Finance and the other by where land is distributed not just to small farmers but to
the Planning Commission-have been made public, yet the landless, .and where the power of landlords is broken
reveal two very contrasting and indeed, conflicting analyses, down, can one hope to see poverty reduced amongst the
opinions and strategies, for poverty reduction in Pakistan. two-thirds of the poor.
The Ministry of Finance document is, of course, the Other findings which show government failure relate to
Poverty Reduction Strategy Paper (PRSP) still in its draft the demand for basic services, especially health care. The
form, which should be finalized before the end of this year. poor identified health care related institutions as the most
The PRSP document lays out the poverty alleviation strategy important to them. The poor are far more vulnerable to
of the government which has been followed since October disease, yet do not have access to government facilities.
1999 and formalizes key elements of that strategy. Moreover, there is a wide gap between what the government
The key elements of the PRSP focus on accelerating is supposed to provide and what poor communities actually
growth with macroeconomic stability, investing in human receive. The highly inadequate level in investment in basic
capital, expanding social safety nets and emphasize better services was cited as a key reason for the failure of health
governance. Private sector growth is seen as one of and education facilities. A crucial requirement to get people
the most critical elements of Pakistan's poverty reduction out of poverty is to substantially raise public expenditure on
strategy, as is the generation of productive employment at services and infrastructure. However, with public expenditure
a time when the PRSP document acknowledges that the on development falling or not rising in line with need, the
rate of unemployment exceeds 10 per cent in the country. condition of the poor regarding access to health, education,
Since the rise in unemployment has been seen largely as a water and infrastructure, will probably deteriorate.
consequence of lower growth, an increase in growth is said The need for jobs was another key need identified by
to have an employment enhancing effect. the poor as unemployment is a major cause of poverty.
The PRSP document acknowledges that nearly two-thirds Unfortunately, with lower growth, increased privatization,
of Pakistan's poor live in rural areas and that more than fifty and an inhospitable economic environment, opportunities
per cent of the rural population is landless. Since poverty in for employment continue to stagnate while the number of
Pakistan has a largely rural dimension, rural development people looking for jobs grows each year.
will be needed to help reduce poverty, for which agricultural The documents reveal very contrasting approaches to the
infrastructure and programmes will be required. There is poverty issue in Pakistan. The PRSP strategy of the Ministry
also a passing reference to the distribution of state owned of Finance, which is the actual current economic policy
land to small farmers, though oddly, not to the fifty per cent of the government, is based primarily on macroeconomic
landless rural population. stabilization which does not directly help reduce poverty.
While the PRSP claims that it is 'home grown', as do all Moreover, stabilization has occurred without sufficient
government policies no matter where they originate from, growth, a key requirement for poverty reduction. Clearly,
the other document, the Pakistan Participatory Poverty the government's current strategy, reflected in the PRSP, is
Assessment (PPA), is in many ways just that, and is a highly insufficient to make a significant dent in the level of
rather different document compared to most other official poverty in Pakistan.
publications. The PPA is based on in-depth surveys in 51 The PPA document, on the other hand, focuses very
sites in very poor areas across the country and has had sharply on the issue of the access and ownership of land
the active involvement and support from the Planning and in rural areas where poverty is particularly acute. With the
Development Division of the Federal Government, as well Prime Minister having declared that there will be no more
as in each of the provinces and in the Northern Areas and land reforms, poverty in Pakistan is here to stay, and all
FATA. other attempts at poverty reduction or alleviation, are likely
Unlike the PRSP, the Participatory Poverty Assessment to remain far from adequate. If there is any sincerity in the
is based on interviews and opinions of the poor as to why government's desire to reduce poverty, it will have to push
they are poor and how they see their way out of poverty. land reforms to the top of its poverty reduction strategy.
Hence, unlike the findings of the PRSP, those of the PPA There is no other alternative.
differ markedly.
For a start, one of the main findings of the PPA was
regarding the lack of access to land by the poor. The poor Source: S. Akbar Zaidi, Dawn, September 13, 2003.
676 Issues in Pakistan's Economy

recent but also because of the issues it discusses and for the recommended, as the national and seven Pakistan regional
most recent bibliography on poverty' in Pakistan: Naseem, reports, are based on the 'Voices of the Poor', where detailed
S. M., A Review of Studies on Poverty in Pakistan: Origin, Evolution, qualitative stories and reports from the poor themselves, have
Thematic Content and Future Directions, History of PIDE Series-6 been documented. These have been published by the Planning
(Islamabad: Pakistan Institute of Development Economics, Commission in Islamabad. The Ministry of Finance's Poverty
2012). Reduction Strategy Paper (PRSP), released in early 2004, should
The Mahbub ul Haq Centre for Human Development's also be consulted as it describes the Government's poverty
A Profile of Poverty in Pakistan (Islamabad, February 1999) reduction strategy-also see Box 22.8.
has numerous articles as are the Annual Reviews of the PRSPs have now become important documents used by the
Social Policy Development Centre ( SPDC), particularly their IMF and the World Bank in dealing with developing countries.
Annual Review 2000: Towards Poverty Reduction (Karachi: Oxford A great deal of information about PRSPs is available on the
University Press, 2001) and Annual Review 2001: Growth, web pages of these organizations. In addition, the following
Inequality and Poverty (Karachi: Oxford University Press, references would be very useful: Bretton Woods Project,
2002). It is not possible to look at the phenomenon of poverty Poverty Reduction Strategy Papers (PRSPs): A Rough Guide, Bretton
in Pakistan and not consult the World Bank's studies on Woods Project (London, 2003) www.brettonwoodsproject.org; R.
poverty: their two reports are essential reading as well. See Marcus et al. 'Poverty Reduction Strategy Papers (PRSPs)-
World Bank, Pakistan Poverty Assessment, Report No 14397-PAK fulfilling their potential for children in poverty?', Journal of
(Washington DC: World Bank, 1995 ), and the more recent International Development, vol. 14, 2002, 1117-28; and, World
World Bank, Pakistan Poverty Assessment, Report No. 24296- Health Organization, Health in PRSPs: WHO Submission to
PAK (Washington DC: World Bank, October 2002). Akmal the World Bank/IMF Review of PRSPs, December 2001, www.
Hussain's, Pakistan: National Human Development Report 2003 worldbank .org/poverty/strategies/review.
(Islamabad: UNDP, 2003) is also recommended. The Reports Since there have been data constraint regarding poverty
of the Centre for Research on Poverty Reduction and Income numbers in Pakistan since 2006/7, as well as much controversy,
Distribution (CRPRID): Annual Reports on the Millennium there has been little new research on the nature of poverty in
Development Goals. For material on bonded labour, see Pakistan after 2006n. However, the contribution by Haroon
Aly Ercelawn and Muhammad Nauman, Bonded Labour in Jamal of the Social Policy and Development Centre (SPDC),
Pakistan, Working Paper/1/2001 (Geneva: ILO, 2001 ). Karachi, stands out in this regard. Most of his papers are
For a very different understanding of poverty in Pakistan, available on the SPDC web site and should be consulted.
the Pakistan Participatory Poverty Assessments (PPA) are

Appendix 22.1
first and foremost with these issues. Moreover, barring a few
Estimating Poverty Lines exceptions, all applied poverty analysis takes caloric standards
This extract from Haris Gazdar's excellent article 'Poverty in as the starting point.
Pakistan: A Review', shows the problems in the measurement and The basic idea behind the caloric approaches is that the
qualification of poverty lines. Anyone, interested in poverty in poverty line (in the income or consumption spaces) needs to
Pakistan is advised to read the full article. be set with reference to minimum recommended standards of
calorie intake. lt is, assumed that there is a stable functional
relationship between income or consumption and calorie
I. The Construction of Poverty Lines intake. The recommended caloric requirements for healthy
living are derived from clinical nutritional tests under
Most empirical work on poverty in Pakistan has been carried controlled conditions. The poverty line is simply that level of
out with reference to a poverty line or a set of poverty lines. income or total consumption expenditure which is consistent
One of the most popular approaches has been to define with achieving the recommended daily intake of calories. The
poverty in terms of the ability of a household or individual popularity of the calorie-based approach rests on its apparent
to attain a certain level of calorie intake. However although scientificity, and the ease of interpretation. Neither of these
'fixing' a unique poverty line may have some merit in the two suppositions, however, turns out to be durable under
political economy of public policy, it is of limited use as scrutiny.
an analytical construct, and does not add very much to the While it is true that clinical nutritional tests lie behind the
conduct of poverty analysis. A more eclectic approach that recommended calorie standards, on which poverty lines are
involves using a range of poverty lines and focuses on relative then based, the interpretation of these norms as immutable
poverty rankings of different population groups can be more basic requirements is open to question. Nutritional tests
informative of the nature of income-and consumption- are carried out for controlled groups of subjects and under
poverty. Arguments about the construction of poverty lines controlled conditions of physical exertion. There is a great
cannot be ignored entirely, however, since much of the applied deal of interpersonal variation in calorie requirements, as
work on poverty analysis in Pakistan has been concerned
 Chapter 22 Poverty: Trends, Causes, and Solutions 677

well as a great deal of variation in the calorie requirements Ahmad, 1993) are based on the argument that the poverty
of a person under different circumstances. The poverty line, line could be interpreted as a 'minimum' or 'basic' needs
however, is a summary benchmark indicator, and poverty consumption bundle. The precise composition and value of
analysis is usually carried out using data sources that are the basic needs bundle depends on the specific economic
unable to provide detailed information about a person's and social context under consideration. One way of thinking
precise physiological condition or quantify her normal level of about the poverty line is that it represents the minimum level
physical exertion. The possibility of wide inter-personal and of income or consumption below which a person ought to
inter-temporal variations in minimum caloric requirements be regarded as socially disadvantaged. Ahmad (1993) arrives
is further complicated by the fact that there is no consensus at this minimal bundle on the basis of a consultative exercise
among poverty analysts on which caloric norm to use for involving not only policymakers but also members of the
constructing poverty lines. Operationally, the norms that public. His results were used by Gazdar, Howes and Zaidi,
have been used vary between 2,000 to 2,550 kcal per day-a 1994a.
range of over 20 per cent. Even the apparently simple task of These approaches have been criticized on the grounds that
assigning minimum calorie norms on the basis of physiological they are arbitrary and 'subjective' (Ali, 1995). This criticism
testing rests to a great extent on the exercise of choice and reveals some confusion about the status of methods such
judgement on the part of the analyst. as consultative exercises and opinion surveys. The main
The mapping of caloric norms onto household incomes difference between such methods and statistical methods
or consumption presents another set of problems. The most that estimate parameters from survey data is that the latter
common method in this regard is based upon the estimation are based upon revealed behaviour while the former are
of a calorie-expenditure function. The relationship between based on express evaluations of social status. Surveys that
total income or expenditure and caloric intake is estimated collect data on opinions about social status are neither more
statistically using household budget survey data, which nor less subjective than those which collect data on actual
typically include information on the quantities of various consumption. They are, in fact, attempting to answer different
food items consumed. The poverty line is then set as that questions.
income or expenditure level at which the expected calorie Any particular method for the. derivation of a poverty line
consumption (based on parameter estimates) is just equal to involves a number of choices and judgements that need to
the recommended caloric norm. Recent users of this approach be made by the analyst or the policymaker. The quest of a
in Pakistan have been Ercelawn (1991) and Malik (1991, 'pure' scientific or 'objective' poverty line, therefore, is likely
1994). A variation on this approach was suggested by Lanjouw to remain unfulfilled. Rather than expend further intellectual
(1994) where the consumption patterns of the poorest resources in this quest, it would be better if researchers chose
groups were used rather than those of the entire sample as in from existing poverty lines in order to take analysis further,
Ercelawn (1991) and Malik (1991, 1994). The basic idea here or worked with a range of poverty lines without worrying to
is that the consumption patterns in the sample itself are used much about their pedigree.
to determine the level of total expenditure which is consistent The contrast between poverty analysis in lndia and Pakistan
with achieving the caloric norms. is quite interesting in this regard. The original rural poverty line
Calorie consumption depends, however, on a whole range in lndia was, indeed, referenced around a daily intake of 2, 100
of variables and not simply on household purchasing power. calories per person, while the urban line was based originally
For any given level of income, for example, a household whose on 1,900 calories per day. This was done for 1960-61 in an
members are involved in relatively arduous physical labour is influential study by Dandekar and Rath (1971 ). The difference
likely have a higher consumption of calories compared to a between the rural and urban caloric norms was explained in
similar household whose members have relatively sedentary terms of the higher energy needs of the rural population due
work or leisure activities. A poverty line which is based upon to their more physically exacting work and lifestyles, but no
the statistical relationship between calorie consumption and reasons were given for the• precise difference of 200 calories
household expenditure is a rough average over households per day between the two groups. ln the subsequent updating
made of individuals of very differing physiologies and with and adjustment of the Indian poverty line, however, the
very different rates of expending energy. To interpret such reference to calorie standards was dropped and standard price
a poverty line as marking off potentially well-nourished indices were used. Although the poverty line in use currently is
individuals from potentially malnourished ones would require based on one that was first estimated with calorific standards
extremely stringent and untenable assumptions about the in mind, no attempt has been made to refer the subsequent
distribution of these other attributes. updating of this poverty line to calorific standards.
Even seemingly 'objective' ways of arriving at poverty lines, While in India much of the discussion has revolved around
therefore, are fraught with a large number of 'subjective' the methodology for updating an agreed benchmark poverty
choices and decisions such as: which caloric norm to use? line over time and for regions, rather than on defining
Whether to set the poverty lines according to the consumption that benchmark, in Pakistan, a great deal of work in the
pattern of the entire sample or a subset of it? And, how measurement of poverty deals with the specification of the
precisely to map calories to expenditure or income? benchmark. The most likely explanation for the general
J acceptance in India of one benchmark poverty line and the
As noted above, there are few exceptions to calorie-based
approaches to the construction of poverty lines. These lack of consensus on this issue in Pakistan is that in India the
exceptions (including Gazdar, Howes and Zaidi, 1994 and government officially endorsed the poverty line. ln Pakistan,
678 Issues in Pakistan's Economy
l
despite a number of attempts by various bodies, no official
poverty line ·has yet been endorsed.
example, estimated separate calorie-expenditure functions
for each province and indeed, for cities, towns and rural
I
For purposes of research into poverty, as well as for policy areas respectively within each province. Malik (1991, 1994)
matters, the precise origin of a poverty line does not really conducted a similar exercise with the rural sample, and simply
matter, since any poverty line would be based at least partly used the poverty line then obtained for the entire sample. This
on normative criteria, and thus there is some measure of method requires a brief comment, because it is popular among
arbitrariness in its choice. What is important is not how the some poverty analysis and because its use is premised on the
initial poverty line was specified in the first place, but the unfounded presumption of scientific objectivity.
methods which are used for updating it over time, across The problems with interpreting any calorie-based poverty
regions, and for rural and urban areas. For such analysis, in line as marking off actual or potential malnourished
fact, it is better to use not one but a set of poverty lines.. households or individuals from the rest were discussed above.
Using estimates of separate calorie-consumption functions
in order to make regional and temporal adjustments to
II. Inter-Regional and Inter-Temporal the benchmark poverty line is fraught with even greater
difficulties. One serious problem has been encountered in the
Adjustments separate estimation of calorie consumption functions in rural
The issue of adjusting a benchmark poverty line for different and urban areas, and the use of a unique caloric norm for
regions and over time-even a poverty line that might have the type of area. lf the rural sample includes a much higher
been chosen completely arbitrarily in the first place-is an concentration of workers involved in physically demanding
important one. There is a case, of course, for updating the labour (as is, indeed, plausible) and if the rural lifestyle, in
initial bundle from time to time in order to reflect long-term general, requires a greater consumption of calories than the
changes in the economy and in consumption patterns. The urban lifestyle (due to the need to walk longer distances to
poverty line is, after all, to a great extent, socially constructed. fetch water, for example), then for any given level of income,
ln other words, the socially acceptable minimum standard of the rural households are likely to consume more calories, on
living can and does change as economic conditions change. average, than their urban counterparts. Estimating the poverty
Updating the poverty line for medium-to long-term changes line from a calorie-expenditure function using a unique
in economic conditions, individual preferences and social caloric standard for the urban and rural sub-samples would
norms, however is not the same as adjusting the poverty line have the effect of over-estimating the urban poverty line in
to account for changes in the cost of living over time, or to comparison with the rural.
account for differences in the cost of living between different One way around much estimation biases has been to
regions. designate different caloric standards for urban and rural areas.
lf the poverty line is regarded as the value of a minimum lt is not clear, however, as to what the. precise difference
bundle, the appropriate method for adjusting it for different between the caloric standards for urban and rural areas ought
regions and for different time periods is the same as the to be. Often the difference is based on a judgement on the
method for making such adjustments for any other value that part of the analyst in order to produce plausible rural and
is expressed in money terms-i.e. a price index. The main issue urban estimates of relative poverty. ln the case of poverty
is to find the appropriate adjustment factors for differences in line adjustments also, therefore, the calorific approach has
the cost of living (or the cost of acquiring that bundle), and the appearance of 'objectivity' while relying, ultimately, on
applying these adjustment factors to the benchmark poverty reasonable but subjective judgement in order to arrive at
line. results that are plausible.
While there is a fair degree of agreement over this method,
some practitioners, particularly those who have favoured Source: Gazdar, Haris, 'Poverty in Pakistan: A Review', in Khan,
calorie based approaches to the construction of the poverty Shahrukh (ed.), Fifty Years of Pakistan's Economy (Karachi: Oxford
line, have taken a different route. Ercelawn (1991), for University Press, 1999), 265-274.

Appendix 22.2

The Political Economy of Number many of the issues which have been in the public eye since the
Pakistan People's Party government took office in 2008. For a
Crunching: Poverty Data in Pakistan response and critique, we also add an article by Pervez Tahir,
Pakistan's former Chief Economist.
ln a number of articles on poverty estimates in Pakistan,
Ashfaque H. Khan, a senior economist and prominent member
1. The present government is facing real embarrassment on
of the Musharraf-Shaukat Aziz economic team, has given a
poverty estimates for 2007-08. The Panel of Economists
comprehensive and detailed assessment of the political economy
formed by the government in April 2008 under the leadershi~
issues of estimating poverty in Pakistan. The following short
of Dr Hafiz Pasha, found that 35-40 per cent people of
pieces, partially edited, from him between 2009 and 2012, reveal
,
I Chapter 22 Poverty: Trends, Causes, and Solutions 679

I Pakistan were living below the poverty line in 2007-08-up

from 22.3 per cent in 2005-06. The political leadership,
Thus, at any given point in time there can be different poverty
estimates with same or different data sets. What is required,
unaware of the technical details of the estimation techniques, therefore, is that we continue to use the same methodology
took the estimates of the Panel seriously and everybody, irrespective of its strength and weaknesses, lest we should
including the ministers, the prime minister and the president never be able to know as to what is happening on poverty
started mentioning the numbers within and outside the front.
country. The political leadership had no reason to distrust There are views about the methodology used by the Panel
the professional skills of the Panel of Economists. Their only of Economists. One, that in the absence of PSLM Survey
fault was that they could not realise that some members of data for 2007-08 the Panel simply adjusted the poverty line
the Panel of Economists were positioning themselves to get upward to the extent of cumulative inflation (20 per cent) for
ministerial jobs and some retired "experts" were trying to the period 2006-07 and 2007-08. On the other hand, they
secure their jobs in the government. These people could have used household consumption expenditure for the year 2005-
moved their way to the present. regime only if they would 06, which was not adjusted upward to match the poverty line.
paint a bleak picture of the state of the economy, including ln other words, apple was compared with orange. Naturally,
the substantial rise in poverty. l am positive that this Panel such a flawed methodology was bound to produce erroneous
of Economists has had no courage to write similar three results. Second, that the Panel used an equation to forecast
paragraphs as documented in the Memorandum of Economic poverty. This equation has many exogenous variables, such as
and Financial Policies attached with the Letter of lntent, food inflation, remittances, openness of trade, development
signed by the Government of Pakistan on Nov 20, 2008 expenditure as percentage of GDP, etc. Giving the value of
with the lMF. These three paragraphs, written by the present each variable for 2007-08 and using the estimated parameters
regime, very aptly summarize the major economic and social it predicted poverty for 2007-08. Forecasting is a complex
achievements of the last one decade, including the 'reduction exercise and requires transparency in the use of data. The
in poverty and an improvement in many social indicators'. lt Panel did not release those numbers which went into the
appears that the Panel of Economists was trying to become model. Thirdly, they used the preliminary version of the
more Christian than the Pope and as such came up with model whose parameters changed substantially in subsequent
poverty estimates based on flawed methodology. revisions. The Panel never bothered to contact the author of
On the other hand, the Centre for Poverty Reduction and the model. Had they contacted him, he could have saved the
Social Policy Development (CPRSPD), using the PSLM Survey Panel from such disgrace.
2007-08, also estimated poverty for the year 2007-08. They
found that poverty at national level declined sharply from Source: Khan, Ashfaque H., 'On Poverty Estimates', The News,
22.3 per cent in 2005-06 to 17.2 per cent in 2007-08. Karachi, 7 July 2009.
Poverty, both in rural and urban areas also registered sharp
declines. The estimates of the CPRSPD were also validated
by the experts from the World Bank. The 'experts' from the
Planning Commission are of the view that a sharp decline
in poverty in 2007-08 does not depict the ground reality. 11. The Centre for Poverty Reduction and Social Policy
Why should it depict the ground reality? Firstly, the period Development (CPRSPD) of the Planning Commission has
it covers is from July 2007 to June 2008. Secondly, poverty estimated the extent of poverty in Pakistan by using the
estimates are not like the growth number, money supply or Pakistan Social and Living Standards Measurement Survey,
inflation which change yearly. Poverty number reflects the commonly known as the PSLM Survey, for the year 2007-08.
changes in the lives of the people which are affected by the The CPRSPD found a sharp decline in nation-wide poverty in
policies pursued for a fairly long period of time. To be fair to 2007-08 over 2005-06, lt _found that the number of people
the government, how can they say now that the poverty in living below the poverty line declined from 22.3 per cent
Pakistan has declined substantially in 2007-08 as opposed in 2005-06 to 17.2 per cent in 2007-08. Rural and urban
to their earlier stance that it had increased to the range of poverty also registered declines from 27 to 20.6 per cent and

I 35-40 per cent? ln other words, how can they say that at the
time of taking charge of the state of affairs only 17.2 per cent
people were living below the poverty line and that there are
indications that poverty is on the rise once again in Pakistan.
This is indeed the real embarrassment for the government
13.1 to 10.1 per cent, respectively during the period. These
results were also validated by the World Bank experts, Mr
Nobu Yoshida and Tomayuki Sho, especially flown from the
World Bank headquarters at the request of the government of
Pakistan. These two experts conducted their validation exercise

r caused by the Panel of Economists.

Poverty estimates are highly sensitive to changes in
different variables. For example, should we use calorie intake
and presented their results to the Planning Commission on 29
May 2009. The World Bank experts recommended that the
government should release these numbers because these are
or basic need approach or should we use 2550, 2250 or 2350 credible.
calorie to draw the poverty line? Should we use CPI, SPl, WPl Despite the World Bank's recommendation, the government
or prices derived from the Survey itself to adjust the poverty has not yet released the poverty numbers. Why is it so reluctant
line or should we use consumption or income? The basket in releasing the poverty numbers? To answer this question, 1
of commodities may differ across researchers and even the will have to remind the readers that immediately after taking
cleaning protocol of data may give different poverty estimates. charge of the state of affairs the present government had
680 Issues in Pakistan's Economy

formed a Panel of Economists headed by Dr 1--fafiz Pasha the government but has also brought a bad name for the
in April 2008. The panel found that 35-40 per cent of the country. lt is in the interest of Dr Shaikh and in the interest of
population was living below the poverty line in 2007-08- the country that such "experts" are kept outside the Q-block.
up from 22.3 per cent in 2005-06. lt is important to note
that when the panel was working on poverty estimates, Source: Khan, Ashfaque H., 'On Releasing Poverty Numbers, The
the PSLM Survey data for 2007-08 was not available. They News, Karachi, 13 April 2009.
estimated the numbers using some methodology which was
never revealed by them. lt is now exceedingly clear that the
estimates were based on flawed methodology. l had objected lll. Mehtab Haider, a well-respected economic journalist of The
to the use of such methodology because 1 was then associated News, published a story headlined 'Poverty reduced to half in
with the ministry of finance. The visiting World Bank team at Musharrafs regime: WB Report' (7 August). Quoting from the
that time was also of the same opinion.
The political leadership, unaware of the technical details,
took the estimates of the panel seriously and everybody,
World Bank's 30 July report, 'Country Partnership Strategy',
the writer, Mehtab Haider, reported that the percentage of 1
Pakistanis living the below poverty line had fallen from 34.5
including the president, the prime minister, and the cabinet per cent in 2001-02 to 17.2 per cent in 2007-08.
ministers started mentioning the numbers within and outside This news item has vindicated my position, thanks to the
the country. Even the same numbers as estimated by the World Bank. l had been urging the government over the
panel appeared in the document of the Friends of Democratic last 15 months through my columns to release the poverty
Pakistan (FODP) meeting held in Tokyo last year. The political numbers for 2007-08. The government, in particular the
leadership had no reason to distrust the professional skills of Planning Commission, failed to release the numbers, obviously
the economists in the panel. However, their only fault was for political reasons.
that they could not realise that some members of the panel ... Why is the government so reluctant in releasing the
were positioning themselves to get lucrative assignments and poverty figures? There are two reasons for this. First, as
some retired 'experts' were trying to secure their jobs in the Mehtab Haider has said 'poverty reduced to half in Musharrafs
government. regime .. .'. The government wanted to suppress the figures
How could the government release the poverty numbers of because it never wanted to tell the people that they inherited
the CPRSPD? How could it comply with the recommendations only 17.2 per cent people living below the poverty line.
of the World Bank to release the numbers? The CPRSPD Furthermore, it was politically suicidal to admit that poverty
found a sharp decline in poverty, which was validated by the reduced to one-half in just six years during 'Musharrafs
World Bank. The panel under the leadership of Dr Hafiz Pasha regime'.
on the other hand found a sharp increase in poverty. This is Secondly, the government had formed a "Panel of
a real embarrassment for the government. How could it tell Economists" headed by Dr Hafiz A. Pasha in April 2008.
the world in general and people of Pakistan in particular that The panel found that 35-40 per cent of the population was
poverty numbers which they were propagating were wrong living below poverty line in 2007-08-up from 22.3 per cent
and based on flawed methodology? 1 have all the sympathy in 2005-06. lt is important to note that when the panel
with the political leadership. was working on poverty estimates, the PSLM Survey data
The question generally being raised by some stubborn for 2007-08 were not available. The panel estimated the
'experts' that the poverty numbers estimated by the CPRSPD numbers under a methodology that was never revealed. lt is
and validate9 by the World Bank do not represent the current now exceedingly clear that the panel's estimates were based
ground reality. How could this be the representative of the on flawed methodology.
current ground reality when the survey itself was conducted Some professional economists like to put themselves into
from July 2007 to June 2008? The current ground reality will potentially advantageous position whenever a change of
be reflected when the PSLM survey for 2010-11, if at all, will government takes place in Pakistan. Some retired 'experts'
be conducted. would do anything to please the new political leadership to
Not releasing the numbers has wide-ranging consequences. protect their jobs. Some would try to secure lucrative jobs
First, the benchmark for the poverty numbers is five years
old (2005-06). Second, the next PSLM survey which was
to be conducted in 2009-10 has been delayed. Third, the
government is trying to conduct a fresh survey which is not
in line with the PSLM methodology. This is tantamount to
or consultancy positions. Jobs and consultancies would be
available only if they painted a horrible picture of the state of
the economy inherited by the new leadership. A combination
of all these motives was enough to persuade the political
leadership to prevent the release of the poverty figures.
I
moving the goalpost and destroying the poverty numbers.
... Poverty may have increased in Pakistan after 2007-08.
The global economic crisis in 2008 has brought miseries for
Even a cursory look at these figures would reveal that not
only poverty declined sharply in Pakistan from 2001-02 to
1
2007-08 but inequality was reduced as well. Meanwhile,
the people of Asia-Pacific region. More than 26 million people social indicators improved and the unemployment rate
could lose jobs by the end of 2010; and millions who took dropped. Are such outcomes not the cherished goals of every
decades to work their way out of poverty have slipped back government? lf something good happened from 2001-02 to
in it. Pakistan is part of the region and is no exception. Rise 2007-08, there is nothing wrong in acknowledging the facts.
in poverty is a global phenomenon and we should not be Should the government still not release the poverty numbers
apologetic on this count. The panel has not only embarrassed even after the World Bank has done so? Where are those so
 Chapter 22 Poverty: Trends, Causes, and Solutions 681

called 'experts' in the Planning Commission now? Where