IMPACT OF POLITICAL INSTABILTY ON

THE ECONOMIC GROWTH OF PAKISTAN

Shahrukh Alaya 22140

PAKISTAN ECONOMIC POLICY

FINAL REPORT

Submitted To:
Sir Muhammad Usman
 ABSTRACT

Political Instability is the inclination of a country towards downfall due to the competitiveness,
violence and conflicts between political parties. The purpose of this research is to determine the
effect of political instability on the growth of economy of Pakistan. This paper shows how the
political instability and lack of law and order have negative effect on the economy and macro-
economic performance. We also find that political Instability lowers the productivity and
increase the inflation rate and unemployment rate, adversely affecting the GDP.

Keywords: Political Instability, Economic growth, Law and Order, Productivity, GDP, Inflation
rate, Unemployment rate
 TABLE OF CONTENTS:

 1-Introduction

 2-History of Political Instability in Pakistan

 3-Literature Review

 4-Methods

 5-Findings

 6-Discussion

 7-Conclusions

 8-Recommendations

 References
INTRODUCTION:
Political Instability is regarded as a huge trouble and harmful to the economic performance by
economists. Political Instability leads to the inconsistent economic policies, making the country
volatile. It negatively affects the macroeconomic performance of the country.

Pakistan since its independence has seen an instable political environment and still is surviving
in this cut-throat world. From 1947 till 2018, not a single political party has governed their full 5
years in government. They either resign willingly due to public or political pressure, or they have
to leave government as per court orders. Pakistan has seen numerous power hungry politicians,
who only care about their own interest rather than the country’s well-being. They involve in
corruption, taking the public’s money and using them to their own luxuries rather than spending
on the country. This has led Pakistan to take loans from IMF, US and other agencies. This
behavior has led Pakistan on the brink of recession. Economic policies were changed with every
changing government in Pakistan led to have a short term macro-economic policies.

The political uncertainty makes Pakistan an unpredictable country that has led to low
investments affecting the GDP of the country. Pakistan has seen so many wars, terrorist attacks,
sanctions by UN, love and hate relationship with US, involvement in Afghan-Soviet war, ethnic
conflicts, global recession and natural disasters which resulted in weak development policies.
These events have resulted in Pakistan having an unstable economy, short lived economic booms
and internal conflicts. According to (Seher, 2016, T), Pakistan's investment rate is declining, the
economy is slowing, the unemployment rate is rising, and millions of Pakistanis are living in
poverty.

Political instability, inflation rate, and unemployment rate are just a few of the factors that
influence Pakistan's GDP.

Distribution of Data of economic growth factors between the different years:

This graph depicts the changes in inflation over

the first half of the decade, from 13.66 in 2011 to
2.86 in 2016. This was an adverse environment
for economic development. The statistics show
that the growth rate increased gradually and then
slowed from that year (2016) to 6.74 in 2019.
Figure 2 depicts GDP growth from 2008 to
2020, with 15,000,000 and 20,000,000 as the
starting points, and the growth line increasing
year after year. The graph's conclusion
demonstrates that growth is approaching the
40,000 mark.

Figure 3 shows the unemployment rate, which fluctuated as the number of jobs increased and
dropped, hampered economic progress. According to the
data on this line, the number peaked at 6 in 2010 and
continued to rise until 2012. The employment rate
improved significantly for a few years then began to
collapse from that year to 2018, with just a minor
improvement, but the line dropped dramatically in 2019
and 2020, hitting close to 3, resulting in increased
unemployment.
BACKGROUND/HISTORY

After the independence in 1947, Pakistan was trying to settle down its economy till 1953. The
political turmoil in Pakistan after the assassination of Liaquat Ali Khan was abrogated by
establishment of martial law.

Ayub Khan Era:

The era of Ayub Khan, knows as golden era of economic growth, was established.General Ayub
Khan introduced industrialization, rural development, foreign investment which were his gifts to
the impoverished country. His encouragement of creating private sectors, with small and medium
scale industries opened new job opportunities in the country. The development of dams, power
stations, barrages were made. It all contributed in the economy of Pakistan as the economic
graph was rising. First Trade agreement between Pakistan and China was signed. The Annual
GDP growth was estimated to be 6.8% during 1960-1966.

1965 war:

The India-Pakistan war over Kashmir took place in 1965. Pakistan's economy suffered as a result
of the war, as defense spending soared from 4.82 percent to 9.86 percent of GDP, reaching a
staggering 55.6 percent by 1971. Foreign investments were reduced as a result of the conflict,
and economic restraints were imposed.

General Yahya Khan

The dispute between East Pakistan and West Pakistan started. It was again a political dispute as
Sheikh Mujibur rehman (Leader in East Pakistan) wanted an autonomy and democracy in Eat
Pakistan. Pakistan’ millitary operation ‘searchlight’ and 1971 Dhakka University massacre, lead
to Bangladesh Declaration of Independence. The separation of East Pakistan, which had huge
contribution in the economy, left Pakistan with an unstable economy. The large scale industrial
sector had a negative of 5.6% growth rate in 1971-72 due to the war with India and separation of
East Pakistan.

Post East Pakistan Separation:

The separation happed due to these power hungry politicians. After the separation of East India,
Yahya Khan resigned due to political pressure by Zulfiqar Ali Bhutto. The doom of Pakistan’s
economy began from there as the economy was broken down from middle. Pakistan lost most of
its assets due the wars. The cotton Industry was affected as it lost its jute producing area and East
Pakistan market as well. Due to economic crisis, Pakistan had to devalue their currency.
Zulfiqar Ali Bhutto (PPP):

He was the most populous leader of that time due its socialist approach. He nationalized the
industries with its 3 staged program. The approach was to satisfy the labor union to maintain
peace in industry, as they were not treated with good working environment before Bhutto’s
socialist approach. At first stage he nationalized 31 major mega-corporations, industries. At
second stage, he nationalized banks and financial industry. Later he nationalized the cotton
industry which was very unsuccessful as the producer sold their low quality cotton on very high
prices. During the nationalisation era, economic growth slowed, decreasing as an average of
6.8%/ year in the (1960’s) to 4.8%/ year on average in the (1970s). The nationalised enterprises
lost money as a result of the non-market-based rulings. Poverty and economic imbalance
dropped from 1971 and 1977, while inflation increased to an average of 16 percent.

Many people criticize Bhutto’s nationalization approach as the rupee was devalued in his
leadership. In 1973, OPEC oil embargo and increased prices also affected the Pakistan’s import
bill. Pakistan was affected by the worldwide recession after 1973. Bhutto establishes the
foundation of Port Qasim.

General Zia:

General Zia gained power 1978, which was determined to initiate Islamization. He believed that
religious traditions should guide the Pakistan’s Institutes. After soviet invasion of Afghanistan,
Pakistan opened its doors for Afghan refugees. Due to lack of resources, Pakistan sought help
from Muslim countries and other countries as well. The US aid and aid from Middle east gave
Pakistan another economic boom. General Zia liberalized many industries. In the 1980s,
Pakistan's GDP grew at a rate of 6.5 percent per year on average. However, Zia's leadership
generated a deep seated conflict among Pakistan's ethnic groups, resulting in bloodshed and
intolerance in the community. Due to which, Pakistan still suffers with ethnic, religious conflicts
and violence. He borrowed with high interest rate to pay government wages.

Benazir Bhutto:

Benazir Bhutto was a popular, vibrant, and

divisive leader in Pakistan at the time. Benazir
Bhutto was Pakistan's first female prime minister.
Other than that, this was the explanation why
political parties led by men had issue with Benazir.
In 1988, Benazir came into power. She first
promised to de-nationalize the industries but later
on, only few economic regulations were reviewed.
All of the shares in Pakistan Steel Mills and
Pakistan Railways were remained in government
hands. The economy suffered as a result of
nationalisation. It harmed investors' faith in the country. To avoid financial meltdown, Nawaz
Sharif announced an economic emergency in 1998 and froze all assets under government control.
Pakistan's GDP growth rate has slowed to 4%, despite the country's fiscal and external
imbalances persisting, resulting in a debt crisis. As a result, Pakistan has the lowest level of
progress in the UNDP’s Human Development Index. Corruption charges were filed against her
and her husband, Asif Ali Zardari.

Nawaz Sharif (PMLN):

In 1990, Nawaz Sharif got elected as PM Pakistan. The stock market improved during Sharif's
second term, and inflation was kept to 3.5 percent, down from 7% in 1993–96.

Pervaiz Musharaf:

Pervaiz Musharaf became President of Pakistan after a military coup in 1999. The poverty
expenditure rate fell to 34.5 percent in 2008 from 17.2 percent in 2007. This was due to the
privatisation programme. Concerns like as external
and internal debt, a big budget deficit, rising poverty,
unemployment, and sluggish exports were among the
first issues he addressed. Pakistan's foreign exchange
reserves were insufficient to cover imports, and the
country had little access to private finance markets.

Between 2002 and 2007, the economy grew faster as a

result of these structural improvements. There were
around 11.8 million new jobs generated. The debt-to-
GDP ratio was reduced from 100% to 55%. Pakistan's
foreign reserves grew from US$1.2 billion in October
1999 to US$10.7 billion on June 30, 2004. The value of the rupee has increased. However, from
a political standpoint, Pakistan has once again become embroiled in the War on Terrorism. These
advances were mostly owing to billions of dollars in US aid in exchange for Pakistan's
participation for the US-led fight in Afghanistan against terrorists. Due to legal and public
pressure, Pervaiz Musharaf resigned in 2008.

Asif Ali Zardari (PPP):

Asif Ali Zardari became President of Pakistan in 2008, while Syed Yousuf Raza Gilliani became
Prime Minister. They brought up the subject of nationalisation once more. Their leadership
presided over an increase in violence, corruption, and unsustainable economic policies that
pushed Pakistan back into stagflation. The Pakistani economy dropped to 4.09 percent, down
from 8.96 to 9.00 percent during Musharaf's presidency. The yearly growth rate has slowed from
a long-term average of 5% to slightly over 2.0%."The country's currency in circulation as a
percentage of total deposits is 31%, which is relatively high when compared to India," according
to PIDE. Because the private sector played such a minor role, it was the primary reason of poor
economic growth.

Nawaz Sharif (PMLN):

In 2013, Nawaz Sharif became PM of

Pakistan once again. After taking his office,
Pakistan got on board on a $6.3 billion IMF
Extended Fund Facility. It was done to focus
on stabilizing public finances, reducing energy
shortages, to improve its balance of payment
position. The Economic growth of 4.3% was
seen in the fiscal year 2014-15. Foreign
reserves were increased to US $10 billion. The
IMF confirmed that inflation dropped to 13% in 2014 as compared to 25% in 2008.

-Corruption and Panema Paper leaks.

According to the Panama Papers, which were stolen data from law firm Mossack Fonseca in
2016, the Sharif family has millions of dollars in property and corporations in the United
Kingdom and around the world under many names. The court announced its decision on July 28,
2017, after a thorough and lengthy investigation. The court ruled that Sharif was ineligible to
hold public office because he failed to disclose his job with the Dubai-based Capital FZE
Company in his nomination document. He received a ten-year imprisonment, while his daughter,
Maryam Nawaz, received a seven-year sentence and a fine of £8 million and £2 million,
respectively. Between 2011 and 2013, Sharif and Imran Khan became embroiled in a fierce
dispute. This rivalry grew in later 2011; both
government leaders were blaming each other
on various political issues. After 2013
elections, Imran Khan accused Nawaz Sharif
of rigging in elections. Imran Khan locked
down Islamabad in 2016, demanding Sharif
to resign and a corruption inquiry against
Sharif Family.
LITERATURE REVIEW
For an economic development, a political stability is important. The political instability makes
the economy severely vulnerable (Mustafa, Nawaz and Rubab, 2017). According to Lipstel
(1960), for a country to be believed as stable, it should have a democracy or even dictatorship for
25 years continuously. It is stated by (Alesina & Perotti, 1996), that it is perceived by investors
that the frequent change in government leads to threat in policies, so they invest in safer
environment that is less political uncertain. According to Qureshi (2010), Pakistan’s economy
has been largely influenced by the political instability for so long. Since its independence,
Pakistan has spent under military control and rest under political regimes.Velasco and Tornell
(1992) said that the main cause of instable political system is civil unrest, strikes which lead to
the low investment and eventually to a collapse in economic system of the state. Zaidi(2006)
said that the irregular policies of government in the period of nationalization effected the

Pakistan’s economic growth. For the remedy of the economic growth, according to Barro (2013)
is to free the government and its institute from corruption. As a result, the investors would be
motivated to invest which will lead to economic growth. Stated by (Rakhshani 2021), the root
cause of unstable political condition that is faces by Pakistan’s government is the stumbling and
segmented political organization. On the other hand, the weak political parties obliged every
government to seek help from the alliance to come into power.
METHODOLOGY:

The methodology of this research paper was done by the use of Secondary data from IMF, World
Bank, already published articles. The statistics, graphs were also taken from these websites.
It was made sure that the reliability and credibility of this research is maintained even with the
use of secondary data.

FINDINGS:

The evidence from the past data and statistics shows the political instability has a negative effect
on the economy of Pakistan.

The political instability has an adverse effect on the Inflation rate, unemployment rate and GDP
of Pakistan.

The research also indicates that the productivity level also decreases with the nationalization of
the industries.
DISCUSSION:

Political Instability has a negative impact on economic growth as it disrupts the market activities
and labor relations. It also decreases the investments due to the untrustworthy political
environment in the country. The political instability effects mostly to the services industry e.g
transportation, as it get delayed often due to political disturbance in the cities. Sometimes these
political parties start a ‘dharna’-sit in protests in major cities which results disturbance in the
market. It results in delayed deliveries, dispatches from the companies, which leads to the
increased cost of production. Because on the political stable days the work load on staff
increases, they work night shifts that increase labor cost and energy consumption.

Lack of Law and order:

 When there is violence and instability in a

country, it creates a law and order crisis.

 Pakistan since its independence has law and

order qualms. The lack of law and order has a
huge effect on the economy.

 Pakistan is known for the violence of terrorist in the country. The constant suicide
bombing, target killings makes Pakistan an unsafe and unpredictable country,

 This results in low foreign investments, import export constraints.

 Terrorist attacks disrupts stock marks and people investing/working in stocks have to
bear the losses

 Pakistan’s economy does not extend from agriculture and textiles. The economy grows
with the expansion of the industries.

 Pakistan’s lack of expansion of export base has detoriated the economy and made the
country vulnerable to the shift in world demand.

 Historically, In World Bank’s Governance Indicators Datasets, Pakistan has not been on
good figure in ‘the Rule of Law’ indicator. This metric assesses how much trust agents
have in society's rules and how well they follow them. (Fig 1)

 Even within South Asia, it is not doing well as well as

with its competitors, except for Afghanistan which has
been experiencing a war since 2001. (Fig 2)

CONCLUSION:
In conclusion, the economy is depended on the political stability. As discussed, the political
instability, terrorism, lack of law and order in Pakistan had an adverse effect on the economic
growth. The economic growth is inversely proportion the political instability. The constant shift
in governments, inconsistent policies, ethnic diversity, and ethnic conflicts makes Pakistan an
untrustworthy for the foreign investment.

RECOMMENDATION:

 Pakistan’s legal system has many obstacles, weaknesses that needs to be addressed. If we
remove the weaknesses from our legal system and legal infrastructure, there is an
immense amount of growth potential.

 The economic policies should be consistent, long term and sustainable. It should be
independent to political dispension.

 To have an growth in economy and overall country, Pakistan must have a rule of law,
ensure transparency, ruthless accountability and consistent economic policies.

 The political leaders should look for the interest of the country instead of their own
interest.

 Zero tolerance against corruption should be the main goal for Pakistan’s future economic
policies.

 Strengthen the law enforcement institutions, and promote the national integration, as it
would improve the internal security and will defend the country against interal and
external threats.

 Pakistan must establish responsive criminal judicial system.

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