The Role of the State in Economic Development

Public Policy & Management: Perspectives and Issues - Assignment 1

Adil Taj Mohammad

SRN - 100200731
Word Count: 2,365
Introduction
There has been, and continues to be, much debate but little agreement on the role of the
state in promoting economic development. The debate ranges from what the state should
and should not do as well as how it should it (World Bank, 1997; Flynn, 2000; Flynn, 2002;
Leftwich, 2000) Hughes, 2003; Chang, 2002).
Chang (2002), for example, considers three distinct phases of the states role and activities
in the last century: (1) Pre-World War II laissez-faire doctrine (associated with Adam
Smith); (2) Golden Age Economics (variety of interventionist economic theories such as
welfare economics, Keynesianism, early developmental economics) and (3) neo-liberalism
(associated with, among others, Friedman & Friedman). Others, such as Flynn (2002)
explain New Public Management as a distinct philosophy. Separate to these various
philosophies of the state’s involvement (or not) in capitalist economies, there were a
second strand of approaches in the communist and socialist countries.

In Pakistan, a nation founded in 1947 after independence from British colonial rule, the
state has played various roles in promoting economic development: From land-reformer,
nationaliser and de-nationaliser of important sectors of the economy - often in compliance
with stipulations from international organisations such as Asian Development Bank,
International Monetary Fund and the World Bank Group (including the International Bank
for Reconstruction and Development).
Pakistan is a ‘developing country’ and currently has a democratically elected centre-left
government. It is an illiberal democracy (Hague and Harrop, 2010).

This report sets out to review the role of the state of Pakistan in promoting economic
development.
In doing so, it will (1) define economic development, (2) outline the historical development
of the involvement of the state in promoting it and (3) examine key variables that have
influenced its involvement.
Next, it will (4) assess the current role and effectiveness of the Pakistani state in promoting
economic development and (5) consider possible future adjustments.
Finally, it shall conclude with a (6) summary of key points and a (7) commentary on the
preceding examination and assessment.

Examination of variables that have influenced the state’s involvement in promoting

economic development.
‘Economic development’, as a concept, is itself a subject of much debate in terms of its
purpose, definitions and measurements (see for example Arndt, 1987 and Bingham & Mier,
1993). For the purposes of this report, economic development can be defined and
measured as follows:

“Qualitative change and restructuring in a country's economy in connection with

technological and social progress. The main indicator of economic development is
increasing GNP per capita (or GDP per capita), reflecting an increase in the economic
productivity and average material wellbeing of a country's population.”
(Soubbotinam, 2004)
This definition, too, could trigger a debate about the distribution and equity of the outcome
of such progress as well as the measurement (GDP, GNP). But that is outside the scope of
this report.

Pakistan’s history, post-independence, has been tumultuous: It has been characterised by

political volatility, swinging back and forth and back between authoritarian regime and
illiberal democracy.

In the very early years post independence, the economic policy focussed on solving a key
problem: integrating large numbers of refugees. Additionally, the state, through its 1951
National Development Plan (NDP) focussed on create a functioning infrastructure (such a
hydroelectric dams and gas pipelines), secure food supply and develop industries. The
NDP was succeeded by Five Year Plans. During the Ayub Khan’s military rule, the state
pursued land reforms, but failed in achieving its intended outcomes.
With Zulfikar Ali Bhutto, the Pakistani state pursued socialist policies, such as
nationalisation of major industries (steel, chemical, cement, insurances, domestic banks,
schools, universities) and also implemented laws such as the Industrial Regulations
Ordinance 69 (granting labour unions authority to negotiate with employers on behalf of
employees). The mantra was “Roti, kapra aur makaan” (“food, clothing and shelter”).
Bhutto’s socialist-inspired era was replaced with periods of privatisation and economic
liberalisation.

We shall now examine key variables that have influenced, and in some cases continue to
influence, the involvement of the Pakistani state in promoting economic developments.

Population: Poverty and growth

At independence, Pakistan saw a flood of poor migration from India. During the eighties,
Pakistan became the country with the world’s largest refugee population when millions of
Afghans flee the Soviet invasion in their country. Pakistan’s ‘indigenous’ population, largely
illiterate and poor, has had a comparatively high population growth (Asian Development
Bank, 2009).
This variable has necessitated the Pakistani state, through various governments, to get
involved to accommodate the refugees and growing population.
However, some may argue that inflows of migrants from India included highly educated
and skilled people (compared with the indigenous population) giving the country an
advantage in terms of its civil service and business community.

Major Natural disasters

Pakistan has been prone to major natural disasters throughout its history as an
independent sovereign state (and prior to this). Arguable, the state has had to divert funds
otherwise to be expended on promoting economic development, to disaster relief and
emergency assistance to those affected. On the other hand, some may argue that
Pakistan has received aid and relief funds for international organisations and other
countries for exactly this purpose, and as such should be able to continue to promote
economic development.

History and geopolitics

Pakistan used to be a part of British India. Since independence from British colonial rule,
India and Pakistan have both laid claim to Kashmir. These claims have caused three wars
and a chronic tension on both sides of the border between the two countries; compounded
by their nuclear weapons. On the other side of the country, the Soviet invasion of
Afghanistan during the eighties and Shia Muslim Iran have also caused a tension. In all
cases (Afghanistan, India, Iran) Pakistan’s powerful military has laid a constant claim to
attention, funds and resources - which have been diverted away from policies and reforms
that would promote economic development.
On the hand, it is argued that the very same causes of tensions have earned Pakistan
significant monetary favours, notably from USA in connection with their proxy war in
Afghanistan in the eighties, their invasion of Afghanistan in the 2000s, their containment
policy of Iran since 1979 - as well as Pakistan’s friendship with China, founded by both
countries’ rivalry with India.
Others may argue that there can be little doubt that the state’s attempts at attracting
Foreign Direct Investment has suffered as a result of these variables.

Monetary policy conditions for credits and loans Asian Development Bank, International
Monetary Fund, International Bank Reconstruction and Development (World Bank) and
from individual countries (USA)
As a consequence of the Pakistani state’s reliance on international donor countries (e.g.
USA) and creditors (Asian Development Bank, International Monetary Fund), its role in
promoting economic development has been influenced by the same. During times of
alliance or partnerships with USA and mainstream organisations such as Asian
Development Bank, International Monetary Fund, the emphasis has been to promote
economic development through neo-liberal inspired reforms (privatisations, etc.). During
times of alliance with China, the opposite has been the case (e.g. during the Zulfikar Ali
Bhutto years, 1971-1977).
Contrarily, it may be argued that close alliance with advanced nations means access to
funds, expertise and skills - otherwise not accessible. And as such, the conditions would
be to be welcomed reforms to an otherwise inefficient state.

Assessment of the state’s role and effectiveness in promoting economic

development.
Based on the examination above, I shall now assess the current role and effectiveness of
the Pakistani state in promoting economic development.

In recent years the state has launched initiatives and reforms to create economic
development. These include tax and VAT reforms; Income Support Programme (‘the
largest social protection scheme in the country’s history’ according to the Ministry of
Finance (2010)); devolution. These are on top of various other initiatives and reforms
launched in the past (such as land reforms in 1959, 1972, 1977). Finally, the country has
been recipient of large amounts of humanitarian and development aid.

The question, therefore, is how effectively the state has promoted economic development
in Pakistan?

A number of measures give us an indication:

 - GDP, as a measure for economic growth, was 4.1% in 2008 - the lowest since 2003
(Asian Development Bank, 2009).
- Population grew by 1.7% in 2008 - the lowest since 1990. That is as far back as the
ADB figures go. (Asian Development Bank, 2009).
- Occupational Structure of the labour Force: As at 2008, Pakistan was still an agrarian
economy by labour force (agriculture 45%), although closely followed by mining,
services and trade (42%). Manufacturing was 13%. Interestingly, compared with 1990,
Agriculture grew (together with mining, services and trade), both at the expense of
manufacturing. (Asian Development Bank, 2009).
- Unemployment stood at 5.2% in 2008 - the lowest since 1995. (Asian Development
Bank, 2009).
- As at 2008, 35.5% of the population were urban. (Asian Development Bank, 2009).
- Literacy (combined, male and female) stood at 52% in 2010 - the lowest since 1979, and
an increase from 21% (UNESCO, 2005).
- Under-5 mortality stood at 89/1000 - the lowest since 1970 (UNICEF)

Based on the data above, it is clear that on a key number of fronts, the state promoted
economic development - albeit, a detailed and a comparative study would be required to
assess whether it had achieved its full potential economic development.

Further and future economic development is hostage to especially Pakistan’s geopolitical

situation and to potential major natural disasters - both of which are outside the state’s
immediate control. However, Pakistan can mitigate at least the geopolitical by considering
longer terms alliances with China and middle eastern states, to reduce dependency on US.
Additionally, Pakistan may re-consider its relation with India through the Kashmir position -
concessions on claims to the disputed territory may normalise relations with its neighbour
and thus enable it to focus more on economic development. Pakistan’s civilian,
democratically elected government leverage US influence of Pakistan’s army right now to
do so no; the latter would otherwise likely block such a move or indeed threaten a civilian
government with transition to military rule.

The World Bank (2009) states that Pakistan, among a number of other countries, is
‘particularly because difficult political and social environments prevented adequate policy
measures to adjust to the terms of trade shock. Additionally, their reliance on foreign
funding has been relatively large. The global financial crisis worsened their
macroeconomic difficulties as sources of funding contracted.’

Interestingly, Ali (2009) - a director of the Economic Analysis Department at the State Bank
of Pakistan - argues otherwise: That Pakistan was relatively insulated to the impact of the
‘global credit crisis’ and subsequent impact on financial markets: Due to historical
macroeconomic imbalances. Specifically, he argues that:

‘The financial sector of the economy is still in its developing stages with limited, albeit
growing, linkages with global markets. As a result, Pakistan has been relatively well-
insulated against the contagion in international financial markets. It is remarkable to note
that Pakistan is among a handful of countries with a positive rate of growth, and among a
very few with the lowest decline in real GDP growth as compared to other countries
affected by the global financial crisis’.
(Ali, 2009)

Conclusion
The Pakistani state has played a role in the country’s economic development. This role has
varied by administration and over time: From Golden Age Economics style intervention -
even with a bout of flirtation with socialism - to neo-liberal tendencies.

Numerous factors, many historical and external, have influenced the involvement of the
state in respect of its promotion of economic activity, including population (poverty and
growth), history and geo-politics, monetary policy conditions and natural disasters.

The state has pursued policies and reforms for economic development and data supports
that improvement across key performance indicators has been made. Although further
comparative and detailed analysis is required to establish whether the full potential for
economic development has been achieved.

Future economic development depends on the impact of specifically Pakistan’s geopolitical

situation and on the impact of potential major natural disasters.
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